-----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, QYN7en4yBEuK0C2sySqNlXQQ3RkRJ+rKK6zWz5UGZS+VbezcTkxk/q+Wx+t8C/JJ oPzMQjo3GBNcs4FN1pdMkw== 0000891618-99-004210.txt : 19990921 0000891618-99-004210.hdr.sgml : 19990921 ACCESSION NUMBER: 0000891618-99-004210 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19990920 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANAGEMENT NETWORK GROUP INC CENTRAL INDEX KEY: 0001094814 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-87383 FILM NUMBER: 99713724 BUSINESS ADDRESS: STREET 1: 7300 COLLEGE BLVD., STE 302 CITY: OVERLAND PARK STATE: KS ZIP: 66210 MAIL ADDRESS: STREET 1: 7300 COLLEGE BLVD., STE 302 CITY: OVERLAND PARK STATE: KS ZIP: 66210 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 20, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 THE MANAGEMENT NETWORK GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 5416 48-1129619 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
THE MANAGEMENT NETWORK GROUP, INC. 7300 COLLEGE BOULEVARD, SUITE 302 OVERLAND PARK, KS 66210 (913) 345-9315 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) RICHARD P. NESPOLA PRESIDENT AND CHIEF EXECUTIVE OFFICER THE MANAGEMENT NETWORK GROUP, INC. 7300 COLLEGE BOULEVARD, SUITE 302 OVERLAND PARK, KS 66210 (913) 345-9315 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: CHRISTOPHER D. MITCHELL, ESQ. SANJIV S. DHAWAN, ESQ. JUDITH E. BROWN, ESQ. ROSEANN M. ROTANDARO, ESQ. WILSON SONSINI GOODRICH & ROSATI PROFESSIONAL CORPORATION 650 PAGE MILL ROAD PALO ALTO, CA 94304 (650) 493-9300 GAVIN B. GROVER, ESQ. BRIAN V. CAID, ESQ. MATTHEW BURNS, ESQ. MORRISON & FOERSTER LLP 425 MARKET STREET SAN FRANCISCO, CA 94105 (415) 268-7000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. 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. [ ] CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AGGREGATE OFFERING REGISTRATION SECURITIES TO BE REGISTERED PRICE(1) FEE - --------------------------------------------------------------------------------------------------------------------- Common stock, $0.001 par value per share............. $69,000,000 $19,182 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(o) promulgated under the Securities Act of 1933. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 The information in this prospectus is not complete and may be changed. Underwriters may not confirm the sales of these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED SEPTEMBER 20, 1999 PROSPECTUS SHARES [LOGO] Common Stock This is an initial public offering of common stock by The Management Network Group, Inc. We are selling all of the shares offered under this prospectus. We anticipate that the initial public offering price will be between $ and $ . ------------------ Prior to this offering, there has been no public market for our common stock. We have applied to have our common stock quoted on the Nasdaq National Market under the symbol TMNG. ------------------
PER SHARE TOTAL --------- -------- Initial public offering price............................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to The Management Network Group, Inc., before expenses.................................................. $ $
Several of our stockholders have granted the underwriters an option for a period of 30 days to purchase up to additional shares of common stock to cover over-allotments. ------------------ INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8. ------------------ The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. HAMBRECHT & QUIST BANCBOSTON ROBERTSON STEPHENS SALOMON SMITH BARNEY JEFFERIES & COMPANY, INC , 1999 3 [ARTWORK] THIS IS GRAPHIC REPRESENTATION OF THE LOGOS OF OUR CUSTOMERS. [ARTWORK] 4 [ARTWORK] THIS IS GRAPHIC REPRESENTATION OF OUR VARIOUS STRENGTHS. [ARTWORK] 5 [ARTWORK] THIS IS GRAPHIC REPRESENTATION OF OUR VARIOUS STRENGTHS. [ARTWORK] 6 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 3 Risk Factors................................................ 7 Forward-Looking Statements.................................. 16 Use of Proceeds............................................. 16 Dividend Policy............................................. 16 Capitalization.............................................. 17 Dilution.................................................... 18 Unaudited Pro Forma Condensed Consolidated Financial Data... 19 Selected Consolidated Financial Data........................ 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 25 Business.................................................... 35 Management.................................................. 50 Certain Transactions........................................ 60 Principal Stockholders...................................... 62 Description of Capital Stock................................ 64 Shares Eligible For Future Sale............................. 67 Underwriting................................................ 69 Legal Matters............................................... 70 Experts..................................................... 71 Where You Can Find Additional Information................... 71 Index to Financial Statements............................... F-1
TMNG(R), TMNG.com(TM), TMNG CLEC Planner(TM), TMNG Lexicon(TM), TMNG e-Lexicon(TM), Margin Master(TM) and QBC(R) are trademarks of The Management Network Group, Inc. eRoom(TM) is a trademark of Instinctive Technology, Inc. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. 2 7 PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in the common stock. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements before making an investment decision. THE MANAGEMENT NETWORK GROUP, INC. We are a leading provider of management consulting services to the global telecommunications industry, including communications service providers, technology companies and financial services firms. We provide comprehensive, mission-critical services, including strategic, management and operational advice, that enable our clients to meet the challenges of today's competitive and dynamic telecommunications environment, including the growing demand for e-business infrastructure. Since our inception in 1990, we have performed services for over 170 clients. These clients include Ameritech, AT&T, Bell Atlantic, EDS, Lucent Technologies, Morgan Stanley Capital Partners, Saville Systems and Williams Communications. We have experienced strong revenue growth since 1995 and have been profitable every fiscal year. Our industry-focused services help our broad range of clients capitalize on the vast opportunities brought about by a rapidly changing market. Major industry drivers include worldwide deregulation, the explosive growth of the Internet and e-business, rapid technological advances and the convergence of various services offered by our clients. According to industry sources, worldwide telecommunications revenues are expected to exceed $1 trillion by 2001 and Internet use is expected to grow from 142 million users in 1998 to over 500 million users in 2003. The increasingly competitive marketplace in which our customers operate has created a pressing need for highly specialized consulting services. Our complete range of solutions include strategic assessments, infrastructure design and evaluation, operational support and process improvement, and system evaluation, selection and implementation advice. The sophisticated services we provide make extensive use of the proprietary toolsets we have developed, ensuring the high quality and timeliness of our services. Our solutions enable our clients to compete more effectively by aligning their service offerings with their chosen market strategies. In addition, our solutions allow them to offer their services cost-effectively and accelerate the introduction of new technologies, while improving overall customer satisfaction and retention, all of which are critical components of their profitability. The in-depth expertise we provide to our clients, including both incumbents and new entrants, through our long-term relationships has established us as a leader in the telecommunications consulting arena. We provide our services through highly experienced consultants who average over ten years of industry experience. In 1998 and 1997, our President and Chief Executive Officer was named by a leading trade publication to its annual list of the most influential people in competitive long distance telecommunications. In both years he was the highest-ranking non-carrier executive selected for this list. We believe our clients value the extensive expertise and industry knowledge our consultants provide, enabling us to forge long-term relationships with our clients, who in many cases rely on our advice and services to make critical strategic and business decisions. Our key growth initiatives include playing a critical role in our target market's Internet infrastructure development and e-business requirements and expanding our geographic reach to serve our clients' growing global needs. We plan to serve the Internet and e-business market through our TMNG.com business, which will combine our telecommunications knowledge with our developing e-business expertise to help build the backbone of the rapidly growing Internet by serving communications service providers' needs in developing applications hosting and other innovative services and strategies. In addition, as Europe faces increasing deregulation and growing competition, we plan to apply our demonstrated expertise gained in the competitive U.S. telecommunications market. Our European revenues have increased substantially in the first six months of 1999. Other key components of our growth strategy include extending our market leadership by continuing to build our brand and leveraging our scalable business model. 3 8 THE OFFERING Common stock offered by us....... shares Common stock outstanding after this offering.................... shares Use of Proceeds.................. For repayment of indebtedness and general corporate purposes, including working capital and potential acquisitions. Nasdaq National Market symbol.... TMNG ------------------------ The number of shares of common stock outstanding after this offering is based on the number of shares outstanding as of , 1999 and does not include the following: - 1,473,500 shares of common stock subject to options issued at a weighted average exercise price of $ per share granted under our 1998 equity incentive plan. Please see "Capitalization" for a more complete discussion regarding the outstanding shares of our common stock and options to purchase our common stock and other related matters. ------------------------ We are the successor to a telecommunications consulting company founded in 1990 by Richard P. Nespola, our President and Chief Executive Officer. We were incorporated in Kansas in 1993 and reincorporated in Delaware in September 1999. Our principal executive offices are located at 7300 College Boulevard, Suite 302, Overland Park, Kansas 66210 and our telephone number is (913) 345-9315. Our web site is www.tmng.com and our corporate email address is "info@tmng.com." Any reference contained in this prospectus to our web site, or to any other web site, shall not be deemed to incorporate information from those sites into this prospectus. ------------------------ Unless otherwise noted, all information in this prospectus: - assumes that the underwriters will not exercise their option to purchase additional shares of common stock to cover over-allotments, if any; and - gives effect to a 1-for-2 reverse split of our common stock to be effected prior to the completion of this offering, except for the audited financial statements included in this prospectus. 4 9 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA (UNAUDITED) The following summary financial information should be read in conjunction with our consolidated financial statements and their related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. Listed below is our statement of operations data for fiscal years 1994 through 1998 and for the six months ended July 3, 1999 and July 4, 1998, and our balance sheet data as of July 3, 1999. The results for the interim periods are not necessarily indicative of the results for the full fiscal year or any future period. Interim results reflect all adjustments, which are in the opinion of management, necessary to a fair statement of these results. To calculate the "Pro Forma As Adjusted Statement of Operations Data" for fiscal year 1998 and the six months ended July 4, 1998 and July 3, 1999, we have assumed the following occurred as of the first day of fiscal 1998: - our leveraged recapitalization, which was actually completed in February 1998; - our conversion of tax status from a subchapter "S" corporation to a subchapter "C" corporation which occurred at the time of recapitalization; and - the sale of shares of common stock in the offering at an assumed initial public offering price of $ per share, after deducting the underwriting discounts and estimated offering expenses, and the application of the net proceeds of the offering to repay all of our bank debt. To calculate the pro forma as adjusted balance sheet data, we have assumed this offering and the application of the net proceeds from this offering, as described above, occurred on July 3, 1999. Beginning with fiscal 1998, we switched to a four week -- four week -- five week quarterly accounting system in which each quarter is 13 weeks long and ends on a Saturday. As a result of this change, our fiscal year end changed from December 31 to the Saturday which is 13 weeks from the end of the third fiscal quarter. The words "fiscal year" in this prospectus refer to the fiscal year most closely coinciding with the related calendar year. Our 1998 fiscal year therefore ended on January 2, 1999. When we refer to the "six months of 1998" and to "six months of 1999" in this prospectus, we mean the six month period ending on July 4, 1998 and July 3, 1999, respectively. 5 10
FISCAL YEAR SIX MONTHS ENDED ------------------------------------------------ --------------------------- 1994 1995 1996 1997 1998 JULY 4, 1998 JULY 3, 1999 -------- ------- ------- ------- ------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues......................................... $ $ 7,299 $17,279 $20,184 $32,103 $13,032 $23,856 -------- ------- ------- ------- ------- ------- ------- Cost of services:................................ Direct cost of services......................... 4,303 9,648 11,384 17,411 6,996 12,377 Equity related charges.......................... 239 956 ------- ------- ------- ------- ------- ------- Total cost of services.................... 4,303 9,648 11,384 17,650 6,996 13,333 -------- ------- ------- ------- ------- ------- ------- Gross profit..................................... 2,996 7,631 8,800 14,453 6,036 10,523 -------- ------- ------- ------- ------- ------- ------- Operating expenses: Selling, general and administrative expenses.... 1,242 2,798 3,280 6,158 2,400 4,886 Equity related charges.......................... 22 570 ------- ------- ------- ------- ------- ------- Total operating expenses.................. 1,242 2,798 3,280 6,180 2,400 5,456 -------- ------- ------- ------- ------- ------- ------- Income from operations........................... 1,754 4,833 5,520 8,273 3,636 5,067 -------- ------- ------- ------- ------- ------- ------- Net income available to common stockholders...... $ $ 1,758 $ 4,713 $ 5,504 $ 3,043 $ 877 $ 2,262 ======== ======= ======= ======= ======= ======= ======= Net income per common share Basic........................................... $ $ 0.08 $ 0.21 $ 0.24 $ 0.14 $ 0.04 $ 0.10 ======== ======= ======= ======= ======= ======= ======= Diluted......................................... $ $ 0.08 $ 0.21 $ 0.24 $ 0.13 $ 0.04 $ 0.10 ======== ======= ======= ======= ======= ======= ======= Weighted average common shares outstanding: Basic........................................... 22,500 22,500 22,500 22,500 22,500 22,507 ======== ======= ======= ======= ======= ======= ======= Diluted......................................... 22,500 22,500 22,500 22,944 22,600 23,639 ======== ======= ======= ======= ======= ======= ======= Pro forma provision for income taxes(1).......... $ 703 $ 1,885 $ 2,202 $ 2,530 $ 1,118 $ 1,612 Pro forma net income available to stockholders... $ 1,055 $ 2,828 $ 3,302 $ 3,795 $ 1,678 $ 2,262 ======== ======= ======= ======= ======= ======= ======= PRO FORMA AS ADJUSTED STATEMENT OF OPERATIONS DATA: Revenues......................................... $32,103 $13,032 $23,856 Income from operations........................... 8,386 3,749 5,067 Net income....................................... 5,095 2,291 2,932 Net income per common share Basic........................................... ======= ======= ======= Diluted......................................... ======= ======= ======= Weighted average common shares outstanding(2) Basic........................................... ======= ======= ======= Diluted......................................... ======= ======= =======
SIX MONTHS ENDED JULY 3, 1999 ----------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Net working capital......................................... $ 5,731 Total assets................................................ $ 12,090 Total debt (including current debt)......................... $ 23,350 -- Common stockholders' equity (deficiency in assets).......... $(14,356)
- --------------- (1) Before February 12, 1998, we were a subchapter "S" corporation and, accordingly, federal and state income taxes were paid at the stockholder level only. Upon consummation of the February 1998 leveraged recapitalization, we terminated our subchapter "S" corporation status and, accordingly, became subject to federal and state income taxes. The pro forma as adjusted statement of operations data statement information reflects adjustments to historical net income as if we had not elected subchapter "S" corporation status for federal and state income tax purposes. (2) Pro forma as adjusted weighted average common shares outstanding assumes that the following occurred at the beginning of the period indicated: - our leveraged recapitalization, which actually occurred in February 1998; and - the issuance of shares of common stock issuable in this offering. 6 11 RISK FACTORS You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. Investing in our common stock involves a high degree of risk. Any of the following risks could materially harm our business, operating results and financial condition and could result in a complete loss of your investment. WE FOCUS EXCLUSIVELY ON SERVING THE TELECOMMUNICATIONS INDUSTRY AND THEREFORE CHANGES IN THIS INDUSTRY COULD HARM OUR BUSINESS We currently derive all of our revenues from consulting engagements within the telecommunications industry. Much of our recent growth has arisen from business opportunities presented by industry trends that include deregulation, increased competition, technological advances, the growth of e-business and the convergence of service offerings. These factors have combined to make the telecommunications industry highly dynamic and form some of the core drivers of the market that we serve. If the current industry trends change, the demand for telecommunications consulting work will likely decrease. In addition, the telecommunications industry is in a period of consolidation, which could reduce our current client base, eliminate future opportunities or create conflicts of interest among our clients. Additionally, current and future economic pressures in the industry may cause telecommunications companies to use internal resources in lieu of spending resources on the types of services we offer. WE ARE DEPENDENT ON A LIMITED NUMBER OF LARGE CUSTOMERS FOR A MAJOR PORTION OF OUR REVENUES, AND THE LOSS OF A MAJOR CUSTOMER COULD HARM OUR BUSINESS We derive a significant portion of our revenues from a relatively limited number of clients. For example, during 1997 and 1998, revenues from our ten most significant clients accounted for approximately 78.4% and 76.0% of our revenues, respectively. In the first six months of 1999, Williams Communications and diAx accounted for 44.2% and 13.0% of our revenues, respectively. The services required by any one client can be limited by a number of factors, including industry consolidation, technological developments, economic slowdown or internal budget constraints. As a result, the volume of work performed for specific clients varies from period to period, and a major client in one period may not use our services in a subsequent period. Our clients are not obligated to engage us for additional services. In addition, clients may prematurely terminate or reduce the scope of our services, which would cause our revenues to decline. Our services are often sold under short-term engagements and most clients can reduce or cancel their contracts with little or no penalty or notice. Our operating results may suffer if we are unable to rapidly deploy consultants if a client defers, modifies or cancels a project. Consequently, you should not predict or anticipate our future revenue based on the number of clients we have or the number and scope of our existing engagements. THE UNPREDICTABILITY OF OUR QUARTER-TO-QUARTER RESULTS MAY HARM THE TRADING PRICE OF OUR COMMON STOCK Our revenue and operating results may vary significantly from quarter-to-quarter due to a number of factors. In future quarters, our operating results may be below the expectations of public market analysts or investors, and the price of our common stock may decline. Factors that could cause quarterly fluctuations include: - the beginning and ending of significant contracts during a quarter; - the size and scope of assignments; - consultant turnover, utilization rates and billing rates; - the loss of key consultants, which could cause clients to end their relationships with us; - the ability of clients to terminate engagements without penalty; - fluctuations in demand for our services resulting from budget cuts, project delays, cyclical downturns or similar events; 7 12 - clients' decisions to divert resources to other projects, including Year 2000 remediation work, which may limit clients' resources that would otherwise be allocated to projects we could provide; - reductions in the prices of services offered by our competitors; - fluctuations in the telecommunications market and economic conditions; - seasonality during the summer, vacation and holiday periods; and - fluctuations in the value of foreign currency versus the U.S. dollar. Because a significant portion of our expenses are relatively fixed, a variation in the number of client assignments or the timing of the initiation or the completion of client assignments may cause significant variations in operating results from quarter to quarter and could result in losses. To the extent the addition of consultant employees is not followed by corresponding increases in revenues, our operating results could be harmed. WE MUST CONTINUE TO ATTRACT AND RETAIN QUALITY CONSULTANTS, AND OUR INABILITY TO DO SO WOULD HARM OUR BUSINESS Our business involves the delivery of sophisticated telecommunications consulting services that only highly experienced, qualified and well-trained consultants can provide. We must attract a significant number of new consultants to implement our growth plans. We primarily recruit senior consultants who have previous experience in competitive markets in the telecommunications industry. As a result, the number of potential consultants that meet our criteria is relatively small, and we face significant competition for these consultants from our direct competitors and others in the telecommunications industry. Many of our competitors are able to offer potential consultants significantly greater compensation than we can. Moreover, increasing competition for these consultants may result in significant increases in our costs to retain the consultants, which could harm our margins and results of operations. Many of our consultants work for us as independent contractors, and this status may make it easier for competing firms to hire these consultants away from us. In addition, we will need to attract consultants in international locations, principally Europe, to support our international growth plans. We have limited experience in recruiting internationally, and we cannot assure you that we will be able to do so. Our inability to recruit new consultants and retain existing consultants could seriously harm our business. THE MARKET IN WHICH WE COMPETE IS INTENSELY COMPETITIVE AND ACTIONS BY COMPETITORS COULD HARM OUR BUSINESS The market for consulting services to telecommunications companies is intensely competitive, highly fragmented and subject to rapid change. The market includes a large number of participants from a variety of market segments, including general management consulting firms, the consulting practices of "Big Five" accounting firms, most of which have practice groups focused on the telecommunications industry and local or regional firms specializing in telecommunications services. Some of these competitors have also formed strategic alliances with telecommunications and technology companies serving the industry. We also compete with internal resources of our clients. Our competitors include American Management Systems, Andersen Consulting, Booz-Allen & Hamilton, The Boston Consulting Group, Cap Gemini, KPMG Peat Marwick and PricewaterhouseCoopers. Many information technology consulting firms also maintain significant practice groups devoted to the telecommunications industry. Many of these companies have a national and international presence and may have greater personnel, financial, technical and marketing resources. We cannot assure you that we will compete successfully with our existing competitors or with any new competitors. We also believe our ability to compete depends on a number of factors outside of our control, including: - the prices at which others offer competitive services, including aggressive price competition and discounting on individual engagements; - the ability and willingness of our competitors to finance customers' projects on favorable terms; 8 13 - the ability of our competitors to undertake more extensive marketing campaigns than we can; - the extent, if any, to which our competitors develop proprietary tools that improve their ability to compete with us; - the ability of our customers to perform the services themselves; and - the extent of our competitors' responsiveness to customer needs. We may not be able to compete effectively on these or other factors, and, as a result, our revenues or income may decline. WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS, AND IF WE ARE UNABLE TO MANAGE THIS GROWTH, OUR BUSINESS MAY BE HARMED We are currently experiencing a period of rapid growth that may strain our managerial and operational resources. To support our growth, our organizational infrastructure must grow accordingly. We expect this expansion to continue to place a significant strain on our managerial, operational and financial resources. To manage the expected growth of our operations and personnel, we must: - improve existing and implement new operational, financial and management controls, reporting systems and procedures; and - maintain and expand our financial management information systems. If we fail to address these issues or if our expected growth does not materialize, our business could be harmed. IF WE DO NOT EFFECTIVELY MANAGE THE CONVERSION OF INDEPENDENT CONTRACTORS TO EMPLOYEES, OUR BUSINESS MAY BE HARMED We are planning to offer contingent employee or full-time employee status to certain of our independent contractors. As we convert independent contractors to consultant employees, we will incur additional fixed costs for each such employee that we do not incur when we retain an independent contractor. To effectively manage these additional fixed costs, we will need to continuously improve utilization management and minimize unbilled employee time. In addition, this change may cause other disruptions to our business. If we fail to manage this transition, our business could be harmed. IF WE DO NOT CONTINUALLY ENHANCE OUR SERVICES TO MEET THE CHANGING NEEDS OF OUR CUSTOMERS, WE MAY LOSE FUTURE BUSINESS TO OUR COMPETITORS We believe that our future success will depend, to a significant extent, upon our ability to enhance our existing services and to introduce new services to meet the requirements of our customers in a rapidly developing and evolving market. Our present or future services may not satisfy the evolving needs of the telecommunications market. If we are unable to anticipate or respond adequately to customer needs, we may lose business and our financial performance will suffer. OUR PLANS FOR INTERNATIONAL EXPANSION MAY NOT SUCCEED, WHICH WOULD HARM OUR BUSINESS Our future revenues depend to a large extent on expansion into international markets through a combination of strategic relationships and internal business expansion. We plan to expand internationally by serving both U.S. companies expanding internationally as well as European and other foreign companies expanding globally. Our future international operations might not succeed for a number of reasons, including: - difficulties in staffing and managing foreign operations; - seasonal reductions in business activity; - fluctuations in currency exchange rates or imposition of currency exchange controls; 9 14 - competition from local and foreign-based consulting companies; - issues relating to uncertainties of laws and enforcement relating to the protection of intellectual property; - unexpected changes in trading policies and regulatory requirements; - legal uncertainties inherent in transnational operations such as export and import regulations, tariffs and other trade barriers; - taxation issues; - operational issues such as longer customer payment cycles and greater difficulties in collecting accounts receivable; - language and cultural differences; - general political and economic trends; and - expropriations of assets, including bank accounts, intellectual property and physical assets by foreign governments. Accordingly, we may not be able to successfully execute our business plan in foreign markets. If revenue from international ventures is not adequate to cover our investment in those ventures, our business could be harmed. IF OUR INTERNATIONAL BUSINESS VOLUMES INCREASE, WE WILL BE EXPOSED TO GREATER FOREIGN CURRENCY EXCHANGE RISKS, WHICH COULD HARM OUR BUSINESS The percentage of our revenues comprised of international engagements increased significantly in the first six months of 1999 and may continue to increase. Some of our international engagements are denominated in the local currency of our clients. Expenses that we incur in delivering these services, consisting primarily of consultant compensation, are typically denominated in U.S. dollars. These expenses may also be denominated in another foreign currency. To the extent that the value of a currency in which our billings are denominated decreases in relation to the U.S. dollar or another currency in which our expenses are denominated, our business, operating results and financial condition could be harmed. We may hedge our foreign currency exposure from time to time, but we cannot assure you that any hedging will be effective. WE EXPECT THE GROWTH OF OUR TMNG.COM BUSINESS TO DRIVE FUTURE REVENUES AND IF THIS DOES NOT HAPPEN OUR BUSINESS MAY SUFFER A significant part of our future growth is dependent upon our ability to grow our TMNG.com business which is focused on providing consulting services to help telecommunications companies build the infrastructure, systems and processes needed to support e-business. To support this growth, we must develop a base of highly skilled consultants with Internet-based skills and proprietary tools. The personnel and skill sets required for our TMNG.com services are different from those used in our traditional lines of business. The personnel that we need to support this business may not be widely available, and we may encounter unforeseen difficulties in recruiting needed personnel for the TMNG.com initiative. We cannot guarantee that we can develop adequate toolsets to address the unique needs of Internet-based companies. Our limited experience within the rapidly changing Internet industry may make it difficult to develop relevant toolsets. Additionally, the continuously evolving nature of the Internet makes it very difficult to establish e-business expertise. If we fail to adequately develop our Internet and e-business skills, we may not be able to capitalize on the growth opportunities presented by these sectors, and our business may be harmed. OUR TMNG.COM BUSINESS IS DEPENDENT ON CONTINUED GROWTH, USE AND ACCEPTANCE OF THE INTERNET AND E-BUSINESS Our success in providing e-business related consulting services depends in part on widespread acceptance and use of the Internet as a way to conduct business. For us to be successful in providing e-business related 10 15 consulting services, our clients must promote e-business to satisfy their customers' needs. Our long-term revenues and profits, if any, substantially depend upon the acceptance and use of the Internet and other online services as an effective medium of commerce. The Internet and e-business may not become a viable long-term commercial marketplace due to potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. The commercial acceptance and use of the Internet may not continue to develop at current rates. Our business would be harmed if: - use of the Internet and other online services does not increase or increases at a slower pace than expected or on-line services do not become viable marketplaces; - the infrastructure for the Internet and other online services does not effectively support future expansion of e-business; or - concerns over security and privacy inhibit the growth of the Internet. WE ARE DEPENDENT ON A LIMITED NUMBER OF KEY PERSONNEL, AND THE LOSS OF THESE INDIVIDUALS COULD HARM OUR BUSINESS Our business consists primarily of the delivery of professional services and, accordingly, our success depends upon the efforts, abilities, business generation capabilities and project execution of our executive officers and key consultants. Our success is also dependent upon the managerial, operational and administrative skills of our executive officers, particularly Richard Nespola, our President and Chief Executive Officer. The loss of any executive officer or key consultant or group of consultants, or the failure of these individuals to generate business or otherwise perform at or above historical levels could harm our business. IF WE FAIL TO PERFORM EFFECTIVELY ON PROJECT ENGAGEMENTS, OUR REPUTATION, AND THEREFORE OUR BUSINESS COULD BE HARMED Many of our engagements come from existing clients or from referrals by existing clients. Therefore, our growth is dependent on our reputation and on client satisfaction. The failure to perform services that meet a client's expectations may damage our reputation and harm our ability to attract new business. Damage to our reputation arising from client dissatisfaction could therefore harm our business. INDUSTRY CONSOLIDATION OR MERGERS AND ACQUISITIONS OF OUR CUSTOMERS COULD HARM OUR BUSINESS The telecommunications industry has begun consolidating, and we believe that this trend will continue for a number of years. Industry consolidation or the formation of joint ventures or alliances could reduce our customer base, reduce the number of potential customers we can target or decrease the demand for our services. A merger or acquisition of one of our customers may result in the elimination, postponement or reduction of external consulting projects by the newly combined company. IF WE FAIL TO DEVELOP LONG-TERM RELATIONSHIPS WITH CUSTOMERS, OUR SUCCESS WOULD BE JEOPARDIZED A substantial majority of our business is derived from repeat customers. Our future success depends to a significant extent on our ability to develop long-term relationships with successful telecommunications providers who will give us new and repeat business. We may be unable to develop new customer relationships and our new or existing customers may be unsuccessful. Our inability to build long-term customer relations or the failure of new or existing customers to be successful would result in a loss of future business which would harm our business. 11 16 A LARGE NUMBER OF OUR PERSONNEL ARE CLASSIFIED AS INDEPENDENT CONTRACTORS FOR TAX AND EMPLOYMENT LAW PURPOSES, AND IF THESE PERSONNEL WERE TO BE RECLASSIFIED AS EMPLOYEES, WE COULD BE SUBJECT TO BACK TAXES, INTEREST, PENALTIES AND OTHER LEGAL CLAIMS WHICH WOULD HARM OUR BUSINESS We provide the substantial majority of our consulting services through independent contractors and, therefore, do not pay federal or state employment taxes or withhold income taxes for such persons. Further, we generally do not include these independent contractors in our benefit plans. In the future, the IRS and state authorities may challenge the status of consultants as independent contractors. Independent contractors may also initiate proceedings to seek reclassification as employees under state law. In either case, if persons engaged by us as independent contractors are determined to be employees by the IRS or any state taxation department, we would be required to pay applicable federal and state employment taxes and withhold income taxes with respect to such persons and could become liable for amounts required to be paid or withheld in prior periods along with penalties. In addition, we could be required to include such persons in our benefit plans retroactively and going forward. As of August 31, 1999, approximately 120 consultants were working on engagements for us as independent contractors. In addition, at least another 100 individuals have worked for us as independent contracts since January 1, 1998. Any challenge by the IRS or state authorities or individuals resulting in a determination that a substantial number of such persons are employees would harm our business. WE COULD BE SUBJECT TO CLAIMS FOR PROFESSIONAL LIABILITY, WHICH COULD HARM OUR BUSINESS As a provider of professional services, we face the risk of liability claims. A liability claim brought against us could harm our business. We may also be subject to claims by our clients for the actions of our consultants and employees arising from damages to clients' business or otherwise. Any such claims could also harm our business. In particular, we are currently a defendant in litigation brought by the bankruptcy trustee of one of our former clients. This litigation seeks to recover $320,000 in consulting fees paid by the former client and also seeks to recover at least $1.85 million for breach of contract, breach of fiduciary duties and negligence. Although we cannot give you any assurances as to the ultimate outcome of this litigation, we believe that the ultimate resolution of this matter will not materially harm our business. THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE, AND OUR INVESTORS MAY EXPERIENCE INVESTMENT LOSSES The market price of our common stock may be volatile. Our stock price could fluctuate in response to a variety of factors, including: - variations in our quarterly operating results; - announcements of technological innovations that render our talent outdated; - introduction of new services or new pricing policies by us or our competitors; - trends in the telecommunications industry; - acquisitions or strategic alliances by us or others in our industry; - failure to achieve financial analysts' or other estimates of our results of operations for any fiscal period; - changes in estimates of our performance or recommendations by financial analysts; and - market conditions in the telecommunications industry and the economy as a whole. In addition, the stock market experiences significant price and volume fluctuations. These fluctuations particularly affect the market prices of the securities of many high technology companies. These broad market fluctuations could harm the market price of our common stock. When the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a securities class action lawsuit against us, we could incur substantial costs defending the lawsuit. A pending class action lawsuit could also divert the time and attention of our management. Any of these events could harm our business. 12 17 WE MAY MAKE ACQUISITIONS, WHICH ENTAIL RISKS THAT COULD HARM OUR BUSINESS As part of our business strategy, we may make acquisitions of, or significant investments in, complementary businesses, although no such acquisitions or investments are currently planned or pending. Any future acquisition would be accompanied by the risks commonly encountered in acquisitions. These risks include: - the difficulty associated with assimilating the personnel and operations of acquired companies or realizing anticipated synergies; - the potential disruption of our ongoing business, the distraction of management and consultants and the diversion of resources; and - adverse effects on our financial statements, including large, one-time write-offs, ongoing charges for amortization of goodwill and assumption of indebtedness and liabilities of acquired businesses. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with any such acquisitions. Additionally, future acquisitions by us could result in our issuing more stock or incurring debt or liabilities, any of which could harm our business or the market price of our common stock. OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR BUSINESS Trademarks, tradenames and trade secrets and other intellectual property rights are important to our success and our competitive position. Although we seek to protect these rights through a variety of means, we cannot assure you that the actions we have taken or may take are adequate to protect these rights. Any claims brought against us, regardless of their merit, could result in costly litigation and the diversion of our financial resources and technical and management personnel. Further, if such claims are proven valid, through litigation or otherwise, we may be required to change our trademarks and pay financial damages, which could harm our business. We generally control access to and distribution of our intellectual property. In addition, we generally seek to protect our intellectual property through confidentiality agreements. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, parties, including former employees or consultants of ours, may attempt to disclose, obtain or use our solutions or technologies. We cannot assure you that the steps we have taken will prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States. PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL RETAIN SUBSTANTIAL CONTROL OVER US AFTER THE OFFERING AND MAY MAKE DECISIONS THAT ARE NOT IN THE BEST INTEREST OF OTHER STOCKHOLDERS Upon completion of this offering, our executive officers, directors and stockholders owning more than five percent of our outstanding common stock (and their affiliates) will, in the aggregate, own approximately % of our outstanding common stock. As a result, such persons, acting together, will have the ability to substantially influence all matters submitted to the stockholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets) and to control our management and affairs. Accordingly, concentration of ownership of our common stock may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, even if such a transaction would be beneficial to other stockholders. THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE Our common stock has never been sold in a public market. An active trading market for our common stock may not develop or be sustained upon the completion of this offering. In addition, the initial offering 13 18 price may not be indicative of the prices that will prevail in the public market after the offering, and the market price of the common stock could fall below the initial public offering price. THE SIGNIFICANT NUMBER OF SHARES OF COMMON STOCK THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR FUTURE MAY HARM THE MARKET PRICE OF OUR COMMON STOCK Sales of a substantial number of shares of our common stock in the public market following this offering could harm the market price for our common stock. This may prevent stockholders from reselling their shares at or above the price at which they purchased their shares. The number of shares of common stock available for sale in the public market is limited by restrictions under federal securities law and under agreements that our stockholders have entered into with the underwriters or with us. WE USED TO BE TAXED UNDER SUBCHAPTER "S" OF THE INTERNAL REVENUE CODE AND CLAIMS OF TAXING AUTHORITIES RELATED TO OUR PRIOR SUBCHAPTER "S" CORPORATION STATUS COULD HARM US From 1993 through 1998, we were taxed as a "pass-through" entity under subchapter "S" of the Internal Revenue Code. Since February 1998, we have been taxed under subchapter "C" of the Internal Revenue Code, which is applicable to most corporations and treats the corporation as an entity that is separate and distinct from its stockholders. If our tax returns for the years in which we were a subchapter "S" corporation were to be audited by the Internal Revenue Service or another taxing authority and an adverse determination was made during the audit, we could be obligated to pay back taxes, interest and penalties. The stockholders of our predecessor entity agreed, at the time we acquired our predecessor, to indemnify us against negative tax consequences arising from our prior "S" corporation status. This indemnity is secured by escrowed funds in an escrow that terminates in February 2001. Accordingly, this indemnity may not be sufficient to cover claims made by the IRS or other taxing authorities, and any such claims could harm our business. INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION If you purchase shares of our common stock, you will incur immediate and substantial dilution in pro forma net tangible book value per share. If other security holders exercise options or warrants to purchase our common stock, you will suffer further dilution. Any additional equity financing may be dilutive to our stockholders and debt financing, if available, may involve restrictive covenants, which may limit our operating flexibility with respect to certain business matters. If additional funds are raised through the issuance of equity securities, the percentage ownership of our stockholders will be reduced. Stockholders may experience additional dilution in net book value per share and such equity securities may have rights, preferences and privileges senior to those of the holders of our common stock. WE DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE We currently intend to retain all available funds for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Contractual restrictions currently prohibit us from paying cash dividends. ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A THIRD PARTY ACQUISITION OF US DIFFICULT Our certificate of incorporation and bylaws and anti-takeover provisions of Delaware law could make it more difficult for a third party to acquire control of us, even if a change in control would be beneficial to stockholders. In addition, our bylaws provide for a classified board, with board members serving staggered three-year terms. The Delaware anti-takeover provisions and the existence of a classified board could make it more difficult for a third party to acquire us. After this offering, the board of directors will have the authority to issue up to 10,000,000 shares of preferred stock. Without any further vote or action on the part of the stockholders, the board of directors will have the authority to determine the price, rights, preferences, privileges and restrictions of the preferred stock. This preferred stock, if it is ever issued, may have preference over the rights of the holders of common 14 19 stock. Although the ability to issue preferred stock provides us with flexibility in connection with possible acquisitions and other corporate purposes, the issuance may also make it more difficult for a third party to acquire a majority of our outstanding voting stock. We currently have no plans to issue preferred stock. All of this could limit the price that some investors might be willing to pay in the future for shares of our common stock. IF OUR INTERNAL SYSTEMS OR THE INTERNAL SYSTEMS OF OUR CUSTOMERS OR SUPPLIERS ARE NOT YEAR 2000 COMPLIANT, OUR BUSINESS COULD BE HARMED We cannot assure you that our computer systems and software products do not contain undetected errors or defects associated with Year 2000 data functions, nor can we assure you that the software components we have acquired from third parties will be Year 2000 compliant. This failure to be Year 2000 compliant could result in system failures, delays or miscalculations. Computer systems and software that have not been developed or enhanced recently may need to be upgraded or replaced to comply with Year 2000 requirements. If we discover any Year 2000 errors or defects in our internal systems, we could incur substantial costs in making repairs. The resulting disruption of our operations could harm our business. Furthermore, the Internet operations of many of our customers and suppliers may be affected by Year 2000 complications. The failure of our customers or suppliers to ensure that their systems are Year 2000 compliant could harm our customers and suppliers, resulting in our inability to obtain necessary data communication and telecommunication capacity, which in turn could harm our business. 15 20 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties, which may include statements about our: - business strategy; - financial performance and trends affecting our business; and - plans, objectives, expectations and intentions contained in this prospectus that are not historical facts. When used in this prospectus, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are generally intended to identify forward-looking statements. In addition, this prospectus includes statistical data that comes from information published by independent sources, including International Data Corporation (IDC). Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of reasons, including those discussed under "Risk Factors" and elsewhere in this prospectus. We assume no obligation to update any forward-looking statements. USE OF PROCEEDS We estimate that we will receive proceeds of $ from the sale of the shares of common stock we are offering assuming a public offering price of $ per share and after deducting the underwriting discount and our estimated offering expenses. We intend to use approximately $23.4 million of the proceeds of the offering for repayment of indebtedness. We plan to use the remainder of the proceeds for general corporate purposes, including working capital. We may also use some of the proceeds to acquire other complementary businesses, although we have no current plans relating to any of these transactions. Pending these uses, the net proceeds of this offering will be invested in short-term, investment grade, interest-bearing securities. The indebtedness to be repaid with the proceeds of this offering consists of two term loans, with principal balances of $11.4 million and $12.0 million at July 3, 1999, and any outstanding borrowings under our $5.0 million revolving credit facility. As of July 3, 1999, no borrowings were outstanding under our revolving credit facility. The term loans and revolving credit facility are secured by a pledge of substantially all of our assets. We pay quarterly interest on the term loan that has an $11.4 million principal balance at the London Interbank Offered Rate, or LIBOR, plus 2.75%. We pay quarterly interest on the other term loan at LIBOR plus 3.00%. As of July 3, 1999, LIBOR equaled 5.11% and the interest rates on our term loans were 7.86% and 8.11%, respectively. Both of the term loans mature on December 31, 2003. The terms of our indebtedness require us to maintain specified financial ratios and observe additional restrictive covenants. As of July 3, 1999, we were in compliance with these ratios and covenants. DIVIDEND POLICY We currently expect to retain our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Covenants in our bank credit agreements prohibit the payment of cash dividends. 16 21 CAPITALIZATION The following table sets forth as of July 3, 1999: - our actual capitalization; and - our pro forma capitalization as adjusted to reflect the proceeds from the sale of shares of our common stock offered hereby at an assumed initial public offering price of $ per share and after deducting the underwriting discount and estimated offering expenses and repayment of debt with the net proceeds of this offering. The actual information below is qualified by, and should be read in conjunction with, our consolidated financial statements and related notes appearing elsewhere in this prospectus.
JULY 3, 1999 --------------------------- PRO FORMA ACTUAL AS ADJUSTED ---------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) Long-term debt, including current portion................... $ 23,350 Stockholders' equity (deficiency in assets): Preferred stock, $0.001 par value; 10,000,000 shares authorized, none issued and outstanding, Actual and Pro forma as adjusted...................................... Common stock, $0.001 par value; 100,000,000 shares authorized, shares issued and outstanding, at amount paid in(1): Actual: 22,566,498 shares; and Pro Forma As Adjusted: shares(1)................................. 21,585 Retained earnings (deficit)(2)............................ (33,624) Accumulated other comprehensive income -- foreign currency translation adjustment............................................. (4) (4) Unearned compensation..................................... (2,313) Total stockholders' equity (deficiency in assets)........................................... (14,356) -------- ------- Total capitalization.............................. $ 8,994 $ ======== =======
- ------------------------- (1) The number of shares of common stock outstanding at July 3, 1999 excludes: 1,950,000 shares issuable upon the exercise of options under our 1998 equity incentive plan consisting of: 1,221,500 shares underlying options outstanding at a weighted average exercise price of $1.58 per share, of which 100,000 are exercisable as of July 3, 1999; and 728,500 shares underlying options available for future grants. (2) Pro Forma As Adjusted retained earnings (deficit) reflects $234,000 of charges for deferred financing costs incurred in connection with our February 1998 leveraged recapitalization, eliminated in connection with the retirement of our long-term debt. 17 22 DILUTION Our net tangible book value as of July 3, 1999 was approximately ($14.5) million, or approximately ($.06) per share of common stock. Net tangible book value per share represents the amount of tangible assets less total liabilities, divided by the shares of common stock outstanding as of July 3, 1999. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after the offering. After giving effect to our sale of shares of common stock in this offering at an assumed public offering price of $ per share and after deducting the underwriting discount and estimated offering expenses, our pro forma as adjusted net tangible book value as of July 3, 1999 would have been approximately $ million, or $ per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $ per share to purchasers of common stock in this offering. Initial public offering price per share..................... Net tangible book value per share as of July 3, 1999...... Increase per share attributable to new investors.......... Pro forma as adjusted net tangible book value per share..... Dilution per share to new investors.........................
The following table sets forth the total consideration paid and the average price per share paid by the existing stockholders and by new investors, before deducting estimated underwriting discounts and commissions and offering expenses payable by us at an assumed public offering price of $ per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ---------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing stockholders................. 22,566,498 $17,485,000 $0.77 New investors......................... ---------- ----- ----------- ----- ----- Total....................... ========== ===== =========== ===== =====
The foregoing computations exclude 1,221,500 shares of common stock subject to options issued at a weighted average exercise price of $1.58 per share granted under our 1998 equity incentive plan. To the extent these options are exercised, there would be additional dilution to investors purchasing shares in this offering. 18 23 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA The following unaudited pro forma condensed consolidated financial data has been prepared by our management from our consolidated financial statements and the notes to those statements included elsewhere in this prospectus. We believe that the accounting treatment used to prepare the pro forma data provides a reasonable basis on which to present this unaudited pro forma condensed consolidated financial data. The unaudited pro forma condensed consolidated statement of operations for fiscal 1998, and the six months ended July 3, 1999, reflects adjustments as if our leveraged recapitalization (which occurred in February, 1998) and this offering had occurred on January 1, 1998. The unaudited pro forma as adjusted condensed consolidated balance sheet as of July 3, 1999, gives effect to this offering and the use of proceeds as stated in "Use of Proceeds" as if it had occurred on July 3, 1999. We are providing the unaudited pro forma condensed consolidated financial data for informational purposes only. The pro forma condensed financial data shown below may not necessarily be indicative of either our financial position or the results of our operations which would have occurred had the recapitalization and this offering actually occurred on the dates described above, nor are they necessarily indicative of the results of operations for any future period. The unaudited pro forma condensed consolidated financial data and accompanying notes should be read in conjunction with our financial statements and the notes to those statements included elsewhere in this prospectus.
FISCAL YEAR 1998 ---------------------------------------------------------------------- ADJUSTMENTS ADJUSTMENTS RELATED TO THE PRO RELATED TO THIS PRO FORMA ACTUAL RECAPITALIZATION FORMA OFFERING AS ADJUSTED ------- ---------------- ------- --------------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS: Revenues............................................. $32,103 $32,103 $32,103 Cost of services: Direct cost of services............................ 17,411 17,411 17,411 Equity related charges............................. 239 239 239 ------- ------- ------- Total cost of services......................... 17,650 17,650 17,650 ------- ------- ------- Gross profit......................................... 14,453 14,453 14,453 Operating expenses: Selling, general and administrative expenses....... 6,158 $(113)(1) 6,045 6,045 Equity related charges............................. 22 22 22 ------- ----- ------- ------- Total operating expenses....................... 6,180 (113) 6,067 6,067 ------- ------- ------- Income from operations............................... 8,273 113 8,386 8,386 Other income (expense)............................... 88 88 88 Interest income...................................... 18 18 18 Interest expense..................................... (2,054) (255)(2) (2,309) $2,309(3) ------- ----- ------- ------ ------- Income before provision for income taxes and extraordinary items................................ 6,325 (142) 6,183 2,309 8,492 Provision for income taxes........................... 3,282 (57)(4) 2,473 924(4) 3,397 (752)(5) ------- ----- ------- ------ ------- Net income available to common stockholders.......... $ 3,043 $ 667 $ 3,710 $1,385 $ 5,095 ======= ===== ======= ====== ======= Net income per common share Basic.............................................. $ 0.14 $ 0.16 ======= ======= ======= Diluted............................................ $ 0.13 $ 0.16 ======= ======= ======= Weighted average common shares outstanding(6) Basic.............................................. 22,500 22,500 ======= ======= ======= Diluted............................................ 22,944 22,944 ======= ======= =======
- ------------------------- (see accompanying notes) 19 24
SIX MONTHS ENDED JULY 3, 1999 ----------------------------------------------------------------------- ADJUSTMENTS ADJUSTMENTS RELATED TO THE PRO RELATED TO THIS PRO FORMA ACTUAL RECAPITALIZATION FORMA OFFERING AS ADJUSTED -------- ---------------- -------- --------------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS: Revenues............................... $ 23,856 $ 23,856 $23,856 Cost of services: Direct cost of services.............. 12,377 12,377 12,377 Equity related charges............... 956 956 956 -------- -------- ------- Total cost of services.......... 13,333 13,333 13,333 -------- -------- ------- Gross profit........................... 10,523 10,523 10,523 Operating expenses: Selling, general and administrative expenses........................... 4,886 4,886 4,886 Equity related charges............... 570 570 570 -------- -------- ------- Total operating expenses........ 5,456 5,456 5,456 -------- -------- ------- Income from operations................. 5,067 5,067 5,067 Other income (expense)................. (79) (79) (79) Interest income........................ 2 2 2 Interest expense....................... (1,116) (1,116) $ 1,116(3) 0 -------- -------- ------- ------- Income before provision for income taxes................................ 3,874 3,874 1,116 4,990 Provision for income taxes............. 1,612 1,612 446(4) 2,058 -------- -------- ------- ------- Net income available to common stockholders......................... $ 2,262 $ 2,262 $ 670 $ 2,932 ======== ======== ======= ======= Net income per common share Basic................................ $ 0.10 $ 0.10 ======== ======== ======= Diluted.............................. $ 0.10 $ 0.10 ======== ======== ======= Weighted average common shares outstanding(6) Basic................................ 22,507 22,507 ======== ======== ======= Diluted.............................. 23,639 23,639 ======== ======== =======
- ------------------------- (see accompanying notes) 20 25
SIX MONTHS ENDED JULY 4, 1998 ---------------------------------------------------------------------- ADJUSTMENTS ADJUSTMENTS RELATED TO THE PRO RELATED TO THIS PRO FORMA ACTUAL RECAPITALIZATION FORMA OFFERING AS ADJUSTED ------- ---------------- ------- --------------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS: Revenues................................ $13,032 $13,032 $13,032 Cost of services: Direct cost of services............... 6,996 6,996 6,996 Equity related charges................ ------- ------- ------- Total cost of services........... 6,996 6,996 6,996 ------- ------- ------- Gross profit............................ 6,036 6,036 6,036 Operating expenses: Selling, general and administrative expenses............................ 2,400 $(113)(1) 2,287 2,287 Equity related charges................ ------- ----- ------- ------- Total operating expenses......... 2,400 (113) 2,287 2,287 ------- ------- ------- Income from operations.................. 3,636 113 3,749 3,749 Other income (expense).................. 52 52 52 Interest income......................... 17 17 17 Interest expense........................ (909) (255)(2) (1,164) $1,164(3) ------- ----- ------- ------ ------- Income before provision for income taxes and extraordinary item................ 2,796 (142) 2,654 1,164 3,818 Provision for income taxes.............. 1,919 (57)(4) 1,061 466(4) 1,527 (801)(5) ------- ----- ------- ------ ------- Net income available to common stockholders.......................... $ 877 $ 716 $ 1,593 $ 698 $ 2,291 ======= ===== ======= ====== ======= Net income per common share Basic................................. $ 0.04 $ 0.07 ======= ======= ======= Diluted............................... $ 0.04 $ 0.07 ======= ======= ======= Weighted average common shares outstanding(6) Basic................................. 22,500 22,500 ======= ======= ======= Diluted............................... 22,600 22,600 ======= ======= =======
- ------------------------- (see accompanying notes) NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (1) Represents a reduction in compensation currently payable to our Chief Executive Officer as required under his employment agreement entered into in connection with the February 1998 recapitalization, in excess of actual compensation paid during the period from January 1, 1998 through February 12, 1998. (2) The interest and amortization expense pro forma adjustment relating to the recapitalization is as follows:
SIX MONTHS ENDED ---------------------------- FISCAL 1998 JULY 4, 1998 JULY 3, 1999 ----------- ------------ ------------ (IN THOUSANDS) Interest expense relating to the bank term loans using an assumed interest rate of 7.9% per annum for the term loan that has $11.4 million outstanding and 8.6% per annum for the other term loan....................................... $238 $238 $-- Interest expense relating to the revolving credit facility using an assumed interest rate of 8.4% per annum.......... 5 5 -- Amortization of deferred financing costs relating to borrowings under the term loans........................... 12 12 -- ---- ---- -- $255 $255 $-- ==== ==== ==
21 26 (3) Represents the elimination of interest and amortization expense due to the repayment of such debt with the proceeds of this offering as follows:
SIX MONTHS ENDED ---------------------------- FISCAL 1998 JULY 4, 1998 JULY 3, 1999 ----------- ------------ ------------ (IN THOUSANDS) Elimination of interest expense relating to repayment of approximately $23.4 million in term loans................. $2,050 $1,018 $ 983 Elimination of interest expense relating to repayment of revolving credit facility................................. 141 90 76 Elimination of deferred financing cost amortization......... 118 56 57 ------ ------ ------ $2,309 $1,164 $1,116 ====== ====== ======
(4) Represents adjustment for the tax effect of notes (1), (2) and (3), as applicable, at an effective rate of 40.0%. (5) We were a subchapter "S" corporation before closing of the February 1998 recapitalization. The pro forma income statement information reflects adjustments to historical net income as if we had not elected subchapter "S" corporation status for federal and state income tax purposes and reflects the income tax effect of the pro forma adjustments related to the February 1998 recapitalization and this offering assuming an effective tax rate of 40.0%. (6) Pro forma as adjusted weighted average shares outstanding assumes that the offering occurred at the beginning of the period and the issuance of shares of common stock issuable in this offering were outstanding at January 1, 1998. 22 27
JULY 3, 1999 ------------------------------------------ ADJUSTMENTS RELATED TO THIS PRO FORMA ACTUAL OFFERING AS ADJUSTED -------- --------------- ----------- (IN THOUSANDS) Unaudited Pro Forma Condensed Consolidated Balance Sheet Data: ASSETS CURRENT ASSETS: Cash................................................... $ 933 $ (1) $ (23,350)(2) Receivables: Accounts receivable.................................. 4,458 Accounts receivable -- unbilled...................... 5,017 -------- -------- -------- 9,475 Less: allowance for doubtful accounts................ (193) -------- -------- -------- 9,282 Prepaid tax asset...................................... 775 156(3) Other assets........................................... 62 -------- -------- -------- Total current assets......................... 11,052 (23,194) DEFERRED FINANCING COSTS, net.......................... 390 (390)(3) -- PROPERTY AND EQUIPMENT, net............................ 544 DEFERRED TAX ASSET..................................... 104 -------- -------- -------- TOTAL ASSETS................................. $ 12,090 $(23,584) $ ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) CURRENT LIABILITIES: Long-term debt -- current portion.................... $ 2,225 $ (2,225)(2) $ -- Bank overdraft....................................... 244 Trade accounts payable............................... 788 Trade accounts payable -- related party.............. -- -- Accrued payroll, bonuses and related expenses........ 1,528 Accrued interest payable............................. 69 Other accrued liabilities............................ 355 Deferred taxes....................................... 112 -------- -------- -------- Total current liabilities.................... 5,321 (2,225) LONG-TERM DEBT......................................... 21,125 (21,125)(2) -- -------- -------- -------- STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS): Common stock......................................... 21,585 (1) Retained earnings (deficit).......................... (33,624) (234)(3) Accumulated other comprehensive income -- Foreign currency translation and adjustment....... (4) Unearned compensation................................ (2,313) -------- -------- -------- Total stockholders' equity (deficiency in assets)...... (14,356) (234) -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)..................... $ 12,090 $(23,584) $ ======== ======== ========
Notes to unaudited pro forma condensed consolidated balance sheet. (1) Represents the issuance of shares of common stock in connection with this offering at an assumed initial public offering price of $ per share, less the underwriting discount and estimated offering expenses. (2) Represents the application of the net proceeds of this offering to repay the outstanding balances of the term loans and revolving credit facility. (3) Represents deferred financing costs associated with the term loans which will be charged against income upon the completion of this offering, net of tax effect. 23 28 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for the six months ended July 4, 1998, are derived from our unaudited financial statements and the notes to those statements included elsewhere in this prospectus. In the opinion of our management, our unaudited financial statements have been prepared on the same basis as our audited financial statements and include all adjustments, consisting of only normal recurring adjustments, and adjustments necessary to record the recapitalization discussed in note 1 to our consolidated financial statements included elsewhere in this prospectus, necessary for a fair presentation of our financial condition and results of operations for such periods. The selected financial data at December 31, 1994 and 1995, and for fiscal 1994 have been derived from our unaudited financial statements, which are not included in this prospectus. The selected financial data at December 31, 1996, and for fiscal 1995, have been derived from our audited financial statements and the notes to those statements which are not included in this prospectus. The selected financial data at December 31, 1997, January 2, 1999, July 3, 1999 and for the six months ended July 3, 1999 and for each of fiscal years 1996, 1997 and 1998 have been derived from our audited financial statements and the notes to those statements included elsewhere in this prospectus. The selected financial data should be read in conjunction with, and is qualified in its entirety by, "Management's Discussion and Analysis of Financial Condition and Results of Operations," our audited financial statements and the notes to those statements and the other financial data included elsewhere in this prospectus.
FISCAL YEAR SIX MONTHS ENDED --------------------------------------------- ------------------- JULY 4, JULY 3, 1994 1995 1996 1997 1998 1998 1999 ---- ------- ------- ------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues.................................................... $-- $ 7,299 $17,279 $20,184 $ 32,103 $ 13,032 $ 23,856 Cost of services: Direct cost of services................................... -- 4,303 9,648 11,384 17,411 6,996 12,377 Equity related charges.................................... 239 956 --- ------- ------- ------- -------- -------- -------- Total cost of services.............................. 4,303 9,648 11,384 17,650 6,996 13,333 --- ------- ------- ------- -------- -------- -------- Gross profit................................................ -- 2,996 7,631 8,800 14,453 6,036 10,523 Operating expenses: Selling, general and administrative expenses.............. -- 1,242 2,798 3,280 6,158 2,400 4,886 Equity related charges.................................... 22 570 --- ------- ------- ------- -------- -------- -------- Total operating expenses............................ 1,242 2,798 3,280 6,180 2,400 5,456 --- ------- ------- ------- -------- -------- -------- Income from operations...................................... -- 1,754 4,833 5,520 8,273 3,636 5,067 Other income (expense): Interest income........................................... -- 6 16 6 18 17 2 Interest expense.......................................... -- (2) (136) (30) (2,054) (909) (1,116) Other, net................................................ -- 8 88 52 (79) --- ------- ------- ------- -------- -------- -------- Total other income (expense)................................ -- 4 (120) (16) (1,948) (840) (1,193) Income before provision for income taxes.................... -- 1,758 4,713 5,504 6,325 2,796 3,874 Provision for income taxes.................................. -- 3,282 1,919 1,612 --- ------- ------- ------- -------- -------- -------- Net income available to common stockholders................. $-- $ 1,758 $ 4,713 $ 5,504 $ 3,043 $ 877 $ 2,262 === ======= ======= ======= ======== ======== ======== Net income per common share Basic................................................... $-- $ 0.08 $ 0.21 $ 0.24 $ 0.14 $ 0.04 $ 0.10 === ======= ======= ======= ======== ======== ======== Diluted................................................. $-- $ 0.08 $ 0.21 $ 0.24 $ 0.13 $ 0.04 $ 0.10 === ======= ======= ======= ======== ======== ======== Weighted average common shares outstanding Basic................................................... -- 22,500 22,500 22,500 22,500 22,500 22,507 Diluted................................................. -- 22,500 22,500 22,500 22,944 22,600 23,639 Pro forma provision for income taxes(1)..................... $-- $ 703 $ 1,885 $ 2,202 $ 2,530 $ 1,118 $ 1,612 === ======= ======= ======= ======== ======== ======== Pro forma net income available to common Stockholders....... $-- $ 1,055 $ 2,828 $ 3,302 $ 3,795 $ 1,678 $ 2,262 === ======= ======= ======= ======== ======== ======== "S" corporation distributions............................... $-- $ 1,450 $ 6,095 $ 2,600 $ 4,664 $ 4,664 $ -- === ======= ======= ======= ======== ======== ======== CONSOLIDATED BALANCE SHEET DATA: Net working capital......................................... $-- $ 2,809 $ 1,743 $ 4,689 $ 6,025 $ 4,789 $ 5,731 Total assets................................................ -- 3,443 4,121 5,483 11,006 8,487 12,090 Total debt (including current debt)......................... -- 26,017 25,263 23,350 Total Stockholders' Equity (Deficiency in assets)........... $-- $ 2,809 $ 1,743 $ 4,709 $(18,271) $(20,404) $(14,356)
- ------------------------- (1) Before February 12, 1998, we were a subchapter "S" corporation and, accordingly, federal and state income taxes were paid at the stockholder level only. Upon consummation of the February 1998 leveraged recapitalization, we terminated our subchapter "S" corporation status and, accordingly became subject to federal and state income taxes. The pro forma income statement information reflects adjustments to historical net income as if we had not elected subchapter "S" corporation status for federal and state income tax purposes. 24 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements based upon current expectations that involve risks and uncertainties. When used in this prospectus, the words "intend," "anticipate," "believe," "estimate," "plan" and "expect" and similar expressions as they relate to us are included to identify forward-looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. OVERVIEW We are a global management consulting firm that specializes in serving the telecommunications industry. We provide comprehensive, mission-critical services that enable our clients to meet the challenges of today's competitive and dynamic telecommunications environment, including the growing demand for Internet infrastructure and e-business solutions. Our clients include communications service providers, technology companies and the investment firms that support the telecommunications industry. We leverage our industry expertise and proprietary methodologies to provide strategic, management and operational support to our clients. From 1994 through 1998, our revenues grew at a compounded annual growth rate of over %. Revenue for the six months ended July 3, 1999 increased by 83.1% over the six months ended July 4, 1998. The principal factors driving revenue growth have been increased competition in the telecommunications industry resulting from deregulation, new technology and convergence of voice and data services. The combined factors create new opportunities and challenges for telecommunications companies, resulting in a need for independent expertise by both incumbent carriers and new market entrants alike. Beginning with fiscal year 1998, we switched to a four week -- four week -- five week quarterly accounting system in which each quarter is 13 weeks and ends on a Saturday. As a result of this change, our fiscal year end changed from being December 31 to being the Saturday which is 13 weeks from the end of the third fiscal quarter. Our 1998 fiscal year therefore ended on January 2, 1999. The words "fiscal year" in this prospectus refer to the fiscal year most closely coinciding with the related calendar year. When we refer to the "six months of 1998" and the "six months of 1999" in this prospectus, we mean the six month period ending on July 4, 1998 and July 3, 1999, respectively. Sources of Revenue and Revenue Recognition Policy. Our revenues consist of consulting fees for professional services and related expense reimbursements. Substantially all of our consulting services are contracted on a time and materials basis. We recognize substantially all revenues in the period in which the service is performed. We generally begin a client relationship with a short-term engagement utilizing a few consultants. Our sales strategy focuses on building long-term relationships with both new and existing clients to gain additional engagements within existing accounts and referrals for new clients. We also use strategic alliances with other companies to sell our services and anticipate that we will continue to do so in the future. Because we are a consulting company, we experience fluctuations in revenues derived from our clients during the course of a project lifecycle. As a result, the volume of work performed for specific clients varies from period to period and a major client from one period may not use our services in another period. In addition, our clients generally may end their engagements with little or no penalty or notice. If a client engagement ends earlier than we expect, we must re-deploy professional service personnel as any resulting unbillable time could harm our margins. Through fiscal year 1998, most of our engagements were in North America. We have experienced growth in our international consulting engagements, primarily in Europe. International revenues during the first six months of fiscal year 1999 grew to 24.1% of total revenue from 19.5% in 25 30 the comparable period of the prior year. We expect that international revenues will continue to represent an increasing percentage of total revenues. Our knowledge and focus on trends impacting markets abroad enable us to provide the expert advice needed by international clients competing in newly deregulated markets and by U.S. companies seeking to expand their global reach. We continue to expand our geographic presence in key locations based on industry demand and our clients' needs and opportunities. We are planning to introduce our TMNG.com services, which will be directed at assisting communications service providers in building the infrastructure to support e-business. We are recruiting additional consultants to support this business and designing our proprietary toolsets to focus on e-business, including our TMNG e-Lexicon. While we expect to incur substantial costs in connection with the development of TMNG.com, we also expect that a significant portion of our long-term service revenues will be attributable to our TMNG.com service offerings. Should these revenues fall short of our expectations for any reason, our margins could be harmed. Customer concentration. While we have a large number of customers, we also depend on a few key customers for a significant portion of our revenues. In fiscal year 1998, 42.5% of our revenues came from three customers with services to each accounting for more than ten percent of our revenues. For the first six months of fiscal year 1999, 57.3% of our revenues came from two customers with each accounting for more than ten percent of our revenues. We generally negotiate discounted pricing for large projects with long-term customers. Because our clients typically engage our services on a project basis, their needs for our services vary substantially from period to period. While we are seeking to diversify our customer base and expand the portion of our revenues which is derived from service through various channels, we anticipate that our operating results will continue to depend on volume services to a relatively small number of communication service providers and technology vendors. Cost of Services. Cost of services consists primarily of fees paid to independent contractors and client-related compensation for consultants who are employees as well as equity related non-cash charges we incur in connection with the grants of equity securities primarily to consultants. Employee compensation includes certain unbillable time, training, vacation time, benefits and payroll taxes. Our annual gross margins have ranged from % to 45.1% during the period from 1994 to 1998. Margins are primarily impacted by: - the type of consulting services provided; - the size of service contracts and negotiated volume discounts; - changes in our pricing policies and those of our competitors; - utilization rates of consultants and independent contractors; and - employee and independent contractor costs associated with a competitive labor market. In addition, gross margins may be impacted by a change we are beginning to implement in our consultants' status. Currently, the majority of our consulting engagements are staffed by independent contractors. To improve our ability to attract and retain personnel, we plan to offer certain current consultants either regular full-time employment or contingent employment. Contingent employees are eligible for stock options and generally receive company-paid medical insurance, vacation and other employee benefits. However, instead of receiving a regular salary, contingent employees will be compensated only for time spent serving on consulting projects for customers or requested assistance on internal projects, including updating our toolsets. We believe our contingent employment model is unique and provides our consultants with employee benefits, greater flexibility for personal time and organizational support while providing us greater flexibility in managing utilization rates than if we hired these consultants as full-time employees. In addition, as we increase the full-time employee portion of our consultant base, it becomes increasingly important for us to manage utilization rates. If we are unable to manage utilization rates, our gross 26 31 margins may be negatively impacted because of the additional fixed costs associated with full-time employees. Operating Expenses. Operating expenses include selling, general and administrative expenses as well as equity related non-cash charges we incur in connection with the grants of equity security primarily to partners, principals and certain senior executives. Sales and marketing expenses consist primarily of personnel and related costs for our direct client marketing efforts and marketing staff. We primarily use a relationship sales model in which our partners, principals and consultants generate revenues. We take these revenue generating activities into account when determining these individuals' quarterly bonus compensation, which is generally recorded as sales and marketing expenses. Other expenditures include costs associated with marketing materials, trade shows and advertising. To increase market awareness of our company, we intend to continue to expand our direct and indirect sales efforts substantially, both domestically and internationally. We will continue investment in sales and marketing by adding to our senior executive team to support targeted marketing programs, promoting recognition of our senior executives through published articles and trade show presentations, and advertisement of new service offerings, including a substantial portion for TMNG.com. We expect our sales and marketing expenses to increase in the future. General and administrative expenses consist primarily of salaries for employees engaged primarily in executive and support functions as well as expenses for corporate infrastructure. We plan to maintain our flexible, virtual structure as we grow. We do not expect to invest heavily in facilities, and we plan to rely on electronic communication and virtual offices, like our eRooms, to support our organization. We are also investing heavily in updating our toolsets and developing new ones. A substantial portion of our recruiting and toolset development expenses will be incurred in connection with the development of our TMNG.com service line. Our development expenditures are expensed when incurred. We expect our selling, general and administrative expenses to increase in absolute dollars and as a percentage of revenues, due in part to the expenses we expect to incur in connection with the development of TMNG.com. Equity related charges. In connection with the grant of certain stock options to employees during the six months ended July 3, 1999 and fiscal year ended 1998, we recorded unearned compensation of $2,372,000 and $305,000, respectively, representing the difference between the deemed value of common stock for accounting purposes and the exercise price of these options at the date of grant. Unearned compensation is presented as a reduction of stockholders' equity (deficit) and is amortized over the vesting period of the applicable options. We expensed $364,000 million of unearned compensation during the six months ended July 3, 1999. In addition, $261,000 and $721,000 of compensation expense was recorded for stock options granted to independent contractors and other non-employees during fiscal year ended 1998 and the six months ended July 3, 1999. This employee and non-employee compensation expense relates to stock options awarded to individuals providing consulting service and operating activities. Recapitalization. From our inception through February 12, 1998, the date of our leveraged recapitalization, our pre-recapitalization stockholders, Richard P. Nespola, Micky K. Woo, Alan H. Staples and Ralph R. Peck conducted operations through several loosely affiliated entities. On February 12, 1998, we effected a leveraged recapitalization with Behrman Capital II, L.P. and affiliated venture funds in which the Behrman Capital funds acquired shares of common stock for $20.0 million. At that time, we also borrowed $24.0 million in term loans and obtained a $5.0 million revolving credit facility. The proceeds from the investment by Behrman Capital and the term loans were used principally to fund the redemption of approximately 60% of the common stock owned by Messrs. Nespola, Woo, Peck and Staples for an aggregate redemption price of approximately $38.7 million. In connection with the recapitalization, we made distributions to the stockholders of approximately $4.7 million, representing accumulated equity in our company and resulting in negative stockholders' equity of $21.4 million. We accounted for the transaction using the leveraged recapitalization accounting convention. As a result of the recapitalization, we incurred non-recurring recapitalization costs totaling approximately $3.1 million related to offering costs. 27 32 Prior to the recapitalization, we compensated Messrs. Woo, Peck and Staples for oversight and strategic advice principally through management fees paid to affiliates owned by them, along with fees for independent contractor services provided to our clients through these affiliated entities. At the time of the recapitalization, we ceased making payments of management fees and entered into an employment agreement with each of Messrs. Nespola, Woo, Peck and Staples. From 1993 through February 12, 1998, we elected to be treated as a subchapter "S" corporation for tax purposes. During that period, all of our outstanding common stock was owned by Messrs. Nespola, Woo, Peck and Staples. Upon consummation of the recapitalization, we terminated our subchapter "S" corporation election and became obligated to pay federal and state income taxes as a subchapter "C" corporation. We estimate our effective income tax rate will be approximately 40% of taxable income in fiscal year 1999. RESULTS OF OPERATIONS The following table sets forth financial data for the fiscal years indicated as a percentage of revenues:
PERCENTAGE OF REVENUES ------------------------------------------------------- FISCAL YEAR ENDED SIX MONTHS ENDED ----------------------- ---------------------------- 1996 1997 1998 JULY 4, 1998 JULY 3, 1999 ----- ----- ----- ------------ ------------ (UNAUDITED) Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of services: Direct cost of services............... 55.8 56.4 54.2 53.7 51.9 Equity related charges................ 0.7 4.0 ----- ----- ----- ----- ----- Total cost of services............. 55.8 56.4 54.9 53.7 55.9 Gross margin............................ 44.2 43.6 45.1 46.3 44.1 ----- ----- ----- ----- ----- Operating expenses: Selling, general and administrative expenses........................... 16.2 16.3 19.2 18.4 20.5 Equity related charges................ 0.1 2.4 ----- ----- ----- ----- ----- Total operating expenses........... 16.2 16.3 19.3 18.4 22.9 Income from operations.................. 28.0 27.3 25.8 27.9 21.2 Other income (expense): Interest income....................... 0.1 .1 Interest expense...................... (0.8) (6.4) (7.0) (4.7) Other expenses, net................... 0.3 0.4 (0.3) ----- ----- ----- ----- ----- Income before income taxes.............. 27.3 27.3 19.7 21.4 16.2 ----- ----- ----- ----- ----- Provisions for income tax............... 10.2 14.7 6.7 ----- ----- ----- ----- ----- Net income............................ 27.3% 27.3% 9.5% 6.7% 9.5% ===== ===== ===== ===== =====
COMPARISON OF SIX MONTHS ENDED JULY 3, 1999 AND JULY 4, 1998 Revenues. Revenues increased 83.1% to $23.9 million for the six month period for 1999 from $13.0 million for the six month period for 1998. The increase was primarily attributable to a net increase in consulting services offset by certain negotiated volume discounts. Revenues for the first six months of 1999 included revenues from services provided to one large customer, which accounted for 44.2% of our revenues during that period. Our international revenue expanded to 24.1% of revenues in the six month period for 1999 compared to 19.5% for the six month period for 1998, primarily due to an increase in European business. 28 33 Cost of Services Direct Cost of Services. Direct cost of services increased to $12.5 million for the six month period for 1999 from $7.0 million for the six month period for 1998. Direct cost of services as a percent of revenue decreased from 53.7% for the six month period for 1998 to 51.9% for the six month period for 1999. Direct gross margins improved because our consultant mix changed to include more employees in fiscal year 1999 compared to fiscal year 1998. A greater portion of full-time employees at a relatively constant utilization rate tends to improve gross margins because of their overall lower fixed salary compared to the higher variable costs we pay our independent contractors. The margin improvement provided by increasing the full-time employee base was slightly offset by discounted customer pricing associated with large engagements. Equity Related Charges. We recorded $956,000 of non-cash stock based compensation charge in the six month period for 1999 in connection with the issuance of stock options to our consultants. This charge reduced gross margin in this period by 4.0%. Operating Expenses Selling, General and Administrative Expense. Selling, general and administrative expenses increased to $4.9 million for the six month period for 1999 from $2.4 million for the six month period for 1998. Selling, general and administrative expense as a percentage of revenue increased to 20.5% for the six month period for 1999 from 18.4% for the six month period for 1998. We incurred an increase in marketing costs primarily as a result of an increase in sales bonuses associated with implementation of a revised incentive program for our consultants and increased revenues for the six month period for 1999. We incurred an increase in selling, general and administrative expense primarily due to the personnel and facility costs associated with opening a new corporate office in the third quarter of fiscal year 1998 and increased administrative staffing to manage and support the growth of the organization. We also hired managing directors to lead our European and Canadian subsidiaries at the beginning of fiscal year 1999. In addition, we established reserves of $160,000 for a potential claim brought against us by a trustee in bankruptcy for a former client. Equity Related Charges. We recorded $570,000 of non-cash stock based compensation charges in the six month period for 1999 in connection with the issuance of stock options to our partners, principals and certain senior executives. This charge increased operating expenses as a percentage of revenue by 2.4% in this period. Interest Expense. Interest expense increased to $1.1 million for the six month period for 1999, compared to $900,000 for the six month period for 1998. Interest expense primarily relates to $24.0 million of borrowings under our term loans incurred in connection with our recapitalization in February 1998 and borrowings on our revolving credit facility. The increase in interest expense was due to six months of expense incurred for the six month period for 1999 compared to five months of expense for the six month period for 1998. Other (Income) Expense. Other income for the six month period for 1998 primarily represents the recovery of $92,000 related to an employee advance previously reserved. Income Taxes. Provision for income taxes for the six month period for 1999 as a percentage of pretax income was 41.6% compared to 68.6% for the six month period for 1998. The 68.6% effective tax rate for the six month period 1998 exceeded the statutory federal income tax rate primarily due to the establishment of net deferred taxes upon conversion to a "C" corporation on February 12, 1998 in connection with the leveraged recapitalization and state income taxes. These increases in income tax expense were partially reduced by the exclusion of net income prior to February 12, 1998, representing "S" corporation net income. Prior to the conversion to a "C" corporation on February 12, 1998, we did not report tax expense as an "S" corporation. 29 34 COMPARISON OF FISCAL YEARS 1998 AND 1997 Revenues. Revenues increased 59.1% to $32.1 million in fiscal year 1998 from $20.2 million in fiscal year 1997, resulting from a net increase in consulting services and higher billing rates due to the reduction in volume discounts as compared to fiscal year 1997. The revenues in fiscal year 1997 included revenues from services provided to one large customer, which accounted for 39.3% of revenues in that year, at a negotiated volume discount. International revenues in fiscal year 1998 were 16.2% of revenues, primarily from Canada, and in fiscal year 1997 were 0.8% of revenues. Cost of Services Direct Cost of Services. Direct cost of services increased to $17.4 million in fiscal year 1998 from $11.4 million in fiscal year 1997. As a percentage of revenues, direct cost of services decreased to 54.2% in fiscal year 1998 from 56.4% in fiscal year 1997. The gross margin improvement resulted primarily from a reduction in business from our two largest customers in fiscal year 1997 at negotiated volume discounts. In addition, our gross margins improved because our consultant mix changed to include more employees in fiscal year 1998 compared to fiscal year 1997. Equity Related Charges. We recorded $239,000 non-cash stock based compensation charge in fiscal year 1998 in connection with the issuance of stock options to our consultants. This charge reduced gross margin in this period by 0.7%. Operating Expenses Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 87.7% to $6.2 million in fiscal year 1998 from $3.3 million in fiscal year 1997. As a percentage of revenues, selling, general and administrative expenses increased to 19.2% in fiscal year 1998 from 16.3% in fiscal year 1997. Employee costs increased in fiscal year 1998 due to the larger role our principals had in generating sales and the compensation expense associated with those responsibilities. In addition, expenses increased in fiscal year 1998 due to infrastructure investment. We opened our new corporate office in September 1998, and hired five management and administrative employees late in the year. We installed management information systems in 1998, including our financial reporting and project costing systems. In fiscal year 1998, we enhanced our marketing materials, expanded our marketing efforts in Europe and promoted our brand. We also expanded efforts to enhance our TMNG Lexicon and TMNG CLEC Planner toolsets in fiscal year 1998. Interest Expense. Interest expense increased to $2.1 million in fiscal year 1998 from $30,000 in fiscal year 1997. Interest expense in fiscal year 1998 related primarily to two term loans in an aggregate principal amount of $24.0 million entered into in connection with our leveraged recapitalization. In fiscal year 1997, interest expense related to notes payable to several of our stockholders. Other (Income) Expense. Other income in the fiscal year 1998 primarily represents the recovery of $92,000 related to an employee advance previously reserved in fiscal year 1997. Income Taxes. Provision for income taxes was $3.3 million in fiscal year 1998. The 51.9% effective tax rate in fiscal year 1998 exceeded the statutory federal income tax rate primarily due to the establishment of net deferred taxes upon conversion to a subchapter "C" corporation, and state income taxes. These increases in provision for income taxes were partially reduced by the exclusion of net income prior to February 12, 1998, representing "S" corporation net income. Prior to the conversion to a "C" corporation on February 12, 1998, we did not report tax expense as an "S" corporation. 30 35 COMPARISON OF FISCAL YEARS 1997 AND 1996 Revenues. Revenues increased 16.8% to $20.2 million in fiscal year 1997 from $17.3 million in fiscal year 1996, resulting from a net increase in consulting services offset in part by a volume discount negotiated by a large customer in fiscal year 1997, which customer represented 39.3% of revenues. Cost of Services. Cost of services increased to $11.4 million in fiscal year 1997 from $9.6 million in fiscal year 1996. As a percentage of sales, cost of services was 56.4% and 55.8% in fiscal years 1997 and 1996, respectively. Gross margins decreased in fiscal year 1997 compared to fiscal year 1996 due primarily to negotiated volume discounts provided to one large customer in fiscal year 1997. Operating Expenses Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $3.3 million in fiscal year 1997 from $2.8 million in fiscal year 1996. As a percentage of revenues, selling, general and administrative expenses increased to 16.3% in fiscal year 1997 from 16.2% in 1996. Selling, general and administrative expenses remained relatively constant as there were no significant changes in operations with the exception of increased marketing activities. Interest Expense. Interest expense decreased to $30,000 in fiscal year 1997 from $136,000 in fiscal year 1996. The decrease in interest expense resulted from the payment of notes payable to stockholders. 31 36 SELECTED UNAUDITED HISTORICAL QUARTERLY FINANCIAL DATA The following tables set forth certain unaudited consolidated statements of operations data for the six quarters ended July 3, 1999, as well as the percentage of revenues represented by each item. These data have been derived from unaudited interim consolidated financial statements prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, considered necessary for a full presentation of such information when read in conjunction with the consolidated financial statements and notes appearing elsewhere in this prospectus. Operating results for any quarter are not necessarily indicative of results for any future period.
QUARTER ENDED ------------------------------------------------------------------- APRIL 4, JULY 4, OCTOBER 3, JANUARY 2, APRIL 3, JULY 3, 1998 1998 1998 1999 1999 1999 -------- ------- ---------- ---------- -------- ------- Revenues.......................... $6,154 $6,878 $8,439 $10,632 $11,433 $12,423 ====== ====== ====== ======= ======= ======= Cost of services: Direct cost of services......... 3,413 3,583 4,615 5,800 5,937 6,440 Equity related charges.......... 14 225 507 449 ------ ------ ------ ------- ------- ------- Total cost of services.............. 3,413 3,583 4,629 6,025 6,444 6,889 Gross profit.................... 2,741 3,295 3,810 4,607 4,989 5,534 Operating expenses: Selling general and administrative expenses...... 1,014 1,386 1,603 2,155 2,428 2,458 Equity related charges.......... 1 21 170 400 ------ ------ ------ ------- ------- ------- Total operating expenses.............. 1,014 1,386 1,604 2,176 2,598 2,858 ------ ------ ------ ------- ------- ------- Income from operations............ $1,727 $1,909 $2,206 $ 2,431 $ 2,391 $ 2,676 ====== ====== ====== ======= ======= ======= Revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of services: Direct cost of services......... 55.5 52.1 54.7 54.6 51.9 51.8 Equity related charges.......... .2 2.1 4.4 3.7 ------ ------ ------ ------- ------- ------- Total cost of services.............. 55.5 52.1 54.9 56.7 56.3 55.5 ------ ------ ------ ------- ------- ------- Gross margins..................... 44.5 47.9 45.1 43.3 43.7 44.5 Operating expenses Selling, general and administrative expenses...... 16.4 20.1 19.0 20.2 21.2 19.8 Equity related charges.......... .2 1.5 3.2 ------ ------ ------ ------- ------- ------- Total operating expenses.............. 16.4 20.1 19.0 20.4 22.7 23.0 ------ ------ ------ ------- ------- ------- Income from operations............ 28.1% 27.8% 26.1% 22.9% 21.0% 21.5% ====== ====== ====== ======= ======= =======
In the past, we have experienced seasonal fluctuations in revenue in the fourth quarter due primarily to the fewer number of business days because of the holiday periods occurring in that quarter. We may in the future experience fluctuations in revenue in the fourth quarter as well as summer and other vacation periods as we expand internationally. LIQUIDITY AND CAPITAL RESOURCES We have historically funded our business through cash provided by operations. The principal use of cash subsequent to the leveraged recapitalization was debt service incurred in connection with the leveraged recapitalization. Prior to the leveraged recapitalization, the principal use of cash was to fund distribution of earnings to our stockholders. At July 3, 1999, we had cash of approximately $900,000. Although we believe that the net proceeds of this offering together with cash generated from operations will be sufficient to meet our anticipated cash requirements, 32 37 including scheduled debt repayments and anticipated capital expenditures, for at least the next 12 months, we may in the future require additional funds to meet our cash requirements and successfully execute on our business model beyond that 12-month period. We may be required to raise additional funds through sales of equity or debt securities or seek additional financing from financial institutions. We cannot assure you that that financing will be available to us on favorable terms or, if obtained, will be sufficient for our needs. Cash provided by operating activities for the six month period for 1999 and 1998 and for the fiscal years ended 1998, 1997 and 1996 was approximately $2.5 million, $2.2 million, $2.0 million, $4.3 million and $4.3 million, respectively. Cash provided by operating activities for the six month period for 1999 was generated primarily by net income, as adjusted primarily by increases in prepaid tax assets and receivables aggregating $900,000 and decreases in accounts payable of $500,000, offset by an increase in accrued liabilities of $600,000. Cash provided by operating activities for the six month period for 1998 was generated by net income and increases in accounts payable, accrued liabilities and deferred tax liabilities aggregating $3.2 million, adjusted primarily by increases in accounts receivable of $1.8 million. Cash provided by operating activities in fiscal year 1998 was generated by net income and an increase in accounts payable and accrued liabilities of $1.8 million, adjusted primarily by an increase in accounts receivable of $3.9 million. Cash provided by operating activities in fiscal year 1997 was generated by net income as adjusted by an increase in accounts receivable of $1.4 million. Cash provided by operating activities in fiscal year 1996 was generated by net income, adjusted primarily by an increase in accounts receivable of $700,000. Cash used in investing activities for the six month period for 1999 and 1998 and for fiscal year 1998 was $200,000, $100,000, and $500,000, respectively. Cash was used for the purchase of property and equipment, and we expect to continue to invest in fixtures and equipment in the ordinary course of business, including expenditures in connection with the purchase of sales and staff tracking software and the upgrading of computer equipment and networking infrastructure. Cash used in financing activities for the six month period for 1999 and 1998 and for the fiscal years 1998, 1997 and 1996 was $2.3 million, $1.6 million, $800,000, $4.3 million, and $4.3 million, respectively. Cash used in financing activities for the six month period for 1999 was due primarily to the repayment of long-term debt and net repayments of borrowing under the credit facility aggregating $2.7 million. Cash used in financing activities for the six month period for 1998 and fiscal year 1998 was due primarily to the impact of net borrowings of $24.0 million in connection with the leveraged recapitalization and net issuance and redemption of common stock of $21.8 million, an increase in deferred financing costs of $600,000, and the payment of final subchapter "S" corporation distributions of $4.7 million. Cash used in financing activities in fiscal 1997 and 1996 was due primarily to distributions to stockholders of $4.0 million and $4.7 million, respectively. INTEREST RATE RISK We have variable interest rate exposure under our senior bank debt agreements, which we mitigate by utilizing derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes. We entered into an interest rate cap agreement on March 13, 1998, covering a notional amount of $12.0 million under one of our term loans, to reduce our exposure to market risks from changes in interest rates. We plan to retire the outstanding senior bank debt and the interest cap agreement in connection with this offering. Under the interest rate cap agreement, if during any period the floating interest rate on our senior bank debt exceeds the cap rate under the agreement, which is currently 8.187%, our bank will pay us the difference between the two rates for the period. 33 38 RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants, or AICPA, issued Statement of Position, or SOP, No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires entities to capitalize certain costs related to internal-use software once certain criteria have been met. We adopted SOP No. 98-1 effective January 3, 1999 and it did not have a significant effect on our financial position or results of operations. In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP No. 98-5 is adopted. We adopted SOP No. 98-5 effective January 1, 1999 and it did not have a significant effect on our financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. FAS No. 133 establishes methods for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities, We expect that the adoption of FAS No. 133 will not have a significant effect on our financial position or results of operations. FAS No. 137 has deferred the effective date of FAS 133 to fiscal years beginning after June 15, 2000. YEAR 2000 READINESS The "Year 2000" issue is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other machinery as the year 2000 is approached and reached. These problems arise from hardware and software unable to distinguish dates in the "2000's" from dates in the "1900's" and from other sources such as the use of special codes and conventions in software that make use of a date field. We recognize the need to ensure our operations will not be adversely affected by Year 2000 software failures. We have reviewed our internal management information and other critical business systems to identify any Year 2000 problems. All such systems were vendor supplied with no significant modifications. Consequently, we have communicated with the external vendors that supply us with material software and information systems and with significant suppliers to determine their Year 2000 readiness. Based on our vendors' representations, we believe that the third-party hardware and software we use is Year 2000 compliant although we have not performed any operational tests on these systems. To date, we have not incurred any material costs directly associated with Year 2000 compliance efforts. As discussed above, we do not expect the total cost of Year 2000 problems to be material to our business, financial condition and operating results. During the months prior to the century change, however we will continue to evaluate any new versions of software and information systems provided by third parties and any new infrastructure systems that we may acquire, to determine whether they are Year 2000 compliant. Despite our current assessment, we may not identify and correct all significant Year 2000 problems on a timely basis. If the representations made by our various vendors regarding Year 2000 compliance are inaccurate, additional Year 2000 compliance efforts may involve significant time and expense and unremediated problems could harm our business. We currently have no contingency plans to address the risk. 34 39 BUSINESS OVERVIEW We are a leading provider of management consulting services to the global telecommunications industry, including communications service providers, technology companies and financial services firms. We provide comprehensive, mission-critical services that enable our clients to meet the challenges of today's competitive and dynamic telecommunications environment, including the growing demand for e-business infrastructure. Our highly experienced consultants, who average over ten years of telecommunications industry experience, enable us to leverage our industry expertise and proprietary methodologies to provide strategic, management and operational support to our clients. Since 1990, we have performed services for over 170 clients, including Ameritech, AT&T, Bell Atlantic, EDS, Lucent Technologies, Morgan Stanley Capital Partners, Saville Systems and Williams Communications. We serve clients in all major regions of the U.S., in key European markets and in several other international locations. We have experienced strong revenue growth since 1995 and have been profitable every fiscal year.. INDUSTRY BACKGROUND Major changes and market dynamics are affecting the global telecommunications industry. These include: - deregulation, which began in the U.S. with the breakup of AT&T and continued with the Telecommunications Act of 1996 and is accelerating in Europe and other international markets; - the growth of the Internet and e-business, which is increasing the demand for telecommunications bandwidth and is placing further pressure on incumbent and emerging communications service providers to make substantial changes in the way they do business to support this growth; - convergence among the different types of services being provided by a single telecommunications company; - the influx of new entrants and increasing competition due to deregulation and an increasing demand for telecommunications services; and - technological advances, which have significantly increased the volume of traffic that can be carried over telecommunications networks and have lowered transmission costs. All of these factors are contributing to continuous change and a major paradigm shift in the overall telecommunications market, including the shift to e-business. As a result, the overall worldwide telecommunications revenues are growing at a rapid rate and are expected to exceed $1 trillion by 2001. According to IDC, the number of wireless subscribers is expected to increase from 257 million in 1998 to 550 million in 2003; Internet usage is expected to grow from 142 million users in 1998 to over 500 million users in 2003; and Internet-based commerce is expected to exceed $1 trillion worldwide by 2003. Deregulation The U.S. telecommunications market is reaping the benefits of the deregulation, which began in 1984 and continued with the federal Telecommunications Act of 1996. Deregulation has brought about the liberalization of the telecommunications market in the United States, leading to new opportunities not only for the incumbent communications carriers but also for a vast array of new market entrants. This trend has created substantially greater competition in the industry, resulting 35 40 in significantly reduced rates as well as vastly improved and new technologies, which in turn are fueling even more competition. More recently, deregulation has accelerated internationally. In 1997, the World Trade Organization Telecommunications Accord was adopted, and this treaty has contributed to deregulation initiatives in Europe, Asia and Latin America. Industry sources expect that the impact of deregulation in Europe and other locations worldwide will continue over the next decade resulting in new entrants, increasing complexity. Explosion of e-Business The growth of the Internet is a global phenomenon that is fundamentally changing the nature of the telecommunications industry. Web user growth, coupled with the growth of new types of on-line and e-business services has driven the emergence of new service providers such as Internet service providers, on-line communities, Internet telephony providers and many others. In addition, traditional telecommunications carriers have entered the on-line market, providing Internet connections and e-commerce services to businesses and consumers. The growth of the Internet and e-business raises critical strategic and operational issues that telecommunications companies will need to address, including: - complex integration issues associated with merging old and new network technologies; - unprecedented demand for bandwidth, which companies must meet while simultaneously assuring service quality; - operational changes needed to support e-business initiatives in a secure environment, including seamless web-based customer care, on-line bill presentment and payment, dynamic product introduction and management; - development of marketing programs for personalized, on-line interactive marketing, supported by the ability to gather and utilize intelligence associated with the customers' Internet interactions; and - the ability to provide telecommunications services in a secure environment, addressing privacy concerns and regulations. Convergence and Complexity In the past, communications service providers typically specialized or offered a single product or a limited set of products to their customers, requiring the customer to purchase its entire package of communications needs from multiple providers. Deregulation has enabled companies to enter previously closed markets, and, in today's world, service providers are increasingly offering all or many of those services through one stop shopping, seeking to meet all of the customer's communications needs. In addition, advances in technology have accelerated convergence in the services provided on the underlying communications network. For example, Internet telephony will enable service providers to efficiently integrate voice and data services on a single platform. Consolidation among key players has also contributed to convergence as major companies seek to broaden their service offerings through acquisitions. This convergence generates a high degree of operational complexity for companies resulting from the need to integrate multiple corporate infrastructures, networks, operations and processes. As convergence leads to more and more providers offering a more comprehensive communications solution to a single customer, the stakes for acquiring and retaining that customer are becoming increasingly high. Influx of New Entrants The increased demand for services has led not only to additional offerings by the established players, but also to new entrants to the market, aided by a continuing flow of capital from the financial community and reduced entry barriers. Industry sources estimate that there are now over 3,000 new providers of voice and data telecommunications services in the U.S. We expect this 36 41 competitive trend to continue to migrate overseas as global deregulation spreads. In France, for example, since competition began, more than 50 new service providers have entered the market. New market entrants seek to gain market share from incumbent service providers, who in turn are striving to change their business models to adapt to the newer, more competitive industry environment. As a result, core telecommunications services are becoming increasingly commoditized, making superior customer service and satisfaction, as well as efficient and cost effective back office systems, key competitive elements. Rapid Technological Advances The telecommunications industry is characterized by rapid technological advances. The advent of new technologies, including ATM (asynchronous transfer mode), frame relay, DSL (digital subscriber line), ISDN (integrated services data network), and now Internet protocol and wireless application protocol, is creating an unprecedented level of transmission capacity, both in terms of the size and number of packets of data that can be transmitted. Additionally, improvements in fiber optics and other transmission technologies have exponentially increased the number of calls a single fiber can carry from 8,000 in 1985 to 1.5 million in 1999. These technological advances are enabling communications providers to harness multiple applications (such as voice, data and video) on a single network, creating new types and combinations of services available to a broader range of users. These advances have also significantly reduced underlying transmission costs, requiring communications providers to run their networks as efficiently as possible while developing and effectively implementing enhanced, more complex products. Industry Challenges The multiple forces affecting the telecommunications industry, including global deregulation, have led to increased competition and complexity in the market for all types of communications services. To gain or maintain a competitive advantage, communications service providers and the technology and financial firms that focus on the telecommunications industry must understand the growing complexities and how to best leverage the market's opportunities and challenges, including those driven by the rapid growth of e-business. With this understanding, these companies must develop sound strategic plans and implement effective solutions that best exploit the market's dynamics. To compete effectively, companies must fully understand the enterprise-wide implications of a proposed solution and must implement these solutions swiftly with the most effective technologies, systems and processes. Because the expertise needed by communications companies to address the market's needs is typically outside their core competencies, they must either recruit and employ experts or retain outside specialists. Due to the range of expertise required and the time associated with hiring and training new personnel, bringing expertise in-house is often not a viable option. When retaining outside specialists, communications companies need experts that fully understand the telecommunications industry and can provide timely and unbiased advice and recommendations. OUR SOLUTION We provide comprehensive mission-critical services, including strategy, management, operational and e-business support to communications service providers, technology companies and financial services firms in the United States, Canada, Europe and other major international markets. Our solutions encompass the following key elements. - Exclusive focus on the telecommunications and e-business industries. Since our founding in 1990, we have occupied a unique position in the consulting arena, with our exclusive focus on the telecommunications industry and our more recent focus on the e-business marketplace. Our consultants have significant industry and consulting experience across critical business disciplines. Our customers rely on our expertise and reputation, not only to 37 42 help them keep up with market growth but to help them deal with the trends as they arise and adapt their business plans to meet the demands of the future. Our telecommunications and e-business focus allows us to best fulfill our clients' needs and continuously refine our services by staying at the forefront of, and helping to define, industry standards. - Integrated, complete solution. We leverage our industry expertise to provide comprehensive solutions from initial, high-level strategic assessments of clients' needs through tactical program management. We have consulting experience with all major aspects of managing a telecommunications company, from product launch through order entry, service provisioning and billing. Our complete solution addresses the business, information technology and operational needs associated with all aspects of our clients' requirements. We work with telecommunications providers by delivering business planning, management support, process development, operations support, systems requirements, selection and implementation. We also use our understanding of service providers' needs to help the software and technology companies that serve the telecommunications industry to define strategies, develop applications, respond to requests for proposals and implement their solutions within the service provider environment. Finally, we facilitate the evaluation of proposed investments in telecommunications companies and related technology companies by investment banking and private equity firms by providing prospect evaluation, due diligence and post investment support services. - Partnership with clients. We develop long-term relationships with our clients as we demonstrate our understanding of all aspects of their business. We work closely with senior management to understand, predict and address our clients' evolving strategic and operational business needs. A majority of our current top 20 customers who have been in business since 1995 have been customers of ours since then. We expect to develop long-term relationships with our more recent clients by gaining a deep understanding of their business and providing a broad array of services. - Global presence. Our knowledge and focus on the trends impacting markets abroad enable us to provide the expert advice needed by international clients competing in newly deregulated markets and by U.S. companies seeking to expand their global reach. We have worked with clients across the globe, focusing primarily on North America and Europe. At the end of 1998, consulting engagements in Europe represented 5.1% of our total revenues; for the first six months of 1999, revenues from European engagements represented over 19.3% of our total revenues. We continue to expand our geographic presence in key locations based on our clients' needs and opportunities. - Industry leading consultants. We use seasoned telecommunications professionals with telecommunications industry expertise. Our senior officers and principals average more than 15 years of financial, operational or systems experience in competitive telecommunications markets. Our consultants average over ten years of telecommunications industry experience. This extensive experience has positioned our team to set standards as industry leaders and means that all of our project team members bring hands-on expertise and practical insight to each engagement. - Proprietary toolsets and methodologies. Our proprietary toolsets and methodologies have been created and are updated by our consultants based on their experience over many consulting engagements and represent best practices in the industry. Our consultants use these tools to win engagements and help clients improve productivity, gain a competitive advantage, reduce time to market and market entry risk, and increase revenues and profits. The following are our toolsets. TMNG Lexicon is a requirements framework for the competitive telecommunications industry and covers all key functional operations areas, such as order entry, billing and customer care. 38 43 QBC (Quality Billing Center) is an end-to-end revenue assurance model that is designed to help carriers improve cash flow, reduce call center volumes and diminish customer billing complaints and challenges. TMNG CLEC Planner is an economic planning tool designed for the competitive local exchange carrier market. Margin Master is an activity based costing model designed specifically for competitive carrier cost assignment and management. C-B-I (Carried to Billed to Invoiced) is designed to allow service providers to track calls and other billable events from carried to billed to invoiced. TMNG e-Lexicon is being developed as a requirements framework for telecommunications companies serving e-business customers and developing their own web-based capabilities. - Vendor and technology neutral. Because we focus on management consulting, we are in a unique technology- and vendor-neutral position to make unbiased evaluations and recommendations that are based on a thorough knowledge of each solution and each client's situation. Therefore, we are able to capitalize on our extensive experience across complex multi-technological telecommunications and back office systems environments to provide the most sound and practical recommendations to our clients. Because of our neutrality, we believe we are trusted for our unbiased opinions in the telecommunications community, which has allowed us to play a key role in setting industry standards. For example, the European Billing Association, a non-profit trade association, endorsed our Quality Billing Center as the chosen billing and service management standard for the European carrier community. OUR STRATEGY Our objective is to establish ourself as the telecommunications consulting company of choice to communications service providers, technology companies and financial services and investment banking firms. The following are the key strategies we intend to pursue to meet this objective. - Expand geographic reach to serve our clients' global needs. We plan to continue to expand geographically to deliver our services and solution capabilities to client companies located around the world. By offering our full range of professional services on a global basis, we believe we can broaden market awareness about our services and solutions to create new revenue opportunities. In Europe, the competitive market expertise of our U.S. consultants is a key factor for European companies facing the business issues associated with deregulation and increased competition. Our expertise in Europe can also play a key role for U.S. companies expanding their European business. - Focus on supporting our current target market's e-business needs through our TMNG.com business. Because communications service providers represent the infrastructure of the Internet, the ability of these service providers to build an infrastructure to meet the demand for increased Internet traffic will be critical to their businesses. More specifically, the growth of the Internet has also led to a greater demand for Internet-based business support services and the seamless integration of electronic services with traditional means of interacting with customers. Through TMNG.com, we are combining our telecommunications knowledge with our developing e-business expertise to help telecommunications service providers build the infrastructure, systems, processes and services to address these opportunities arising from the growth of the Internet. As communications service providers begin to deploy their application hosting strategies, TMNG.com will also address their back-office requirements to support their application-based initiatives. 39 44 - Expand long-term client relationships. We build long-term relationships with our customers by delivering high quality solutions to help our clients set their strategies and operate as efficiently as possible in the rapidly changing telecommunications environment. We believe this focus improves client satisfaction and results in two major benefits for us: follow-on engagements with existing, satisfied clients and referrals for new clients. Expanding our existing client relationships will allow us to jointly plan future projects and, in particular, develop large, multi-year engagements. The dynamic nature of the telecommunications industry generates a continuing need for our services, and clients come back to us because of our knowledge of their systems and architectures and their satisfaction with our services. - Further develop and enhance our scalable business model. We plan to further enhance our scalable business model to accommodate anticipated need for our services generated by industry growth. The following are the key elements of our business model. Attracting and retaining high quality, experienced consultants. We seek to attract high quality consultants with a broad range of experience and knowledge within the telecommunications industry through aggressive recruitment efforts, including focused external recruiting, in-house recruiting specialists and consultant referral incentive programs. We retain our consultants through a variety of programs, including our stock option plan, competitive compensation packages, flexible employment model and dynamic, challenging assignments at the forefront of the telecommunications industry. Creating replicable business processes. To support our anticipated growth, we are creating replicable business processes. Our toolsets provide our consultants with a framework that they use to augment their experience and help analyze and solve clients' problems. We are also building a network of eRooms to serve as a knowledge base, enable consultant collaboration on engagements and provide support information and updates of our current toolsets and releases of next generation tools. Maintaining a flexible, virtual organization. We intend to retain our flexible, virtual structure as we grow. We are developing a contingent employee model to enable us to hire and retain consultants by providing them with increased benefits. We believe the model allows us to better manage utilization and to minimize unbilled consultant time. We also do not expect to invest heavily in facilities and plan to rely on electronic telecommunications and virtual offices, like our eRooms, to support our organization. - Extending our market leadership position and building our brand. We intend to expand our leadership position in the telecommunications consulting industry and to establish us as the consulting firm of choice for communications service providers and the technology and banking companies that serve them. We intend to leverage our extensive industry knowledge, strong client base, and highly qualified and experienced professionals to help our clients provide more value-added services to their customer base. We also have several marketing initiatives underway to continue building our corporate brand. PROPRIETARY TOOLSETS We have created proprietary toolsets based on our consultants' experience which represent best practices in the industry. We continually invest in these toolsets by updating them to keep them at the forefront of the industry. The following are our toolsets which form the basis of our methodologies. - TMNG Lexicon: a framework of best-in-class business requirements for the competitive telecommunications industry that harnesses the collective experience, knowledge and lessons learned from top professionals in the industry. From order entry to billing to customer care, it covers every functional area typically found in a telecommunications company, and now 40 45 contains over 4,000 requirements. On an ongoing basis, the Lexicon is modified, tested and updated to reflect additional knowledge gained and changes in the market. - QBC (Quality Billing Center): an end-to-end revenue assurance model that is tailored to a carrier's business systems and process environment. Successfully implemented at telecommunications companies around the world, the QBC provides key benefits and measurable results, including improved cash flow, reduced call center volumes, and diminished customer billing challenges. The European Billing Association recently endorsed our QBC as the best of breed in telecommunications process measurement tools. - TMNG CLEC Planner: an economic planning tool developed exclusively for the competitive local exchange carrier market. It is used to make resale versus facility-based decisions, determine transition plans, make market entry decisions, identify profitable target markets, develop resource plans that align with revenue forecasts and analyze pricing strategy impacts. - Margin Master: an activity-based costing tool developed for the telecommunications industry that helps carriers determine product profit margins. It supports decisions in a convergent or bundled product offering and enables market segment, region, channel, and product-specific analysis. With growing pressure on margins and reliance on bundled service offerings, our Margin Master tool becomes increasingly valuable. - C-B-I (Carried to Billed to Invoiced): a methodology that assists carriers with the complex task of reconciling incoming call records, customer billing, and invoices from their service provider. This proprietary tool allows us to design systems resellers use to track calls and other billable events from "carried to billed to invoiced," with the objective of maximizing revenue by minimizing or eliminating lost billable events. - TMNG e-Lexicon: currently under development, it will be the first toolset in our next generation process architectures. The e-Lexicon will capitalize on our experience and understanding of the requirements being driven by the convergence of telephony and the Internet in areas such as electronic bill presentment and payment, Internet protocol mediation, web-based customer service and Internet provisioning. This toolset will also leverage our extensive knowledge of the existing telecommunications infrastructure, and combine that knowledge with our experience, understanding, and research of the leading edge business support systems and operations support systems software solutions to develop the e-Lexicon. 41 46 CUSTOMERS AND SERVICES We provide services to customers in key market segments of the industry. Since 1990, we have performed consulting assignments for over 170 companies, including over 80 telecommunications service providers, over 50 technology companies (including global consulting firms) and over 20 investment banking and financial services firms. For the 18 months ended July 3, 1999, telecommunications service providers accounted for 67% of our revenues, technology companies accounted for 31% of our revenues and investment banking and financial services firms accounted for 2% of our revenues. The following is an alphabetical list of representative customers in each of these market segments:
COMMUNICATIONS SERVICE PROVIDERS TECHNOLOGY COMPANIES FINANCIAL SERVICES FIRMS - -------------------------------- -------------------- ------------------------ Allegiance Telecom Cap Gemini Banque Paribas Ameritech EDS Behrman Capital AT&T EHPT Columbia Capital Corporation Bell Atlantic EXL Communications Jefferies & Company BellSouth IBM Madison Dearborn Partners diAx Intertech Management Group Morgan Stanley Capital Partners e.Spire Communications Lucent Technologies Oak Hill Capital Management Nextlink Communications OAN TA Associates PageMart Wireless Portal Software Retevision PricewaterhouseCoopers Sprint Saville Systems TeleHub Communications Williams Communications Group
COMMUNICATIONS SERVICE PROVIDERS We provide all types of carriers and service providers with services ranging from high-level strategy definition to tactical project management to help extend their worldwide reach. Strategic Consulting. We analyze market trends and dynamics for telecommunications service providers and advise them on market evolution and development. We also help service providers define, refine and implement strategies through business case development and market launch planning. In addition, we analyze acquisition opportunities to determine if they are complementary to strategies our service provider clients are implementing. Process Development and Operations Support. We have spearheaded numerous engagements to design infrastructure, improve processes, and provide operations support. When telecommunications providers implement new business support systems and operations support systems, they are seeking to maximize efficiency and integration in order processing and customer care as well as timeliness and accuracy in the revenue stream from call mediation to billing and payment processing. Our experience includes revenue assurance and reporting, performance and cost benchmarking, change management and revenue operations management. We help clients improve the efficiency, integration, and timeliness of their order processing, provisioning, billing and customer care systems. Using our proprietary revenue assurance tools, we improve the timeliness, accuracy and completeness of carriers' revenue stream management. Systems Requirements, Selection and Implementation. We have extensive expertise in the area of systems assessment, requirements definition, gap analysis, vendor selection, implementation management, testing, and project and program management. We assist service providers in preparing and managing requests for proposals for software systems purchases. Our unique, vendor- neutral and technology-neutral position ensures that the solutions we recommend are based on what is best for our clients' businesses. 42 47 TECHNOLOGY, SOFTWARE AND CONSULTING COMPANIES Our extensive first-hand knowledge of incumbent and emerging service providers' needs provides a solid knowledge base of services for technology and software companies and positions us as subject matter experts to other consulting companies. Product development strategic consulting. We help technology and software companies analyze and focus their product and development strategies and efforts to meet the needs of telecommunications service providers. Our knowledge of service provider requirements, along with our proprietary toolsets, provides significant benefit to technology companies as they develop new products and applications. In particular, our TMNG Lexicon toolset helps facilitate rapid analysis of technology companies' products and product plans. We anticipate that our TMNG e-Lexicon toolset will also be used for this purpose. Market research and analysis. We help technology and software companies analyze market trends and dynamics to improve their ability to respond to the requirements of changing and evolving markets. We also analyze acquisition and investment opportunities for our clients. Responses to requests for proposals. We assist technology, software and consulting companies in responding to requests for proposals that they receive from service providers and others. Our expertise enables us to ascertain the most critical elements of a request for proposal and to help our clients prepare responses that address the service provider's key requirements. Implementation support. For global consulting firms that have engagements which require specialized telecommunications expertise, we serve as the telecommunications experts. In addition, we support our software clients by assisting with program management for software implementation. These assignments leverage our extensive understanding of both the software solution and the service provider communities. INVESTMENT BANKING AND FINANCIAL SERVICES FIRMS We assist investment banking and financial services firms with prospect validation and due diligence in connection with planned investments and other transactions. Our broad knowledge of the industry and subject matter expertise speed up the evaluation of proposals and potential investment candidates. Our prospect validation services include candidate validation, business plan development, financial modeling and contract development and negotiation. Our consultants and toolsets also facilitate rapid development and execution when conducting due diligence. Our services in this area include business case evaluation and validation, financial model analysis, product and evaluation, benchmarking, organization and business process validation, systems evaluation, and network plan reviews. REPRESENTATIVE ENGAGEMENTS The following engagements illustrate some of the services that we are providing and have provided to several of our current clients. Communications Service Providers A Leading Wholesale Carrier. We helped this client develop its business plan for entry into the voice market. Once the business plan was approved, we were selected to manage the implementation. We are continuing to serve as the program management office for this client's 43 48 market entry. Our responsibilities include providing consulting services and coordinating deliverables being provided by other vendors. Key services we provided included: - authoring the initial business case to examine the viability and impact of a voice strategy; - developing functional and technical requirements for all areas of customer relationship management, such as order entry, provisioning, billing, customer care, collections, as well as other back office systems such as access cost management; - supporting the development of a network management and deployment strategy; - assisting in the development of the product marketing strategy; and - managing the entire user acceptance testing process. A Major Global Carrier. We have performed numerous diversified engagements for this client, ranging from strategy development, competitive cost analyses, to systems requirements. Recent projects include: - developing a wholesale strategy development and tactical planning. We were asked to help this client develop a strategy to serve the wholesale market to help the company further enhance its product offering. We continue to provide tactical planning assistance to this division; and - assisting this client with the integration of a recent acquisition of a large national competitive local exchange carrier, including systems and process review and development of recommendations for improvement. We have also assisted with developing requirements for an accounts receivable system, issuing requests for proposals, selecting vendors, reconciling data from disparate systems and identifying areas for process improvement. A European Competitive Service Provider. We are assisting this client in every facet of systems implementation for all customer life cycle systems (billing, customer care, order entry and provisioning), including requirements development, testing, and post-implementation support. This effort addresses the complete set of this client's products for local, long distance, Internet, wireless and other services. We are also assisting with this client's conversion to a new software operating system platform and selecting and implementing vendors for other business support systems and operations support systems. Technology Companies A Worldwide Technology Company. We have assisted this client with a variety of market initiatives dating back to when this client was in the business support systems/operations support systems arena. Sample engagements include: - assisting this client in the development of a proposal for a global satellite project, focusing on billing functionality; - providing international advanced intelligent network expertise; - conducting market assessments for two key initiatives, Internet and prepaid telephone cards. These assessments included a competitive analysis, a market size analysis and the development of market entry criteria; - performing due diligence support for this client's billing vendor acquisition; and - serving as the billing project management organization with this client and alliance partners in the competitive local exchange carrier market. A Major Global Systems Integration and Software Services Firm. We have worked with this client on numerous engagements both domestically and internationally. We have provided this 44 49 client with telecommunications subject matter expertise both directly and as a subcontractor in engagements it provided to its clients. Representative projects include: - development of a market strategy for this client's competitive local exchange carrier market practice. We conducted primary and secondary market research, evaluated this client's tools and capabilities, and identified initiatives for this client in competitive local exchange carrier markets; - completion of an assessment of this client's billing product. After completing a gap analysis against market requirements, we served as project manager for the implementation of improvements to this key strategic product; - development of functional and technical requirements for next generation billing and collections system for a Spanish telecommunications company; and - development of requirements for and assistance with the launch of the calling card and debit card platform and international gateway switch for a Malaysian communications service provider. Assisted with all aspects of the implementation of the international settlements process. Financial Services Companies A Leading Merchant Banking Firm. We provided the primary due diligence for a potential investment in a European data services company. In this capacity, we completed due diligence reviews of the underlying network and technology platforms proposed for the venture. We also developed the business plan assumptions and financials, including the cost structure and revenue plans, transfer costing methodology, and the voice implementation strategy. MARKETING, SALES AND STRATEGIC ALLIANCES Our marketing and sales efforts are focused on growing our client relationships, developing new relationships, and building our brand recognition in the U.S. and abroad. We market and sell our services through multiple channels, including our partners, principals, and consultants; long-term client relationships; relationships with strategic partners; advertising; tradeshows; web site marketing; and public relations. Marketing Our marketing activities are focused on expanding our presence and brand recognition in the U.S. and abroad, to further our position as the consulting firm of choice for telecommunications service providers and the technology and banking firms that serve them. Our integrated marketing programs include: - TMNG, TMNG.com and TMNG Europe advertising campaigns; - ongoing Web site management and enhancement; - marketing communications; - industry trade shows and speaking engagements; - knowledge and toolset packaging; - ongoing public relations campaign; and - articles authored by us or our consultants published in trade journals. Significant marketing efforts are focused on TMNG.com, including a newly developed TMNG.com advertising campaign. In concert with this advertising campaign, we reinforce the TMNG.com message and brand with marketing communications, trade shows, publicity and web site activities. Additionally, a new TMNG Europe campaign is under development. 45 50 We are an active participant in telecommunications and Internet telephony conferences and trade shows in North America and Europe. We regularly participate as keynote speakers, panel moderators, workshop leaders, and exhibitors. Considered an industry authority, we are frequently consulted by the trade media. In 1998 and 1997, Mr. Nespola, our President and Chief Executive Officer, was named to Phone+ magazine's annual list of the most influential people in competitive long distance telecommunications. In each year, he was the highest ranking non-carrier executive selected for the list. Sales We sell our services directly to senior and management-level executives of communications service providers in the United States, Europe, Canada, Asia, Australia and South America, primarily through relationship sales. Our officers and principals sell the majority of our engagements. In addition, our consultants also sell, and are encouraged to do so with a compensation structure that provides both financial and equity incentives. In pursuing new business, our sales team and consultants emphasize our industry reputation, experience, vendor- and technology-neutral position and time-saving proprietary business tools. Our sales strategy centers on building long-term relationships with our clients, to gain new and follow-on engagements within existing accounts and referrals for new clients. Expanding our existing client relationships will allow us to jointly plan future projects and, in particular, develop large, multi-year engagements. Strategic Alliances We have entered into, and intend to continue entering into, strategic alliances with a select group of technology and related companies. The primary goals of our strategic alliances are: - to enhance our overall service offerings; - to create or identify new revenue opportunities through referrals and the creation of new service offerings; and - to increase our credibility and visibility in the marketplace through collaboration in joint marketing. We currently have strategic alliances with Emerald Solutions, IBM, PricewaterhouseCoopers and Tanning Technology Corporation. We do not enter into exclusive arrangements with technology companies so that we can maintain our vendor neutrality. OPERATIONS We believe that a key factor differentiating us from other consulting firms is our operational and organizational structure. We have developed an operational model that enables us to limit our physical facilities and other overhead requirements and maximize utilization of the consultant base. This structure enables us to control costs and contributes to our operating margins. We limit our facilities requirements through the use of use electronic communication. Although our consultants are geographically dispersed throughout the United States and in international locations, our only corporate office facility is our headquarters in the Kansas City area. Our consultants typically do not require office facilities as they work either from the customer's site or their homes. To provide our consultants with additional infrastructure support, we are creating a series of eRooms which consultants will be able to access through the Internet. We have already established an eRoom that includes proposals we have made for consulting engagements and an eRoom containing repositories of deliverables generated during consulting engagements. We are also building engagement specific eRooms to facilitate collaboration among consultants that are in disparate locations but are working on the same engagement. These eRooms, including our first 46 51 engagement specific eRoom, went on line in September 1999. We also plan to develop a human resources eRoom that will provide information regarding compensation and benefits and will fulfill the same function as a bricks and mortar human resources office. In addition, we plan to develop eRooms that provide consultant support for our proprietary toolsets. Our eRooms are designed to provide our consultants with access to the same types of information and support they would otherwise need to receive from a corporate headquarters organization. To track consultant utilization and project profitability, we have established a sophisticated management reporting system. This system enables us to track consultant utilization and productivity as well as costs related to and profitability of particular projects and engagements. Our staffing needs are coordinated by our project staffing group, which uses a database containing information on the availability and subject matter expertise of our consultants. Through the use of this database, we are able to effectively match consultant availability and expertise with the needs of incoming engagements. Our organization is relatively flat in nature. As a result, we do not have layers of management and require only a relatively small headquarters staff for administrative purposes. In addition, our consultants play a key role in selling new consulting services as well as working on their current engagements. HUMAN RESOURCES We believe that our ability to recruit and retain experienced, highly-qualified and highly-motivated personnel has contributed greatly to our success to date and will be critical for us in the future. We seek to offer a positive environment and corporate culture and to offer significant financial opportunities. We offer a flexible recruiting model that we believe enhances our ability to attract consultants and to effectively manage utilization. Our consultants may work for us as employees, independent contractors or as contingent employees. Contingent employees will, unlike independent contractors, receive company-paid medical insurance, vacation and other employee benefits. Instead of receiving a regular salary, however, contingent employees will only be paid for time spent working on consulting projects for customers or working on internal projects. We intend to begin offering contingent employment to a selected portion of our independent contractor base later this year. Generally, we will offer contingent employment to independent contractors that are regularly involved in consulting projects, have a broad range of expertise and are highly utilized by us. Our current independent contractor base also includes individuals with specialized expertise in discrete areas, and we typically deploy these individuals only when their unique expertise is necessary. We expect that we will continue to retain these individuals as independent contractors. As of August 31, 1999, we had approximately 210 consultants available to work on engagements for us. Of these, 46 were full-time employees and approximately 120 were working on engagements for us as independent contractors. The remaining consultants are available to work on engagements as we need them. In addition to our consultants, we have a headquarters staff of 15, which includes our Chief Executive Officer, Chief Financial Officer and other administrative personnel. We retain our professionals through the use of many initiatives. We compensate our employees through a combination of regular cash compensation, performance-based cash incentive compensation and participation in our stock option and other equity incentive plans and independent contractors through a competitive daily service rate. Through the use of the three-pronged employment model option, we offer significant flexibility to suit the varied needs and skill sets of our consulting base. Further, because we are a "virtual" company, consultants are not required to relocate to a particular office to join us, which offers geographic flexibility to our consulting base. 47 52 COMPETITION The market for telecommunications consulting services is relatively new, highly fragmented and changing rapidly. We face competition from major business consulting firms, the consulting arms of accounting and other professional services organizations and our customers' internal resources. We consider some of our principal competitors to be American Management Systems, Andersen Consulting, Booz-Allen & Hamilton, The Boston Consulting Group, Cap Gemini, KPMG Peat Marwick and PricewaterhouseCoopers. Many of these competitors have significantly greater financial, technical and marketing resources and greater name recognition than we do. We have faced, and expect to continue to face, additional competition from new entrants into our markets. We have also experienced increased price competition, particularly from larger firms that have the financial resources to aggressively price engagements that they have a particular interest in obtaining. Increased competition could result in price reductions, fewer client projects, underutilization of consultants, reduced operating margins and loss of market share, any of which could harm our business. The principal competitive factors in our market include responsiveness to the needs of customers, quality and reliability of consultants, price, project management capability and technical expertise. We believe that our ability to compete depends in part on performance, a focused service offering formula, the price/value formula of our service offerings, responsiveness to customer needs and our ability to hire, retain, and motivate key personnel. INTELLECTUAL PROPERTY Our success is dependent, in part, upon our proprietary processes and methodologies, and we rely upon a combination of copyright, trade secret, and trademark law to protect our intellectual property. We have obtained federal registration for two trademarks in the United States and have filed applications to register eight other marks in the United States. It is possible that third parties may challenge our trademark applications. We do not have any patent protection for the proprietary toolsets and methodologies used by our consultants. We currently do not anticipate applying for patent protection for these toolsets and methodologies. We enter into confidentiality agreements with our employees, independent contractors and clients. We also limit access to and distribution of our proprietary information. In addition, we have entered into non-competition agreements with certain of our key employees. We cannot assure you that the steps we have taken in this regard will be adequate to prevent or deter misappropriation of our proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. Misappropriation or unauthorized use of our intellectual property could harm our business. FACILITIES Our principal executive offices are located in a 3,357 square foot facility in Overland Park, Kansas. This facility houses our executive, corporate and administrative offices. We occupy these premises under a lease which expires in July 2003. We anticipate that our current executive office facility will be sufficient to meet our corporate facilities needs for the foreseeable future. 48 53 LEGAL PROCEEDINGS In June 1998, the bankruptcy trustee of one of our former clients sued us in the U.S. Bankruptcy Court in New York seeking recovery of $160,000 in consulting fees paid by the former client during the period from July 1, 1996 (the date an involuntary bankruptcy proceeding was initiated against the former client) through August 6, 1996 (the date the former client agreed to an order for relief in the bankruptcy proceeding) and $160,000 in consulting fees paid by the former client after August 6, 1996. The bankruptcy trustee has also sued us for at least $1.85 million for breach of contract, breach of fiduciary duties and negligence. Although we cannot give you any assurance as to the ultimate outcome of this proceeding, we believe we have meritorious defenses to the claims made by the bankruptcy trustee, including particularly the claims for breach of contract, breach of fiduciary duty and negligence, and that the ultimate resolution of this matter will not materially harm our business. 49 54 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding our executive officers and directors as of August 1, 1999:
NAME AGE POSITION ---- --- -------- Grant G. Behrman(1)....................... 45 Chairman of the Board Richard P. Nespola........................ 55 President, Chief Executive Officer and Director Ralph R. Peck............................. 49 Vice President Micky K. Woo.............................. 46 Vice President and Director Donald E. Klumb........................... 37 Vice President and Chief Financial Officer William M. Matthes(1)..................... 39 Director Mario M. Rosati(2)........................ 53 Director Dennis G. Sisco........................... 54 Director Roy A. Wilkens(1)(2)...................... 56 Director
- ------------------------- (1) Member of the compensation committee (2) Member of the audit committee Grant G. Behrman has served as our Chairman of the Board since February 1998. Mr. Behrman currently serves as Managing Partner of Behrman Capital and was a founding partner of that firm. At Behrman Capital, he has primary responsibility for investments made in the information technology and outsourcing areas. Prior to founding Behrman Capital, Mr. Behrman was a founding member of Morgan Stanley's Venture Capital Group where he worked from 1981 to 1991, and a consultant with the Boston Consulting Group from 1977 to 1981. Mr. Behrman is a director of Visual Networks, Inc. and several private companies including Groundswell, Inc. Mr. Behrman received an M.B.A. with distinction from the Wharton Graduate School of Business in 1977. Mr. Behrman received his undergraduate degree in Business from the University of the Witwatersrand (South Africa). Richard P. Nespola has served as our President and Chief Executive Officer and founded TMNG in 1990. Prior to founding TMNG, from 1989 to 1990, Mr. Nespola served as Senior Vice President and Chief Operating Officer of Telesphere Communications. From 1986 through 1989, he held the positions of Vice President of Financial Operations and Senior Vice President of Strategic Markets and Product Pricing at Sprint. He also served as the Senior Director of Revenue and Treasury Operations at MCI from 1982 to 1986. Mr. Nespola is a director of Groundswell, Inc. In both 1997 and 1998, Mr. Nespola was named to Phone+ magazine's annual list of the most influential people in competitive long distance telecommunications. In each year, he was the highest ranking non-carrier executive selected for the list. Mr. Nespola is also a frequent chair of industry forums and noted conference speaker. Mr. Nespola received his B.A. and his M.B.A. from Long Island University. Ralph R. Peck has served as Vice President and has been a partner with TMNG since August 1991. From 1986 to 1988, Mr. Peck was a Director of Revenue Management at Sprint and held various management positions with MCI from 1984 to 1986. In these positions, Mr. Peck had responsibility for billing systems, billing center management, revenue and treasury management, new product development, and customer database conversions. Mr. Peck received his B.S.B.A. from American University. Micky K. Woo has served as our Vice President and as a director, and he has been a partner with us since December 1991. Prior to joining us, Mr. Woo served as Vice President of Information Systems and Revenue Assurance at Telesphere Communications from June 1989 to November 1991. From 1987 to 1989, Mr. Woo held a number of high level management positions with Sprint and from 1983 to 1987 with MCI. Prior to entering the telecommunications industry, Mr. Woo was a 50 55 consultant with Price Waterhouse. Mr. Woo received his B.A. in Computer Science and an M.A. in accounting from the University of Iowa. Donald E. Klumb has served as our Vice President and Chief Financial Officer since July 1999. From June 1998 to July 1999, Mr. Klumb was a partner at Deloitte & Touche LLP and headed the firm's midwest telecommunications and high technology practice. From 1992 to 1998, he was a senior manager with Deloitte & Touche. Mr. Klumb received his B.S. in accounting from the University of Wisconsin-Milwaukee and is a certified public accountant. William M. Matthes has served as a director since February 1998. Since April 1996, Mr. Matthes has been a Managing Partner of Behrman Capital. Prior to joining Behrman Capital, Mr. Matthes was Chief Operating Officer of Holsted Marketing, Inc., a direct marketing company. Previously, Mr. Matthes was a General Partner at Brentwood Associates. Mr. Matthes currently serves on the board of Starwood Financial Trust and several private companies, including Groundswell, Inc., where he serves as Chairman of the Board. Mr. Matthes received his M.B.A. from Harvard Business School in 1986 where he was both a Baker Scholar and a Loeb Rhoades Fellow. Mr. Matthes also received his A.B. in Economics from Stanford University, where he graduated with honors and distinction. Mario M. Rosati has served as a director since June 1999. Mr. Rosati is a member of the executive committee of Wilson, Sonsini, Goodrich & Rosati, one of the premier legal firms for high technology companies. He has been with the law firm since 1971, first as an associate and then as a member since 1975. He is a member of the board of directors of Aehr Test Systems, Genus, Inc., Mypoints.com, Inc., Ross Systems, Inc., Sanmina Corporation, and Vivus, Inc. Mr. Rosati received his B.A. from the University of California at Los Angeles and his J.D. from the University of California at Berkeley, Boalt Hall School of Law. Dennis G. Sisco has served as a director since February 1998. Since January 1998, Mr. Sisco has been a partner with Behrman Capital. From 1993 to 1997, Mr. Sisco served as an Executive Vice President of Dun and Bradstreet and Cognizant Corporation and he served as President of D&B Enterprises from 1989 to 1993. Previously, Mr. Sisco held several operating positions in technology companies and served as a General Partner at Oak Investment Partners. Mr. Sisco specializes in the information technology area and currently serves on the boards of Aspect Development, Inc., The Gartner Group, Inc. and TSI Software International, Ltd. Mr. Sisco graduated with honors from Western Maryland College with a B.A. in Economics. Roy A. Wilkens has served as a director since June 1999. In 1985, Mr. Wilkens founded WilTel, Inc., a subsidiary of Williams, and was the Chief Executive Officer of that company from 1985 to 1995. In 1995, Wiltel was acquired by LDDS Communications, a predecessor company to MCI Worldcom, and Mr. Wilkens remained as Chief Executive Officer of Wiltel until 1997. Prior to 1985, Mr. Wilkens served as the President of Williams Pipeline Company, a subsidiary of Williams. In 1992, President George Bush appointed Mr. Wilkens to the National Security Telecommunications Advisory Council. He has also served as chairman of both the Competitive Telecommunications Association and the National Telecommunications Network. Mr. Wilkens is a member of the board of directors of Invensys Corporation, Inc., McLeodUSA Incorporated, Splitrock Services, Inc. and UniDial, Inc. Each officer, except the Chief Executive Officer, serves at the discretion of the board of directors and holds office until his or her successor is elected and qualified or until his or her earlier resignation or removal. The Chief Executive Officer serves under his employment agreement with us. There are no family relationships among any of our directors, executive officers or key employees. 51 56 OTHER KEY PERSONNEL
NAME AGE POSITION ---- --- -------- Carol F. Bleecker.................................. 50 Principal Kimberly J. Cole................................... 41 Principal Peter D'Agostino................................... 54 General Manager of TMNG.com Linda L. Gimnich................................... 51 Principal Jane D. Hufstedler................................. 54 Principal Edward F. Shanahan................................. 45 Principal Leslie T. Shaw..................................... 50 Managing Director, TMNG Europe S. David Craig..................................... 40 Managing Director, TMNG Canada
Our other key personnel include managers of our subsidiaries and our principals. Our principals typically have been with us for a significant period of time and have responsibility for key accounts, sales or other managerial functions as well as the provision of consulting services. Carol F. Bleecker has served as a Principal since July 1997. Ms. Bleecker joined us in November 1994 as a senior consultant. In 1989, Ms. Bleecker founded Acorn Technologies, a telecommunications consulting firm, and served as a Senior Partner from 1989 to 1994. Ms. Bleecker received her B.A. from Wells College and her M.P.A. from George Washington University. Kimberly J. Cole has served as a Principal since 1996. Mr. Cole joined us in 1991 as a senior consultant working with service providers, global technology providers and systems integrators on process/organization re-engineering, new product introduction, system implementation, third party evaluations and strategic analysis. From 1989 to 1990, Mr. Cole served as a manager at Telesphere and from 1987 to 1989 as a manager at Sprint. Mr. Cole received his B.B.A. from Western Michigan University and his M.B.A. from the University of Michigan. Peter D'Agostino has served as a Principal and Network Practice Leader since 1998 and General Manager of TMNG.com since July 1999. Mr. D'Agostino began consulting with us in 1994. Mr. D'Agostino started his 30-year career in telecommunications at Bell Laboratories and has held various management and executive positions in the industry, including at AT&T and MCI, where he was responsible for data and voice network design, management and operation. From 1990 to 1998, Mr. D'Agostino was the senior founding partner in The Computech Group. Mr. D'Agostino received his B.S. from Pratt Institute and his M.S. and Ph.D. degrees in Electrical Engineering from New York University. Linda L. Gimnich has served as a Principal since 1996. From 1995 to 1996, she served as Vice President of Provisioning and Billing for Excel Communications. From 1993 to 1995, she served as a Principal and senior consultant at TMNG. From 1980 to 1993, she held executive positions at Sprint and its predecessor companies in strategic planning, revenue management, billing, customer service, information systems and equal access product marketing. Ms. Gimnich received her B.S. degree from Louisiana State University. Jane D. Hufstedler has served as a Principal since October 1998. Ms. Hufstedler joined us in October 1996 as a senior consultant. From 1994 to 1996, Ms. Hufstedler served as the Vice President of operations at Preferred Telecom. From 1993 to 1994 she served as product director for customer care at Tandem. Prior to 1993, Ms. Hufstedler held senior management positions at Southwestern Bell and Sprint and its predecessor companies. Edward F. Shanahan has served as a Principal since 1992. Mr. Shanahan joined us in 1991 as a senior consultant. From June 1989 to September 1991, Mr. Shanahan served as director of internal billing at Telesphere. Prior to 1989, Mr. Shanahan held several management positions at MCI and Sprint. Mr. Shanahan received his B.S. from University of Massachusetts and his M.B.A. from the University of Maryland. 52 57 Leslie T. Shaw has served as Managing Director of TMNG Europe since December 1998. Mr. Shaw joined us as a senior consultant in June 1998. From December 1997 through June 1998, Mr. Shaw worked as an independent consultant. From 1992 through 1997, Mr. Shaw held various director-level positions with France Telecom. Mr. Shaw received his H.N.C. in Telecommunications from Manchester University (United Kingdom). S. David Craig has served as Managing Director for TMNG Canada since February 1999. From November 1994 to February 1999, Mr. Craig served in management positions, including Vice President of Network Operations, Vice President of Customer Service, and Vice President of Customer Assistance and Revenue Management, with AT&T Canada. Mr. Craig received his B.S. in Engineering from the University of Waterloo (Canada), and his M.B.A. from the Ivey School of Business at the University of Western Ontario (Canada). BOARD COMPOSITION Our bylaws currently authorize seven directors. Our certificate of incorporation and bylaws provide that our board will be divided into three classes, Class I, Class II and Class III, with each class serving staggered three-year terms. The Class I directors, Messrs. , will stand for reelection at the 2000 annual meeting of stockholders. The Class II directors, Messrs. , will stand for reelection at the 2001 annual meeting of stockholders. The Class III directors, Messrs. , will stand for reelection at the 2002 annual meeting of stockholders. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This staggered classification of the board of directors may have the effect of delaying or preventing changes in control or management. COMMITTEES OF THE BOARD OF DIRECTORS The board of directors has established a compensation committee and an audit committee. The compensation committee, consisting of Messrs. Behrman, Matthes and Wilkens, reviews and approves the salaries, bonuses and other compensation payable to our executive officers and administers and makes recommendations concerning our employee benefits plans. The audit committee, consisting of Messrs. Rosati and Wilkens, recommends the selection of independent public accountants to the board of directors, reviews the scope and results of the audit and other services provided by our independent accountants and reviews our accounting practices and systems of internal accounting controls. DIRECTOR COMPENSATION Directors who are also our employees currently receive no additional compensation for their services as directors of our company. Directors who are not our employees may occasionally receive options under our 1998 equity incentive plan. Messrs. Rosati and Wilkens each received an option to purchase 37,500 shares of our common stock when they joined the board of directors in 1999. We have no other director compensation arrangements, other than reimbursement for travel expenses and other out-of-pocket costs incurred in connection with directors' attendance at meetings. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of our compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. 53 58 EMPLOYMENT AND NONCOMPETITION AGREEMENTS In connection with our merger and recapitalization in 1998, we entered into a noncompetition agreement with Behrman Capital and an affiliated fund and Messrs. Nespola, Peck and Woo. We also entered into employment agreements with such individuals at that time. Noncompetition Agreement. Under this agreement, Messrs. Nespola, Peck and Woo have agreed to restrain from any direct or indirect competition with us and to further refrain from any solicitation of our employees or interference with our contractual relations with employees. The noncompetition agreement terminates as to Mr. Nespola, on February 13, 2005, and as to Messrs. Peck and Woo, on the earlier of February 12, 2005 on the third anniversary of the date of termination of their employment with us. Alan Staples, a former stockholder and employee of ours, is also subject to the provisions of this agreement through November 2001. Employment Agreements. We have employment agreements with Messrs. Nespola, Peck and Woo, which set forth the terms and conditions of their employment with us. These terms and conditions include: - compensation in the form of annual salary, bonus and other compensation awarded at the discretion of the board of directors as a result of successful acquisitions by the company, the initial public offering of our stock and other events; - full time duties; - benefits, including vacation, fringe benefits and severance benefits; - a confidentiality provision requiring nondisclosure of our nonpublic information; - an assignment provision entitling us to all rights in the products resulting from services performed under the employment agreements; and - an arbitration clause selecting the form of arbitration for the resolution of disputes under the employment agreements. EXECUTIVE COMPENSATION The following table contains information, in summary form, concerning the compensation paid to our chief executive officer and each of our most highly compensated executive officers whose total salary, bonus and other compensation exceeded $100,000 during fiscal year 1998. In accordance with the rules of the SEC, the compensation described in this table does not include perquisites and other personal benefits received by the executive officers named in the table below which does not exceed the lessor of $50,000 or ten percent of the total salary and bonus reported for these officers. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ALL OTHER 1998 NAME AND PRINCIPAL POSITIONS SALARY CASH BENEFIT BONUS COMPENSATION ---------------------------- ------ ------------ ----- -------------- Richard Nespola, President and Chief Executive Officer..................... $554,215(1) $41,226 $200,000 $19,656(2) Micky Woo, Vice President..................... 210,973 41,226 150,000 -- Ralph Peck, Vice President.................... 210,973 41,226 100,000 -- Alan Staples, Partner(3)...................... 179,243 34,919 -- --
- ------------------------- (1) Mr. Nespola's current annual salary rate is $440,000. (2) All other 1998 compensation is for the use of an automobile and reflects 100.0% of the lease payments. (3) Mr. Staples terminated his employment with us in November 1998. 54 59 In addition, Mr. Klumb, our Vice President and Chief Financial Officer, joined us in July 1999 at an annual salary rate of $180,000. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information relating to stock options awarded to each of the executive officers named in the summary compensation table during fiscal 1998. All such options were awarded under our 1998 equity incentive plan.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ------------------------------------------------- ANNUAL RATES OF NUMBER OF PERCENT OF STOCK PRICE SECURITIES TOTAL APPRECIATION FOR UNDERLYING OPTIONS EXERCISE OPTION TERM OPTIONS GRANTED PRICE EXPIRATION -------------------- NAME GRANTED IN 1998 PER SHARE DATE 5% 10% ---- ---------- ---------- --------- ---------- -------- -------- Richard Nespola................ -- -- -- -- Micky K. Woo................... 50,000 4.68% $1.62 12/31/99 Ralph R. Peck.................. 50,000 4.68% $1.48 12/31/99 Alan Staples................... -- -- -- --
In 1998, we granted options to purchase an aggregate of 1,099,750 shares of common stock to our employees, directors and consultants. Generally, we grant options at an exercise price equal to the fair market value of the underlying common stock on the date of grant, as determined by our board of directors, and the options vest over three or four years from the date of grant. In determining the fair market value of our common stock, our board of directors considers valuations of comparable companies, valuation reports and analyses prepared by third parties, and the lack of liquidity of our securities. Once we become a publicly held company, the fair market value of our stock will equal its trading market price on the day of the grant. In accordance with the rules of the SEC, the above table sets forth the potential realizable value over the ten-year period from the grant date to the expiration date, assuming rates of stock appreciation of five percent and ten percent compounded annually. These amounts do not represent our estimate of future stock price performance. Actual realizable values, if any, of stock options will depend on the future performance of our common stock. On July 26, 1999, we granted Mr. Klumb an option to purchase 250,000 shares of our common stock. This option was granted under our 1998 equity incentive plan with an exercise price of $2.00 per share. 55 60 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table set forth information for each of the officers named in the summary compensation table concerning option exercises for fiscal year 1998, and exercisable and unexercisable options held at January 2, 1999. The officers named in the summary compensation table did not exercise any options during fiscal year 1998. The "Value of Unexercised In-the-Money Options at January 2, 1999" is based on a value of $ per share of our common stock, which is the initial public offering price, less the per share exercise price, multiplied by the number of shares issued upon exercise of the option. All options were granted under our 1998 equity incentive plan.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS AT FISCAL YEAR END --------------------------- NAME EXERCISABLE UNEXERCISABLE ---- ----------- ------------- Richard Nespola............................................. 0 -- Micky K Woo................................................. 0 50,000 Ralph R. Peck............................................... 0 50,000 Alan Staples................................................ 0 --
STOCK PLANS 1998 Equity Incentive Plan The amended and restated 1998 equity incentive plan was adopted and approved by our board of directors and by our stockholders in September, 1999. When we amended and restated our 1998 equity incentive plan, we combined both our 1998 equity incentive plan and our 1998 consultant equity incentive plan. The 1998 equity incentive plan provides for the grant to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code, and for the grant to employees, directors and consultants of nonstatutory stock options and stock purchase rights. As of July 3, 1999, a total of 1,950,000 shares of common stock were reserved for issuance pursuant to the 1998 equity incentive plan, of which options to acquire 1,221,500 shares were issued and outstanding as of that date. The 1998 equity incentive plan provides for annual increases in the number of shares available for issuance thereunder, on the first day of each new fiscal year, effective beginning with fiscal year 2000, equal to the lesser of five percent of the outstanding shares of common stock on the first day of the fiscal year, million shares or such amount as the board may determine. The board of directors or a committee of the board administers the 1998 equity incentive plan. In the case of options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Internal Revenue Code, the committee will consist of two or more "outside directors" within the meaning of Section 162(m) of the Internal Revenue Code. The administrator has the power to determine the terms of the options or share purchase rights granted, including the exercise price, the number of shares subject to each option or share purchase rights, the exercisability of the options and the form of consideration payable upon exercise. Options We determine the exercise price of nonstatutory stock options granted under the 1998 equity incentive plan, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Internal Revenue Code, the exercise price must at least be equal to the fair market value of the common stock on the date of grant. The exercise price of all incentive stock options granted under the 1998 equity incentive plan 56 61 must be at least equal to the fair market value of the common stock on the date of grant. With respect to any participant who owns stock possessing more than ten percent of the voting power of all classes of our outstanding capital stock, the exercise price of any incentive stock option granted must equal at least 110.0% of the fair market value on the grant date and the term of such incentive stock option must not exceed five years. The term of all other options granted under the 1998 equity incentive plan may not exceed ten years. An optionee generally must exercise an option granted under the 1998 equity incentive plan at the time set forth in the optionee's option agreement after the end of optionee's status as an employee, director or consultant of ours, or within 12 months after the optionee's termination by death or disability (or within a longer time period not exceeding five years), but in no event later than the expiration of the option's ten year term. If an optionee is terminated by us or any of our subsidiaries for cause, as defined in the 1998 equity incentive plan, then any option held by the optionee shall be terminated immediately or after any period of time as determined by the administrator. The administrator determines the exercise price of stock purchase rights granted under the 1998 equity incentive plan. In the case of stock purchase rights, unless the administrator determines otherwise, the restricted stock purchase agreement entered into in connection with the exercise of the stock purchase rights shall grant us a repurchase option that we may exercise upon the voluntary or involuntary termination of the purchaser's service with us for any reason (including death or disability). The purchase price for shares we repurchase pursuant to restricted stock purchase agreements shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to us. The repurchase option shall lapse at a rate that the administrator determines. An optionee generally may not transfer options and stock purchase rights granted under the 1998 equity incentive plan and only an optionee may exercise an option and stock purchase rights during his or her lifetime. The 1998 equity incentive plan provides that upon our dissolution, liquidation or merger with or into another corporation or a sale of substantially all of our assets, the successor corporation shall assume or substitute each option or stock purchase right held by an employee. If the employee is terminated other than for cause within six months after the dissolution, liquidation, merger or sale of assets, the vesting of each outstanding option or stock purchase right will automatically accelerate as to 50% of the unvested shares subject to the option or stock purchase right. All options or stock purchase rights held by independent contractors and all holders of options not assumed or substituted by the surviving entity shall be exercisable for a period of 15 days after the holder receives notice of his or her rights. The option or stock purchase right will terminate upon the expiration of the 15 day period. Unless terminated sooner, the 1998 equity incentive plan will terminate automatically in 2008. In addition, we have the authority to amend, suspend or terminate the 1998 equity incentive plan, provided that no such action may affect any share of common stock previously issued and sold or any option previously granted under the 1998 equity incentive plan without the optionee's written consent. 1999 EMPLOYEE STOCK PURCHASE PLAN The board of directors adopted our 1999 employee stock purchase plan in September 1999 and stockholders approved the 1999 purchase plan in September 1999. A total of 100,000 shares of common stock has been reserved for issuance under the purchase plan. In addition, the 1999 purchase plan provides for annual increases in the number of shares available for issuance under the 1999 purchase plan on the first day of each fiscal year, beginning 57 62 with fiscal year 2000, equal to the lesser of 0.05% of the outstanding shares of common stock on the first day of the fiscal year or such lesser amount as may be determined by the board. The board of directors or a committee appointed by the board administers the 1999 purchase plan. The board of directors or its committee has full and exclusive authority to interpret the terms of the 1999 purchase plan and determine eligibility. Employees are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. An employee, however, may not be granted an option to purchase stock under the 1999 purchase plan if such an employee: - immediately after grant owns stock possessing five percent or more of the total combined voting power or value of all classes of the capital stock of ours; or - whose rights to purchase stock under all employee stock purchase plans of ours accrues at a rate which exceeds $25,000 worth of stock for each calendar year. The 1999 purchase plan, which is intended to qualify under Section 423 of the Internal Revenue Code, contains consecutive, overlapping 24 month offering periods. Each offering period includes four six month purchase periods. The offering periods generally start on the first trading day on or after January 1 and June 30 of each year, except for the first such offering period which will commence on the first trading day on or after the effective date of this offering and will end on the last trading day on or before June 30, 2001. The 1999 purchase plan permits participants to purchase common stock through payroll deductions of up to 15% of the participant's "compensation." Compensation is defined as the participant's base straight time gross earnings and commissions but excludes payments for overtime, shift premium payments, incentive compensation, incentive payments, bonuses and other compensation. Amounts deducted and accumulated by the participant are used to purchase shares of common stock at the end of each offering period. The price of stock purchased under the 1999 purchase plan is 85.0% of the lower of the fair market value of the common stock at the beginning or end of the offering period. If the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, participants will withdraw from the current offering period following the exercise and will automatically re-enroll in a new offering period. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with us. A participant may not transfer rights granted under the 1999 purchase plan other than by will, the laws of descent and distribution or as otherwise provided under the 1999 purchase plan. The 1999 purchase plan provides that, if we merge with or into another corporation or a sale of substantially all of our assets, a successor corporation may assume or substitute for each outstanding option. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened, and a new exercise date will be set. The 1999 purchase plan will terminate in 2009. However, the board of directors has the authority to amend or terminate the 1999 purchase plan, except that, subject to certain exceptions described in the 1999 purchase plan, no such action may adversely affect any outstanding rights to purchase stock under the 1999 purchase plan. 58 63 LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following: - any breach of their duty of loyalty to the corporation or its stockholders; - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases or redemptions; or - any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our bylaws provide that we shall indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. We have entered into agreements to indemnify our directors and executive officers, in addition to indemnification provided for in our bylaws. These agreements, among other things, indemnify our directors and executive officers for certain expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by us arising out of such person's services as our director or executive officer, any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. 59 64 CERTAIN TRANSACTIONS RECAPITALIZATION TRANSACTION On February 12, 1998, we entered into a series of transactions that resulted in our leveraged recapitalization. Prior to completion of the recapitalization, we made distributions totaling $4.7 million to our stockholders and all stockholders' notes receivable were paid off. The recapitalization included the following transactions (share information set forth below with respect to the recapitalization gives effect to the 1-for-2 reverse stock split that we will effect prior to the completion of this offering): - we converted all authorized non-voting common stock to voting common stock and we declared a 3,272.73-for-one stock split resulting in total number of authorized shares of 60,000,000 at the time of the recapitalization, which is 30,000,000 after the reverse stock split, with 27,500,000 shares issued and outstanding; - Behrman Capital and an affiliated fund organized Behrman Capital TMNG, Inc., a new company, and contributed $20.0 million in exchange for 100% of the new company's capital stock. The new company was formed as a transitory corporation solely for the purpose of effecting the recapitalization and has not carried on any activities to date other than those related to its formation and the recapitalization; - Behrman Capital exchanged 100% of its stock in the new company for 13,500,000 newly issued shares of TMNG common stock. The new company was then merged into TMNG with TMNG being the surviving corporation. At this time we changed our income tax status to a "C" corporation from an "S" corporation; - we entered into a senior bank credit facility that provided $24.0 million in term loans and a $5.0 million revolving credit facility from a syndicate of banks. We utilized the funds provided by the revolving credit facility and the proceeds from the merger with the new company to acquire 13,500,000 shares of common stock from existing shareholders (as of December 31, 1997) for aggregate consideration of $38.7 million. These shares were then retired and returned to the status of authorized but unissued shares; and - in connection with the recapitalization, we entered into employment agreements and a noncompetition agreement with Messrs. Nespola, Peck, Staples and Woo. OTHER TRANSACTIONS Mr. Rosati, one of our directors, is also a member of Wilson Sonsini Goodrich & Rosati, Professional Corporation, which became our outside corporate counsel in July 1999. We have entered into indemnification agreements with each of our directors and executive officers. In November 1998, Mr. Staples entered into a separation agreement and release and a stock purchase agreement with us, Behrman Capital and its affiliated entities that are stockholders of ours and Messrs. Nespola, Peck and Woo. Mr. Staples' company, Revenue Systems Management Company, was also a party to these agreements. Under the separation agreement, Mr. Staples resigned from his position with us and his employment agreement with us was terminated. He received his salary and expenses up to the date of termination and his company received a lump-sum payment of $95,000. Under the stock purchase agreement, our existing stockholders repurchased all of Mr. Staples shares of our common stock for an aggregate repurchase price of $2.7 million. Intertech Management Group, Inc. is a customer of ours. Messrs. Matthes and Sisco, two of our directors, are also directors of Intertech Management Group, Inc. In addition, venture funds affiliated with Behrman Capital, with whom Messrs. Matthes and Sisco are employed, hold shares of 60 65 preferred stock of Intertech that are convertible into approximately 25.0% of Intertech's outstanding common stock. Mr. Wilkens, a member of our board of directors, will become a director and non-executive Chairman of the Board of Williams Communication Group, Inc. upon completion of Williams' initial public offering. Williams was our largest customer during fiscal year 1998 and the first six months of fiscal year 1999. POLICY REGARDING TRANSACTIONS WITH AFFILIATES All future transactions with affiliates, including any loans we make to our officers, directors, principal stockholders or other affiliates, will be approved by a majority of our board of directors, including a majority of the independent and disinterested members or, if required by law, a majority of disinterested stockholders, and will be on terms no less favorable to us than we could have obtained from unaffiliated third parties. 61 66 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of August 31, 1999 and as adjusted to reflect the sale of the shares of common stock in this offering by: - each person or entity known by us to own more than five percent of our outstanding stock; - our Chief Executive Officer, each of the executive officers named in the summary compensation table and each of our directors; and - all of our directors and executive officers as a group. Unless otherwise indicated, the address for each beneficial owner is c/o The Management Network Group, Inc., 7300 College Boulevard, Suite 302, Overland Park, Kansas 66210. The beneficial ownership is calculated based on 22,566,498 shares of our common stock outstanding as of August 31, 1999, and shares outstanding immediately following the completion of this offering. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting and investment power with respect to the securities. Unless otherwise indicated, and subject to applicable community property laws, to the best of our knowledge, the persons named in this table have sole voting and investing power with respect to all of the shares of common stock held by them. Shares issuable upon the exercise of options that are exercisable or become exercisable within 60 days of August 31, 1999 are considered outstanding for the purpose of computing percentage ownership of that person, but are not treated as outstanding for the purpose of computing any other person's ownership percentage. Messrs. Nespola, Woo and Peck have granted the underwriters an option to purchase up to an aggregate of shares of common stock to cover over-allotments, if any.
SHARES BENEFICIALLY OWNED ------------------------------------------- PERCENT BEFORE PERCENT AFTER BENEFICIAL OWNER NUMBER OFFERING OFFERING ---------------- ---------- -------------- ------------- Behrman Capital II L.P.(1).............................. 14,673,912 65.0% 126 E. 56th Street, 27th Floor New York, NY 10022 Grant G. Behrman(2)..................................... 14,673,912 65.0 Behrman Capital 126 E. 56th Street, 27th Floor New York, NY 10022 William M. Matthes(3)................................... 14,580,985 64.6 Behrman Capital Four Embarcadero Center, Suite 3640 San Francisco, CA 94111 Dennis G. Sisco(4)...................................... 14,580,985 64.6 Behrman Capital 126 E. 56th Street, 27th floor New York, NY 10022 Richard P. Nespola(5)................................... 4,891,304 20.6 Micky K. Woo............................................ 1,956,521 8.7 Ralph R. Peck........................................... 978,261 4.3 Donald E. Klumb(6)...................................... 37,500 * Mario M. Rosati(7)...................................... 37,500 * Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304
62 67
SHARES BENEFICIALLY OWNED ------------------------------------------- PERCENT BEFORE PERCENT AFTER BENEFICIAL OWNER NUMBER OFFERING OFFERING ---------------- ---------- -------------- ------------- Roy A. Wilkens(7)....................................... 37,500 * All directors and executive officers as a group (9 persons)(8)........................................... 22,537,498 99.9
- ------------------------- * Less than 1%. (1) Also includes 92,927 shares held by Strategic Entrepreneur Fund II, L.P., an affiliate of Behrman Capital. (2) Represents 14,580,985 shares held by Behrman Capital and 92,927 shares held by Strategic Entrepreneur Fund. Mr. Behrman is a managing member of Behrman Brothers LLC, the general partner of Behrman Capital and is a general partner of Strategic Entrepreneur Fund. Mr. Behrman disclaims beneficial ownership of the shares held by these entities, except to the extent of his proportionate partnership interest therein. Mr. Behrman is a member of our board of directors. (3) Represents 14,580,985 shares held by Behrman Capital. Mr. Matthes is a managing member of Behrman Brothers LLC, the general partner of Behrman Capital. Mr. Matthes disclaims beneficial ownership of the shares held by Behrman Capital, except to the extent of his proportionate partnership interest therein. Mr. Matthes is a member of our board of directors. (4) Represents 14,580,985 shares held by Behrman Capital. Mr. Sisco is a member of Behrman Brothers LLC, the general partner of Behrman Capital. Mr. Sisco disclaims beneficial ownership of the shares held by Behrman Capital, except to the extent of his proportionate partnership interest therein. Mr. Sisco is a member of our board of directors. (5) Includes 250,000 shares held by the TMNG 1999 Trust, Faye Nespola, Trustee. (6) Consists of 37,500 stock options that vest upon the closing of this offering. (7) Consists of 37,500 stock options that are exercisable within 60 days of August 31, 1999. These options, if exercised, will be subject to a right of repurchase of unvested shares. The shares subject to these options vest in four equal annual installments, with the first quarter becoming vested on June 4, 2000. (8) Includes 112,500 stock options that are exercisable within 60 days of August 31, 1999 and 250,000 shares held by TMNG 1999 Trust, Faye Nespola, Trustee. Also includes an aggregate of 14,580,985 shares held by Behrman Capital and 92,927 shares held by Strategic Entrepreneur Fund. 63 68 DESCRIPTION OF CAPITAL STOCK GENERAL Prior to giving effect to the 1 for 2 reverse split of our common stock to be effected prior to the completion of this offering, we are authorized to issue up to 100,000,000 shares of common stock, $0.001 par value and 10,000,000 shares of undesignated preferred stock. From time to time, our board of directors may establish the rights and preferences of the preferred stock. As of August 31, 1999, after giving effect to the reverse split, 22,566,498 shares of common stock were issued and outstanding and held by 11 stockholders, and zero shares of preferred stock were issued and outstanding. The following description of our capital stock is, by necessity, not complete. We encourage you to refer to our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and applicable provisions of Delaware law for a more complete description. COMMON STOCK Each holder of common stock is entitled to one vote for each share held on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends, if any, as may be declared time to time by the board of directors out of funds legally available for that purpose. See "Dividend Policy." If we undergo a liquidation, dissolution or winding up, the holders of common stock are entitled to share in our assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by the rights of the holders of shares of any series of preferred stock which we may designate in the future. PREFERRED STOCK The board of directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until the board of directors determines the specific rights of the holders of this preferred stock. However, the effects might include, among other things: - restricting dividends on the common stock; - diluting the voting power of the common stock; - impairing the liquidation rights of the common stock; or - delaying or preventing a change in control of us without further action by the stockholders. Upon the closing of this offering, no shares of preferred stock will be outstanding. REGISTRATION RIGHTS OF CERTAIN HOLDERS After this offering, holders of 22,419,000 shares of common stock or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under the terms of an agreement between us and the holders of the registrable securities. Beginning 180 days following the date of this prospectus, holders of at least 15.0% of the registrable securities may require on up to two occasions, that we use our best efforts 64 69 to register the registrable securities for public resale. We are obligated to register these shares only if the outstanding registrable securities have an anticipated public offering price of at least $8.0 million. Also, holders of 25.0% of the registrable securities may require, no more than once during any six-month period, that we register their shares for public resale on Form S-3 or similar short-form registration if the value of the securities to be registered is at least $2.0 million. Furthermore, if we elect to register any of its shares of common stock for purposes of effecting any public offering, the holders of registrable securities are entitled to include their shares of common stock in the registration, but we may reduce the number of shares proposed to be registered in view of market conditions. These registration rights have been waived with respect to this offering. We will bear all expenses in connection with any registration, other than underwriting discounts and commissions. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CHARTER AND BYLAWS Provisions of Delaware law and our certificate of incorporation and bylaws could make it more difficult to acquire us by means of a tender offer, proxy contest or otherwise, or to remove our officers and directors. These provisions, summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board. We believe that the benefits of increased protection of its potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweighs the disadvantages of discouraging such proposals because negotiation of such proposals could result in an improvement of their terms. Our board of directors is divided into three classes. The directors in each class will serve for a three-year term, with our stockholders electing one class each year. This system of electing and removing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of the directors. Our certificate of incorporation provides that stockholders may act only at duly called annual or special meetings of stockholders, not by written consent. Our bylaws further provide that special meetings of our stockholders may be called only by the President, Chief Executive Officer or Chairman of the Board or a majority of the board of directors. Our bylaws provide that stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our annual meeting of stockholders, must provide timely notice thereof in writing. The bylaws also specify requirements as to the form and content of a stockholder's notice. These provisions may preclude stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders. We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless the "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns or within three years prior to the determination of interested stockholder status, did own, 15.0% or more of a corporation's voting stock. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders. 65 70 Our certificate of incorporation and bylaws do not provide for cumulative voting in the election of directors. The amendment of any of the above provisions of our certificate of incorporation would require approval by holders of at least two-thirds of the outstanding common stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is Norwest Bank Minnesota, N.A. 66 71 SHARES ELIGIBLE FOR FUTURE SALE Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect the market price of the common stock. Upon completion of this offering, we will have outstanding shares of common stock based upon shares outstanding at August 31, 1999, assuming no exercise of outstanding options after August 31, 1999. All of the shares sold in this offering will be freely tradable without restriction under the Securities Act except for any shares purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 22,566,498 shares of common stock outstanding are all "restricted" shares under the Securities Act. All restricted shares are subject to lock-up agreements with the underwriters pursuant to which the holders of the restricted shares have agreed not to sell, pledge or otherwise dispose of such shares for a period of 180 days after the date of this prospectus. Hambrecht & Quist LLC may release the shares subject to the lock-up agreements in whole or in part at any time with or without notice. However, Hambrecht & Quist LLC has no current plans to do so. The following table indicates approximately when the 22,566,498 shares of our common stock that are not being sold in the offering but which will be outstanding at the time the offering is complete will be eligible for sale into the public market:
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET -------------------------------------------------------------- At effective date........................................... 0 180 days after effective date............................... At various times thereafter upon the expiration of applicable holding periods................................
As of August 31, 1999, 1,950,000 shares were reserved for issuance under our amended and restated 1998 equity incentive plan, of which options to purchase 1,604,000 shares were then outstanding and options to purchase 75,000 shares were then exercisable. These shares are subject to lock-up agreements. We intend to file, within 180 days after the date of this prospectus, a registration statement under the Securities Act to register the 1,950,000 shares under our 1998 equity incentive plan and the 100,000 shares of common stock reserved for issuance under our employee stock purchase plan. Upon registration, all of these shares will be freely tradable when issued, subject to Rule 144 volume limitations applicable to affiliates and lock-up agreements. In general, under Rule 144, as currently in effect, a person, or persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of: - one percent of the then outstanding shares of the common stock, which will equal approximately shares immediately after this offering, or - the average weekly trading volume of the common stock during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC. Sales pursuant to Rule 144 are subject to requirements relating to manner of sale, notice and availability of current public information about us. A person, or persons whose shares are aggregated, who is not deemed to have been one of our affiliates at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least two years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. RULE 701 In general, under Rule 701, a TMNG employee, director, officer or consultant who purchases shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of the offering is entitled to resell these shares 90 days after the effective 67 72 date of this offering in reliance on Rule 144, without having to comply with certain restrictions, including the holding period, contained in Rule 144. The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the shares acquired upon exercise of these options (including exercises after the date of this prospectus). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one year minimum holding period requirement. LOCK-UP AGREEMENTS All of our officers and directors and holders of our common stock and options to purchase common stock have agreed pursuant to "lock-up" agreements that they will not offer, sell, contract to sell, pledge, grant any option to sell, or otherwise dispose of, directly or indirectly, any shares of common stock or securities convertible or exchangeable for common stock, or warrants or other rights to purchase common stock for a period of 180 days after the date of this prospectus without the prior written consent of Hambrecht & Quist LLC. We have also entered into an agreement with Hambrecht & Quist LLC that we will not offer, sell or otherwise dispose of our common stock until 180 days offer the effective date of this offering. 68 73 UNDERWRITING Subject to the terms and conditions of the underwriting agreement, the underwriters named below, acting through their representatives, Hambrecht & Quist LLC, BancBoston Robertson Stephens Inc., Salomon Smith Barney Inc. and Jefferies & Company Inc., have severally agreed to purchase from us the following respective number of shares of our common stock:
NAME NUMBER OF SHARES ---- ---------------- Hambrecht & Quist LLC....................................... BancBoston Robertson Stephens Inc........................... Salomon Smith Barney Inc.................................... Jefferies & Company Inc..................................... -------- Total............................................. ========
The underwriting agreement provides that the obligations of the underwriters are subject to the conditions precedent, including the absence of any material adverse change in our business and the receipt of certificates, opinions and letters from us, our counsel and independent auditors. The nature of the underwriters' obligation requires that they purchase all shares of common stock offered if any shares are purchased. The underwriters propose to offer the shares of common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at such price less a concession not in excess of $ per share. The underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters. We have been advised by the representatives that the underwriters do not intend to confirm discretionary sales in excess of 5% of the shares of common stock offered by this prospectus. Several of our stockholders have granted to the underwriters an option, exercisable no later than 30 days after the date of the effective date of this offering to purchase up to additional shares of common stock at the public offering price, less the underwriting discount, set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each underwriter will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of common stock to be purchased by it shown in the above table bears to the total number of shares of common stock offered in this offering. The stockholders will be obligated to sell shares to the underwriters to the extent the option is exercised. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of common stock offered in this prospectus. The following table summarizes the compensation that we will pay to the underwriters in connection with this offering: UNDERWRITING DISCOUNTS AND COMMISSION PAYABLE BY US
WITHOUT WITH OVER-ALLOTMENT OVER-ALLOTMENT EXERCISE EXERCISE -------------- -------------- Underwriting discounts and commissions......................
The offering of the shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of shares in whole or in part. TMNG and the stockholders who have granted the underwriters an over-allotment option have agreed to indemnify the underwriters against liabilities connected to this offering, including 69 74 liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect thereof. Each of our executive officers, directors, stockholders and optionholders has agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, offer to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into or exchangeable for shares of common stock owned by them as of the date of this prospectus or thereafter acquired directly by such holders or with respect to which they have or hereafter acquire the power of disposition, until the date 180 days following the date of this prospectus. In addition, we have agreed that we will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of common stock, options or warrants to acquire shares of common stock or securities exchangeable for or convertible into shares of common stock until the date 180 days following the date of this prospectus, except that we may issues shares upon the exercise of options granted prior to the date hereof, and may grant additional options under our stock option plans, provided that without the prior written consent of Hambrecht & Quist LLC the additional options shall not be exercisable during such period. Prior to this offering, there has been no public market for our shares. The initial public offering price has been negotiated among or company and the underwriters. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be our historical performance, estimates of our business potential and earnings, prospects, an assessment of management and the consideration of the above factors in relation to market valuation of companies in related businesses. We have applied to have our common stock quoted on the Nasdaq National Market under the symbol TMNG. Certain persons participating in this offering may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the common stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the common stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the underwriters to reclaim a selling concession from a syndicate member in connection with the offering when shares of common stock sold by the syndicate member are purchased in syndicate covering transactions. These activities by the Underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. Such transactions may be effected on the Nasdaq National Market, in the over-the-counter market, or otherwise. Stabilizing, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Morrison & Foerster LLP, San Francisco, California. As of August 31, 1999, a certain investment partnership and members of Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially owned an aggregate of 75,000 shares of our common stock. Mario M. Rosati, one of our directors, and Christopher D. Mitchell, our secretary, are members of Wilson Sonsini Goodrich & Rosati. 70 75 EXPERTS The financial statements as of December 31, 1997, January 2, 1999 and July 3, 1999 and for each of the three fiscal years in the period ended January 2, 1999 and the six months ended July 3, 1999 included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon report of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC in Washington, D.C. a Registration Statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus, filed as part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and the common stock, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement, and each such statement being qualified in all respects by reference to the document to which it refers. Anyone may inspect the registration statement and its exhibits and schedules without charge at the public reference facilities the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. You may obtain copies of all or any part of these materials from the SEC upon payment to the SEC of prescribed fees. You may also inspect these reports and other information without charge at a web site maintained by the SEC. The address of this site is http://www.sec.gov. Upon completion of this offering we will become subject to the informational requirements of the Exchange Act and, in accordance therewith, file reports, proxy statements and other information with the SEC. You will be able to inspect and copy these reports, proxy statements and other information at the public reference facilities maintained by the SEC and at the SEC's regional offices at the addresses noted above. You also will be able to obtain copies of this material from the Public Reference Section of the SEC as described above, or inspect them without charge at the SEC's web site. We have applied to have our common stock quoted on the Nasdaq National Market. Upon completion of this offering, you will be able to inspect reports, proxy and information statements and other information concerning us at the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 2006. 71 76 THE MANAGEMENT NETWORK GROUP, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Income and Comprehensive Income.................................................... F-4 Consolidated Statements of Stockholders' Equity (Deficiency in Assets)................................................ F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 77 INDEPENDENT AUDITORS' REPORT To the Board of Directors of The Management Network Group, Inc. Overland Park, Kansas We have audited the accompanying consolidated balance sheets of The Management Network Group, Inc. and subsidiaries (the "Company") as of July 3, 1999, January 2, 1999 and December 31, 1997 and the related consolidated statements of income and comprehensive income, stockholders' equity (deficiency in assets) and cash flows for the six month period ended July 3, 1999, and years ended January 2, 1999, December 31, 1997 and 1996. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of July 3, 1999, January 2, 1999 and December 31, 1997, and the results of their operations and their cash flows for the six month period ended July 3, 1999, and for years ended January 2, 1999, December 31, 1997 and 1996 in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company retroactively changed its method of accounting for stock based compensation to non-employees. Deloitte & Touche LLP Kansas City, Missouri September 17, 1999 F-2 78 THE MANAGEMENT NETWORK GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
DECEMBER 31, JANUARY 2, JULY 3, 1997 1999 1999 ------------ ---------- -------- CURRENT ASSETS: Cash...................................................... $ 222 $ 959 $ 933 Receivables: Accounts receivable..................................... 4,206 5,993 4,458 Accounts receivable -- unbilled......................... 1,103 3,251 5,017 ------ -------- -------- 5,309 9,244 9,475 Less: Allowance for doubtful accounts................... (68) (120) (193) ------ -------- -------- 5,241 9,124 9,282 Prepaid tax asset......................................... 775 Other assets.............................................. 51 62 ------ -------- -------- Total current assets............................... 5,463 10,134 11,052 ------ -------- -------- DEFERRED FINANCING COSTS, net............................... 447 390 PROPERTY AND EQUIPMENT, net................................. 425 544 DEFERRED TAX ASSET.......................................... 104 ADVANCES TO RELATED PARTY................................... 201 Less: Allowance for uncollectible advances.............. (181) ------ -------- -------- 20 ------ -------- -------- TOTAL ASSETS....................................... $5,483 $ 11,006 $ 12,090 ====== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) CURRENT LIABILITIES: Long-term debt -- current portion......................... $ 1,300 $ 2,225 Bank overdraft............................................ 244 Trade accounts payable.................................... $ 134 959 788 Trade accounts payable -- related party................... 565 332 Accrued payroll, bonuses and related expenses............. 664 1,528 Accrued interest payable.................................. 440 69 Other accrued liabilities................................. 75 176 355 Income taxes payable...................................... 52 Deferred taxes............................................ 186 112 ------ -------- -------- Total current liabilities.......................... 774 4,109 5,321 LONG-TERM DEBT.............................................. 24,717 21,125 DEFERRED TAXES.............................................. 451 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) Common stock: Voting -- $.0003 par value, 15,000,000 shares authorized; 9,000,000 shares issued and outstanding in 1997; no par, 60,000,000 shares authorized; 45,000,000 shares issued and outstanding in 1998, 45,133,000 shares issued and outstanding on July 3, 1999............................. 3 17,918 21,585 Non-voting -- no par, 45,000,000 shares authorized; 36,000,000 shares issued and outstanding in 1997........ 11 Preferred stock -- $1.00 par value, 20,000 shares authorized; no shares issued or outstanding............... Additional paid-in capital.................................. 399 Retained earnings (deficit)................................. 4,468 (35,886) (33,624) Accumulated other comprehensive income -- Foreign currency translation adjustment................... (1) 2 (4) Unearned compensation....................................... (305) (2,313) Less: stockholders' notes receivable........................ (171) ------ -------- -------- Total stockholders' equity (deficiency in assets)........... 4,709 (18,271) (14,356) ------ -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)................................................... $5,483 $ 11,006 $ 12,090 ====== ======== ========
See notes to consolidated financial statements. F-3 79 THE MANAGEMENT NETWORK GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SIX MONTHS ENDED ---------------------------------------- --------------------- DECEMBER 31, DECEMBER 31, JANUARY 2, JULY 4, JULY 3, 1996 1997 1999 1998 1999 ------------ ------------ ---------- ----------- ------- (UNAUDITED) REVENUES........................................ $17,279 $20,184 $32,103 $13,032 $23,856 COST OF SERVICES: Direct cost of services....................... 9,648 11,384 17,411 6,996 12,377 Equity related charges........................ 239 956 ------- ------- ------- ------- ------- Total cost of services................. 9,648 11,384 17,650 6,996 13,333 ------- ------- ------- ------- ------- GROSS PROFIT.................................... 7,631 8,800 14,453 6,036 10,523 OPERATING EXPENSES: Selling, general and administrative........... 2,798 3,280 6,158 2,400 4,886 Equity related charges........................ 22 570 ------- ------- ------- ------- ------- Total operating expenses............... 2,798 3,280 6,180 2,400 5,456 ------- ------- ------- ------- ------- INCOME FROM OPERATIONS.......................... 4,833 5,520 8,273 3,636 5,067 OTHER INCOME (EXPENSE): Interest income............................... 16 6 18 17 2 Interest expense.............................. (136) (30) (2,054) (909) (1,116) Other, net.................................... 8 88 52 (79) ------- ------- ------- ------- ------- Total other expense.................... (120) (16) (1,948) (840) (1,193) ------- ------- ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES........ 4,713 5,504 6,325 2,796 3,874 PROVISION FOR INCOME TAXES...................... 3,282 1,919 1,612 ------- ------- ------- ------- ------- NET INCOME...................................... 4,713 5,504 3,043 877 2,262 OTHER COMPREHENSIVE INCOME -- Foreign currency translation adjustment....... (1) 3 (6) ------- ------- ------- ------- ------- COMPREHENSIVE INCOME............................ $ 4,713 $ 5,503 $ 3,046 $ 877 $ 2,256 ======= ======= ======= ======= ======= NET INCOME PER COMMON SHARE Basic......................................... $ 0.10 $ 0.12 $ 0.07 $ 0.02 $ 0.05 ======= ======= ======= ======= ======= Diluted....................................... $ 0.10 $ 0.12 $ 0.07 $ 0.02 $ 0.05 ======= ======= ======= ======= ======= SHARES USED IN CALCULATION OF NET INCOME AND PRO FORMA NET INCOME PER COMMON SHARE Basic......................................... 45,000 45,000 45,000 45,000 45,014 ======= ======= ======= ======= ======= Diluted....................................... 45,000 45,000 45,888 45,200 47,277 ======= ======= ======= ======= ======= PRO FORMA INFORMATION (UNAUDITED) Pro forma provision for income taxes.......... $ 1,885 $ 2,202 $ 2,530 $ 1,118 ======= ======= ======= ======= Pro forma net income.......................... $ 2,828 $ 3,302 $ 3,795 $ 1,678 ======= ======= ======= ======= PRO FORMA NET INCOME PER COMMON SHARE Basic......................................... $ 0.06 $ 0.07 $ 0.08 $ 0.04 ======= ======= ======= ======= Diluted....................................... $ 0.06 $ 0.07 $ 0.08 $ 0.04 ======= ======= ======= =======
See notes to consolidated financial statements. F-4 80 THE MANAGEMENT NETWORK GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK COMMON STOCK $.0003 PAR 1996 AND $.0003 PAR 1996 AND 1997; NO PAR 1997; NO PAR COMMENCING COMMENCING FEBRUARY 12, 1998 FEBRUARY 12, 1998 ACCUMULATED VOTING NON-VOTING ADDITIONAL RETAINED OTHER --------------------- -------------------- PAID-IN EARNINGS COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSSES) ----------- ------- ----------- ------ ---------- --------- --------------- BALANCE, JANUARY 1, 1996......... 9,000,000 $ 3 36,000,000 $ 11 $ 124 $ 2,946 Treasury stock sales............ 275 Distributions................... (6,095) Repayments on stockholders' notes receivable.............. Net income...................... 4,713 ----------- ------- ----------- ---- ------- -------- --- BALANCE, DECEMBER 31, 1996....... 9,000,000 3 36,000,000 11 399 1,564 Distributions................... (2,600) Other comprehensive income -- Foreign currency translation adjustment........ $(1) Repayments on stockholders' notes receivable.............. Net income...................... 5,504 ----------- ------- ----------- ---- ------- -------- --- BALANCE, DECEMBER 31, 1997....... 9,000,000 3 36,000,000 11 399 4,468 (1) Distributions................... (4,664) Other comprehensive income -- Foreign currency translation adjustment........ 3 Repayments on stockholders' notes receivable.............. Conversion of non-voting stock to voting stock............... 36,000,000 11 (36,000,000) (11) Issuance of common stock, net of offering costs of $3,061...... 27,000,000 16,939 Repurchase and cancellation of treasury stock................ (27,000,000) (38,733) Adjustment to reflect change in par value..................... 17,338 (17,338) Issuance of options............. 305 Stock compensation.............. 261 Net income...................... 3,043 ----------- ------- ----------- ---- ------- -------- --- BALANCE, JANUARY 2, 1999......... 45,000,000 17,918 (35,886) 2 =========== ======= =========== ==== ======= ======== === Issuances of options............ 2,372 Stock compensation.............. 721 Other Comprehensive Income -- Foreign currency translation adjustment........ (6) Issuance of Common Stock........ 133,000 574 Net income...................... 2,262 ----------- ------- ----------- ---- ------- -------- --- BALANCE, JULY 3, 1999............ 45,133,000 $21,585 $ $(33,624) $(4) =========== ======= =========== ==== ======= ======== === NON-VOTING COMMON STOCK HELD IN STOCKHOLDERS' TREASURY UNEARNED NOTES --------------- COMPENSATION RECEIVABLE SHARES AMOUNT TOTAL ------------ ------------- ------ ------ -------- BALANCE, JANUARY 1, 1996......... 9,000 $(275) $ 2,809 Treasury stock sales............ $(500) (9,000) 275 50 Distributions................... (6,095) Repayments on stockholders' notes receivable.............. 267 267 Net income...................... 4,713 ------- ----- ------ ----- -------- BALANCE, DECEMBER 31, 1996....... (233) 1,744 Distributions................... (2,600) Other comprehensive income -- Foreign currency translation adjustment........ (1) Repayments on stockholders' notes receivable.............. 62 62 Net income...................... 5,504 ------- ----- ------ ----- -------- BALANCE, DECEMBER 31, 1997....... (171) 4,709 Distributions................... (4,664) Other comprehensive income -- Foreign currency translation adjustment........ 3 Repayments on stockholders' notes receivable.............. 171 171 Conversion of non-voting stock to voting stock............... Issuance of common stock, net of offering costs of $3,061...... 16,939 Repurchase and cancellation of treasury stock................ (38,733) Adjustment to reflect change in par value..................... Issuance of options............. (305) Stock compensation.............. 261 Net income...................... 3,043 ------- ----- ------ ----- -------- BALANCE, JANUARY 2, 1999......... (305) (18,271) ======= ===== ====== ===== ======== Issuances of options............ (2,372) Stock compensation.............. 364 1,085 Other Comprehensive Income -- Foreign currency translation adjustment........ (6) Issuance of Common Stock........ 574 Net income...................... 2,262 ------- ----- ------ ----- -------- BALANCE, JULY 3, 1999............ $(2,313) $ $ $(14,356) ======= ===== ====== ===== ========
See notes to consolidated financial statements. F-5 81 THE MANAGEMENT NETWORK GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED ---------------------------------------- --------------------- DECEMBER 31, DECEMBER 31, JANUARY 2, JULY 4, JULY 3, 1996 1997 1999 1998 1999 ------------ ------------ ---------- ----------- ------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................... $ 4,713 $ 5,504 $ 3,043 $ 877 $ 2,262 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................. 136 48 124 Stock option and bonus share compensation...... 261 1,526 Provision for deferred income taxes............ 637 701 (629) Provision for uncollectible advances to related party........................................ 181 (181) (59) Changes in: Accounts receivable.......................... 152 (1,727) (1,735) (2,921) 1,608 Accounts receivable -- unbilled.............. (828) 374 (2,148) 1,074 (1,766) Prepaid tax assets........................... (775) Other current assets......................... (51) (8) (11) Related party receivables.................... (26) (175) 201 79 Trade accounts payable....................... (14) 129 825 1,022 (171) Trade accounts payable -- related party...... (41) 291 (233) (565) (332) Accrued liabilities.......................... 48 26 1,257 1,992 620 Payables to related parties.................. 300 (300) ------- ------- -------- -------- ------- Net cash provided by operating activities.............................. 4,304 4,303 2,012 2,240 2,456 ------- ------- -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES -- Acquisition of property and equipment............ (455) (61) (186) ------- ------- -------- -------- ------- Net cash used in investing activities..... (455) (61) (186) ------- ------- -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to shareholders.................... (4,695) (4,000) (4,664) (4,664) Bank overdraft................................... 244 Proceeds from long-term debt..................... 24,000 24,000 Net borrowings under revolving credit facility... 2,017 1,263 (2,017) Deferred financing costs......................... (553) (553) Issuance of common stock, net of expenses........ 16,939 16,939 133 Payments received on stockholders' note receivable..................................... 267 62 171 171 Payments made on long-term debt.................. (650) Payments made on notes payable -- related party.......................................... (300) (350) Issuance of notes payable -- related party....... 350 Sale of treasury stock........................... 50 Purchase of treasury stock....................... (38,733) (38,733) ------- ------- -------- -------- ------- Net cash used in financing activities..... (4,328) (4,288) (823) (1,577) (2,290) ------- ------- -------- -------- ------- EFFECT OF EXCHANGE RATE ON CASH.................... (1) 3 1 (6) ------- ------- -------- -------- ------- NET INCREASE (DECREASE) IN CASH.................... (24) 14 737 603 (26) CASH, Beginning of period.......................... 232 208 222 222 959 ------- ------- -------- -------- ------- CASH, End of period................................ $ 208 $ 222 $ 959 $ 825 $ 933 ======= ======= ======== ======== ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during period for interest............. $ 88 $ 79 $ 1,517 $ 770 $ 1,421 ======= ======= ======== ======== ======= Cash paid during period for taxes................ $ $ $ 2,581 $ 43 $ 2,969 ======= ======= ======== ======== ======= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS -- Sale of treasury stock in exchange for stockholders' note receivable.................. $ 500 $ $ $ $ ======= ======= ======== ======== ======= Stock compensation............................... $ $ $ 261 $ $ 1,526 ======= ======= ======== ======== =======
See notes to consolidated financial statements. F-6 82 THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JULY 4, 1998 IS UNAUDITED) 1. ORGANIZATION NATURE OF OPERATIONS -- The Management Network Group, Inc. ("TMNG" or the "Company") was formed on April 1, 1993 as a management consulting firm specializing in global competitive telecommunications. Primary services include serving wireless and wireline communications carriers in all industry segments, and the technology and investment firms that support the telecommunications industry. A majority of the Company's revenues are to customers in the United States, however the Company also provides services to customers in the United Kingdom, Canada, Australia and other foreign countries. The Company's business is international in scope with corporate offices in Kansas City. RECAPITALIZATION -- On February 12, 1998, TMNG entered into a series of transactions that resulted in a leveraged capitalization (the "recapitalization") of the Company. Prior to the recapitalization, the Company made distributions totaling approximately $4.7 million to its stockholders and all stockholders' notes receivable were paid off. The recapitalization included the following transactions: - All authorized non-voting common stock was converted to voting common stock and the Company declared a 3,272.73-for-one stock split resulting in total authorized shares of 60 million with 45 million issued and outstanding. In connection with this stock split, the Company changed its par common stock to no par common stock. All historical share data has been retroactively restated for the effect of the stock split. - Behrman Capital II, LP ("Behrman") organized Behrman Capital TMNG, Inc. ("NEWCO") with contributed capital of $20.0 million and Behrman owning 100% of NEWCO capital stock. NEWCO was formed as a transitory corporation solely for the purpose of effecting the recapitalization and has not carried on any activities to date other than those incident to its formation and the recapitalization. - Behrman exchanged 100% of its NEWCO stock for 27 million newly issued shares of TMNG common stock. NEWCO was then merged with and into TMNG with TMNG as the surviving corporation, at which time TMNG changed its income tax status to a subchapter "C" corporation from an subchapter "S" corporation. Offering costs of approximately $3.1 million were charged against additional paid-in capital at the time of the merger. - TMNG entered into a senior bank credit facility that provided $24.0 million in term loans and a $5.0 million revolving credit facility from a syndicate of banks. TMNG utilized the funds provided by the credit facility and the proceeds from the merger with NEWCO to acquire 27 million shares of common stock from existing stockholders (as of December 31, 1997) for an aggregate cost of approximately $38.7 million. Such treasury shares were then retired. The costs to enter into the credit facility of approximately $500,000, were capitalized. PRINCIPLES OF CONSOLIDATION -- The consolidated statements include the accounts of TMNG and its wholly-owned subsidiaries, The Management Network Group Europe Ltd. ("TMNG-Europe"), formed on March 19, 1997, based in the United Kingdom, The Management Network Group Canada Ltd. ("TMNG-Canada"), formed on May 14, 1998, based in Toronto, Canada and TMNG.com, Inc., formed in June 1999. All significant intercompany accounts and transactions have been eliminated in consolidation. FISCAL YEAR -- Effective January 1, 1998, the Company adopted a 52/53 week fiscal year, changing the year end date from December 31, to the Saturday nearest December 31. The fiscal year ended January 2, 1999 had 52 weeks and is referred to herein as fiscal year 1998. All references F-7 83 THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JULY 4, 1998 IS UNAUDITED) herein for fiscal years 1997 and 1996 represent the years ended December 31, 1997 and December 31, 1996, respectively. TMNG-Europe and TMNG-Canada maintain year end dates of December 31. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTRACTS -- The Company enters into both time and materials and fixed price contracts with its customers. A substantial majority of TMNG's contracts are based upon time and materials. Under a time and materials contract the customer pays a negotiated daily rate for all services performed plus expenses incurred. Under a fixed price contract the customer pays a predetermined fixed price for all services performed regardless of the professional time required. Fixed price contracts generally involve immaterial amounts and are of short duration. Prior to January 3, 1999 TMNG subcontracted with several companies (five of which were related parties to TMNG through certain common ownership or are owned by employees of TMNG) to provide consultants acting as independent contractors to render the services required under the customer contracts. These subcontracts were on a time and materials basis, contained confidentiality/noncompete provisions and could be terminated by either party on 30 days prior notice. REVENUE RECOGNITION -- Time and materials service revenues and related time and materials service costs are recorded in the period in which the service is performed. Fixed price service contract revenues and related costs are recognized upon contract completion under the completed contract method. CASH -- Cash includes cash on hand and cash in bank and is stated at cost, which approximates market. PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is based on the estimated useful lives of the assets and is computed using the straight-line method. Asset lives range from three to seven years for computers and equipment. Leasehold improvements are capitalized and amortized over the life of the lease. Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in income. INTANGIBLE ASSETS -- Deferred financing costs are capitalized and amortized over the term of the related credit facility. Accumulated amortization was approximately $106,000 and $163,000 at January 2, 1999 and July 3, 1999, respectively. LONG-LIVED ASSETS -- The Company, using its best estimates based on reasonable and supportable assumptions and projections, reviews for impairment long-lived assets and certain identifiable intangibles to be held and used whenever events or changes in circumstances indicate that the carrying amount of its assets might not be recoverable. Management has concluded no financial statement adjustment is currently required. ADVERTISING COSTS -- Advertising costs are expensed as incurred. Advertising expense charged to operations totaled approximately $57,000, $115,000, $101,000, and $156,000 for 1996, 1997, fiscal year 1998, and the six months ended July 3, 1999, respectively. F-8 84 THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JULY 4, 1998 IS UNAUDITED) INCOME TAXES -- As described in Note 1, the Company converted to a subchapter "C" corporation for income tax reporting purposes effective February 12, 1998. Deferred tax liabilities of approximately $1.1 million were recorded on February 12, 1998, in conjunction with the conversion, for the cumulative temporary differences (see Note 7). The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements. A valuation allowance is provided when, in the opinion of management, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Prior to February 12, 1998, the Company elected to be treated as a subchapter "S" corporation under the Internal Revenue Code and thus was treated substantially as a partnership for income tax purposes. Accordingly, until the time of conversion to a subchapter "C" corporation, the individual stockholders were responsible for their proportionate share of the corporate taxable income or loss for federal and state income tax reporting purposes. 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 could differ from those estimates. UNAUDITED INTERIM FINANCIAL STATEMENTS -- The unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the six months ended July 4, 1998. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION -- The 1997, fiscal year 1998 and the six months ended July 3, 1999 consolidated financial statements include TMNG -- Europe (located in the United Kingdom). The fiscal year 1998 and the six months ended July 3, 1999 consolidated financial statements also include TMNG -- Canada. Both entities conduct business primarily denominated in their respective local currency. Assets and liabilities have been translated to U.S. dollars at the period-end exchange rate. Income and expenses have been translated at exchange rates which approximate the average of the rates prevailing during each period. Translation adjustments are reported as a separate component of other comprehensive income in the consolidated statements of stockholders' equity. Realized and unrealized exchange gains and losses included in results of operations were approximately $75,000 for the six months ended July 3, 1999. Amounts for other periods presented were insignificant. STOCK-BASED COMPENSATION -- The Company accounts for stock based compensation for employees in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related Interpretations and for stock-based compensation for non-employees in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." In connection with the planned registration of the Company's common stock with the Securities and Exchange Commission, the Company has retroactively adopted a new method of accounting for stock based compensation issued to certain non-employees. The Company has recognized compensation expense based on the fair market value of the options in accordance with EITF 96-18. Previously, the Company accounted for such options under the provisions of APB No. 25, and accordingly, did not recognize any expense. The accompanying 1998 consolidated financial statements have been restated for this accounting change. NET INCOME PER SHARE -- Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share F-9 85 THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JULY 4, 1998 IS UNAUDITED) reflects the potential dilution of securities by adding other common stock equivalents, including stock options, in the weighted average number of common shares outstanding for a period, if dilutive. DERIVATIVE FINANCIAL INSTRUMENTS -- The Company enters into interest rate caps to manage exposure to interest rate volatility. The Company does not enter into derivative financial instruments for speculative or trading purposes. The costs of interest rate cap agreements are included in interest expense ratably over the lives of the agreements. Payments to be received as a result of the cap agreements are recorded as a reduction of interest expense. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS -- The Company recently adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information about operating segments, products and services, geographic areas and major customers. NEW ACCOUNTING STANDARDS -- The FASB recently issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 was amended by SFAS no. 137 which requires adoption of the SFAS requirements for fiscal years beginning after June 15, 2000. This standard establishes accounting and reporting requirements for derivative financial instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In the opinion of management, the effect of adoption of this standard will not have a material impact to operating results of the Company. PRO FORMA INFORMATION -- Pro forma information included in the consolidated statements of income and comprehensive income is unaudited and included to reflect the pro forma effect of providing income taxes on previously untaxed subchapter "S" net income. This effect is calculated as follows: Pro forma income tax expense -- assumed 40% effective tax rate. Pro forma basic and diluted common shares -- include the effect of common share issuance and stock option exercise in accordance with SFAS No. 128, "Earnings per Share." FAIR VALUE OF FINANCIAL INSTRUMENTS -- The fair values of asset and liability financial instruments approximate the carrying values. RECLASSIFICATIONS -- Certain prior period financial statement balances have been reclassified to conform to current period presentation. 3. MAJOR CUSTOMERS AND SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Major customers in terms of significance to TMNG's revenues (i.e. in excess of 10% of revenues) for the years ended December 31, 1996 and 1997, and fiscal year 1998, and the six F-10 86 THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JULY 4, 1998 IS UNAUDITED) months ended July 3, 1999 and accounts receivable as of December 31, 1997, January 2, 1999, and July 3, 1999 are as follows (amounts in thousands):
AMOUNT OF REVENUES ACCOUNTS RECEIVABLE ------------------------------------------ ------------------------------------- FISCAL SIX MONTHS YEAR ENDED DECEMBER 31, JANUARY 2, JULY 3, 1996 1997 1998 JULY 3, 1999 1997 1999 1999 ------ ------ ------ ------------ ------------ ---------- ------- Customer A........................ $1,700 $7,928 $1,504 Customer B........................ 2,639 2,524 113 Customer C........................ 3,839 Customer D........................ $4,138 $1,121 Customer E........................ 4,093 2,354 Customer F........................ 5,412 $10,559 1,440 $1,810 Customer G........................ 3,101 595
All of TMNG's receivables are obligations of companies in the telecommunications industry. The Company generally does not require collateral or other security on their accounts receivable. The credit risk on these accounts is controlled through credit approvals, limits and monitoring procedures. A non-executive member of the TMNG board of directors also serves as a non-executive director of Customer F. Service revenues earned outside the United States for the years ended December 31, 1996 and 1997 were not significant. Revenues earned in the United States and internationally based on domiciles of project owner for fiscal year 1998 and the six months ended July 3, 1999 are as follows: (amounts in thousands):
INCOME BEFORE INCOME AMOUNT OF REVENUES TAXES --------------------- -------------------- SIX MONTHS SIX MONTHS FISCAL ENDED FISCAL ENDED YEAR JULY 3, YEAR JULY 3, 1998 1999 1998 1999 ------- ---------- ------ ---------- United States............................. $26,914 $18,110 $5,336 $2,977 International: Switzerland............................. 758 3,101 150 504 Canada.................................. 3,541 970 697 157 Other................................... 890 1,675 142 236 ------- ------- ------ ------ Total........................... $32,103 $23,856 $6,325 $3,874 ======= ======= ====== ======
No long-lived assets are deployed outside the United States. 4. PROPERTY AND EQUIPMENT
JANUARY 2, JULY 3, 1999 1999 ---------- ------- (000'S) (000'S) Furniture and fixtures...................................... $ 69 $109 Software and computer equipment............................. 256 399 Leasehold improvements...................................... 130 133 ---- ---- 455 641 Less: accumulated depreciation and amortization............. 30 97 ---- ---- $425 $544 ==== ====
Depreciation expense was approximately $30,000 for fiscal year 1998 and approximately $67,000 for the six months ended July 3, 1999. F-11 87 THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JULY 4, 1998 IS UNAUDITED) 5. LONG-TERM DEBT
JANUARY 2, JULY 3, 1999 1999 ---------- ------- (000'S) (000'S) Term loans.................................................. $24,000 $23,350 Revolving credit facility................................... 2,017 ------- ------- 26,017 23,350 Less long-term debt -- current portion...................... 1,300 2,225 ------- ------- $24,717 $21,125 ======= =======
As of July 3, 1999, the Company had a $29.0 million secured credit facility, as amended, with substantially all assets of the Company pledged as collateral. The $29.0 million credit facility, which expires through December 2003, includes two $12.0 million term loans and a $5.0 million revolving credit facility. Borrowings against the revolving credit facility are limited to 85% of eligible accounts receivable as defined in the credit facility agreement. Interest is payable quarterly as follows: (7.86% to 9.00% as of July 3, 1999)
INTEREST MARGIN RATE BASE RANGE --------- ------------- Term loan A................................................ LIBOR 2.00% - 2.75% Term loan B................................................ LIBOR 2.50% - 3.00% Revolving credit facility.................................. LIBOR 2.00% - 2.75%
The weighted average interest rate for the revolving line of credit was 9.59% and 9.00% in fiscal year 1998 and the six months ended July 3, 1999, respectively. The terms of the secured credit facility require the Company to maintain certain financial ratios and observe additional restrictive covenants the most restrictive of which preclude the payment of dividends and limit capital expenditures. It is management's belief that the Company was in compliance with all covenants as of January 2, 1999 and July 3, 1999. The fair value of long-term debt approximates the carrying value as of January 2, 1999 and July 3, 1999. As of July 3, 1999, the future minimum principal payments on debt are as follows (amounts in thousands):
FISCAL YEAR ----------- Remainder of 1999........................................... $ 650 2000........................................................ 3,150 2001........................................................ 3,650 2002........................................................ 3,900 2003........................................................ 12,000 ------- $23,350 =======
6. DERIVATIVE FINANCIAL INSTRUMENTS As a requirement of the secured credit facility agreement, in March 1998 the Company purchased an interest rate cap agreement from a bank counterparty with decreasing notional amounts in conjunction with specified debt principal payments. The interest rate cap agreement F-12 88 THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JULY 4, 1998 IS UNAUDITED) was entered into to partially offset the variable rate characteristics of $12.0 million in term loans. The notional amount was $12.0 million as of July 3, 1999. The cap agreement was effective March 13, 1998 and terminates on March 30, 2001. The agreement caps the floating interest rate exposure on outstanding debt up to the notional amount of the agreement at 8.1875%. The Company believes its exposure to potential loss due to counterparty nonperformance is minimized primarily due to the relatively strong credit ratings of the bank counterparty and due to the size and diversity of the counterparty bank. The interest rate agreement is subject to market risk to the extent that market rates for similar instruments decrease and the Company terminates the hedge prior to maturity. 7. INCOME TAXES For the fiscal year 1998 and the six months ended July 3, 1999, the income tax provision consists of the following (amounts in thousands):
FISCAL SIX MONTHS YEAR ENDED JULY 3, 1998 1999 ----------- ------------- Federal Current................................................... $2,090 $1,746 Deferred tax benefit...................................... (391) (556) ------ ------ 1,699 1,190 State Current................................................... 491 425 Deferred tax benefit...................................... (40) (73) ------ ------ 451 352 Foreign..................................................... 64 70 ------ ------ 2,214 1,612 Deferred recorded on conversion to subchapter "C" corporation............................................... 1,068 ------ ------ Total..................................................... $3,282 $1,612 ====== ======
The following is a reconciliation between the provision for income taxes and the amounts computed at the statutory federal income tax rate (amounts in thousands):
FISCAL YEAR SIX MONTHS ENDED 1998 JULY 3, 1999 -------------- ---------------- AMOUNT % AMOUNT % ------ ---- ------ ---- Computed expected federal income tax expense....... $2,214 35.0 $1,356 35.0 State income tax expense, net of federal benefit... 285 4.5 197 5.1 Conversion to subchapter "C" corporation........... 1,068 16.9 Subchapter "S" corporation earnings (January 1, 1998 to February 11, 1998)....................... (318) (5.0) Other.............................................. 33 0.5 59 1.5 ------ ---- ------ ---- Total............................................ $3,282 51.9 $1,612 41.6 ====== ==== ====== ====
F-13 89 THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JULY 4, 1998 IS UNAUDITED) Items giving rise to the provision for deferred income taxes (benefit) excluding the deferred tax expense recorded on conversion to subchapter "C" corporation (amounts in thousands):
FISCAL SIX MONTHS YEAR ENDED 1998 JULY 3, 1999 ----------- ------------ Bad debt reserve............................................ $ (20) $ (29) Stock option compensation expense........................... (104) (433) Change from cash to accrual tax basis accounting............ (270) (138) Other....................................................... (37) (29) ----- ----- Total............................................. $(431) $(629) ===== =====
The significant components of deferred income tax assets and liabilities and the related balance sheet classifications, as of January 2, 1999 and July 3, 1999, are as follows (amounts in thousands):
JANUARY 2, JULY 3, 1999 1999 ---------- ------- Current deferred tax assets (liabilities): Bad debt reserve.......................................... $ 46 $ 75 Prepaid expenses.......................................... (19) (16) Accrued expenses.......................................... 57 106 Change from cash to accrual tax basis accounting -- current portion.......................... (270) (277) ----- ----- Net current deferred tax liability................ $(186) $(112) ===== ===== Non-current deferred tax assets (liabilities): Change from cash to accrual tax basis accounting.......... $(540) $(416) TMNG -- Europe -- cumulative net operating losses......... 134 133 Stock option compensation expense......................... 104 537 Other..................................................... (15) (17) ----- ----- (317) 237 Valuation allowance....................................... (134) (133) ----- ----- Net non-current deferred tax liability............ $(451) $ 104 ===== =====
A valuation allowance has been established for the Company's deferred income tax asset related to the future benefit of net operating losses related to TMNG -- Europe, as management cannot assess the likelihood that the future tax benefit will be realized. An allowance of $134,000 and $133,000 has been recorded as of January 2, 1999 and July 3, 1999, respectively. The Company has foreign net operating loss carryforwards totaling approximately $442,000 at July 3, 1999. The utilization of such net operating loss carryforwards are restricted to the earnings of specific foreign subsidiaries. 8. OPERATING LEASES The Company leases office facilities and certain automobiles under non-cancelable operating leases expiring at various dates through August 2003. Total rental expense was approximately $17,000, $27,000, $40,000 and $47,000 for 1996, 1997, fiscal 1998 and the six months ended July 3, F-14 90 THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JULY 4, 1998 IS UNAUDITED) 1999, respectively. As of July 3, 1999, the future minimum payments under operating leases are as follows (amounts in thousands):
FISCAL YEAR ----------- Remainder of 1999........................................... $ 50 2000........................................................ 87 2001........................................................ 82 2002........................................................ 83 2003........................................................ 58 2004........................................................ 2 ---- $362 ====
9. STOCK OPTION PLAN In 1998, 5,000,000 shares of the Company's Common Stock were authorized for issuance under the Company's 1998 Equity Incentive Plan and 1998 Stock Option Plan (the "Plans"). The Plans provide the Company's Common Stock for the granting of incentive stock options and non-qualified stock options to employees and nonqualified stock options to employees, directors and consultants. Incentive stock options are granted at an exercise price of not less than fair value per share of the common stock on the date of grant as determined by the board of directors. Nonqualified stock options are granted at an exercise price of not less than 85% of the fair value per share on the date of grant as determined by the board of directors. Vesting and exercise provisions are determined by the board of directors. Options granted under the Plans generally become exercisable over a three to four year period beginning on the date of grant. Options granted under the Plans have a maximum term of ten years. Subsequent to July 3, 1999, the Company elected to merge the Plans.
OUTSTANDING OPTIONS ---------------------------------------------- NUMBER OF PRICE PER WEIGHTED-AVERAGE SHARES SHARE EXERCISE PRICE --------- ------------- ---------------- Options granted in fiscal 1998............ 2,199,500 $0.74 - $0.81 $0.74 --------- ------------- ----- Balance at January 2, 1999................ 2,199,500 0.74 - 0.81 0.74 Options granted........................... 293,500 1.00 1.00 Options cancelled......................... (50,000) 0.74 0.74 --------- ------------- ----- Balance at July 3, 1999................... 2,443,000 $0.74 - $1.00 $0.79 ========= ============= =====
Prior to January 3, 1999, options were generally issued at fair value. The Company applies APB 25 and related Interpretations in accounting for its stock option plan for employees and certain non-employees. Accordingly, no compensation expense had been recognized for these options. The Company accounts for its stock option awards to independent contractors and other non-employees in accordance with the fair value measurement provision of SFAS No. 123. Under its provisions, the Company recognizes compensation cost over the vesting periods. These options have resulted in a charge to operations of approximately $261,000 and $721,000 for fiscal year 1998 and the six months ended July 3, 1999, respectively. During fiscal year 1998 and the six months ended July 3, 1999, in connection with the grant of certain stock options to employees, the Company recorded unearned stock compensation of $305,000 and $2,372,000, respectively, representing the difference between the exercise price and the fair value of the Company's common stock on the date such stock options were granted. Such F-15 91 THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JULY 4, 1998 IS UNAUDITED) amount is being amortized by charges to operations and credit to stockholders' equity (deficiency in assets) on a graded vesting method. At July 3, 1999, the Company had a total of $2,313,000 remaining to be amortized over the corresponding vesting period of each respective option, generally three to four years. The amortization expense relates to options awarded to employees in all operating expense categories. This amount has been separately allocated to these categories. The fair value of each option grant as of January 2, 1999 and July 3, 1999 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
JANUARY 2, JULY 3, 1999 1999 ------------- ------------- Volatility factor..................................... 0 0 Risk-free interest rate............................... 4.24% - 5.65% 5.12% - 5.69% Expected life......................................... 5 years 5 years
Had compensation cost for the Company's stock option plan been determined based upon the fair value at the grant date for awards under the plan, consistent with the Black-Scholes option pricing methodology, the Company's net income for fiscal year 1998 would have decreased by approximately $33,000 and net income for the six months ended July 3, 1999 would have decreased by approximately $62,000. For purposes of pro forma disclosures, the estimated fair value of options is amortized to pro forma expense over the options' vesting period. Pro forma information for the periods which options were outstanding follows (in thousands, except per share amounts):
SIX MONTHS FISCAL YEAR ENDED 1998 JULY 3, 1999 ----------- ------------ Net Income: As reported............................................... $3,043 $2,262 ====== ====== Pro forma................................................. $3,010 $2,200 ====== ====== Basic and diluted net income per share: Basic..................................................... $ 0.07 $ 0.05 ====== ====== Diluted................................................... $ 0.07 $ 0.05 ====== ====== Basic and diluted pro forma net income per share: Basic..................................................... $ 0.07 $ 0.05 ====== ====== Diluted................................................... $ 0.07 $ 0.05 ====== ======
Subsequent to July 3, 1999, the Company issued approximately 800,000 stock options to employees and consultants. 10. RELATED PARTY TRANSACTIONS During the six months ended July 3, 1999, the Company issued 133,000 shares of common stock representing bonus compensation to certain employees. The Company calculated compensation expense related to these shares at the fair value of the shares at date of issuance. Accordingly, compensation expense of $441,000 was charged to operations. Two members of the TMNG board of directors are also directors of a customer with which TMNG does business. During fiscal year 1998 and for the six months ended July 3, 1999, the F-16 92 THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JULY 4, 1998 IS UNAUDITED) Company earned revenues from this customer of approximately $330,000 and $1.5 million respectively. Receivables from this customer at January 2, 1999 and July 3, 1999 were approximately $275,000 and $732,000, respectively. Additionally, venture funds affiliated with TMNG's majority shareholder hold shares of preferred stock of this customer that are convertible into approximately 25% of the customer's outstanding common stock. Through January 2, 1999 TMNG subcontracted with five companies owned by certain stockholders and employees of TMNG. These companies provided consultants (acting as independent contractors) to TMNG to render consulting services to TMNG customers. Effective January 3, 1999, TMNG contracts directly with consultants. Total services received from these companies was approximately $7.8 million, $9.6 million and $14.9 million in 1996, 1997 and fiscal 1998, respectively, and are included in cost of services in the statements of income. Included in accounts payable at December 31, 1997 and January 2, 1999 are balances due for such services of approximately $565,000 and $332,000, respectively. During 1996, 9,000,000 shares of treasury stock (non-voting) were purchased by shareholders of the Company for cash of $50,000 and notes receivable of $500,000. Such notes matured beginning January 1998 through April 1998 with interest rates ranging from 5.2% to 7.0%. The outstanding balance on the notes receivable at December 31, 1996 and 1997 are presented within stockholders' equity as they represent receivables due from the sale of common stock. Included in interest income is approximately $16,000, $6,000 and $7,000 in 1996, 1997 and fiscal year 1998, respectively, related to these notes. As described in Note 1, the notes were retired on February 12, 1998. On February 10, 1996, the Company issued options to acquire 4.5 million shares of non-voting common stock at an exercise price of $0.06 per share (estimated fair value at date of grant). The options were to be exercised prior to June 30, 1997. The options were exercised on June 29, 1996, and are included in the aforementioned sale of treasury stock. During 1996, 1997, fiscal year 1998 and the six months ended July 3, 1999 TMNG made payments of approximately $213,000, $200,000, $77,000, and $35,000, respectively, to a company owned by a significant stockholder of TMNG. In addition, TMNG made a payment of $100,000 in 1997 to a stockholder. Such payments were for services rendered under consulting agreements between TMNG and the respective affiliated company and/or shareholder. These expenses were classified as selling, general and administrative in the accompanying statements of income and comprehensive income. During 1996 and 1997 TMNG incurred interest expense on notes and distributions payable of approximately, $136,000 and $30,000, respectively, for certain related parties. The interest rate applied was 7.0%. 11. CONTINGENCIES During 1997, one of the Company's customers entered Chapter 11 of the bankruptcy code. According to the bankruptcy code, certain payments made within a specified period of time prior to the date of the bankruptcy filing and payments made subsequent to the date of the bankruptcy filing which are not previously authorized, could be declared "preference payments". Under certain conditions, preference payments could be required to be remitted to the bankruptcy trustee for satisfaction of general creditor claims. During 1998, the bankruptcy trustee filed suit against the Company for preferential payments received prior to and subsequent to the bankruptcy filing, and related damages of approximately $1.9 million. The total amount of payments received from this customer during the specified preference period aggregated approximately $320,000. In the opinion of management, resolution of this legal action will not have a material adverse effect on the Company's consolidated results of operations, cash flows or financial position. F-17 93 THE MANAGEMENT NETWORK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JULY 4, 1998 IS UNAUDITED) During 1997, the Company discovered that its TMNG-Europe general manager and director had drawn Company funds without authorization. The director resigned from TMNG-Europe during the year ended December 31, 1997 and claimed that he was owed unpaid remuneration and reimbursable expenses. During 1998, the Company received approximately $92,000 from the former director in settlement of the claim. The Company may become involved in various legal and administrative actions arising in the normal course of business. These could include actions raised by taxing authorities challenging the employment status of consultants utilized by the Company. While the resolution of any of such actions or the matter described above may have an impact on the financial results for the period in which it is resolved, the Company believes that the ultimate disposition of these matters will not have a material adverse effect upon its consolidated results of operations, cash flows or financial position. 12. SUBSEQUENT EVENTS On August 27, 1999, the board of directors approved, subject to stockholder approval, the amendment of the Company's Certificate of Incorporation, which included, among other things, reincorporation of the Company in the State of Delaware and a change in the par values and total number common stock and preferred stock of which the Company is authorized to issue. The total number of shares of common stock which the Company has authority to issue is 100 million with par value of $0.001 per share. The total number of shares of preferred stock which the Company has authority to issue is 10 million with par value of $0.001 per share. On September 7, 1999, the Board of Directors authorized the Company to proceed with an initial public offering of its common stock. F-18 94 [ARTWORK] THIS IS GRAPHIC REPRESENTATION OF OUR VISION INCLUDING VALUE PROPOSITION, SCOPE AND DEPTH, AND PROPRIETARY TOOLS. [ARTWORK] 95 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SHARES [LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- HAMBRECHT & QUIST BANCBOSTON ROBERTSON STEPHENS SALOMON SMITH BARNEY JEFFERIES & COMPANY, INC --------------------- , 1999 --------------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO "TMNG.COM", "TMNG", "WE", "US" AND "OUR" REFER TO THE MANAGEMENT NETWORK GROUP, INC. AND ITS SUBSIDIARIES, AND REFERENCES TO "TMNG" REFER TO THE BRAND NAME OF OUR SERVICES. UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 96 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all fees and expenses payable by us in connection with the registration of our common stock. All of the amounts shown are estimates except for the SEC registration fee, NASD filing fee and the Nasdaq National Market listing fees.
AMOUNT TO BE PAID ------------ SEC Registration Fee........................................ $19,182 NASD Filing Fee............................................. 7,400 Nasdaq National Market Listing Fee.......................... * Printing and Engraving Expenses............................. * Legal Fees and Expenses..................................... * Accounting Fees and Expense................................. * Transfer Agent and Registrar Fees and Expenses.............. * Miscellaneous Expenses...................................... * ------- Total............................................. * =======
- --------------- * To be completed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law allows for the indemnification of officers, directors and any corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act. Our certificate of incorporation and our bylaws provide for indemnification of our directors, officers, employees and other agents to the extent and under the circumstances permitted by the Delaware General Corporation Law. We have also entered into agreements with our directors and executive officers that require us among other things to indemnify them against certain liabilities that may arise by reason of their status or service as directors and executive officers to the fullest extent permitted by Delaware law. We have also purchased directors and officers liability insurance, which provides coverage against certain liabilities including liabilities under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (a) Within the past three years, we have issued and sold the following unregistered securities: (1) In February, 1998, we issued and sold an aggregate of 13,500,000 shares of common stock to our officers and directors and to certain other individuals for an aggregate purchase price of $19,980,000. (2) We issued and sold an aggregate of 66,500 shares of common stock to certain individuals in 1999. (3) Since our inception, we have granted options to purchase 1,647,750 shares of common stock to directors, employees and consultants under our 1998 Equity Incentive Plan at exercise prices ranging from $1.48 to $2.00 per share. Of the 1,647,750 shares granted, all options remain outstanding. The sales and issuances of securities in the transactions described above were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act, Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the II-1 97 Securities Act, as transactions by an issuer not involving any public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in such transactions. All recipients had adequate access to information about us through their relationship with us. (b) There were no underwritten offerings employed in connection with any of the transactions set forth in Item 15(a). ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1* Form of Underwriting Agreement 2.1 Agreement and Plan of Merger by and among the registrant and certain parties dated January 7, 1998 3.1 Certificate of Incorporation of the registrant 3.2 Bylaws of the registrant 4.1* Specimen Common Stock Certificate 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 10.1 Registration Rights Agreement dated January 7, 1998 among the registrant and certain investors 10.2 Form of Indemnification Agreement between the registrant and each of its Directors and Officers 10.3 1998 Equity Incentive Plan and form of agreements thereunder 10.4 1999 Employee Stock Purchase Plan and form of agreements thereunder 10.5 Consulting Services Agreement between the registrant and Williams Communications Group, Inc. dated November 5, 1997 10.6 Credit Agreement, including revolving credit notes and term notes, dated February 12, 1998 among the registrant and certain guarantors, lenders and agents 10.7 Lease between Lighton Plaza L.L.C. and the registrant dated April 23, 1998 10.8 Noncompetition Agreement between the registrant and certain parties dated February 12, 1998. 10.9 Employment Agreement between the registrant and Richard Nespola dated February 12 , 1998. 10.10 Employment Agreement between the registrant and Micky Woo dated February 12, 1998. 10.11 Employment Agreement between the registrant and Ralph Peck dated February 12, 1998. 10.12 Employment Agreement between the registrant and Donald Klumb dated September 9, 1999 21.1 List of subsidiaries 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Wilson Sonsini Goodrich & Rosati (included in exhibit 5.1) 24.1 Power of attorney (see page II-4) 27.1 Financial data schedule
- --------------- * Denotes exhibit to be filed by amendment. (b) Financial Statement Schedules: None. ITEM 17. UNDERTAKINGS Indemnification by us for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of TMNG, we have been advised that in the opinion of II-2 98 the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If that a claim for indemnification against such liabilities (other than the payment by TMNG of expenses incurred or paid by a director, officer or controlling person of TMNG in the successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by TMNG is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. We hereby undertake that: (a) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by TMNG pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (b) 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. II-3 99 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, TMNG has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Overland Park, State of Kansas, on the 15th day of September, 1999. THE MANAGEMENT NETWORK GROUP, INC. By: /s/ RICHARD P. NESPOLA ------------------------------------ Richard P. Nespola, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard P. Nespola and Donald E. Klumb and each of them, his attorneys-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD P. NESPOLA President, Chief Executive Officer September 15, 1999 - ----------------------------------- and Director Richard P. Nespola /s/ DONALD E. KLUMB Chief Financial Officer and September 15, 1999 - ----------------------------------- Treasurer Donald E. Klumb /s/ MICKY K. WOO Vice President and Director September 15, 1999 - ----------------------------------- Micky K. Woo /s/ RALPH R. PECK Vice President September 15, 1999 - ----------------------------------- Ralph R. Peck /s/ GRANT G. BEHRMAN Director September 15, 1999 - ----------------------------------- Grant G. Behrman
II-4 100
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM M. MATTHES Director September 15, 1999 - ----------------------------------- William M. Matthes /s/ DENNIS G. SISCO Director September 15, 1999 - ----------------------------------- Dennis G. Sisco Director September , 1999 - ----------------------------------- Roy Wilkens /s/ MARIO M. ROSATI Director September 15, 1999 - ----------------------------------- Mario M. Rosati
II-5 101 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 1.1* Form of Underwriting Agreement 2.1 Agreement and Plan of Merger by and among the registrant and certain parties dated January 7, 1998 3.1 Certificate of Incorporation of the registrant 3.2 Bylaws of the registrant 4.1* Specimen Common Stock Certificate 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 10.1 Registration Rights Agreement dated January 7, 1998 among the registrant and certain investors 10.2 Form of Indemnification Agreement between the registrant and each of its Directors and Officers 10.3 1998 Equity Incentive Plan and form of agreements thereunder 10.4 1999 Employee Stock Purchase Plan and form of agreements thereunder 10.5 Consulting Services Agreement between the registrant and Williams Communications Group, Inc. dated November 5, 1997 10.6 Credit Agreement, including revolving credit notes and term notes, dated February 12, 1998 among the registrant and certain guarantors, lenders and agents 10.7 Lease between Lighton Plaza L.L.C. and the registrant dated April 23, 1998 10.8 Noncompetition Agreement between the registrant and certain parties dated February 12, 1998. 10.9 Employment Agreement between the registrant and Richard Nespola dated February 12, 1998. 10.10 Employment Agreement between the registrant and Micky Woo dated February 12, 1998. 10.11 Employment Agreement between the registrant and Ralph Peck dated February 12, 1998. 10.12 Employment Agreement between the registrant and Donald Klumb dated September 9, 1999 21.1 List of subsidiaries of TMNG, Inc. 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Wilson Sonsini Goodrich & Rosati (included in exhibit 5.1) 24.1 Power of attorney (see page II-4) 27.1 Financial data schedule
- --------------- * Denotes exhibit to be filed by amendment. EX-2.1 2 AGREEMENT & PLAN OF MERGER DATED 01/07/98 1 Exhibit 2.1 ================================================================================ AGREEMENT AND PLAN OF MERGER by and among BEHRMAN CAPITAL II L.P., a Delaware limited partnership, and STRATEGIC ENTREPRENEUR FUND II, L.P., a Delaware limited partnership as "Parent" BEHRMAN CAPITAL TMNG, INC., a Delaware corporation as "Merger Sub" MANAGEMENT NETWORK GROUP, INC., a Kansas corporation as the "Company" and RICHARD NESPOLA, MICKY WOO, ALAN STAPLES AND RALPH PECK as the "Stockholders" Dated as of January 7, 1998 2 TABLE OF CONTENTS
PAGE(S) ------- ARTICLE I. THE MERGER.......................................................................2 1.1. The Merger.............................................................2 1.2. Articles of Incorporation of the Surviving Corporation.................2 1.3. Bylaws of the Surviving Corporation....................................2 1.4. Directors of the Surviving Corporation.................................2 1.5. Officers of the Surviving Corporation..................................2 ARTICLE II. THE CLOSING.....................................................................3 2.1. Closing................................................................3 2.2. Closing Deliveries.....................................................3 2.3. Effective Time.........................................................5 2.4. Effect of the Merger...................................................5 ARTICLE III. EFFECT OF MERGER ON CAPITAL STOCK..............................................6 3.1. Effect on Capital Stock................................................6 3.2. Exchanging Company Shares..............................................7 3.3. Escrow of Merger Consideration.........................................7 3.4. Exchange of Certificates; Procedures...................................7 3.5. No Further Rights In Exchanging Company Shares.........................8 3.6. Lost Certificates......................................................8 3.7. Withholding Rights.....................................................8 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS.............8 4.1. Organization, Existence and Good Standing..............................8 4.2. Subsidiaries...........................................................9 4.3. Company Capital Stock..................................................9 4.4. Power and Authority...................................................10 4.5. Legal Proceedings.....................................................10 4.6. Financial Statements..................................................11 4.7. No Undisclosed Liabilities............................................11 4.8. No Violation..........................................................11 4.9. Material Contracts....................................................12 4.10. Compliance With Law; Consents and Authorizations......................13 4.11. Insurance.............................................................14 4.12. Tax Matters...........................................................14 4.13. Employee Benefit Plans................................................17 4.14. Licenses; Accreditation and Regulatory Approvals......................18 4.15. Absence of Certain Changes or Events..................................18 4.16. Personal Property.....................................................21 4.17. Real Property.........................................................21 4.18. Customers.............................................................21 4.19. Receivables; Payables.................................................22
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PAGE(S) ------- 4.20. Transactions with Affiliates..........................................22 4.21. Restricted Cash.......................................................22 4.22. Commissions and Fees..................................................22 4.23. Environmental Matters.................................................22 4.24. Labor Matters.........................................................23 4.25. Intellectual Property.................................................23 4.26. Disclosure............................................................25 ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.........................25 5.1. Organization. Existence and Good Standing.............................25 5.2. Power and Authority...................................................26 5.3. Legal Proceedings.....................................................26 5.4. Consents and Approvals; No Violation..................................26 5.5. No Prior Activities...................................................27 5.6. Merger Sub Common Stock...............................................27 5.7. Commissions and Fees..................................................27 ARTICLE VI. ACCESS TO INFORMATION AND DOCUMENTS............................................27 6.1. Access to Information and Documents...................................27 ARTICLE VII. COVENANTS OF THE COMPANY AND THE STOCKHOLDERS.................................28 7.1. Affirmative Covenants.................................................28 7.2. Negative Covenants....................................................29 7.3. No Solicitations......................................................31 7.4. Approval of Merger....................................................32 7.5. Fees and Expenses.....................................................32 7.6. Stock Split...........................................................32 ARTICLE VIII. FINANCING....................................................................32 8.1. Financing.............................................................32 ARTICLE IX. COVENANTS OF THE COMPANY, THE STOCKHOLDERS AND PARENT..........................33 9.1. Public Disclosures....................................................33 9.2. Notification of Certain Matters.......................................33 9.3. Other Actions.........................................................33 9.4. Regulatory and Other Authorizations; Consents.........................34 9.5. Option Pool...........................................................34 9.6. Tax Returns; Responsibility for Certain Tax Matters...................35 9.7. Principals and Practice Leaders.......................................36 9.8. Distribution to Stockholders..........................................37 9.9. Company Disclosure Schedule...........................................37 ARTICLE X. TERMINATION, AMENDMENT AND WAIVER...............................................37 10.1. Termination...........................................................37 10.2. Effect of Termination.................................................38 ARTICLE XI. CONDITIONS TO CLOSING..........................................................38 11.1. Mutual Conditions.....................................................38
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PAGE(S) ------- 11.2. Conditions to Obligations of Parent and Merger Sub....................38 11.3. Conditions to Obligations of the Company and the Stockholders.........40 ARTICLE XII. ESCROW........................................................................41 12.1. Establishment of Escrow...............................................41 12.2. Escrow for Indemnification............................................41 12.3. Distribution of Escrowed Funds........................................41 12.4. Controlling Document..................................................41 ARTICLE XIII. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION..................41 13.1. Survival; Indemnification.............................................41 13.2. Limitations on Indemnity..............................................43 13.3. Procedure; Third Party Claims.........................................44 13.4. Survival of Representations and Warranties of Parent and Merger Sub; Indemnification.......................................................44 ARTICLE XIV. MISCELLANEOUS.................................................................45 14.1. Notices...............................................................45 14.2. Further Assurances....................................................46 14.3. Governing Law.........................................................46 14.4. "Material Adverse Effect"or "Material Adverse Change".................46 14.5. Taxes.................................................................46 14.6. Captions..............................................................47 14.7. Integration of Schedule and Exhibits..................................47 14.8. Entire Agreement; No Third-Party Beneficiaries........................47 14.9. Counterparts..........................................................47 14.10. Binding Effect; No Assignment.........................................47 14.11. Severability..........................................................47 14.12. Waivers and Amendments................................................48 14.13. Specific Performance..................................................48
iii 5 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), is entered into as of January 7, 1998, by and among BEHRMAN CAPITAL II L.P., a Delaware limited partnership and STRATEGIC ENTREPRENEUR FUND II, L.P., a Delaware limited partnership (collectively, "Parent"), BEHRMAN CAPITAL TMNG, INC., a Delaware corporation ("Merger Sub"), MANAGEMENT NETWORK GROUP, INC., a Kansas corporation (the "Company"), and RICHARD NESPOLA, MICKY WOO, ALAN STAPLES and RALPH PECK, each an individual (collectively, the "Stockholders"). W I T N E S S E T H: WHEREAS, each of the respective Boards of Directors of Parent, Merger Sub and the Company has determined that it is in the best interests of its stockholders for Merger Sub to merge with and into the Company upon the terms and subject to the conditions of this Agreement (the "Merger"), and such Boards of Directors have approved such Merger, pursuant to which (a) 8,250 shares (or 27,000,000 shares after giving effect to the Stock Split, as defined in Section 7.6) of common stock, par value $1.00 per share, of the Company ("Common Stock") and (b) all issued and outstanding shares of common stock, par value $1.00 per share, of Merger Sub ("Merger Sub Common Stock") issued and outstanding immediately prior to the Effective Time (as defined in Section 2.3 hereof) of the Merger will be converted into the right to receive the consideration set forth in Article III hereof; WHEREAS, the Stockholders represent all of the stockholders of the Company as of the date hereof and, as an inducement for Parent to enter into this Agreement, each of the Stockholders of the Company agrees to enter into this Agreement and, further, to vote all voting securities of the Company beneficially owned by him in favor of approval and adoption of this Agreement and the transactions contemplated hereby, and to take any further actions as may be required to approve this Agreement and the transactions contemplated hereby; WHEREAS, each of the Parent, Merger Sub, the Company and each Stockholder desires to make certain representations, warranties, covenants and agreements in connection with the Merger and to prescribe various conditions to the Merger; WHEREAS, simultaneously with the consummation of the Merger, (a) Parent, the Stockholders and the Company shall enter into a Stockholders Agreement (the "Stockholders Agreement") in the form attached hereto as Exhibit A; (b) Parent, the Stockholders and the Company shall enter into a Registration Rights Agreement (the "Registration Rights Agreement") in the form attached hereto as Exhibit B; (c) Parent, each of the Stockholders and the Company shall enter into a Noncompete Agreement (the "Noncompete Agreement") in the form attached hereto as Exhibit C; (d) the Company and each of the Stockholders shall enter into an Employment Agreement (the "Employment Agreement") in the form attached hereto as Exhibit D-1 through Exhibit D-4; (e) Parent, the Stockholders and the Company shall enter into an Escrow Agreement (the "Escrow Agreement") in the form attached hereto as Exhibit E; and 6 WHEREAS, it is intended that the Merger be recorded as a recapitalization for financial reporting purposes. NOW, THEREFORE, in consideration of the foregoing, and the mutual representations, warranties, covenants and agreements contained herein, the parties hereto do hereby agree as follows: ARTICLE I. THE MERGER 1.1. The Merger. Subject to the terms and conditions set forth in this Agreement, and in accordance with the General Corporation Code of the State of Kansas (the "KGCC") and the General Corporation Law of the State of Delaware (the "DGCL"), Merger Sub shall be merged with and into the Company at the Effective Time. Following the Effective Time, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the Surviving Corporation (the "Surviving Corporation") and shall succeed to and assume all the rights and obligations of Merger Sub and the Company in accordance with the KGCC. The Merger shall have the effects set forth in the KGCC and Section 252 of the DGCL. 1.2. Articles of Incorporation of the Surviving Corporation. The Articles of Incorporation of the Company as in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation from and after the Effective Time and until thereafter amended or repealed in accordance with the laws of the State of Kansas, such Articles of Incorporation and the Bylaws of the Company. 1.3. Bylaws of the Surviving Corporation. The Bylaws of the Company as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation from and after the Effective Time and until thereafter altered, amended or repealed in accordance with the laws of the State of Kansas, the Articles of Incorporation of the Company and such Bylaws. 1.4. Directors of the Surviving Corporation. The Board of Directors of the Surviving Corporation shall be comprised of the directors of Merger Sub immediately prior to the Effective Time until their respective successors are duly elected and qualified. The Company shall cause each director of the Company and each of its Subsidiaries which are corporations, to tender his or her resignation prior to the Effective Time, each such resignation to be effective as of the Effective Time. Parent and Merger Sub shall take all necessary action to elect Richard P. Nespola and Micky K. Woo to the Board of Directors of Merger Sub immediately prior to the Effective Time. Following the Closing, Parent and the Stockholders shall elect directors of the Company in accordance with the terms and provisions of the Stockholders Agreement, the Articles of Incorporation and Bylaws of the Company, each as then in effect, and applicable law. 1.5. Officers of the Surviving Corporation. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation until their respective successors are duly elected and qualified. 2 7 ARTICLE II. THE CLOSING 2.1. Closing. The closing for the Merger (the "Closing") shall take place at the offices of Latham & Watkins, 53rd at Third, Suite 1000, 885 Third Avenue, New York, New York 10022 as soon as practicable on a day (the "Closing Date") following the satisfaction or waiver of each of the conditions set forth in Article XI hereof, or at such other date, time and place as the parties hereto shall agree. 2.2. Closing Deliveries. (a) At the Closing, the Company and the Stockholders shall deliver to Parent the following, duly executed by the Company and/or the Stockholders (as applicable): (i) Resolutions. Copies of (1) resolutions of the Board of Directors of the Company certified by a Secretary, Assistant Secretary or other appropriate officer of the Company, duly authorizing and approving (x) the Stock Split (as defined in Section 7.6) and (y) the Merger, the execution, delivery and performance of this Agreement, the other agreements referred to herein and the transactions contemplated hereby and thereby and (2) unanimous resolutions adopted by the Stockholders duly approving (x) the Stock Split and (y) the Merger, the execution, delivery and performance of this Agreement, the other agreements referred to herein and the transactions contemplated hereby and thereby. (ii) Share Certificates. Certificates representing (1) the shares of Common Stock of the Surviving Corporation into which the shares of common stock of Merger Sub are converted pursuant to Section 3.1(a), which certificates shall be duly registered in such name as Parent shall have specified to the Company prior to the Closing and (2) the Exchanging Company Shares. (iii) Resignations. Resignations of Faye Nespola and of all directors of the Company and each of its Subsidiaries (as defined herein) made effective as of the Closing. (iv) Stockholders Agreement. The Stockholders Agreement in the form attached hereto as Exhibit A (the "Stockholders Agreement"). (v) Registration Rights Agreement. The Registration Rights Agreement in the form attached hereto as Exhibit B ("the Registration Rights Agreement"). (vi) Noncompete Agreement. The Noncompete Agreement in the form attached hereto as Exhibit C (the "Noncompete Agreement"). (vii) Employment Agreements. Employment Agreements in the form attached hereto as Exhibit D-1 through Exhibit D-4 executed by the Company and the applicable individual signatory thereto (individually an "Employment Agreement" and collectively the "Employment Agreements"). 3 8 (viii) Escrow Agreement. The Escrow Agreement in the form attached hereto as Exhibit E (the "Escrow Agreement"). (ix) Opinion of Counsel. An opinion of Shughart, Thomson & Kilroy, substantially in the form attached hereto as Exhibit F. (x) Letters of Intent. Letters of Intent outlining the employment terms of each of the following individuals in form and substance satisfactory to Parent (individually a "Letter of Intent" and collectively the "Letters of Intent"): (1) Carol Bleeker, Kim Cole, Linda Gimnich and Ed Shanahan (collectively, the "Principals") and (2) to the extent available, Peter D'Agostino, Valarie Finberg, Bob Jaczewski and Robert Segat (collectively, the "Practice Leaders"). The Company shall not be required to deliver a Letter of Intent with respect to any Practice Leader at or prior to the Effective Time. (xi) Certificates of Good Standing. A certificate of good standing for the Company from the Secretary of State of the State of Kansas and for each Subsidiary from its jurisdiction of organization. (xii) Merger Filings. The Kansas Articles of Merger and the Delaware Certificate of Merger (as such terms are defined in Section 2.3) which must be filed with the Secretaries of State of the States of Kansas and Delaware, respectively, in order to consummate the Merger. (xiii) Stock Split Amendments. Amendments to the Articles of Incorporation of the Company properly adopted and filed with the Secretary of State of the State of Kansas effecting the Stock Split (as defined in Section 7.6). (xiv) Conditions Precedent. Evidence reasonably satisfactory to Parent that all conditions to Parent's obligations hereunder have been satisfied or properly waived. (b) At the Closing, Parent, Merger Sub and the Company shall deliver or cause to be delivered to the Stockholders (i) the Merger Consideration for the Exchanging Company Shares, as described in Section 3.1(c) and (ii) the Employment Agreements. (c) At the Closing, Parent shall deliver to the Company and the Stockholders the following, duly executed by Parent or Merger Sub (as applicable): (i) Resolutions. Copies of resolutions of Parent and Merger Sub certified by a Secretary, Assistant Secretary or other appropriate officer of Parent and Merger Sub, respectively, duly authorizing and approving the Merger, the execution, delivery and performance of this Agreement, the other agreements referred to herein and the transactions contemplated hereby and thereby. (ii) Stockholders Agreement. The Stockholders Agreement. 4 9 (iii) Registration Rights Agreement. The Registration Rights Agreement. (iv) Noncompete Agreement. The Noncompete Agreement. (v) Escrow Agreement. The Escrow Agreement. (vi) Certificates of Good Standing. A certificate of good standing for each of Parent and Merger Sub from the Secretary of State of the State of Delaware. (vii) Merger Filings. The Kansas Articles of Merger and the Delaware Certificate of Merger (as such terms are defined in Section 2.3) which must be filed with the Secretaries of State of the States of Kansas and Delaware, respectively, in order to consummate the Merger. (viii) Conditions Precedent. Evidence reasonably satisfactory to the Company and the Stockholders that all conditions to their respective obligations hereunder have been satisfied or properly waived. 2.3. Effective Time. Subject to the provisions of this Agreement, the parties shall file (a) an Agreement and Plan of Merger and Articles of Merger (collectively, the "Kansas Articles of Merger") executed in accordance with the relevant provisions of the KGCC and (b) a certificate of merger (the "Delaware Certificate of Merger") executed in accordance with the relevant provisions of the DGCL and shall make all other filings or recordings required under the KGCC and the DGCL as soon as practicable on or after the Closing Date. The Merger shall become effective at the latest of such time as (i) the Kansas Articles of Merger is duly filed with the Kansas Secretary of State, (ii) the Delaware Certificate of Merger is duly filed with the Delaware Secretary of State, or (iii) at such other time as the Company and Parent shall agree should be specified in the Kansas Articles of Merger (the "Effective Time"). 2.4. Effect of the Merger. When the Merger has been effected, the separate existence of Merger Sub shall cease, the Surviving Corporation shall have all of the rights, privileges, immunities and powers, and shall be subject to all the duties and liabilities, of a corporation organized under Kansas law, and the Surviving Corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of a public as well as of a private nature of Merger Sub and the Company (together, the "Constituent Corporations"); all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares and all other choses in action, and all and every other interest, of or belonging to or due each of the Constituent Corporations, shall be taken and deemed to be transferred to and vested in the Surviving Corporation without further act or deed. The Surviving Corporation shall thenceforth be responsible and liable for all liabilities and obligations of each of the Constituent Corporations so merged; and any claim existing or action or proceeding pending by or against either of the Constituent Corporations may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in its place. Neither the rights of creditors nor any liens upon the respective properties of the Constituent Corporations and the Surviving 5 10 Corporation shall be impaired by the Merger, all with the effect set forth in the KGCC and the DGCL. ARTICLE III. EFFECT OF MERGER ON CAPITAL STOCK 3.1. Effect on Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of any holder of any shares of Common Stock or any holder of shares of common stock of Merger Sub: (a) Common Stock of Merger Sub. Each issued and outstanding share of Merger Sub Common Stock shall be converted into and become a number of fully paid and nonassessable shares of Common Stock of the Surviving Corporation following the Merger equal to the quotient of (i) the number of Exchanging Company Shares divided by (ii) the number of shares of Merger Sub Common Stock outstanding immediately prior to the Effective Time. At the Effective Time, Parent, as the sole holder of the Merger Sub Common Stock, shall surrender any and all certificates representing such Merger Sub Common Stock to the Surviving Corporation and shall be entitled to receive in exchange therefor certificates representing the number of shares of Common Stock of the Surviving Corporation into which the Merger Sub Common Stock theretofore represented by the certificates so surrendered shall have been converted as provided in this Section 3.1(a). From and after the Effective Time, until so surrendered, each certificate theretofore representing shares of issued and outstanding Merger Sub Common Stock shall be deemed for all corporate purposes to evidence the number of shares of Common Stock of the Surviving Corporation into which such shares of Merger Sub Common Stock shall have been converted. (b) Cancellation of Treasury Stock. Each share of Common Stock that is owned by the Company or by any Subsidiary shall automatically be canceled, retired and extinguished and shall cease to exist without payment of any consideration therefor. (c) Conversion of Exchanging Company Shares. Each Exchanging Company Share shall be converted into the right to receive in cash by wire transfer of immediately available funds (i) $42,400,000 (of which an aggregate of $17,000,000 shall be placed in escrow in accordance with the provisions of Section 3.3 and Article XII hereof) divided by (ii) the total number of Exchanging Company Shares (the "Merger Consideration"). (d) Status of the Exchanging Company Shares. As of the Effective Time, all Exchanging Company Shares shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any Exchanging Company Shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration to be paid in consideration therefor upon surrender of such certificate in accordance with Section 3.3, without interest. (e) Non-Exchanging Company Shares. All shares of Common Stock other than Exchanging Company Shares held by the Stockholders immediately prior to the Effective 6 11 Time shall be automatically deemed, as of the Effective Time and without any action by the holders thereof, to be shares of Common Stock of the Surviving Corporation. Such shares of Common Stock shall have no rights to the Merger Consideration or any other rights arising solely from the Merger. (f) Waiver of Dissenters' Rights. Each Stockholder hereby waives any rights for appraisal with respect to all Exchanging Company Shares held by him arising under the provisions of the KGCC in connection with the Merger. 3.2. Exchanging Company Shares. As used in this Agreement, (i) "Exchanging Company Shares" means 8,250 (or 27,000,000 after giving effect to the Stock Split) issued and outstanding shares of Common Stock (excluding shares to be canceled in accordance with Section 3.1(b)) representing in the aggregate 60% of the fully diluted and outstanding capital stock of the Company at the Effective Time, of which 4,125 shares (or 13,500,000 shares after giving effect to the Stock Split) are held by Richard Nespola, 1,650 shares (or 5,400,000 shares after giving effect to the Stock Split) are held by Micky Woo, 1,650 shares (or 5,400,000 shares after giving effect to the Stock Split) are held by Alan Staples and 825 shares (or 2,700,000 shares after giving effect to the Stock Split) are held by Ralph Peck. 3.3. Escrow of Merger Consideration. Notwithstanding the provisions of this Article III, $17,000,000 of the Merger Consideration shall be placed in escrow pursuant to the provisions of Article XII hereof and the Escrow Agreement in effect pursuant thereto. 3.4. Exchange of Certificates; Procedures. (a) At the Effective Time, each record holder of any certificate or certificates which, immediately prior to the Effective Time, represented outstanding Exchanging Company Shares (the "Certificates") whose Exchanging Company Shares were converted into the right to receive the Merger Consideration shall be entitled to surrender his Certificates to Parent for cancellation in exchange for the Merger Consideration and, subject to receipt of such certifications as Parent may reasonably request, Parent and the Company hereby agree to cause such Merger Consideration to be paid to such Stockholder at such time. No interest shall be paid or accrued for the benefit of holders of the Certificates on the Merger Consideration payable upon the surrender of the Certificates. It shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or otherwise be in proper form for transfer. Notwithstanding the foregoing, no party hereto shall be liable to a holder of Exchanging Company Shares for any cash or interest delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. If any Certificates shall not have been surrendered at the Effective Time, the payment in respect of such Certificates shall, to the extent permitted by applicable laws, become the property of the Surviving Corporation, free and clear of all claims of interest of any person previously entitled thereto. (b) From and after the Effective Time, there shall be no transfers on the share transfer books of the Surviving Corporation of the Exchanging Company Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for payment, they may, in the sole and absolute discretion 7 12 of Parent, be canceled and exchanged for the Merger Consideration in accordance with the procedures set forth in Section 3.1 and this Section 3.4. 3.5. No Further Rights In Exchanging Company Shares. The Merger Consideration received by any Stockholder pursuant to this Agreement shall be deemed to have been delivered and received in full satisfaction of all rights pertaining to such Stockholder's Exchanging Company Shares. At the Effective Time, the holders of Certificates shall cease to have any rights with respect to such Exchanging Company Shares. 3.6. Lost Certificates. Notwithstanding the provisions of Section 3.4, in the event any Certificate which immediately prior to the Effective Time represented outstanding Exchanging Company Shares has been lost, stolen or destroyed (a "Lost Certificate"), upon the making of an affidavit of that fact no later than the Effective Time by the person claiming such Certificate to be lost, stolen or destroyed and an agreement to indemnify Parent against any claim that may be made against it with respect to such Certificate, Parent will deliver the Merger Consideration to which the Exchanging Company Shares were entitled in respect of such Lost Certificate. 3.7. Withholding Rights. Parent or the Surviving Corporation shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of Certificates such amounts as Parent or the Surviving Corporation (as applicable) is required to deduct and withhold with respect to the making of such payment under the Internal Revenue Code of 1986, as amended (the "Code"), or any provisions of state, local or foreign tax law. To the extent that amounts are so withheld by Parent or the Surviving Corporation (as applicable) such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the Exchanging Company Shares in respect of which such deduction and withholding was made. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS The Company and each of the Stockholders, severally but not jointly, represent and warrant to Parent and Merger Sub as follows, subject to qualification by the specific disclosures set forth in the written statement signed by the Chief Executive Officer of the Company and delivered to Parent at least five (5) business days following the date hereof (the "Company Disclosure Schedule"), which disclosure shall expressly reference the representations and warranties so qualified: 4.1. Organization, Existence and Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Kansas and has all necessary corporate power to own, operate or lease the properties and assets owned, operated or leased by it and to carry on its business as presently conducted, except where failure to so qualify or be in good standing would not have a Material Adverse Effect (as defined in Section 14.4 hereof) on the Company. The Company is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction in which the character of its properties and assets 8 13 owned, operated or leased by it or the nature of its activities makes such qualification necessary, except for such failures which, when taken together with all other such failures, would not have a Material Adverse Effect on the Company. The Company has heretofore made available to Parent complete and correct copies of its Articles of Incorporation and Bylaws, each of the foregoing as amended to the date of this Agreement. 4.2. Subsidiaries. (a) Section 4.2(a) of the Company Disclosure Schedule lists all Subsidiaries of the Company. As used in this Agreement, "Subsidiary" shall mean any corporation or other organization, whether incorporated or unincorporated, in which the Company is a general partner or of which at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporations or other organizations is directly or indirectly owned or controlled by the Company and/or by any one or more of its Subsidiaries including, without limitation, TMNG Europe Limited. (b) Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation. Each Subsidiary has all necessary corporate power to own, lease or operate its properties and assets owned, leased or operated by it and to carry on its business as presently conducted. Each Subsidiary is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction in which the character of properties and assets owned, operated or leased by it or the nature of its activities makes such qualification necessary, except for such failures which, when taken together with all other such failures, would not have a Material Adverse Effect on the Company. True and complete copies of the Articles of Incorporation or Bylaws of each Subsidiary, each as amended to the date of this Agreement, have been heretofore made available to Parent. 4.3. Company Capital Stock. Without giving effect to the Stock Split (as defined in Section 7.6), the Company's authorized capital stock consists of 20,000 shares of Common Stock, all of which hold equal voting rights under the Articles of Incorporation, and 20,000 shares of preferred stock, par value $1.00 per share ("Preferred Stock"). Without giving effect to the Stock Split, 13,750 shares of Common Stock are issued and outstanding on the date hereof, and no shares of Preferred Stock are issued and outstanding on the date hereof. After giving effect to the Stock Split, the Company's authorized capital stock will consist of 60,000,000 shares of Common Stock, all of which shall hold equal voting rights under the Articles of Incorporation. After giving effect to the Stock Split, 45,000,000 shares of Common Stock will be issued and outstanding. The Common Stock constitutes all of the issued and outstanding shares of capital stock of the Company. Except as set forth on Section 4.3 of the Company Disclosure Schedule, all of the issued and outstanding shares of Common Stock are held by the Stockholders and are duly and validly issued, fully paid and nonassessable and were not issued in violation of any preemptive rights. The stockholders of all issued and outstanding shares of Common Stock, together with number, class and series of such stock held by each Stockholder, prior to and following the Stock Split, are set forth in Section 4.3 of the Company Disclosure Schedule. All shares of nonvoting Common Stock of the Company which were issued or authorized by the Company prior to the date hereof were properly converted into shares of Common Stock such that as of the date hereof and at the Effective Time there are no shares of 9 14 nonvoting Common Stock authorized and issued by the Company and all shares of Common Stock issued or authorized by the Company hold equal voting rights. Except as set forth in Section 4.3 of the Company Disclosure Schedule, no Person holds any Company Equity Rights. As used herein, "Company Equity Rights" means any options, warrants, rights of conversion or agreements, arrangements or commitments (whether or not in writing) obligating the Company (with or without consideration and whether or not presently exercisable or convertible) to issue or sell shares of its capital stock. Except as set forth in Section 4.3 of the Company Disclosure Schedule, there are no voting trusts, stockholders agreements, proxies or other similar agreements in effect with respect to the voting or transfer of the Common Stock. There is no liability for dividends declared or accumulated but unpaid with respect to any of the shares of Common Stock. 4.4. Power and Authority. The Company has all necessary corporate power and authority to execute, deliver and perform this Agreement and the agreements attached as exhibits hereto and to consummate the transactions contemplated hereby and thereby, and has taken all action required by all applicable Laws (as defined in Section 4.8), its Articles of Incorporation, Bylaws or otherwise, to authorize the execution, delivery and performance of this Agreement and the agreements attached as exhibits hereto and the consummation of the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the agreements attached as exhibits hereto by the Company, performance of its obligations hereunder and thereunder and consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company. As of the date hereof, the Board of Directors of the Company has duly approved this Agreement, has determined that the Merger is in the best interests of the Company and its stockholders and has resolved to recommend the adoption of this Agreement and the Merger by its stockholders. This Agreement has been duly executed and delivered by the Company and each Stockholder and, assuming this Agreement constitutes a valid and binding obligation of Parent and Merger Sub, constitutes a valid and binding obligation of the Company and each Stockholder, enforceable against the Company and each Stockholder in accordance with its terms except that the enforcement hereof may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). 4.5. Legal Proceedings. (a) Except as set forth in Section 4.5 of the Company Disclosure Schedule, there is no claim, action, suit, arbitration, litigation, governmental investigation or other proceeding (each, an "Action") pending against the Company or any Subsidiary or any Stockholder or its properties or business, or the transactions contemplated by this Agreement. To the knowledge of the Company and each Stockholder, there is no Action threatened against the Company or any Subsidiary or any Stockholder or its properties or business, or the transactions contemplated by this Agreement, which is reasonably likely to have a Material Adverse Effect on the Company or any Subsidiary. Except as set forth in Section 4.5 of the Company Disclosure Schedule, none of the Company or any Subsidiary or their respective assets and properties is subject to any material order, judgment, injunction, decree, stipulation or determination entered by or with any government, governmental or regulatory authority, board, 10 15 agency or other entity, or any court, tribunal or judicial body, whether federal, state or local (each, a "Governmental Authority"). Section 4.5 of the Disclosure Schedule sets forth all closed litigation matters to which the Company or any Subsidiary was a party during the five years preceding the Closing, the date such litigation was commenced and concluded, and the nature of the resolution thereof (including amounts paid in settlement or judgment). 4.6. Financial Statements. The Company has heretofore furnished to Parent copies of the following financial statements: the audited consolidated balance sheets of the Company as of December 31, 1995 and December 31, 1996 and September 30, 1997, and the audited consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the two (2) year periods ended December 31, 1996 and the nine month period ended September 30, 1997 (the "Latest Statement Date"), together with the notes thereto, and the unqualified opinion of Deloitte & Touche LLP, the Company's independent auditors (collectively, the "Company Financial Statements"). The Company Financial Statements are true and correct in all material respects and fairly present the consolidated financial position, consolidated results of operations and consolidated cash flows of the Company as of the dates and for the periods ended. Each of the Company Financial Statements has been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis except as disclosed in the footnotes thereto. 4.7. No Undisclosed Liabilities. Neither the Company nor any Subsidiary has any liabilities or obligations of any nature, whether accrued, absolute, fixed or contingent, except (a) to the extent reflected and accrued for or properly reserved against in the Company Financial Statements, (b) for liabilities disclosed in Section 4.7 of the Company Disclosure Schedule, or (c) for liabilities and obligations not exceeding $25,000 individually or in the aggregate which have arisen after the Latest Statement Date in the ordinary course of business consistent with past custom and practice (none of which is a liability resulting from breach of contract, breach of warranty, tort, infringement claim or lawsuit). 4.8. No Violation. Except as set forth in Section 4.8 of the Company Disclosure Schedule, neither the execution and delivery of this Agreement, the agreements attached as exhibits hereto, nor the consummation by the Company of the transactions contemplated hereby or thereby will (a) violate, conflict with or result in any breach of any provision of the respective organizational documents of the Company or any Subsidiary, (b) to the knowledge of the Company and the Stockholders, violate any order, decree, injunction, judgment, ruling, law, statute, regulation, rule or other determination of any Governmental Authority (collectively, "Laws") applicable to the Company, any Subsidiary or any Stockholder, (c) require the giving of notice to any party to a Material Contract or accord any such party the right to modify or terminate a Material Contract, (d) require the making of any payment, other than payments as expressly contemplated by this Agreement, to any employee of the Company or any Subsidiary, or any other Person or (e) conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in any Encumbrance on the shares of Common Stock or the properties or assets of the Company or any Subsidiary pursuant to, (i) any Material Contract or (ii) any 11 16 material License (as defined in Section 4.14) held by the Company or any Subsidiary. Except as set forth in Section 4.8 of the Company Disclosure Schedule, all shares of the Company's Common Stock are free and clear of any Encumbrances. As used in this Agreement, "Person" means any individual, partnership, limited liability company, limited liability partnership, trust, estate, joint venture, corporation, unincorporated association, government bureau or agency or other entity of any nature. As used in this Agreement, "Encumbrance" means any security interests, pledges, mortgages, liens, charges, adverse claims of ownership, voting restrictions, limitations on transfer or proxies or use or other encumbrances of any kind. 4.9. Material Contracts. (a) Section 4.9(a) of the Company Disclosure Schedule sets forth the following contracts (collectively, along with each Lease, "Material Contracts") in effect as of the date of this Agreement to which the Company or any Subsidiary is a party: (i) any commitment, contract (excluding any customer contract) or agreement that the Company reasonably anticipates will, in accordance with its terms, involve aggregate payments by the Company or any Subsidiary of more than $25,000 within 1997 or 1998; (ii) any commitment, contract, agreement, note or other instrument with any customer of the Company, which is currently in force and effect and pursuant to which the Company has received within calendar year 1997, or expects to receive in calendar year 1998, at least $100,000; (iii) each contract or agreement between the Company or any Subsidiary, or Chelsea Consulting, Inc., EFS Group, Inc. or an Affiliate of a Stockholder, on the one hand, and an individual or entity rendering professional consulting services as a contractor to a customer of the Company or any Subsidiary, on the other hand, whether or not the Company or any Subsidiary is a party to such contract or agreement, including, without limitation, each contract or agreement between any Stockholder or its Affiliates and any third party involving the provision of professional consulting services; (iv) any employment agreements (including without limitation any arrangements or obligations with respect to severance, change in control or termination pay) with any officer, director or employee of the Company or any Subsidiary; (v) all partnership, joint venture or similar agreements to which the Company or any Subsidiary is a party; (vi) any note, loan, letter of credit, contract relating to indebtedness for borrowed money or capitalized leases, or other contract in respect of which the Company or any Subsidiary is obligated in any way to provide funds in respect of, or to guarantee or assume, any debt, obligation or dividend of any person or entity, the amount of which shall individually or in the aggregate exceed $25,000; (vii) any indemnity arrangement arising in connection with any sale or disposition of assets (other than sales of assets in the ordinary course of business); 12 17 (viii) any acquisition or disposition contracts of the Company or any Subsidiary under which a party thereto remains obliged to pay moneys or perform; (ix) all contracts, agreements and commitments with any Governmental Authority or with any labor union; (x) agreements or commitments for capital expenditures in excess of $10,000 for any single project; (xi) all patent, trademark, service mark, trade name, copyright and franchise licenses, royalty agreements or similar contracts; (xii) any material agreements relating to the licensure or ownership of the hardware or software utilized in the Company's or any Subsidiary's information systems; and (xiii) each contract, agreement or commitment to which the Company or any Subsidiary is a party (A) limiting the right of the Company or any Subsidiary prior to or after the Closing Date, or the Parent or any of its subsidiaries or Affiliates at or after the Closing Date, (1) to engage in, or to compete with any person in, any business, including each contract or agreement containing exclusivity provisions restricting the geographical area in which, or the method by which, any business may be conducted by the Company or any Subsidiary prior to or after the Closing Date, or the Parent or any of its subsidiaries or affiliates after the Closing Date or (2) to solicit any customer or client or (B) containing "most favored nations" or similar provisions affecting the pricing terms of contracts to which it is a party. (b) Each Material Contract, and each other material contract, agreement or commitment entered into between the date hereof and the Effective Time which would have been required to be disclosed in Section 4.9(a) of the Company Disclosure Schedule had such contract, agreement or commitment been entered into prior to the date of this Agreement, is in full force and effect and is a legal, valid and binding obligation, and there is not, nor has there been (i) any material default (or any event which, with the giving of notice or lapse of time or both, would be a material default) by the Company or any Subsidiary or, to the knowledge of the Company or any Subsidiary, any other party, in the timely performance of any obligation to be performed or paid under any such Material Contract or any such other material contract or agreement as described above, (ii) to the knowledge of the Company, any threat of cancellation or termination of any such Material Contract, (iii) any contract, agreement or commitment that has been canceled or otherwise terminated within the last 12 months which would have been such a Material Contract had such contract or agreement not been canceled or terminated, or (iv) any modification or amendment to any such Material Contract, subsequent to its delivery to Parent, except as specifically described in Section 4.9(a) of the Company Disclosure Schedule. 4.10. Compliance With Law; Consents and Authorizations. (a) To the knowledge of the Company and each Stockholder, except as set forth in Section 4.10 of the Company Disclosure Schedule, each of the Company and each Subsidiary has, in all material respects, operated its business in compliance with applicable Law and it and its business are not in 13 18 violation of any Law applicable to such Company or Subsidiary, which violation could have a Material Adverse Effect. (b) No consent, authorization, license, approval, order or permit of, or declaration, filing or registration with, or notification to, any Governmental Authority or any other third party, is required to be made or obtained by any Stockholder, the Company or any Subsidiary in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, except as set forth in Section 4.10(b) of the Company Disclosure Schedule or as expressly contemplated by the terms of this Agreement. 4.11. Insurance. Section 4.11 of the Company Disclosure Schedule lists all material insurance policies or binders covering the assets, employees and operations of as of the date hereof, showing the insurers, limits, type of coverage, annual premiums, deductibles and expiration dates. All such policies or binders are in full force and effect. Such policies and binders insure against risks and liabilities, and in amounts and terms and conditions, sufficient to comply with applicable Law and all Material Contracts. To the Company's knowledge, neither the Company nor any Subsidiary is in default with respect to any provision contained in any such policy or binder. 4.12. Tax Matters. (a) The Company and each of its Subsidiaries has timely filed with the appropriate Tax (as defined in Section 14.5) authorities all Tax Returns (as defined in Section 14.5) required to be filed by it or on its behalf on or prior to the date hereof, and such Tax Returns are true, complete and correct. Neither the Company nor any Subsidiary currently is the beneficiary of any extension of time within which to file a Tax Return, nor has any such extension been requested by the Company or any Subsidiary. No claim has been made by an authority in a jurisdiction where the Company or any Subsidiary does not file Tax Returns that the Company or any such Subsidiary may be subject to Taxation by the jurisdiction. (b) With respect to all amounts in respect of Taxes imposed on the Company and its Subsidiaries or for which the Company or any Subsidiary is liable, whether to taxing authorities or to other persons or entities, with respect to all taxable periods or portions of taxable periods ending on or before the Closing, all applicable Tax laws and agreements with respect to Taxes have been complied with in all respects, and all such amounts required to be paid by the Company or any Subsidiary to taxing authorities or others on or before the date hereof have been paid. (c) Each of the Company and its Subsidiaries has withheld and paid all Taxes required to be withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party. (d) No dispute or claim has been raised or claimed by any taxing authority in connection with or relating to any Taxes of the Company or any Subsidiary, and none of the Company, any Subsidiary, or any Stockholder has any actual or constructive knowledge that such an issue will be raised. There are no outstanding waivers of statute of limitations with respect to any Tax Return or report of the Company or any Subsidiary and no request for any such waiver is pending. Section 4.12 of the Company Disclosure Schedule lists all federal, state, 14 19 local, and foreign income Tax Returns filed with respect to any of the Company and its Subsidiaries for taxable period ended on or after December 31, 1993, indicates those Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of an audit. The Stockholders have delivered to Parent correct and complete copies of all income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by any of the Company or any of its Subsidiaries since December 31, 1993. (e) Other than Encumbrances for Taxes contemplated by Section 4.16(b) or disclosed pursuant to Section 4.16(d), there are no Encumbrances on any assets of the Company or any Subsidiary that arose in connection with any failure (or alleged failure) to pay any Tax. (f) None of the Company or any Subsidiary has made any payments, is obligated to make any payments or is a party to any contract, agreement, plan or arrangement that under certain circumstances could obligate it to make any payments, separately or in the aggregate, that will be nondeductible under Section 280G of the Code (or any corresponding provision of state, local, or foreign income Tax law) or subject to excise Tax to the recipient under Section 4999 of the Code (or any corresponding provision of state, local, or foreign income Tax law). (g) Neither the Company nor any Subsidiary has ever been a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code. (h) None of the Company or any Subsidiary has filed a consent pursuant to Section 341(f) of the Code (or any corresponding provision of state, local, or foreign income Tax law) or agreed to have Section 341(f)(2) of the Code (or any corresponding provision of state, local, or foreign income Tax law) apply to any disposition of any asset owned by it or any Subsidiary. (i) The Company has been a validly electing "S corporation" within the meaning of Section 1361 and 1362 of the Code at all times during its existence and will be a validly electing "S corporation" up to and including the day before the Closing Date. (j) Section 4.12 of the Company Disclosure Schedule identifies each Subsidiary that is a "qualified subchapter S subsidiary" within the meaning of Section 1361(b)(3)(B) of the Code. Each Subsidiary so identified has been a qualified subchapter S subsidiary at all times since the date shown next to its name on the Company Disclosure Schedule up to and including the day before the Closing Date. (k) None of the Company nor any Subsidiary is a party to any joint venture, partnership or other arrangement that could be treated as a partnership for federal and applicable state, local and foreign income Tax purposes. (l) None of the assets of the Company is property that the Company is required to treat as being owned by any other person pursuant to the "safe harbor lease" provisions of former Section 168(f)(8) of the Code. 15 20 (m) None of the assets of the Company nor of any Subsidiary directly or indirectly secures any debt the interest on which is Tax-exempt under Section 103(a) of the Code (or any corresponding provision of state, local, or foreign income Tax law). (n) None of the assets of the Company nor of any Subsidiary is "Tax-exempt use property" within the meaning of Section 168(h) of the Code (or any corresponding provision of state, local, or foreign income Tax law). (o) None of the Company nor any of its Subsidiaries has ever agreed to make, nor is required to make, any adjustment under Section 481(a) of the Code (or any corresponding provision of state, local, or foreign income Tax law) by reason of a change in accounting method or otherwise. (p) None of the Company nor any of its Subsidiaries has ever participated in or is now participating in an international boycott within the meaning of Section 999 of the Code (or any corresponding provision of state, local, or foreign income Tax law). Neither the Company nor any Subsidiary has a permanent establishment in any foreign country, as defined in any applicable Tax treaty or convention between the United States and the relevant foreign jurisdiction. (q) The Company is not a personal holding company within the meaning of Section 542 of the Code. (r) Neither the Company nor any Subsidiary is a party to or is bound by any Tax-indemnity, Tax-sharing, or Tax-allocation agreement. (s) The Company Financial Statements include all reserves for matters concerning Taxes as are required under GAAP. The unpaid Taxes of the Company and its Subsidiaries do not exceed the reserve for Tax liability (rather than any reserve for deferred Taxes established to reflect temporary differences between book and Tax bases and carry forwards) set forth or included in the Company Financial Statements, as adjusted for the passage of time through the Closing, in accordance with GAAP. (t) No Subsidiary organized under the laws of a country other than the United States (the "Foreign Subsidiaries") has any investment in U.S. property within the meaning of Code Section 956. (u) None of the Company or any Subsidiary has entered into transfer pricing agreements or other like arrangements with respect to the United States or any foreign jurisdiction. (v) None of the Foreign Subsidiaries is (i) engaged in a United States trade or business for federal income Tax purposes; (ii) a passive foreign investment company within the meaning of the Code; or (iii) a foreign investment company within the meaning of the Code. Section 4.12 of the Company Disclosure Schedule sets forth for each of the Foreign Subsidiaries: (1) the amount of current and accumulated earnings and profits as of the date hereof and the 16 21 amount expected as of the Closing Date; and (2) the amount of previously taxed income within the meaning of Section 959 of the Code as of the date hereof and the amount expected as of the Closing Date. None of Parent, the Company, nor any Subsidiary would be required to include any amount in gross income with respect to any Foreign Subsidiary pursuant to Section 951 of the Code if the taxable year of any such Foreign Subsidiary were deemed to end on the Closing Date after the Closing. Neither the Company nor any Subsidiary knows of any proposed or planned change in the Tax laws of any foreign jurisdiction that could, if enacted, materially increase the Taxes payable by or on behalf of any of the Company or its Subsidiaries. 4.13. Employee Benefit Plans. (a) Except as set forth in Section 4.13(a) of the Company Disclosure Schedule, neither the Company nor any Subsidiary has established or maintains, is obligated to make contributions to or under or otherwise participate in, or has any liability or obligations with respect to (i) any bonus, stock option, stock purchase, stock appreciation, phantom stock or other type of incentive compensation plan, program, agreement, policy, commitment, contract or arrangement (whether or not set forth in a written document), (ii) any pension, profit-sharing, retirement or other plan, program or arrangement, or (iii) any other employee benefit plan, fund or program, including, but not limited to, those described in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder ("ERISA"). All such plans (individually, a "Plan" and, collectively, the "Plans") have been operated and administered in accordance with, as applicable, ERISA, the Code, Title VII of the Civil Rights Act of 1964, as amended, the Equal Pay Act of 1967, as amended, the Age Discrimination in Employment Act of 1967, as amended, and the related rules and regulations adopted by those federal agencies responsible for the administration of such laws. No act or failure to act by the Company or any Subsidiary has resulted in a "prohibited transaction" (as defined in ERISA and in Section 4975 of the Code) with respect to the Plans that is not subject to a statutory or regulatory exception or in any breach of fiduciary duty under Title I of ERISA. Neither the Company nor any Subsidiary has previously made, is currently making, or is obligated in any way to make, any contributions to, or has any liability or obligations with respect to, any multiemployer plan within the meaning of Section 3(37) or Section 4001(a)(3) of ERISA or any pension plan which is subject to Section 412 of the Code or Title IV of ERISA. Neither the Company nor any Subsidiary has any obligation, under any Plan or otherwise, to provide any employee or former employee with any postretirement, medical, life or other welfare benefit, except as required by Section 4980B of the Code. The Internal Revenue Service has issued, with respect to each Plan and each related trust agreement, annuity contract or other funding instrument which is intended to be qualified and tax-exempt under the provisions of Sections 401(a) and 501(a) of the Code, respectively, a favorable determination letter with respect to such qualification and tax-exempt status for all periods from the effective date of each Plan to date. The Company has no knowledge of any facts which exist or any events which have occurred that would adversely effect such qualification and tax-exempt status. All contributions required to be made to any Plan by the Company or any Subsidiary has been made when due on a timely basis. Neither the Company nor any Subsidiary is or at any time has been a member of a "controlled group of corporations" with or under "common control" with any corporation or any trades or businesses. 17 22 (b) True and complete copies of each of the following documents have been delivered by the Company with respect to each Plan: (i) each Plan document (and, if applicable, related trust agreements) and all amendments thereto, all written interpretations thereof and written descriptions thereof which have been distributed to the employees of the Company or any Subsidiary, (ii) for the three (3) most recent Plan years, Annual Reports on Form 5500 Series filed with any governmental agency for each Plan which is subject to such filing requirement and (iii) the most recent determination letter issued by the Internal Revenue Service for each Plan which is intended to be qualified under Section 401(a) of the Code. 4.14. Licenses; Accreditation and Regulatory Approvals. To the knowledge of the Company and each Stockholder, the Company and each Subsidiary hold all material licenses, permits, franchises, certificates of need and other governmental or regulatory authorizations and approvals which are needed or required by Law with respect to their businesses, operations and facilities as they are currently or presently conducted (collectively, the "Licenses"). To the knowledge of the Company and each Stockholder, all such Licenses are in full force and effect and each of the Company and each Subsidiary is in compliance with all conditions and requirements of the Licenses and with all rules and regulations relating thereto, except as set forth in Section 4.14 of the Company Disclosure Schedule. To the knowledge of the Company and each Stockholder, no such License has been revoked, conditioned or restricted except as for customary conditions or restrictions or as can be cured by the Company or its Subsidiaries within the period allowed by the applicable Governmental Authority for such cure without having a material and adverse effect upon such Company or its Subsidiaries or their businesses, and no Action is pending, or to the Company's knowledge, threatened which in any way challenges the validity of, or seeks to revoke, condition or restrict any such License. 4.15. Absence of Certain Changes or Events. Except as set forth in Section 4.15 of the Company Disclosure Schedule, since the Latest Statement Date to the date of this Agreement there has not been: (a) any material damage, destruction or loss (whether or not covered by insurance) with respect to any material assets of the Company or any Subsidiary; (b) any change by the Company or any Subsidiary in its accounting methods, principles or practices, other than such changes required by GAAP or except as may be disclosed in the footnotes to the Company's Financial Statements; (c) except in association with attempting to recruit independent contractors to become employees upon terms and conditions disclosed to Parent, any (i) increase in the compensation payable or to become payable to any director, officer or employee, except for increases in salary or wages payable or to become payable in the ordinary course of business and consistent with past practice to employees of the Company or such Subsidiary who are not directors or officers of the Company or such Subsidiary; (ii) grant of any severance or termination pay (other than pursuant to the normal severance policy of the Company or such Subsidiary as in effect on the date of this Agreement) to, or entry into any employment or severance agreement with, any director, officer or employee; or (iii) grant or promise of an 18 23 increase in the benefits under, or the establishment or amendment of, any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option (including, without limitation, the granting of stock options, stock appreciation rights, performance awards or restricted stock awards), stock purchase or other employee benefit plan (except as may be contractually required under Law), or (iv) grant or promise of any other increase in the compensation payable or to become payable to directors, officers or employees of the Company or any Subsidiary, except for increases in salaries or wages payable or to become payable in the ordinary course of business and consistent with past practice to employees of the Company or any Subsidiary who are not directors or officers of the Company or any Subsidiary and that in the aggregate have not resulted in a material increase in the benefits or compensation expense of the Company or any Subsidiary; (d) any transaction or contract material to the Company or any Subsidiary, or any commitment to do the same, entered into by the Company or any Subsidiary other than in the ordinary course of business and consistent with past practice and not material in the aggregate, or any material changes in the customary method of operations of the Company or any Subsidiary, including, without limitation, practices and policies relating to marketing, selling and pricing; (e) any transfer, Encumbrance, lease, sublease, license or other disposition by the Company or any Subsidiary of any of its assets other than in the ordinary course of business and consistent with past practice and not material in the aggregate; (f) any writing down, in accordance with GAAP consistent with past practice, of the value of any inventories or accounts receivable or any material revaluation downward by the Company or any Subsidiary of any of its assets or any cancellation or writing off as worthless and uncollectible of any material debt, note or account receivable by the Company or any Subsidiary, or any waiver by the Company or any Subsidiary of a right of substantial value; (g) any cancellation, termination, material waiver, material modification, release or relinquishment by the Company or any Subsidiary of a Material Contract (excluding customer contracts, agreements or arrangements), or any notice that any Material Contract has been or will be canceled, or that any material portion of the services provided or to be provided thereunder will be discontinued; (h) any individual capital expenditure by the Company or any Subsidiary or commitment to make such capital expenditure in excess of $10,000; (i) any payment or incurring of liability to pay any Taxes, assessments, fees, penalties, interest or other governmental charges other than those arising and discharged or to be discharged in the ordinary course of business and consistent with past practice; (j) any loans, advances or capital contributions made by the Company or any Subsidiary to, or investments by any such party in, any person or entity other than the Company or any Subsidiary as to which the uses of the transferred cash or property are not subject to restrictions greater than or equal to those imposed prior to such transfer, including, without limitation, to any employee, officer or director of the Company or any Subsidiary; 19 24 (k) any incurring or guarantee of indebtedness by the Company or any Subsidiary or commitment to incur or guarantee indebtedness, or of liabilities (except in the ordinary course of business), by the Company or any Subsidiary; (l) any failure to maintain the Company's or any Subsidiary's plant, property and equipment in good repair and operating condition, ordinary wear and tear excepted; (m) any failure to pay any creditor any material amount owed to such creditor, or to discharge any material obligation, when such payment or discharge is due or within 30 days of such date, except where such obligation is contested in good faith by the Company or any Subsidiary; (n) any declaration, setting aside or payment of dividends or distributions in respect of any capital stock of the Company or any Subsidiary or any redemption, purchase or other acquisition of any capital stock or other securities of the Company or any Subsidiary; (o) any issuance by the Company or any Subsidiary of any share of capital stock, bond, note, option, warrant or other corporate security (other than option exercises for Common Stock); (p) any acquisition of assets by the Company or any Subsidiary of any corporation, partnership or other business organization or division thereof; (q) any (i) redemption, purchase or other acquisition of any shares of capital stock or other equity interests or any securities or obligations convertible or exchangeable for any shares of capital stock or other equity interests, or any options, warrants or conversion or other rights to acquire any shares of the capital stock, equity interests or any such securities or obligations, of the Company or any Subsidiary; (ii) reorganization or recapitalization of the Company or any Subsidiary; or (iii) split, combination or reclassification of any of the capital stock or issuance or authorization or proposal to issue any other securities in respect of, in lieu of or in substitution for, shares of capital stock of the Company or any Subsidiary, other than as expressly contemplated by this Agreement; (r) any proposal or adoption of any amendments to the Articles of Incorporation or Bylaws or equivalent organizational documents of the Company or any Subsidiary; (s) any (i) change in any of the methods of accounting in effect at the Latest Statement Date, or (ii) making or rescinding of any express or deemed election relating to Taxes, settlement or compromise of any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, or change in any methods of reporting income or deductions for federal income Tax purposes from those employed in the preparation of the federal income Tax returns for the taxable year ending December 31, 1996, except as may be required by applicable Law; (t) any action described in Section 7.2 hereof; 20 25 (u) any Material Adverse Change; or (v) any authorization, approval, agreement or commitment by the Company or any Subsidiary to take any action described in clauses (a) through (t) above. 4.16. Personal Property. The Company and each Subsidiary collectively own, have a valid leasehold interest in, or have legal right to use, all of the tangible personal property necessary to carry on the business of the Company and each Subsidiary as presently conducted, free and clear of all Encumbrances except for (a) Encumbrances for inchoate mechanics' and materialmen's liens for construction in progress and workmen's, repairmen's, warehousemen's and carriers' liens arising in the ordinary course of business, (b) Encumbrances for Taxes not yet payable, (c) Encumbrances arising out of, under, or in connection with, this Agreement (collectively, "Permitted Encumbrances") and (d) Encumbrances set forth in Section 4.16 of the Company Disclosure Schedule. 4.17. Real Property. Except as set forth in Section 4.17 of the Company Disclosure Schedule, neither the Company nor the Subsidiary owns or leases any real property. Section 4.17 of the Company Disclosure Schedule lists each parcel of real property leased by the Company or its Subsidiaries, as tenant, together with a description of all buildings and other structures, facilities or improvements currently located thereon (collectively, "Leased Real Property"), and of the approximate square footage of each parcel of Leased Real Property and the initial and renewal terms under the applicable lease with respect to each parcel of Leased Real Property. Each of the Company and each Subsidiary to their respective leases for the Leased Real Property (the "Leases") (a) has a valid and subsisting leasehold interest in each Lease, (b) has not subleased or assigned any interest in an such Lease and (c) has not received any written notice of material default under any such Lease which is still in effect. 4.18. Customers. Section 4.9(a)(ii) of the Company Disclosure Schedule contains (a) a complete and accurate list, as of the date of this Agreement, of each customer of the Company and each Subsidiary which is currently in force and effect and pursuant to which the Company or any Subsidiary has received within calendar year 1997, or expects to receive in calendar year 1998, at least $100,000 and (b) the amount of revenue generated for each such customer during the nine-month period ended September 30, 1997. Neither the Company nor any Subsidiary has received an express indication from any customer that such customer has ceased, or will cease, to use the services of the Company or such Subsidiary, or has reduced, or will reduce, the use of such services at any time or has threatened to do so. Neither the Company nor any Subsidiary has received notice from any existing customer of the Company or any Subsidiary requesting, or has knowledge of an intention by any existing customer to request, that the Company or such Subsidiary grant price concessions, rebates or reductions on products or services provided by the Company or such Subsidiary, or any other modification of any contract, agreement or arrangement with the Company or such Subsidiary that has had, or could reasonably be expected to have, a material adverse effect upon the economic benefits of the relationship with such customer (collectively, "Customer Modifications"). No Customer Modification has become effective in the past twelve months except as disclosed in Section 4.18 of the Company Disclosure Schedule. Section 4.18 of the Company Disclosure Schedules sets forth the 21 26 Company's treatment (i.e., deferral, expensing and amortization) during the fiscal year 1996 and the period ending September 30, 1997 of start-up costs for each customer contract listed in Section 4.9(a)(ii) of the Company Disclosure Schedule. 4.19. Receivables; Payables. The accounts receivable of the Company and each Subsidiary have arisen, and are consistent with levels maintained, in the ordinary course of business and represent bona fide claims of the Company or such Subsidiary against debtors for sales made, services performed or other charges arising on or before the date hereof not subject to valid claims of set-off or other defenses or counterclaims, and, except as set forth in Section 4.19 of the Company Disclosure Schedule or subject to the reserves therefor set forth on such balance sheet (which have been recorded on a consistent basis in a manner consistent with GAAP), to the Company's and the Stockholders' knowledge, will be collectible in the ordinary course of business, without resort to litigation or extraordinary collection activity. The accounts payable of the Company and each Subsidiary have arisen, and are consistent with levels maintained, in the ordinary course of business and represent bona fide payables of the Company or such Subsidiary. To the knowledge of the Company and each Stockholder, all items which are required by GAAP to be reflected as accounts receivable or accounts payable on the Company Financial Statements and the books and records of the Company and each Subsidiary are so reflected. 4.20. Transactions with Affiliates. From the Latest Statement Date to the date of this Agreement, there have been no material transactions, agreements or arrangements between the Company or any Subsidiary, on the one hand, and (a) any stockholder, director or officer of the Company or any Subsidiary or any of its Affiliates or (b) any member of the immediate family of any individual described in clause (a) on the other, except as set forth in Section 4.20 of the Company Disclosure Schedule. As used in this Agreement, "Affiliate" means, when used with respect to a specified party, another party that, either directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the party specified. 4.21. Restricted Cash. Except as set forth in Section 4.21 of the Company Disclosure Schedule, there are no regulatory or contractual restrictions on the ability of the Company or any Subsidiary to freely transfer its cash and cash equivalents. 4.22. Commissions and Fees. The Company has not employed any investment banker, broker, finder, consultant or intermediary in connection with the transactions contemplated by this Agreement which would be entitled to any investment banking, brokerage, finder's or similar fees or commissions in connection with this Agreement or the transactions contemplated hereby payable by the Company. 4.23. Environmental Matters. Neither the Company nor any Subsidiary is currently Handling, nor in the past has Handled, any Materials of Environmental Concern in any material quantity at, on or from any property or facility owned, leased, operated or occupied by any of them, including any previously owned, leased, operated or occupied property or facility. To the Company's knowledge, neither the Company nor any Subsidiary is the subject of any federal, state, local or foreign investigation, and neither the Company nor any Subsidiary has received 22 27 any written notice or claim, or entered into any negotiations or agreements with any third party, relating to any liability or remedial action or potential liability or remedial action under Environmental Laws, and there are no pending or, to the Company's knowledge, threatened actions, suits or proceedings against or affecting the Company or any Subsidiary, or their properties, assets or operations, in connection with any such Environmental Laws that if adversely determined, might result in any Material Adverse Change in the Company or any Subsidiary. To the Company's knowledge, there are no past or present Environmental Conditions (as defined below) that are likely to form the basis of any claim under existing law against them which might result in any Material Adverse Change in the Company or any Subsidiary. The term "Handling" or "Handled" means the production, use, generation, storage, treatment, recycling, disposal, discharge, release, processing, distribution, transport or other handling or disposition of any kind. The term "Environmental Laws" means all federal, state, local or foreign statutes, ordinances, regulations, rules, judgments, orders, notice requirements, court decisions, agency guidelines or principles of law, as they may be hereinafter amended from time to time, that (i) regulate or relate to the protection, investigation, remediation or clean-up of the environment, the use, generation, treatment, storage, transportation, disposal, or other handling of any Material of Environmental Concern (as defined below), the preservation or protection of waterways, groundwater, drinking water, air, wildlife, plants or other natural resource, or the health and safety of persons or property (including without limitation occupational safety and health), or (ii) impose or create liability or responsibility with respect to any of the foregoing. The term "Environmental Condition" means any occurrence, fact or other condition at any location in, on, about or beneath any property owned, leased, operated or otherwise occupied by the Company or any Subsidiary, including any previously owned, leased or occupied property, resulting from, relating to or arising out of the presence, emission, exposure, migration, dispersal or threatened release, spill, leak, escape into the environment, or Handling of any Material of Environmental Concern. The term "Material of Environmental Concern" means any substance that is regulated by or forms the basis for liability under any applicable Environmental Laws. 4.24. Labor Matters. Neither the Company nor any Subsidiary is a party to any labor agreement with respect to its employees with any labor organization, group or association nor, to the knowledge of the Company, within the last year, have there been attempts to organize. There is no complaint, charge or claim pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary by any Governmental Authority, arising out of, in connection with, or otherwise relating to the employment by the Company or Subsidiary of any individual. 4.25. Intellectual Property (a) General. Section 4.25 of the Company Disclosure Schedule sets forth with respect to the Proprietary Rights of the Company and each Subsidiary: (i) for each patent and patent application, as applicable, the number, normal expiration date, title and priority information for each country in which such patent has been issued, or, the application number, date of filing, title and priority information for each country, (ii) for each trademark, trade name or service mark, whether or not registered, the date first used, the application serial number or 23 28 registration number, the class of goods or services covered, the nature of the goods or services, the countries in which the names or mark is used and the expiration date for each country in which a trademark has been registered, (iii) for each copyright for which registration has been sought, whether or not registered, the date of creation and first publication of the work, the number and date of registration for each country in which a copyright application has been registered, (iv) for each mask work, whether or not registered, the date of first commercial exploitation and if registered, the registration number and date of registration and (v) all such Proprietary Rights in the form of licenses. True and correct copies of all such Proprietary Rights (including all pending applications and application related documents and materials) owned, controlled or used by or on behalf of the Company or any Subsidiary or in which the Company or any Subsidiary has any interest whatsoever have been provided or made available to Parent. As used in this Agreement, "Proprietary Rights" means all (a) U.S. and foreign patents, patent applications, patent disclosures and improvements thereto, including any applications therefor, (b) U.S. and foreign trademarks, service marks, trade dress, logos, trade names and corporate names and the goodwill associated therewith and registrations and applications for registration thereof, (c) U.S. and foreign copyrights and registrations and applications for registration thereof, (d) trade secrets and confidential business information (including ideas, formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced to practice), know-how, research and development information, software, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information), (e) other proprietary rights, (f) copies and tangible embodiments thereof (in whatever form or medium) and (g) licenses granting any rights with respect to any of the foregoing. (b) Adequacy. To the knowledge of the Company and each Stockholder, the Proprietary Rights of the Company and each Subsidiary are all those necessary for the normal conduct of the business as presently conducted by the Company and each Subsidiary and as presently contemplated by the Company and each Subsidiary. (c) Royalties and Licenses. To the knowledge of the Company and each Stockholder, neither the Company nor any Subsidiary has any obligation to compensate any Person for the use of any of its Proprietary Rights nor has the Company or any Subsidiary granted to any Person any license, option or other rights to use in any manner any of its Proprietary Rights, whether requiring the payment of royalties or not, except as set forth in Section 4.25 of the Company Disclosure Schedule. (d) Ownership. To the knowledge of the Company and each Stockholder, each of the Company and each Subsidiary owns or has a valid right to use its Proprietary Rights, and such Proprietary Rights will not cease to be valid rights of the Company or such Subsidiary by reason of the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. (e) Absence of Claims. Except as set forth in Section 4.25 of the Company Disclosure Schedule, none of the Company, any Subsidiary or any Stockholder has received any 24 29 notice of (i) alleged invalidity with respect to any Proprietary Rights of the Company or any Subsidiary or (ii) alleged infringement of any rights of others due to any activity by the Company or any Subsidiary. To the knowledge of the Company and each Stockholder, the Company's and each Subsidiary's use of their respective Proprietary Rights in their past, current and planned products and services do not and would not infringe upon or otherwise violate the valid rights of any third party anywhere in the world. No other Person (A) has notified the Company, any Subsidiary or any Stockholder that it is claiming any ownership of or right to use any Proprietary Rights of the Company or any Subsidiary or (B) to the best knowledge of the Company, each Subsidiary and each Stockholder, is infringing upon any such Proprietary Rights in any way. (f) Protection of Proprietary Rights. Each of the Company and each Subsidiary has taken all reasonable and prudent steps to protect its Proprietary Rights from infringement by any other Person. Each of the Company and each Subsidiary has taken all appropriate actions and made all applications and filings pursuant to applicable laws to perfect or protect its interest in its Proprietary Rights, given the Company's current use of such Proprietary Rights and the value thereof. All of the pending applications for any Proprietary Rights of the Company and each Subsidiary have been duly filed and all other reasonable and prudent actions to protect such Proprietary Rights have been taken. Each of the Company and each Subsidiary has taken reasonable steps necessary or appropriate (including, entering into appropriate confidentiality, nondisclosure and non-competition agreements with officers, directors, subcontractors, independent contractors, full-time and part-time employees, licensees and customers in connection with the assets or the business of the Company) to safeguard and maintain the secrecy and confidentiality of, and the proprietary rights in, the Proprietary Rights of the Company and each Subsidiary. 4.26. Disclosure. None of the representations, warranties or statements by the Company in this Agreement contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements or facts contained therein not misleading. There is no fact in existence on the date hereof or at the Closing, which would have, or is reasonably likely to have, a Material Adverse Effect on the Company or any Subsidiary or the due performance by the Company of its obligations hereunder, which has not been expressly set forth in this Agreement, or in the other documents described herein. ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub, jointly and severally, represent and warrant to the Company and the Stockholders as follows: 5.1. Organization. Existence and Good Standing. Parent and Merger Sub are a limited partnership and corporation, respectively, duly organized and validly existing and in good standing under the laws of the State of Delaware. Parent has all necessary partnership power, and Merger Sub has all necessary corporate power, to own its properties and assets and to carry on its business as presently conducted and is duly qualified to do business and is in good 25 30 standing in all jurisdictions in which the character of the property owned, leased or operated or the nature of the business transacted by it makes qualification necessary, except for such failures which, when taken together with all other such failures, would not have a Material Adverse Effect on Parent or Merger Sub. Merger Sub has heretofore made available to the Company complete and correct copies of its Certificate of Incorporation and Bylaws, each of the foregoing as amended to the date of this Agreement. 5.2. Power and Authority. Parent and Merger Sub have all necessary partnership power and corporate power, respectively, and authority to execute, deliver and perform this Agreement and the agreements attached as exhibits hereto and to consummate the transactions contemplated hereby and thereby and have taken all necessary partnership action and corporate action, respectively, required by all applicable Laws (as defined in Section 4.8), its Certificate of Incorporation, Bylaws or otherwise, to authorize the execution, delivery and performance of this Agreement and the agreements attached as exhibits hereto and the consummation of the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the agreements attached as exhibits hereto by the Parent and Merger Sub, performance of their respective obligations hereunder and thereunder and consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary partnership action of Parent and corporate action of Merger Sub. As of the date hereof, the Board of Directors of Merger Sub has duly approved this Agreement, has determined that the Merger is in the best interests of Merger Sub and Parent and has resolved to recommend the adoption of this Agreement and the Merger by Parent. This Agreement has been duly executed and delivered by Parent and Merger Sub and, assuming this Agreement constitutes a valid and binding obligation of the Company and the Stockholders, constitutes a valid and binding obligation of Parent and Merger Sub, enforceable against Parent and Merger Sub in accordance with its terms except that the enforcement hereof may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). 5.3. Legal Proceedings. On the date hereof, there are no Actions pending or, to Parent's knowledge, threatened against Parent or Merger Sub, at law or in equity, that would affect their ability to consummate the transactions contemplated by this Agreement. 5.4. Consents and Approvals; No Violation. Neither the execution and delivery of this Agreement nor the consummation by Parent and Merger Sub of the transactions contemplated hereby will (a) violate, conflict with or result in any breach of any provision of the respective organizational documents of Parent or Merger Sub, (b) violate any Law applicable to Parent or Merger Sub, (c) conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in any Encumbrance on the properties or assets of Parent or Merger Sub pursuant to, (i) any material agreement, contract or other instrument binding upon Parent or Merger Sub or (ii) any material license, franchise, permit or other similar authorization held by Parent or Merger 26 31 Sub, or (d) require any consent, approval or authorization of, or notice to, or declaration, filing or registration with, any Governmental Authority or any other third party. 5.5. No Prior Activities. Merger Sub is not a party to any material agreements and has not conducted any activities other than in connection with the organization of Merger Sub, the negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby. Merger Sub has no Subs. As used in this Agreement, "Subs" shall mean any corporation or other organization, whether incorporated or unincorporated, in which Merger Sub is a general partner or of which at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporations or other organizations, is directly or indirectly owned or controlled by Merger Sub. 5.6. Merger Sub Common Stock. Merger Sub's authorized capital stock consists of 1000 shares of Merger Sub Common Stock, all of which are issued and outstanding. The Merger Sub Common Stock constitutes all of the issued and outstanding shares of capital stock of Merger Sub. All of the issued and outstanding shares of Merger Sub Common Stock are held by Parent and are duly and validly issued, fully paid and nonassessable and were not issued in violation of any preemptive rights. Other than Parent, no Person holds any Merger Sub Equity Rights. As used herein, "Merger Sub Equity Rights" means any options, warrants, rights of conversion or agreements, arrangements or commitments (whether or not in writing) obligating Merger Sub (with or without consideration and whether or not presently exercisable or convertible) to issue or sell shares of its capital stock. There are no voting trusts, stockholders agreements, proxies or other similar agreements in effect with respect to the voting or transfer of the Merger Sub Common Stock. There is no liability for dividends declared or accumulated but unpaid with respect to any of the shares of Merger Sub Common Stock. 5.7. Commissions and Fees. Neither Parent nor Merger Sub has not employed any investment banker, broker, finder, consultant or intermediary in connection with the transactions contemplated by this Agreement which would be entitled to any investment banking, brokerage, finder's or similar fees or commissions in connection with this Agreement or the transactions contemplated hereby payable by the Company other than a $1,115,000 transaction fee payable to Parent or its affiliates and a fee payable to Broadview Associates in an amount to be negotiated prior to the Effective Time and reasonably acceptable to Parent and the Stockholders. ARTICLE VI. ACCESS TO INFORMATION AND DOCUMENTS 6.1. Access to Information and Documents. Between the date hereof and the Closing Date, the Company, each Subsidiary, each of the Stockholders and each of their respective Affiliates, subsidiaries, partners, directors, officers, stockholders, employees, accountants, counsel, financial advisors, agents, and other representatives (collectively, the "Company Parties") will give to Parent and its Affiliates, partners, officers, directors, employees, stockholders, subsidiaries, counsel, accountants, financing sources, agents, financial advisors and 27 32 other representatives (collectively, the "Parent Representatives") full access, at reasonable times, to all the properties, documents, contracts, personnel files and other relevant records of the Company Parties and shall furnish the Parent Representatives with reasonable access to the employees, stockholders, Principals, Practice Leaders and independent contractors of such Company Parties and copies of such documents and with such information with respect to the affairs of such Company Parties as the Parent Representatives may from time to time reasonably request. Each Company Party will disclose and make available to the Parent Representatives all books, contracts, accounts, personnel records, letters of intent, papers, records, communications with regulatory authorities and other documents relating to the business and operations of such Company Party. Parent acknowledges and understands that the Company Parties utilize independent contractors (including the Principals and Practice Leaders) to perform services for the Company and that the Company Parties do not control access to the records, employees or independent contractors of such independent contractors. ARTICLE VII. COVENANTS OF THE COMPANY AND THE STOCKHOLDERS 7.1. Affirmative Covenants. Unless otherwise expressly contemplated by this Agreement, or consented to in writing by Parent, the Company and each of the Stockholders hereby covenant and agree to, and to cause each Subsidiary to use their respective best efforts to, do each of the following between the date hereof and the Effective Time: (a) operate the business of the Company and each Subsidiary only in the usual, regular and ordinary course consistent with past practice; (b) use reasonable efforts to preserve intact the business organization and assets, maintain the rights and franchises, retain the services of the respective officers, key employees and consultants, and maintain the relationships with the respective customers and suppliers, of the business of the Company and each Subsidiary; (c) maintain and keep the properties and assets of the Company and each Subsidiary in as good repair and condition as at present in all material respects, ordinary wear and tear excepted; (d) keep in full force and effect insurance and bonds comparable in amount and scope of coverage to that currently maintained by the Company and each Subsidiary; (e) perform in all material respects all obligations required to be performed under all Material Contracts and Licenses relating to or affecting the assets, properties or operations of the Company and each Subsidiary; (f) comply with and perform in all material respects all obligations and duties imposed on the Company or any Subsidiary by all applicable Laws; 28 33 (g) maintain the books, accounts and records of the Company and each Subsidiary in the usual, regular and ordinary manner on a basis consistent with past practice; (h) deliver to Parent, within fifteen (15) business days after the end of each calendar month, an unaudited, consolidated balance sheet, statement of earnings, statement of stockholders' equity and cash flow statement for the Company for such month just ended and all ancillary management reports; (i) notify Parent of any material Action commenced by or against the Company or any Subsidiary or any Actions commenced or threatened which relate to the transactions contemplated by this Agreement; (j) consult with Parent as to additional expenditures with respect to the Company and the Subsidiary's information systems exceeding $10,000 in the aggregate; and (k) renew any Material Contract to which the Company or any Subsidiary is a party described in Section 4.9(a)(iii) which expired as of December 31, 1997 to provide for a new term expiring no earlier than December 31, 1998. 7.2. Negative Covenants. Unless otherwise expressly contemplated by this Agreement or consented to in writing by Parent, the Company hereby covenants and agrees not to, and to cause each Subsidiary not to, and each Stockholder hereby covenants and agrees to cause the Company not to, do any of the following between the date hereof and the Effective Time: (a) (i) increase the compensation payable or to become payable to any director, officer, employee or contractor, except for increases in salary or wages payable or to become payable in the ordinary course of business and consistent with past practice to employees or contractors of the Company and each Subsidiary who are not directors or officers of the Company or such Subsidiary; (ii) grant any severance or termination pay (other than pursuant to the normal severance policy of the Company or such Subsidiary as in effect on the date of this Agreement) to, or enter into any employment or severance agreement with, any director, officer, employee or contractor; or (iii) grant, promise an increase in benefits under, establish or amend, or pay any bonus, insurance, deferred compensation, pension, retirement, profit sharing, stock option (including, without limitation, the granting of stock options, stock appreciation rights, performance awards or restricted stock awards), stock purchase or other similar employee benefit plans or arrangements in respect of directors, officers, employees or contractors of the Company or such Subsidiary, except to the extent that the Company or such Subsidiary is, on the date hereof, contractually obligated or required by Law to do so; (b) declare, set aside or pay any dividend on, or make or incur any obligation to make any other distribution in respect of, outstanding equity interests of the Company or Subsidiary except for an amount equal to 50% of taxable net income of the Company from January 1, 1997 through the Effective Time, net of any dividends and distributions of the Company made during 1997 or 1998 with respect to such net taxable income; 29 34 (c) (i) redeem, purchase or otherwise acquire any shares of capital stock or other equity interests or any securities or obligations convertible or exchangeable for any shares of capital stock or other equity interests, or any options, warrants or conversion or other rights to acquire any shares of the capital stock, equity interests or any such securities or obligations, in each case of the Company or such Subsidiary; (ii) effect any reorganization or recapitalization; or (iii) other than as expressly contemplated by the Stock Split (as defined in Section 7.6), split, combine or reclassify any of the capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for, shares of capital stock, in each case of the Company or such Subsidiary; (d) issue, deliver, award, grant or sell, or authorize or propose the issuance, delivery, award, grant or sale (including the grant of any Encumbrances, limitations on voting rights or other encumbrances) of, any shares of any class of capital stock or other equity interests (including shares held in treasury), any securities convertible into or exercisable or exchangeable for any such shares or other equity interests, or any rights, warrants or options to acquire, any such shares or other equity interests, of the Company or such Subsidiary (except for the issuance of shares of Common Stock upon exercise of options outstanding on the date hereof) or amend or otherwise modify the terms of any such rights, warrants or options, the effect of which shall be favorable to the holders thereof; (e) acquire or agree to acquire, by merging or consolidating with, by purchasing an equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets of any other person (other than the purchase of assets from suppliers or vendors in the ordinary course of business and consistent with past practice); (f) sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, or agree (or solicit any inquiries or proposals or enter into any discussions or negotiations) to sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, any of the properties or assets of the Company or such Subsidiary or cancel, release or assign any indebtedness owed to or any claims held by the Company or such Subsidiary, except for dispositions of immaterial assets in the ordinary course of business and consistent with past practice; (g) other than as expressly contemplated by the Stock Split, propose or adopt any amendments to the Articles of Incorporation or Bylaws or equivalent organizational documents of the Company or such Subsidiary; (h) (i) change any methods of accounting in effect at September 30, 1997 (except such changes as are reflected in the Company Financial Statements), (ii) make or rescind any express or deemed election relating to Taxes, settle or compromise any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, or change any methods of reporting income or deductions for federal income Tax purposes from those employed in the preparation of the federal income Tax returns for the taxable year ending December 31, 1996, except as may be required by applicable Law or (iii) file any tax returns 30 35 without first submitting such returns to Parent for its review, and securing approval from Parent for filing; (i) incur any indebtedness for borrowed money or purchase money indebtedness, or assume, guarantee, endorse or otherwise become responsible for indebtedness of any other person, or make any loans or advances to any person; (j) enter into any transaction or contract or commitment for a transaction material to the Company, other than contracts with customers in the ordinary course of business; (k) terminate, modify or amend any Material Contract or License, except in the ordinary course of business and not involving a material increase in liability or reduction in revenue, settle or otherwise resolve any financial issue, claim or adjustment under any such Material Contract or License, or make any payment or effect any modification to any Material Contract or License in connection with obtaining any consent or approval necessitated by the transactions contemplated hereby (other than payments and modifications which, individually, and in the aggregate, are immaterial); (l) enter into or make any payment or transfer in respect of any material transactions, agreements, or arrangements between the Company or such Subsidiary, on the one hand, and (i) any director or officer of the Company or such Subsidiary or (ii) any member of the immediate family of any individual described in (i) on the other hand except for a payment to Faye Nespola (or an entity designated by her) in an amount not to exceed $75,000 in consideration of services rendered to the Company in connection with the transactions contemplated by this Agreement; (m) settle or compromise any Action; (n) take any action described in Section 4.15; or (o) agree, authorize, approve or commit in writing or otherwise to do any of the foregoing. 7.3. No Solicitations. From the date hereof until the earlier of the Effective Time or the termination of this Agreement in accordance with its terms (the "Acquisition Exclusivity Period"), none of the Stockholders, the Company nor any Subsidiary will, and none of them will permit any of the Company Parties to, directly or indirectly, (a) solicit, encourage, initiate or entertain any inquiries, offers or proposals or enter into or continue any discussions, negotiations or agreements relating to the sale or other disposition of the Company (whether through a merger, reorganization, recapitalization, stock purchase or otherwise) or its assets, properties, business or operations (a "Proposed Acquisition") to or with any person or entity other than Parent and Merger Sub or (b) provide any assistance or any information to any person or entity other than Parent and Merger Sub relating to any Proposed Acquisition. The Company and each Stockholder agrees to immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties (other than Parent and Merger Sub) heretofore conducted, or the provision by any Stockholder, the Company or any Subsidiary or the Company 31 36 Parties of information to any party (other than Parent and Merger Sub) to which information heretofore has been provided. If during the Acquisition Exclusivity Period the Company receives any such inquiry or proposal or request for information, or offer to discuss or negotiate any Proposed Acquisition, the Company will immediately provide notice thereof to Parent, indicating therein the name of the person or entity initiating such activity and the terms and conditions of any such offer. Parent and Merger Sub hereby acknowledge that nothing in this Agreement shall require the Company or any Stockholder (either directly or through their representatives) to request return of any information provided to any other person prior to the date hereof in connection with or contemplation of a Proposed Acquisition, or advise any such person of the existence of this Agreement. 7.4. Approval of Merger. The Company shall take all necessary or appropriate action under the KGCC and its Articles of Incorporation and Bylaws to call a meeting of its stockholders (or to take such action by written consent), to be held at the earliest practicable date, to consider and vote on a proposal to approve the Merger, this Agreement and the transactions contemplated hereby. Each Stockholder covenants and agrees (a) to vote at such meeting of stockholders or by written consent, as the case may be, to approve the Merger, this Agreement and the transactions contemplated hereby and (b) that such Stockholder will not exercise, and hereby waives, his dissenters rights arising from the Merger under the KGCC with respect to any of his shares of capital stock of the Company. 7.5. Fees and Expenses. All fees and expenses of Parent, Merger Sub, the Company and the Stockholders including, without limitation, the fees and expenses of counsel, accountants and consultants, shall be paid (a) by the Company upon consummation of the transactions contemplated hereby, (b) by Parent in the event the transactions hereunder are not consummated due to the failure of Parent or Merger Sub to fulfill the conditions set forth in Section 11.3 for any reason other than the failure of the Company or any Stockholder to fulfill the conditions set forth in Section 11.2 and (c) by the party incurring such fees and expenses, in the event the transactions hereunder are not consummated for any other reason. 7.6. Stock Split. Prior to or concurrently with the Effective Time, the Company and each Stockholder shall take all necessary or appropriate action under the KGCC and the Articles of Incorporation and Bylaws of the Company to increase the authorized number of shares of Common Stock to 60,000,000 and effect a stock split of the shares of Common Stock pursuant to which each share of Common Stock issued and outstanding as of the date hereof is divided into 3,272.727272 shares of Common Stock of the Company and eliminate any provisions in the Articles of Incorporation or Bylaws of the Company granting holders of any shares of the Company's capital stock preemptive rights (collectively, the "Stock Split"). ARTICLE VIII. FINANCING 8.1. Financing. Parent will use its reasonable efforts to obtain, on behalf of the Company, funds necessary for the consummation of the transactions contemplated hereby, from 32 37 a bank or banks or other institutional lenders on terms acceptable to Richard Nespola and Micky Woo. The Company and each Stockholder shall reasonably cooperate with, and provide all reasonable assistance to, Parent and Merger Sub in connection with obtaining such financing; provided, however, that no Stockholder shall be obligated or expected to provide assistance in a manner that materially interferes with his obligations under this Agreement or the continuance of the business and operations of the Company. Subject to the terms and conditions set forth herein and assuming satisfaction of the conditions to Closing set forth in Article XI, if Parent is unable to obtain, on behalf of the Company, such financing from a bank or banks or other institutional lenders, Parent or its affiliates shall provide such financing to the Company as is necessary to consummate the Merger (a "Bridge Loan") on terms acceptable to Richard Nespola and Micky Woo. Following the Closing, the Company and each Stockholder shall cooperate with, and provide all necessary assistance to, Parent in connection with refinancing any Bridge Loan made by Parent or its affiliates to the Company (which shall bear interest at a rate of interest equal to the lesser of the maximum lawful rate or 12% per annum and contain such other terms reasonably acceptable to Parent, the Company, Richard Nespola and Micky Woo) following the Closing. ARTICLE IX. COVENANTS OF THE COMPANY, THE STOCKHOLDERS AND PARENT 9.1. Public Disclosures. Parent, the Company and the Stockholders will consult with each other before issuing any press release or otherwise making any public statement with respect to the transactions contemplated by this Agreement, and shall not issue any such press release or make any such public statement prior to such consultation and without the approval of the other parties hereto. 9.2. Notification of Certain Matters. The Company and the Stockholders shall give prompt notice to Parent, and Parent and Merger Sub shall give prompt notice to the Company and the Stockholders, of (a) the occurrence, or failure to occur, of any event which occurrence or failure would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect at any time from the date hereof to the Effective Time, and (b) any material failure of the Company, any Stockholders, Parent or Merger Sub, as the case may be, or of any Affiliate thereof, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that no such notification shall affect the representations or warranties of the parties or the conditions to the obligations to the parties hereunder. 9.3. Other Actions. None of the Company, the Stockholders, Parent or Merger Sub shall knowingly or intentionally take any action, or omit to take any action, if such action or omission would, or reasonably might be expected to, result in any of its representations and warranties set forth herein being or becoming untrue in any material respect, or in any of the conditions set forth in this Agreement not being satisfied, or (unless such action or omission is required by applicable law) which would materially and negatively affect the ability of the Company, the Stockholders, Parent or Merger Sub to obtain any consents or approvals required 33 38 for the consummation of the Merger or which would otherwise materially impair the ability of the Company, the Stockholders, Parent or Merger Sub to consummate the Merger in accordance with the terms of this Agreement or materially delay such consummation, in each case without consent of the other parties hereto. 9.4. Regulatory and Other Authorizations; Consents. Each party hereto shall use its commercially reasonable efforts to (a) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable under applicable Law or otherwise to promptly consummate and make effective the transactions contemplated by this Agreement, and (b) obtain all authorizations, consents, orders and approvals of, and to give all notices to and make all filings with, all Governmental Authorities and other third parties that may be or become necessary for its execution and delivery of, and the performance of its obligations pursuant to, this Agreement including, without limitation, those consents set forth in Section 4.10(b) of the Company Disclosure Schedule or otherwise contemplated by this Agreement. Each party will cooperate fully with the other party in promptly seeking to obtain all such authorizations, consents, orders and approvals, giving such notices, and making such filings. In connection with obtaining such consents from third parties, no party shall be required to make payments, commence litigation or agree to modifications of the terms thereof (other than payments and modifications which individually, and in the aggregate, are immaterial), and no material modification shall be made to any contract, agreement or other commitment of the Company or any Subsidiary without the prior written consent of Parent. The parties hereto agree not to take any action that will have the effect of unreasonably delaying, impairing or impeding the receipt of any required authorizations, consents, orders or approvals. Prior to making any application or filing with any Governmental Authority or other person or entity in connection with this Agreement, the Company, on the one hand, and Parent or Merger Sub, on the other hand, shall provide the other with drafts thereof and afford the other a reasonable opportunity to comment on such drafts. Without limiting the generality of the preceding sentences, each of Parent, Merger Sub, the Stockholders and the Company agrees to cooperate and use all commercially reasonable efforts to vigorously contest and resist any action, suit, proceeding or claim, and to have vacated, lifted, reversed or overturned any injunction, order, judgment or decree (whether temporary, preliminary or permanent), that delays, prevents or otherwise restricts the consummation of the Merger or any other transaction contemplated by this Agreement, and to take any and all actions as may be required by Governmental Authorities as a condition to the granting of any such necessary approvals or as may be required to avoid, vacate, lift, reverse or overturn any injunction, order, judgment, decree or regulatory action (provided, however, that in no event shall any party hereto take, or be required to take, any action that would have a Material Adverse Effect on Parent, Merger Sub, the Company, any Subsidiary or any Stockholder). Notwithstanding the foregoing, in no event shall Parent or the Company be required at any time from the date hereof through and following the Effective Time to dispose of the assets, or divest the businesses, of Parent, the Company or any Subsidiary or any of their respective Affiliates. 9.5. Option Pool. Prior to the Closing, the Company will take such action as is required to adopt an option plan (the "Option Plan") to be effective at the Effective Time, such that options to purchase Common Stock of the Company representing the right to purchase an aggregate of ten percent (10%) of the capital stock of the Company outstanding as of the Closing 34 39 shall be available for future grants of options under such option plan to current or future employees or independent contractors of the Company. Options issued under the Option Plan shall initially have an exercise price equal to $0.74 per share of Common Stock issued upon exercise, shall dilute the Stockholders' and Parent's ownership of the Company pro rata and shall be subject to option agreements which shall contain, among other things, requirements relating to vesting, continued employment or services, rights of repurchase by the Company upon termination of employment, and such other provisions, in each case as determined by the Board of Directors of the Company. Parent shall consent to the terms of such Option Plan prior to its adoption by the Company. 9.6. Tax Returns; Responsibility for Certain Tax Matters. The following provisions shall govern the allocation of responsibility as between Parent, the Company, and the Stockholders for certain Tax matters following the Closing Date: (a) Tax Periods Ending on or Before the Closing Date. The Company shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for the Company and its Subsidiaries for all Tax periods ending on or prior to the Closing Date which are filed after the Closing Date. The Company shall permit the Stockholders to review and comment on each such Tax Return described in the preceding sentence prior to filing. The Stockholders shall reimburse Parent for Taxes of the Company and its Subsidiaries with respect to such periods within fifteen (15) days after payment by Parent or the Company and its Subsidiaries of such Taxes. (b) Tax Periods Beginning Before and Ending After the Closing Date. The Company shall prepare or cause to be prepared and file or cause to be filed any Tax Returns of the Company and its Subsidiaries for Tax periods which begin before the Closing Date and end after the Closing Date. The Stockholders shall pay to Parent within fifteen (15) days after the date on which Taxes are paid with respect to such periods an amount equal to the portion of such Taxes which relates to the portion of such taxable period ending on the Closing Date. For purposes of this subsection, in the case of any Taxes that are imposed on a periodic basis and are payable for a taxable period that includes (but does not end on) the Closing Date, the portion of such Tax which relates to the portion of such taxable period ending on the Closing Date shall (i) in the case of any Taxes other than Taxes based upon or related to income, wages or other receipts, be deemed to be the amount of such Tax for the entire taxable period multiplied by a fraction the numerator of which is the number of days in the taxable period ending on the Closing Date and the denominator of which is the number of days in the entire taxable period, and (ii) in the case of any Taxes based upon or related to income, wages or other receipts, be deemed equal to the amount which would be payable if the relevant taxable period ended on the Closing Date. Any credits relating to a taxable period that begins before and ends after the Closing Date shall be taken into account as though the relevant taxable period ended on the Closing Date. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with prior practice of the Company and its Subsidiaries. (c) Refunds. Parent agrees to assign and promptly remit (and to cause the Company and each Subsidiary, as applicable, to assign and promptly remit) all refunds 35 40 (including interest thereon) net of any Tax effect to Parent, Company, or any Subsidiary, received by Parent, the Company or any Subsidiary of any Taxes for which the Stockholders have indemnified Parent or the Company under Section 13.1; provided, however, that Parent shall be entitled to the portion of any refund resulting from a carryback of a net operating loss, net capital loss, Tax credit or similar item sustained or arising in any period (or portion thereof) ending after the Closing Date. (d) Cooperation on Tax Matters. (i) Parent, the Company and its Subsidiaries and the Stockholders shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns pursuant to this Section and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Company and its Subsidiaries and the Stockholders agree (A) to retain all books and records with respect to Tax matters pertinent to the Company and its Subsidiaries relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Parent or the Stockholders, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (B) to give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, the Company and its Subsidiaries or the Stockholders, as the case may be, shall allow the other party to take possession of such books and records. (ii) Parent and the Stockholders further agree, upon request, to use their best efforts to obtain any certificate or other document from any governmental authority or any other person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). (e) Certain Taxes. All transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement (including any New York State Gains Tax, New York City Transfer Tax and any similar Tax imposed in other states or subdivisions), shall be paid by the Stockholders when due, and the Stockholders will, at their own expense, file all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and other Taxes and fees, and, if required by applicable law, Parent will, and will cause its affiliates to, join in the execution of any such Tax Returns and other documentation. 9.7. Principals and Practice Leaders. Promptly following the date hereof, the Company and the Stockholders shall, in consultation with Parent, use good faith efforts to cause the Principals and Practice Leaders to execute Letters of Intent on or before the Effective Time. 36 41 Promptly following the execution of such Letters of Intent, the Company shall, in consultation with Parent, use good faith efforts to cause such Principals and Practice Leaders to execute legally binding definitive agreements containing the terms of such Letters of Intent. 9.8. Distribution to Stockholders. Not later than sixty (60) days following the Effective Time the Company shall distribute to the Stockholders an aggregate amount equal to 50% of the taxable net income of the Company from January 1, 1997 through the Effective Time, net of any dividends and distributions of the Company made during 1997 or 1998 with respect to such net taxable income. Such amount shall be in addition to the Merger Consideration and shall be based upon the calculation of the Company's taxable net income using the Company's historical accounting methods from January 1, 1997 through the Effective Time. 9.9. Company Disclosure Schedule. The Company Disclosure Schedule is not attached to this Agreement as of the date hereof. The failure to attach the Company Disclosure Schedule as of the date hereof does not affect the binding obligations of the parties to this Agreement. It is the obligation of the Company and the Stockholders to deliver the Company Disclosure Schedule to Parent to be attached to this Agreement within five (5) business days of the date hereof. The representations and warranties set forth in Article IV shall be effective as of the date that the final draft of the Company Disclosure Schedule is delivered to Parent and Merger Sub pursuant to this Section 9.9, as certified in a writing executed by Parent, the Company and each Stockholder. In the event that the Company or any Stockholder fails to deliver its respective sections of the Company Disclosure Schedule within five (5) business days, the representations and warranties set forth in Article IV shall be deemed complete and accurate and not subject to any conditions or exceptions not stated in Article IV. ARTICLE X. TERMINATION, AMENDMENT AND WAIVER 10.1. Termination. This Agreement may be terminated at any time prior to the Effective Time: (a) By mutual written consent of Parent and the Company. (b) By Parent or the Company if the Closing Date shall not have occurred by January 31, 1998, unless the failure of the Effective Time to occur by such date shall be due to (i) the failure of a Stockholder to approve the Merger, this Agreement and the transactions contemplated hereby in accordance with the KGCC and the DGCL, in which case only the Parent may elect to terminate this Agreement, (ii) the failure of Parent to approve the Merger, this Agreement and the transactions contemplated hereby in accordance with the DGCL and the KGCC, in which case only the Company may elect to terminate this Agreement or (iii) the failure of the party seeking to terminate this Agreement to perform or observe the covenants and agreements of such party set forth herein. (c) By Parent or the Company if there shall have been any material breach of a material obligation of the other and, if such breach is curable, such default shall have not been 37 42 remedied within thirty (30) days after receipt by the defaulting party of notice in writing from the other party specifying such breach and requesting that it be remedied; provided, that such thirty-day period shall be extended for so long as the other party shall be making diligent attempts to cure such default. (d) By Parent or the Company, if any court of competent jurisdiction in the United States or other United States governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting any of the transactions contemplated hereby and such order, decree, ruling or any other action shall have become final and non-appealable. 10.2. Effect of Termination. In the event of termination of this Agreement as provided in Section 10.1, this Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of any party, other than the provisions of Sections 7.5 and 10.2, which shall survive such termination, and except to the extent that such termination results from the willful and material breach by a party of any of its representations, warranties, covenants or other agreements set forth in this Agreement. ARTICLE XI. CONDITIONS TO CLOSING 11.1. Mutual Conditions. The respective obligations of each party to effect the Merger shall be subject to the satisfaction, at or prior to the Closing Date, of the following conditions (any of which may be waived in writing by Parent and the Company): (a) None of Parent, Merger Sub, the Stockholders, the Company nor any of their respective Affiliates shall be subject to any order, decree or injunction by a Governmental Authority which prevents or materially delays the consummation of the Merger. (b) No statute, rule, regulation, order, decree, judgment, injunction, stipulation or determination shall have been enacted by any Governmental Authority that makes the consummation of the Merger and any other transaction contemplated hereby illegal. 11.2. Conditions to Obligations of Parent and Merger Sub. The obligations of Parent and Merger Sub to consummate the Merger and the other transactions contemplated hereby shall be subject to the satisfaction, at or prior to the Closing Date, of the following conditions (any of which may be waived in writing by Parent): (a) Each of the agreements of the Company and the Stockholders to be performed at or prior to the Closing Date pursuant to the terms hereof shall have been duly performed in all material respects, and the Company and each of the Stockholders shall have performed, in all material respects, all of the acts required to be performed by them at or prior to the Closing Date by the terms hereof. 38 43 (b) The representations and warranties of the Company and the Stockholders set forth in Article IV shall be true and correct as of the date of this Agreement and as of the Closing Date. The representations and warranties of the Company and the Stockholders set forth in this Agreement that are qualified as to materiality shall be true and correct, and those that are not so qualified shall be true and correct in all material respects, as of the date of this Agreement and as of the Closing as though made at and as of such time, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties that are qualified as to materiality shall be true and correct, and those that are not so qualified shall be true and correct in all material respects, as of such earlier date). (c) All consents and approvals of Governmental Authorities necessary for consummation of the transactions contemplated hereby and all consents and approvals set forth on Section 4.10(b) of the Company Disclosure Schedule shall have been obtained. (d) None of Parent, Merger Sub nor any of their respective Affiliates shall be subject to any (i) Action brought by any third party challenging the transactions contemplated hereby or (ii) order, decree or injunction by a Governmental Authority which would impose any material limitation on the ability of Parent to effectively exercise full rights of ownership of, or control over, the capital stock of the Company or any material portion of the assets or business of the Company and the Subsidiaries, taken as a whole. (e) The Stockholders Agreement, the Registration Rights Agreement, the Noncompete Agreement, each Employment Agreement and the Escrow Agreement shall be in full force and effect in accordance with their terms and the parties to such agreements shall have performed and complied with all covenants and agreements required to be performed or complied with therein by such parties. (f) From the date of this Agreement until the Effective Time, there shall not have occurred any Material Adverse Change in the Company or any Subsidiary. (g) From the Date of this Agreement until the Effective Time, there shall not have occurred or been proposed any material change in any Law, or any new Law proposed, that would have, or would be reasonably like to have, a Material Adverse Effect n the Company or any Subsidiary. (h) Each of the agreements listed in Exhibit 11.2(h) shall have been terminated without cost or liability to Parent or the Company or any Subsidiary, and shall be of no further force or legal effect. (i) To the Company's knowledge, none of the relationships between the Company and its customers shall have, in any manner, been negatively impacted or altered for any reason that would be reasonably likely to have a Material Adverse Effect on the Company. (j) The Stock Split shall have been properly effected pursuant to the Articles of Incorporation and Bylaws of the Company and the KGCC and shall be in full force and effect. 39 44 (k) Each of the Letters of Intent to be executed by the Principals shall have been entered into by and between the Company and the applicable Principal signatory thereto. (l) Parent shall have been furnished with a certificate, executed by the Chief Executive Officer and the Secretary of the Company, dated the Closing Date, certifying in such detail as Parent may reasonably request as to the fulfillment of the conditions set forth in Sections 11.2(a), (b), (f), (g) and (i). (m) The deliveries to be made by the Company and the Stockholders under Section 2.2(a) shall have been received by Parent. (n) Parent and Parent Representatives shall have completed their due diligence review conducted in connection with the transactions contemplated hereby, and following the date of this Agreement, none of Parent nor any Parent Representative shall have discovered a fact or condition which Parent shall reasonably determine may cause a Material Adverse Effect upon the Company or the transactions contemplated hereby. Parent shall notify the Company to the extent it has knowledge of any material inaccuracy or incompleteness of the representations and warranties of the Company and the Stockholders hereunder prior to the Closing; provided, however, that none of the due diligence review conducted by Parent and/or Parent's Representatives, any such notification by Parent, nor the failure by Parent to provide any such notification shall have any effect whatsoever on the liability of the Company or any Stockholder to Parent under this Agreement or otherwise for the breach of any representations, warranties or covenants of the Company or the Stockholders hereunder. (o) All shares of the Company's Common Stock shall be free and clear of all Encumbrances. 11.3. Conditions to Obligations of the Company and the Stockholders. The obligations of the Company and the Stockholders to consummate the Merger and the other transactions contemplated hereby shall be subject to the satisfaction, at or prior to the Closing Date, of the following conditions (any of which maybe waived in writing by the Company): (a) Each of the agreements of Parent and Merger Sub to be performed at or prior to the Closing Date pursuant to the terms hereof shall have been duly performed, in all material respects, and each of Parent and Merger Sub shall have performed, in all material respects, all of the acts required to be performed by it at or prior to the Closing Date by the terms hereof. (b) The representations and warranties of Parent and Merger Sub set forth in Article V shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date. The Company shall have been furnished with certificates, executed by duly authorized representatives of Parent and Merger Sub, dated the Closing Date, certifying in such detail as the Company may reasonably request as to the fulfillment of the foregoing conditions. (c) The Stockholders Agreement, the Registration Rights Agreement, the Noncompete Agreement, each Employment Agreement and the Escrow Agreement shall be in 40 45 full force and effect in accordance with their terms and the parties to such agreements shall have performed and complied with all covenants and agreements required to be performed or complied with therein by such parties. (d) The deliveries to be made or caused to be made by Parent under Section 2.2(b) and (c) shall have been received by the Company and the Stockholders (as applicable). ARTICLE XII. ESCROW 12.1. Establishment of Escrow. Concurrently with the Closing, Parent, the Company and the Stockholders shall open an escrow with UMB, n.a. (the "Escrow Agent") by (a) all parties hereto depositing fully executed copies of this Agreement and the Escrow Agreement with the Escrow Agent and (b) the Company depositing Merger Consideration in an aggregate cash amount of Seventeen Million Dollars ($17,000,000) in immediately available funds (the "Escrowed Funds") with the Escrow Agent. The Escrowed Funds shall be deposited by the Company into separate escrow accounts established for each Stockholder according to the percentages set forth opposite each Stockholder's name on Exhibit G hereto (individually an "Escrow Account" and collectively the "Escrow Accounts"). The funds in each Stockholder's Escrow Account shall be invested in a mixture of equity, bond and cash instruments, acceptable to Parent and such Stockholder, as provided in the Escrow Agreement. 12.2. Escrow for Indemnification. The Escrowed Funds in each Escrow Account shall be used to indemnify the Indemnitees for Losses (as such terms are defined in Section 13.1(b)) incurred, relating to, or arising out of, the circumstances set forth in Section 13.1(b) (the "Indemnification Claims"). 12.3. Distribution of Escrowed Funds. Subject to satisfaction of all Indemnification Claims, if any, made prior to the date of distribution, the Escrow Agent shall distribute the Escrowed Funds to the Stockholders in the manner described in the Escrow Agreement. 12.4. Controlling Document. To the extent the provisions of the Escrow Agreement conflict with the provisions of this Agreement, the provisions of the Escrow Agreement shall supersede this Agreement and be the controlling document. ARTICLE XIII. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 13.1. Survival; Indemnification. (a) No representations, warranties, agreements, or covenants of the Company or the Stockholders contained herein shall survive beyond the Effective Time except that (i) the representations and warranties of the Company and the Stockholders contained in Sections 4.1, 4.3, 4.10, 4.14, 4.23 and 4.24 hereof, and any other 41 46 covenants or agreements of the Company and the Stockholders that by their express terms are intended to survive the Effective Time, shall survive for three (3) years from the Closing Date ("Three Year Claims"), (ii) the representations and warranties of the Company and the Stockholders contained in Section 4.12 shall survive until the expiration of the relevant statute of limitations applicable thereto ("Tax Claims") and (iii) all other representations and warranties of the Company and the Stockholders set forth in Article IV hereof shall survive for eighteen (18) months from the Closing Date ("General Claims"). At the Effective Time, all representations, warranties, covenants and agreements of the Company and the Stockholders contained in this Agreement shall expire as to the Company and thereafter shall be deemed to have been made exclusively by the Stockholders. (b) After the Effective Time, the Company or, if the Company is then insolvent, Parent and each of its partners, officers, directors, employees, stockholders, agents, representatives and Affiliates (collectively, the "Indemnitees" and individually, an "Indemnitee") (subject to the terms and conditions below) will be entitled to be indemnified and held harmless by each Stockholder severally pro rata based on the percentages set forth in Exhibit G against and in respect of any claims, damages, diminution in value, losses, costs, expenses, liabilities (absolute, accrued, contingent or otherwise) including, without limitation, interest, penalties, reasonable attorneys' fees and expense of investigation, response action or remedial action (collectively, "Losses") incurred or suffered by the Indemnitee, directly or indirectly, caused by, incident to, in connection with, arising out of or related to (i) any untruth, inaccuracy, error in, or breach of, any representation, warranty or covenant of the Company or any Stockholder contained in this Agreement and (ii) any Taxes of the Company or any Subsidiary with respect to any Tax period or portion thereof ending on or prior to the Closing Date (or for any Tax period beginning before and ending after the Closing Date to the extent allocable (determined in a manner consistent with Section 9.7 hereof) to the portion of such period beginning before and ending on the Closing Date). All amounts paid by the Stockholders pursuant to their indemnification obligations hereunder shall be paid to the Company, unless the Company is insolvent as of the time an indemnification claim is made, in which case all such amounts shall be paid to the Indemnitee seeking indemnification pursuant to this Article XIII. For purposes of this Article XIII, the Company shall only be deemed "insolvent" if the Company is unable to meet its obligations as they become due after giving effect to any such indemnification payment. Any Loss shall be limited to those amounts for which the Indemnitee does not receive coverage under applicable insurance policies, if any, and shall be net of any Tax benefit actually received by the Indemnitee as a result of such loss. This indemnity shall not take into account any Taxes paid by the Indemnitee in connection with payments, if any, by the Stockholders to the Indemnitee under this Section 13.1. All indemnification requests of Indemnitees hereunder shall be made by the Indemnitee's Agent to each Stockholder. (c) If the Indemnitee shall have any claim of indemnification pursuant to Subsection 13.1(b), it shall promptly request that the Indemnitee's Agent (as defined in the Escrow Agreement) give written notice thereof to the Stockholders including a brief description of the facts upon which such claim is based and, if then known, the amount thereof. Notwithstanding the foregoing, the failure of the Indemnitee to give any written notice contemplated by this subsection or the failure to give such notice promptly shall not relieve the 42 47 party obligated to provide indemnification to the Indemnitee of its obligations hereunder except to the extent it shall have been prejudiced by such failure. (d) If a Stockholder shall notify the Indemnitee's Agent in writing (within forty-five (45) days of delivery by the Indemnitee's Agent of a written notice of claim for indemnification) of his objection to a claim of indemnification (or the amount thereof), the Indemnitee's Agent and the Stockholder shall negotiate in a bona fide attempt to resolve the matter. If any Stockholder shall have not notified the Indemnitee or the Indemnitee's Agent in writing of any objection within such forty-five (45) day period, then the Stockholders shall be deemed to have agreed with such indemnification claim. If no such agreement has been reached, either the Indemnitee or the Stockholder may, not earlier than forty-five (45) days after the date of the initial claim notice, submit the dispute to confidential, binding arbitration in San Francisco, California before a panel of three arbitrators, one to be selected by the Indemnitee's Agent and one by the Stockholder, and the third to be selected by the other two arbitrators, pursuant to the procedures and rules for commercial arbitration of the American Arbitration Association. The decision of the arbitrators shall be the final and binding determination of the dispute and shall be fully enforceable as an arbitration award in any court having jurisdiction and venue over such parties. The party which does not prevail in such arbitration shall pay the costs and expenses of the other incurred in such arbitration. 13.2. Limitations on Indemnity. (a) Skip on Claims. The Indemnitee agrees not to seek recourse against, and shall not recover from Shareholders under any Losses arising under a Three Year Claim, a Tax Claim or a General Claim until the aggregate amount of all such Losses with respect to such claim exceed $200,000 (the "Threshold Amount"), whereupon, provided the other requirements of this Article XIII have been complied with, the entire amount of such Losses shall become due and payable. Each time the entire amount of such Losses is paid in full, the Threshold Amount shall again apply. (b) (i) The maximum aggregate liability of each Stockholder to indemnify the Indemnitee under this Article XIII for Three Year Claims and for General Claims shall not exceed the amount in the Escrow Account of such Stockholder as of the time that the Indemnitee delivers written notice of a claim of indemnification to the Stockholder pursuant to Section 13.1(c) and shall be satisfied solely from the amount remaining in such Escrowed Accounts. In no event shall any Stockholder be personally liable for any Losses for Three Year Claims or for General Claims except from the amounts in their respective Escrow Account. (ii) All Losses relating to or arising from the Tax Claims shall be first satisfied from any remaining balance of the Escrowed Amounts which have not been paid to satisfy Three Year Claims and General Claims. Thereafter, Parent may seek recourse for the Tax Claims against each Stockholder, severally pro rata according to the percentages set forth opposite each Stockholder's name on Exhibit G hereto, and not jointly. The maximum aggregate liability of the Stockholders to indemnify the Indemnitee under this Article XIII for Tax Claims, together with amounts paid by the Stockholder for Three Year Claims and for General Claims, shall not exceed the amount of $31,800,000. 43 48 (c) DeMinimis. No claim for indemnification shall be made hereunder with respect to the any individual claim unless the Losses arising under such claim exceed $5,000. 13.3. Procedure; Third Party Claims.(a) In the event that, at any time or from time to time after the Effective Time, a Person entitled to indemnification under this Article XIII (an "Indemnified Party") shall sustain a Loss against which such Indemnified Party is entitled to indemnification under this Agreement, such Indemnified Party shall notify the party hereto obligated to provide such indemnification (the "Indemnitor") of any such Loss so sustained. Indemnitor shall pay to such Indemnified Party the amount of such Loss so sustained, subject to the right to contest any claim which has not yet resulted in a Loss, as provided herein and under the Escrow Agreement. The Indemnified Party shall promptly notify the Indemnitor of the existence of any claim, demand, or other matter involving liabilities to third parties to which the Indemnitor's indemnification obligations would apply and shall give the Indemnitor a reasonable opportunity to defend the same or prosecute such action to conclusion or settlement satisfactory to the Indemnified Party at Indemnitor's own expense and with counsel of Indemnitor's selection (who shall be approved by Indemnified Party, which approval shall not be unreasonably withheld); provided that the Indemnified Party shall at all times also have the right to fully participate in the defense at its own expense. If the Indemnitor shall, within a reasonable time after said notice, fail to defend, the Indemnified Party shall have the right, but not the obligation, to undertake the defense of, and to compromise or settle (exercising reasonable business judgment) the claim or other matter on behalf, for the account, and at the risk and expense, of Indemnitor. Except as provided in the preceding sentence, the Indemnified Party shall not compromise or settle the claim or other matter without the prior written consent of the Indemnitor, which consent shall not be unreasonably withheld. If the claim is one that cannot by its nature be defended solely by the Indemnitor, the Indemnified Party shall make available all information and assistance that the Indemnitor may reasonably request; provided that any associated expenses shall be paid by the Indemnitor. (b) If any Indemnitor contests or challenges any claim or action asserted against an Indemnified Party referred to in this Article XIII, it shall do so at its own cost and expense, holding such Indemnified Party harmless from all costs, fees, expenses, debts, liabilities and charges in connection with such contest; shall diligently defend against any such claim; and shall hold such Indemnified Party's business and assets free and harmless from any attachment, execution, judgment, lien or other legal process. 13.4. Survival of Representations and Warranties of Parent and Merger Sub; Indemnification. The representations, warranties, agreements and covenants of Parent and Merger Sub contained herein shall survive for eighteen (18) months from the Closing Date. Parent agrees to indemnify and hold the Stockholders harmless from and against any and all Losses which may accrue or be sustained by the Stockholders arising out of or as a result of any of the warranties, representations or covenants of Parent contained in this Agreement being incorrect, untrue or breached. Any Loss shall be limited to those amounts for which the Stockholders do not receive coverage under applicable insurance policies, if any, and shall be net of any Tax benefit actually received by the Stockholders as a result of such Loss. This indemnity shall not take into account any Taxes paid by the Stockholders in connection with payments, if 44 49 any, by Parent to the Stockholders under this Section 13.4. All indemnification requests of the Stockholders hereunder shall be made by each Stockholder to the Parent. ARTICLE XIV. MISCELLANEOUS 14.1. Notices. Any communications required or desired to be given hereunder shall be deemed to have been properly given if sent by hand delivery or by facsimile and overnight courier to the parties hereto at the following addresses, or at such other address as either party may advise the other in writing from time to time: If to the Company: Management Network Group, Inc. 11613 Tomahawk Creek Parkway Suite D Leawood, Kansas 66211 Attention: President Facsimile: (913) 345-0071 with a copy to: Shughart, Thomson & Kilroy 12 Wyandotte Plaza 120 West 12th Street Kansas City, Missouri 64105-1929 Attention: Jacob W. Bayer, Jr., Esq. Facsimile: (816) 374-0509 If to Parent or Merger Sub: c/o Behrman Capital II L.P. 126 East 56th Street New York, New York 10022 Attention: Grant G. Behrman Facsimile: (212) 980-7024 with a copy to: Behrman Capital Four Embarcadero Center Suite 3640 San Francisco, California 94111 Attention: William M. Matthes Facsimile: (415) 434-7310 45 50 and: Latham & Watkins 75 Willow Road Menlo Park, California 94025 Attention: Peter F. Kerman, Esq. Facsimile: (650) 463-2600 All such communications shall be deemed to have been delivered on the date of hand delivery or on the next business day following the deposit of such communications with the overnight courier. 14.2. Further Assurances. Each party hereby agrees to perform any further acts and to execute and deliver any documents which may be reasonably necessary to carry out the provisions of this Agreement. 14.3. Governing Law. The laws of the state of Kansas shall govern the interpretation, validity and performance of the terms of this Agreement, regardless of the law that might be applied under principles of conflicts of law. Any suit, action or proceeding by a party hereto with respect to this Agreement, or any judgment entered by any court in respect of any thereof, may be brought in any state or federal court of competent jurisdiction in the State of Kansas, and each party hereto hereby submits to the non-exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. Nothing herein shall in any way be deemed to limit the ability of a party hereto to serve any such writs, process or summonses in any other manner permitted by applicable law or to obtain jurisdiction over any party hereto, in such other jurisdictions and in such manner, as may be permitted by applicable law. Each party hereto hereby irrevocably waives any objections which it may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any state or federal court of competent jurisdiction in the State of Kansas, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. No suit, action or proceeding against a party hereto with respect to this Agreement may be brought in any court, domestic or foreign, or before any similar domestic or foreign authority other than in a court of competent jurisdiction in the State of Kansas, and each party hereto hereby irrevocably waives any right which it may otherwise have had to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. 14.4. "Material Adverse Effect" or "Material Adverse Change". "Material Adverse Change" or "Material Adverse Effect" means, when used in connection with a party, any change, effect, event or occurrence that has, or is reasonably likely to have, individually or in the aggregate, a material adverse impact on the business, prospects, operations, results of operations, assets or condition (financial or otherwise) of such party and its subsidiaries taken as a whole. 14.5. Taxes. For purposes of this Agreement, the term "Tax" or "Taxes" shall mean any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under 46 51 Section 59A of the Code), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. For purposes of this Agreement, the term "Tax Return" shall mean any return, report, information return or other document (including any related or supporting information) with respect to Taxes. 14.6. Captions. The captions or headings in this Agreement are made for convenience and general reference only and shall not be construed to describe, define or limit the scope or intent of the provisions of this Agreement. 14.7. Integration of Schedule and Exhibits. The Company Disclosure Schedule and all other schedules and exhibits attached to this Agreement is an integral part of this Agreement as if fully set forth herein. 14.8. Entire Agreement; No Third-Party Beneficiaries. This instrument, including the Disclosure Schedules and all exhibits and schedules attached hereto, contains the entire agreement of the parties and supersedes any and all prior or contemporaneous agreements between the parties, written or oral, with respect to the transactions contemplated hereby. This Agreement is for the sole benefit of the parties hereto and their permitted assigns, and nothing herein, express or implied, is intended to or shall confer upon any other person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. 14.9. Counterparts. This Agreement may be executed in several counterparts, each of which, when so executed, shall be deemed to be an original, and such counterparts shall, together, constitute and be one and the same instrument. 14.10. Binding Effect; No Assignment. This Agreement shall be binding on, and shall inure to the benefit of, the parties hereto, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No party may assign any right or obligation hereunder without the prior written consent of the other parties hereto. 14.11. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule or law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible. 47 52 14.12. Waivers and Amendments. This Agreement may be amended or modified, and the terms and conditions hereof may be waived, only by a written instrument signed by the parties hereto or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege hereunder, nor any single or partial exercise of any other right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies which any party may otherwise have at Law or in equity. 14.13. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement required to be performed prior to the Closing was not performed in accordance with the terms hereof and that, prior to the Closing, the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at Law or in equity. 48 53 IN WITNESS WHEREOF, each of Parent, the Company and each of the Stockholders have caused this Agreement to be executed by their respective duly authorized officers, all as of the day and year first above written. PARENT: THE COMPANY: BEHRMAN CAPITAL II L.P., MANAGEMENT NETWORK GROUP, INC., a Delaware limited partnership a Kansas corporation By: Behrman Brothers, LLC, By: its general partner ------------------------------------- Richard P. Nespola, President and Chief Executive Officer By: ------------------------------ Grant G. Behrman, Managing Member STRATEGIC ENTREPRENEUR THE STOCKHOLDERS: FUND II, L.P., a Delaware limited partnership ---------------------------------------- Richard P. Nespola By: ------------------------------ ---------------------------------------- Grant G. Behrman, Micky K. Woo General Partner ---------------------------------------- MERGER SUB: Alan H. Staples BEHRMAN CAPITAL TMNG, INC., ---------------------------------------- a Delaware corporation Ralph R. Peck By: ------------------------------ Grant G. Behrman, President EX-3.1 3 CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF THE MANAGEMENT NETWORK GROUP, INC. DELAWARE CORPORATION ARTICLE I The name of this corporation is The Management Network Group, Inc. ARTICLE II The address of the corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Zip Code 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV This corporation is authorized to issue two classes of stock to be designated Common Stock and Preferred Stock. The total number of shares of Common Stock which this corporation has authority to issue is 100,000,000 with par value of $0.001 per share. The total number of shares of Preferred Stock which this corporation has authority to issue is 10,000,000 with a par value of $0.001 per share. The shares of Preferred Stock shall be undesignated Preferred Stock and may be issued from time to time in one or more series pursuant to a resolution or resolutions providing for such issue duly adopted by the board of directors (authority to do so being hereby expressly vested in the board). The board of directors is further authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares in any such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. The authority of the board of directors with respect to each such class or series shall include, without limitation of the foregoing, the right to determine and fix: -1- 2 i. the distinctive designation of such class or series and the number of shares to constitute such class or series; ii. the rate at which dividends on the shares of such class or series shall be declared and paid, or set aside for payment, whether dividends at the rate so determined shall be cumulative or accruing, and whether the shares of such class or series shall be entitled to any participating or other dividends in addition to dividends at the rate so determined, and if so, on what terms; iii. the right or obligation, if any, of the Corporation to redeem shares of the particular class or series of Preferred Stock and, if redeemable, the price, terms and manner of such redemption; iv. the special and relative rights and preferences, if any, and the amount or amounts per share, which the shares of such class or series of Preferred Stock shall be entitled to receive upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; v. the terms and conditions, if any, upon which shares of such class or series shall be convertible into, or exchangeable for, shares of capital stock of any other class or series, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; vi. the obligation, if any, of the Corporation to retire, redeem or purchase shares of such class or series pursuant to a sinking fund or fund of a similar nature or otherwise, and the terms and conditions of such obligation; vii. voting rights, if any, on the issuance of additional shares of such class or series or any shares of any other class or series of Preferred Stock; viii. limitations, if any, on the issuance of additional shares of such class or series or any shares of any other class or series of Preferred Stock; and ix. such other preferences, powers, qualifications, special or relative rights and privileges thereof as the board of directors of the Corporation, acting in accordance with this Certificate of Incorporation, may deem advisable and are not inconsistent with law and the provisions of this Certificate of Incorporation. ARTICLE V The name and mailing address of the incorporator are as follows: RoseAnn M. Rotandaro 650 Page Mill Road Palo Alto, CA 94304 The corporation is to have perpetual existence. -2- 3 ARTICLE VI In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the corporation. ARTICLE VII The number of directors which constitutes the whole Board of Directors of the corporation shall be designated in the Bylaws of the corporation. The directors shall be divided into three classes with the term of office of the first class (Class I) to expire at the annual meeting of stockholders held in 2000; the term of office of the second class (Class II) to expire at the annual meeting of stockholders held in 2001; the term of office of the third class (Class III) to expire at the annual meeting of stockholders held in 2002; and thereafter for each such term to expire at each third succeeding annual meeting of stockholders after such election. ARTICLE VIII Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the corporation may be kept (subject to any provisions contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the corporation. ARTICLE IX Holders of stock of any class or series of the corporation shall not be entitled to cumulate their votes for the election of directors or any other matter submitted to a vote of the stockholders. ARTICLE X No action shall be taken by the stockholders of the corporation except at an annual or special meeting of the stockholders called in accordance with the Bylaws and no action shall be taken by the stockholders by written consent. The affirmative vote of sixty-six and two thirds percent (662/3%) of the then outstanding voting securities of the corporation, voting together as a single class, shall be required for the amendment, repeal or modification of the provisions of Article IX or X of this Certificate of Incorporation or Sections 2.3, 2.5 and 3.2(b) of the corporation's Bylaws. ARTICLE XI To the fullest extent permitted by the Delaware General Corporation Law, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Article X nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article XI, shall eliminate or reduce the effect of this Article XI in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article XI, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. -3- 4 ARTICLE XII 1. The corporation shall indemnify each of the corporation's directors and officers in each and every situation where, under Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time ("Section 145"), the corporation is permitted or empowered to make such indemnification. The corporation may, in the sole discretion of the Board of Directors of the corporation, indemnify any other person who may be indemnified pursuant to Section 145 to the extent the Board of Directors deems advisable, as permitted by Section 145. The corporation shall promptly make or cause to be made any determination required to be made pursuant to Section 145. 2. No person shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is subsequently amended to further eliminate or limit the liability of a director, then a director of the corporation, in addition to the circumstances in which a director is not personally liable as set forth in the preceding sentence, shall not be liable to the fullest extent permitted by the amended General Corporation Law of the State of Delaware. For purposes of this Article XII, "fiduciary duty as a director" shall include any fiduciary duty arising out of serving at the corporation's request as a director of another corporation, partnership, joint venture or other enterprise, and "personal liability to the corporation or its stockholders" shall include any liability to such other corporation, partnership, joint venture, trust or other enterprise, and any liability to the corporation in its capacity as a security holder, joint venturer, partner, beneficiary, creditor or investor of or in any such other corporation, partnership, joint venture, trust or other enterprise. ARTICLE XIII Advance notice of new business and stockholder nominations for the election of directors shall be given in the manner and to the extent provided in the Bylaws of the corporation. ARTICLE XIV The corporation reserves the right to amend, alter, change or repeal any provisions contained in this Certificate, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. -4- 5 I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this certificate, hereby declaring and certifying, under penalties of perjury, that this is my act and deed and the facts herein stated are true, and accordingly have hereunto set my hand this 27th day of August, 1999. ---------------------------------------- RoseAnn M. Rotandaro Incorporator -5- EX-3.2 4 BYLAWS OF THE REGISTRANT 1 EXHIBIT 3.2 BYLAWS OF THE MANAGEMENT NETWORK GROUP, INC. 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I CORPORATE OFFICES......................................................................1 1.1 REGISTERED OFFICE.................................................................1 1.2 OTHER OFFICES.....................................................................1 ARTICLE II MEETINGS OF STOCKHOLDERS..............................................................1 2.1 PLACE OF MEETINGS.................................................................1 2.2 ANNUAL MEETING....................................................................1 2.3 SPECIAL MEETING...................................................................2 2.4 NOTICE OF STOCKHOLDERS' MEETINGS..................................................2 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS...................2 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE......................................3 2.7 QUORUM............................................................................4 2.8 ADJOURNED MEETING; NOTICE.........................................................4 2.9 CONDUCT OF BUSINESS...............................................................4 2.10 VOTING............................................................................4 2.11 WAIVER OF NOTICE..................................................................5 2.12 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING...........................5 2.13 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.......................5 2.14 PROXIES...........................................................................6 2.15 LIST OF STOCKHOLDERS ENTITLED TO VOTE.............................................6 ARTICLE III DIRECTORS............................................................................7 3.1 POWERS............................................................................7 3.2 NUMBER OF DIRECTORS...............................................................7 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS...........................7 3.4 RESIGNATION AND VACANCIES.........................................................7 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE..........................................8 3.6 REGULAR MEETINGS..................................................................8 3.7 SPECIAL MEETINGS; NOTICE..........................................................9 3.8 QUORUM............................................................................9 3.9 WAIVER OF NOTICE..................................................................9 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING................................10 3.11 FEES AND COMPENSATION OF DIRECTORS...............................................10 3.12 APPROVAL OF LOANS TO OFFICERS....................................................10 3.13 REMOVAL OF DIRECTORS.............................................................10 ARTICLE IV COMMITTEES...........................................................................11 4.1 COMMITTEES OF DIRECTORS..........................................................11 4.2 COMMITTEE MINUTES................................................................11
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PAGE ---- 4.3 MEETINGS AND ACTION OF COMMITTEES................................................11 ARTICLE V OFFICERS..............................................................................12 5.1 OFFICERS.........................................................................12 5.2 APPOINTMENT OF OFFICERS..........................................................12 5.3 SUBORDINATE OFFICERS.............................................................12 5.4 REMOVAL AND RESIGNATION OF OFFICERS; FILLING VACANCIES...........................12 5.5 CHAIRMAN OF THE BOARD............................................................13 5.6 CHIEF EXECUTIVE OFFICER..........................................................13 5.7 PRESIDENT........................................................................13 5.8 VICE PRESIDENTS..................................................................13 5.9 SECRETARY........................................................................13 5.10 CHIEF FINANCIAL OFFICER..........................................................14 5.11 ASSISTANT SECRETARY..............................................................14 5.12 ASSISTANT TREASURER..............................................................15 5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS...................................15 5.14 AUTHORITY AND DUTIES OF OFFICERS.................................................15 ARTICLE VI INDEMNITY............................................................................15 6.1 THIRD PARTY ACTIONS..............................................................15 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION....................................16 6.3 SUCCESSFUL DEFENSE...............................................................16 6.4 DETERMINATION OF CONDUCT.........................................................16 6.5 PAYMENT OF EXPENSES IN ADVANCE...................................................17 6.6 INDEMNITY NOT EXCLUSIVE..........................................................17 6.7 INSURANCE INDEMNIFICATION........................................................17 6.8 THE CORPORATION..................................................................17 6.9 EMPLOYEE BENEFIT PLANS...........................................................18 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES......................18 ARTICLE VII RECORDS AND REPORTS.................................................................18 7.1 MAINTENANCE AND INSPECTION OF RECORDS............................................18 7.2 INSPECTION BY DIRECTORS..........................................................19 7.3 ANNUAL STATEMENT TO STOCKHOLDERS.................................................19 ARTICLE VIII GENERAL MATTERS....................................................................19 8.1 CHECKS...........................................................................19 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.................................20 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES...........................................20 8.4 SPECIAL DESIGNATION ON CERTIFICATES..............................................20 8.5 LOST CERTIFICATES................................................................21 8.6 CONSTRUCTION; DEFINITIONS........................................................21 8.7 DIVIDENDS........................................................................21 8.8 FISCAL YEAR......................................................................21
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PAGE ---- 8.9 SEAL.............................................................................21 8.10 TRANSFER OF STOCK................................................................22 8.11 STOCK TRANSFER AGREEMENTS........................................................22 8.12 REGISTERED STOCKHOLDERS..........................................................22 ARTICLE IX AMENDMENTS...........................................................................22
-iii- 5 BYLAWS OF THE MANAGEMENT NETWORK GROUP, INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, either within or without the State of Delaware, as may be designated by the board of directors or in the manner provided in these bylaws. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation in the State of Delaware. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of stockholders shall be held on the second Tuesday of May of each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding 6 business day. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president or the secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than ten (10) nor more than sixty (60) days after the receipt of the request. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the board of directors may be held. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, (i) nominations for the election of directors, and (ii) business proposed to be brought before any stockholder meeting may be made by the board of directors or proxy committee appointed by the board of directors or by any stockholder entitled to vote in the election of directors generally if such nomination or business proposed is otherwise proper business before such meeting. However, any such stockholder may nominate one or more persons for election as directors at a meeting or propose business to be brought before a meeting, or both, only if such stockholder has given timely notice in proper written form of their intent to make such nomination or nominations or to propose such business. To be timely, such stockholder's notice must be delivered to or mailed and received at the principal -2- 7 executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the first anniversary date of mailing of the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. To be in proper form, a stockholder's notice to the secretary shall set forth: (a) the name and address of the stockholder who intends to make the nominations or propose the business and, as the case may be, of the person or persons to be nominated or of the business to be proposed; (b) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) if applicable, a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee or each matter of business to be proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the board of directors; and (e) if applicable, the consent of each nominee to serve as director of the corporation if so elected. The chairman of the meeting shall refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.7 QUORUM The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the -3- 8 certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the Chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.8 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.9 CONDUCT OF BUSINESS The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business. 2.10 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.12 of these bylaws, subject to the provisions of Sections 217 and 218 of the Delaware General Corporation Law (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as provided in the last paragraph of this Section 2.10, or as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. At a stockholders' meeting at which directors are to be elected, each stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such stockholder normally is entitled to cast) if the candidates' names have been properly placed in nomination (in accordance with these bylaws) prior to commencement of the voting and the stockholder requesting cumulative voting or any other stockholder voting at the meeting in person or by proxy has given notice prior to commencement of the voting of the stockholder's intention to cumulate votes. If cumulative voting is properly requested, each holder of stock, or of any class or classes or of a series or series thereof, who elects to cumulate votes shall be entitled to as many votes as equals the number of votes which (absent this provision as to cumulative voting) such person would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by such person, and that such person may cast all of such votes -4- 9 for a single director or may distribute them among the number to be voted for, or for any two or more of them, as such person may see fit. 2.11 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the Delaware General Corporation Law or of the certificate of incorporation or these bylaws, a written waiver, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 2.12 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of a corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the Delaware General Corporation Law if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the Delaware General Corporation Law. 2.13 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. -5- 10 If the board of directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the first date on which a signed written consent is delivered to the corporation. (iii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.14 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by a written proxy, signed by such stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if such stockholder's name is placed on the proxy by any reasonable means including, but not limited to, by facsimile signature, manual signature, typewriting, telegraphic transmission or otherwise, by such stockholder or such stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the Delaware General Corporation Law. 2.15 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. -6- 11 ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the Delaware General Corporation Law and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall be seven (7) until changed by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the stockholders. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Upon the firmly underwritten registered public offering of the company's securities (the "IPO"), the directors shall be divided into three classes with the term of office of the first class to expire at the first annual meeting of stockholders held after the IPO; the term of office of the second class to expire at the second annual meeting of stockholders held after the IPO; the term of office of the third class to expire at the third annual meeting of stockholders held after the IPO; and thereafter for each such term to expire at each third succeeding annual meeting of stockholders after such election. ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Elections of directors need not be by written ballot. 3.3 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors shall resign from the board of directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or -7- 12 resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the Delaware General Corporation Law. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the Delaware General Corporation Law as far as applicable. 3.4 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of such board of directors, or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting pursuant to this section shall constitute presence in person at the meeting. -8- 13 3.5 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.6 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two (2) directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.7 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute, the certificate of incorporation, or these bylaws. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.8 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the Delaware General Corporation Law, the certificate of incorporation, or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when such person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special -9- 14 meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 3.9 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.10 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors. 3.11 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.12 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that, so long as stockholders of the corporation are entitled to cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect such director if then cumulatively voted at an election of the entire board of directors or, if there be classes of directors, at an election of the class of directors of which such director is a part. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. -10- 15 ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority (i) approving or adopting or recommending to the stockholders, any action or matter expressly required by the Delaware General Corporation Law to be submitted to stockholders for approval or (ii) adopting, amending, or repealing any bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors -11- 16 may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall be appointed by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS; FILLING VACANCIES Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Any vacancy occurring in any office of the corporation shall be filled by the board of directors. -12- 17 5.5 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to the chairman of the board by the board of directors or as may be prescribed by these bylaws. If there is no president and no one has been appointed chief executive officer, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.6 of these bylaws. 5.6 CHIEF EXECUTIVE OFFICER The board of directors shall select a chief executive officer of the corporation who shall be subject to the control of the board of directors and have general supervision, direction and control of the business and the officers of the corporation. The chief executive officer shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. 5.7 PRESIDENT The president shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. In addition and subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if no one has been appointed chief executive officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have the powers and duties described in Section 5.6. 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by -13- 18 resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. The secretary shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. The chief financial officer shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. The chief financial officer shall be the treasurer of the corporation. 5.11 ASSISTANT SECRETARY The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as may be prescribed by the board of directors or these bylaws. 5.12 ASSISTANT TREASURER The assistant treasurer, or, if there is more than one, the assistant treasurers, in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the chief financial officer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the chief financial officer and shall perform such other duties and have such other powers as may be prescribed by the board of directors or these bylaws. -14- 19 5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 5.14 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. ARTICLE VI INDEMNITY 6.1 THIRD PARTY ACTIONS The corporation shall 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 such person 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, officer, employee or agent of another corporation, partnership, joint venture trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the corporation, which approval shall not be unreasonably withheld) actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, 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 the person reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person's conduct was unlawful. -15- 20 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION The corporation shall 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 such person is or was a director, officer, employee or agent of corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) and amounts paid in settlement (if such settlement is approved in advance by the corporation, which approval shall not be unreasonably withheld) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in manner such person 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 claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine 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 which the Delaware Court of Chancery or such other court shall deem proper. Notwithstanding any other provision of this Article VI, no person shall be indemnified hereunder for any expenses or amounts paid in settlement with respect to any action to recover short-swing profits under Section 16(b) of the Securities Exchange Act of 1934, as amended. 6.3 SUCCESSFUL DEFENSE To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. 6.4 DETERMINATION OF CONDUCT Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that the indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made (1) by the Board of Directors or the Executive Committee by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding or (2) or if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Notwithstanding the foregoing, a director, officer, employee or agent of the Corporation shall be entitled to contest any determination that the director, officer, employee or agent has not met the applicable standard of conduct set forth in Sections 6.1 and 6.2 by petitioning a court of competent jurisdiction. -16- 21 6.5 PAYMENT OF EXPENSES IN ADVANCE Expenses incurred in defending a civil or criminal action, suit or proceeding, by an individual who may be entitled to indemnification pursuant to Section 6.1 or 6.2, shall be paid by the corporation 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 if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this Article VI. 6.6 INDEMNITY NOT EXCLUSIVE The indemnification and advancement of expenses provided by or granted pursuant to the other sections of this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. 6.7 INSURANCE INDEMNIFICATION The corporation shall have the power to purchase and maintain insurance on behalf of 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, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this Article VI. 6.8 THE CORPORATION For purposes of this Article VI, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under and subject to the provisions of this Article VI (including, without limitation the provisions of Section 6.4) with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. 6.9 EMPLOYEE BENEFIT PLANS For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or -17- 22 involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article VI. 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive officer or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent so to act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not -18- 23 so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. -19- 24 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place -20- 25 of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in (i) the Delaware General Corporation Law or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The corporation may adopt a corporate seal, which shall be adopted and which may be altered by the board of directors, and may use the same by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. -21- 26 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the Delaware General Corporation Law. 8.12 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. -22- EX-10.1 5 REGISTRATION RIGHTS AGREEMENT DATED 01/07/98 1 EXHIBIT 10.1 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of February 12, 1998 is entered into by and among The Management Network Group, Inc., a Kansas corporation (the "Company"), and each of the parties listed on Exhibit A hereto (the "Holders"). RECITALS A. The Holders own shares of the Company's common stock, par value $1.00 per share (the "Common Stock"). B. The Company and the Holders desire to provide for the registration under the Securities Act of 1933, as amended, of the Registrable Securities (as defined below), all according to the terms of this Agreement. AGREEMENT 1. Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: (a) "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (b) "Exchange Act" shall mean the Securities Act of 1934, as amended. (c) The terms "Register", "Registered" and "Registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act ("Registration Statement"), and the declaration or ordering of the effectiveness of such Registration Statement. (d) "Registrable Securities" shall mean all Common Stock of the Company. (e) "Registration Expenses" shall mean all expenses incurred in complying with Section 2, Section 3 or Section 4 of this Agreement (excluding Selling Expenses), including, without limitation, all federal and state registration, qualification and filing fees, printing expenses, fees and disbursements of counsel for the Company, Blue Sky fees and expenses, the expense of any special audits incident to or required by any such registration, and all other accounting fees incurred by the Company. (f) "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 2 (g) "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities pursuant to this Agreement and the fees and disbursements of legal counsel to the Holders. 2. Demand Registration. 2.1. Request for Registration. Subject to the terms of this Agreement, in the event that the Company shall receive from the Holders representing an aggregate of at least fifteen percent (15%) of the Registrable Securities, at any time commencing six months following the Company's first underwritten public offering on a firm commitment basis, a written request that the Company effect a Registration with respect to at least a majority of the Registrable Securities held by such Holders, the Company shall (a) promptly give written notice of the proposed Registration to all other Holders, and (b) as soon as practicable, use its best efforts to effect Registration of the Registrable Securities specified in such request, together with any Registrable Securities of any Holder joining in such request as are specified in a written request given within twenty (20) days after written notice from the Company of the proposed Registration. Notwithstanding the foregoing, the Company shall not be obligated to take any action to effect any such Registration pursuant to this Section 2.1 (x) if the estimated market value of the Registrable Securities requested to be Registered pursuant to this Section 2.1 is less than $8,000,000 or (y) after the Company has effected two (2) such Registrations pursuant to this Section 2.1 and such Registrations have been declared effective. For purposes of this Section 2.1, any shares of Common Stock transferred by any Holder to a trust or custodianship exclusively for the benefit of such Holder's spouse, direct descendants (including legally adopted children) or direct ascendants shall be deemed to be held by such Holder who transferred such shares of Common Stock. 2.2. Right of Deferral of Registration. If the Company shall furnish to all such Holders who joined in the request a certificate signed by the Chief Executive Officer of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company for any Registration to be effected as requested under Section 2.1, the Company shall have the right, exercisable one (1) time only with respect to each demand registration request, to defer the filing of a Registration Statement with respect to such offering for a period of not more than one hundred twenty (120) days from delivery of the request of the Holders. 2.3. Registration of Other Securities in Demand Registration. Any Registration Statement filed pursuant to the request of the Holders under this Section 2 may, subject to the provisions of Section 2.4, include securities of the Company other than Registrable Securities. 2.4. Underwriting in Demand Registration. 2.4.1. Notice of Underwriting. If the Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2, and the Company shall include such information in the written notice referred to in Section 2.1. The right of any 2 3 Holder to Registration pursuant to this Section 2 shall be conditioned upon such Holder's agreement to participate in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting. 2.4.2. Priority on Demand Registration. Any Registration Statement filed pursuant to this Section 2 may include securities of the Company other than Registrable Securities. Notwithstanding any other provision of this Section 2, if the underwriter advises the Company that market factors (including, without limitation, the aggregate number of Registrable Securities requested to be Registered, the general condition of the market, and the status of the persons proposing to sell securities pursuant to the Registration) require a limitation of the type of securities to be sold or the number of securities to be underwritten, the Company then shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated in such offering in the following order of priority: in the event of a public offering (other than the initial public offering) of the equity securities of the Company, (a) first, Registrable Securities, on a pro rata basis according to the respective aggregate number of Registrable Securities held by the Holders requesting to Register any of their Registrable Securities at the time such requests are made and (b) second, to the securities of the Company. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. 2.4.3. Selection of Underwriter in Demand Registration. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into a customary underwriting agreement with the representative (the "Underwriter's Representative") of the underwriter or underwriters selected for such underwriting by the Company (which underwriter or underwriters shall be reasonably acceptable to a majority in interest of the Holders proposing to distribute their securities through such underwriting). 2.4.4. Right of Withdrawal in Demand Registration. If any Holder of Registrable Securities, or a holder of other securities entitled to be included in such Registration, disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the other Holders delivered at least ten (10) days prior to the effective date of the Registration Statement. The securities so withdrawn shall also be withdrawn from the Registration Statement. 2.4.5. Blue Sky in Demand Registration. In the event of any Registration pursuant to Section 2, the Company will exercise its reasonable efforts to Register and qualify the securities covered by the Registration Statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably appropriate for the distribution of such securities; provided, however, that (a) the Company shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, and (b) notwithstanding anything in this Agreement to the contrary, in the event any jurisdiction in which the securities shall be qualified imposes a non-waivable requirement that expenses incurred in connection with the qualification of the securities be borne by selling stockholders, such expenses shall be payable pro rata by the selling stockholders. 3 4 3. Piggyback Registration. 3.1. Notice of Piggyback Registration and Inclusion of Registrable Securities. Subject to the terms of this Agreement, each time the Company decides to Register any of its equity securities (other than pursuant to a Form S-4, a Form S-8, or a transaction pursuant to Rule 145 under the Securities Act), on a form that would be suitable for a registration involving solely Registrable Securities (a "Piggyback Registration"), the Company will: (a) promptly give the Holders written notice thereof and (b) include in such Registration and in the underwriting involved therein, all the Registrable Securities specified in a written request delivered to the Company by any Holder within fifteen (15) days after delivery of such written notice from the Company. 3.2. Underwriting in Piggyback Registration. 3.2.1. Notice of Underwriting in Piggyback Registration. If a Piggyback Registration is an underwritten registration, the right of each Holder to Registration pursuant to this Section 3 shall be conditioned upon the inclusion of such Holder's Registrable Securities in such underwriting to the extent provided in this Section 3. If any Holder proposes to distribute its securities through such underwriting, such Holder shall (together with the Company and any other stockholders distributing their securities through such underwriting) enter into an underwriting agreement with the representative of the underwriter or underwriters (the "Underwriter's Representative") selected by the Company for such offering. 3.2.2. Priority on Registration. In the event the Underwriter's Representative advises the Holders in writing that market factors (including, without limitation, the aggregate number of shares of Registrable Securities requested to be Registered, the general condition of the market, and the status of the persons proposing to sell securities pursuant to the Registration) require a limitation of the type of securities to be sold or the number of securities to be underwritten, the Company may reduce the aggregate number of all the Holders' Registrable Securities to be included in the Registration. In such event, the number of Registrable Securities of each selling Holder included in the Registration shall be apportioned pro rata among the selling Holders according to the total amount of Registrable Securities requested to be included by such selling Holders or in such other proportion as shall mutually be agreed upon. In no event shall the amount of securities of the selling Holders included in the registration be reduced below twenty-five percent (25%) of the total amount of securities included in such registration, unless such offering is the Company's first firm commitment underwritten public offering of its equity securities registered under the Securities Act and such registration does not include shares of any other selling stockholders, in which event any or all of the Registrable Securities of the Holders may be excluded. In no event will shares of any other selling stockholder be included in such registration which would reduce the number of shares which may be included by Holders without the written consent of Holders of not less than a majority of the Registrable Securities proposed to be sold in the offering. 3.2.3. Withdrawal in Piggyback Registration. If any Holder disapproves of the terms of any such underwriting, it may elect to withdraw therefrom by written notice to the Company and the underwriter delivered at least ten (10) days prior to the effective 4 5 date of the Registration Statement. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such Registration. 3.3. Blue Sky in Piggyback Registration. In the event of any Registration of Registrable Securities pursuant to Section 3, the Company will exercise its reasonable efforts to Register and qualify the securities covered by the Registration Statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably appropriate for the distribution of such securities; provided, however, that (a) the Company shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, and (b) notwithstanding anything in this Agreement to the contrary, in the event any jurisdiction in which the securities shall be qualified imposes a non-waivable requirement that expenses incurred in connection with the qualification of the securities be borne by selling stockholders, such expenses shall be payable pro rata by selling stockholders. 4. Registrations on Form S-3. 4.1. Request for Registration on Form S-3. In the event that (a) the Company shall receive from the Holders representing an aggregate of at least twenty-five percent (25%) of the Registrable Securities a request in writing (specifying that the request is being made pursuant to this Section 4.1) that the Company file a registration statement on Form S-3 under the Securities Act ("Form S-3") (or any successor form to Form S-3 regardless of its designation) for a public offering of shares of the Registrable Securities, the reasonably anticipated aggregate price to the public of which would be at least $2,000,000, and (b) the Company is a registrant entitled to use Form S-3 to register such shares, then the Company shall use its reasonable efforts to cause such shares to be registered on Form S-3 (or any successor form to Form S-3). Notwithstanding the foregoing, the Company shall not be obligated to take any action to effect any Registration pursuant to this Section 4.1 after the Company has effected two (2) such Registrations pursuant to this Section 4.1 and such Registrations have been declared effective. 4.2. Right of Deferral of Registration. If the Company shall furnish to all such Holders who joined in the request a certificate signed by the Chief Executive Officer of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company for any Registration to be effected as requested under Section 4.1, the Company shall have the right, exercisable one (1) time only with respect to each registration request, to defer the filing of a Registration Statement with respect to such offering for a period of not more than one hundred twenty (120) days from delivery of the request of the Holders. 5. Expenses of Registration. All Registration Expenses incurred in connection with Registrations pursuant to Section 2, Section 3 and Section 4 shall be borne by the Company. Notwithstanding the above, the Company shall not be required to pay for any expenses of any Registration proceeding begun pursuant to Section 2 or Section 4 if the Registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be Registered (which Holders shall bear all such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to a Demand 5 6 Registration pursuant to Section 2 or Registration on Form S-3 pursuant to Section 4, as applicable, in which event such right shall be forfeited to the same extent by all Holders. All Selling Expenses shall be borne by the holders of the securities Registered pro rata on the basis of the number of shares Registered. 6. Obligations of the Company. Whenever required under Section 2, Section 3 or Section 4 (so long as, in the case of Registrations under Section 3, the Company, in its sole discretion, does not abandon the Piggyback Registration) to use its best efforts to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: 6.1. Prepare and file with the Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become and remain effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to the Holder's counsel, if any, selected by the Holders, copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel); provided, however, that in connection with any proposed registration intended to permit an offering of any securities from time to time (i.e. a so-called "shelf registration"), the Company shall in no event be obligated to cause any such registration to remain effective for more than 90 days; 6.2. Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; and 6.3. Furnish to the holders of Registrable Securities such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. 6.4. Promptly deregister, if requested by the Holders, any Registrable Securities which are not sold pursuant to a Demand Registration or Piggyback Registration after the registration statement relating thereto is no longer effective. 6.5. Promptly notify the Holders at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of (a) the happening of any event of which the Company is aware as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein, in light of the circumstances under which made, not misleading and, at the request of the Holders, the Company will as promptly as practicable prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein in light of the circumstances under which made, not misleading or (b) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or of any order preventing or 6 7 suspending the use of any preliminary prospectus, or of the suspension of the qualification of the registration statement for offering or sale in any jurisdiction, or of the institution or threatening of any proceedings for any of such purposes. 7. Information Furnished by the Holders. It shall be a condition precedent of the Company's obligations under this Agreement that each Holder furnish to the Company such information regarding such Holder and the distribution proposed by it as the Company may reasonably request in the event such Holder's Registrable Securities are included in any Registration. 8. Indemnification. 8.1. Company's Indemnification of the Holders. To the extent permitted by law, the Company will indemnify the Holders, each of their respective stockholders, partners, members, officers, managers, directors, employees, agents, any underwriter (as defined in the Securities Act) for such Holder and each person controlling the Holders or underwriter within the meaning of the Securities Act or Exchange Act, with respect to which Registration, qualification or compliance of Registrable Securities has been effected pursuant to this Agreement against all claims, losses, damages and liabilities (or actions in respect thereof) to the extent such claims, losses, damages or liabilities arise out of or are based upon any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus or Registration Statement incident to any such Registration, qualification or compliance, are based on 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 or are based on any violation (or alleged violation) by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, Exchange Act or any state securities law in connection with the offering covered by the Registration; and the Company will reimburse the Holders, each of their respective stockholders, partners, members, managers, directors, officers, employees, agents, underwriters and each person who controls each Holder or underwriter for any reasonable legal and other expenses as and when incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the indemnity contained in this Section 8.1 shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld; and provided, further, that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based upon any untrue statement or omission based upon written information furnished to the Company by any Holder, such stockholder, partner, member, manager, officer, employee, director, underwriter or such controlling person and stated to be for use in connection with the offering of securities of the Company. 8.2. The Holders' Indemnification of Company. To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such Registration, qualification or compliance is being effected pursuant to this Agreement, indemnify the Company, each of its stockholders, directors, officers, employees, agents and each person who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such Registration or any of such other 7 8 Holder's stockholders, partners, members, managers, directors, officers, employees, agents or any person who controls such Holder within the meaning of the Securities Act or Exchange Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based upon any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus or Registration Statement incident to any such Registration, qualification or compliance, are based on 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 or are based on any violation (or alleged violation) by the Holders of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, Exchange Act or any state securities law in connection with the offering covered by the Registration; and such Holder will reimburse the Company, such stockholders, directors, officers, employees, agents and such control persons, underwriter or other Holder, or stockholder, partner, member, manager, director, officer, employee, agent or controlling person of such other Holder for any reasonable legal and other expenses as and when incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such prospectus or Registration Statement in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use in connection with such Registration; provided however, that the indemnity agreement contained in this Section 8.2 shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of such Holders, which consent shall not be unreasonably withheld. In no event shall any indemnity under this Section 8.2 exceed the proceeds from the offering received by such Holder. 8.3. Indemnification Procedure. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof and generally summarize such action. The indemnifying party shall have the right to participate in and to assume the defense of such claim with counsel mutually satisfactory to the parties; provided, however, that if any party reasonably determines that there may be a conflict between the position of the Company and the Holders in conducting the defense of such action, suit or proceeding by reason of recognized claims for indemnity under this Section 8, then counsel for such party shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of such party. The failure to notify an indemnifying party promptly of the commencement of any such action, if prejudicial to the ability of the indemnifying party to defend such action, shall relieve such indemnifying party, to the extent so prejudiced, of any liability to the indemnified party under this Section 8, but the omission so to notify the indemnifying party will not relieve such party of any liability that such party may have to any indemnified party otherwise other than under this Section 8. 9. Market Stand-off. The Holders hereby agree that, if so requested by the Board of Directors of the Company or any Underwriter's Representative, the Holders shall not sell or otherwise transfer any Registrable Securities or other securities of the Company during the 180 day period following the effective date of a Registration Statement of the Company filed under the Securities Act with respect to the Company's initial public offering, and during the 8 9 period specified by the Underwriter's Representative following the effective date of a Registration Statement of the Company filed under the Securities Act with respect to any subsequent primary offering by the Company (except as part of such underwritten registration), in each case without the prior written consent of the Underwriter's Representative for such offering; provided that all officers of the Company enter into similar agreements. 10. Reports Under Securities and Exchange Act of 1934. With a view to making available to the Holders of Registrable Securities the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the Commission that may at any time permit a Holder to sell securities of the Company to the public without registration, the Company agrees to use its reasonable efforts to: 10.1. Make and keep public information available, as those terms are understood and defined in Rule 144, at all times subsequent to 90 days after the effective date of the first registration statement covering an underwritten public offering filed by the Company; 10.2. File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and 10.3. Furnish to any Holder so long as such Holder owns any of the Registrable Securities forthwith upon request a written statement by the Company that it has complied with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of said first registration statement filed by the Company), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as may be reasonably requested in availing any Holder of any rule or regulation of the Commission permitting the selling of any such securities without registration. Notwithstanding anything to the contrary herein, the parties hereto agree that the sole remedy for any breach by the Company of the provisions of this Section 10.3 shall be the granting of an additional demand registration to the Holders, which demand registration shall be subject to, and exercised pursuant to, the provisions of Section 2, including, without limitation, the deferral rights of the Company described in Section 2.2. 11. Miscellaneous. 11.1. Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Holders relative to the subject matters hereof. Any previous agreement between the Company and the Holders concerning Registration rights in connection with the Registrable Securities is superseded by this Agreement. 11.2. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to its conflict of law principles or rules. 9 10 11.3. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11.4. Headings. The headings of the Sections of this Agreement are for convenience and shall not by themselves determine the interpretation of this Agreement. 11.5. Notices. Any notice required or permitted hereunder shall be given in writing and shall be conclusively deemed effectively given (a) upon personal delivery to the person to be notified, (b) when sent by confirmed facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (c) five (5) days after deposit in the United States mail, by registered or certified mail, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt addressed as set forth on the signature page of this Agreement, or at such other address as a party may designate by ten (10) days' advance written notice to the other party. 11.6. Amendment of Agreement. Any provision of this Agreement may be amended, modified or waived only by a written instrument signed by the Company and the Holders of at least a majority of the Registrable Securities. Exhibit A may be amended by the Company as necessary to reflect the addition of new Holders pursuant to the terms hereof, or to reflect the addition of parties hereto as contemplated by this Agreement. 11.7. Assignment; Successors and Assigns. Except as set forth herein, this Agreement is not assignable by the parties hereto without the written consent of the other parties. The rights to cause the Company to register Registrable Securities pursuant to Section 2, 3 and 4 may be assigned by a Holder to a transferee or assignee of Registrable Securities which (a) is a subsidiary, parent, general partner, limited partner or retired partner, member or retired member of a Holder or (b) is a Holder's family member or trust for the benefit of an individual Holder, provided, however, (i) the transferor shall, at least 10 days prior to such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (ii) such transferee shall agree to be subject to all restrictions set forth in this Agreement. Except as otherwise expressly provided for herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such Registrable Securities in its records as the absolute owner and holder of such Registrable Securities for all purposes. 11.8. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 10 11 11.9. Attorney's Fees. In any action or proceeding brought to enforce any provision of this Agreement, the successful party shall be entitled to recover reasonable attorney's fees in addition to any other available remedy. 11 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. THE COMPANY: THE MANAGEMENT NETWORK GROUP, INC., a Kansas corporation By: ------------------------------------- Name: Title: Address: 11613 Tomahawk Creek Parkway, Suite D Leawood, Kansas 66211 Fax: 913/345-0071 Attention: President THE HOLDERS: BEHRMAN CAPITAL II L.P., a Delaware limited partnership By: Behrman Brothers, LLC, its general partner By: ----------------------------- Grant G. Behrman, Managing Member Address: 126 East 56th Street New York, New York 10022 Telecopy: (212) 980-7024 Attention: Grant G. Behrman STRATEGIC ENTREPRENEUR FUND II, L.P., a Delaware limited partnership By: ------------------------------------- Grant G. Behrman, General Partner Address: 126 East 56th Street New York, New York 10022 Telecopy: (212) 980-7024 Attention: Grant G. Behrman 13 - -------------------------------- Richard P. Nespola Address: 11613 Tomahawk Creek Parkway, Suite D Leawood, Kansas 66211 Fax: 913/345-0071 Attention: President - -------------------------------- Micky K. Woo Address: 38 Devonshire Drive Oak Brook, Illinois 60523 Fax: 630/920-1350 - -------------------------------- Alan H. Staples Address: 13816 Goodman Overland Park, Kansas 66223 Fax: 913/851-2054 - -------------------------------- Ralph R. Peck Address: 4923 Rutherford Court Granite Bay, California Fax: 916/791-5103 14 EXHIBIT A LIST OF HOLDERS 1. Behrman Capital II L.P. 2. Strategic Entrepreneur Fund II, L.P. 3. Richard P. Nespola 4. Micky K. Woo 5. Alan H. Staples 6. Ralph R. Peck EX-10.2 6 FORM OF INDEMNIFICATION AGREEMENT 1 Exhibit 10.2 THE MANAGEMENT NETWORK GROUP, INC. FORM OF INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is effective as of September ____, 1999 by and between The Management Network Group, Inc., a Delaware corporation (the "Company"), and ______________________ ("Indemnitee"). WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and its related entities; WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and the advancement of expenses to, Indemnitee to the maximum extent permitted by law; WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for the Company's directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; and WHEREAS, in connection with the Company's reincorporation, the Company and Indemnitee desire to continue to have in place the additional protection provided by an indemnification agreement, with such changes as are required to conform the existing agreement to Delaware law and to provide indemnification and advancement of expenses to the Indemnitee to the maximum extent permitted by Delaware law; WHEREAS, in view of the considerations set forth above, the Company desires that Indemnitee shall be indemnified and advanced expenses by the Company as set forth herein; NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below. 1. Certain Definitions. a. "Change in Control" shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) 2 of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets. b. "Claim" shall mean with respect to a Covered Event: any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other. c. References to the "Company" shall include, in addition to The Management Network Group, Inc., any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which The Management Network Group, Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. d. "Covered Event" shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other -2- 3 enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity. e. "Expenses" shall mean any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, to be a witness in or to participate in, any action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of any Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. f. "Expense Advance" shall mean a payment to Indemnitee pursuant to Section 3 of Expenses in advance of the settlement of or final judgement in any action, suit, proceeding or alternative dispute resolution mechanism, hearing, inquiry or investigation which constitutes a Claim. g. "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(d) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other Indemnitees under similar indemnity agreements). h. References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. i. "Reviewing Party" shall mean, subject to the provisions of Section 2(d), any person or body appointed by the Board of Directors in accordance with applicable law to review the Company's obligations hereunder and under applicable law, which may include a member or members of the Company's Board of Directors, Independent Legal Counsel or any other person or body not a party to the particular Claim for which Indemnitee is seeking indemnification. j. "Section" refers to a section of this Agreement unless otherwise indicated. k. "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. -3- 4 2. Indemnification. a. Indemnification of Expenses. Subject to the provisions of Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any Claim (whether by reason of or arising in part out of a Covered Event), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. b. Review of Indemnification Obligations. Notwithstanding the foregoing, in the event any Reviewing Party shall have determined (in a written opinion, in any case in which Independent Legal Counsel is the Reviewing Party) that Indemnitee is not entitled to be indemnified hereunder under applicable law, (i) the Company shall have no further obligation under Section 2(a) to make any payments to Indemnitee not made prior to such determination by such Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all Expenses theretofore paid to Indemnitee to which Indemnitee is not entitled hereunder under applicable law; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee is entitled to be indemnified hereunder under applicable law, any determination made by any Reviewing Party that Indemnitee is not entitled to be indemnified hereunder under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expenses theretofore paid in indemnifying Indemnitee until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expenses shall be unsecured and no interest shall be charged thereon. c. Indemnitee Rights on Unfavorable Determination; Binding Effect. If any Reviewing Party determines that Indemnitee substantively is not entitled to be indemnified hereunder in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by such Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and, subject to the provisions of Section 15, the Company hereby consents to service of process and to appear in any such proceeding. Absent such litigation, any determination by any Reviewing Party shall be conclusive and binding on the Company and Indemnitee. d. Selection of Reviewing Party; Change in Control. If there has not been a Change in Control, any Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), any Reviewing Party with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnification of Expenses under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, or under any other applicable law, if desired by Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). -4- 5 Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be entitled to be indemnified hereunder under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay Expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees unless (i) the employment of separate counsel by one or more Indemnitees has been previously authorized by the Company in writing, or (ii) an Indemnitee shall have provided to the Company a written statement that such Indemnitee has reasonably concluded that there may be a conflict of interest between such Indemnitee and the other Indemnitees with respect to the matters arising under this Agreement. e. Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement other than Section 10 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Claim, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. 3. Expense Advances. a. Obligation to Make Expense Advances. Upon receipt of a written undertaking by or on behalf of the Indemnitee to repay such amounts if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified therefore by the Company hereunder under applicable law, the Company shall make Expense Advances to Indemnitee. b. Form of Undertaking. Any obligation to repay any Expense Advances hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured and no interest shall be charged thereon. c. Determination of Reasonable Expense Advances. The parties agree that for the purposes of any Expense Advance for which Indemnitee has made written demand to the Company in accordance with this Agreement, all Expenses included in such Expense Advance that are certified by affidavit of Indemnitee's counsel as being reasonable shall be presumed conclusively to be reasonable. 4. Procedures for Indemnification and Expense Advances. a. Timing of Payments. All payments of Expenses (including without limitation Expense Advances) by the Company to the Indemnitee pursuant to this Agreement shall be made to the fullest extent permitted by law as soon as practicable after written demand by Indemnitee therefor is presented to the Company, but in no event later than thirty (30) business days after such written demand by Indemnitee is presented to the Company, except in the case of Expense -5- 6 Advances, which shall be made no later than ten (10) business days after such written demand by Indemnitee is presented to the Company. b. Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified or Indemnitee's right to receive Expense Advances under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. c. No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by this Agreement or applicable law. In addition, neither the failure of any Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by any Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under this Agreement under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by any Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder under applicable law, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. d. Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies. e. Selection of Counsel. In the event the Company shall be obligated hereunder to provide indemnification for or make any Expense Advances with respect to the Expenses of any Claim, the Company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of the Company's election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of separate counsel subsequently retained by or on behalf of Indemnitee with respect to the same -6- 7 Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of separate counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's separate counsel shall be Expenses for which Indemnitee may receive indemnification or Expense Advances hereunder. 5. Additional Indemnification Rights; Nonexclusivity. a. Scope. The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 10(a) hereof. b. Nonexclusivity. The indemnification and the payment of Expense Advances provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification and the payment of Expense Advances provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though subsequent thereto Indemnitee may have ceased to serve in such capacity. 6. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Company's Certificate of Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder. 7. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from -7- 8 indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 9. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are provided to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 10. Exceptions. Notwithstanding any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement: a. Excluded Actions or Omissions. To indemnify or make Expense Advances to Indemnitee with respect to Claims arising out of acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under applicable law. b. Claims Initiated by Indemnitee. To indemnify or make Expense Advances to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Covered Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, Expense Advances, or insurance recovery, as the case may be. c. Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred by the Indemnitee with respect to any action instituted (i) by Indemnitee to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous, or (ii) by or in the name of the Company to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous. d. Claims Under Section 16(b). To indemnify Indemnitee for Expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. -8- 9 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise at the Company's request. 13. Expenses Incurred in Action Relating to Enforcement or Interpretation. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee with respect to such action (including without limitation attorneys' fees), regardless of whether Indemnitee is ultimately successful in such action, unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee in defense of such action (including without limitation costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. 14. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. -9- 10 15. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and signed for by the party addressed, on the date of such delivery, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 16. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 17. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including without limitation each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 18. Choice of Law. This Agreement, and all rights, remedies, liabilities, powers and duties of the parties to this Agreement, shall be governed by and construed in accordance with the laws of the State of Delaware as applied to contracts between Delaware residents entered into and to be performed entirely in the State of Delaware without regard to principles of conflicts of laws. 19. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 20. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. 21. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. -10- 11 22. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities. -11- 12 IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. THE MANAGEMENT NETWORK GROUP, INC. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Address: 7300 College Boulevard, Suite 302 Overland Park, KS 66210 AGREED TO AND ACCEPTED INDEMNITEE: ---------------------------------------- (Signature) NAME ---------------------------------------- Name ---------------------------------------- Address ---------------------------------------- -12- EX-10.3 7 1998 EQUITY INCENTIVE PLAN 1 Exhibit 10.3 THE MANAGEMENT NETWORK GROUP, INC. 1998 EQUITY INCENTIVE PLAN (AS AMENDED AND RESTATED ___________, 1999) The Management Network Group, Inc., having established the The Management Network Group, Inc. 1998 Equity Incentive Plan, effective April 30, 1998, and The Management Network Group, Inc. 1998 Consultant Equity Incentive Plan, effective April 30, 1998, hereby amends and restates the Plans into one plan effective as of ___________, 1999. 1. Purposes of the Plan. The purposes of this 1998 Equity Incentive Plan are: o to attract and retain the best available personnel for positions of substantial responsibility, o to provide additional incentive to Employees, Directors and Consultants, and o to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means (i) any willful material violation by the Optionee of any law or regulation applicable to the business of the Company or a Parent or Subsidiary of the Company, the Optionee's conviction for, or guilty plea to, a felony or a crime involving moral turpitude, any willful perpetration by the Optionee of a common law fraud, (ii) the Optionee's commission of an act of personal dishonesty which involves personal profit in connection with the Company or any other entity having a business relationship with the Company, (iii) any material breach by the Optionee of any provision of any agreement or understanding between the Company, or any Parent 2 or Subsidiary of the Company, and the Optionee regarding the terms of the Optionee's service as a Service Provider, including without limitation, the willful and continued failure or refusal of the Optionee to perform the material duties required of such Optionee as a Service Provider, other than as a result of having a Disability, or a breach of any applicable invention assignment and confidentiality agreement or similar agreement between the Company and the Optionee, (iv) Optionee's disregard of the policies of the Company or any Parent or Subsidiary of the Company so as to cause loss, damage or injury to the property, reputation or employees of the Company or a Parent or Subsidiary of the Company, or (v) any other misconduct by the Optionee which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or a Parent of Subsidiary of the Company. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan. (g) "Common Stock" means the common stock of the Company. (h) "Company" means The Management Network Group, Inc., a Delaware corporation. (i) "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity. (j) "Director" means a member of the Board. (k) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (l) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: -2- 3 (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (o) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (p) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (q) "Notice of Grant" means a written or electronic notice evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. (r) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "Option" means a stock option granted pursuant to the Plan. (t) "Option Agreement" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (u) "Option Exchange Program" means a program whereby outstanding Options are surrendered in exchange for Options with a lower exercise price. (v) "Optioned Stock" means the Common Stock subject to an Option or Stock Purchase Right. (w) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. -3- 4 (x) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (y) "Plan" means this 1998 Equity Incentive Plan, as amended and restated. (z) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan. (aa) "Restricted Stock Purchase Agreement" means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (cc) "Section 16(b)" means Section 16(b) of the Exchange Act. (dd) "Service Provider" means an Employee, Director or Consultant. (ee) "Share" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (ff) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. (gg) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is [______________] Shares, plus an annual increase to be added on the first day of the Company's fiscal year beginning in 2000 equal to the lesser of (i) [______________] shares, (ii) [__]% of the outstanding shares on such date or (iii) a lesser amount determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. -4- 5 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Service Providers. (ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted; -5- 6 (vii) to institute an Option Exchange Program; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option or Stock Purchase Right (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 6. Limitations. (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. -6- 7 (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 1,000,000 Shares. (ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 500,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 13), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 15 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all -7- 8 classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or -8- 9 (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider for any reason other than the Optionee's death, Disability or termination of service for Cause (but not in the event of an Optionee's change of status from Employee to Consultant (in which case an Employee's Incentive Stock Option shall automatically convert to a Nonstatutory Stock Option on the ninety-first (91st) day following such change of status) or from Consultant to Employee), such Optionee may, but only within such period of time as is determined by the Administrator, of at least thirty (30) days, with such determination in the case of an Incentive Stock Option not exceeding three (3) months after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that Optionee was entitled to exercise it at the date of such termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. -9- 10 (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may, but only within twelve (12) months from the date of such termination (or within such longer time period, not exceeding five (5) years, after the termination date as may be determined by the Administrator, with any exercise beyond twelve (12) months after the termination date, deemed to be a Nonstatutory Stock Option) (and in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise his or her Option the extent the Option is vested on the date of termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider (or the Optionee dies within three (3) months after a termination other than for Cause), the Option may be exercised at any time within twelve (12) months following the date of death (or within such longer time period, not exceeding five (5) years after the termination date as may be determined by the Administrator) (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Termination for Cause. If the Optionee is terminated for Cause, then Optionee's Option shall expire on such Optionee's termination date or such later time and on such conditions as are determined by the Administrator. (f) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. -10- 11 (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 12. Non-Transferability of Options and Stock Purchase Rights. Unless determined otherwise by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall -11- 12 be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution, Liquidation, Merger or Asset Sale. Subject to the third sentence of this Section 13(b), in the event of the proposed dissolution or liquidation of the Company or a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. Notwithstanding the foregoing, in the event that a Optionee ceases to be a Service Provider for any reason other than Cause (including a voluntary resignation) within six (6) months of the consummation of a transaction described in this Section 13(b) pursuant to which outstanding Options and Stock Purchase Rights are assumed or substituted as provided above, the vesting and exercisability of each outstanding Option or Stock Purchase Right shall be automatically accelerated as to 50% of the unvested Shares of Optional Stock subject to the Option or Stock Purchase Right on the date of such Optionee's termination. Notwithstanding the foregoing, (i) in the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, and (ii) in the case of an Option or Stock Purchase Right granted to a Service Provider who is a Consultant at the time such Option or Stock Purchase Right is granted, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in accordance with the foregoing sentence, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this Section, the Option or Stock Purchase Right shall be considered assumed if, following the dissolution, liquidation, merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the dissolution, liquidation, merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the dissolution, liquidation, merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the dissolution, liquidation, merger or sale of assets. (c) Other Treatment of Options and Stock Purchase Rights. Subject to any greater rights granted to Optionees under the foregoing provisions of this Section 13, in the event of the occurrence of any transaction described in Section 13 hereof, any outstanding Options and Stock Purchase Rights will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation or sale of assets. -12- 13 14. Date of Grant. The date of grant of an Option or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 16. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 17. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. -13- 14 19. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. -14- 15 THE MANAGEMENT NETWORK GROUP, INC. 1998 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number ---------------------------------------- Date of Grant ---------------------------------------- Vesting Commencement Date ---------------------------------------- Exercise Price per Share $ ---------------------------------------- Total Number of Shares Granted ---------------------------------------- Total Exercise Price $ ---------------------------------------- Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: ---------------------------------------- Vesting Schedule: Subject to accelerated vesting as set forth below, this Option may be exercised, in whole or in part, in accordance with the following schedule: [25% OF THE SHARES SUBJECT TO THE OPTION SHALL VEST TWELVE MONTHS AFTER THE VESTING COMMENCEMENT DATE, AND 1/48 OF THE SHARES SUBJECT TO THE OPTION SHALL VEST EACH MONTH THEREAFTER, SUBJECT TO THE OPTIONEE CONTINUING TO BE A SERVICE PROVIDER ON SUCH DATES]. 16 Termination Period: This Option may be exercised for [THREE MONTHS] after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for [TWELVE MONTHS] after Optionee ceases to be a Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT A. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). B. Exercise of Option. (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to [TITLE] of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. -2- 17 C. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: 1. cash; or 2. check; or 3. consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; or 4. surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares; or 5. with the Administrator's consent, delivery of Optionee's promissory note (the "Note") in the form attached hereto as Exhibit C, in the amount of the aggregate Exercise Price of the Exercised Shares together with the execution and delivery by the Optionee of the Security Agreement attached hereto as Exhibit B. The Note shall bear interest at the "applicable federal rate" prescribed under the Code and its regulations at time of purchase, and shall be secured by a pledge of the Shares purchased by the Note pursuant to the Security Agreement; or 6. to the extent permitted by the Administrator, delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale proceeds required to pay the Exercise Price. D. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. E. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. F. Tax Consequences. Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD -3- 18 CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. G. Exercising the Option. 1. Nonstatutory Stock Option. The Optionee may incur regular federal income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. 2. Incentive Stock Option. If this Option qualifies as an ISO, the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status. 3. Disposition of Shares. (a) NSO. If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. (b) ISO. If the Optionee holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. -4- 19 H. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of [state]. I. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: THE MANAGEMENT NETWORK GROUP, INC. - ------------------------------------ ---------------------------------------- Signature By - ------------------------------------ ---------------------------------------- Print Name Title - ------------------------------------ Residence Address - ------------------------------------ -5- 20 CONSENT OF SPOUSE The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Option Agreement. ---------------------------------------- Spouse of Optionee 21 EXHIBIT A THE MANAGEMENT NETWORK GROUP, INC. 1998 EQUITY INCENTIVE PLAN EXERCISE NOTICE [COMPANY NAME] [address] Attention: [Title] 1. Exercise of Option. Effective as of today, _______________, _____, the undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of The Management Network Group, Inc. (the "Company") under and pursuant to the 1998 Equity Incentive Plan (the "Plan") and the Stock Option Agreement dated, _____ (the "Option Agreement"). The purchase price for the Shares shall be $_____, as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 13 of the Plan. 5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 22 6. Entire Agreement; Governing Law. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Kansas. Submitted by: Accepted by: PURCHASER: THE MANAGEMENT NETWORK GROUP, INC. - ------------------------------------ ---------------------------------------- Signature By - ------------------------------------ ---------------------------------------- Print Name Its Address: Address: THE MANAGEMENT NETWORK GROUP, INC. - ------------------------------------ [address] - ------------------------------------ ---------------------------------------- Date Received -2- 23 EXHIBIT B SECURITY AGREEMENT This Security Agreement is made as of __________, _____ between The Management Network Group, Inc., a Kansas corporation ("Pledgee"), and _________________________ ("Pledgor"). Recitals Pursuant to Pledgor's election to purchase Shares under the Option Agreement dated ________ (the "Option"), between Pledgor and Pledgee under Pledgee's 1998 Equity Incentive Stock Plan, and Pledgor's election under the terms of the Option to pay for such shares with his promissory note (the "Note"), Pledgor has purchased _________ shares of Pledgee's Common Stock (the "Shares") at a price of $________ per share, for a total purchase price of $__________. The Note and the obligations thereunder are as set forth in Exhibit C to the Option. NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the Kansas Commercial Code, hereby pledges all of such Shares (herein sometimes referred to as the "Collateral") represented by certificate number ______, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Option, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) Payment of Indebtedness. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. 24 (b) Encumbrances. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. (c) Margin Regulations. In the event that Pledgee's Common Stock is now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. Voting Rights. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Options and Rights. In the event that, during the term of this pledge, subscription Options or other rights or options shall be issued in connection with the pledged Shares, such rights, Options and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. Default. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Option or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the Kansas Commercial Code. -2- 25 7. Release of Collateral. Subject to any applicable contrary rules under Regulation G, there shall be released from this pledge a portion of the pledged Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. Withdrawal or Substitution of Collateral. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. Term. The within pledge of Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. Pledgeholder Liability. In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of his acts, or omissions to act, as Pledgeholder. 12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 13. Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. Governing Law. This Security Agreement shall be interpreted and governed under the internal substantive laws, but not the choice of law rules, of Kansas. -3- 26 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" ---------------------------------------- Signature ---------------------------------------- Print Name ---------------------------------------- Address: "PLEDGEE" THE MANAGEMENT NETWORK GROUP, INC. a Kansas corporation Signature ---------------------------------------- Print Name ---------------------------------------- Title "PLEDGEHOLDER" ---------------------------------------- Secretary of The Management Network Group, Inc. -4- 27 EXHIBIT C NOTE $_______________ [City, State] ------------------, ----- FOR VALUE RECEIVED, _____________________ promises to pay to The Management Network Group, Inc., a Kansas corporation (the "Company"), or order, the principal sum of _______________________ ($_____________), together with interest on the unpaid principal hereof from the date hereof at the rate of _______________ percent (____%) per annum, compounded semiannually. Principal and interest shall be due and payable on _______________, _____. Payment of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is subject to the terms of the Option, dated as of ________________. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. In the event the undersigned shall cease to be an employee, director or consultant of the Company for any reason, this Note shall, at the option of the Company, be accelerated, and the whole unpaid balance on this Note of principal and accrued interest shall be immediately due and payable. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. ---------------------------------------- ---------------------------------------- 28 THE MANAGEMENT NETWORK GROUP, INC. 1998 EQUITY INCENTIVE PLAN NOTICE OF GRANT OF STOCK PURCHASE RIGHT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice of Grant. [Grantee's Name and Address] You have been granted the right to purchase Common Stock of the Company, subject to the Company's Repurchase Option and your ongoing status as a Service Provider (as described in the Plan and the attached Restricted Stock Purchase Agreement), as follows: Grant Number _________________________ Date of Grant _________________________ Price Per Share$ ________________________ Total Number of Shares Subject _________________________ to This Stock Purchase Right Expiration Date: _________________________ YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE OR IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By your signature and the signature of the Company's representative below, you and the Company agree that this Stock Purchase Right is granted under and governed by the terms and conditions of the 1998 Equity Incentive Plan and the Restricted Stock Purchase Agreement, attached hereto as Exhibit A-1, both of which are made a part of this document. You further agree to execute the attached Restricted Stock Purchase Agreement as a condition to purchasing any shares under this Stock Purchase Right. GRANTEE: THE MANAGEMENT NETWORK GROUP, INC. - --------------------------------- ---------------------------------------- Signature By - --------------------------------- ---------------------------------------- Print Name Title 29 EXHIBIT A-1 THE MANAGEMENT NETWORK GROUP, INC. 1998 EQUITY INCENTIVE PLAN RESTRICTED STOCK PURCHASE AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Restricted Stock Purchase Agreement. WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser") is an Service Provider, and the Purchaser's continued participation is considered by the Company to be important for the Company's continued growth; and WHEREAS in order to give the Purchaser an opportunity to acquire an equity interest in the Company as an incentive for the Purchaser to participate in the affairs of the Company, the Administrator has granted to the Purchaser a Stock Purchase Right subject to the terms and conditions of the Plan and the Notice of Grant, which are incorporated herein by reference, and pursuant to this Restricted Stock Purchase Agreement (the "Agreement"). NOW THEREFORE, the parties agree as follows: 1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase shares of the Company's Common Stock (the "Shares"), at the per Share purchase price and as otherwise described in the Notice of Grant. 2. Payment of Purchase Price. The purchase price for the Shares may be paid by delivery to the Company at the time of execution of this Agreement of cash, a check, or some combination thereof. 3. Repurchase Option. (a) In the event the Purchaser ceases to be a Service Provider for any or no reason (including death or disability) before all of the Shares are released from the Company's Repurchase Option (see Section 4), the Company shall, upon the date of such termination (as reasonably fixed and determined by the Company) have an irrevocable, exclusive option (the "Repurchase Option") for a period of sixty (60) days from such date to repurchase up to that number of shares which constitute the Unreleased Shares (as defined in Section 4) at the original purchase price per share (the "Repurchase Price"). The Repurchase Option shall be exercised by the Company by delivering written notice to the Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) AND, at the Company's option, (i) by delivering to the Purchaser or the Purchaser's executor a check in the amount of the aggregate Repurchase Price, or (ii) by canceling an amount of the Purchaser's indebtedness to the Company equal to the aggregate Repurchase Price, or (iii) by a combination of 30 (i) and (ii) so that the combined payment and cancellation of indebtedness equals the aggregate Repurchase Price. Upon delivery of such notice and the payment of the aggregate Repurchase Price, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being repurchased by the Company. (b) Whenever the Company shall have the right to repurchase Shares hereunder, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations to exercise all or a part of the Company's purchase rights under this Agreement and purchase all or a part of such Shares. If the Fair Market Value of the Shares to be repurchased on the date of such designation or assignment (the "Repurchase FMV") exceeds the aggregate Repurchase Price of such Shares, then each such designee or assignee shall pay the Company cash equal to the difference between the Repurchase FMV and the aggregate Repurchase Price of such Shares. 4. Release of Shares From Repurchase Option. (a) _______________________ percent (______%) of the Shares shall be released from the Company's Repurchase Option [one year] after the Date of Grant and __________________ percent (______%) of the Shares [at the end of each month thereafter], provided that the Purchaser does not cease to be a Service Provider prior to the date of any such release. (b) Any of the Shares that have not yet been released from the Repurchase Option are referred to herein as "Unreleased Shares." (c) The Shares that have been released from the Repurchase Option shall be delivered to the Purchaser at the Purchaser's request (see Section 6). 5. Restriction on Transfer. Except for the escrow described in Section 6 or the transfer of the Shares to the Company or its assignees contemplated by this Agreement, none of the Shares or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until such Shares are released from the Company's Repurchase Option in accordance with the provisions of this Agreement, other than by will or the laws of descent and distribution. 6. Escrow of Shares. (a) To ensure the availability for delivery of the Purchaser's Unreleased Shares upon repurchase by the Company pursuant to the Repurchase Option, the Purchaser shall, upon execution of this Agreement, deliver and deposit with an escrow holder designated by the Company (the "Escrow Holder") the share certificates representing the Unreleased Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The Unreleased Shares and stock assignment shall be held by the Escrow Holder, pursuant to the Joint Escrow Instructions of the Company and Purchaser attached hereto as Exhibit A-3, until such time as the Company's Repurchase Option expires. As a further condition to the Company's obligations under this -2- 31 Agreement, the Company may require the spouse of Purchaser, if any, to execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-4. (b) The Escrow Holder shall not be liable for any act it may do or omit to do with respect to holding the Unreleased Shares in escrow while acting in good faith and in the exercise of its judgment. (c) If the Company or any assignee exercises the Repurchase Option hereunder, the Escrow Holder, upon receipt of written notice of such exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. (d) When the Repurchase Option has been exercised or expires unexercised or a portion of the Shares has been released from the Repurchase Option, upon request the Escrow Holder shall promptly cause a new certificate to be issued for the released Shares and shall deliver the certificate to the Company or the Purchaser, as the case may be. (e) Subject to the terms hereof, the Purchaser shall have all the rights of a shareholder with respect to the Shares while they are held in escrow, including without limitation, the right to vote the Shares and to receive any cash dividends declared thereon. If, from time to time during the term of the Repurchase Option, there is (i) any stock dividend, stock split or other change in the Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of the Purchaser's ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Repurchase Option. 7. Legends. The share certificate evidencing the Shares, if any, issued hereunder shall be endorsed with the following legend (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 8. Adjustment for Stock Split. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares that may be made by the Company after the date of this Agreement. 9. Tax Consequences. The Purchaser has reviewed with the Purchaser's own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. The Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser's own tax liability that -3- 32 may arise as a result of the transactions contemplated by this Agreement. The Purchaser understands that Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income the difference between the purchase price for the Shares and the Fair Market Value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" includes the right of the Company to buy back the Shares pursuant to the Repurchase Option. The Purchaser understands that the Purchaser may elect to be taxed at the time the Shares are purchased rather than when and as the Repurchase Option expires by filing an election under Section 83(b) of the Code with the IRS within 30 days from the date of purchase. The form for making this election is attached as Exhibit A-5 hereto. THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON THE PURCHASER'S BEHALF. 10. General Provisions. (a) This Agreement shall be governed by the internal substantive laws, but not the choice of law rules of [state]. This Agreement, subject to the terms and conditions of the Plan and the Notice of Grant, represents the entire agreement between the parties with respect to the purchase of the Shares by the Purchaser. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Agreement, the terms and conditions of the Plan shall prevail. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Agreement. (b) Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party hereto. (c) The rights of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (d) Either party's failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, nor prevent that party from thereafter enforcing any other provision of this Agreement. The rights granted both parties hereunder are cumulative and shall not constitute a waiver of either party's right to assert any other legal remedy available to it. -4- 33 (e) The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. (f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE PURCHASER'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By Purchaser's signature below, Purchaser represents that he or she is familiar with the terms and provisions of the Plan, and hereby accepts this Agreement subject to all of the terms and provisions thereof. Purchaser has reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement. Purchaser agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Agreement. Purchaser further agrees to notify the Company upon any change in the residence indicated in the Notice of Grant. DATED: ----------------------------- PURCHASER: THE MANAGEMENT NETWORK GROUP, INC. - ----------------------------------- ---------------------------------------- Signature By - ----------------------------------- ---------------------------------------- Print Name Title -5- 34 EXHIBIT A-2 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, _______________________________, hereby sell, assign and transfer unto (__________) shares of the Common Stock of THE MANAGEMENT NETWORK GROUP, INC., standing in my name of the books of said corporation represented by Certificate No. _____ herewith and do hereby irrevocably constitute and appoint to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Purchase Agreement (the "Agreement") between________________________ and the undersigned dated ______________, _____. Dated: _______________, _____ Signature: ------------------------------ INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise the Repurchase Option, as set forth in the Agreement, without requiring additional signatures on the part of the Purchaser. 35 EXHIBIT A-3 JOINT ESCROW INSTRUCTIONS ------------------, ---- Corporate Secretary The Management Network Group, Inc. [address] Dear __________: As Escrow Agent for both The Management Network Group, Inc., a Kansas corporation (the "Company"), and the undersigned purchaser of stock of the Company (the "Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement ("Agreement") between the Company and the undersigned, in accordance with the following instructions: 1. In the event the Company and/or any assignee of the Company (referred to collectively as the "Company") exercises the Company's Repurchase Option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company or its assignee, against the simultaneous delivery to you of the purchase price (by cash, a check, or some combination thereof) for the number of shares of stock being purchased pursuant to the exercise of the Company's Repurchase Option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as Purchaser's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. 36 Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the stock is held by you. 4. Upon written request of the Purchaser, but no more than once per calendar year, unless the Company's Repurchase Option has been exercised, you shall deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Company's Repurchase Option. Within 90 days after Purchaser ceases to be a Service Provider, you shall deliver to Purchaser a certificate or certificates representing the aggregate number of shares held or issued pursuant to the Agreement and not purchased by the Company or its assignees pursuant to exercise of the Company's Repurchase Option. 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of the same to Purchaser and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. -2- 37 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: THE MANAGEMENT NETWORK GROUP, INC. [address] PURCHASER: ---------------------------------------- ---------------------------------------- ---------------------------------------- ESCROW AGENT: Corporate Secretary The Management Network Group, Inc. [address] 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. -3- 38 18. These Joint Escrow Instructions shall be governed by, and construed and enforced in accordance with, the internal substantive laws, but not the choice of law rules, of Kansas. Very truly yours, THE MANAGEMENT NETWORK GROUP, INC. ---------------------------------------- By ---------------------------------------- Title PURCHASER: ---------------------------------------- Signature ---------------------------------------- Print Name ESCROW AGENT: - ------------------------------------- Corporate Secretary -4- 39 EXHIBIT A-4 CONSENT OF SPOUSE I, _________________________, spouse of ________________________, have read and approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In consideration of the Company's grant to my spouse of the right to purchase shares of The Management Network Group, Inc., as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated:____________________, _____ ---------------------------------------- Signature of Spouse 40 EXHIBIT A-5 ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income for the current taxable year the amount of any compensation taxable to taxpayer in connection with his or her receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME: TAXPAYER: SPOUSE: ADDRESS: IDENTIFICATION NO.: TAXPAYER: SPOUSE: TAXABLE YEAR: 2. The property with respect to which the election is made is described as follows: shares (the "Shares") of the Common Stock of The Management Network Group, Inc. (the "Company"). 3. The date on which the property was transferred is:________________, ______. 4. The property is subject to the following restrictions: The Shares may be repurchased by the Company, or its assignee, upon certain events. This right lapses with regard to a portion of the Shares based on the continued performance of services by the taxpayer over time. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $__________. 6. The amount (if any) paid for such property is: $___________. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. Dated: ----------------, ------ ---------------------------------------- Taxpayer The undersigned spouse of taxpayer joins in this election. Dated: ----------------, ------ ---------------------------------------- Spouse of Taxpayer EX-10.4 8 1999 EMPLOYEE STOCK PURCHASE PLAN 1 Exhibit 10.4 THE MANAGEMENT NETWORK GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1999 Employee Stock Purchase Plan of The Management Network Group, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the common stock of the Company. (d) "Company" shall mean The Management Network Group, Inc. and any Designated Subsidiary of the Company. (e) ["COMPENSATION" SHALL MEAN ALL BASE STRAIGHT TIME GROSS EARNINGS AND COMMISSIONS, BUT EXCLUSIVE OF PAYMENTS FOR OVERTIME, SHIFT PREMIUM, INCENTIVE COMPENSATION, INCENTIVE PAYMENTS, BONUSES AND OTHER COMPENSATION.] (f) "Designated Subsidiary" shall mean any Subsidiary which has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first Trading Day of each Offering Period. (i) "Exercise Date" shall mean the last Trading Day of each Purchase Period. 2 (j) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock prior to the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board; or (iv) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "Offering Periods" shall mean the periods of approximately twenty-four (24) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after January 1 and June 30 of each year and terminating on the last Trading Day in the periods ending twenty-four months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before [ _____________ ]. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this 1999 Employee Stock Purchase Plan. (m) "Purchase Period" shall mean the approximately six month period commencing after one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. (n) "Purchase Price" shall mean 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower; provided however, that the Purchase Price may be adjusted by the Board pursuant to Section 20. -2- 3 (o) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (p) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (q) "Trading Day" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. Eligibility. (a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after January 1 and June 30 each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before [ _____________ ]. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without shareholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. -3- 4 (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. 6. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each -4- 5 Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than [10,000] shares of the Company's Common Stock (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future Offering Periods, increase or decrease, in its absolute discretion, the maximum number of shares of the Company's Common Stock an Employee may purchase during each Purchase Period of such Offering Period. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. (a) Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. (b) If the Board determines that, on a given Exercise Date, the number of shares with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Enrollment Date of the applicable Offering Period, or (ii) the number of shares available for sale under the Plan on such Exercise Date, the Board may in its sole discretion (x) provide that the Company shall make a pro rata allocation of the shares of Common Stock available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and continue all Offering Periods then in effect, or (y) provide that the Company shall make a pro rata allocation of the shares available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and terminate any or all Offering Periods then in effect pursuant to Section 20 hereof. The Company may make pro rata allocation of the shares available on the Enrollment Date of any applicable Offering Period pursuant to the preceding sentence, -5- 6 notwithstanding any authorization of additional shares for issuance under the Plan by the Company's shareholders subsequent to such Enrollment Date. 9. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Termination of Employment. Upon a participant's ceasing to be an Employee, for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. Stock. (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, the maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be [_____________ (____________)] -6- 7 shares, plus an annual increase to be added on the first day of the Company's fiscal year beginning in 2000 equal to the lesser of (i) [____] shares, (ii) 0.5% of the outstanding shares on such date or (iii) a lesser amount determined by the Board. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, -7- 8 transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. Reports. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the Reserves, the maximum number of shares each participant may purchase each Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation -8- 9 or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 20. Amendment or Termination. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Offering Period or the Plan is in the best interests of the Company and its shareholders. Except as provided in Section 19 and this Section 20 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. (c) In the event the Board determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to: (i) altering the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price; -9- 10 (ii) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Board action; and (iii) allocating shares. Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants. 21. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. 24. Automatic Transfer to Low Price Offering Period. To the extent permitted by any applicable laws, regulations, or stock exchange rules if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. -10- 11 EXHIBIT A THE MANAGEMENT NETWORK GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. ____________________ hereby elects to participate in The Management Network Group, Inc. 1999 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (from 1 to _____%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to shareholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only):. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me 12 over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days after the date of any disposition of my shares and I will make adequate provision for Federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print)___________________________________________________________ (First) (Middle) (Last) - ----------------------------------- ---------------------------------------- Relationship ---------------------------------------- (Address) -2- 13 Employee's Social Security Number: ---------------------------------------- Employee's Address: ---------------------------------------- ---------------------------------------- ---------------------------------------- I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated: ----------------------------- ---------------------------------------- Signature of Employee ---------------------------------------- Spouse's Signature (If beneficiary other than spouse) -3- 14 EXHIBIT B THE MANAGEMENT NETWORK GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of The Management Network Group, Inc. 1999 Employee Stock Purchase Plan which began on ____________, ______ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: ---------------------------------------- ---------------------------------------- ---------------------------------------- Signature: ---------------------------------------- Date: ----------------------------------- EX-10.5 9 CONSULTING SERVICES AGREEMENT 1 Exhibit 10.5 CONSULTING SERVICES AGREEMENT This Agreement, entered into this 5th day of November, 1997 between The Management Network Group, Inc., located at 38 Devonshire Drive, Oak Brook, Illinois 60521 referred to as ("CONSULTANT") and Williams Communications Group, Inc., located at One Williams Center, MD 26-1, Tulsa, Oklahoma 74172 (referred to as "CUSTOMER"). 1. PROJECT DESCRIPTION. A. The CUSTOMER hereby orders and CONSULTANT hereby agrees to perform the services described on Schedule A (referred to as "Service[s]") which such Schedule entitled "Consulting Services Schedule" is attached hereto and made a part hereof. From time to time, changes may be made in the Services in the nature of additions, deletions or modifications, which changes will be reflected in an Amendment to Schedule A. Schedule A when executed by both parties hereto is incorporated into and made part of this Agreement. B. Machine time, if required by CONSULTANT in order to perform this Service, shall be provided by the CUSTOMER at the facility indicated in the Consultant Services Schedule(s). CUSTOMER agrees to submit representative input data and test data as requested by CONSULTANT in sufficient detail, format, and quantity as described in the CONSULTANT Services Schedule(s). 2. PROPERTY RIGHTS. A. TITLE TO CERTAIN TANGIBLE PROPERTY. All tangible materials (whether original or duplicates) including, without limitation, equipment purchase agreements, file or data base materials in whatever form, books, manuals, sales literature, equipment price lists, training materials, client record cards, client files, correspondence, documents, contracts, orders, messages, memoranda, notes, agreements, invoices, receipts, lists, software listings or printouts, all programmer generated materials including any materials cataloged on the CUSTOMER's storage medium, documentation of tests conducted by CONSULTANT, all programs developed by CONSULTANT in accordance with the attached Consultant Services Schedule(s), specifications, models, computer programs, and records of any kind in the possession or control of CONSULTANT which in any way relate to or pertain to CUSTOMER's business, including the business of the parent or subsidiaries or affiliates of CUSTOMER, whether furnished to CONSULTANT by CUSTOMER or prepared, compiled or acquired by CONSULTANT during consulting relationship with CUSTOMER, shall be the sole property of CUSTOMER. At any time upon request of CUSTOMER, and in any event promptly upon termination of this Agreement, CONSULTANT shall deliver all such materials to CUSTOMER. CUSTOMER shall be under no obligation to pay to CONSULTANT any sums of money then due CONSULTANT or becoming due thereafter until CONSULTANT has complies with the provisions of this section. 2 B. TITLE TO CERTAIN INTANGIBLE PROPERTY. CONSULTANT and its personnel shall immediately disclose and assign to CUSTOMER any right, title and interest in any inventions, models, processes, patents, copyrights and improvements thereon relating to services or processes or products of CUSTOMER that CONSULTANT, CONSULTANT's personnel or CONSULTANT's employees conceives or acquires during any consulting relationship with CUSTOMER or that CONSULTANT, CONSULTANT's personnel, or CONSULTANT's employees may conceive or acquire, during the period of one year after termination of this Agreement. 3. OWNERSHIP OF COPYRIGHT. CONSULTANT, CONSULTANT'S PERSONNEL, CONSULTANT'S EMPLOYEES, and CUSTOMER agree that the work to be produced by CONSULTANT and its personnel shall be considered a work made for hire as defined in the Copyright Act of 1976, 17 U.S.C. Section 101; and is therefore owned exclusively by CUSTOMER under Section 201(b), which vests copyright ownership of works for hire in the CUSTOMER for whom the work is prepared. 4. REPORT FORMS. CONSULTANT personnel providing Services under this Agreement will complete any CUSTOMER provided project control and/or project time reporting forms. 5. INDEPENDENT CONTRACTOR STATUS. A. CONSULTANT hereby declares it is engaged in an independent business and agrees to perform the Services as an independent contractor with full responsibility for the control and direction of its employees. CONSULTANT, in its performance of this Agreement, has and hereby retains this right to exercise full control and supervision over the accomplishment of the objectives set forth in the Consultant Services Schedule. CONSULTANT shall not be an agent, employee or servant for and may not bind CUSTOMER. This Agreement is not understood that CONSULTANT is free to contract for similar services to be performed for others during the term of this Agreement. B. CONSULTANT shall be solely responsible for the payment of each employee's compensation and benefits including employment taxes, any similar taxes associates with employment, withholding of federal, state, or local taxes imposed on wages, deductions for social security, contributions for unemployment compensation funds, and all other regulations governing such matters. CONSULTANT further warrants that it will comply with all other applicable, federal, state or local laws or regulations applicable to CONSULTANT as an employer regarding compensation, hours of work or other conditions of employment, including those applicable to minimum wage and overtime wages. C. The CONSULTANT represents that it is withholding federal and state income taxes, FICA, and FUTA taxes from the paychecks of all its employees who do work for CUSTOMER, its parent or any of its affiliates in all positions pursuant to this Agreement. Page 2 of 12 3 D. CONSULTANT further agrees to furnish CUSTOMER upon request a certificate or other evidence of proof of payment, or compliance with local, state, or federal laws covering contributions, taxes, and assessments imposed on wages and the employer. E. CONSULTANT personnel providing Services under this Agreement shall not be entitled to participate in or receive benefits under any CUSTOMER programs maintained for its employees, including, without limitation, life, medical and disability benefits, pension, profit sharing or other retirement plans or other fringe benefits. Nor shall CONSULTANT personnel be entitled to any direct or indirect compensation or remuneration of any kind from CUSTOMER as a result of the performance of this Agreement, except for CUSTOMER's obligation to pay the charges to CONSULTANT provided for herein, and CONSULTANT shall be responsible for all compensation of such CONSULTANT personnel and shall indemnify CUSTOMER for any claim by any CONSULTANT personnel for such rights or benefits. 6. INDEMNIFICATION. A. CONSULTANT shall be liable for and shall indemnify CUSTOMER against all claims, demands or liabilities (including reasonable attorneys' fees) due to personal injury, including death or any person or employee or damage to or loss of CUSTOMER property, arising out of or occurring in connection with the Services provided under this Agreement and which is caused in whole or in part by CONSULTANT or any personnel directly or indirectly employed by CONSULTANT. B. CONSULTANT agrees to indemnify the CUSTOMER for all taxes, contributions, penalties, fees and expenses (including but not limited to attorneys' fees and expenses) incurred by the CUSTOMER because of CONSULTANT's failure to withhold federal and state income taxes, FICA taxes, or FUTA taxes or any other such taxes or governmental charges, state or federal which CUSTOMER may be required to pay on account of CONSULTANT. 7. FEES. Fees will be invoiced in accordance with the attached Consultant Services Schedule(s). 8. COMMENCEMENT OF SERVICES. The Services shall commence on the date shown in the Consultant Services Schedule(s). 9. TERM. A. This Agreement shall commence as of the date first written above and shall continue in force and effect for a period of one (1) year (the "Term") unless Page 3 of 12 4 terminated earlier upon 30 days prior written notice by either party without liability to the other party, except as hereafter provided. B. Neither termination or expiration of this Agreement shall terminate the obligations of the CUSTOMER to CONSULTANT for charges due CONSULTANT for performance under this Agreement, nor or CONSULTANT or its personnel with respect to the protection of CUSTOMER's confidential information, nor the obligation of indemnity by CONSULTANT in provisions 5, 6 and 16.C of this Agreement, all of such obligations shall survive any termination or expiration hereof. 10. INSURANCE. CONSULTANT shall obtain, pay for and maintain insurance for the coverage and amounts of coverage not less than those set forth below and shall provide to CUSTOMER certificates issued by insurance companies satisfactory to CUSTOMER to evidence such coverages. Such certificates shall provide that there shall be no termination, decrease in, or nonrenewal of such coverages without thirty (30) days' prior written notice to CUSTOMER. In the event of any failure by CONSULTANT to comply with the requirements of this provision, CUSTOMER may, at its option, on notice to CONSULTANT, suspend this Agreement until there is full compliance with this paragraph or terminate this Agreement. The coverages required are as follows: A. Worker's Compensation insurance complying with the laws of the State or States having jurisdiction over each employee, whether or not CONSULTANT is required by such laws to maintain such insurance, and Employer's Liability with limits of $500,000 each accident, $500,000 disease each employee, and $500,000 disease policy limit. If work is to be performed in Nevada, North Dakota, Ohio, Washington, Wyoming, or West Virginia, CONSULTANT will participate in the appropriate state fund(s) to cover all eligible employees and provide a stop gap endorsement. B. Commercial or Comprehensive General Liability insurance on an occurrence form with a combined single limit of $1,000,000 each occurrence, and annual aggregates of $1,000,000 for bodily injury and property damage, including coverage for blanket contractual liability, broad form property damage, personal injury liability, independent contractors, products/completed operations, and when applicable the explosion, collapse and underground exclusion will be deleted. C. Automobile Liability insurance with a combined single limit of $1,000,000 each occurrence for bodily injury and property damage to include coverage for all owned, non-owned, and hired vehicles. In each of the above described policies, CONSULTANT agrees to waive and will required to insurers to waive any right of subrogation or recovery they may have against CUSTOMER, its parent, subsidiary, or affiliated companies. Page 4 of 12 5 Under the policies described in (B) and (C) above, CUSTOMER, its parent, subsidiary and affiliated companies will be named as additional insureds as respects CONSULTANT's operations and as respects any work performed under this contract. Any costs associated with naming these additional insureds is included in the contract costs. The policies described in (B) and (C) above will include the following "other insurance" amendment: "This insurance is primary insurance with respect to CUSTOMER, its parent, subsidiary and affiliated companies, and any other insurance maintained by COMPANY, its parent, subsidiary or affiliated companies is excess and not contributory with this insurance." Non-renewal or cancellation of policies described above will be effective only after written notice is received by CUSTOMER from the insurance company thirty (30) days in advance of any such non-renewal or cancellation. Prior to commencing the work hereunder, CONSULTANT will deliver to CUSTOMER certificates of insurance on an Acord 25 or 25S form per Exhibit A evidencing the existence of the insurance coverage required above. In the event of a loss or claim arising out of or in connection with this contract, CONSULTANT agrees, upon request of CUSTOMER, to submit the original or a certified copy of its insurance policies for inspection by CUSTOMER. CUSTOMER will not insure nor be responsible for any loss or damage, regardless of cause, to property of any kind, including loss of use thereof, owned, leased or borrowed by the CONSULTANTS, or their employees, servants or agents. 11. CONFIDENTIALITY. A. Definition: "Confidential Information" shall mean any and all written information identified as confidential by a legend to that effect and verbal information identified as confidential at the time of disclosure. Notwithstanding the foregoing, Confidential Information shall include the information described in section D below. B. Effect of Termination: Upon termination or expiration of this Agreement for any reason, or upon request of CUSTOMER, all Confidential Information, together with any copies thereof, shall be returned to the CUSTOMER or certified destroyed by the CONSULTANT. C. Equitable Relief: CONSULTANT acknowledges that in the event of a breach or threatened breach of the provisions of this Section, remedies at law will be inadequate and that CUSTOME shall be entitled to an injunction or other specific performance to enforce this provision, provided, however, that nothing herein shall be construed as precluding the CUSTOMER from pursuing further remedies. Page 5 of 12 6 D. ACKNOWLEDGEMENT OF NECESSITY OF SPECIAL COVENANTS CONTAINED IN SECTIONS 12 AND 13. In the course of CONSULTANT's consulting services hereunder, CONSULTANT will acquire valuable trade secrets, proprietary data and other Confidential Information (described above), with respect to CUSTOMER's business. The parties hereto agree that such trade secrets, proprietary data and other confidential information include but are not limited to the following: the inventions, models, processes, patents, copyrights, and improvements thereon described in sections 2.A, 2.B, and 3, CUSTOMER's business and financial methods and practices, pricing and selling techniques, file or data base materials, price lists, software listings or printouts, computer programs, lists of CUSTOMER's clients, client record cards, client files, credit and financial data of CUSTOMER's suppliers and present and prospective clients, and particular business requirements of CUSTOMER's present and prospective clients, as well as similar information relating to the parent, subsidiaries and affiliates of CUSTOMER. In addition, CONSULTANT, on behalf of CUSTOMER, may develop a personal acquaintance with clients and prospective clients of CUSTOMER, its parent, subsidiaries and affiliates. As a consequence thereof, the parties hereto acknowledge that CONSULTANT will occupy a position of trust and confidence with respect to CUSTOMER's affairs, products and services. In view of the foregoing and in consideration of the remuneration to be paid to CONSULTANT, CONSULTANT acknowledges that it is reasonable and necessary for the protection of the goodwill and business of CUSTOMER that CONSULTANT make the covenants contained in sections 12 and 13 regarding the conduct of CONSULTANT during and subsequent to CONSULTANT's rendering of services to CUSTOMER, and that CUSTOMER will suffer irreparable injury if CONSULTANT engages in conduct prohibited thereby. CONSULTANT, CONSULTANT's personnel, and CONSULTANT's employees represent that their experience and abilities are such that observance of the aforementioned covenants will not cause CONSULTANT any undue hardship or unreasonably interfere with CONSULTANT's ability to earn a livelihood. The covenants contained in sections 12 and 13 shall each be construed as a separate agreement independent of any other provisions of this Agreement, and the existence of any claim or cause of action of CONSULTANT against CUSTOMER, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by CUSTOMER of any of those covenants. 12. TRADE SECRETS AND CONFIDENTIAL INFORMATION. CONSULTANT and CONSULTANT's personnel, during the term of this Agreement or at any time thereafter, will not, without the express written consent of CUSTOMER, directly or indirectly communicate or divulge to, or use for his/her own benefit or for the benefit of any other person, firm, association or corporation, any of CUSTOMER's or its parent's or subsidiaries' or affiliates' trade secrets, proprietary data or other confidential information including, by way of illustration, the information described in section 11, which trade Page 6 of 12 7 secrets, proprietary data and other Confidential Information were communicated to or otherwise learned or acquired by CONSULTANT and/or CONSULTANT's personnel in the course of the consulting relationship covered by this Agreement, except that CONSULTANT may disclose such matters to the extent that disclosure is required (a) in the course of the consulting relationship with CUSTOMER, (b) to enable CONSULTANT's personnel to render services hereunder, or (c) by a court or other governmental agency of competent jurisdiction. As long as such matters remain trade secrets, proprietary data or other confidential information, CONSULTANT and CONSULTANT's personnel will not use such trade secrets, proprietary data or other confidential information in any way or in any capacity other than as a CONSULTANT of CUSTOMER and to further the CUSTOMER's interests. 13. CUSTOMER CLIENTELE. For a period of two years following the termination of this Agreement for any reason whatsoever (or if this period shall be unenforceable by law, then for such period as shall be enforceable), CONSULTANT and CONSULTANT's personnel will not contact (with a view toward selling any product or service competitive with any product or service sold or proposed to be sold by CUSTOMER or its parent or any subsidiary or affiliate of CUSTOMER at the time of termination of this Agreement, except for services currently provided by CONSULTANTS in the normal course of association or corporation (a) to which CUSTOMER or its parent or any subsidiary or affiliate of CUSTOMER sold any product or service, (b) which CONSULTANT or CONSULTANT's personnel solicited, contacted or otherwise dealt with on behalf of CUSTOMER or its parent or any subsidiary or affiliate of CUSTOMER, or (c) which CONSULTANT or CONSULTANT's personnel was otherwise aware was a client of CUSTOMER or its parent or any subsidiary or affiliate of CUSTOMER, during the year preceding the termination of this Agreement. CONSULTANT and/or CONSULTANT's personnel will not directly or indirectly make any such contact either for his/her own benefit or for the benefit of any other person, firm, association, or corporation, and CONSULTANT and CONSULTANT's personnel will not in any manner assist any person, firm, association, or corporation to make any such contact. 14. IMPROPER PAYMENTS. CONSULTANT will not use any funds received under this Agreement for illegal or otherwise improper purposes related to the Agreement. CONSULTANT will not pay any commissions, fees, or rebates to any employee of CUSTOMER nor favor any employee of CUSTOMER with gifts or entertainment of significant cost or value. If CUSTOMER has reasonable cause to believe that the provisions of the preceding sentences have been violated, CUSTOMER, or its representative, may audit the records of CONSULTANT, for the sole purpose of establishing compliance with such requirements. 15. ASSIGNED EMPLOYEES. A. CONSULTANT's employees assigned to work with CUSTOMER and/or its subsidiaries shall, weather permitting, undertake activities designed to accomplish the tasks described in Schedule A by the Expected Completion Date. CUSTOMER may request at any time the removal of any or all of the Page 7 of 12 8 CONSULTANT's employees from CUSTOMER's project. In the event of removal of a certain individual(s), and if CUSTOMER requests that CONSULTANT replace the individuals, CONSULTANT shall promptly replace the individual(s) for the remainder of the assignment. B. CONSULTANT represents that it is in full compliance with the Immigration Reform and Control Act of 1986 and will only provide CUSTOMER and its subsidiaries with personnel whose employment eligibility has been verified. 16. CONSULTANT EMPLOYEES. A. CONSULTANT shall recruit, interview, test, select, hire, and train the persons who shall provide the Services hereunder. CONSULTANT shall have sole responsibility to counsel, discipline, review, evaluate, set the pay rates of, and terminate its employees assigned to CUSTOMER. CONSULTANT employees assigned to perform the Services for CUSTOMER are solely the employees of CONSULTANT. B. CONSULTANT agrees to comply in all material aspects with all federal, state and local laws relating to employment, including without limitation, equal employment opportunity, discrimination in employment or employment practices, occupational safety or health standards, labor laws, state insurance laws, unemployment insurance, collective bargaining, payment and withholding of taxes, wage and hour laws, the Employee Retirement Income Security Act, the Americans With Disabilities Act, and the Immigration Reform and Control Act. C. CONSULTANT shall indemnify and hold harmless CUSTOMER from and against any and all losses, costs, claims, action, damages, liabilities, fines, penalties, injuries (including death) or expenses (including reasonable legal expenses) of any kind or whatsoever nature arising out of, resulting from, or relating to, all obligations and liabilities of CONSULTANT with respect to CONSULTANT employees arising out of employment by CONSULTANT or during the period of such employment or which accrue under any employee plan or benefit arrangement otherwise, including without limitation, all obligations of CONSULTANT for salaries, vacation, and holiday pay, severance payments, bonuses and other forms of compensation, benefits or other payments; and all costs and expenses with respect to any termination by CONSULTANT of its employees who performed services under this Agreement. 17. SOLICITATION OF EMPLOYMENT. A. CONSULTANT shall not, during the Term of this Agreement and for a period of three (3) months thereafter, directly or indirectly induce, cause, solicit, persuade, or attempt to do any of the foregoing in order to cause any representative, agent or employee of CUSTOMER, its parent, or any of its affiliates to terminate such person's employment relationship with CUSTOMER, its parent, or any of its Page 8 of 12 9 affiliates, or to violate the terms of any agreement between said representative, agent, or employee and CUSTOMER, its parent, or any of its affiliates. B. CONSULTANT shall not, during the Term of this Agreement, solicit or attempt to solicit another consulting firm's employee or personnel performing services on the premises of the CUSTOMER. C. CUSTOMER agrees to solicit, without written permission, the employment of any of CONSULTANT's employees, with whom CUSTOMER comes into contact during an assignment under this Agreement, during the term of the assignment, and continuing for a period of three (3) months thereafter. Thereafter, CUSTOMER shall be free of any obligation to CONSULTANT. 18. ALCOHOL AND DRUG POLICY. A. CONSULTANT's personnel, while on CUSTOMER's premises or engaged in CUSTOMER's work, shall refrain from unauthorized consumption or possession of alcoholic beverages and the possession, sale, use or distribution of unauthorized drugs. CONSULTANT agrees to ensure a drug-free workforce whereby CONSULTANT maintains an Alcohol and Drug Abuse Prevention Program in compliance with CUSTOMER's policy which will include, but not be limited to, drug testing and certification of such testing of CONSULTANT's employees as appropriate and to the extent permitted by law. CUSTOMER is granted the right to request and receive written verification from CONSULTANT of CONSULTANT's drug testing of its employees who are to be on CUSTOMER's premises for a period in excess of five (5) days, prior to entry of CONSULTANT's employees onto CUSTOMER's premises. CONSULTANT's failure to comply with this paragraph will constitute a material breach of this Agreement. B. Notwithstanding any other provision of this Agreement, violation of provision 18.A by CONSULTANT personnel will: 1) result in immediate removal of CONSULTANT personnel from the CUSTOMER's premises and, 2) constitute a material breach of this Agreement. CONSULTANT shall have the obligation to replace its personnel with a suitable substitute or substitutes, within a reasonable time. 19. NO SMOKING POLICY. A. CUSTOMER maintains a smoke-free workplace and does not permit smoking or the use of any type of smoking material in any customer facility or vehicle. CONSULTANT shall comply with CUSTOMER's No Smoking Policy. CONSULTANT shall recognize the foregoing no smoking rules and inform its employees of such rules. CONSULTANT shall not permit its employees any special break periods for smoking while performing services under this Agreement. Page 9 of 12 10 B. Notwithstanding any other provision of this Agreement, violation of Provision 19.A by CONSULTANT personnel will 1) result in immediate removal of CONSULTANT personnel from the CUSTOMER's premises and, 2) constitute a material breach of this Agreement. CONSULTANT shall have the obligation to replace its personnel with a suitable substitute or substitutes, within a reasonable time. 20. WORKPLACE VIOLENCE RISK REDUCTION AND RESPONSE POLICY. CONSULTANT shall comply with CUSTOMER's Workplace Violence Risk Reduction and Response Policy. CONSULTANT's personnel, while on CUSTOMER's premises or engaged in CUSTOMER's work, shall also comply with the Policy. Notwithstanding any other provision of this Agreement, violation of this policy by CONSULTANT personnel will: 1) result in immediate discharge and removal of CONSULTANT personnel from the CUSTOMER's premises and, 2) may, at CUSTOMER's option, constitute a material breach of this Agreement. CONSULTANT shall have the obligation to make a good faith effort to replace its personnel with a suitable substitute or substitutes, within a reasonable time if CUSTOMER requests a replacement. 21. BACKGROUND INQUIRIES. CONSULTANT agrees to conduct investigative background inquiries on all of its personnel that are supplied to CUSTOMER to perform the Services described on Schedule A. Background inquiries are to be made investigating criminal, and other relevant records and reports including but not limited to those reports with information concerning past performance, experience and reasons for termination from past employers. All background inquiries will be conducted in compliance with all applicable laws including but not limited to laws concerning sealed records. CONSULTANT agrees to require its personnel to sign a form giving authorization to CONSULTANT to conduct such an inquiry and releasing CONSULTANT, CUSTOMER and those persons contacted from any claims the individual might bring including but not limited to claims for invasion of privacy of defamation. CONSULTANT shall inform CUSTOMER of the results of the inquiry and CUSTOMER may request that an individual not be assigned to CUSTOMER under this Agreement. A conviction of a crime will not automatically disqualify one of CONSULTANT's personnel from begin assigned to CUSTOMER. CONSULTANT agrees to indemnify and hold harmless CUSTOMER, its affiliates, officers, directors and employees for all claims, demands or liabilities including reasonable attorneys' fees arising out of the actions or omissions of CONSULTANT under this Agreement and arising out of the actions of CONSULTANT's personnel while on CUSTOMER's premises and/or performing services for CUSTOMER. 22. AUDIT. Upon reasonable notice and at all times hereafter CUSTOMER shall have, at CUSTOMER's expense, the right to audit or to have audited and to copy the books and records of CONSULTANT which relate directly to this Agreement. When required by Page 10 of 12 11 CUSTOMER, CONSULTANT shall provide the auditors with access to all personnel, property and records, and cooperation of CONSULTANT's personnel, necessary to effectuate the audit or audits hereunder. The auditors shall have the right to copy any and all documentation relating to performance under this Agreement. 23. ASSIGNABILITY. This Agreement may not be assigned by either party without the prior written consent of the other party, except that no consent is necessary for the CUSTOMER to assign this Agreement to a parent, subsidiary, or affiliate of CUSTOMER. This Agreement shall be binding upon CONSULTANT, CONSULTANT's personnel, CONSULTANT's employees, its successors and permitted assigns, if CONSULTANT is unincorporated, then upon CONSULTANT's heirs and permitted assigns and the CUSTOMER, its successors and permitted assigns. 24. NOTICES. All notices which may be necessary or proper for either CUSTOMER or CONSULTANT to give or deliver to the other shall be sent and shall be deemed given when sent by registered or certified mail, postage prepaid and return receipt requested, and if given by CUSTOMER to CONSULTANT, shall be addressed to: Mr. Micky K. Woo 38 Devonshire Drive Oakbrook, IL 60523 Telephone number: 630/920-1320 Attn: Micky K. Woo and if given by CONSULTANT to CUSTOMER, shall be addressed to: Williams Communications Group, Inc. One Williams Center Tulsa, Oklahoma 74172 Attn: Contract Administration 25. AMENDMENTS. This Agreement, and the provisions hereof, may be altered, or amended, modified or superseded only in a writing executed jointly by CUSTOMER and CONSULTANT. 26. COMPLETE AGREEMENT. Both parties acknowledge that they have read this Agreement and any attachments hereto, understand them and agree to be bound by their terms, and further agree that they are the complete and exclusive statement of the Agreement between the parties, which supersede all proposals oral or written and other communications between the parties relating to this Service. The parties further agree that all changes to this Agreement must be in writing and signed by the parties in order to bind them. Page 11 of 12 12 27. GOVERNING LAW. The rights and obligations of the parties to this Agreement shall be governed by and construed in accordance with, the laws of the State of Oklahoma without regard to the choice of law principles thereof. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the date first written above. THE MANAGEMENT NETWORK GROUP, INC. WILLIAMS COMMUNICATIONS GROUP, INC. Signature: Signature: ------------------------ ------------------------------ Name: Name: ----------------------------- ----------------------------------- Title: Title: ---------------------------- ---------------------------------- ATTACHMENTS: Consulting Services Schedule Page 12 of 12 13 SCHEDULE A CONSULTING SERVICES SCHEDULE 1. NAME OF CONSULTANT EMPLOYEE(S): SEE ATTACHED PROPOSAL___________________ ________________________________________________________________________ 2. RATE:___________________________________________________________________ 3. DATE SERVICES SHALL COMMENCE:___________________________________________ 4. APPROXIMATE DATE SERVICES SHALL TERMINATE:______________________________ 5. SERVICES TO BE PERFORMED: 5.1 CONSULTANT SHALL PROVIDE THE FOLLOWING SERVICES:________________ ________________________________________________________________ ________________________________________________________________ 5.2 CONSULTANT SHALL ALSO PROVIDE SUCH SERVICES AS MAY BE REQUESTED BY CUSTOMER FROM TIME TO TIME DURING THE TERM OF THIS AGREEMENT AS PROVIDED IN SECTION 1 HEREOF. 6. EXPECTED COMPLETION DATE: 6.1 CONSULTANT WILL PERFORM BASED ON INDIVIDUAL PROJECTS AND THE HOURS AGREED UPON FOR EACH PROJECT. ADDITIONAL HOURS OF SERVICES, IF ANY, WILL BE MUTUALLY AGREED UPON BY CUSTOMER AND CONSULTANT AS THE NEED ARISES. 6.2 CONSULTANT WILL ESTABLISH A WRITTEN PROJECT WORKING SCHEDULE ACCEPTABLE TO CUSTOMER, WHICH SCHEDULE MAY BE VARIED WITH THE PRIOR CONSENT OF CUSTOMER. THE PROJECT WORKING SCHEDULE SHALL BE SUBMITTED TO AND APPROVED BY CUSTOMER BEFORE WORK ON ANY PROJECT BEGINS. 6.3 CONSULTANT MAY WORK LESS THAN TWENTY (20) HOURS WEEKLY ONLY WITH THE PRIOR CONSENT OF CUSTOMER. Page 1 of 2 14 7. FACILITY(IES) WHERE SERVICES TO BE PERFORMED: ________________________________________________________________________ ________________________________________________________________________ 8. REPRESENTATIVE INPUT DATA AND TEST DATA REQUESTED, IF ANY, (IN SUFFICIENT DETAIL, FORMAT AND QUANTITY): ________________________________________________________________________ ________________________________________________________________________ 9. INVOICING:______________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ THE MANAGEMENT NETWORK GROUP, INC. WILLIAMS COMMUNICATIONS GROUP, INC. Signature: Signature: ----------------------- -------------------------- Name: Name: ---------------------------- ------------------------------- Title: Title: --------------------------- ------------------------------ Date: Date: ---------------------------- ------------------------------- Page 2 of 2 EX-10.6 10 CREDIT AGREEMENT DATED 02/12/98 1 Exhibit 10.6 EXECUTION COPY ================================================================================ CREDIT AGREEMENT Dated as of February 12, 1998 Among THE MANAGEMENT NETWORK GROUP, INC., THE GUARANTORS NAMED HEREIN, THE LENDERS NAMED HEREIN, and THE CHASE MANHATTAN BANK, AS ADMINISTRATIVE AND COLLATERAL AGENT and IBJ SCHRODER BANK & TRUST COMPANY, AS SYNDICATION AGENT 2 TABLE OF CONTENTS
Page ---- I. DEFINITIONS..........................................................................1 SECTION 1.01. Certain Defined Terms..................................................1 SECTION 1.02. Accounting Terms......................................................20 II. THE LOANS...........................................................................22 SECTION 2.01. Term Loan Commitments and Revolving Credit Commitments................22 SECTION 2.02. Loans.................................................................22 SECTION 2.03. Notice of Loans.......................................................25 SECTION 2.04. Notes; Repayment of Loans.............................................25 SECTION 2.05. Interest on Loans.....................................................27 SECTION 2.06. Fees..................................................................27 SECTION 2.07. Termination and Reduction of Revolving Credit Commitments and Term Loan Commitments.............................27 SECTION 2.08. Interest on Overdue Amounts; Alternate Rate of Interest...............28 SECTION 2.09. Prepayment of Loans...................................................29 SECTION 2.10. Reserve Requirements; Change in Circumstances.........................32 SECTION 2.11. Change in Legality....................................................35 SECTION 2.12. Indemnity.............................................................36 SECTION 2.13. Pro Rata Treatment; Assumption by and Delegation of Authority to the Agent..............................36 SECTION 2.14. Sharing of Setoffs....................................................38 SECTION 2.15. Taxes.................................................................38 SECTION 2.16. Payments and Computations.............................................41 SECTION 2.17. Issuance of Letters of Credit.........................................41 SECTION 2.18. Payment of Letters of Credit; Reimbursement...........................42 SECTION 2.19. Agent's Actions with respect to Letters of Credit.....................44 SECTION 2.20. Letter of Credit Fees.................................................44 III. COLLATERAL SECURITY.................................................................45 SECTION 3.01. Security Documents....................................................45 SECTION 3.02. Filing and Recording..................................................45 IV. REPRESENTATIONS AND WARRANTIES......................................................45 SECTION 4.01. Organization, Legal Existence.........................................45 SECTION 4.02. Authorization.........................................................46 SECTION 4.03. Governmental Approvals................................................46 SECTION 4.04. Binding Effect........................................................46 SECTION 4.05. Material Adverse Change...............................................46 SECTION 4.06. Litigation; Compliance with Laws; etc.................................47 SECTION 4.07. Financial Statements..................................................47
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Page ---- SECTION 4.08. Federal Reserve Regulations...........................................48 SECTION 4.09. Taxes.................................................................48 SECTION 4.10. Employee Benefit Plans................................................49 SECTION 4.11. No Material Misstatements.............................................50 SECTION 4.12. Investment Company Act; Public Utility Holding Company Act............50 SECTION 4.13. Security Interest.....................................................51 SECTION 4.14. Use of Proceeds.......................................................51 SECTION 4.15. Subsidiaries..........................................................51 SECTION 4.16. Title to Properties; Possession Under Leases; Trademarks..............51 SECTION 4.17. Solvency..............................................................52 SECTION 4.18. Permits, etc..........................................................52 SECTION 4.19. Compliance with Environmental Laws....................................53 SECTION 4.20. No Change in Credit Criteria or Collection Policies...................53 SECTION 4.21. Employee Matters......................................................54 SECTION 4.22. Recapitalization......................................................54 V. CONDITIONS OF CREDIT EVENTS.........................................................54 SECTION 5.01. All Credit Events.....................................................54 SECTION 5.02. First Borrowing.......................................................55 VI. AFFIRMATIVE COVENANTS...............................................................60 SECTION 6.01. Legal Existence.......................................................60 SECTION 6.02. Businesses and Properties.............................................60 SECTION 6.03. Insurance.............................................................61 SECTION 6.04. Taxes.................................................................61 SECTION 6.05. Financial Statements, Reports, etc....................................62 SECTION 6.06. Litigation and Other Notices..........................................64 SECTION 6.07. ERISA.................................................................65 SECTION 6.08. Maintaining Records; Access to Properties and Inspections; Right to Audit.......................................66 SECTION 6.09. Use of Proceeds.......................................................66 SECTION 6.10. Fiscal Year-End.......................................................66 SECTION 6.11. Further Assurances....................................................67 SECTION 6.12. Additional Grantors and Guarantors....................................67 SECTION 6.13. Environmental Laws....................................................67 SECTION 6.14. Perform Other Covenants...............................................69 SECTION 6.15. Maintain Operating Accounts...........................................69 SECTION 6.16. Purchase Price Adjustments............................................69 SECTION 6.17. Amendments............................................................69 SECTION 6.18. Interest Rate Protection..............................................69 SECTION 6.19. Life Insurance........................................................70 VII. NEGATIVE COVENANTS..................................................................70 SECTION 7.01. Liens.................................................................70
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Page ---- SECTION 7.02. Sale and Lease-Back Transactions......................................71 SECTION 7.03. Indebtedness..........................................................71 SECTION 7.04. Dividends, Distributions and Payments.................................72 SECTION 7.05. Consolidations, Mergers and Sales of Assets...........................72 SECTION 7.06. Investments...........................................................72 SECTION 7.07. Capital Expenditures..................................................73 SECTION 7.08. Debt Service Coverage Ratio...........................................73 SECTION 7.09. Leverage Ratio; EBITDA................................................74 SECTION 7.10. Interest Coverage Ratio...............................................75 SECTION 7.11. Business..............................................................75 SECTION 7.12. Sales of Receivables..................................................75 SECTION 7.13. Use of Proceeds.......................................................76 SECTION 7.14. ERISA.................................................................76 SECTION 7.15. Accounting Changes....................................................76 SECTION 7.16. Prepayment or Modification of Indebtedness; Modification of Charter Documents.................................76 SECTION 7.17. Transactions with Affiliates..........................................77 SECTION 7.18. Consulting Fees.......................................................77 SECTION 7.19. Negative Pledges, Etc.................................................77 VIII. EVENTS OF DEFAULT...................................................................77 IX. AGENT...............................................................................81 X. MANAGEMENT, COLLECTION AND STATUS OF RECEIVABLES AND OTHER COLLATERAL...............85 SECTION 10.01. Collection of Receivables; Management of Collateral..................85 SECTION 10.02. Receivables Documentation............................................87 SECTION 10.03. Status of Receivables and Other Collateral...........................87 SECTION 10.04. Monthly Statement of Account.........................................88 SECTION 10.05. Collateral Custodian.................................................88 XI. MISCELLANEOUS.......................................................................88 SECTION 11.01. Notices .............................................................88 SECTION 11.02. Survival of Agreement................................................89 SECTION 11.03. Successors and Assigns; Participations...............................89 SECTION 11.04. Expenses; Indemnity..................................................93 SECTION 11.05. Applicable Law.......................................................94 SECTION 11.06. Right of Setoff......................................................94 SECTION 11.07. Payments on Business Days............................................95 SECTION 11.08. Waivers; Amendments..................................................95 SECTION 11.09. Severability.........................................................97 SECTION 11.10. Entire Agreement; Waiver of Jury Trial, etc..........................97 SECTION 11.11. Confidentiality......................................................97 SECTION 11.12. Submission to Jurisdiction...........................................98
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Page ---- SECTION 11.13. Counterparts; Facsimile Signature....................................98 SECTION 11.14. Headings.............................................................99
iv 6 Page ---- EXHIBITS EXHIBIT A-1 Form of Term Note-A EXHIBIT A-2 Form of Term Note-B EXHIBIT B Form of Revolving Credit Note EXHIBIT C Form of Opinion of Counsel EXHIBIT D-1 Form of Pledge Agreement EXHIBIT D-2 Charge Over Shares EXHIBIT E Form of Security Agreement EXHIBIT F Form of Assignment and Acceptance EXHIBIT G Form of Security Agreement - Trademarks EXHIBIT H Form of Assignment of Contract EXHIBIT I Form of Assignment of Life Insurance SCHEDULES SCHEDULE 2.01(a) Term Loan Commitments SCHEDULE 2.01(b) Revolving Credit Commitments SCHEDULE 2.02 Domestic Lending Offices SCHEDULE 2.03 Eurodollar Lending Offices SCHEDULE 4.01 Qualified Jurisdictions SCHEDULE 4.05 Material Adverse Change SCHEDULE 4.06(a) Litigation SCHEDULE 4.06(b) Compliance with Laws SCHEDULE 4.09 Taxes SCHEDULE 4.18 Permits SCHEDULE 4.19 Environmental Law Compliance SCHEDULE 4.20 Change in Credit Criteria SCHEDULE 5 Employees SCHEDULE 6.03 Insurance SCHEDULE 6.04 Taxes SCHEDULE 6.05(j) Borrowing Base Certificate SCHEDULE 6.13 Hazardous Materials SCHEDULE 7.01 Existing Liens SCHEDULE 7.03 Existing Indebtedness SCHEDULE 7.18 Affiliate Fees v 7 CREDIT AGREEMENT dated as of February 12, 1998, among THE MANAGEMENT NETWORK GROUP, INC., a Kansas corporation (the "Borrower"), the financial institutions from time to time party hereto, initially consisting of those financial institutions listed on Schedules 2.01(a) and 2.01(b) annexed hereto (collectively, the "Lenders"), and THE CHASE MANHATTAN BANK, as administrative and collateral agent for the Lenders (in such capacity, the "Agent"), and IBJ SCHRODER BANK & TRUST COMPANY, as syndication agent. The Borrower has applied to the Lenders for Loans (such term and all other capitalized terms used in this paragraph having the respective meanings ascribed to such terms above or hereinafter) up to an aggregate principal amount of $29,000,000 in the form of (a) a Term Loan-A to the Borrower in an aggregate principal amount not in excess of $12,000,000 outstanding, (b) a Term Loan-B to the Borrower in an aggregate principal amount not in excess of $12,000,000 and (c) Revolving Credit Loans to the Borrower at any time and from time to time prior to the Revolving Credit Termination Date in an aggregate principal amount not in excess of $5,000,000 at any time outstanding. The proceeds of the Term Loans, and up to $500,000 of Revolving Credit Loans, shall be used to partially finance the consideration to be paid pursuant to the Recapitalizaton Agreement and to pay fees and expenses associated with the Recapitalization. The proceeds of the Revolving Credit Loans shall also be used for general corporate purposes. The Grantors will provide Collateral in accordance with the provisions of this Agreement and the Security Documents. The Lenders are severally, and not jointly, willing to extend such Loans to the Borrower subject to the terms and conditions hereinafter set forth. Accordingly, the Borrower, the Lenders and the Agent hereby agree as follows: 1. DEFINITIONS SECTION 1.1. Certain Defined Terms. For purposes hereof, the following terms shall have the meanings specified below: "Adjusted LIBO Rate" shall mean, with respect to any Eurodollar Loan for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the product of (i) the LIBO Rate in effect for such Interest Period and (ii) Statutory Reserves. For purposes hereof, "Statutory Reserves" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including, without limitation, any marginal, special, emergency, or supplemental reserves) expressed as a decimal established by the Board and any other banking authority to which any Lender is subject with respect to the Adjusted LIBO Rate for Eurocurrency Liabilities (as defined in Regulation D). Such reserve percentages shall include, without limitation, those imposed under Regulation D. 8 Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets which may be available from time to time to any Lender under Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Affiliate" shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries Controls or is Controlled by or is under common Control with the person specified. "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" shall have meanings correlative thereto. "Agent" shall have the meaning assigned to such term in the preamble to this Agreement. "Alternate Base Loan" shall mean a Loan based on the Alternate Base Rate in accordance with Article II hereof. "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1%, and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the Agent at its principal office in New York City as its prime rate in effect at such time. "Base CD Rate" shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) Statutory Reserves and (b) the Assessment Rate. "Three-Month Secondary CD Rate" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. "Statutory Reserves" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the maximum reserve percentage (including any marginal, special, emergency or supplemental reserves) expressed as a decimal, established by the Board and any other banking 2 9 authority to which the Agent is subject with respect to the Base CD Rate, for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Assessment Rate" shall mean the annual assessment rate (net of refunds and rounded upwards, if necessary, to the next 1/16 of 1%) estimated by the Agent (in good faith, but in no event in excess of statutory or regulatory maximums) to be payable by the Agent to the Federal Deposit Insurance Corporation (or any successor) for insurance by such Corporation (or such successor) of time deposits made in dollars at the Agent's domestic offices during the current calendar year. "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. If for any reason the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective Rate, or both, for any reason, including, the inability or failure of the Agent to obtain sufficient quotations in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "Applicable Lending Office" shall mean, with respect to each Lender, such Lender's Domestic Lending Office in the case of an Alternate Base Loan and such Lender's Eurodollar Lending Office in the case of a Eurodollar Loan. "Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee and accepted by the Agent, in substantially the form of Exhibit F annexed hereto. "Assignment of Contract" shall mean the Assignment of Contract, dated as of the date hereof, between the Borrower and the Agent, for its own benefit and for the benefit of the Lenders, substantially in the form of Exhibit H annexed hereto, as amended, modified or supplemented from time to time. "Assignment of Life Insurance" shall mean the Assignment of Life Insurance dated as of the date hereof, between the Borrower and the Agent, for its own benefit and for the benefit of the Lenders, substantially in the form of Exhibit I annexed hereto, as amended, modified or supplemented from time to time. 3 10 "Availability" shall mean at any time (i) the lesser at such time of (x) the Total Revolving Credit Commitment and (y) the Borrowing Base, minus (ii) the sum at such time of (x) the unpaid principal balance of, and accrued interest and fees on the Revolving Credit Loans together with all reserves established pursuant to this Agreement including, without limitation, Section 7.01(c) hereof, and (y) the Letter of Credit Usage. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States. "Borrower" shall have the meaning assigned to such term in the preamble to this Agreement. "Borrowing Base" shall have the meaning assigned to such term in Section 2.01(b) hereof. "Business Day" shall mean any day, other than a Saturday, Sunday or legal holiday in the State of New York, on which banks are open for substantially all their banking business in New York City except that, if any determination of a "Business Day" shall relate to a Eurodollar Loan, the term "Business Day" shall in addition exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capitalized Lease Obligation" shall mean an obligation to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real and/or personal property which obligation is required to be classified and accounted for as a capital lease on a balance sheet prepared in accordance with GAAP, and for purposes hereof the amount of such obligation shall be the capitalized amount thereof determined in accordance with GAAP. "Cash Interest Expense" shall mean, with respect to any person for any period, the Interest Expense of such person for such period less all non-cash items constituting Interest Expense during such period (including, without limitation, amortization of debt discounts and payments of interest on Indebtedness by issuance of Indebtedness). "Change in Net Working Accounts" shall mean the change (expressed as a negative number in the event of an increase or a positive number in the event of a decrease), if any, in the excess of Consolidated current assets (excluding cash and cash equivalents) as of the end of the applicable period over Consolidated current liabilities (excluding the current portion of long-term Indebtedness and amounts outstanding in the final year of the Revolving Credit Commitment) as of the end of such period as compared with the beginning of such period. 4 11 "Change of Control" shall mean Holdings shall cease to own stock of the Borrower entitling it, at the time a determination is made hereunder, to cast the votes required to elect a majority of members of the Board of Directors of the Borrower. "Closing Date" shall mean the date of the first borrowing under this Agreement, but in no event later than February 28, 1998. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Collateral" shall mean all collateral and security as described in the Security Documents. "Commitment" shall mean, with respect to each Lender, the sum of the Term Loan-A Commitment of such Lender as set forth in Schedule 2.01(a), the Term Loan-B Commitment of such Lender as set forth in Schedule 2.01(a) and the Revolving Credit Commitment of such Lender as set forth in Schedule 2.01(b), as each may be adjusted from time to time pursuant to this Agreement including, without limitation, Section 2.07 hereof. "Commitment Letter" shall mean the letter dated January 27, 1998, as amended to the Closing Date, addressed to Behrman Capital and the related letter of interest dated January 22, 1998 and accompanying outline of terms and fee schedule. "Consolidated" shall mean, in respect of the Borrower, as applied to any financial or accounting term, such term determined on a consolidated basis in accordance with GAAP (except as otherwise required herein) for the Borrower and all of its consolidated subsidiaries. "Contaminant" shall mean all Hazardous Materials and all those substances which are regulated by or form the basis of liability under Federal, state or local environmental, health and safety statutes or regulations, or any other material or substance which constitutes a material health, safety or environmental hazard to any person or property. "Credit Event" shall mean each borrowing and each issuance of a Letter of Credit hereunder. "Credits" shall mean the Loans and Letters of Credit. "Customer" shall mean and include the account debtor or obligor with respect to any Receivable. 5 12 "Debt Service Coverage Ratio" shall mean, with respect to any person for any period, the ratio of (i) Net Cash Flow to (ii) aggregate Debt Service Expense. "Debt Service Expense" shall mean, with respect to any person for any period, the aggregate of regularly scheduled principal payments of all Funded Debt (including, without limitation, Subordinated Indebtedness) made or to be made by such person during such period on a Consolidated basis in accordance with GAAP. "Default" shall mean any condition, act or event which, with notice or lapse of time or both, would constitute an Event of Default. "dollars" or the symbol "$" shall mean dollars in lawful currency of the United States of America. "Domestic Lending Office" shall mean, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name in Schedule 2.02 annexed hereto, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent. "EBITDA" shall mean with respect to any person for any period the sum of (i) Net Income, (ii) Interest Expense, (iii) depreciation and amortization expense, (iv) other noncash items properly deducted in arriving at Net Income (or less any such items properly added in arriving at Net Income), and (v) federal, state and local income taxes. "Eligible Receivables" shall mean Receivables created by the Borrower arising out of the rendition of services by the Borrower, which are and at all times shall continue to be acceptable to the Agent in all respects. Standards of eligibility may be fixed and revised from time to time solely by the Agent in the Agent's reasonable judgment. In general, without limiting the foregoing, a Receivable shall in no event be deemed to be an Eligible Receivable unless: (a) all payments due on the Receivable have been recorded on Borrower's books and represent services performed; (b) the payment due on the Receivable is not more than 90 days past the invoice date or 60 days past the due date; (c) the payments due on more than 50% of all Receivables from the same Customer are less than 90 days past the invoice date; (d) the Receivable arose from services fully rendered in relation to the amount of Receivable and no default on the part of the Borrower exists under the agreement or arrangement under which such services are being furnished; (e) the Receivable is in full conformity with the representations and warranties made by the Borrower to the Agent and the Lenders with respect thereto and is free and clear of all security interests and Liens of any nature whatsoever other than any security interest deemed to be held by the Borrower or any security interest created pursuant to the Security Documents or permitted by Section 7.01 hereof; (f) the Receivable constitutes an "account" or "chattel paper" within the meaning of the Uniform Commercial Code of the state in which the 6 13 Receivable is located; (g) the Customer has not asserted that the Receivable, and the Borrower is not aware that the Receivable, arises out of a bill and hold or consignment or is subject to any setoff, contras, net-out contract, offset, deduction, dispute, credit, counterclaim or other defense arising out of the transactions represented by the Receivables or independently thereof (but only to the extent of such asserted setoff, deduction, dispute or other claim); (h) the Receivable arose in the ordinary course of business of the Borrower; (i) the Customer is not (x) the United States government or the government of any state or political subdivision thereof or therein in which compliance with the Federal Assignment of Claims Act of 1940 or similar statute is required to provide the Agent with Lien priority or (y) an Affiliate of the Borrower or any subsidiary of any thereof or an employee of the Borrower; (j) the Customer is a United States or Canadian person or an obligor in the United States or Canada; (k) the Receivable complies with all material requirements of all applicable laws and regulations, whether Federal, state or local (including, without limitation, usury laws and laws, rules and regulations relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy); (l) to the knowledge of the Borrower, the Receivable is in full force and effect and constitutes a legal, valid and binding obligation of the Customer enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally and by general equity principles; (m) the Receivable is denominated in and provides for payment by the Customer in dollars; (n) the Receivable has not been and is not required to be charged off or written off as uncollectible in accordance with GAAP or the customary business practices of the Borrower; (o) the Agent on behalf of the Lenders possesses a valid, perfected first priority security interest in such Receivable as security for payment of the Obligations; (p) the Receivable is not with respect to a Customer (other than AT&T) having its principal place of business in New Jersey, Minnesota or any other state denying creditors access to its courts in the absence of a Notice of Business Activities Report or other similar filing, unless Borrower has either qualified as a foreign corporation authorized to transact business in such state or has filed a Notice of Business Activities Report or similar filing with the applicable state agency for the then current year; and (q) the Agent in the exercise of its reasonable discretion is satisfied with the credit standing of the Customer in relation to the amount of credit extended provided that any limitations on the amount of Receivables of any Customer to be excluded by the Agent in its reasonable discretion under this clause (q) shall only affect the ability of the Borrower to include the amount of such Receivables as Eligible Receivables for purposes of the funding of future Revolving Credit Loans. Notwithstanding the foregoing, all Receivables of any single Customer which, in the aggregate, exceed 35% of the total Eligible Receivables at the time of any such determination shall be deemed not to be Eligible Receivables to the extent of such excess. "Environmental Claim" shall mean any written notice of violation, claim, demand, abatement or other order by any governmental authority or any person for 7 14 personal injury (including sickness, disease or death), tangible or intangible property damage, damage to the environment, nuisance, pollution, contamination or other adverse effects on the environment, or for fines, penalties or deed or use restrictions, resulting from or based upon (i) the existence, or the continuation of the existence, of a Release (including, without limitation, sudden or non-sudden, accidental or nonaccidental Releases), of, or exposure to, any Contaminant at, in, by or from any of the properties of the Borrower or its subsidiaries, (ii) the environmental aspects of the transportation, storage, treatment or disposal of Contaminants in connection with the operation of any of the properties of the Borrower or its subsidiaries or (iii) the violation, or alleged violation by the Borrower or any of its subsidiaries, of any statutes, ordinances, orders, rules, regulations, Permits or licenses of or from any governmental authority, agency or court relating to environmental matters connected with any of the properties of the Borrower or its subsidiaries, under any applicable Environmental Law. "Environmental Laws" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. Section 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), the Oil Pollution Act of 1990 (33 U.S.C. Section 2701 et seq.), the Safe Drinking Water Act (42 U.S.C. Section 300f, et seq.), the Clear Air Act (42 U.S.C. Section 7401 et seq.), the Toxic Substances Control Act, as amended (15 U.S.C. Section 2601 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. Section 136 et seq.), and the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.), as such laws have been and hereafter may be amended or supplemented, and any related or analogous present or future Federal, state or local, statutes, rules, regulations, ordinances, licenses, permits and interpretations and orders of regulatory and administrative bodies. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) which together with the Borrower or any of its subsidiaries would be treated as a single employer under Section 302 of Title I or Title IV of ERISA or with respect to Section 412 or Section 414(b), (e), (m) or (o) of the Code. "Eurodollar Lending Office" shall mean, with respect to any Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name in Schedule 2.03 annexed hereto (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent. "Eurodollar Loan" shall mean a Loan based on the Adjusted LIBO Rate in accordance with Article II hereof. 8 15 "Event of Default" shall have the meaning assigned to such term in Article VIII hereof. "Excess Cash Flow" shall mean, with respect to any person for any period, the amount, if any, by which Net Cash Flow (which solely for the purpose of determining Excess Cash Flow shall include the Change in Net Working Accounts for such period) of such person and its subsidiaries on a Consolidated basis for such period exceeds the sum (a) of the Debt Service Expense of such person and its subsidiaries on a Consolidated basis for such period plus (b) the excess of the aggregate amount of all optional prepayments, if any, made with respect to the Term Loans pursuant to Section 2.09(a) hereof, during such period over the regularly scheduled payments to be made pursuant to Section 2.04(c) during such period. "Final Maturity Date" shall mean the sixth anniversary of the Closing Date. "Financial Officer" shall mean, with respect to any person, the chief financial officer, controller, treasurer or other financial officer of such person. "FIRREA" shall mean the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended from time to time. "Fiscal Year" shall mean the fiscal year of the Borrower for accounting purposes which ends on December 31 of each year. "Funded Debt" shall mean with respect to any person as of the date of determination thereof, all Indebtedness (including Subordinated Indebtedness) of such person and its subsidiaries on a Consolidated basis outstanding at such time (including the current portion thereof) which matures more than one year after the date of calculation (including amounts outstanding in the final year of the Term Loans or any other funded indebtedness), and any such Indebtedness maturing within one year from such date of calculation which is renewable or extendable at the option of the obligor to a date more than one year from such date and including in any event the Revolving Credit Loans. "GAAP" shall have the meaning assigned to such term in Section 1.02 hereof. "Grantor" shall mean any Grantor, Pledgor or Debtor, as such terms are defined in any of the Security Documents. "Guarantee" shall mean any obligation, contingent or otherwise, of any person guaranteeing or having the economic effect of guaranteeing any Indebtedness or obligation of any other person in any manner, whether directly or indirectly, and shall include, without limitation, any obligation of such person, direct or indirect, to (i) 9 16 purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness or obligation, (ii) purchase property, securities or services for the purpose of assuring the owner of such Indebtedness or obligation of the payment of such Indebtedness or obligation, or (iii) maintain working capital, equity capital, available cash or other financial condition of the primary obligor so as to enable the primary obligor to pay such Indebtedness or obligation; provided, however, that the term Guarantee shall not include endorsements for collection or collections for deposit, in either case in the ordinary course of business. "Guarantor" shall mean any subsidiary of the Borrower which becomes a guarantor of the Obligations after the date hereof. "Hazardous Material" shall mean any pollutant, contaminant, chemical, or industrial or hazardous, toxic or dangerous waste, substance or material, defined or regulated as such in (or for purposes of) any Environmental Law and any other toxic, reactive, or flammable chemicals, including (without limitation) any asbestos, any petroleum (including crude oil or any fraction), any radioactive substance and any polychlorinated biphenyls; provided, in the event that any Environmental Law is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment; and provided, further, to the extent that the applicable laws of any state establish a meaning for "hazardous material," "hazardous substance," "hazardous waste," "solid waste" or "toxic substance" which is broader than that specified in any Federal Environmental Law, such broader meaning shall apply. "Holdings" shall mean Behrman Capital II L.P. and Strategic Entrepreneur Fund II, L.P., each a Delaware limited partnership, together with their respective successors and assigns. "Indebtedness" shall mean, with respect to any person, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such person evidenced by bonds, debentures, notes or other similar instruments or upon which interest charges are customarily paid, (c) all obligations of such person for the deferred purchase price of property or services, excluding current accounts payable arising in the ordinary course of business and not overdue beyond such period as is commercially reasonable for such person's business, (d) all obligations of such person under conditional sale or other title retention agreements relating to property purchased by such person and all Capitalized Lease Obligations, (e) all payment obligations of such person with respect to interest rate or currency protection agreements, including, without limitation, the Rate Agreements, (f) all obligations of such person as an account party under any letter of credit or in respect of bankers' acceptances, (g) all obligations of any third party secured by property or assets of such person (regardless of whether or not such person is liable for 10 17 repayment of such obligations), (h) all Guarantees of such person (without duplication of the relevant underlying Indebtedness) and (i) the redemption price of all redeemable preferred stock of such person, but only to the extent that such stock is redeemable at the option of the holder or requires sinking fund or similar payments at any time prior to the Final Maturity Date. "Indemnitees" shall have the meaning assigned to such term in Section 11.04(c) hereof. "Information" shall have the meaning assigned to such term in Section 11.11 hereof. "Interest Coverage Ratio" shall mean, with respect to any person for any period, the ratio of (i) EBITDA less capital expenditures to (ii) the Cash Interest Expense. "Interest Expense" shall mean, with respect to any person for any period, the interest expense of such person during such period determined on a Consolidated basis in accordance with GAAP, and shall in any event include, without limitation, (i) the amortization of debt discounts, (ii) the amortization of all fees payable in connection with the incurrence of Indebtedness to the extent included in interest expense, (iii) the portion of any Capitalized Lease Obligation allocable to interest expense, and (iv) payments of interest expense in kind. "Interest Margin" shall mean, with respect to any Loan, the amount as set forth below as corresponds to the ratio of Funded Debt to EBITDA for the Borrower and its subsidiaries on a Consolidated basis for the four most recent consecutive fiscal quarters ending on or prior to the date of determination set forth below, determined on the Closing Date and adjusted thereafter, three (3) Business Days after the delivery of the financial statements to the Agent required pursuant to Section 6.05(a) or (b) hereof, as applicable, together with the corresponding compliance certificates required pursuant to Section 6.05(e) hereof, commencing with the financial statements and certificates for the period ending March 31, 1999, or if the Borrower shall fail to timely deliver such statements and certificates for any such period or during the continuance of an Event of Default, then at the highest Interest Margin provided for herein (until such statements and certificates are delivered and/or such Event of Default is cured to the satisfaction of the Agent or waived in writing by the Required Lenders):
- ----------------------------------------------------------------------------------------------- LIBO Rate Alternate Base Interest Rate Interest Margin for LIBO Rate Margin for Alternate Base Term Loan-A Interest Term Loan-A Rate Interest Ratio of Funded Debt to and Revolving Margin for and Revolving Margin for EBITDA Credit Loans Term Loan-B Credit Loans Term Loan-B
11 18
- ----------------------------------------------------------------------------------------------- LIBO Rate Alternate Base Interest Rate Interest Margin for LIBO Rate Margin for Alternate Base Term Loan-A Interest Term Loan-A Rate Interest Ratio of Funded Debt to and Revolving Margin for and Revolving Margin for EBITDA Credit Loans Term Loan-B Credit Loans Term Loan-B - ----------------------------------------------------------------------------------------------- Greater than 3.00:1.00 2.75% 3.00% 1.25% 1.50% - ----------------------------------------------------------------------------------------------- Equal to or less than 2.50% 3.00% 1.00% 1.50% 3.00:1.00 but greater than 2.50:1.00 - ----------------------------------------------------------------------------------------------- Equal to or less than 2.25% 3.00% 0.75% 1.50% 2.50:1.00 but greater than 2.00:1.00 - ----------------------------------------------------------------------------------------------- 2.00:1.00 or less 2.00% 2.50% 0.50% 1.00% - -----------------------------------------------------------------------------------------------
On the Closing Date, the LIBO Rate Interest Margin for Term Loan-A and Revolving Credit Loans shall be 2.75% and for Term Loan-B shall be 3.00% and the Alternate Base Rate Interest Margin shall be 1.25% for Term Loan-A and Revolving Credit Loans and for Term Loan-B shall be 1.50%; each shall thereafter commencing with the delivery of the March 31, 1999 financial statements be adjusted in accordance with the provisions hereof. "Interest Payment Date" shall mean (i) in the case of an Alternate Base Loan, the last Business Day of March, June, September and December, commencing March 31, 1998, and (ii) with respect to any Eurodollar Loan, the last day of the Interest Period applicable thereto, and, in addition, in respect of any Eurodollar Loan of more than three (3) months' duration, each earlier day which is three (3) months after the first day of such Interest Period. "Interest Period" shall mean, as to any Eurodollar Loan, the period commencing on the date of such Eurodollar Loan and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is one (1), two (2), three (3) or six (6) months thereafter, as the Borrower may elect with respect to its Eurodollar Loans; provided, however, that (x) if an Interest Period would end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, with respect to Eurodollar Loans, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, (y) no Interest Period shall end later than the Final Maturity Date and (z) interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "Lender" shall have the meaning assigned to such term in the preamble to this Agreement. "Letter of Credit" shall have the meaning assigned such term in Section 2.17 hereof. 12 19 "Letter of Credit Usage" shall mean at any time, (i) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (ii) the unreimbursed drawings at such time under all such Letters of Credit which have not been converted to Revolving Credit Loans pursuant to the provisions hereof. "Leverage Ratio" with respect to any person for any period shall mean the ratio of (i) Funded Debt as at the date of determination to (ii) Net Cash Flow. "LIBO Rate" shall mean, with respect to any Eurodollar Loan for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the rate at which dollar deposits approximately equal in principal amount to the Eurodollar Loan of the Agent and for a maturity equal to the applicable Interest Period are offered in immediately available funds to the London branch of the Agent by leading banks in the London interbank market for Eurodollars at approximately 11:00 A.M., London time, two (2) Business Days prior to the first day of such Interest Period. "Lien" shall mean, with respect to any asset, (i) any mortgage, lien, pledge, encumbrance, charge or security interest in or on such asset, (ii) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset, (iii) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities or (iv) any other right of or arrangement with any creditor to have such creditor's claim satisfied out of such assets, or the proceeds therefrom, prior to the general creditors of the owner thereof. "Loan" shall mean the Term Loan-A, the Term Loan-B or any Revolving Credit Loan. "Loan Documents" shall mean this Agreement, each Security Document, each Guarantee executed and delivered at any time with respect to the Obligations, the Notes and each other document, instrument, or agreement now or hereafter delivered to the Agent or any Lender in connection herewith or therewith. "Loan Party" shall mean the Borrower and its subsidiaries, each Grantor (other than an individual pledgor) and each person which may hereafter become a Guarantor. "Mandatory Prepayment" shall mean an amount equal to seventy-five percent (75%) (or commencing with the Fiscal Year ending December 31, 2001 fifty percent (50%)) of Excess Cash Flow, if any, of the Borrower and its subsidiaries for the Fiscal Year then ended. 13 20 "Margin Stock" shall have the meaning assigned to such term in Regulation U. "Material Adverse Effect" shall mean a material adverse effect on (i) the business, assets, prospects, operations or financial or other condition of the Borrower and its subsidiaries or any Guarantor, (ii) the ability of the Borrower or any Guarantor to perform or pay the Obligations in accordance with the terms hereof or of any other Loan Document, (iii) the rights of, or benefits available to, the Lenders or the Agent under any Loan Document or (iv) the Agent's Lien on any material portion of the Collateral or the priority of such Lien. "Multiemployer Plan" shall mean a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Net Amount of Eligible Receivables" shall mean and include at any time, without duplication, the gross amount of Eligible Receivables at such time less (without duplication of any item subtracted to determine the amount of Eligible Receivables) (i) sales, excise or similar taxes and (ii) returns, discounts, claims, credits and allowances of any nature at any time issued, owing, granted, outstanding, available or claimed. "Net Cash Flow" shall mean, with respect to any person for any period, without duplication of addition or subtraction of items, (A) the sum for such period of (i) Net Income, (ii) depreciation and amortization expense, (iii) the change (expressed as a positive number in the event of an increase or a negative number in the event of a decrease) in deferred tax liabilities, (iv) other noncash items properly deducted in arriving at Net Income (or minus any such items properly added in arriving at Net Income) and (v) the change (expressed as a negative number in the event of an increase or a positive number in the event of a decrease), if any, in deferred tax assets minus (B) the sum of all capital expenditures made in cash or in accounts payable (and not financed other than by Revolving Credit Loans). "Net Income" shall mean, with respect to any person for any period, the aggregate income (or loss) of such person for such period which shall be an amount equal to net revenues and other proper items of income for such person less the aggregate for such person of any and all items that are treated as expenses under GAAP, and less Federal, state and local tax expense, but excluding any extraordinary gains or losses or any gains or losses from the sale or disposition of assets other than in the ordinary course of business, all computed and calculated in accordance with GAAP. "Notes" shall mean the Term Notes-A, the Term Notes-B and the Revolving Credit Notes. 14 21 "Obligations" shall mean all obligations, liabilities and Indebtedness of the Borrower to the Lenders and the Agent, whether now existing or hereafter created, direct or indirect, due or not, whether created directly or acquired by assignment, participation or otherwise, including without limitation all obligations, liabilities and Indebtedness of the Borrower with respect to the Rate Agreements (so long as any Lender shall be party thereto), the Security Documents and other Loan Documents, the principal of and interest on the Revolving Credit Loans, the Term Loans and the payment or performance of all other obligations, liabilities, and Indebtedness of the Borrower to the Lenders and the Agent hereunder, under the Letters of Credit or under any one or more of the other Loan Documents (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, and interest that, but for the filing of a petition in bankruptcy with respect to the Borrower, would accrue on such obligations, whether or not a claim is allowed against the Borrower for such interest in the related bankruptcy proceeding), including without limitation all fees, costs, expenses and indemnity obligations hereunder and thereunder. "Other Taxes" shall have the meaning assigned to such term in Section 2.15(b) hereof. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Pension Plan" shall mean any employee pension benefit plan within the meaning of Section 3(2) of ERISA which is subject to the provisions of Title IV of ERISA or Section 412 of the Code with respect to which the Borrower or any ERISA Affiliate has liability. "Permits" shall have the meaning assigned to such term in Section 4.18 hereof. "person" shall mean any natural person, corporation, business trust, limited liability company, association, company, joint venture, partnership or government or any agency or political subdivision thereof. "Plan" shall mean any employee benefit plan, other than a multiemployer plan, within the meaning of Section 3(3) of ERISA and which is maintained (in whole or in part) for employees of the Borrower or any subsidiary. "Pledge Agreement" shall mean the Pledge Agreements and/or Charge over Shares dated as of the date hereof, between the Grantor(s) and the Agent, for its own benefit and for the benefit of the Lenders, in substantially the form of Exhibits D-1 and D-2 annexed hereto, as amended, modified or supplemented from time to time. 15 22 "Pledged Stock" shall have the meaning assigned to such term in the Pledge Agreement. "Prior Lender Obligations" shall mean the secured $1,000,000 line of credit dated November 13, 1997 from UMB, N.A. to the Borrower. "Pro Rata Basis" shall mean (i) as applied to allocations between the Term Loan-A and the Term Loan-B, as of any day of determination, a percentage equal to the ratio that (x) the outstanding principal balance of the Term Loan-A or the Term Loan-B, as the case may be, as of such day bears to (y) the outstanding principal balance of the Term Loans as of such day and (ii) as applied to allocations between the Total Term Loan-A Commitment and the Total Term Loan-B Commitment, as of any day of determination, a percentage equal to the ratio that (x) the Total Term Loan-A Commitment or the Total Term Loan-B Commitment, as the case may be, as of such day bears to (y) the Total Term Loan Commitment as of such day. "Rate Agreements" shall have the meaning assigned to such term in Section 6.18 hereof. "Recapitalization" shall mean the transactions to occur on or prior to the Closing Date pursuant to the Recapitalization Agreement. "Recapitalization Agreement" shall mean the Agreement and Plan of Merger dated as of January 7, 1998, as amended to the Closing Date, by and among Holdings, Behrman Capital TMNG, Inc., the Borrower, and the shareholders of the Borrower pursuant to which the Borrower will be recapitalized in accordance with the terms thereof. "Recapitalization Documents" shall mean the Recapitalization Agreement, the stockholders agreement among the Borrower and the signatories thereto, the employment and non-compete agreements and all other agreements, documents and instruments executed and delivered pursuant thereto or in connection therewith, in each case as in effect on the Closing Date. "Receivables" shall mean and include all of the Borrower's accounts, instruments, documents, chattel paper and general intangibles, whether secured or unsecured, whether now existing or hereafter created or arising, and whether or not specifically assigned to the Agent for its own benefit and/or the ratable benefit of the Lenders. "Regulation D" shall mean Regulation D of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation G" shall mean Regulation G of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. 16 23 "Regulation T" shall mean Regulation T of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation U" shall mean Regulation U of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation X" shall mean Regulation X of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Release" shall mean any releasing, spilling, leaking, seepage, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping, in each case as defined in Environmental Law, and shall include any "Threatened Release," as defined in Environmental Law. "Remedial Work" shall mean any investigation, site monitoring, containment, cleanup, removal, restoration or other remedial work of any kind or nature with respect to any property of the Borrower or its subsidiaries (whether such property is owned, leased, subleased or used), including, without limitation, with respect to Contaminants and the Release thereof. "Repayment Date" shall have the meaning assigned to such term in Section 2.04(c) hereof. "Reportable Event" shall mean a Reportable Event as defined in Section 4043(c) of ERISA other than those events for which the 30-day notice period has been waived. "Required Lenders" shall mean Lenders having 66 2/3% of the Total Commitment. "Responsible Officer" shall mean, with respect to any person, any vice president or president, or the chief financial officer or controller, of such person; provided, however, that no individual who resigns or is removed as such an officer or employee of the Borrower in connection with the Transactions and has been so identified to the Agent shall be a Responsible Officer of the Borrower. "Revolving Credit Alternate Base Loan" shall mean a Revolving Credit Loan that is an Alternate Base Loan. "Revolving Credit Commitment" shall mean, with respect to any Lender, the Revolving Credit Commitment of such Lender as set forth in Schedule 2.01(b) annexed hereto, as the same may be reduced from time to time pursuant to this Agreement including, without limitation, Section 2.07 hereof. 17 24 "Revolving Credit Commitment Fee" shall have the meaning set forth in Section 2.06(a) hereof. "Revolving Credit Eurodollar Loan" shall mean a Revolving Credit Loan that is a Eurodollar Loan. "Revolving Credit Loan" shall mean a Revolving Credit Loan made pursuant to Sections 2.01 and 2.02 hereof. "Revolving Credit Notes" shall mean the Revolving Credit Notes of the Borrower, executed and delivered as provided in Section 2.04 hereof, in substantially the form of Exhibit B annexed hereto, as amended, modified or supplemented from time to time. "Revolving Credit Termination Date" shall mean the earlier to occur of (i) the fifth anniversary of the Closing Date and (ii) such date as the Revolving Credit Loans shall otherwise be payable in full and the Revolving Credit Commitment shall terminate, expire or be canceled in accordance with the terms of this Agreement. "Security Agreement" shall mean the Security Agreement dated as of the date hereof, between the Grantor(s) and the Agent, for its own benefit and for the benefit of the Lenders, substantially in the form of Exhibit E annexed hereto, as amended, modified or supplemented from time to time. "Security Agreement - Patents and Trademarks" shall mean the Security Agreement and Mortgage - Patents and Trademarks, dated as of the date hereof, between the Debtor(s), as such term is defined therein, and the Agent, for its own benefit and for the benefit of the Lenders, substantially in the form of Exhibit G annexed hereto, as amended, modified or supplemented from time to time. "Security Documents" shall mean the Pledge Agreement, the Security Agreement, the Security Agreement - Patents and Trademarks, the Assignment of Life Insurance, the Assignment of Contract and each other agreement now existing or hereafter created providing collateral security for the payment or performance of any Obligations. "Subordinated Indebtedness" shall mean, with respect to the Borrower, Indebtedness subordinated in right of payment to such person's monetary obligations under this Agreement upon terms satisfactory to and approved in writing by the Required Lenders. "subsidiary" shall mean, with respect to any person, any corporation, association or other business entity of which securities or other ownership interests representing more than 50% of the ordinary voting power are, at the time as of which 18 25 any determination is being made, owned or controlled, directly or indirectly, by the parent of such person or one or more subsidiaries of the parent of such person. "Taxes" shall have the meaning assigned to such term in Section 2.15(a) hereof. "Term Alternate Base Loan" shall mean a Term Loan-A or Term Loan-B that is an Alternate Base Loan. "Term Eurodollar Loan" shall mean a Term Loan-A or Term Loan-B that is a Eurodollar Loan. "Term Loan-A" shall mean the Term Loan-A made pursuant to Sections 2.01 and 2.02 hereof. "Term Loan-A Alternate Base Loan" shall mean a Term Loan-A that is an Alternate Base Loan. "Term Loan-A Commitment" shall mean, with respect to any Lender, the Term Loan-A Commitment of such Lender as set forth in Schedule 2.01(a) annexed hereto, as the same shall be reduced from time to time pursuant to this Agreement, including, without limitation, Section 2.07 hereof. "Term Loan-A Eurodollar Loan" shall mean a Term Loan-A that is a Eurodollar Loan. "Term Loan-A Maturity Date" shall mean the fifth anniversary of the Closing Date. "Term Loan-B" shall mean the Term Loan-B made pursuant to Sections 2.01 and 2.02 hereof. "Term Loan-B Alternate Base Loan" shall mean a Term Loan-B that is an Alternate Base Loan. "Term Loan-B Commitment" shall mean, with respect to any Lender, the Term Loan-B Commitment of such Lender as set forth in Schedule 2.01(a) annexed hereto, as the same shall be reduced from time to time pursuant to this Agreement, including, without limitation, Section 2.07 hereof. "Term Loan-B Eurodollar Loan" shall mean a Term Loan-B that is a Eurodollar Loan. 19 26 "Term Loans" shall mean, collectively, the Term Loan-A and the Term Loan-B. "Term Notes-A" shall mean the Term Notes-A of the Borrower, executed and delivered as provided in Section 2.04 hereof, in substantially the form of Exhibit A-1 hereto, as amended, modified or supplemented from time to time. "Term Notes-B" shall mean the Term Notes-B of the Borrower, executed and delivered as provided in Section 2.04 hereof, in substantially the form of Exhibit A-2 hereto, as amended, modified or supplemented from time to time. "Total Commitment" shall mean the sum of the Lenders' Total Term Loan Commitment and Total Revolving Credit Commitment, as the same may be reduced from time to time pursuant to this Agreement including, without limitation, Section 2.07 hereof. "Total Revolving Credit Commitment" shall mean the sum of the Lenders' Revolving Credit Commitments, as the same may be reduced from time to time pursuant to this Agreement including, without limitation, Section 2.07 hereof. "Total Term Loan Commitment" shall mean the sum of the Total Term Loan-A Commitment and the Total Term Loan-B Commitment, as the same may be reduced from time to time pursuant to this Agreement including, without limitation, Section 2.07 hereof. "Total Term Loan-A Commitment" shall mean the sum of the Lenders' Term Loan-A Commitments, as the same shall be reduced from time to time pursuant to this Agreement, including, without limitation, Section 2.07 hereof. "Total Term Loan-B Commitment" shall mean the sum of the Lenders' Term Loan-B Commitments, as the same shall be reduced from time to time pursuant to this Agreement, including, without limitation, Section 2.07 hereof. "Transactions" shall have the meaning assigned to such term in Section 4.02 hereof. SECTION 1.2. Accounting Terms. Unless otherwise expressly provided herein, each accounting term used herein shall have the meaning given it under generally accepted accounting principles in effect from time to time in the United States applied on a basis consistent with those used in preparing the financial statements referred to in Section 6.05 hereof ("GAAP"); provided, however, that each reference in Article VII hereof, or in the definition of any term used in Article VII hereof, to GAAP shall mean GAAP as in effect on the date hereof. If any "Accounting Changes" (as 20 27 defined below) occur and such changes result in a change in the calculation of the financial covenants, standards or terms used in this Agreement or any other Loan Document, then the Borrower, the Agent and the Lenders agree to enter into negotiations in order to amend such provisions of the Agreement so as to equitably reflect such Accounting Changes with the desired result that the criteria for evaluating the Borrower's and its subsidiaries' financial condition shall be the same after such Accounting Changes as if such Accounting Changes had not been made; provided, however, that the agreement of the Required Lenders to any required amendments of such provisions shall be sufficient to bind all the Lenders. "Accounting Changes" shall mean (a) changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants (or successor thereto or any agency with similar functions), (b) changes in accounting principles concurred in by the Borrower's independent certified public accountants; (c) purchase accounting adjustments under A.P.B. 16 and/or 17 and EITF 88-16, and the application of the accounting principles set forth in FASB 109, including the establishment of reserves pursuant thereto and any subsequent reversal (in whole or in part) of such reserves; and (d) the reversal of any reserves established as a result of purchase accounting adjustments. All such adjustments resulting from expenditures made subsequent to the Closing Date (including capitalization of costs and expenses or payment of pre-Closing Date liabilities) shall be treated as expenses in the period the expenditures are made and deducted as part of the calculation of EBITDA in such period. If the Agent, the Borrower and the Required Lenders agree upon the required amendments, then after appropriate amendments have been executed and the underlying Accounting Change with respect thereto has been implemented, any reference to GAAP contained in this Agreement or in any other Loan Document shall, only to the extent of such Accounting Change, refer to GAAP, consistently applied after giving effect to the implementation of such Accounting Change. Unless and until any such required amendments shall become effective, all calculations of financial covenants and other standards and terms shall continue to be calculated without regard to the underlying Accounting Change; and if the Agent, the Borrower and the Required Lenders cannot agree upon the required amendments within thirty (30) days following the date of implementation of any Accounting Change, then all Financial Statements delivered and all calculations of financial covenants and other standards and terms in accordance with this Agreement and the other Loan Documents shall be prepared, delivered and made without regard to the underlying Accounting Change. On the Closing Date, the levels for the financial covenants were established based on the assumption that Net Income would be reduced by approximately $2,000,000 in approximately equal installments over the first four years by reason of additional taxes to be paid by reason of the conversion of the Borrower from an S Corporation to a C Corporation. If such assumption proves to be incorrect, the Borrower, Agent and Lenders agree to adjust covenant levels to reflect the actual accounting effect from such conversion. 21 28 2. THE LOANS SECTION 2.1. Term Loan Commitments and Revolving Credit Commitments. (a) Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender, severally and not jointly, agrees to make a Term Loan-A and a Term Loan-B to the Borrower on the Closing Date, in a principal amount not to exceed the amount of such Lender's Term Loan-A Commitment and Term Loan-B Commitment, respectively, set forth opposite its name in Schedule 2.01(a) hereto. (1) Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender, severally and not jointly, agrees to make Revolving Credit Loans to the Borrower, at any time and from time to time from the date hereof to the Revolving Credit Termination Date, in an aggregate principal amount at any time outstanding not to exceed the amount of such Lender's Revolving Credit Commitment set forth opposite its name in Schedule 2.01(b) annexed hereto, as such Revolving Credit Commitment may be reduced from time to time in accordance with the provisions of this Agreement. Notwithstanding the foregoing, the aggregate principal amount of Revolving Credit Loans outstanding at any time to the Borrower shall not exceed (1) the lesser of (A) the Total Revolving Credit Commitment (as such amount may be reduced pursuant to this Agreement including, without limitation, Section 2.07 hereof) and (B) an amount equal [to eighty-five percent (85%) of the Net Amount of Eligible Receivables (the "Borrowing Base") minus (2) the Letter of Credit Usage at such time (not to exceed $500,000 at any time). The Borrowing Base will be computed monthly and a compliance certificate from a Responsible Officer of the Borrower presenting its computation will be delivered to the Agent in accordance with Section 6.05 hereof. Subject to the foregoing and within the foregoing limits, the Borrower may borrow, repay (or, subject to the provisions of Section 2.09 hereof, prepay) and reborrow Revolving Credit Loans, on and after the date hereof and prior to the Revolving Credit Termination Date, subject to the terms, provisions and limitations set forth herein, including, without limitation, the requirement that no Revolving Credit Loan shall be made hereunder if the amount thereof exceeds the Availability outstanding at such time. SECTION 2.2. Loans. (a) The Revolving Credit Loans made by the Lenders on any date shall be in integral multiples of $50,000 (except that the foregoing limitation shall not be applicable to the extent that the proceeds of such Loans are requested to be disbursed to the Borrower's controlled disbursement account maintained with the Agent); provided, however, that the Eurodollar Loans made on any date shall be in a minimum aggregate principal amount equal to the product of $500,000 times the number of Lenders on such date. 22 29 (1) Loans shall be made ratably by the Lenders in accordance with their respective Term Loan-A Commitments, Term Loan-B Commitments or Revolving Credit Commitments, as the case may be; provided, however, that the failure of any Lender to make any Loan shall not in itself relieve any other Lender of its obligation to lend hereunder. The Term Loan-A shall be made by the Lenders on the Closing Date against delivery of Term Notes-A, payable to the order of the Lenders, as referred to in Section 2.04. The Term Loan-B shall be made by the Lenders on the Closing Date against delivery of the Term Notes-B, payable to the order of the Lenders, as referred to in Section 2.04. (2) Each Loan shall be either an Alternate Base Loan or a Eurodollar Loan as the Borrower may request pursuant to Section 2.03 hereof. Each Lender may fulfill its obligations under this Agreement by causing its Applicable Lending Office to make such Loan; provided, however, that the exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the term of the applicable Note. Not more than eight (8) Eurodollar Loans may be outstanding at any one time. (3) Subject to the provisions of paragraph (e) below, each Lender shall make its Term Loan-A and Term Loan-B on the Closing Date and Revolving Credit Loans on the proposed dates thereof by paying the amount required to the Agent in New York, New York in immediately available funds not later than 12:00 noon, New York City time, and the Agent shall as soon as practicable, but in no event later than 3:00 p.m., New York City time, credit the amounts so received to the general deposit account of the Borrower with the Agent in immediately available funds or, if Loans are not to be made on such date because any condition precedent to a borrowing herein specified is not met, return the amounts so received to the respective Lenders. (4) The Borrower shall have the right at any time upon prior irrevocable written, telex or facsimile notice (promptly confirmed in writing) to the Agent given in the manner and at the times specified in Section 2.03 with respect to the Loans into which conversion or continuation is to be made, to convert all or any portion of Eurodollar Loans into Alternate Base Loans, to convert all or any portion of Alternate Base Loans into Eurodollar Loans (specifying the Interest Period to be applicable thereto), to convert the Interest Period with respect to all or any portion of any Eurodollar Loans to another permissible Interest Period, and to continue all or any portion of any Loans into a subsequent Interest Period of the same duration, subject to the terms and conditions of this Agreement (including the last sentence of Section 2.02(c) hereof) and to the following: (1) each conversion or continuation shall be made pro rata among the Lenders in accordance with the respective principal amounts of the Loans comprising the conversion or continuation; and in the case of a conversion or continuation of fewer than all the Loans, the aggregate 23 30 principal amount of Loans converted or continued shall not be less than $500,000 times the number of Lenders on such date in the case of Eurodollar Loans and shall be an integral multiple of $50,000; (2) accrued interest on a Loan (or portion thereof) being converted or continued shall be paid by the Borrower at the time of conversion or continuation; (3) if any Eurodollar Loan is converted at any time other than the end of an Interest Period applicable thereto, the Borrower shall make such payments associated therewith as are required pursuant to Section 2.12; (4) any portion of a Revolving Credit Eurodollar Loan which is subject to an Interest Period ending on a date that is less than one month prior to the Revolving Credit Termination Date may not be converted into, or continued as, a Eurodollar Loan and shall be automatically converted at the end of such Interest Period into an Alternate Base Loan; (5) any portion of a Term Eurodollar Loan required to be paid on any Repayment Date occurring less than one month after the end of the then current Interest Period applicable to such Loan, may not be converted into, or continued as, a Term Eurodollar Loan and shall be automatically converted at the end of such Interest Period into a Term Alternate Base Loan; and (6) no Default (other than those for which a grace period is provided pursuant to subparagraph (d) of Article VIII) or Event of Default shall have occurred and be continuing. The Interest Period applicable to any Eurodollar Loan resulting from a conversion shall be specified by the Borrower in the irrevocable notice of conversion delivered pursuant to this Section; provided, however, that if no such Interest Period shall be specified, the Borrower shall be deemed to have selected an Interest Period of one month's duration; and, provided further, that no such Interest Period may be for more than one month's duration for the period commencing on the Closing Date and ending on the earlier to occur of (x) the 120th day following the Closing Date and (y) the completion to the satisfaction of the Lenders of the syndication of its portion of the Total Commitment and the Loans and other Credits thereunder. If the Borrower shall not have given timely notice to continue any Eurodollar Loan into a subsequent Interest Period (and shall not otherwise have given notice to convert such Loan), such Loan (unless repaid or required to be repaid pursuant to the terms hereof) shall, subject to (iv) and (v) above, automatically be converted into an Alternate Base Loan. The Agent 24 31 shall promptly advise the Lenders of any notice given pursuant to this Section and of each Lender's portion of the continuation or conversion hereunder. SECTION 2.3. Notice of Loans. The Borrower shall, through a Responsible Officer of the Borrower, give the Agent irrevocable written, telex or facsimile notice (promptly confirmed in writing) of each borrowing (including, without limitation, a conversion as permitted by Section 2.02(e) hereof) not later than 12:00 noon, New York City time, (i) three (3) Business Days before a proposed Eurodollar Loan borrowing or conversion and (ii) the same Business Day of an Alternate Base Loan borrowing or conversion (except that no such confirmation will be required, unless requested by the Agent, to the extent that the proceeds of such borrowing are requested to be disbursed to Borrower's controlled disbursement account maintained with the Agent). Such notice shall specify (w) whether the Loans then being requested are to be Alternate Base Loans or Eurodollar Loans, (x) the date of such borrowing (which shall be a Business Day) and amount thereof and (y) if such Loans are to be Eurodollar Loans, the Interest Period with respect thereto. If no election as to the type of Loan is specified in any such notice, all such Loans shall be Alternate Base Loans. If no Interest Period with respect to any Eurodollar Loan is specified in any such notice, then an Interest Period of one (1) month's duration shall be deemed to have been selected (subject to the second proviso in the last paragraph of Section 2.02). The Agent shall promptly advise the Lenders of any notice given pursuant to this Section 2.03 and of each Lender's portion of the requested borrowing. SECTION 2.4. Notes; Repayment of Loans. (a) The Term Loan-A made by a Lender shall be evidenced by a single Term Note-A, duly executed on behalf of the Borrower, dated the Closing Date, in substantially the form of Exhibit A-1 annexed hereto, delivered and payable to such Lender in a principal amount equal to its Term Loan-A Commitment on such date. The Term Loan-B made by a Lender shall be evidenced by a single Term Note-B, duly executed on behalf of the Borrower, dated the Closing Date, in substantially the form of Exhibit A-2 annexed hereto, delivered and payable to such Lender in a principal amount equal to its Term Loan-B Commitment on such date. All Revolving Credit Loans made by a Lender to the Borrower shall be evidenced by a single Revolving Credit Note, duly executed on behalf of the Borrower, dated and executed and delivered on the Closing Date, in substantially the form of Exhibit B annexed hereto, delivered and payable to such Lender in a principal amount equal to its Revolving Credit Commitment in respect of the Borrower on such date. The outstanding balance of each Revolving Credit Loan, as evidenced by any such Revolving Credit Note, shall mature and be due and payable on the Revolving Credit Termination Date. (1) Each Revolving Credit Note shall bear interest from its date on the principal balance thereof outstanding from time to time, as provided in Section 2.05 hereof. 25 32 (2) The aggregate principal amount of the Term Loan-A as evidenced by the Term Notes-A and the aggregate principal amount of the Term Loan-B as evidenced by the Term Notes-B, shall be payable in 16 and 4 consecutive quarterly installments (the date of each such installment, a "Repayment Date"), respectively, in the amounts set forth below, and such payments shall be distributed ratably among the Lenders in accordance with their respective Term Loan-A Commitments or Term Loan-B Commitments, as the case may be:
Term Loan-A Term Loan-B Date Payment Payment ---- ------------ ----------- March 31, 1999, June 30, 1999, September 30, 1999 and $325,000 0 December 31, 1999 March 31, 2000, June 30, 2000, September 30, 2000 and $787,500 0 December 31, 2000 March 31, 2001, June 30, 2001, September 30, 2001 and 912,500 0 December 31, 2001 March 31, 2002, June 30, 2002, September 30, 2002 and 975,000 0 December 31, 2002 March 31, 2003, June 30, 2003, September 30, 2003 and $3,000,000 December 31, 2003
To the extent not previously paid, the Term Loan-A shall be due and payable on the Term Loan-A Maturity Date and the Term Loan-B shall be due and payable on the Final Maturity Date. Each Term Note shall bear interest from its date on the outstanding principal balance thereof, as provided in Section 2.05. All principal payments in respect of the Term Loans shall be accompanied by accrued interest on the principal amount being repaid to the date of payment. No scheduled payment of principal in respect of the Term Loans shall be made to the extent that a lesser principal payment would result in the payment in full of the outstanding amount of the Term Loans, and such lesser amount is paid. (3) Each Lender, or the Agent on its behalf, shall, and is hereby authorized by the Borrower to, endorse on the schedule attached to the Term Note-A, Term Note-B, or Revolving Credit Note, as applicable, of such Lender (or on a continuation of such schedule attached to such Note and made a part thereof) an appropriate notation evidencing the date and amount of each Loan to the Borrower from such Lender, as well as the date and amount of each payment and prepayment with respect thereto; provided, however, that the failure of any person to make such a notation on a Note shall not affect any obligations of the Borrower under such Note. Any such notation shall be conclusive and binding as to the date and amount of such Loan or portion thereof, or payment or prepayment of principal or interest thereon, absent manifest error. 26 33 SECTION 2.5. Interest on Loans. (a) Subject to the provisions of Section 2.05(c) and Section 2.08 hereof, each Alternate Base Loan shall bear interest at a rate per annum equal to the Alternate Base Rate plus the applicable Interest Margin. (1) Subject to the provisions of Section 2.05(c) and Section 2.08 hereof, each Eurodollar Loan shall bear interest at a rate per annum equal to the Adjusted LIBO Rate plus the applicable Interest Margin. (2) Interest on each Loan shall be payable in arrears on each applicable Interest Payment Date and on the Term Loan-A Maturity Date and on the Final Maturity Date. Interest on each Alternate Base Loan and Eurodollar Loan shall be computed based on the number of days elapsed in a year of 360 days. The Agent shall determine each interest rate applicable to the Loans in accordance with this Agreement, and shall promptly advise the Borrower and the Lenders of the interest rate so determined. SECTION 2.6. Fees. (a) The Borrower shall pay each Lender, through the Agent, (i) on the last Business Day of each March, June, September and December commencing March 31, 1998 and (ii) on the Revolving Credit Termination Date, in immediately available funds, a commitment fee (the "Revolving Credit Commitment Fee") of one half of one percent ( 1/2 of 1%) per annum on the average daily unused amount of the Revolving Credit Commitment of such Lender, during the quarter (or shorter period as the case may be) ending on such date, it being understood that Letter of Credit Usage shall constitute "use" of the Revolving Credit Commitment in a corresponding amount. The Revolving Credit Commitment Fee due to each Lender under this Section 2.06 shall commence to accrue on the date hereof and cease to accrue on the earlier of (i) the Revolving Credit Termination Date and (ii) the termination of the Revolving Credit Commitment of such Lender pursuant to this Agreement including, without limitation, pursuant to Section 2.07 hereof. The Revolving Credit Commitment Fee shall be calculated on the basis of the actual number of days elapsed in a year of 360 days. (1) The Agent for its own account shall be paid an administration fee by the Borrower in the amount of $25,000 on the Closing Date and thereafter on each anniversary of the Closing Date, the sum of $25,000 until the Obligations have been satisfied in full. SECTION 2.7. Termination and Reduction of Revolving Credit Commitments and Term Loan Commitments. (a) Upon at least three (3) Business Days' prior irrevocable written notice (or facsimile notice promptly confirmed in writing) to the Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Total Revolving Credit Commitment, 27 34 ratably among the Lenders in accordance with the amounts of their Revolving Credit Commitments; provided, however, that the Total Revolving Credit Commitment shall not be reduced at any time to an amount less than the Revolving Credit Loans outstanding under the Revolving Credit Commitments and the Letter of Credit Usage at such time. Each partial reduction of the Total Revolving Credit Commitment shall be in a minimum of $50,000 or an integral multiple of $50,000. (1) Simultaneously with any termination or reduction of the Total Revolving Credit Commitment pursuant to paragraph (a) of this Section 2.07, the Borrower shall pay to each Lender, through the Agent, the Revolving Credit Commitment Fee due and owing through and including the date of such termination or reduction on the amount of the Revolving Credit Commitment of such Lender so terminated or reduced. (2) The Total Revolving Credit Commitment shall be permanently reduced on each date that a prepayment of principal of the Revolving Credit Loans is required pursuant to Section 2.09(d) or 2.09(e) hereof by the amount of each such required prepayment. In any event, the Revolving Credit Commitment of each Lender shall automatically and permanently terminate on the Revolving Credit Termination Date, and all Revolving Credit Loans still outstanding on such date shall be due and payable in full together with accrued interest thereon. (3) The Total Term Loan Commitment shall be permanently reduced by the amount of any repayment or prepayment of the outstanding principal amount of the Term Loans on the date of any such repayment or prepayment. Any reduction in the Total Term Loan Commitment shall simultaneously reduce, on a Pro Rata Basis, the Total Term Loan-A Commitment and the Total Term Loan-B Commitment. In any event, (x) all amounts due and owing under the Total Term Loan-A Commitment shall be due and payable on the Term Loan-A Maturity Date and (y) all amounts due and owing under the Total Term Loan-B Commitment shall be due and payable on the Final Maturity Date. SECTION 2.8. Interest on Overdue Amounts; Alternate Rate of Interest. (a) If the Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, by acceleration or otherwise, the Borrower shall on demand from time to time pay interest, to the extent permitted by law, on all Obligations outstanding up to the date of actual payment of such defaulted amount (after as well as before judgment) at a rate per annum equal to two percent (2%) in excess of the rates otherwise applicable thereto. (1) In the event, and on each occasion, that on the day two (2) Business Days prior to the commencement of any Interest Period for a Eurodollar Loan the Agent shall have determined that dollar deposits in the amount of each Eurodollar Loan are not generally available in the London interbank market, or that the 28 35 rate at which dollar deposits are being offered will not reflect adequately and fairly the cost to any Lender of making or maintaining such Eurodollar Loan during such Interest Period, or that reasonable means do not exist for ascertaining the Adjusted LIBO Rate, the Agent shall as soon as practicable thereafter give written notice (or facsimile notice promptly confirmed in writing) of such determination to the Borrower and the Lenders, and any request by the Borrower for the making of a Eurodollar Loan pursuant to Section 2.03 hereof or conversion or continuation of any Loan into a Eurodollar Loan pursuant to Section 2.02 hereof shall, until the circumstances giving rise to such notice no longer exist, be deemed to be a request for an Alternate Base Loan. Each determination by the Agent made hereunder shall be conclusive absent manifest error. SECTION 2.9. Prepayment of Loans. (a) Subject to the terms and conditions contained in this Section 2.09 and elsewhere in this Agreement, the Borrower shall have the right to prepay any Loan at any time in whole or from time to time in part (except in the case of a Eurodollar Loan only on the last day of an Interest Period) without penalty (except as otherwise provided for herein); provided, however, that each such partial prepayment of a Loan shall be in an integral multiple of $50,000. (1) On the date of any termination or reduction of the Total Revolving Credit Commitment pursuant to Section 2.07(a) hereof or elsewhere in this Agreement, the Borrower shall pay or prepay so much of the Revolving Credit Loans as shall be necessary in order that the Availability equals or exceeds zero following such termination or reduction. Any prepayments required by this paragraph (b) shall be applied to outstanding Revolving Credit Alternate Base Loans up to the full amount thereof before they are applied to outstanding Revolving Credit Eurodollar Loans; provided, however, that the Borrower shall not be required to make any prepayment of any Eurodollar Loan pursuant to this Section until the last day of the Interest Period with respect thereto so long as an amount equal to such prepayment is deposited by the Borrower in a cash collateral account with the Agent to be held in such account on terms satisfactory to the Agent. (2) The Borrower shall make prepayments of the Revolving Credit Loans from time to time such that the Availability equals or exceeds zero at all times when the calculation of Availability is required to be made under this Agreement. Any prepayments required by this paragraph (c) shall be applied to outstanding Revolving Credit Alternate Base Loans up to the full amount thereof before they are applied to outstanding Revolving Credit Eurodollar Loans; provided, however, that the Borrower shall not be required to make any prepayment of any Eurodollar Loan pursuant to this Section until the last day of the Interest Period with respect thereto so long as an amount equal to such prepayment is deposited by the Borrower in a cash collateral account with the Agent to be held in such account on terms satisfactory to the Agent. (3) Within three days of (i) the sale of any assets of the Borrower or any of its subsidiaries (excluding sales of inventory in the ordinary course of business or 29 36 sales of equipment not exceeding $100,000 in any calendar year) or of the capital stock of the Borrower (subject to Section 7.05 hereof) or (ii) the consummation of the issuance of any debt securities of any Borrower, subsidiary or any Guarantor, the Borrower shall make a mandatory prepayment of the Loans in an amount equal to 100% of the proceeds received (net of taxes due, amounts required to retire any underlying liabilities and any reasonable expenses of sale), which proceeds shall be applied as set forth in paragraph (g) below. Nothing contained in this paragraph (d) shall be or be deemed to be a consent to the sale of any assets or stock or the issuance of any stock or debt securities. (4) Within ninety (90) days of the end of each Fiscal Year of the Borrower, commencing with the Fiscal Year ending December 31, 1998, the Borrower shall make a mandatory prepayment of the Loans in an amount equal to the Mandatory Prepayment for the Fiscal Year then ended, such prepayment to be applied as set forth in paragraph (g) below. (5) (i) Except as provided in clause (ii) below, promptly and in any event not more than two Business Days following the receipt by the Agent or the Borrower or any of its subsidiaries of any net proceeds of (x) any casualty insurance required to be maintained pursuant to Section 6.03 hereof on account of each separate loss, damage or injury (each, a "Casualty Event") in excess of $100,000 (or, if there shall be continuing a Default or an Event of Default, of the full amount of net proceeds) to any asset of the Borrower or such subsidiary (including, without limitation, any Collateral), or (y) any business interruption insurance required to be maintained pursuant to Section 6.03 hereof on account of any business interruption event (each, a "BI Event") in excess of $100,000 (or, if there shall be continuing a Default or Event of Default, of the full amount of net proceeds), the Borrower or such subsidiary shall notify the Agent of such receipt in writing or by telephone promptly confirmed in writing, and not later than two Business Days following receipt by the Agent or the Borrower or such subsidiary of any such proceeds, there shall become due and payable a prepayment of the Loans in an amount equal to 100% of such proceeds. Prepayments from such net proceeds shall be applied as set forth in paragraph (g) below. (1) In the case of the receipt of net proceeds described in clause (i) above with respect to a Casualty Event or BI Event, the Borrower may elect, by written notice delivered to the Agent not later than the day on which a prepayment would otherwise be required under clause (i), (x) in the case of proceeds received with respect to a BI Event, to use such proceeds in the ordinary course of Borrower's business and (y) in the case of proceeds received with respect to any Casualty Event, to apply all or a portion of such net proceeds for the purpose of replacing, repairing, restoring or rebuilding (referred to herein as a "Rebuilding") the relevant tangible property, and, in any such event, any required prepayment under clause (i) above shall be reduced dollar for dollar by the amount of such election under clause (x) or clause (y) of this sentence. An election under this clause (ii) shall not be effective unless: (x) at 30 37 the time of such election there is continuing no Default or Event of Default; (y) the Borrower shall have certified to the Agent that: (i) the net proceeds of the insurance adjustment with respect to a Casualty Event, together with other funds available to the Borrower, shall be sufficient to complete such proposed Rebuilding in accordance with all applicable laws, regulations and ordinances; and (ii) no Default or Event of Default has arisen or will arise as a result of such BI Event, Casualty Event or Rebuilding; and (z) if the amount of net proceeds in question exceeds $250,000, the Borrower shall have obtained the written consent of the Required Lenders to such election. (2) In the event of an election under clause (ii) above, pending application of the net proceeds to business operations with respect to a BI Event or to Rebuilding with respect to a Casualty Event, the Borrower shall not later than the time at which prepayment would have been, in the absence of such election, required under clause (i) above, apply such net proceeds to the prepayment of the outstanding principal balance, if any, of the Revolving Credit Loans (not in permanent reduction of the Revolving Credit Commitment), and deposit (the "Special Deposit") with the Agent, the balance, if any, of such net proceeds remaining after such application, pursuant to agreements in form, scope and substance reasonably satisfactory to the Agent. The Special Deposit, together with all earnings on such Special Deposit, shall be available to the Borrower solely for the applicable Rebuilding or ordinary course business operations, as the case may be; provided, however, that at such time as a Default or Event of Default shall occur, the balance of the Special Deposit and earnings thereon may be applied by the Agent to repay the Obligations in such order as the Agent shall elect. The Agent shall be entitled to require proof, as a condition to the making of any withdrawal from the Special Deposit, that the proceeds of such withdrawal are being applied for the purposes permitted hereunder. (3) Notwithstanding anything to the contrary in this paragraph (f), on the date two days following the receipt by the Agent or the Borrower of any net proceeds of any insurance referred to in Section 6.19 hereof, there shall become due and payable a prepayment of principal in respect of the Obligations in an amount equal to 100% of such net proceeds; provided, however, so long as no Event of Default has occurred and is continuing, and the permanent key-man life insurance is in place, up to $2,000,000 in the case of Richard Nespola and up to $500,000 in the case of each of Micky Woo, Alan Staples and Ralph Peck of such proceeds may be maintained in a cash collateral account with the Agent on terms satisfactory to the Agent for the purposes of retaining a replacement executive. A prepayment made pursuant to this clause (iv) shall be applied in the manner set forth in paragraph (g) below. (6) When making a prepayment, whether mandatory or otherwise, pursuant to paragraph (a), (b), (c), (d), (e) or (f) above, the Borrower shall furnish to the Agent, not later than 12:00 noon (New York City time) (i) one (1) Business Day prior to the date of such prepayment of Alternate Base Loans and (ii) three (3) Business Days 31 38 prior to the date of such prepayment of Eurodollar Loans, written, telex or facsimile notice (promptly confirmed in writing) of prepayment which shall specify the prepayment date and the principal amount of each Loan (or portion thereof) to be prepaid, which notice shall be irrevocable and shall commit the Borrower to prepay such Loan by the amount stated therein on the date stated therein. A prepayment shall be accompanied by accrued interest on the principal amount being prepaid to the date of prepayment. Prepayments made pursuant to paragraph (d), (e) or (f) above shall be applied as follows: (A) first, on a Pro Rata Basis to outstanding Term Loans-A and Term Loans-B which are Term Alternate Base Loans in the inverse order of Repayment Dates up to the full amount thereof and then on a Pro Rata Basis to outstanding Term Loans-A and Term Loans-B which are Term Eurodollar Loans in the inverse order of Repayment Dates up to the full amount thereof and (B) second, to outstanding Revolving Credit Alternate Base Loans up to the full amount thereof and then to Revolving Credit Eurodollar Loans up to the full amount thereof; provided, however, that if at the time of the making of any prepayment in accordance with clause (B), there are undrawn Letters of Credit outstanding, then in the discretion of the Agent, all or a portion of any such prepayment (not to exceed an amount equal to the aggregate undrawn amount of all such outstanding Letters of Credit) shall be deposited by the Borrower in a cash collateral account to be held by the Agent for its own benefit and for the benefit of the Lenders for application by the Agent to the payment of any drawing made under any such Letters of Credit; and, provided, however, that the Borrower shall not be required to make any prepayment of any Term or Revolving Credit Eurodollar Loan required pursuant to this Section 2.09(g) until the last day of the Interest Period with respect thereto so long as an amount equal to such prepayment is deposited by the Borrower into a cash collateral account with the Agent to be held in such account pursuant to terms satisfactory to the Agent. (7) All prepayments under this Section 2.09 shall be subject to Section 2.12 hereof. (8) Except as otherwise expressly provided in this Section 2.09, payments with respect to any paragraph of this Section 2.09 are in addition to payments made or required to be made under any other paragraph of this Section 2.09. (9) All prepayments of the Term Loan under Section 2.09(a) shall be applied in the inverse order of Repayment Dates. The amount of the Term Loan prepaid may not be reborrowed. SECTION 2.10. Reserve Requirements; Change in Circumstances. (a) Notwithstanding any other provision herein, if after the date of this Agreement (or in the case of any assignee of any Lender, the date of assignment) any change in applicable law or regulation or in the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) shall: (i) subject the Agent or any Lender 32 39 (which shall for the purpose of this Section 2.10 include any assignee or lending office of the Agent or any Lender) to any charge, fee, deduction or withholding of any kind or to any tax with respect to any amount paid or to be paid by either the Agent or any Lender with respect to any Eurodollar Loans made by a Lender to the Borrower or with respect to the obligations of any Lender under Sections 2.17 through 2.20 hereof or under any Letter of Credit (other than (x) taxes imposed on the overall net income of the Agent or such Lender and (y) franchise taxes imposed on the Agent or such Lender, in either case by the jurisdiction in which such Lender or the Agent has its principal office or its lending office with respect to such Eurodollar Loan or any political subdivision or taxing authority of either thereof); (ii) change the basis of taxation of payments to any Lender or the Agent of the principal of or interest on any Eurodollar Loan or any other fees or amounts payable with respect to any Letter of Credit or otherwise hereunder (other than taxes imposed on the overall net income of such Lender or the Agent by the jurisdiction in which such Lender or the Agent has its principal office or by any political subdivision or taxing authority therein); (iii) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or loans or loan commitments extended by, or Letters of Credit issued and maintained by, such Lender; or (iv) impose on any Lender or, with respect to Eurodollar Loans, the London interbank market, any other condition affecting this Agreement, Letters of Credit issued and maintained by or Eurodollar Loans made by such Lender; and the result of any of the foregoing shall be to increase the cost to any such Lender of making or maintaining any Eurodollar Loan or Letter of Credit, or to reduce the amount of any payment (whether of principal, interest, fee, compensation or otherwise) receivable by such Lender or to require such Lender to make any payment in respect of any Eurodollar Loan or Letter of Credit, then the Borrower shall pay to such Lender or the Agent, as the case may be, upon such Lender's or the Agent's demand, such additional amount or amounts as will compensate such Lender or the Agent for such additional costs or reduction. The Agent and each Lender agree to give notice to the Borrower of any such change in law, regulation, interpretation or administration with reasonable promptness after becoming actually aware thereof and of the applicability thereof to the Transactions. Notwithstanding anything contained herein to the contrary, nothing in clause (i) or (ii) of this Section 2.10(a) shall be deemed to (x) permit the Agent or any Lender to recover any amount thereunder which would not be recoverable under Section 2.15 hereof or (y) require the Borrower to make any payment of any amount to the extent that such payment would duplicate any payment made by the Borrower pursuant to Section 2.15 hereof. (1) If at any time and from time to time after the date of this Agreement, any Lender shall determine that the adoption of any applicable law, rule, regulation or guideline regarding capital adequacy, or any change in any applicable law, rule, regulation or guideline regarding capital adequacy, including, without limitation, the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital 33 40 Standards", or any change in the interpretation or administration of any thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender (or its lending office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or will have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of its obligations hereunder to a level below that which such Lender could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy), then from time to time the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. Each Lender agrees to give notice to the Borrower of any adoption of, change in, or change in interpretation or administration of, any such law, rule, regulation or guideline with reasonable promptness after becoming actually aware thereof and of the applicability thereof to the Transactions. Notwithstanding any other provision in this paragraph (b), none of any Lender or the Agent shall be entitled to demand compensation pursuant to this paragraph (b) if it shall not be the general practice of such Lender or the Agent, as applicable, to demand such compensation in similar circumstances under comparable provisions of other comparable credit agreements. (2) A statement of any Lender or the Agent setting forth such amount or amounts, supported by calculations in reasonable detail, as shall be necessary to compensate such Lender (or the Agent) as specified in paragraphs (a) and (b) above shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay each Lender or the Agent the amount shown as due on any such statement within ten (10) days after its receipt of the same. (3) Failure on the part of any Lender or the Agent to demand compensation for any increased costs, reduction in amounts received or receivable with respect to any Interest Period or any Letter of Credit or reduction in the rate of return earned on such Lender's capital, shall not constitute a waiver of such Lender's or the Agent's rights to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in rate of return in such Interest Period or in any other Interest Period or with respect to such Letter of Credit. The protection under this Section 2.10 shall be available to each Lender and the Agent regardless of any possible contention of the invalidity or inapplicability of any law, regulation or other condition which shall give rise to any demand by such Lender or the Agent for compensation. Notwithstanding the foregoing, the Borrower shall not be required to compensate a Lender or the Agent pursuant to this Section for any increased costs or reductions incurred more than six months prior to the date that such Lender or the Agent, as the case may be, notifies the Borrower of the change giving rise to such increased costs or reductions and of such Lender's or the Agent's intention to claim compensation therefor; provided that, if the change giving rise to such increased costs 34 41 or reductions is retroactive, then the six-month period referred to above shall be extended by a period of time equal to the period from the date of such change through and including the earliest date of such retroactive effect. (4) Any Lender claiming any additional amounts payable pursuant to this Section 2.10 agrees to use reasonable efforts (consistent with legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a designation would avoid the need for, or reduce the amount of, any such additional amounts and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. SECTION 2.11. Change in Legality. (a) Notwithstanding anything to the contrary herein contained, if any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations to make Eurodollar Loans as contemplated hereby, then, by written notice to Borrower and to the Agent, such Lender may: (1) declare that Eurodollar Loans will not thereafter be made by such Lender hereunder, whereupon the Borrower shall be prohibited from requesting Eurodollar Loans from such Lender hereunder unless such declaration is subsequently withdrawn; and (2) only in the event it is unlawful for such Lender to continue to maintain such Eurodollar Loans, require that all outstanding Eurodollar Loans made by such Lender be converted to Alternate Base Loans, in which event (A) all such Eurodollar Loans shall be automatically converted to Alternate Base Loans as of the effective date of such notice as provided in paragraph (b) below and (B) all payments of principal which would otherwise have been applied to repay the converted Eurodollar Loans shall instead be applied to repay the Alternate Base Loans resulting from the conversion of such Eurodollar Loans in each case without any liability to the Borrower to such Lender pursuant to Section 2.12 below as a result of such early conversion. (2) For purposes of Section 2.11(a) hereof, a notice to the Borrower by any Lender shall be effective, if lawful, on the last day of the then current Interest Period or, if there are then two or more current Interest Periods, on the last day of each such Interest Period, respectively; otherwise, such notice shall be effective with respect to the Borrower on the date of receipt by the Borrower. SECTION 2.12. Indemnity. The Borrower shall indemnify the Agent and each Lender against any loss or reasonable expense (including, but not limited to, any loss or reasonable expense sustained or incurred or to be sustained or incurred by 35 42 reason of or in connection with the execution and delivery or assignment of, or payment under, any Letter of Credit, or in liquidating or employing deposits from third parties acquired to effect or maintain any Loan or part thereof as a Eurodollar Loan) which the Agent or such Lender may sustain or incur as a consequence of the following events (regardless of whether such events occur as a result of the occurrence of an Event of Default or the exercise of any right or remedy of the Agent or the Lenders under this Agreement or any other agreement, or at law): any failure of the Borrower to fulfill on the date of any Credit Event the applicable conditions set forth in Article V hereof applicable to it; any failure of the Borrower to borrow hereunder after irrevocable notice of borrowing pursuant to Section 2.03 hereof has been given; any payment, prepayment or conversion of a Eurodollar Loan on a date other than the last day of the relevant Interest Period; or any default in payment or prepayment of the principal amount of any Loan or any part thereof or interest accrued thereon, or with respect to any Letter of Credit, in each case as and when due and payable (at the due date thereof, by irrevocable notice of prepayment or otherwise); provided, that the Borrower shall not be liable for any indemnification under Section 2.12 to the extent that any such loss or expense results from the Agent's or any Lender's gross negligence or willful misconduct. Such loss or reasonable expense shall include, without limitation, an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the principal or other amount so paid, prepaid or converted or not borrowed for the period from the date of such payment, prepayment or conversion or failure to borrow to, in the case of a Loan, the last day of the Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan which would have commenced on the date of such failure to borrow), at the applicable rate of interest for such Loan provided for herein over (ii) the amount of interest (as reasonably determined by such Lender) that would be realized by such Lender in reemploying the funds so paid, prepaid or converted or not borrowed for such period or Interest Period, as the case may be. Any such Lender shall provide to the Borrower a statement, signed by an officer of such Lender, explaining any loss or expense and setting forth, if applicable, the computation pursuant to the preceding sentence, and such statement shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such statement within ten (10) days after the receipt of the same. The indemnities contained herein shall survive the expiration or termination of this Agreement and of the Letters of Credit. SECTION 2.13. Pro Rata Treatment; Assumption by and Delegation of Authority to the Agent. (a) Except as permitted under Sections 2.10, 2.11 and 2.15 hereof, each borrowing, each payment or prepayment of principal of the Notes, each payment of interest on the Notes, each payment of any fee or other amount payable hereunder and each reduction of the Total Revolving Credit Commitment, Total Term Loan-A Commitment and Total Term Loan-B Commitment shall be made pro rata among the Lenders in the proportions that their Revolving Credit Commitments bear to the Total Revolving Credit Commitment or that their Term Loan-A Commitments bear to 36 43 the Total Term Loan-A Commitment or that their Term Loan-B Commitments bear to the Total Term Loan-B Commitment, as the case may be. (1) Notwithstanding the occurrence or continuance of a Default or Event of Default or other failure of any condition to the making of Loans or occurrence of other Credit Events hereunder subsequent to the Credit Events on the Closing Date, unless the Agent shall have been notified in writing by any Lender in accordance with the provisions of paragraph (c) below prior to the date of a proposed Credit Event that such Lender will not make the amount that would constitute its pro rata share of the applicable Credits on such date available to the Agent, the Agent may assume that such Lender has made such amount available to the Agent on such date, and the Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is made available to the Agent on a date after such Credit Event date, such Lender shall pay to the Agent on demand an amount equal to the product of (i) the daily average Federal Funds Effective Rate during such period as quoted by the Agent, times (ii) the amount of such Lender's pro rata share of such Credits, times (iii) a fraction the numerator of which is the number of days that elapse from and including such Credit Event date to the date on which such Lender's pro rata share of such Credits shall have become immediately available to the Agent and the denominator of which is 360. A certificate of the Agent submitted to any Lender with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. If such Lender's pro rata share of such Credits is not in fact made available to the Agent by such Lender within three Business Days of such Credit Event date, the Agent (without releasing such Lender from any liability it might have to the Agent or the Borrower by reason of its failure to fund) shall be entitled to recover such amount with interest thereon at the rate per annum applicable to the Loans hereunder, on demand, from the Borrower. (2) Unless and until the Agent shall have received written notice from the Required Lenders as to the existence of a Default, an Event of Default or some other circumstance which would relieve the Lenders of their respective obligations to extend Credits hereunder, which notice shall be in writing and shall be signed by the Required Lenders and shall expressly state that the Required Lenders do not intend to make available to the Agent such Lenders' ratable share of Credits extended after the effective date of such notice, the Agent shall be entitled to continue to make the assumptions described in Section 2.13(b) above. After receipt of the notice described in the preceding sentence, which shall become effective on the third Business Day after receipt of such notice by the Agent (unless otherwise agreed by the Agent), the Agent shall be entitled to make the assumptions described in Section 2.13(b) above as to any Credits as to which it has not received a written notice to the contrary prior to 11:00 a.m. (New York time) on the Business Day next preceding the day on which such Credits are to be extended. The Agent shall not be required to extend the portion of any Credits as to which it shall have received notice by a Lender of such Lender's intention not to make its ratable portion of such Credits available to the Agent. Any 37 44 withdrawal of authorization as described under this Section 2.13(c) shall not affect the validity of any Credits extended prior to the effectiveness thereof. SECTION 2.14. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against the Borrower, including, but not limited to, a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, obtain payment (voluntary or involuntary) in respect of a Note or exposure under the Letter of Credit Usage held by it as a result of which the unpaid principal portion of the Notes or exposure under the Letter of Credit Usage held by it shall be proportionately less than the unpaid principal portion of the Notes or exposure under the Letter of Credit Usage held by any other Lender, it shall be deemed to have simultaneously purchased from such other Lender a participation in the Notes and exposure under the Letter of Credit Usage held by such other Lender, so that the aggregate unpaid principal amount of the Notes and exposure under the Letter of Credit Usage and participations in Notes and exposure under the Letter of Credit Usage held by it shall be in the same proportion to the aggregate unpaid principal amount of all Notes and exposure under the Letter of Credit Usage then outstanding as the principal amount of the Notes and exposure under the Letter of Credit Usage held by it prior to such exercise of banker's lien, setoff or counterclaim was to the principal amount of all Notes and exposure under the Letter of Credit Usage outstanding prior to such exercise of banker's lien, setoff or counterclaim; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.14 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustments restored without interest. The Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in a Note and exposure under the Letter of Credit Usage deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower to such Lender as fully as if such Lender held a Note in the amount of such participation. SECTION 2.15. Taxes. (a) Any and all payments by the Borrower hereunder shall be made, in accordance with Section 2.16 hereof, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings in any such case imposed by the United States or any political subdivision thereof, excluding: (1) in the case of the Agent and each Lender, taxes imposed or based on its net income, and franchise or capital taxes imposed on it, (A) if the Agent or such Lender is organized under the laws of the United States or any 38 45 political subdivision thereof and (B) if the Agent or such Lender is not organized under the laws of the United States or any political subdivision thereof, and its principal office or Applicable Lending Office is located in the United States, and in the case of both (A) and (B), withholding taxes payable with respect to payments to the Agent or such Lender at its principal office or Applicable Lending Office under laws (including, without limitation, any reaty, ruling, determination or regulation) in effect on the date hereof, but not any increase in withholding tax resulting from any subsequent change in such laws (other than withholding with respect to taxes imposed or based on its net income or with respect to franchise or capital taxes), and (2) taxes (including withholding taxes) imposed by reason of the failure of the Agent or any Lender, in either case that is organized outside the United States, to comply with Section 2.15(f) hereof (or the inaccuracy at any time of the certificates, documents and other evidence delivered thereunder) (all such nonexcluded taxes, 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 hereunder to the Lenders or the Agent, (x) the sum payable shall be increased by the amount necessary so that after making all required deductions (including without limitation deductions applicable to additional sums payable under this Section 2.15) such Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (y) the Borrower shall make such deductions and (z) the Borrower shall pay the full amount deducted to the relevant tax authority or other authority in accordance with applicable law. (2) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement (hereinafter referred to as "Other Taxes"). (3) The Borrower will indemnify each Lender and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction (except as specified in clauses (a)(i) and (ii)) on amounts payable under this Section 2.15) 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. This indemnification shall be made within 30 days from the date such Lender or the Agent (as the case may be) makes written demand therefor. If any Lender receives a refund in respect of any Taxes or Other Taxes for which such Lender has received payment from the Borrower hereunder, such Lender shall promptly notify the Borrower of such refund and such Lender shall promptly repay such refund to the Borrower, provided that the Borrower, upon the request of such 39 46 Lender, agrees to return such refund (plus any penalties, interest or other charges) to such Lender in the event such Lender is required to repay such refund. (4) Within 30 days after the date of any payment of Taxes or Other Taxes withheld by the Borrower in respect of any payment to any Lender, the Borrower will furnish to the Agent, at its address referred to in Section 11.01 hereof, such certificates, receipts and other documents as may be reasonably required to evidence payment thereof. (5) Without prejudice to the survival of any other agreement hereunder, the agreements and obligations contained in this Section 2.15 shall survive the payment in full of principal and interest hereunder. (6) Each Lender that is organized outside of the United States shall deliver to the Borrower on the date hereof (or, in the case of an assignee, on the date of the assignment) and from time to time as required for renewal under applicable law duly completed copies of United States Internal Revenue Service Form 1001 or 4224 (or any successor or additional forms), as appropriate, indicating in each case that such Lender is entitled to receive payments under this Agreement without any deduction or withholding of any United States federal income taxes. The Agent (if the Agent is an entity organized outside the United States) and each Lender that is organized outside the United States shall promptly notify the Borrower and the Agent of any change in its Applicable Lending Office and such Lender shall, prior to the immediately following due date of any payment by the Borrower or any Guarantor hereunder or under any other Loan Document, deliver to the Borrower or such Guarantor, as the case may be (with copies to the Agent), such certificates, documents or other evidence, as required by the Code or Treasury Regulations issued pursuant thereto, including without limitation Internal Revenue Service Form 4224, Form 1001 and any other certificate or statement of exemption required by Treasury Regulation Section 1.1441-4(a) or Section 1.1441-6(c) or any subsequent version thereof, properly completed and duly executed by such Lender establishing that such payment is (i) not subject to withholding under the Code because such payment is effectively connected with the conduct by such Lender of a trade or business in the United States or (ii) totally exempt from United States tax under a provision of an applicable tax treaty. The Borrower shall be entitled to rely on such forms in their possession until receipt of any revised or successor form pursuant to this Section 2.15(f). If the Agent or a Lender fails to provide a certificate, document or other evidence required pursuant to this Section 2.15(f), then (i) the Borrower shall be entitled to deduct or withhold on payments to the Agent or such Lender as a result of such failure, as required by law, and (ii) the Borrower shall not be required to make payments of additional amounts with respect to such withheld amounts pursuant to clause (x) of Section 2.15(a) to the extent such withholding is required solely by reason of the failure of the Agent or such Lender to provide the necessary certificate, document or other evidence of an exemption from withholding. 40 47 (7) Each Lender and the Agent shall use reasonable efforts to avoid or minimize any amounts which might otherwise be payable pursuant to this subsection 2.15 (including seeking refunds of any amounts that are reasonably believed not to have been correctly or legally asserted); provided, however, that such efforts shall not include the taking of any actions by such Lender or the Agent that would result in any tax, costs or other expense to such Lender or the Agent (other than a tax, cost or other expense for which such Lender or the Agent shall have been reimbursed or indemnified by the Borrower pursuant to this Agreement or otherwise) or any action which would or might in the reasonable opinion of such Lender or the Agent have an adverse effect upon its business, operations or financial condition or otherwise be disadvantageous to such Lender or the Agent. SECTION 2.16. Payments and Computations. The Borrower shall make each payment hereunder and under any instrument delivered hereunder not later than 12:00 noon (New York City time) on the day when due in lawful money of the United States (in freely transferable dollars) to the Agent at its offices at 633 Third Avenue, New York, New York 10017-6764 for the account of the Lenders, in immediately available funds. The Agent may charge, when due and payable, the Borrower's account with the Agent for all interest, principal and Commitment Fees or other fees owing to the Agent or the Lenders on or with respect to this Agreement and/or the Loans and other Loan Documents. If at any time there is not sufficient availability to cover any of the payments referred to in the prior sentence, and in any event upon the occurrence of any Default, the Borrower shall make any such payments upon demand. SECTION 2.17. Issuance of Letters of Credit. Upon the request of the Borrower, and subject to the conditions set forth in Article V hereof and such other conditions to the opening of Letters of Credit as the Agent requires of its customers generally (and which are not contrary to the terms of this Agreement), the Agent shall from time to time open commercial and standby letters of credit (each, a "Letter of Credit") for the account of the Borrower, the aggregate undrawn amount of all outstanding Letters of Credit not at any time to exceed $500,000; provided, however, that the Borrower may not request the Agent to open a Letter of Credit if after giving effect thereto (measured by the face amount of such Letter of Credit) Availability would be less than zero. The issuance of each Letter of Credit shall be made on at least three Business Days' prior written notice from the Borrower to the Agent, at its Domestic Lending Office, which written notice shall be an application for a Letter of Credit on the Agent's customary form completed to the satisfaction of the Agent, together with the proposed form of the Letter of Credit (which shall be satisfactory to the Agent) and such other certificates, documents and other papers and information as the Agent may reasonably request. The Agent shall not at any time be obligated to issue any Letter of Credit if such issuance would conflict with, or cause the Agent or any Lender to exceed any limits imposed by, any applicable requirements of law. The expiration date of any (i) commercial Letter of Credit shall not be later than 90 days from the date of issuance thereof and (ii) any standby Letter of Credit shall not be later than 360 days from the 41 48 date of issuance thereof, and, in any event, no Letter of Credit shall have an expiration date later than thirty days prior to the Revolving Credit Termination Date. The Letters of Credit shall be issued with respect of transactions occurring in the ordinary course of business of the Borrower. SECTION 2.18. Payment of Letters of Credit; Reimbursement. Upon the issuance of any Letter of Credit, the Agent shall notify each Lender of the principal amount, the number, and the expiration date thereof and the amount of such Lender's participation therein. By the issuance of a Letter of Credit hereunder and without further action on the part of the Agent or the Lenders, each Lender hereby accepts from the Agent a participation (which participation shall be nonrecourse to the Agent) in such Letter of Credit equal to such Lender's pro rata (based on its Revolving Credit Commitment) share of such Letter of Credit, effective upon the issuance of such Letter of Credit. Each Lender hereby absolutely and unconditionally assumes, as primary obligor and not as a surety, and agrees to pay and discharge, and to indemnify and hold the Agent harmless from liability in respect of, such Lender's pro rata share of the amount of any drawing under a Letter of Credit. Each Lender acknowledges and agrees that its obligation to acquire participations in each Letter of Credit issued by the Agent and its obligation to make the payments specified herein, and the right of the Agent to receive the same, in the manner specified herein, are absolute and unconditional and shall not be affected by any circumstance whatsoever, including, without limitation, the occurrence and continuance of a Default or an Event of Default hereunder, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. The Agent shall review, on behalf of the Lenders, each draft and any accompanying documents presented under a Letter of Credit and shall notify each Lender of any such presentment. Promptly after it shall have ascertained that any draft and any accompanying documents presented under such Letter of Credit appear on their face to be in substantial conformity with the terms and conditions of the Letter of Credit, the Agent shall give telephonic or facsimile notice to the Lenders and the Borrower of the receipt and amount of such draft and the date on which payment thereon will be made, and the Lenders shall, by 11:00 A.M., New York City time on the date such payment is to be made, pay the amounts required to the Agent in New York, New York in immediately available funds, and the Agent, not later than 3:00 p.m. on such day, shall make the appropriate payment to the beneficiary of such Letter of Credit. If in accordance with the prior sentence the Lenders shall pay any draft presented under a Letter of Credit, then the Agent, on behalf of the Lenders, shall charge the general deposit account of the Borrower with the Agent for the amount thereof, together with the Agent's customary overdraft fee in the event the funds available in such account shall not be sufficient to reimburse the Lenders for such payment and the Borrower shall not otherwise have discharged such reimbursement obligation by 11:00 a.m., New York City time, within one (1) Business Day following demand by the Agent. If the Lenders have not been reimbursed with respect to such drawing as provided above, the Borrower hereby authorizes and directs the Agent to increase the principal balance of the Revolving Credit Loans in the amount of any 42 49 payment made by the Lenders. If the Lenders have not been reimbursed with respect to such drawing as provided above and if for any reason an advance under the Revolving Credit Loans may not be made, then the Borrower shall pay to the Agent, for the account of the Lenders, the amount of the drawing together with interest on such amount at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the Alternate Base Rate plus two percent (2%), payable on demand. The obligations of the Borrower under this Section 2.18 to reimburse the Lenders and the Agent for all drawings under Letters of Credit shall be joint and several, absolute, unconditional and irrevocable and shall be satisfied strictly in accordance with their terms, irrespective of: (1) any lack of validity or enforceability of any Letter of Credit; (2) the existence of any claim, setoff, defense or other right which the Borrower or any other person may at any time have against the beneficiary under any Letter of Credit, the Agent or any Lender (other than the defense of payment in accordance with the terms of this Agreement or a defense based on the gross negligence or willful misconduct of the Agent or any Lender) or any other person in connection with this Agreement or any other transaction; (3) any draft or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (4) payment by the Agent or any Lender under any Letter of Credit against presentation of a draft or other document which does not comply with the terms of such Letter of Credit; and (5) any other circumstance or event whatsoever, whether or not similar to any of the foregoing. It is understood that in making any payment under any Letter of Credit (x) the Agent's and any Lender's exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including, without limitation, reliance on the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever and (y) any noncompliance in any immaterial respect of the documents presented under such Letter of Credit with the terms thereof shall, in each case, not be deemed willful misconduct or gross negligence of the Agent or any Lender. 43 50 SECTION 2.19. Agent's Actions with respect to Letters of Credit. Any Letter of Credit may, in the discretion of the Agent or its correspondents, be interpreted by them (to the extent not inconsistent with such Letter of Credit) in accordance with the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce, as adopted or amended from time to time, or any other rules, regulations and customs prevailing at the place where any Letter of Credit is available or the drafts are drawn or negotiated. The Agent and its correspondents may accept and act upon the name, signature, or act of any party purporting to be the executor, administrator, receiver, trustee in bankruptcy, or other legal representative of any party designated in any Letter of Credit in the place of the name, signature, or act of such party. SECTION 2.20. Letter of Credit Fees. The Borrower agrees to pay (i) to the Agent for the account of each Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at a rate per annum equal to the Interest Margin over the Adjusted LIBO Rate applicable to interest on Eurodollar Loans on the average daily amount of such Lender's pro rata share of the Letter of Credit Usage (excluding any portion attributable to unreimbursed drawings) during the period from and including the Closing Date to but excluding the later of the date on which such Lender's Revolving Credit Commitment terminates and the date on which such Lender ceases to have any share of the Letter of Credit Usage, and (ii) to the Agent a fronting fee, which shall accrue at the rate of 1/4 of 1% per annum on the average daily amount of the Letter of Credit Usage (excluding any portion thereof attributable to unreimbursed drawings) during the period from and including the Closing Date to but excluding the later of the date of termination of the Revolving Credit Commitments and the date on which there ceases to be any Letter of Credit Usage, as well as the Agent's standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees and fronting fees accrued through and including the last day of March, June, September and December of each year shall be payable on the last Business Day of each such period, commencing March 31, 1998; provided that all such fees shall be payable on the date on which the Revolving Credit Commitment terminates and any such fees accruing after the date on which the Revolving Credit Commitment terminates shall be payable on demand. Any other fees payable to the Agent pursuant to this paragraph shall be payable on demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). 3. COLLATERAL SECURITY SECTION 3.1. Security Documents. The Obligations shall be secured by the Collateral described in the Security Documents and are entitled to the benefits thereof. The Borrower shall duly execute and deliver the Security Documents, all 44 51 consents of third parties necessary to permit the effective granting of the Liens created in such agreements, financing statements pursuant to the Uniform Commercial Code and other documents, all in form and substance satisfactory to the Agent, as may be reasonably required by the Agent to grant to the Lenders a valid, perfected and enforceable first priority Lien on and security interest in (subject only to the Liens permitted under Section 7.01 hereof) the Collateral. SECTION 3.2. Filing and Recording. The Borrower shall, at its sole cost and expense, cause all instruments and documents given as evidence of security pursuant to this Agreement to be duly recorded and/or filed or otherwise perfected in all places necessary, in the opinion of the Agent, and take such other actions as the Agent may reasonably request, in order to perfect and protect the Liens of the Agent and Lenders in the Collateral. The Borrower, to the extent permitted by law, hereby authorizes the Agent to file any financing statement in respect of any Lien created pursuant to the Security Documents which may at any time be required or which, in the opinion of the Agent, may at any time be desirable although the same may have been executed only by the Agent or, at the option of the Agent, to sign such financing statement on behalf of the Borrower and file the same, and the Borrower hereby irrevocably designates the Agent, its agents, representatives and designees as its agent and attorney-in-fact for this purpose. In the event that any re-recording or refiling thereof (or the filing of any statements of continuation or assignment of any financing statement) is required to protect and preserve such Lien, the Borrower shall, at the Borrower's cost and expense, cause the same to be recorded and/or refiled at the time and in the manner requested by the Agent. 4. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to each of the Lenders that both before and after giving effect to the consummation of the Transactions (including, without limitation, under the Recapitalization Documents): SECTION 4.1. Organization, Legal Existence. The Borrower and each of its subsidiaries are legal entities duly organized, validly existing and in good standing under the laws of the jurisdiction of their respective organization, have the requisite power and authority to own their property and assets and to carry on their business as now conducted and as currently proposed to be conducted and are qualified to do business in every jurisdiction where such qualification is required (all such jurisdictions being listed in Schedule 4.01 annexed hereto) except where the failure to so qualify would not have a Material Adverse Effect. The Borrower has the corporate power to execute, deliver and perform its obligations under this Agreement and the other Loan Documents to which it is a party, and to borrow hereunder and to execute and deliver the Notes. 45 52 SECTION 4.2. Authorization. The execution, delivery and performance by the Borrower of this Agreement and each of the other Loan Documents to which it is a party, the borrowings hereunder by the Borrower, the execution and delivery by the Borrower of the Notes, the grant of security interests in the Collateral created by the Security Documents and the transactions contemplated to occur under or in connection with the Recapitalization Documents (collectively, the "Transactions") (a) have been duly authorized by all requisite corporate and, if required, stockholder action and (b) will not (i) violate (A) any provision of law, statute, rule or regulation or the certificate or articles of incorporation or other applicable constitutive documents or the by-laws of the Borrower, or its subsidiaries, as the case may be, (B) any order of any court, or any rule, regulation or order of any other agency of government binding upon the Borrower, or its subsidiaries, or (C) any provisions of any material indenture, agreement or other instrument to which the Borrower, or its subsidiaries, or any of their respective properties or assets are or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any material indenture, agreement or other instrument referred to in (b)(i)(C) above or (iii) result in the creation or imposition of any material Lien of any nature whatsoever (other than in favor of the Agent, for its own benefit and for the benefit of the Lenders, as contemplated by this Agreement and the Security Documents) upon any property or assets of the Borrower, or its subsidiaries. SECTION 4.3. Governmental Approvals. No registration or filing (other than the filings necessary to perfect the Liens created by the Security Documents) with consent or approval of, or other action by, any Federal, state or other governmental agency, authority or regulatory body is or will be required in connection with the Transactions, other than any which have been made or obtained. SECTION 4.4. Binding Effect. This Agreement and each of the other Loan Documents to which it is a party constitutes, and each of the Notes when duly executed and delivered will constitute, a legal, valid and binding obligation of the Borrower enforceable in accordance with its terms except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). SECTION 4.5. Material Adverse Change. Except as set forth in Schedule 4.05 annexed hereto, there has been no material adverse change in the business, assets, operations or financial condition of the Borrower or any of its subsidiaries since September 30, 1997. SECTION 4.6. Litigation; Compliance with Laws; etc. (a) Except as set forth in Schedule 4.06(a) annexed hereto, there are not any actions, suits or proceedings at law or in equity or by or before any governmental instrumentality or 46 53 other agency or regulatory authority now pending or, to the knowledge of any Responsible Officer of the Borrower, threatened against or affecting the Borrower or any of its subsidiaries or the businesses, assets or rights of the Borrower or any of its subsidiaries (i) which involve any of the Transactions or (ii) as to which it is probable (within the meaning of Statement of Financial Accounting Standards No. 5) that there will be an adverse determination and which, if adversely determined, would, individually or in the aggregate, materially impair the ability of the Borrower to conduct business substantially as now conducted, or have a Material Adverse Effect. (1) Except as set forth in Schedule 4.06(b) annexed hereto, neither the Borrower nor any of its subsidiaries is in violation of any law, or in default with respect to any judgment, writ, injunction, decree, rule or regulation of any court or governmental agency or instrumentality which violation or default would have a Material Adverse Effect. SECTION 4.7. Financial Statements. (a) The Borrower has heretofore furnished to the Agent Consolidated balance sheets and statements of income and cash flows of the Borrower dated as of December 31, 1995 and 1996 and September 30, 1997, each audited by and accompanied by the opinion of independent public accountants. Such balance sheets and statements of income and cash flows present fairly the Consolidated financial condition and results of operations of the Borrower and its subsidiaries as of the dates and for the periods indicated, and such balance sheets and the notes thereto disclose all material liabilities, direct or contingent, of the Borrower and its subsidiaries, as of the dates thereof. (1) The Borrower has heretofore furnished to the Agent, quarterly projected income statements, balance sheets and cash flows of the Borrower on a Consolidated basis through December 31, 1999 and annually thereafter through the Final Maturity Date, together with a schedule confirming the ability of the Borrower to consummate the Transactions and demonstrating prospective compliance with all financial covenants contained in this Agreement, such projections disclosing all assumptions made by the Borrower in formulating such projections and giving effect to the Transactions. The projections are based upon reasonable estimates and assumptions, all of which are reasonable in light of the conditions which existed at the time the projections were made, have been prepared on the basis of the assumptions stated therein, and reflect as of the Closing Date the reasonable estimate of the Borrower of the results of operations and other information projected therein. (2) The Borrower has heretofore furnished to the Agent a Consolidated pro forma balance sheet of the Borrower and which sets forth information before and after giving effect to the Transactions. 47 54 (3) The audited financial statements referred to in this Section 4.07 have been prepared in accordance with GAAP and the internally prepared statements have been prepared on a basis consistent with GAAP but without footnotes. SECTION 4.8. Federal Reserve Regulations. (a) Neither the Borrower nor any of its subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. (1) No part of the proceeds of the Loans will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (i) to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock or to refund indebtedness originally incurred for such purpose, or (ii) for any purpose which entails a violation of, or which is inconsistent with, the provisions of the Regulations of the Board, including, without limitation, Regulation G, T, U or X thereof. If requested by any Lender, the Borrower or any of its subsidiaries shall furnish to such Lender a statement on Federal Reserve Form U-1 referred to in said Regulation U. SECTION 4.9. Taxes. Except as set forth in Schedule 4.09 hereto, the Borrower and each of its subsidiaries have filed or caused to be filed all Federal, state, local and foreign tax returns which are required to be filed by them, on or prior to the date hereof, other than tax returns in respect of taxes that (x) are not franchise, capital or income taxes, (y) in the aggregate are not material and (z) would not, if unpaid, result in the imposition of any material Lien on any property or assets of the Borrower or any its subsidiaries. Except as set forth in Schedule 4.09 hereto, the Borrower and its subsidiaries have paid or caused to be paid all taxes shown to be due and payable on such filed returns or on any assessments received by them, other than (i) any taxes or assessments the validity of which the Borrower or such subsidiary is contesting in good faith by appropriate proceedings, and with respect to which the Borrower or such subsidiary shall, to the extent required by GAAP have set aside on its books adequate reserves and (ii) taxes other than income, capital or franchise taxes that in the aggregate are not material and which would not, if unpaid, result in the imposition of any material Lien on any property or assets of the Borrower or any of its subsidiaries. Except as set forth in Schedule 4.09 hereto, no Federal income tax returns of the Borrower or any of its subsidiaries have been audited by the United States Internal Revenue Service and neither the Borrower nor any of its subsidiaries has as of the date hereof requested or been granted any extension of time to file any Federal, state, local or foreign tax return which return has not since been filed. Except as set forth in Schedule 4.09 hereto, neither the Borrower nor any of its subsidiaries is party to or has any obligation under any tax sharing agreement. SECTION 4.10. Employee Benefit Plans. With respect to the provisions of ERISA: 48 55 (1) As of the Closing Date, no Reportable Event has occurred or is continuing with respect to any Pension Plan, and as of any subsequent date, no such event has occurred which would have a Material Adverse Effect. (2) No prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) has occurred with respect to any Plan subject to Part 4 of Subtitle B of Title I of ERISA which could result in a material liability. (3) As of the Closing Date, neither the Borrower nor any ERISA Affiliate is now, or has been during the preceding five years, obligated to contribute to a Pension Plan or a Multiemployer Plan. Neither the Borrower nor any ERISA Affiliate has (A) ceased operations at a facility so as to become subject to the provisions of Section 4062(e) of ERISA, (B) withdrawn as a substantial employer so as to become subject to the provisions of Section 4063 of ERISA, (C) ceased making contributions to any Pension Plan subject to the provisions of Section 4064(a) of ERISA to which the Borrower, any subsidiary of the Borrower or any ERISA Affiliate made contributions, (D) incurred or caused to occur a "complete withdrawal" (within the meaning of Section 4203 of ERISA) or a "partial withdrawal" (within the meaning of Section 4205 of ERISA) from a Multiemployer Plan that is a Pension Plan so as to incur withdrawal liability under Section 4201 of ERISA (without regard to subsequent reduction or waiver of such liability under Section 4207 or 4208 of ERISA), or (E) been a party to any transaction or agreement under which the provisions of Section 4204 of ERISA were applicable which in the case of items (A) through (E) would have a Material Adverse Effect. (4) No notice of intent to terminate a Pension Plan has been filed, nor has any Plan been terminated pursuant to the provisions of Section 4041(e) of ERISA, in either case which could result in a material liability. (5) The PBGC has not instituted proceedings to terminate (or appoint a trustee to administer) a Pension Plan and no event has occurred or condition exists which could reasonably be expected to constitute grounds under the provisions of Section 4042 of ERISA for the termination of (or the appointment of a trustee to administer) any such Plan. (6) No Pension Plan has incurred any "accumulated funding deficiency" (as defined in Section 412 of the Code), whether or not waived. (7) There are no actions, suits or claims pending (other than routine claims for benefits) or, to the knowledge of the Borrower, which could reasonably be expected to be asserted, against any Plan or the assets of any such Plan which would have a Material Adverse Effect. No civil or criminal action brought pursuant to the provisions of Title I, Subtitle B, Part 5 of ERISA is pending or threatened against any fiduciary or any Plan which would have a Material Adverse Effect. None of the Plans or 49 56 any fiduciary thereof (in its capacity as such) has been the direct or indirect subject of any audit, investigation or examination by any governmental or quasi-governmental agency which would have a Material Adverse Effect. (8) All of the Plans are in material compliance, both as to form and operation, with their terms and with the provisions of ERISA and the Code, and all other applicable laws, rules and regulations; all necessary governmental approvals for the Plans have been obtained and a favorable determination as to the qualification under Section 401(a) of the Code of each of the Plans which is an employee pension benefit plan (within the meaning of Section 3(2) of ERISA) and intended to be qualified has been made by the Internal Revenue Service and a recognition of exemption from federal income taxation under Section 501(c) of the Code of each of the funded employee welfare benefit plans (within the meaning of Section 3(1) of ERISA) has been made by the Internal Revenue Service, and, to the knowledge of the Borrower, nothing has occurred since the date of each such determination or recognition letter that would adversely affect such qualification. SECTION 4.11. No Material Misstatements. The information, reports, financial statements, exhibits and schedules prepared or furnished by or on behalf of the Borrower to the Agent or any Lender in connection with any of the Transactions or this Agreement, the Security Documents, the Notes and other Loan Documents or included therein, taken as a whole, as of the dates specified therein, contained no material misstatement of fact and omitted to state no material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that (a) any statements describing documents and agreements are summaries only and as such are qualified in their entirety by reference to such documents and agreements, (b) to the extent any such information therein was based upon or constitutes a forecast or projection, the Borrower represents only that it acted in good faith and utilized reasonable assumptions, due and careful consideration and the best information known to it at the time in the preparation of such information and (c) as to information that is specified as having been supplied by third parties other than Behrman Capital, the Borrower represents only that it is not aware of any material misstatement therein or omission therefrom. SECTION 4.12. Investment Company Act; Public Utility Holding Company Act. Neither the Borrower nor any of its subsidiaries is an "investment company" as defined in, or is otherwise subject to regulation under, the Investment Company Act of 1940. Neither the Borrower nor any of its subsidiaries is a "holding company" as that term is defined in or is otherwise subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 4.13. Security Interest. Each of the Security Documents creates and grants to the Agent, for its own benefit and for the benefit of the Lenders, a legal, valid and perfected first (except as permitted pursuant to Section 7.01 hereof) 50 57 priority security interest in the collateral identified therein. Such collateral or property is not subject to any other Liens whatsoever, except Liens permitted by Section 7.01 hereof. SECTION 4.14. Use of Proceeds. (a) All proceeds of the borrowing under the Total Term Loan Commitment and up to $500,000 in proceeds of borrowings under the Revolving Credit Commitment shall be used to partially finance the consideration to be paid pursuant to the Recapitalization Agreement and to pay fees and expenses associated with the Recapitalization. (1) All proceeds of each other borrowing under the Revolving Credit Commitment shall be used to provide for general corporate purposes of the Borrower. SECTION 4.15. Subsidiaries. As of the Closing Date, the Borrower has one subsidiary, TMNG Europe Limited, a United Kingdom corporation. SECTION 4.16. Title to Properties; Possession Under Leases; Trademarks. (a) The Borrower and each of its subsidiaries have good and marketable title to, or valid leasehold interest in, all of their respective properties and assets shown on the most recent balance sheet referred to in Section 4.07(a) hereof and all assets and properties acquired since the date of such balance sheet, except for such properties as are no longer used or useful in the conduct of its business or as have been disposed of in the ordinary course of business, and except for minor defects in title that do not interfere with the ability of the Borrower or any of its subsidiaries to conduct its business as now conducted. All such assets and properties are free and clear of all Liens other than those permitted by Section 7.01 hereof. (1) The Borrower and each of its subsidiaries have complied with all obligations under all leases in all material respects to which they are a party and under which they are in occupancy, and all such leases are in full force and effect and the Borrower and each of its subsidiaries enjoy peaceful and undisturbed possession under all such leases. (2) The Borrower and each of its subsidiaries own or control all material trademarks, trademark rights, trade names, trade name rights, copyrights, patents, patent rights and licenses which are necessary for the conduct of the business of the Borrower and each of its subsidiaries. To the actual knowledge of the Responsible Officers of the Borrower, neither the Borrower nor any of its subsidiaries is infringing upon or otherwise acting adversely to any of such trademarks, trademark rights, trade names, trade name rights, copyrights, patent rights or licenses owned by any other person or persons. There is no claim or action by any such other person pending, or to the knowledge of any Responsible Officer of the Borrower or any subsidiary thereof, threatened, against the Borrower or any of its subsidiaries with respect to any of the rights or property referred to in this Section 4.16(c). 51 58 SECTION 4.17. Solvency. (a) The fair salable value of the assets of the Borrower and its Consolidated subsidiaries is not less than the amount that will be required to be paid on or in respect of the probable liability on the existing debts and other liabilities (including contingent liabilities) of the Borrower and its Consolidated subsidiaries, as they become absolute and mature. (1) The assets of the Borrower and its Consolidated subsidiaries do not constitute unreasonably small capital for the Borrower and its Consolidated subsidiaries to carry out their business as now conducted and as proposed to be conducted including the capital needs of the Borrower and its Consolidated subsidiaries, taking into account the particular capital requirements of the business conducted by the Borrower and its Consolidated subsidiaries and projected capital requirements and capital availability thereof. (2) Neither the Borrower nor any of its subsidiaries intends to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be received by the Borrower and any of its subsidiaries, and of amounts to be payable on or in respect of debt of the Borrower and any of its subsidiaries). The cash flow of the Borrower and its Consolidated subsidiaries, after taking into account all anticipated uses of the cash of the Borrower and its Consolidated subsidiaries, will at all times be sufficient to pay all such amounts on or in respect of debt of the Borrower and its Consolidated subsidiaries when such amounts are required to be paid. (3) Neither the Borrower nor any of its subsidiaries believes that final judgments against them in actions for money damages presently pending will be rendered at a time when, or in an amount such that, they will be unable to satisfy any such judgments promptly in accordance with their terms (taking into account the maximum reasonable amount of such judgments in any such actions and the earliest reasonable time at which such judgments might be rendered). The cash flow of the Borrower and its Consolidated subsidiaries, after taking into account all other anticipated uses of the cash of the Borrower and its Consolidated subsidiaries (including the payments on or in respect of debt referred to in paragraph (c) of this Section), will at all times be sufficient to pay all such judgments promptly in accordance with their terms. SECTION 4.18. Permits, etc. Except as disclosed in Schedule 4.18 hereto, the Borrower and each of its subsidiaries possess all licenses, permits, approvals and consents, including, without limitation, all environmental, health and safety licenses, permits, approvals and consents (collectively, "Permits") of all Federal, state and local governmental authorities as required to conduct properly their business except where the failure to possess such permit would not have a Material Adverse Effect, each such Permit is and will be in full force and effect, the Borrower and each of 52 59 its subsidiaries are in compliance in all material respects with all such Permits, and no event (including, without limitation, any violation of any law, rule or regulation) has occurred which allows the revocation or termination of any such Permit or any restriction thereon. SECTION 4.19. Compliance with Environmental Laws. Except such as would not have a Material Adverse Effect or as disclosed in Schedule 4.19 hereto: (i) the operations of the Borrower and its subsidiaries comply in all material respects with all applicable Environmental Laws; (ii) the Borrower and its subsidiaries and all of their present facilities or operations, as well as to the knowledge of the Borrower and its subsidiaries their past facilities or operations, are not subject to any judicial proceeding or administrative proceeding or any outstanding written order or agreement with any governmental authority or private party respecting (a) any Environmental Law, (b) any Remedial Work, or (c) any Environmental Claims arising from the Release of a Contaminant into the environment; (iii) to the best of the knowledge of the Borrower and its subsidiaries, none of their operations is the subject of any Federal or state investigation evaluating whether any Remedial Work is needed to respond to a Release of any Contaminant into the environment in violation of any Environmental Law; (iv) neither the Borrower nor any of its subsidiaries nor any predecessor of the Borrower or any of its subsidiaries has filed any notice under any Environmental Law indicating past or present treatment, storage, or disposal of a Hazardous Material or reporting a spill or Release of a Contaminant into the environment; (v) to the best of the knowledge of the Borrower and its subsidiaries, neither the Borrower nor any of its subsidiaries has any contingent liability in connection with any Release of any Contaminant into the environment; (vi) none of the operations of the Borrower or any of its subsidiaries involves the generation, transportation, treatment or disposal of Hazardous Materials; (vii) neither the Borrower nor any of its subsidiaries has disposed of any Contaminant by placing it in or on the ground or waters of any premises owned, leased or used by any of them and to the knowledge of the Borrower and its subsidiaries neither has any lessee, prior owner, or other person; (viii) no underground storage tanks or surface impoundments are on any property of the Borrower and its subsidiaries; and (ix) no Lien in favor of any governmental authority for (A) any liability under any Environmental Law or regulation, or (B) damages arising from or costs incurred by such governmental authority in response to a Release of a Contaminant into the environment, has been filed or attached to the property of the Borrower and its subsidiaries. SECTION 4.20. No Change in Credit Criteria or Collection Policies. Except as disclosed in Schedule 4.20 hereto, there has been no material change in credit criteria or collection policies concerning account receivables of the Borrower since December 31, 1996. Without duplication, all Eligible Receivables of the Borrower are valid, binding and enforceable obligations of account debtors. All account receivables (other than Eligible Receivables) are valid, binding and enforceable obligations of account debtors. 53 60 SECTION 4.21. Employee Matters. Each of the Borrower and its subsidiaries, in the conduct of its affairs and businesses, has complied in all material respects with all applicable laws and regulations relating to the employment of labor, including those related to wages, hours, discrimination, employee pension and welfare benefit plans, collective bargaining, and the payment of Social Security or similar taxes, and has withheld and paid to the appropriate governmental authority, all amounts required by law or agreement to be withheld from wages or salaries of its employees. Each of the Borrower and its subsidiaries is not a party to any collective bargaining agreement in connection with the employment of its employees. Except as set forth on Schedule 4.21 hereto, there is not pending, nor, to the Borrower's knowledge, threatened, any labor dispute, strike or lockout, slow-down, stoppage, unfair labor practice complaint, grievance procedure or arbitration proceeding relating to or affecting the Borrower or its subsidiaries. SECTION 4.22. Recapitalization. (i) The execution, delivery and performance by Behrman Capital TMNG, Inc., Holdings and the Borrower of the Recapitalization Documents have been duly authorized by all necessary action on the part of the Borrower, Behrman Capital TMNG, Inc. and Holdings, (ii) the Recapitalization Documents constitute the valid, binding and enforceable obligation of the Borrower, Behrman Capital TMNG, Inc. and Holdings, subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and are in full force and effect without default or waiver of any of the conditions thereunder and (iii) there are no governmental consents, filings, approvals or notices required to be made or obtained in connection with the execution, delivery and performance of the Recapitalization Documents except such as have been duly made, obtained or delivered. 5. CONDITIONS OF CREDIT EVENTS The obligation of each Lender to make Loans and extend other Credits hereunder shall be subject to the following conditions precedent: SECTION 5.1. All Credit Events. On each date on which a Credit Event is to occur: (1) The Agent shall have received a notice of borrowing or a request for the issuance of a Letter of Credit pursuant to Section 2.17 hereof as required by Section 2.03 hereof. (2) The representations and warranties set forth in Article IV hereof and in any documents delivered herewith, including, without limitation, the Loan Documents, shall be true and correct in all material respects with the same effect as though made on and as of such date (except insofar as such representations 54 61 and warranties relate expressly to an earlier date and except that the representation set forth in Section 4.05 shall be deemed updated to the most recent financial statements delivered pursuant to Section 6.05(a) and except that the representation made in Section 4.07(b) shall be made only as of the Closing Date). (3) The Borrower shall be in compliance with all the terms and provisions contained herein on its part to be observed or performed, and at the time of and immediately after such Credit Event no Default or Event of Default shall have occurred and be continuing. (4) The Agent shall have received a certificate signed by the Financial Officer of the Borrower (i) as to the compliance with (b) and (c) above and (ii) with respect to each Revolving Credit Loan and each Letter of Credit, demonstrating that after giving effect thereto Availability is zero or greater. SECTION 5.2. First Borrowing. The obligations of the Lenders in respect of the first Credit Event hereunder are subject to the following additional conditions precedent: (1) The Lenders shall have received the favorable written opinion of counsel for the Borrower and Holdings substantially in the form of Exhibit C hereto, dated the Closing Date, addressed to the Lenders and satisfactory to the Agent. (2) The Lenders shall have received (i) a copy of the certificate or articles of incorporation or other constitutive documents, in each case as amended to date, of each of the Borrower, the corporate or partnership Grantors certified as of a recent date by the Secretary of State or other appropriate official of the state of its organization, and a certificate as to the good standing of each from such Secretary of State or other official, in each case dated as of a recent date; (ii) a certificate of the Secretary of each of the Borrower and the corporate Grantors, dated the Closing Date and certifying (A) that attached thereto is a true and complete copy of such person's By-laws as in effect on the date of such certificate and at all times since a date prior to the date of the resolution described in item (B) below, (B) that attached thereto is a true and complete copy of a resolution adopted by such person's Board of Directors authorizing the execution, delivery and performance of this Agreement, the Security Documents, the Notes, the other Loan Documents and the Credit Events hereunder, as applicable, and that such resolution has not been modified, rescinded or amended and is in full force and effect, (C) that such person's certificate or articles of incorporation or constitutive documents has not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to (i) above, and (D) as to the incumbency and specimen 55 62 signature of each of such person's officers executing this Agreement, the Notes, each Security Document or any other Loan Document delivered in connection herewith or therewith, as applicable; (iii) a certificate of another of such person's officers as to incumbency and signature of its Secretary; and (iv) such other documents as the Agent or any Lender may reasonably request. (3) The Agent shall have received a certificate, dated the Closing Date and signed by the Financial Officer of the Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 5.01 hereof and the conditions set forth in this Section 5.02. (4) Each Lender shall have received its Revolving Credit Note and Term Notes duly executed by the Borrower, payable to its order and otherwise complying with the provisions of Section 2.04 hereof. (5) The Agent shall have received the Security Documents and certificates evidencing the Pledged Stock, together with undated stock powers executed in blank, each duly executed by the applicable Grantors. (6) The Agent shall have received certified copies of requests for copies or information on Form UCC-11 or certificates satisfactory to the Lenders of a UCC Reporter Service, listing all effective financing statements which name as debtor the Borrower or any corporate Grantor and which are filed in the appropriate offices in the States in which are located the chief executive office and other operating offices of such person, together with copies of such financing statements. With respect to any Liens not permitted pursuant to Section 7.01 hereof, the Agent shall have received either termination statements or lien release letter, in either case in form and substance satisfactory to it. (7) Each document (including, without limitation, each Uniform Commercial Code financing statement) required by law or requested by the Agent to be filed, registered or recorded in order to create in favor of the Agent for its own benefit and for the benefit of the Lenders a first priority perfected security interest in the Collateral shall have been properly filed, registered or recorded in each jurisdiction in which the filing, registration or recordation thereof is so required or requested. The Agent shall have received an acknowledgment copy, or other evidence satisfactory to it, of each such filing, registration or recordation. (8) The Agent shall have received the results of a search of tax and other Liens, and judgments and of the Uniform Commercial Code filings made with respect to the Borrower and each corporate Grantor in the jurisdictions in which the Borrower is doing business and/or in which any Collateral is located, and in which Uniform Commercial Code filings have been made against the 56 63 Borrower, each Guarantor and each corporate Grantor pursuant to paragraph (g) above. (9) The Lenders and the Agent shall have received and determined to be in form and substance satisfactory to them: (1) the December 31, 1997 schedule and aging of accounts receivable of the Borrower; (2) an opening Borrowing Base calculation and evidence that the Borrower has Availability of not less than $1,500,000 on the Closing Date and cash; (3) evidence that the Borrower has common equity in the minimum amount of $33,300,000 (of which at least $20,000,000 was contributed in cash, directly or indirectly, by Holdings and at least $13,300,000 of rollover equity from management on the Closing Date); (4) a copy of a field examination of the Borrower's books and records; (5) evidence of the compliance by the Borrower with Section 6.03; (6) the financial statements described in Section 4.07 hereof; (7) evidence (which may consist of the certificate provided pursuant to Section 5.02(c) hereof) that the Transactions are in compliance with all applicable laws and regulations except where non-compliance would not have a Material Adverse Effect; (8) evidence of the compliance by the Borrower with Section 6.19; (9) evidence of payment of all fees owed to the Agent and the Lenders by the Borrower under this Agreement, the Commitment Letter or otherwise; (10) evidence that all requisite third party consents (including, without limitation, consents with respect to the Borrower and each of the Grantors) to the Transactions have been received; (11) evidence (which may consist of the certificate provided pursuant to Section 5.02(c) hereof) that there has been no 57 64 material adverse change in the business, assets, operations or financial condition of the Borrower and its subsidiaries since September 30, 1997; (12) evidence of the repayment in full of existing credit arrangements and the termination of all commitments to lend thereunder, including the Prior Lender Obligations, and the termination of all security interests securing such indebtedness as required under paragraph (f) above; and (13) evidence (which may consist of the certificate provided pursuant to Section 5.02(c) hereof) that there are no actions, suits or proceedings at law or in equity or by or before any governmental instrumentality or other agency or regulatory authority now pending or threatened against or affecting the Borrower or any of its subsidiaries or any of their respective businesses, assets or rights which involve any of the Transactions. (10) The Agent and the Lenders shall have had the opportunity, if they so choose, to examine the books of account and other records and files of the Borrower, its subsidiaries and the corporate Grantors and to make copies thereof, to undertake customer and consultant checkings and to conduct a pre-closing audit which shall include, without limitation, verification of Eligible Receivables, payment of payroll taxes and accounts payable and formulation of an opening Borrowing Base, and the results of such examination, checkings and audit shall have been satisfactory to the Agent and Lenders in all respects. (11) The Agent shall have received and had the opportunity to review and determine to be in form and substance satisfactory to it: (1) copies of all material lease agreements entered into by the Borrower and its subsidiaries and all materials relating to the tax assumptions regarding the Transactions; and (2) copies of all loan agreements, notes and other documentation evidencing Indebtedness for borrowed money of the Borrower, its subsidiaries or the corporate Grantors. (12) Messrs. Kaye, Scholer, Fierman, Hays & Handler, LLP, counsel to the Agent, shall have received payment in full for all reasonable legal fees charged, and all costs and expenses incurred, by such counsel through the Closing Date in connection with the transactions contemplated under this Agreement, the Security Documents and the other Loan Documents and instruments in connection herewith and therewith. 58 65 (13) The Agent and the Lenders shall have: (1) received copies of each of the Recapitalization Documents, including all amendments and schedules thereto, each certified by a Responsible Officer of the Borrower to be true and complete copies; (2) received evidence that the Recapitalization Agreement is in full force and effect and all consents, filings and approvals required by applicable law in connection therewith shall have been obtained and made; (3) received evidence that simultaneously with the occurrence of the Credit Events on the Closing Date, the Recapitalization shall have been duly and validly consummated, including the merger of Behrman Capital TMNG, Inc. into the Borrower and the funding of the escrow arrangements, without modification, amendment or waiver (except for such as shall have been approved in writing by the Agent), in accordance with the terms, conditions and provisions of the Recapitalization Agreement and the other Recapitalization Documents; and (4) determined that the terms and provisions of all agreements and documents in connection with the Recapitalization, including without limitation the Recapitalization Documents, are satisfactory in form and substance and the Agent shall have received such legal opinions, certificates and copies of necessary governmental filings and consents as the Agent shall have requested in connection therewith, and shall have determined to its satisfaction that the consummation of the Recapitalization and other transactions contemplated by the Recapitalization Documents are in compliance with all applicable laws and regulations. (14) The corporate structure and capitalization of the Borrower shall be satisfactory to the Lenders in all respects. (15) All legal matters in connection with the Transactions shall be satisfactory to the Agent, the Lenders and their respective counsel in their sole discretion. (16) The Borrower shall have executed and delivered to the Agent a disbursement authorization letter with respect to the disbursement of the proceeds of the Credit Events made on the Closing Date, in form and substance satisfactory to the Agent. 59 66 (17) The Agent and the Lenders shall have had the opportunity, if they so choose, to meet with Alan Staples and Ralph Peck and the results of such meeting shall have been satisfactory to the Agent and the Lenders in all respects. (18) The Borrower shall have delivered satisfactory blocked account letters as to any bank accounts maintained with financial institutions other than the Agent. (19) The Borrower's operating plan, including the timetable for the retention of a chief financial officer within 90 days of the Closing Date and the conversion to an employee model (which shall provide for the employment on the Closing of those persons set forth on Schedule 5 hereto) shall be satisfactory to the Lenders in all respects. (20) The Agent shall have received such other documents as the Lenders or the Agent or Agent's counsel shall reasonably deem necessary. 6. AFFIRMATIVE COVENANTS The Borrower covenants and agrees with each Lender that, so long as this Agreement shall remain in effect or the principal of or interest on any Note, any amount under any Letter of Credit or any fee, expense or other Obligation payable hereunder or in connection with any of the Transactions shall be unpaid, it will, and will cause each of its subsidiaries and, with respect to Section 6.07 hereof, each ERISA Affiliate, to: SECTION 6.1. Legal Existence. Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence except as otherwise permitted by Section 7.05. SECTION 6.2. Businesses and Properties. At all times do or cause to be done all things necessary to preserve, renew and keep in full force and effect the rights, licenses, Permits, franchises, patents, copyrights, trademarks and trade names material to the conduct of its businesses; maintain and operate such businesses in the same general manner in which they are presently conducted and operated; comply with all laws, rules, regulations and governmental orders (whether Federal, state or local) applicable to the operation of such businesses whether now in effect or hereafter enacted (including, without limitation, all applicable laws, rules, regulations and governmental orders relating to public and employee health and safety and all Environmental Laws) and with any and all other applicable laws, rules, regulations and governmental orders, the lack of compliance with which would have a Material Adverse Effect; take all actions which may be required to obtain, preserve, renew and extend all 60 67 Permits and other authorizations which are material to the operation of such businesses; and at all times maintain, preserve and protect all property material to the conduct of such businesses and keep such property in good repair, working order and condition (ordinary wear and tear excluded) and from time to time make, or cause to be made, all repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times. SECTION 6.3. Insurance. (a) Keep its insurable properties insured at all times by financially sound and reputable insurers, consistent with the coverages reflected in Schedule 6.03 hereto, as modified as reflected in said Schedule, (b) maintain such other insurance, to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies similarly situated and in the same or similar businesses, provided, however, that such insurance shall insure the property of the Borrower against all risk of physical damage, including, without limitation, loss by fire, explosion, theft, fraud and such other casualties, consistent with the coverages reflected in Schedule 6.03 hereto, (c) maintain in full force and effect public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by the Borrower or any of its subsidiaries, consistent with the coverages reflected in Schedule 6.03 hereto, (d) maintain business interruption insurance to such extent as is customary with companies similarly situated and in the same or similar businesses, consistent with the coverages reflected in Schedule 6.03 hereto and (e) maintain such other insurance as may be required by law. All insurance covering tangible personal property subject to a Lien in favor of the Agent for its own benefit and for the benefit of the Lenders granted pursuant to the Security Documents shall provide that, in the case of each separate loss the full amount of insurance proceeds shall be payable to the Agent and shall further provide for at least 30 days' prior written notice to the Agent of the cancellation or substantial modification thereof. SECTION 6.4. Taxes. Except as described on Schedule 6.04 hereto, pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise, which, if unpaid, might give rise to material Liens upon such properties or any part thereof, except where the validity or amount thereof is being contested in good faith by appropriate proceedings, the Borrower has set aside on its books adequate reserves with respect thereto in accordance with GAAP and the failure to make payment pending such contest would not result in a Material Adverse Effect. SECTION 6.5. Financial Statements, Reports, etc. Furnish to the Agent, with copies for each of the Lenders: 61 68 (1) within 90 days after the end of each Fiscal Year, (i) Consolidated and consolidating balance sheets and Consolidated and consolidating income statements showing the financial condition of the Borrower and its subsidiaries as of the close of such Fiscal Year and the results of their operations during such year, and (ii) a Consolidated and consolidating statement of shareholders' equity and a Consolidated and consolidating statement of cash flow, as of the close of such Fiscal Year, comparing such financial condition and results of operations to such financial condition and results of operations for the comparable period during the immediately preceding Fiscal Year, all the foregoing financial statements to be audited by independent public accountants acceptable to the Agent (which report shall not contain any qualification except with respect to new accounting principles mandated by the Financial Accounting Standards Board); (2) within 45 days (or 60 days solely with respect to the quarter ending March 31, 1998) after the end of each of the first three (3) fiscal quarters of the Borrower, (i) unaudited Consolidated and consolidating balance sheets and Consolidated and consolidating income statements showing the financial condition and results of operations of the Borrower and its subsidiaries as of the end of each such quarter, (ii) a Consolidated and consolidating statement of shareholders' equity and (iii) a Consolidated and consolidating statement of cash flow, in each case for the fiscal quarter just ended and for the period commencing at the end of the immediately preceding Fiscal Year and ending with the last day of such quarter, and comparing such financial condition and results of operations to the projections for the applicable period provided under paragraph (h) below and to the results for the comparable period during the immediately preceding Fiscal Year in each case prepared and certified by the Financial Officer of the Borrower as presenting fairly the financial condition and results of operations of the Borrower and its subsidiaries and as having been prepared in accordance with GAAP, in each case subject to normal year-end audit adjustments; (3) within 30 days (or April 30, 1998 in the case of January and February 1998) after the end of each of the first two months of each quarter, (i) unaudited Consolidated and consolidating balance sheets and income statements showing the financial condition and results of operations of the Borrower and its subsidiaries as of the end of each such month, (ii) a Consolidated and consolidating statement of shareholders' equity and (iii) a Consolidated and consolidating statement of cash flow, in each case for the month just ended and for the period commencing at the end of the immediately preceding Fiscal Year and ending with the last day of such month, and commencing with the 1999 Fiscal Year comparing such financial condition and results of operations to the projections for the applicable period provided under paragraph (h) below and to the results for the comparable period during the 62 69 immediately preceding Fiscal Year, prepared and certified by the Financial Officer of the Borrower as presenting fairly the financial condition and results of operations of the Borrower and its subsidiaries and as having been prepared in accordance with GAAP; (4) promptly after the same become publicly available, copies of such registration statements, annual, periodic and other reports, and such proxy statements and other information, if any, as shall be filed by the Borrower or any subsidiaries with the Securities and Exchange Commission pursuant to the requirements of the Securities Act of 1933 or the Securities Exchange Act of 1934; (5) concurrently with any delivery under (a) or (b) above, a certificate of the firm or person referred to therein (x) which certificate shall, in the case of the certificate of the Financial Officer of the Borrower, certify that to the best of his or her knowledge no Default or Event of Default has occurred (including calculations demonstrating compliance, with details for the applicable quarters, as of the dates of the financial statements being furnished, with the covenants set forth in Sections 7.07, 7.08, 7.09 and 7.10 hereof) and, if such a Default or Event of Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (y) which certificate, in the case of the certificate furnished by the independent public accountants referred in paragraph (a) above, shall be prepared in accordance with professional standards, may be limited to accounting matters and disclaim responsibility for legal interpretations, but shall in any event state that as of the dates of the financial statements being furnished nothing has come to their attention that has caused them to believe that a Default or Event of Default has occurred under any of the covenants set forth in Sections 7.07, 7.08, 7.09 and 7.10 hereof (such statement to include calculations demonstrating compliance with such covenants) and, if such a Default or Event of Default has occurred, specifying the nature and extent thereof and whether any waiver has been obtained, and shall in addition state that in the course of preparing the audit and the certificate referred to herein, such accountants have not become aware of the occurrence of an Event of Default under Sections 7.07 through 7.10 hereof; provided, however, that any certificate delivered concurrently with (a) above shall be signed by the Financial Officer of the Borrower; (6) concurrently with any delivery under (a) above, a management letter prepared by the independent public accountants who reported on the financial statements delivered under (a) above, with respect to the internal audit and financial controls of the Borrower and its subsidiaries; (7) within 15 days (or 20 days in the case of January 1998) of the end of each fiscal month, an invoice date aging schedule of the Receivables in the 63 70 form of the aging schedule of Receivables dated December 31, 1997 previously furnished to the Agent; (8) within 30 days prior to the beginning of each Fiscal Year, a summary of business plans and financial operation projections (including, without limitation, with respect to capital expenditures) for the Borrower and its respective subsidiaries for such Fiscal Year (including monthly balance sheets, statements of income and of cash flow but calculations of covenant compliance may be on a quarterly basis) and annual projections through the Final Maturity Date prepared by management and in form, substance and detail (including, without limitation, principal assumptions) satisfactory to the Agent; (9) as soon as practicable, copies of all reports, forms, filings, loan documents and financial information submitted to governmental agencies and/or its shareholders; (10) (i) within 20 days after the end of each fiscal month, an update report with respect to the operating plan referred to in Section 5.02(s) hereof commencing March 31, 1998 and (ii) within 15 days after the end of each fiscal month, a certificate substantially in the form of Schedule 6.05(j) hereto executed by the Financial Officer of the Borrower demonstrating compliance as at the end of each month with the Availability requirements; (11) immediately upon becoming aware thereof, notice to the Agent of a material breach by any party of any material agreement with the Borrower; and (12) such other information as the Agent or any Lender may reasonably request. SECTION 6.6. Litigation and Other Notices. Give the Agent written notice of the following promptly after the Borrower becomes aware of same: (1) the issuance by any court or governmental agency or authority of any injunction, order, decision or other restraint prohibiting, or having the effect of prohibiting, the making of the Loans or occurrence of other Credit Events, or invalidating, or having the effect of invalidating, any provision of this Agreement, the Notes or the other Loan Documents, or the initiation of any litigation or similar proceeding seeking any such injunction, order, decision or other restraint; (2) the filing or commencement of any action, suit or proceeding against the Borrower or any of its subsidiaries, whether at law or in equity or by or before any court or any Federal, state, municipal or other governmental agency or authority, (i) which is material and either is brought by or on behalf of any governmental agency or authority, or in which injunctive or other equitable 64 71 relief is sought or (ii) as to which it is probable (within the meaning of Statement of Financial Accounting Standards No. 5) that there will be an adverse determination and which, if adversely determined, would (A) reasonably be expected to result in liability of one or more Borrower or a subsidiary thereof in an aggregate amount of $250,000 or more, not reimbursable by insurance, or (B) materially impair the right of the Borrower or a subsidiary thereof to perform its obligations under this Agreement, any Note or any other Loan Document to which it is a party; (3) any Default or Event of Default, specifying the nature and extent thereof and the action (if any) which is proposed to be taken with respect thereto; and (4) any development in the business or affairs of the Borrower or any of its subsidiaries which has had or which is likely to have, in the reasonable judgment of any Responsible Officer of the Borrower, a Material Adverse Effect. SECTION 6.7. ERISA. (a) Pay and discharge promptly any liability imposed upon it pursuant to the provisions of Title IV of ERISA; provided, however, that neither the Borrower nor any ERISA Affiliate shall be required to pay any such liability if (1) the amount, applicability or validity thereof shall be diligently contested in good faith by appropriate proceedings, and (2) such person shall have set aside on its books reserves which, in the opinion of the independent certified public accountants of such person, are adequate with respect thereto. (1) Deliver to the Agent, promptly, and in any event within 30 days, after (i) the occurrence of any Reportable Event, a copy of the materials that are filed with the PBGC, (ii) the Borrower or any ERISA Affiliate or an administrator of any Pension Plan files with participants, beneficiaries or the PBGC a notice of intent to terminate any such Plan, a copy of any such notice, (iii) the receipt of notice by the Borrower or any ERISA Affiliate or an administrator of any Pension Plan from the PBGC of the PBGC's intention to terminate any Pension Plan or to appoint a trustee to administer any such Plan, a copy of such notice, (iv) the filing thereof with the Internal Revenue Service, if requested from time to time by the Agent, copies of each annual report that is filed on Treasury Form 5500 with respect to any Plan, together with certified financial statements (if any) for the Plan and any actuarial statements on Schedule B to such Form 5500, (v) the Borrower or any ERISA Affiliate knows or has reason to know of any event or condition which might constitute grounds under the provisions of Section 4042 of ERISA for the termination of (or the appointment of a trustee to administer) any Pension Plan, an explanation of such event or condition, (vi) the receipt by the Borrower or any ERISA Affiliate of an assessment of withdrawal liability under Section 4201 of ERISA from a Multiemployer Plan, a copy of such assessment, (vii) the Borrower or any ERISA Affiliate knows or has reason to know of any event or condition which might cause any one of them to incur a material liability 65 72 under Section 4062, 4063, 4064 or 4069 of ERISA or Section 412(n) or 4971 of the Code, an explanation of such event or condition, and (viii) the Borrower or any ERISA Affiliate knows or has reason to know that an application is to be, or has been, made to the Secretary of the Treasury for a waiver of the minimum funding standard under the provisions of Section 412 of the Code, a copy of such application, and in each case described in clauses (i) through (iii) and (v) through (vii) together with a statement signed by the Financial Officer setting forth details as to such Reportable Event, notice, event or condition and the action which the Borrower or such ERISA Affiliate proposes to take with respect thereto. SECTION 6.8. Maintaining Records; Access to Properties and Inspections; Right to Audit. Maintain financial records in accordance with accepted financial practices, maintain its computer systems and software so as to calculate, compare and sequence from, into and between the twentieth century (through 1999), in the year 2000 and the twenty-first century, including leap year calculations and, upon reasonable notice (which may be telephonic), at all reasonable times and as often as any Lender may reasonably request, permit any authorized representative designated by such Lender to visit and inspect the properties and financial records of the Borrower and its subsidiaries and to make extracts from such financial records at such Lender's expense, and permit any authorized representative designated by such Lender to discuss the affairs, finances and condition of the Borrower and its subsidiaries with the appropriate Financial Officer and such other officers as the Borrower shall deem appropriate and the Borrower's independent public accountants, as applicable. The Agent agrees that it shall schedule any meeting with any such independent public accountant through the Borrower and a Responsible Officer of the Borrower shall have the right to be present at any such meeting. At the Borrower's expense, the Agent shall have the right to audit, as often as it may request, the existence and condition of the accounts receivables, inventory, books and records of the Borrower and its subsidiaries and to review their compliance with the terms and conditions of this Agreement and the other Loan Documents; provided that so long as no Event of Default shall have occurred and be continuing, the Agent agrees that such audits at Borrower's expense shall occur no more frequently than twice per calendar year. SECTION 6.9. Use of Proceeds. Use the proceeds of the Credit Events only for the purposes set forth in Section 4.14 hereof. SECTION 6.10. Fiscal Year-End. Cause its Fiscal Year to end on December 31 in each year. SECTION 6.11. Further Assurances. Execute any and all further documents and take all further actions which may be required under applicable law, or which the Agent may reasonably request, to grant, preserve, protect and perfect the first priority security interest created by the Security Documents in the Collateral. 66 73 SECTION 6.12. Additional Grantors and Guarantors. Promptly inform the Agent of the creation or acquisition of any direct or indirect subsidiary (subject to the provisions of Section 7.06 hereof) and cause each direct or indirect subsidiary not in existence on the date hereof to enter into a Guarantee in form and substance satisfactory to the Agent, and to execute the Security Documents, as applicable, as a Grantor, and cause the direct parent of each such subsidiary to pledge all of the capital stock of such subsidiary pursuant to the Pledge Agreement and cause each such subsidiary to pledge its accounts receivable and all other assets pursuant to the Security Agreement. SECTION 6.13. Environmental Laws. (a) Comply, and cause each of its subsidiaries to comply, in all material respects with the provisions of all Environmental Laws, and shall keep its properties and the properties of its subsidiaries free of any Lien imposed pursuant to any Environmental Law except where the imposition of such Lien would not have a Material Adverse Effect. The Borrower shall not cause or suffer or permit, and shall not suffer or permit any of its subsidiaries to cause or suffer or permit, the property of the Borrower or its subsidiaries to be used for the generation, production, processing, handling, storage, transporting or disposal of any Hazardous Material, except for Hazardous Materials used in the ordinary course of business of the Borrower or disclosed in Schedule 6.13 hereto, in which case such Hazardous Materials shall be used, stored, generated, treated and disposed of only in compliance with Environmental Law. (1) Supply to the Agent copies of all submissions by the Borrower or any of its subsidiaries to any governmental body and of the reports of all environmental audits and of all other environmental tests, studies or assessments (including the data derived from any sampling or survey of asbestos, soil, or subsurface or other materials or conditions) that may be conducted or performed (by or on behalf of the Borrower or any of its subsidiaries) on or regarding the properties owned, operated, leased or occupied by the Borrower or any of its subsidiaries or regarding any conditions that might have been affected by Hazardous Materials on or Released or removed from such properties. The Borrower shall also permit and authorize, and shall cause its subsidiaries to permit and authorize, the consultants, attorneys or other persons that prepare such submissions or reports or perform such audits, tests, studies or assessments to discuss such submissions, reports or audits with the Agent and the Lenders. (2) Not later than two Business Days after the Borrower becomes aware or is otherwise informed of such event provide oral and written notice to the Agent upon the happening of any of the following: (1)the Borrower, any subsidiary of the Borrower, or any tenant or other occupant of any property of the Borrower or such subsidiary 67 74 receives written notice of any claim, complaint, charge or notice of a violation or potential violation of any Environmental Law; (2)there has been a spill or other Release of Hazardous Materials upon, under or about or affecting any of the properties owned, operated, leased or occupied by the Borrower or any of its subsidiaries, in amounts that are required to be reported under Environmental Law or Hazardous Materials at levels or in amounts that are required to be reported, remedied or responded to under Environmental Law are detected on or in the soil or groundwater; (3)the Borrower or any of its subsidiaries is or shall be liable for any costs of cleaning up or otherwise responding to a Release of Hazardous Materials; (4)any part of the properties owned, operated, leased or occupied by the Borrower or any of its subsidiaries is or shall be subject to a Lien under any Environmental Law; or (5)the Borrower or any of its subsidiaries undertakes any Remedial Work with respect to any Hazardous Materials. (3) Without in any way limiting the scope of Section 11.04(c) and in addition to any obligations thereunder, the Borrower hereby indemnifies and agrees to hold the Agent and the Lenders harmless from and against any liability, loss, damage, suit, action or proceeding arising out of its business or the business of its subsidiaries pertaining to Hazardous Materials, including, but not limited to, claims of any governmental body or any third person arising under any Environmental Law or under tort, contract or common law. To the extent laws of the United States or any applicable state or local law in which property owned, operated, leased or occupied by the Borrower or any of its subsidiaries is located provide that a Lien upon such property of the Borrower or such subsidiary may be obtained for the removal of Hazardous Materials which have been or may be Released, no later than sixty days after notice that a Release has occurred is given by the Agent to the Borrower or such subsidiary, the Borrower or such subsidiary shall deliver to the Agent a report issued by a qualified third party engineer assessing the existence and extent of any Hazardous Materials located upon or beneath the specified property. To the extent any Hazardous Materials located therein or thereunder either subject the property to Lien or require removal to safeguard the health of any persons, the removal thereof shall be an affirmative covenant of the Borrower hereunder. (4) In the event that any Remedial Work is required to be performed by the Borrower or any of its subsidiaries under any applicable Environmental Law, any judicial order, or by any governmental entity, the Borrower or such subsidiary shall 68 75 commence all such Remedial Work at or prior to the time required therefor under such Environmental Law or applicable judicial orders and thereafter diligently prosecute to completion all such Remedial Work in accordance with and within the time allowed under such applicable Environmental Laws or judicial orders. SECTION 6.14. Perform Other Covenants. Except for the filing of continuation statements and the making of other filings by the Agent as secured party or assignee, at all times take all actions necessary to maintain the Liens and security interests provided for under or pursuant to this Agreement and the Security Documents as valid and perfected first Liens on the property intended to be covered thereby (subject only to Liens expressly permitted hereunder) and promptly supply all information to the Agent necessary for such maintenance. SECTION 6.15. Maintain Operating Accounts. Obtain blocked account letters in form satisfactory to the Agent as to any bank account not maintained with the Agent and sweep all funds from such accounts on a daily basis except for employee insurance and withholdings accounts and other miscellaneous petty cash accounts not having an average balance in excess of $25,000 (collectively, "Miscellaneous Accounts"); within 30 days of the Closing Date, maintain its principal accounts with the Agent (other than Miscellaneous Accounts); and within 45 days of the Closing Date, maintain its cash management arrangements (including lockbox and disbursement control arrangements) with the Agent. SECTION 6.16. Purchase Price Adjustments. Promptly notify the Agent of any purchase price adjustment as contemplated by the Recapitalization Agreement, any such adjustment after the Closing Date in favor of the Borrower or Holdings to be applied as set forth in Section 2.09(d). SECTION 6.17. Amendments. Promptly supply to the Agent certified copies of any amendments to the Recapitalization Documents. SECTION 6.18. Interest Rate Protection. Within the 30 days of the Closing Date, enter into an interest rate cap (the "Rate Agreements") covering a notional principal amount of at least $12,000,000 with a term ending three (3) years from the Closing Date, and on such other terms and conditions as shall be reasonably satisfactory to the Agent. SECTION 6.19. lLife Insurance. On the Closing Date, assign all key-man insurance to the Agent. Within 90 days of the Closing Date (or such later date to which the Required Lenders may consent in writing) and at all times thereafter maintain in full force and effect, key man life insurance on each of Richard Nespola, Micky Woo, Alan Staples and Ralph Peck, or a successor, in an amount of not less than $10,000,000 in the case of Richard Nespola and $3,000,000 each in the case of each other such person, with the Borrower as beneficiary under such policy; and not later than 90 days 69 76 following the Closing Date (or such later date to which the Required Lenders may consent in writing) the Borrower shall assign to the Agent for its own benefit and for the benefit of the Lenders as security for the Obligations all monies payable under or in respect of such insurance policy pursuant to an Assignment of Life Insurance (and, thereafter, the Agent shall release its assignment of the insurance assigned on the Closing Date). 7. NEGATIVE COVENANTS The Borrower covenants and agrees with each Lender that, so long as this Agreement shall remain in effect or the principal of or interest on any Note, any amount under any Letter of Credit, or any fee, expense or other Obligation payable hereunder or in connection with any of the Transactions shall be unpaid, it will not and will not cause or permit any of its subsidiaries and, in the case of Section 7.14 hereof, any ERISA Affiliate to, either directly or indirectly: SECTION 7.1. Liens. Incur, create, assume or permit to exist any Lien on any of its property or assets (including the stock of any direct or indirect subsidiary), whether owned at the date hereof or hereafter acquired, or assign or convey any rights to or security interests in any future revenues, except: (1) Liens incurred and pledges and deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, old-age pensions and other social security benefits (not including any lien described in Section 412(m) of the Code); (2) Liens imposed by law, such as carriers', warehousemen's, mechanics', materialmen's and vendors' liens and other similar liens, incurred in good faith in the ordinary course of business and securing obligations which are not overdue for a period of more than 30 days or which are being contested in good faith by appropriate proceedings as to which the Borrower or any of its subsidiaries, as the case may be, shall, to the extent required by GAAP, have set aside on its books adequate reserves; (3) Liens securing the payment of taxes, assessments and governmental charges or levies, that are not delinquent or are being diligently contested in good faith by appropriate proceedings and as to which adequate cash reserves have been established in accordance with GAAP; provided, however, that in no event shall the aggregate amount of such reserves be less than the aggregate amount secured by such Liens; (4) zoning restrictions, easements, licenses, reservations, provisions, covenants, conditions, waivers, restrictions on the use of property or minor 70 77 irregularities of title (and with respect to leasehold interests, mortgages, obligations, liens and other encumbrances incurred, created, assumed or permitted to exist and arising by, through or under a landlord or owner of the leased property, with or without consent of the lessee) which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business; (5) Liens upon any equipment acquired through the purchase or lease by the Borrower or any of its subsidiaries which are created or incurred contemporaneously with such acquisition to secure or provide for the payment of any part of the purchase price of, or lease payments on, such equipment (but no other amounts and not in excess of the purchase price or lease payments); provided, however, that any such Lien shall not apply to any other property of the Borrower or any of its subsidiaries; provided, further, that after giving effect to such purchase or lease, the aggregate of all Indebtedness secured thereby does not exceed $500,000 at any time outstanding and compliance is maintained with Section 7.07 hereof; (6) Other Liens existing on the date of this Agreement and set forth in Schedule 7.01 annexed hereto but not, except as noted on such Schedule, the extension, renewal or refunding of the Indebtedness secured thereby; (7) Liens created in favor of the Agent for its own benefit and for the benefit of the Lenders; or (8) Liens securing the performance of bids, tenders, leases, contracts (other than for the repayment of borrowed money), statutory obligations, surety, customs and appeal bonds and other obligations of like nature, incurred as an incident to and in the ordinary course of business. SECTION 7.2. Sale and Lease-Back Transactions. Enter into any arrangement, directly or indirectly, with any person whereby the Borrower or any of its subsidiaries shall sell or transfer any property, real or personal, and used in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which the Borrower or such subsidiary intends to use for substantially the same purpose or purposes as the property being sold or transferred. SECTION 7.3. Indebtedness. Incur, create, assume or permit to exist any Indebtedness other than (i) Indebtedness secured by Liens permitted under Section 7.01, (ii) other Indebtedness (including, without limitation, Guarantees) existing on the date hereof and listed in Schedule 7.03 annexed hereto, but not, except as noted on such Schedule, the extension, renewal or refunding thereof, (iii) Indebtedness incurred hereunder, including, without limitation, the Rate Agreements, (iv) Indebtedness to trade creditors incurred in the ordinary course of business, (v) Guarantees 71 78 constituting the endorsement of negotiable instruments for deposit or collection in the ordinary course of business, (vi) Guarantees of the Obligations, (vii) purchase money Indebtedness to the extent permitted by Sections 7.01(e) and 7.07 hereof and (viii) Subordinated Indebtedness. SECTION 7.4. Dividends, Distributions and Payments. Declare or pay, directly and indirectly, any cash dividends or make any other distribution, whether in cash, property, securities or a combination thereof, with respect to (whether by reduction of capital or otherwise) any shares of its capital stock or directly or indirectly redeem, purchase, retire or otherwise acquire for value (or permit any subsidiary to purchase or acquire) any shares of any class of its capital stock or set aside any amount for any such purpose. SECTION 7.5. Consolidations, Mergers and Sales of Assets. Consolidate with or merge into any other person, or sell, lease, transfer or assign to any persons or otherwise dispose of (whether in one transaction or a series of transactions) any portion of its assets (whether now owned or hereafter acquired), or sell any of its inventory other than in the normal course of business, or permit another person to merge into it, or acquire all or substantially all the capital stock or assets of any other person except (a) sales of investments permitted pursuant to Sections 7.06(a) through (e); (b) sales, transfers and other dispositions of any assets that have become obsolete, outdated or surplus to the business of the Borrower or any subsidiary to the extent that the Borrower shall have complied with the provisions of Section 2.09(d); and (c) if at the time thereof and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing (i) the merger of any subsidiary into the Borrower in a transaction in which the Borrower is the surviving corporation and no person other than the Borrower or a subsidiary receives any consideration and (ii) the merger or consolidation of any subsidiary with any other subsidiary in a transaction in which no person other than the Borrower or a subsidiary receives any consideration. SECTION 7.6. Investments. Own, purchase or acquire any stock, obligations, assets (not in the ordinary course of business) or securities of, or any interest in, or make any capital contribution or loan or advance to, any other person, or make any other investments, except: (1) certificates of deposit in dollars of any commercial banks registered to do business in any state of the United States (i) having capital and surplus in excess of $500,000,000 and (ii) whose long-term debt rating is at least investment grade as determined by either Standard & Poor's Ratings Group or Moody's Investors Service, Inc.; (2) readily marketable direct obligations of the United States government or any agency thereof which are backed by the full faith and credit of the United States; 72 79 (3) investments in money market mutual funds having assets in excess of $2,500,000,000; (4) commercial paper at the time of acquisition having the highest rating obtainable from either Standard & Poor's Ratings Group or Moody's Investors Service, Inc.; (5) federally tax exempt securities rated A or better by either Standard & Poor's Ratings Group or Moody's Investors Service, Inc.; and (6) investments in the stock of any subsidiary existing on the Closing Date, but not any additional investment therein; provided that, in each case mentioned in (a), (b), (d) and (e) above, such obligations shall mature not more than one year from the date of acquisition thereof. SECTION 7.7. Capital Expenditures. Permit the aggregate amount of payments made for capital expenditures, including Capitalized Lease Obligations and Indebtedness secured by Liens permitted under Section 7.01(e) hereof, in each of the periods indicated below to exceed an amount equal to the following amounts for the Borrower and its subsidiaries:
Period Maximum Amount ------ -------------- Fiscal Years ending December 31, 1998, December 31, 1999 and $500,000 December 31, 2000 Fiscal Year ending December 31, 2001 $600,000 Fiscal Year ending December 31, 2002 and each Fiscal Year $700,000 thereafter
SECTION 7.8. Debt Service Coverage Ratio. Permit the Debt Service Coverage Ratio of the Borrower and its subsidiaries at the end of each fiscal quarter for the four most recent consecutive fiscal quarters ending on or prior to the date of determination to be less than the respective amounts set forth below for the periods indicated:
Period Ratio ------ --------- Four fiscal quarters ending March 31, 1999 5.50:1.00 Four fiscal quarters ending June 30, 1999 3.50:1.00
73 80
Period Ratio ------ --------- Four fiscal quarters ending September 30, 1999 3.00:1.00 Four fiscal quarters ending December 31, 1999 2.50:1.00 Four fiscal quarters ending March 31, 2000 and June 30, 2000 2.00:1.00 Four fiscal quarters ending September 30, 2000 through the fiscal quarter ending December 31, 2002 1.50:1:00 Four fiscal quarters ending March 31, 2003, June 30, 2003, 1.30:1.00 September 30, 2003 and December 31, 2003
SECTION 7.9. Leverage Ratio; EBITDA. (a) Permit the Leverage Ratio of the Borrower and its subsidiaries at the end of each fiscal quarter for the four most recent consecutive fiscal quarters ending on or prior to the date of determination to be greater than the respective amounts set forth below for the periods indicated:
Period Ratio ------ ----------- Four fiscal quarters ending March 31, 1999 12.00:1.00 Four fiscal quarters ending June 30, 1999 10.00:1.00 Four fiscal quarters ending September 30, 1999 7.50:1.00 Four fiscal quarters ending December 31, 1999 6.50:1.00 Four fiscal quarters ending March 31, 2000 and June 30, 2000 6.00:1.00 Four fiscal quarters ending September 30, 2000 and December 5.00:1.00 31, 2000 Four fiscal quarters ending March 31, 2001 and June 30, 2001 4.50:1.00 Four fiscal quarters ending September 30, 2001 and December 4.00:1.00 31, 2001 Four fiscal quarters ending March 31, 2002 and June 30, 2002 3.00:1.00 Four fiscal quarters ending September 30, 2002 and each fiscal 1.50:1.00 quarter thereafter
74 81 (1) Permit EBITDA of the Borrower and its subsidiaries to be less than the respective amounts for the periods set forth below:
Period Amount ------ ---------- January 1, 1998 through June 30, 1998 $2,550,000 January 1, 1998 through September 30, 1998 $4,500,000 January 1, 1998 through December 31, 1998 $6,150,000
SECTION 7.10. Interest Coverage Ratio. Permit the Interest Coverage Ratio of the Borrower and its subsidiaries to be less than the respective amounts set forth below for the periods indicated.
Period Ratio ------ --------- January 1, 1998 through June 30, 1998 2.75:1.00 January 1, 1998 through September 30, 1998 2.75:1.00 Four fiscal quarters ending December 31, 1998, March 31, 1999 2.75:1.00 and June 30, 1999 Four fiscal quarters ending September 30, 1999 3.00:1.00 Four fiscal quarters ending December 31, 1999 and March 31, 3.50:1.00 June 30 and September 30, 2000 Four fiscal quarters ending December 31, 2000 and March 31, 4.75:1.00 June 30 and September 30, 2001 Four fiscal quarters ending December 31, 2001 and each fiscal 6.00:1.00 quarter thereafter
SECTION 7.11. Business. Alter the nature of its business (that is, telecommunications, consulting and information) as operated on the date of this Agreement in any material respect except as outlined in the operating plan referred to in Section 5.02(s) hereof. SECTION 7.12. Sales of Receivables. Sell, assign, discount, transfer, or otherwise dispose of any accounts receivable, promissory notes, drafts or trade acceptances or other rights to receive payment held by it, with or without recourse, except (i) for the purpose of collection or settlement in the ordinary course of business or (ii) the sale of any such accounts to the Agent for the ratable benefit of the Lenders. 75 82 SECTION 7.13. Use of Proceeds. Permit the proceeds of any Credit Event to be used for any purpose which entails a violation of, or is inconsistent with, Regulation G, T, U or X of the Board, or for any purpose other than those set forth in Section 4.14 hereof. SECTION 7.14. ERISA. (a) Engage in any transaction in connection with which the Borrower or any ERISA Affiliate could be subject to either a material civil penalty assessed pursuant to the provisions of Section 502 of ERISA or a material tax imposed under the provisions of Section 4975 of the Code. (1) Terminate any Pension Plan in a "distress termination" under Section 4041 of ERISA, or take any other action which could result in a material liability of the Borrower or any ERISA Affiliate to the PBGC. (2) Fail to make payment when due of all amounts which, under the provisions of any Plan, the Borrower or any ERISA Affiliate is required to pay as contributions thereto, or, with respect to any Pension Plan, permit to exist any material "accumulated funding deficiency" (within the meaning of Section 302 of ERISA and Section 412 of the Code), whether or not waived, with respect thereto. (3) Adopt an amendment to any Pension Plan requiring the provision of security under Section 307 of ERISA or Section 401(a)(29) of the Code. SECTION 7.15. Accounting Changes. Make, or permit any subsidiary to make, any change in their accounting treatment or financial reporting practices except as required or permitted by GAAP. SECTION 7.16. Prepayment or Modification of Indebtedness; Modification of Charter Documents. (a) Directly or indirectly prepay, redeem, purchase or retire (other than at the stated maturity thereof) any Indebtedness, including, without limitation, any Subordinated Indebtedness, other than Indebtedness incurred hereunder. (1) Modify, amend or otherwise alter the terms and provisions of (i) any Subordinated Indebtedness or (ii) the Recapitalization Documents in any material respect. (2) Modify, amend or alter their certificates or articles of incorporation or preferred stock/certificates of designations in any respect if the effect thereof is, or could reasonably be expected to be, adverse to the interests of the Agent or any Lender or imposes restrictions upon the right and obligations of the Borrower to make payments to the Agent or a Lender hereunder. 76 83 SECTION 7.17. Transactions with Affiliates. Except as otherwise specifically set forth in this Agreement or as described on Schedule 7.18 hereto, directly or indirectly purchase, acquire or lease any property from, or sell, transfer or lease any property to, or enter into any other transaction with, any stockholder, Affiliate or agent of the Borrower, except at prices and on terms not less favorable to it than that which would have been obtained in an arm's-length transaction with a non-affiliated third party, SECTION 7.18. Consulting Fees. Except as provided on Schedule 7.18 hereto, pay any management, consulting or other fees of any kind to Holdings, any subsidiary thereof or any subsidiary of the Borrower, or to any Affiliate of Holdings, any of its subsidiaries or of the Borrower or any of the Borrower's subsidiaries. SECTION 7.19. Negative Pledges, Etc. Except as contemplated under any of the obligations set forth on Schedule 7.01 hereto, enter into any agreement (other than this Agreement or any other Loan Document) which (a) prohibits the creation or assumption of any Lien upon any of the Collateral, or (b) specifically prohibits the amendment or other modification of this Agreement or any other Loan Document. 8. EVENTS OF DEFAULT In case of the happening of any of the following events (herein called "Events of Default"): (1) any representation or warranty made or deemed made in or in connection with this Agreement, any of the Security Documents, the Notes or other Loan Documents or any Credit Events hereunder, shall prove to have been incorrect in any material respect when made or deemed to be made; (2) default shall be made in the payment of any principal of any Note when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; (3) default shall be made in the payment of any interest on any Note, or any fee or any other amount payable hereunder, or under the Notes, Letters of Credit, or any other Loan Document or in connection with any other Credit Event or the Transactions when and as the same shall become due and payable; (4) default shall be made in the due observance or performance of any covenant, condition or agreement to be observed or performed on the part of any 77 84 Loan Party pursuant to the terms of this Agreement, any of the Notes, any of the Security Documents or any other Loan Document, and with respect to Sections 6.05(a), (b) and (c) such default shall not be remedied within 3 days of the occurrence thereof, and with respect to Sections 6.02, 6.04, 6.06(d), 6.07, 6.08 (other than, with respect to visitation rights), 6.11 through 6.13, 6,14, 6.16 and 6.17 such default shall not be remedied within 20 days of the occurrence thereof; (5) any Loan Party shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code or any other Federal, state or foreign bankruptcy, insolvency, liquidation or similar law, (ii) consent to the institution of, or fail to contravene in a timely and appropriate manner, any such proceeding or the filing of any such petition, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator or similar official for any Loan Party or for a substantial part of its property or assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take corporate action for the purpose of effecting any of the foregoing; (6) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of any Loan Party, or of a substantial part of the property or assets of any Loan Party, under Title 11 of the United States Code or any other Federal state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator or similar official for any Loan Party or for a substantial part of the property of any Loan Party or (iii) the winding-up or liquidation of any Loan Party; and such proceeding or petition shall continue undismissed for 90 days or an order or decree approving or ordering any of the foregoing shall continue unstayed and in effect for 30 days; (7) default shall be made with respect to any Indebtedness, or obligations under a capitalized lease of any Loan Party (excluding Indebtedness outstanding hereunder) which is outstanding in an aggregate principal amount of at least $250,000 if the effect of any such default shall be to accelerate, or to permit the holder or obligee of any such Indebtedness or obligations under a capitalized lease (or any trustee on behalf of such holder or obligee) at its option to accelerate, the maturity of such Indebtedness or obligations under a capitalized lease; (8) (i) a Reportable Event shall have occurred with respect to a Pension Plan, (ii) the filing by any Loan Party, any ERISA Affiliate, or an 78 85 administrator of any Pension Plan of a notice of intent to terminate such a Pension Plan in a "distress termination" under the provisions of Section 4041 of ERISA, (iii) the receipt of notice by any Loan Party, any ERISA Affiliate, or an administrator of a Pension Plan that the PBGC has instituted proceedings to terminate (or appoint a trustee to administer) such Pension Plan, (iv) any other event or condition exists which, in the reasonable opinion of the Agent, could constitute grounds under the provisions of Section 4042 of ERISA for the termination of (or the appointment of a trustee to administer) any Pension Plan by the PBGC, (v) a Pension Plan shall fail to maintain the minimum funding standard required by Section 412 of the Code for any plan year or a waiver of such standard is sought or granted under the provisions of Section 412(d) of the Code, (vi) any Loan Party or any ERISA Affiliate has incurred, or is likely to incur, a liability under the provisions of Section 4062, 4063, 4064 or 4201 of ERISA, (vii) any Loan Party or any ERISA Affiliate fails to pay the full amount of an installment required under Section 412(m) of the Code, (viii) the occurrence of any other event or condition with respect to any Plan which would constitute an event of default under any other agreement entered into by any Loan Party or any ERISA Affiliate, and in each case in clauses (i) through (viii) of this subsection (h), such event or condition, together with all other such events or conditions, if any, could subject any Loan Party or any ERISA Affiliate to any taxes, penalties or other liabilities which, in the reasonable opinion of the Agent, could have a Material Adverse Effect; (9) any Loan Party or any ERISA Affiliate (i) shall have been notified by the sponsor of a Multiemployer Plan that it has incurred any withdrawal liability to such Multiemployer Plan which would have a Material Adverse Effect, and (ii) does not have reasonable grounds for contesting such withdrawal liability and is not in fact contesting such withdrawal liability in a timely and appropriate manner; (10) a judgment (not reimbursed by insurance policies of any Loan Party) or decree for the payment of money, a fine or penalty (not reimbursed by insurance policies of any Loan Party) which when taken together with all other such judgments, decrees, fines and penalties shall exceed $200,000 shall be rendered by a court or other tribunal against any Loan Party and (i) shall remain undischarged or unbonded for a period of 30 consecutive days during which the execution of such judgment, decree, fine or penalty shall not have been stayed effectively or (ii) any judgment creditor or other person shall legally commence actions to collect on or enforce such judgment, decree, fine or penalty; (11) this Agreement, any Note, any of the Security Documents, any Guarantee or other Loan Documents shall for any reason cease to be, or shall be asserted by any Loan Party not to be, a legal, valid and binding obligation of any Loan Party, enforceable in accordance with its terms, or the security interest 79 86 or Lien purported to be created by any of the Security Documents shall for any reason cease to be, or be asserted by any Loan Party not to be, a valid, first priority perfected security interest in any Collateral (except to the extent otherwise permitted under this Agreement or any of the Security Documents); or (12) a Change of Control shall occur; or (13) any material damage to, or loss, theft or destruction of, any material Collateral, whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty which causes, for more than thirty (30) consecutive days beyond the coverage period of any applicable business interruption insurance, the cessation or substantial curtailment of revenue producing activities of Borrower if any such event or circumstance could have a Material Adverse Effect; then, and in any such event (other than an event described in paragraph (e) or (f) above), and at any time thereafter during the continuance of such event, the Agent may, and upon the written request of the Required Lenders shall, by written notice (or facsimile notice promptly confirmed in writing) to the Borrower, take any or all of the following actions at the same or different times: (i) terminate forthwith all or any portion of the Total Commitment and the obligations of the Lenders to issue Letters of Credit hereunder;(ii) declare the Notes and any amounts then owing to the Lenders on account of drawings under any Letters of Credit to be forthwith due and payable; and (iii) require that the Borrower remit to the Agent cash collateral in an amount equal to the aggregate undrawn amount of all outstanding Letters of Credit at such time, such cash collateral to be held by the Agent for its own benefit and the benefit of the Lenders in a cash collateral account on terms and conditions satisfactory to the Agent, whereupon the principal of such Notes, together with accrued interest and fees thereon and any amounts then owing to the Lenders on account of drawings under any Letters of Credit and other liabilities of the Borrower accrued hereunder, shall become forthwith due and payable both as to principal and interest, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in the Notes to the contrary notwithstanding; provided, however, that with respect to a default described in paragraph (e) or (f) above, the Total Commitment and the obligation of the Lenders to issue Letters of Credit shall automatically terminate and the principal of the Notes, together with accrued interest and fees thereon and any amounts then owing to the Lenders on account of drawings under any Letters of Credit and any other liabilities of the Borrower accrued hereunder shall automatically become due and payable, both as to principal and interest, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in the Notes to the contrary notwithstanding. 80 87 9. AGENT In order to expedite the transactions contemplated by this Agreement, The Chase Manhattan Bank is hereby appointed to act as Agent on behalf of the Lenders. Each of the Lenders and each subsequent holder of any Note or issuer of any Letter of Credit by its acceptance thereof, irrevocably authorizes the Agent to take such action on its behalf and to exercise such powers hereunder and under the Security Documents and other Loan Documents as are specifically delegated to or required of the Agent by the terms hereof and the terms thereof together with such actions and powers as are reasonably incidental thereto. Neither the Agent nor any of its directors, officers, employees or agents shall be liable as such for any action taken or omitted to be taken by it or them hereunder or under any of the Security Documents and other Loan Documents or in connection herewith or therewith (a) at the request or with the approval of the Required Lenders (or, if otherwise specifically required hereunder or thereunder, the consent of all the Lenders) or (b) in the absence of its or their own gross negligence or willful misconduct. The Agent is hereby expressly authorized on behalf of the Lenders, without hereby limiting any implied authority, (a) to receive on behalf of each of the Lenders any payment of principal of or interest on the Notes outstanding hereunder and all other amounts accrued hereunder paid to the Agent, and promptly to distribute to each Lender its proper share of all payments so received, (b) to distribute to each Lender copies of all notices, agreements and other material as provided for in this Agreement or in the Security Documents and other Loan Documents as received by such Agent and (c) to take all actions with respect to this Agreement and the Security Documents and other Loan Documents as are specifically delegated to the Agent. In the event that (a) the Borrower fails to pay when due the principal of or interest on any Note, any amount payable under any Letter of Credit, or any fee payable hereunder or (b) the Agent receives written notice of the occurrence of a Default or an Event of Default (the Agent being deemed not to have knowledge of any Default or Event of Default unless and until written notice thereof is given to the Agent by the Borrower or a Lender), the Agent promptly shall give written notice thereof to the Lenders, and shall take such action with respect to such Event of Default or other condition or event as it shall be directed to take by the Required Lenders; provided, however, that, unless and until the Agent shall have received such directions, the Agent may take such action or refrain from taking such action hereunder or under the Security Documents or other Loan Documents with respect to a Default or Event of Default as it shall deem advisable in the best interests of the Lenders. The Agent shall not be responsible in any manner to any of the Lenders for the effectiveness, enforceability, perfection, value, genuineness, validity or due execution of this Agreement, the Notes or any of the other Loan Documents or Collateral or any other agreements or certificates, requests, financial statements, 81 88 notices or opinions of counsel or for any recitals, statements, warranties or representations contained herein or in any such instrument or be under any obligation to ascertain or inquire as to the performance or observance of any of the terms, provisions, covenants, conditions, agreements or obligations of this Agreement or any of the other Loan Documents or any other agreements on the part of the Borrower and, without limiting the generality of the foregoing, the Agent shall, in the absence of knowledge to the contrary, be entitled to accept any certificate furnished pursuant to this Agreement or any of the other Loan Documents as conclusive evidence of the facts stated therein and shall be entitled to rely on any note, notice, consent, certificate, affidavit, letter, telegram, teletype message, statement, order or other document which it believes in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. It is understood and agreed that the Agent may exercise its rights and powers under other agreements and instruments to which it is or may be a party, and engage in other transactions with the Borrower, as though it were not Agent of the Lenders hereunder. The Agent shall promptly give notice to the Lenders of the receipt or sending of any notice, schedule, report, projection, financial statement or other document or information pursuant to this Agreement or any of the other Loan Documents and shall promptly forward a copy thereof to each Lender. Neither the Agent nor any of its directors, officers, employees or agents shall have any responsibility to the Borrower on account of the failure or delay in performance or breach by any Lender other than the Agent of any of its obligations hereunder or to any Lender on account of the failure of or delay in performance or breach by any other Lender or the Borrower of any of their respective obligations hereunder or in connection herewith. The Agent may consult with legal counsel selected by it in connection with matters arising under this Agreement or any of the other Loan Documents and any action taken or suffered in good faith by it in accordance with the opinion of such counsel shall be full justification and protection to it. The Agent may exercise any of its powers and rights and perform any duty under this Agreement or any of the other Loan Documents through agents or attorneys. The Agent and the Borrower may deem and treat the payee of any Note as the holder thereof until written notice of transfer shall have been delivered as provided herein by such payee to the Agent and the Borrower. With respect to the Loans made hereunder, the Notes issued to it and any other Credit Event applicable to it, the Agent in its individual capacity and not as an Agent shall have the same rights, powers and duties hereunder and under any other agreement executed in connection herewith as any other Lender and may exercise the same as though it were not the Agent, and the Agent and its affiliates may accept 82 89 deposits from, lend money to and generally engage in any kind of business with the Borrower or other affiliate thereof as if it were not the Agent. Each of the Lenders hereby acknowledges that the Agent and/or one or more Affiliates of the Agent may at any time and from time to time be a holder of equity interests in a Loan Party. Each Lender agrees (i) to reimburse the Agent in the amount of such Lender's pro rata share (based on its Commitment hereunder) of any expenses incurred for its own benefit and for the benefit of the Lenders by the Agent, including counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, not reimbursed by the Borrower and (ii) to indemnify and hold harmless the Agent and any of its directors, officers, employees or agents, on demand, in the amount of its pro rata share, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against it in its capacity as the Agent or any of them in any way relating to or arising out of this Agreement or any of the other Loan Documents or any action taken or omitted by it or any of them under this Agreement or any of the other Loan Documents, to the extent not reimbursed by the Borrower; provided, however, that no Lender shall be liable to the Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgment, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of the Agent or any of its directors, officers, employees or agents. With respect to the release of Collateral, Lenders hereby irrevocably authorize the Agent, at its option and in its discretion, to release any Lien granted to or held by the Agent upon any property covered by this Agreement or the other Loan Documents (i) upon termination of the Total Commitments and payment and satisfaction of all Obligations; (ii) constituting property being sold or disposed of in compliance with the provisions of this Agreement (and the Agent may rely in good faith conclusively on any such certificate, without further inquiry); or (iii) constituting property leased to Borrower or any subsidiary under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by Borrower or such subsidiary to be, renewed or extended; provided, however, that (x) the Agent shall not be required to execute any release on terms which, in the Agent's opinion, would expose the Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (y) such release shall not in any manner discharge, affect or impair the Obligations or any Liens upon (or obligations of any Loan Party, in respect of), all interests retained by any Loan Party, including (without limitation) the proceeds of any sale, all of which shall continue to constitute part of the property covered by this Agreement or the Loan Documents. With respect to perfecting Lenders' security interest in Collateral which, in accordance with Article 9 of the Uniform Commercial Code in any applicable 83 90 jurisdiction, can be perfected only by possession, each Lender hereby appoints each other Lender for the purpose of perfecting such interest. Should any Lender (other than the Agent) obtain possession of any such Collateral, such Lender shall notify the Agent, and, promptly upon the Agent's request, shall deliver such Collateral to the Agent or in accordance with the Agent's instructions. Each Lender agrees that it will not have any right individually to enforce or seek to enforce this Agreement or any Loan Document or to realize upon any Collateral for the Loans, it being understood and agreed that such rights and remedies may be exercised only by the Agent. In the event that a petition seeking relief under Title 11 of the United States Code or any other Federal, state or foreign bankruptcy, insolvency, liquidation or similar law is filed by or against any Loan Party, the Agent is authorized to file a proof of claim on behalf of itself and the Lenders in such proceeding for the total amount of Obligations owed by such Loan Party. With respect to any such proof of claim which the Agent may file, each Lender acknowledges that without reliance on such proof of claim, such Lender shall make its own evaluation as to whether an individual proof of claim must be filed in respect of such Obligations owed to such Lender and, if so, take the steps necessary to prepare and timely file such individual claim. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and any other Loan Document to which such Lender is party. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document, any related agreement or any document furnished hereunder. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, IBJ Schroder Bank & Trust Company may become the successor Agent or if it shall fail to do so, then the Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by such Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a bank with an office (or an affiliate with an office) in New York, New York, having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor bank, such successor shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations hereunder and under each of the other Loan Documents. After any Agent's resignation hereunder, the 84 91 provisions of this Article shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. The Lenders hereby acknowledge that the Agent shall be under no duty to take any discretionary action permitted to be taken by the Agent pursuant to the provisions of this Agreement or any of the other Loan Documents unless it shall be requested in writing to do so by the Required Lenders. The Lenders hereby further acknowledge that the Agent is not acting as the fiduciary of, or the trustee for, any of the Lenders and except as expressly set forth herein, the Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information communicated to the Agent by or relating to the Borrower or any of its subsidiaries. 10. MANAGEMENT, COLLECTION AND STATUS OF RECEIVABLES AND OTHER COLLATERAL SECTION 10.1. Collection of Receivables; Management of Collateral. (a) At the request of the Agent upon the occurrence and continuance of an Event of Default, the Borrower will, at its own cost and expense, (i) arrange for remittances on Receivables to be made directly to lockboxes designated by the Agent or in such other manner as the Agent may direct, and (ii) promptly deposit all payments received by the Borrower on account of Receivables, whether in the form of cash, checks, notes, drafts, bills of exchange, money orders or otherwise, in one or more accounts designated by the Agent in precisely the form received (but with any endorsements of the Borrower necessary for deposit or collection), subject to withdrawal by the Agent only, as hereinafter provided, and until such payments are deposited, such payments shall be deemed to be held in trust by the Borrower for and as the Lenders' property and shall not be commingled with the Borrower's other funds. All remittances and payments that are deposited in accordance with the foregoing will, after two Business Days (or three Business Days in the case of deposits that are made after 1:00 p.m. (New York time)), be applied by the Agent to reduce the outstanding balance of the Revolving Credit Loans, subject to final collection in cash of the item deposited. Upon the occurrence and continuance of an Event of Default, the Agent may send a notice of assignment and/or notice of the Agent's security interest to any and all Customers or any third party holding or otherwise concerned with any of the Collateral, and thereafter the Agent shall have the sole right to collect the Receivables and/or take possession of the Collateral and the books and records relating thereto. Upon the occurrence and continuance of an Event of Default, the Borrower shall not, without the Agent's prior written consent, grant any extension of the time of payment of any Receivable, compromise or settle any Receivable for less than the full amount thereof, release, in whole or in part, any person or property liable for the payment thereof, or allow any credit or discount whatsoever thereon. 85 92 (1) (i) Upon the occurrence and continuance of an Event of Default, the Borrower hereby constitutes the Agent or the Agent's designee as the Borrower's attorney-in-fact with power to endorse the Borrower's name upon any notes, acceptances, checks, drafts, money orders or other evidences of payment or Collateral that may come into its possession; to sign the Borrower's name on any invoice or bill of lading relating to any Receivables, drafts against Customers, assignments and verifications of Receivables and notices to Customers; to send verifications of Receivables; upon the occurrence and continuance of an Event of Default, to notify the Postal Service authorities to change the address for delivery of mail addressed to the Borrower to such address as the Agent may designate; and to do all other acts and things necessary to carry out this Agreement. All acts of said attorney or designee are hereby ratified and approved, and said attorney or designee shall not be liable for any acts of omission or commission, for any error of judgment or for any mistake of fact or law, provided that the Agent or its designee shall not be relieved of liability to the extent it is determined by a final judicial decision that its act, error or mistake constituted gross negligence or willful misconduct. This power of attorney being coupled with an interest is irrevocable until all of the Obligations are paid in full and this Agreement and the Total Commitment is terminated. (ii) The Agent, without notice to or consent of the Borrower, upon the occurrence and during the continuance of an Event of Default, (A) may sue upon or otherwise collect, extend the time of payment of, or compromise or settle for cash, credit or otherwise upon any terms, any of the Receivables or any securities, instruments or insurance applicable thereto and/or release the obligor thereon; (B) is authorized and empowered to accept the return of the goods represented by any of the Receivables; and (C) shall have the right to receive, endorse, assign and/or deliver in its name or the name of the Borrower any and all checks, drafts and other instruments for the payment of money relating to the Receivables, and the Borrower hereby waives notice of presentment, protest and non-payment of any instrument so endorsed. (2) Nothing herein contained shall be construed to constitute the Borrower as agent of the Agent for any purpose whatsoever, and the Agent shall not be responsible or liable for any shortage, discrepancy, damage, loss or destruction of any part of the Collateral wherever the same may be located and regardless of the cause thereof (except to the extent it is determined by a final judicial decision that the Agent's or a Lender's act or omission constituted gross negligence or willful misconduct). The Agent and the Lenders shall not, under any circumstances or in any event whatsoever, have any liability for any error or omission or delay of any kind occurring in the settlement, collection or payment of any of the Receivables or any instrument received in payment thereof or for any damage resulting therefrom (except to the extent it is determined by a final judicial decision that the Agent's or such Lender's error, omission or delay constituted gross negligence or willful misconduct). The Agent and the Lenders do not, by anything herein or in any assignment or otherwise, assume the Borrower's obligations under any contract or agreement assigned to the Agent or the 86 93 Lenders, and the Agent and the Lenders shall not be responsible in any way for the performance by the Borrower of any of the terms and conditions thereof. (3) If any of the Receivables includes a charge for any tax payable to any governmental tax authority, the Agent is hereby authorized (but in no event obligated) in its discretion to pay the amount thereof to the proper taxing authority for the account of the Borrower and to charge the Borrower's account therefor. The Borrower shall notify the Agent if any Receivables include any tax due to any such taxing authority and, in the absence of such notice, the Agent shall have the right to retain the full proceeds of such Receivables and shall not be liable for any taxes that may be due from the Borrower by reason of the sale and delivery creating such Receivables. SECTION 10.2. Receivables Documentation. The Borrower will, in addition to the monthly Receivables agings delivered pursuant to this Agreement, and upon the occurrence and continuance of an Event of Default, at such intervals as the Agent may require, furnish such further schedules and/or information as the Agent may require relating to the Receivables, including, without limitation, sales invoices. In addition, the Borrower shall notify the Agent of any non-compliance in respect of the representations, warranties and covenants contained in Section 10.03 hereof. The items to be provided under this Section 10.02 are to be in form satisfactory to the Agent and are to be executed and delivered to the Agent from time to time solely for its convenience in maintaining records of the Collateral; the Borrower's failure to give any of such items to the Agent shall not affect, terminate, modify or otherwise limit the Agent's Lien or security interest in the Collateral. SECTION 10.3. Status of Receivables and Other Collateral. The Borrower covenants, represents and warrants that: (a) it shall be the sole owner, free and clear of all Liens except in favor of the Agent or otherwise permitted hereunder, of and fully authorized to sell, transfer, pledge and/or grant a security interest in each and every item of said Collateral owned by it; (b) none of the transactions underlying or giving rise to any Eligible Receivable shall violate any applicable state or federal laws or regulations, and all documents relating to any Eligible Receivable shall be legally sufficient under such laws or regulations and shall be legally enforceable in accordance with their terms; (c) to its knowledge without inquiry, each Customer, guarantor or endorser with respect to any Eligible Receivable is solvent and will continue to be fully able to pay all Eligible Receivables on which it is obligated in full when due; (d) all documents and agreements relating to Eligible Receivables shall be true and correct and in all respects what they purport to be; (e) to the best of its knowledge, all signatures and endorsements that appear on all documents and agreements relating to Eligible Receivables shall be genuine and all signatories and endorsers with respect thereto shall have full capacity to contract; (f) it shall maintain books and records pertaining to the Collateral in such detail, form and scope as the Agent shall reasonably require; (g) it will immediately notify the Agent if any accounts arise out of contracts with 87 94 the United States or any department, agency or instrumentality thereof, and will execute any instruments and take any steps required by the Agent in order that all monies due or to become due under any such contract shall be assigned to the Agent and notice thereof given to the United States Government under the Federal Assignment of Claims Act of 1940; (h) it will, immediately upon learning thereof, report to the Agent any material loss or destruction of, or substantial damage to, any of the Collateral, and any other matters affecting the value, enforceability or collectability of any of the Collateral; (i) if any amount payable under or in connection with any Eligible Receivable is evidenced by a promissory note or other instrument, as such terms are defined in the Uniform Commercial Code, such promissory note or instrument shall be promptly pledged, endorsed, assigned and delivered to the Agent as additional collateral; (j) it shall not re-date any invoice or sale or make sales on extended dating beyond that customary in the industry; and (k) it is not nor shall it be entitled to pledge the Lenders' credit on any purchases or for any purpose whatsoever. SECTION 10.4. Monthly Statement of Account. The Agent shall render to the Borrower each month a statement of the Borrower's account, which shall constitute an account stated and shall be deemed to be correct and accepted by and be binding upon the Borrower unless the Agent receives a written statement of the Borrower's exceptions within 30 days after such statement was rendered to the Borrower. SECTION 10.5. Collateral Custodian. Upon the occurrence and continuance of an Event of Default, the Agent may at any time and from time to time employ and maintain in the premises of the Borrower a custodian selected by the Agent who shall have full authority to do all acts necessary to protect the Agent's and Lenders' interests and to report to the Agent thereon. The Borrower hereby agrees to cooperate with any such custodian and to do whatever the Agent may reasonably request to preserve the Collateral. All costs and expenses incurred by the Agent by reason of the employment of the custodian shall be charged to the Borrower's account and added to the Obligations. 11. MISCELLANEOUS SECTION 11.1. Notices. Notices, consents and other communications provided for herein shall be in writing and shall be delivered or mailed (or in the case of telex or facsimile communication, delivered by telex, graphic scanning, telecopier or other telecommunications equipment, with receipt confirmed (and followed by a hard copy delivered or mailed (but the failure to do so shall not invalidate such notice, consent or other communication)), addressed: (1) if to the Borrower or Grantors, c/o Behrman Capital, Four Embarcadero Center, Suite 3640, San Francisco, CA 94111, Facsimile (415) 88 95 434-7310, Attention: William M. Matthes, with copies to (i) The Management Network Group (TMNG), 38 Devonshire Drive, Oak Brook, Illinois 60523, Facsimile (630) 920-1350, Attention: Micky Woo and (ii) Latham & Watkins, 213 South Wacker Drive, 5800 Sears Tower, Chicago, Illinois 60606, Facsimile (312) 993-9767, Attention: Philip J. Perzek, Esq.; (2) if to the Agent, at The Chase Manhattan Bank, 633 Third Avenue, Structured Finance, 7th Floor, New York, New York 10017, Facsimile (212) 622-5218, Attention: Credit Deputy, with a copy to Kaye, Scholer, et al., LLP, 425 Park Avenue, New York, New York 10022, Facsimile (212) 836-6475, Attention: Jeffrey M. Epstein, Esq.; and (3) if to any Lender, at the address set forth below its name in Schedule 2.01 annexed hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if hand delivered or three days after being sent by registered or certified mail, postage prepaid, return receipt requested, if by mail, or upon receipt if by any telex, facsimile or other telecommunications equipment, in each case addressed to such party as provided in this Section 11.01 or in accordance with the latest unrevoked direction from such party. SECTION 11.2. Survival of Agreement. All covenants, agreements, representations and warranties made by the Borrower or any of its subsidiaries herein and in the certificates or other instruments prepared or delivered in connection with this Agreement, any of the Security Documents, any Guarantee or any other Loan Document, shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Loans and the execution and delivery to the Lenders of the Notes and occurrence of any other Credit Event and shall continue in full force and effect as long as the principal of or any accrued interest on the Notes or any other fee or amount payable under the Notes or this Agreement or any other Loan Document is outstanding and unpaid and so long as the Total Commitment has not been terminated. SECTION 11.3. Successors and Assigns; Participations. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of any Loan Party, any ERISA Affiliate, any subsidiary of any thereof, the Agent or the Lenders, that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. Without limiting the generality of the foregoing, the Borrower specifically confirms that any Lender may at any time and from time to time pledge or otherwise grant a security interest in any Loan or any Note (or any part thereof) to any Federal 89 96 Reserve Bank. The Borrower may not assign or transfer any of its rights or obligations hereunder without the written consent of all the Lenders. (1) Each Lender, without the consent of the Borrower or the Agent, may sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Revolving Credit Commitment, Term Loan-A Commitment and Term Loan-B Commitment) and the Loans owing to it and undrawn Letters of Credit and the Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Revolving Credit Commitment, Term Loan-A Commitment and Term Loan-B Commitment) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the banks or other entities buying participations shall be entitled to the cost protection provisions contained in Sections 2.10, 2.12 and 2.15 hereof, but only to the extent any of such Sections would be available to the Lender which sold such participation, and (iv) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement; provided, further, however, that each Lender shall retain the sole right and responsibility to enforce the obligations of the Loan Parties relating to the Loans, including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement, other than amendments, modifications or waivers with respect to decreasing any fees payable hereunder or the amount of principal or the rate of interest payable on, or the dates fixed for any payment of principal of or interest on, the Loans or changing or extending the Commitments or the release of all Collateral. (2) Each Lender may assign by novation, to any one or more banks or other entities without the prior written consent of the Borrower but with the prior written consent of the Agent (which consent shall not be unreasonably withheld), all or a portion of its interests, rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or a portion of its Revolving Credit Commitment, Term Loan-A Commitment and Term Loan-B Commitment and the same portion of the Loans and undrawn Letters of Credit at the time owing to it and the Note or Notes held by it), provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of the assigning Lender's rights and obligations under this Agreement, which shall include the same percentage interest in the Loans, Letters of Credit and Notes, (ii) the amount of the Revolving Credit Commitment, Term Loan-A Commitment and Term Loan-B Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall be in a minimum principal amount of $5,000,000 (unless to another Lender, in which event there shall be no minimum requirement) in the aggregate for the Revolving Credit Commitment, Term Loan-A Commitment and Term Loan-B Commitment of such Lender and the amount of the Revolving Credit Commitment, 90 97 Term Loan-A Commitment and Term Loan-B Commitment of such Lender shall not be less than $5,000,000 or shall be zero (unless such Lender's minimum hold position shall fall below $5,000,000 by reason of an assignment to another Lender), (iii) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance, together with any Note subject to such assignment and a processing and recordation fee of $5,000 and (iv) the Assignee, if it shall not be a Lender, shall deliver to the Agent an Administrative Questionnaire in the form provided to such Assignee by the Agent. Upon such execution, delivery, acceptance and recording and after receipt of the written consent of the Agent, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof, (x) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and under the other Loan Documents and (y) the Lender which is assignor thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.10, 2.12, 2.15 and 11.04, as well as any fees accrued for its account hereunder and not yet paid). (3) By executing and delivering an Assignment and Acceptance, the Lender which is assignor thereunder and the assignee thereunder confirm to, and agree with, each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereunder free and clear of any adverse claim, and that its Commitment and the outstanding balance of its Loans and participations in Letters of Credit, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, such Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, perfection, genuineness, sufficiency or value of this Agreement, the other Loan Documents or any Collateral with respect thereto or any other instrument or document furnished pursuant hereto or thereto; (ii) such Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Loan Party or the performance or observance by any Loan Party of any of their respective obligations under this Agreement, any Guarantees or any of the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance and confirms that it has received a copy of this Agreement, any Guarantees and of the other Loan Documents, together with copies of financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such 91 98 Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Agent to take such action as the Agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (4) The Agent shall maintain at its address referred to in Section 11.01 hereof a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders and the Revolving Credit Commitment, Term Loan-A Commitment and Term Loan-B Commitment, as the case may be, of, and principal amount of the Loans owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders may treat each person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (5) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee together with any Note or Notes subject to such assignment, any processing and recordation fee and, if required, an Administrative Questionnaire and the written consent to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is precisely in the form of Exhibit F annexed hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Lenders and the Borrower. Within five (5) Business Days after receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Agent in exchange for each surrendered Note or Notes a new Note or Notes to the order of such assignee in an amount equal to its portion of the Term Loan-A Commitment, Term Loan-B Commitment and Revolving Credit Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained any Term Loan-A Commitment, Term Loan-B Commitment and Revolving Credit Commitment hereunder, a new Note or Notes to the order of the assigning Lender in an amount equal to the Term Loan-A Commitment, Term Loan-B Commitment and Revolving Credit Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, or, with respect to the Term Notes-A and the Term Notes-B, the principal amount of the Term Notes-A and the Term Notes-B, as the case may be, outstanding at such time as evidenced by the Term Note-A or Notes or Term Note-B or Notes, as the case may be, shall be dated the effective date of such Assignment and 92 99 Acceptance and shall otherwise be in substantially the form of Exhibit A-1, Exhibit A-2 or Exhibit B, as the case may be. Notes surrendered to the Borrower shall be canceled by the Borrower. (6) Notwithstanding any other provision herein, any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 11.03, disclose to the assignee or participant or proposed assignee or participant, any information, including, without limitation, any Information, relating to the Borrower furnished to such Lender by or on behalf of the Borrower in connection with this Agreement; provided, however, that prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential Information relating to the Borrower received from such Lender in accordance with Section 11.11 hereof. SECTION 11.4. Expenses; Indemnity. (a) The Borrower agrees to pay all reasonable out-of-pocket expenses incurred by the Agent in connection with the preparation of this Agreement and the other Loan Documents or with any amendments, modifications, waivers, extensions, renewals, renegotiations or "workouts" of the provisions hereof or thereof (whether or not the transactions hereby contemplated shall be consummated) or incurred by the Agent or any of the Lenders in connection with the enforcement or protection of its rights in connection with this Agreement or any of the other Loan Documents or with the Loans made or the Notes or Letters of Credit issued hereunder, or in connection with any pending or threatened action, proceeding, or investigation relating to the foregoing, including but not limited to the reasonable fees and disbursements of counsel for the Agent and ongoing field examination expenses and charges, and, in connection with such enforcement or protection, the reasonable fees and disbursements of counsel for the Lenders. The Borrower further indemnifies the Lenders from and agrees to hold them harmless against any documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement or the Notes. (1) The Borrower indemnifies the Agent and each Lender and their respective directors, officers, employees and agents against, and agrees to hold the Agent, each Lender and each such person harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees and expenses, incurred by or asserted against the Lender or any such person arising out of, in any way connected with, or as a result of (i) the use of any of the proceeds of the Loans, (ii) this Agreement, any Guarantees, any of the Security Documents, Recapitalization Documents or the other documents contemplated hereby or thereby, (iii) the performance by the parties hereto and thereto of their respective obligations hereunder and thereunder (including but not limited to the making of the Total Commitment) and consummation of the transactions contemplated hereby and thereby, (iv) breach of any representation or warranty, or (v) any claim, litigation, investigation or proceedings relating to any of the foregoing, whether or not the Agent, any Lender or 93 100 any such person is a party thereto; provided, however, that such indemnity shall not, as to the Agent or any Lender, apply to any such losses, claims, damages, liabilities or related expenses to the extent that they result from the gross negligence or willful misconduct of the Agent or any Lender. (2) The Borrower indemnifies, and agrees to defend and hold harmless the Agent and the Lenders and their respective officers, directors, shareholders, agents and employees (collectively, the "Indemnitees") from and against any loss, cost, damage, liability, lien, deficiency, fine, penalty or expense (including, without limitation, reasonable attorneys' fees and reasonable expenses for investigation, removal, cleanup and remedial costs and modification costs incurred to permit, continue or resume normal operations of any property or assets or business of the Borrower or any subsidiary thereof) arising from a violation of, or failure to comply with any Environmental Law and to remove any Lien arising therefrom except to the extent caused by the gross negligence or willful misconduct of any Indemnitee, which any of the Indemnitees may incur or which may be claimed or recorded against any of the Indemnitees by any person. (3) The provisions of this Section 11.04 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the invalidity or unenforceability of any term or provision of this Agreement or the Notes, or any investigation made by or on behalf of the Agent or any Lender. All amounts due under this Section 11.04 shall be payable on written demand therefor. SECTION 11.5. Applicable Law. THIS AGREEMENT AND THE NOTES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK (OTHER THAN THE CONFLICTS OF LAWS PRINCIPLES THEREOF). SECTION 11.6. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender may (and if requested by the Required Lenders, shall) and is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and 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 now or hereafter existing under this Agreement and the Notes held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or the Notes and although such obligations may be unmatured. Each Lender agrees to notify promptly the Agent and the Borrower after any such setoff and application made by such Lender, but the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to other rights and remedies 94 101 (including, without limitation, other rights of setoff) which may be available to such Lender. SECTION 11.7. Payments on Business Days. (a) Should the principal of or interest on the Notes or any fee or other amount payable hereunder become due and payable on other than a Business Day, payment in respect thereof may be made on the next succeeding Business Day (except as otherwise specified in the definition of "Interest Period"), and such extension of time shall in such case be included in computing interest, if any, in connection with such payment. (1) All payments by the Borrower hereunder and all Loans made by the Lenders hereunder shall be made in lawful money of the United States of America in immediately available funds at the office of the Agent set forth in Section 11.01 hereof. SECTION 11.8. Waivers; Amendments. (a) No failure or delay of any Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Lenders hereunder are cumulative and not exclusive of any rights or remedies which they may otherwise have. No waiver of any provision of this Agreement or the Notes nor consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be authorized as provided in paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Borrower in any case shall entitle it to any other or further notice or demand in similar or other circumstances. Each holder of any of the Notes shall be bound by any amendment, modification, waiver or consent authorized as provided herein, whether or not such Note shall have been marked to indicate such amendment, modification, waiver or consent. (1) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders; provided, however, that no such agreement shall (i) change the principal amount of, or extend or advance the maturity of or the dates for the payment of principal of or interest on, any Note or reduce the rate of interest on any Note or reduce the Letter of Credit fees referred to in Section 2.20, (ii) change the Revolving Credit Commitment, Term Loan-A Commitment or Term Loan-B Commitment of any Lender or amend or modify the provisions of this Section, Section 2.06, Section 2.13, Section 4.14 or Section 11.04 hereof or the definition of "Required Lenders," or (iii) release any material portion of Collateral, in each case without the prior written consent of each Lender affected thereby and provided, further, however, that no such agreement shall amend, modify or otherwise affect the rights or duties of the Agent under this Agreement or the other Loan Documents without 95 102 the written consent of the Agent. Each Lender and holder of any Note shall be bound by any modification or amendment authorized by this Section regardless of whether its Notes shall be marked to make reference thereto, and any consent by any Lender or holder of a Note pursuant to this Section shall bind any person subsequently acquiring a Note from it, whether or not such Note shall be so marked. (2) In the event that the Borrower requests, with respect to this Agreement or any other Loan Document, an amendment, modification or waiver and such amendment, modification or waiver would require the unanimous consent of all of the Lenders in accordance with Section 11.08(b) above, and such amendment, modification or waiver is agreed to in writing by the Borrower and the Required Lenders but not by all of the Lenders, then notwithstanding anything to the contrary in Section 11.08(b) above, with the written consent of the Borrower and such Required Lenders, the Borrower and Required Lenders may, but shall not be obligated to, amend this Agreement without the consent of the Lender or Lenders who did not agree to the proposed amendment, modification or waiver (the "Minority Lenders") solely to provide for (i) the termination of the Revolving Credit Commitment, Term Loan-A Commitment and Term Loan-B Commitment of each Minority Lender, (ii) the assignment in accordance with Section 11.03 hereof to one or more persons of each Minority Lender's interests, rights and obligations under this Agreement (including, without limitation, all of such Minority Lender's Revolving Credit Commitment, Term Loan-A Commitment and Term Loan-B Commitment as well as its portion of all outstanding Loans and the Note or Notes held by such Minority Lender) and the other Loan Documents and/or an increase in the Revolving Credit Commitment, Term Loan-A Commitment and Term Loan-B Commitment of one or more Required Lenders, in each case so that after giving effect thereto the Total Revolving Credit Commitment, Total Term Loan-A Commitment and Total Term Loan-B Commitment shall be in the same amounts as prior to the events described in this paragraph, (iii) the repayment to the Minority Lenders in full of all Loans outstanding and accrued interest thereon at the time of the assignment and/or increase in Commitments described in clause (ii) above with the proceeds of Loans made by such persons who are to become Lenders by assignment or with the proceeds of Loans made by Required Lenders who have agreed to increase their Revolving Credit Commitment, Term Loan-A Commitment and Term Loan-B Commitment, (iv) the payment to the Minority Lenders by the Borrower of all fees and other compensation due and owing such Minority Lenders under the terms of this Agreement and the other Loan Documents and (v) such other modifications as the Required Lenders and Borrower shall deem necessary in order to effect the changes specified in clauses (i) through (iv) hereof. SECTION 11.9. Severability. In the event any one or more of the provisions contained in this Agreement or in the Notes should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not in any way be affected or impaired thereby. 96 103 SECTION 11.10.Entire Agreement; Waiver of Jury Trial, etc. (a) This Agreement, the Notes and the other Loan Documents constitute the entire contract between the parties hereto relative to the subject matter hereof. Any previous agreement among the parties hereto with respect to the Transactions is superseded by this Agreement, the Notes and the other Loan Documents. Except as expressly provided herein or in the Notes or the Loan Documents (other than this Agreement), nothing in this Agreement, the Notes or in the other Loan Documents, expressed or implied, is intended to confer upon any party, other than the parties hereto, any rights, remedies, obligations or liabilities under or by reason of this Agreement, the Notes or the other Loan Documents. (1) Except as prohibited by law, each party hereto hereby waives any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with this Agreement, the Notes, any of the other Loan Documents or the Transactions. (2) Except as prohibited by law, each party hereto hereby waives any right it may have to claim or recover in any litigation referred to in paragraph (b) of this Section 11.10 any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. (3) Each party hereto (i) certifies that no representative, agent or attorney of any Lender has represented, expressly or otherwise, that such Lender would not, in the event of litigation, seek to enforce the foregoing waivers and (ii) acknowledges that it has been induced to enter into this Agreement, the Notes or the other Loan Documents, as applicable, by, among other things, the mutual waivers and certifications herein. SECTION 11.11.Confidentiality. The Agent and the Lenders agree to keep confidential (and to cause their respective officers, directors, employees, agents and representatives to keep confidential) all information, materials and documents furnished to the Agent or any Lender (the "Information"). Notwithstanding the foregoing, the Agent and each Lender shall be permitted to disclose Information (i) to such of its officers, directors, employees, agents and representatives as need to know such Information in connection with its participation in any of the Transactions or the administration of this Agreement or the other Loan Documents; (ii) to the extent required by applicable laws and regulations or by any subpoena or similar legal process, or requested by any governmental agency or authority (in which event to the extent permitted by law, the Agent or a Lender, as applicable, shall promptly notify the Borrower of such requirement and of the Information to which it is applicable and to the extent to which such Information has actually been disclosed); (iii) to the extent such Information (A) becomes publicly available other than as a result of a breach of this Agreement, (B) becomes available to the Agent or such Lender on a non-confidential 97 104 basis from a source other than a Loan Party or any of their respective subsidiaries or (C) was available to the Agent or such Lender on a non-confidential basis prior to its disclosure to the Agent or such Lender by a Loan Party or any of their respective subsidiaries; (iv) to the extent any Loan Party or any of their respective subsidiaries shall have consented to such disclosure in writing; (v) in connection with the sale of any Collateral pursuant to the provisions of any of the other Loan Documents; or (vi) pursuant to Section 11.03(g) hereof. SECTION 11.12.Submission to Jurisdiction. (a) Any legal action or proceeding with respect to this Agreement or the Notes or any other Loan Document may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, each Loan Party hereby accepts for themselves and in respect of their property, generally and unconditionally, the jurisdiction of the aforesaid courts. (1) The Borrower hereby irrevocably waives, in connection with any such action or proceeding, any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which they may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. (2) The Borrower hereby irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to each such person, as the case may be, at its address set forth in Section 11.01 hereof. (3) Nothing herein shall affect the right of the Agent or any Lender to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction. SECTION 11.13.Counterparts; Facsimile Signature. This Agreement may be executed in counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract, and shall become effective when copies hereof which, when taken together, bear the signatures of each of the parties hereto shall be delivered to the Agent. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed signature page hereto. SECTION 11.14.Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. 98 105 IN WITNESS WHEREOF, the Borrower, the Agent and the Lenders have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. THE MANAGEMENT NETWORK GROUP, INC. By: ----------------------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Administrative and Collateral Agent and Lender By: ----------------------------------------------- Name: Title: IBJ SCHRODER BANK & TRUST COMPANY, as Syndication Agent and Lender By: ----------------------------------------------- Name: Title: 106 SCHEDULE 2.01(a) TERM LOAN-A COMMITMENTS
Approximate Term Loan-A Percentage of Total Lender Commitment Term Loan-A Commitment - ------ ---------- ---------------------- The Chase Manhattan Bank $6,000,000 50% 633 Third Avenue New York, NY 10017 Attention: Credit Deputy IBJ Schroder Bank & Trust $6,000,000 50% Company One State Street New York, NY 10004 Attention: TMNG Account Officer
TERM LOAN-B COMMITMENTS
Approximate Term Loan-B Percentage of Total Lender Commitment Term Loan-B Commitment - ------ ---------- ---------------------- The Chase Manhattan Bank $6,000,000 50% 633 Third Avenue New York, NY 10017 Attention: Credit Deputy IBJ Schroder Bank & Trust $6,000,000 50% Company One State Street New York, NY 10004 Attention: TMNG Account Officer
107 SCHEDULE 2.01(b) Revolving Credit Commitments
Approximate Revolving Percentage of Credit Total Revolving Lender Commitment Credit Commitment - ------ ---------- ----------------- The Chase Manhattan Bank 633 Third Avenue New York, New York 10017 $2,500,000 50% Attention: Credit Deputy IBJ Schroder Bank & Trust $2,500,000 50% Company One State Street New York, NY 10004 Attention: TMNG Account Officer
108 SCHEDULE 2.02 Domestic Lending Offices
Lender Domestic Lending Office - ------ ----------------------- The Chase Manhattan Bank The Chase Manhattan Bank 633 Third Avenue New York, NY 10017 Attn: Credit Deputy IBJ Schroder Bank & Trust IBJ Schroder Bank & Trust Company Company One State Street New York, NY 10017 Attn: TMNG Account Officer
109 SCHEDULE 2.03 Eurodollar Lending Offices
Lender Eurodollar Lending Office - ------ ------------------------- The Chase Manhattan Bank The Chase Manhattan Bank 633 Third Avenue New York, NY 10017 Attn: Credit Deputy IBJ Schroder Bank & Trust IBJ Schroder Bank & Trust Company Company One State Street New York, NY 10004 Attn: TMNG Account Officer
110 REVOLVING CREDIT NOTE New York, New York $2,500,000 February 12, 1998 FOR VALUE RECEIVED, the undersigned, THE MANAGEMENT NETWORK GROUP, INC., (the "Maker"), hereby promises to pay to the order of THE CHASE MANHATTAN BANK (the "Lender"), at the office of THE CHASE MANHATTAN BANK (the "Agent"), at 633 Third Avenue, New York, New York on the Revolving Credit Termination Date as defined in the Credit Agreement dated as of February 12, 1998, among the Maker, the Lenders named therein and the Agent (as the same may be amended, modified or supplemented from time to time in accordance with its terms, the "Credit Agreement") or earlier as provided for in the Credit Agreement, the lesser of the principal sum of TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000) or the aggregate unpaid principal amount of all Revolving Credit Loans to the Maker from the Lender pursuant to the terms of the Credit Agreement, in lawful money of the United States of America in immediately available funds, and to pay interest from the date thereof on the principal amount hereof from time to time outstanding, in like funds, at said office, at a rate or rates per annum and, in each case, and payable on such dates as determined pursuant to the terms of the Credit Agreement. The Maker promises to pay interest, on demand, on any overdue principal and fees and, to the extent permitted by law, overdue interest from their due dates at a rate or rates determined as set forth in the Credit Agreement. The Maker hereby waives diligence, presentment, demand, protest and notice of any kind whatsoever. The non-exercise by the holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. All borrowings evidenced by this Revolving Credit Note and all payments and prepayments of the principal hereof and interest hereon and the respective dates thereof shall be endorsed by the holder hereof on the schedule attached hereto and made a part hereof, or on a continuation thereof which shall be attached hereto and made a part hereof, or otherwise recorded by such holder i its internal records; provided, however, that the failure of the holder hereof to make such a notation or any error in such a notation shall not in any manner affect the obligation of the Maker to make payments of principal and interest in accordance with the terms of this Revolving Credit Note and the Credit Agreement. 111 This Revolving Credit Note is one of the Note is one of the Notes referred to in the Credit Agreement (and is secured by the Collateral referred to therein), which, among other things, contains provisions for the acceleration of the maturity hereof upon the happening of certain events, for optional and mandatory prepayments of the principal hereof prior to the maturity hereof and for the amendment or waiver of certain provisions of the Credit Agreement, all upon the terms and conditions therein specified. THIS REVOLVING CREDIT NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CHOICE OF LAW DOCTRINE, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THE MANAGEMENT NETWORK GROUP, INC. By: /s/ RICHARD P. NESPOLA ------------------------------ Name: Richard P. Nespola Title: President & CEO 112 Loans and Payments
Unpaid Name of Principal Amount and Payments Balance of Person Making Date Type of Loan Principal Interest Note Notation - ---- ------------ ------------------ ---------- -------------
113 REVOLVING CREDIT NOTE New York, New York February 12, 1998 $2,500,000 FOR VALUE RECEIVED, the undersigned, THE MANAGEMENT NETWORK GROUP, INC., (the "Maker"), hereby promises to pay to the order of IBJ SCHRODER BANK & TRUST COMPANY (the "Lender"), at the office of THE CHASE MANHATTAN BANK (the "Agent"), at 633 Third Avenue, New York, New York on the Revolving Credit Termination Date as defined in the Credit Agreement dated as of February 12, 1998, among the Maker, the Lenders named therein and the Agent (as the same may be amended, modified or supplemented from time to time in accordance with its terms, the "Credit Agreement") or earlier as provided for in the Credit Agreement, the lesser of the principal sum of TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000) or the aggregate unpaid principal amount of all Revolving Credit Loans to the Maker from the Lender pursuant to the terms of the Credit Agreement, in lawful money of the United States of America in immediately available funds, and to pay interest from the date thereof on the principal amount hereof from time to time outstanding, in like funds, at said office, at a rate or rates per annum and, in each case, and payable on such dates as determined pursuant to the terms of the Credit Agreement. The Maker promises to pay interest, on demand, on any overdue principal and fees and, to the extent permitted by law, overdue interest from their due dates at a rate or rates determined as set forth in the Credit Agreement. The Maker hereby waives diligence, presentment, demand, protest and notice of any kind whatsoever. The non-exercise by the holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. All borrowings evidenced by this Revolving Credit Note and all payments and prepayments of the principal hereof and interest hereon and the respective dates thereof shall be endorsed by the holder hereof on the schedule attached hereto and made a part hereof, or on a continuation thereof which shall be attached hereto and made a part hereof, or otherwise recorded by such holder in its internal records: provided, however, that the failure of the holder hereof to make such a notation or any error in such a notation shall not in any manner affect the obligation of the Maker to make payments of principal and interest in accordance with the terms of this Revolving Credit Note and the Credit Agreement. 114 This Revolving Credit Note is one of the Notes referred to in the Credit Agreement (and is secured by the Collateral referred to therein), which, among other things, contains provisions for the acceleration of the maturity hereof upon the happening of certain events, for optional and mandatory prepayment of the principal hereof prior to the maturity hereof and for the amendment or waiver of certain provisions of the Credit Agreement, all upon the terms and conditions therein specified. THIS REVOLVING CREDIT NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CHOICE OF LAW DOCTRINE, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THE MANAGEMENT NETWORK GROUP, INC. By: /s/ RICHARD P. NESPOLA ------------------------------------- Name: Richard P. Nespola Title: President & CEO 115 Loans and Payment
Unpaid Name of Principal Amount and Payments Balance of Person Making Date Type of Loan Principal Interest Note Notation - ---- ------------ ------------------ ---------- -------------
116 TERM NOTE - A $6,000,000 New York, New York February 12, 1998 FOR VALUE RECEIVED, the undersigned, THE MANAGEMENT NETWORK GROUP, INC. (the "Maker"), hereby promises to pa to the order of THE CHASE MANHATTAN BANK (the "Lender"), at the office of THE CHASE MANHATTAN BANK (the "Agent"), at 633 Third Avenue, New York, New York, in installments and as otherwise provided in Section 2.04 of the Credit Agreement dated as of February 12, 1998, among the Maker, the Lenders named therein, and the Agent (as the same may be amended, modified or supplemental from time to time in accordance with its terms, the "Credit Agreement") the principal sum of SIX MILLION DOLLARS ($6,000,000), in lawful money of the United States of America in immediately available funds, and to pay interest from the date thereof on the principal amount hereof from time to time outstanding, in like funds, at said office, at a rate or rates per annum and, in each case, payable on such dates as determined pursuant to the terms of the Credit Agreement. The Maker promises to pay interest, on demand, on any overdue principal and fees and, to the extent permitted by law, overdue interest from their due dates at a rate or rates determined as set forth in the Credit Agreement. The Maker hereby waives diligence, presentment, demand, protest and notice of any kind whatsoever. The non-exercise by the holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. All borrowings evidenced by this Term Note and all payments and prepayments of the principal hereof and interest hereon and the respective date thereof shall be endorsed by the holder hereof on the schedule attached hereto and made a part hereof, or on a continuation thereof which shall be attached hereto and made a part hereof, or otherwise recorded by such holder in its internal records; provided, however, that the failure of the holder hereof to make such a notation or any error in such a notation shall not in any manner affect the obligations of the Maker to make payments of principal and interest in accordance with the terms of this Term Note and the Credit Agreement. This Term Note is one of the Notes referred to in the Credit Agreement (and is secured by the Collateral referred to herein), which among other things, contains provisions for the acceleration of the maturity hereof upon the happening of certain events, for optional and mandatory prepayment of the principal hereof prior to the maturity hereof and for the amendment or waiver of certain provisions of the Credit Agreement, all upon the terms and conditions therein specified. THIS TERM NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CHOICE OF LAW DOCTRINE, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THE MANAGEMENT NETWORK GROUP, INC. By: /s/ Richard P. Nespola ------------------------ Name: Richard P. Nespola Title: President & CEO 117 Loans and Payment
Unpaid Name of Principal Amount and Payments Balance of Person Making Date Type of Loan Principal Interest Note Notation - ---- ------------ ------------------ ---------- -------------
118 TERM NOTE - A $6,000,000 New York, New York February 12, 1998 FOR VALUE RECEIVED, the undersigned, THE MANAGEMENT NETWORK GROUP, INC. (the "Maker"), hereby promises to pay to the order of THE IBJ SCHRODER BANK & TRUST COMPANY (the "Lender"), at the office of THE CHASE MANHATTAN BANK (the "Agent"), at 633 Third Avenue, New York, New York, in installments and as otherwise provided in Section 2.04 of the Credit Agreement dated as of February 12, 1998, among the Maker, the Lenders named therein, and the Agent (as the same may be amended, modified or supplemented from time to time in accordance with its terms, the "Credit Agreement") the principal sum of SIX MILLION DOLLARS ($6,000,000), in lawful money of the United States of America in immediately available funds, and to pay interest from the date thereof on the principal amount hereof from time to time outstanding, in like funds, at said office, at a rate or rates per annum and, in each case, payable on such dates as determined pursuant to the terms of the Credit Agreement. The Maker promises to pay interest, on demand, on any overdue principal and fees and, to the extent permitted by law, overdue interest from their due dates at a rate or rates determined as set forth in the Credit Agreement. The Maker hereby waives diligence, presentment, demand, protest and notice of any kind whatsoever. The non-exercise by the holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. All borrowings evidenced by this Term Note and all payments and prepayments of the principal hereof and interest hereon and the respective dates thereof shall be endorsed by the holder hereof on the schedule attached hereto and made a part hereof, or on a continuation thereof which shall be attached hereto and made a part hereof, or otherwise recorded by such holder in its internal records; provided, however, that the failure of the holder hereof to make such a notation or any error in such a notation shall not in any manner affect the obligations of the Maker to make payments of principal and interest in accordance with the terms of this Term Note and the Credit Agreement. This Term Note is one of the Notes referred to in the Credit Agreement (and is secured by the Collateral referred to therein), which among other things, contains provisions for the acceleration of the maturity hereof upon the happening of certain events, for optional and mandatory prepayment of the principal hereof prior to the maturity hereof and for the amendment or waiver of certain provisions of the Credit Agreement, all upon the terms and conditions therein specified. THIS TERM NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CHOICE OF LAW DOCTRINE, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THE MANAGEMENT NETWORK GROUP, INC. By: /s/ Richard P. Nespola ------------------------ Name: Richard P. Nespola Title: President & CEO 119 Loans and Payment
Unpaid Name of Principal Amount and Payments Balance of Person Making Date Type of Loan Principal Interest Note Notation - ---- ------------ ------------------ ---------- -------------
120 TERM NOTE - B $6,000,000 New York, New York February 12, 1998 FOR VALUE RECEIVED, the undersigned, THE MANAGEMENT NETWORK GROUP, INC., (the "Maker"), hereby promises to pay to the order of THE CHASE MANHATTAN BANK (the "Lender"), at the office of THE CHASE MANHATTAN BANK (the "Agent"), at 633 Third Avenue, New York, New York, in installments and as otherwise provided in Section 2.04 of the Credit Agreement dated as of February 12, 1998, among the Maker, the Lenders named therein, and the Agent (as the same may be amended, modified or supplemented from time to time in accordance with its terms, the "Credit Agreement") the principal sum of SIX MILLION DOLLARS ($6,000,000), in lawful money of the United States of America in immediately available funds, and to pay interest from the date thereof on the principal amount hereof from time to time outstanding, in like funds, at said office, at a rate or rates per annum and, in each case, payable on such dates as determined pursuant to the terms of the Credit Agreement. The Maker promises to pay interest, on demand, on any overdue principal and fees and, to the extent permitted by law, overdue interest from their due dates at a rate or rates determined as set forth in the Credit Agreement. The Maker hereby waives diligence, presentment, demand, protest and notice of any kind whatsoever. The non-exercise by the holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. All borrowings evidenced by this Term Note and all payments and prepayments of the principal hereof and interest hereon and the respective dates thereof shall be endorsed by the holder hereof on the schedule attached hereto and made a part hereof, or on a continuation thereof which shall be attached hereto and made a part hereof, or otherwise recorded by such holder in its internal records; provided, however, that the failure of the holder hereof to make such a notation or any error in such a notation shall not in any manner affect the obligations of the Maker to make payments of principal and interest in accordance with the terms of this Term Note and the Credit Agreement. The Term Note is one of the Notes referred to in the Credit Agreement (and is secured by the Collateral referred to therein), which, among other things, contains provisions for the acceleration of the maturity hereof upon the happening of certain events, for optional and mandatory prepayment of the principal hereof prior to the maturity hereof and for the amendment or waiver of certain provisions of the Credit 121 Agreement, all upon the terms and conditions therein specified. THIS TERM NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CHOICE OF LAW DOCTRINE, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THE MANAGEMENT NETWORK GROUP, INC. By: /s/ RICHARD P. NESPOLA ------------------------------ Name: Richard P. Nespola Title: President & CEO 122 Loans and Payment Unpaid Name of Principal Amount and Payments Balance of Person Making Date Type of Loan Principal Interest Note Notation - ---- ------------ ------------------ ---------- ------------- 3 123 TERM NOTE -- B $6,000,000 New York, New York February 12, 1998 FOR VALUE RECEIVED, the undersigned, THE MANAGEMENT NETWORK GROUP, INC., (the "Maker"), hereby promises to pay to the order of IBJ SCHRODER BANK & TRUST COMPANY (the "Lender"), at the office of THE CHASE MANHATTAN BANK (the "Agent"), at 633 Third Avenue, New York, New York, in installments and as otherwise provided in Section 2.04 of the Credit Agreement dated as of February 12, 1998, among the Maker, the Lenders named therein, and the Agent (as the same may be amended, modified or supplemented from time to time in accordance with its terms, the "Credit Agreement") the principal sum of SIX MILLION DOLLARS ($6,000,000), in lawful money of the United States of America in immediately available funds, and to pay interest from the date thereof on the principal amount hereof from time to time outstanding, in like funds, at said office, at a rate or rates per annum and, in each case, payable on such dates as determined pursuant to the terms of the Credit Agreement. The Maker promises to pay interest, on demand, on any overdue principal and fees and, to the extent permitted by law, overdue interest from their due dates at a rate or rates determined as set forth in the Credit Agreement. The Maker hereby waives diligence, presentment, demand, protest and notice of any kind whatsoever. The non-exercise by the holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. All borrowings evidenced by this Term Note and all payments and prepayments of the principal hereof and interest hereon and the respective dates thereof shall be endorsed by the holder hereof on the schedule attached hereto and made a part hereof, or on a continuation thereof which shall be attached hereto and made a part hereof, or otherwise recorded by such holder in its internal records; provided however, that the failure of the holder hereof to make such a notation or any error in such a notation shall not in any manner affect the obligations of the Maker to make payments of principal and interest in accordance with the terms of this Term Note and the Credit Agreement. This Term Note is one of the Notes referred to in the Credit Agreement (and is secured by the Collateral referred to therein), which, among other things, contains provisions for the acceleration of the maturity hereof upon the happening of certain events, for optional and mandatory prepayment of the principal hereof prior to the 124 maturity hereof and for the amendment or waiver of certain provisions of the Credit Agreement, all upon the terms and conditions therein specified. THIS TERM NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CHOICE OF LAW DOCTRINE, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THE MANAGEMENT NETWORK GROUP, INC. By: /s/ RICHARD P. NESPOLA ----------------------------------- Name: RICHARD P. NESPOLA Title: PRESIDENT CEO 2 125 Loans and Payment
Unpaid Name of Principal Amount and Payments Balance of Person Making Date Type of Loan Principal Interest Note Notation - ---- ------------ ------------------ ----------- -------------
EX-10.7 11 LEASE BETWEEN LIGHTON PLAZA L.L.C./REGISTRANT 1 EXHIBIT 10.7 LEASE BETWEEN LIGHTON PLAZA, L.L.C. AND The Management Network Group Inc. FOR SPACE AT LIGHTON PLAZA I 7300 COLLEGE BOULEVARD OVERLAND PARK, KANSAS SUITE 302 4/23/98 ---------------- DATED 2 TABLE OF CONTENTS
PARAGRAPH PAGE 1.1 DEFINITIONS........................................... 1 1.2 SCHEDULES AND ADDENDA................................. 2 2.1 LEASE OF PREMISES..................................... 2 2.2 PRIOR OCCUPANCY....................................... 2 3.1 RENT.................................................. 2 3.2 DEPOSIT; PREPAID RENT................................. 3 3.3 OPERATING COSTS....................................... 3 3.4 TAXES................................................. 4 4.1 CONSTRUCTION CONDITIONS............................... 4 4.2 COMMENCEMENT OF POSSESSION............................ 4 5.1 PROJECT SERVICES...................................... 4 5.2 INTERRUPTION OF SERVICES.............................. 5 6.1 USE OF LEASED PREMISES................................ 5 6.2 INSURANCE............................................. 6 6.3 REPAIRS............................................... 7 6.4 ASSIGNMENT AND SUBLETTING............................. 7 6.5 ESTOPPEL CERTIFICATE.................................. 8 7.1 SUBSTITUTE PREMISES................................... 8 7.2 ADDITIONAL RIGHTS RESERVED TO LANDLORD................ 9 8.1 CASUALTY AND UNTENANTABILITY.......................... 9 9.1 CONDEMNATION.......................................... 10 10.1 WAIVER AND INDEMNITY.................................. 10 10.2 WAIVER OF SUBROGATION................................. 10 10.3 LIMITATION OF LANDLORD'S LIABILITY.................... 10 11.1 TENANTS DEFAULT....................................... 11 11.2 REMEDIES OF LANDLORD.................................. 11 12.1 SURRENDER OF LEASED PREMISES.......................... 11 12.2 HOLDER OVER TENANCY................................... 12 13.1 QUIET ENJOYMENT....................................... 12 13.2 ACCORD AND SATISFACTION............................... 12 13.3 SEVERABILITY.......................................... 12 13.4 SUBORDINATION AND ATTORNMENT.......................... 12 13.5 ATTORNEY'S FEES....................................... 13 13.6 APPLICABLE LAW........................................ 13 13.7 BINDING EFFECT; GENDER................................ 13 13.8 TIME.................................................. 13 13.9 ENTIRE AGREEMENT...................................... 13 13.10 NOTICES............................................... 13 13.11 HEADINGS.............................................. 14 13.12 BROKERAGE COMMISSIONS................................. 14
3 LIST OF SCHEDULES 1. Description of Leased Premises 2. Rules and Regulations 3. Utility Service 4. Maintenance Services 5. Parking 6. Work Letter 7. Certificate of Acceptance 4 LEASE This Lease is made April 23, 1998 between Lighton Plaza L.L.C. ("Landlord") and The Management Network Group Inc., a Kansas corporation ("Tenant"). ARTICLE ONE DEFINITIONS, SCHEDULES AND ADDENDA 1.1 DEFINITIONS: a. LEASE PREMISES shall mean Suite 302, as described in SCHEDULE 1. b. BUILDING shall mean Lighton Plaza I located at 7300 College Boulevard, Overland Park, Kansas. c. PROJECT shall mean Lighton Plaza, located at 7300-7500 College Boulevard, Overland Park, Kansas. d. TENANT'S SQUARE FOOTAGE shall mean 2,351 rentable square feet; TOTAL SQUARE FOOTAGE of the Building shall mean 117,564 rentable square feet. e. LEASE COMMENCEMENT DATE shall mean 7/15/98, which may be adjusted pursuant to paragraph 4.2 of this Lease; LEASE EXPIRATION DATE shall mean 7/31/03; LEASE TERM shall mean the period between Lease Commencement Date and Lease Expiration Date. f. SEE PAGE 1A FOR BASE RENT SCHEDULE g. TENANT'S PRO RATA SHARE shall mean 2.00%. OPERATING COST STOP shall mean $8.55 per square foot of Total Square Footage per year. h. DEPOSIT shall mean $4,212.21; PREPAID RENT shall mean $4,212.21, of which $4,212.21 represents the first monthly installment of Base Rent, and $0.00 represents the last monthly installment of Base Rent. i. PERMITTED PURPOSE shall mean general offices use. j. AUTHORIZED NUMBER OF PARKING SPACES shall mean 9 spaces at a rate of $0.00 per space per month. k. MANAGING AGENT shall mean Trammell Crow Company whose address is 7300 College Boulevard, Suite 160, Overland Park, KS 66210. i. BROKER OF RECORD shall mean Trammell Crow MW, Inc. m. COOPERATING BROKER shall mean CB Commercial. 5 f. Base Rent shall mean
Months $/RSF/Year Rent Annually Rent Monthly ------ ---------- ------------- ------------ 1-12 $21.50 $50,546.50 $4,212.21 13-24 $22.00 $51,722.00 $4,310.17 25-36 $22.50 $52,897.50 $4,408.13 37-48 $23.00 $54,073.00 $4,506.08 49-60 $23.50 $55,248.50 $4,604.04
plus applicable sales tax, if any; the total Base Rent payable over the entire Lease Term is $264,487.50. 6 n. LANDLORD'S MAILING ADDRESS: 3075 Sanders Road, Suite G5B, Northbrook, Illinois 60062. Attention: Real Estate Equity Investment Division. o. TENANT'S MAILING ADDRESS: 7300 College Boulevard, Ste. 302, Overland Park, Kansas 66210. Attention: Richard Nespola 1.2 SCHEDULES AND ADDENDA: The schedules and addenda listed below are incorporated into this Lease by reference unless lined out. The terms of schedules, exhibits and typewritten addenda, if any, attached or added hereto shall control over any inconsistent provisions in the paragraphs of this Lease. a. SCHEDULE 1: Description of Lease Premises and/or Floor Plan b. SCHEDULE 2: Rules and Regulations c. SCHEDULE 3: Utility Services d. SCHEDULE 4: Maintenance Services e. SCHEDULE 5: Parking f. SCHEDULE 6: Work Letter g. SCHEDULE 7: Certificate of Acceptance ARTICLE TWO PREMISES 2.1 LEASE OF PREMISES: In consideration of the Rent and the provisions of this Lease, Landlord leases to Tenant and Tenant accepts from Landlord the Leased Premises. Tenant's Square Footage is a stipulated amount based on Landlord's method of determining Total Square Footage for rental purposes and may not reflect the actual amount of floor space available for Tenant's use. 2.2 PRIOR OCCUPANCY: Tenant shall not occupy the Leased Premises prior to Lease Commencement Date except with the express prior written consent of Landlord and in accordance with the provisions of SCHEDULE 6. IF WITH Landlord'S consent, Tenant occupies the Leased Premises prior to the Lease Commencement Date, Tenant shall pay Landlord Base Rent in the amounts specified in paragraph 1.1(f), and Tenant's Pro Rata Share of Excess Operating Costs, as defined in paragraph 3.3(b), from the first day of such occupancy. These amounts will be payable on the first day of such occupancy and thereafter on the first day of every calendar month until the first day of the Lease Term. A prorated monthly installment shall be paid for the fraction of the month if Tenant's occupancy of the Leased Premises commences on any day other than the first day of the month. If Tenant shall occupy the Leased Premises prior to Lease Commencement Date, all covenants and conditions of this Lease shall be binding on the parties commencing at such prior occupancy. ARTICLE THREE PAYMENT OF RENT 3.1 RENT: Tenant shall pay each monthly installment of Base Rent in advance on the first calendar day of each month, together with each monthly installment of Tenant's Pro Rata Share of Excess Operating Costs. Monthly installments for any fractional calendar month, at the beginning or end of the Lease Term, shall be prorated based on the number of days in such month. Base Rent, together with all other amounts payable by Tenant to Landlord under this Lease, including, without limitation, any late charges and interest due Landlord for Rent not paid when due, shall be sometimes referred to collectively as "Rent". Tenant shall pay all Rent, without deduction or set-off, to Landlord or Managing Agent at a place specified by Landlord. Rent not paid when due shall bear interest until paid, at the rate of 2% per month, or at the maximum rate allowed by law, whichever is less, from the date when due. Tenant shall also pay a processing charge of $50 with each late payment of Rent. Landlord agrees to waive the processing and interest charge for late payments of Rent twice during any twelve month period during the Lease Term, provided any such late Rent payment is paid in full within 10 days of the date when due. 2 7 3.2 DEPOSIT; PREPAID RENT: Tenant has paid to Landlord the Deposit and Prepaid Rent as security for performance of Tenant's obligations under this Lease. In the event Tenant fully complies with all the terms and conditions of this Lease, the Deposit shall be refunded to Tenant, without interest unless otherwise required by law, upon expiration of this Lease. Landlord may, but is not obligated to, apply a portion of the Deposit to cure any default hereunder and Tenant shall pay on demand the amount necessary to restore the Deposit in full within 10 days after notice by Landlord. 3.3 OPERATING COSTS: Tenant shall pay Tenant's Pro Rata Share of any Excess Operating Costs as follows: a. "Operating Costs" shall mean all reasonable and actual expenses relating to the Lease Premises, the Building or the Project, including but not limited to: real estate taxes and assessments; gross rents, sales, use, business, corporation, franchise or other taxes (except income taxes); utilities not separately chargeable to other tenants; insurance premiums and (to the extent used) deductibles; maintenance, repairs and replacements; refurbishing and repainting; cleaning, janitorial and other services; equipment, tools, materials and supplies; air conditioning, heating and elevator service; property management including management fees; security; employees and contractors; resurfacing and restriping of walks, drives and parking areas; signs, directories and markets; landscaping; and snow and rubbish removal. Operating Costs shall not include expenses for legal services, real estate brokerage and leasing commissions, Landlord's income taxes, income tax accounting, interest, depreciation, general corporate overhead, or capital improvements to the Building or Project except for capital improvements installed for the purpose of reducing or controlling expenses, or required by any governmental or other authority having or asserting jurisdiction over the Building or Project. If any expense, though paid in one year, relates to more than one calendar year, at option of Landlord, such expense may be proportionately allocated among such related calendar years. In the event that the Building is not fully leased during any calendar year, Landlord may make appropriate adjustments to the Operating Costs, using reasonable projections, to adjust such costs to an amount that would normally be expected to be incurred if the Building were 100% leased, and such adjusted cost shall be used for purposes of this paragraph 3.3. "Excess Operating Costs" shall mean any excess of (i) Landlord's Operating Costs for any calendar year over (ii) the Operating Cost Stop multiplied by Total Square Footage. b. Tenant shall pay, in equal monthly installments, Tenant's Pro Rata Share of any estimated Excess Operating Costs for each calendar year which falls (in whole or in part) during the Lease Term (prorated for any partial calendar year at the beginning or end of the Lease Term). Annually, or from time to time, based on actual and projected Operating Cost data, Landlord may adjust its estimate of Operating Costs upward or downward. Within 30 days after notice to Tenant of a revised estimate of Operating Costs, Tenant shall remit to Landlord a sum equal to any shortage of the amount which should have been paid to date for the then current calendar year based on the revised estimate, and all subsequent monthly estimated payments shall be based on the revised estimate. c. As soon as possible, after the first day of each year Landlord shall compute the actual Operating costs for the prior calendar year, and shall give notice thereof to Tenant. Within 30 days after receipt of such notice, Tenant shall pay any deficiency between estimated and actual in Tenant's Pro Rata Share of any Excess Operating costs for the prior calendar year (prorated for any partial calendar year at the beginning or end of the Lease Term). In the event of overpayment by Tenant, Landlord shall apply the excess to the next payment of Rent when due, until such excess if exhausted or until no further payments of Rent are due, in which case, Landlord shall pay to Tenant the balance of such excess within 30 days thereafter. Tenant or its representatives shall have the right, upon reasonable notice, to examine Landlord's books and records with respect to the Operating Costs at the management office during normal business hours at any time within 30 days following the delivery by Landlord to Tenant of the notice of actual Operating Costs. Tenant shall have an additional 10 days to file any written exception to any of the Operating costs. 3 8 3.4 TAXES: In addition to Base Rent and other sums to be paid by Tenant hereunder, Tenant shall reimburse Landlord, as additional Rent, on demand, any taxes payable by Landlord (a) upon, measured by or reasonably attributable to the cost or value of Tenant's equipment, fixtures and other personal property located in the Leased Premises or by the cost or value of any leasehold improvements made to the Leased Premises by Tenant or Landlord, regardless of whether title to such improvements are held by Tenant or Landlord; (b) upon or measured by the monthly rental payable hereunder, including, without limitation, any gross receipts tax or excise tax; (c) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Leased Premises or any portion thereof, (d) upon this Lease or any document to which Tenant is a party creating or transferring an interest or an estate in the Leased Premises. ARTICLE FOUR IMPROVEMENTS 4.1 CONSTRUCTION CONDITIONS: The improvements shall be constructed as described in the work letter attached hereto as SCHEDULE 6 (the "Improvements"). The expenses to be incurred as between Landlord and Tenant for construction of the Improvements are specified in SCHEDULE 6. If any act, omission or change requested or caused by Tenant increases the cost of work or materials or the time required for completion of construction, Tenant shall reimburse Landlord for such increase in cost at the time the increased cost is incurred and shall reimburse Landlord for any loss in Rent at the time the Rent would have become due. Landlord's approval of Tenant's plans for Improvements shall create no responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with laws, rules and regulations of governmental agencies or authorities. 4.2 COMMENCEMENT OF POSSESSION: If the Leased Premises are not substantially completed by the scheduled Lease Commencement Date then the Lease Commencement Date shall be extended to a date 5 days after Landlord shall notify Tenant that the Leased Premises are ready for occupancy. In such an event the Lease Expiration Date shall remain the same. If Landlord fails to cause the Leased Premises to be ready for occupancy at the time of the scheduled Lease Commencement Date, Landlord and Landlord's agents, officers, employees, or contractors shall not be liable for any damage, loss, liability or expense caused thereby, and this Lease shall not become void or voidable unless such failure continues for more than 120 days, in which case Tenant may terminate this Lease upon 20 days written notice to Landlord. Prior to occupying the Leased Premises, Tenant shall execute and deliver to Landlord a letter in the form attached as SCHEDULE 7, acknowledging the Lease Commencement Date and certifying that the improvements have been substantially completed and that Tenant has examined and accepted the Leased Premises. Tenant shall list any items that do not conform with Schedule 6. If Tenant fails to deliver such letter, Tenant shall conclusively be deemed to have made such acknowledgement and certification by occupying the Leased Premises. ARTICLE FIVE PROJECT SERVICES 5.1 PROJECT SERVICES: Landlord shall furnish: a. Utility Services: The utility services listed on SCHEDULE 3 ("Utility Services"). Should Tenant, in Landlord's reasonable judgment, use additional, unusual or excessive Utility Services, Landlord reserves the right to charge for such services as determined either by a separate submeter, installed at Tenant's expense, or by methods specified by an engineer selected by Landlord. b. Maintenance Services: Maintenance of all interior and exterior common areas of the Building areas including lighting, landscaping, cleaning, painting, maintenance and repair of the exterior of the Building and its structural portions and roof, including all of the services listed on SCHEDULE 4 ("Maintenance Services"). 4 9 c. Parking. Parking under the terms and conditions described in Schedule 5 ("Parking"). Utility Services, Maintenance Services and Parking described above shall be collectively referred to as "Project Services". The costs of Project Services shall be a part of Operating Costs. 5.2 INTERRUPTION OF SERVICES: Landlord does not warrant that any of the Project Services will be free from interruption. Any Project Service may be suspended by reason of accident or of necessary repairs, alterations or improvements, or by strikes or lockouts, or by reason of operation of law, or causes beyond the reasonable control of Landlord. Subject to possible rent abatement as may be provided pursuant to the conditions described in paragraph 8.1, any such interruption or discontinuance of such Project Services shall never be deemed a disturbance of Tenant's use and possession of the Leased Premises, or render Landlord liable to Tenant for damages by abatement of rent or otherwise, or relieve Tenant from performance of Tenant's obligations under this Lease; provided, that should such interruption or discontinuance of Project Services which materially impairs Tenant's ability to conduct its business continue for 4 consecutive business days, then beginning on the fifth business day, Landlord shall abate Base Rent and Tenant's Pro Rata Share of Excess Operating Costs, for that portion of the Leased Premises rendered untenantable, from the fifth business day after said interruption or discontinuance until the Project Services are restored. Landlord shall use its best efforts to cause the Project Services to be promptly restored. ARTICLE SIX TENANT'S COVENANTS 6.1 USE OF LEASED PREMISES: Tenant agrees to: a. Permitted Usage: Use the Leased Premises for the Permitted Purpose only and for no other purpose. b. Compliance with Laws: At Tenant's expense, comply with the provisions of all recorded covenants, conditions and restrictions and all building, zoning, fire and other governmental laws, ordinances, regulations or rules now in force or which may hereafter be in force relating to Tenant's use and occupancy of the Leased Premises, the Building, or the Project and all requirements of the carriers of insurance covering the Project. Tenant at its sole cost, shall be responsible for any changes required to the Leased Premises necessary to comply with such laws and regulations which may impose any duly upon Landlord or Tenant as a result of changes to the configuration of the Leased Premises made by Tenant. Landlord shall be responsible for making any other changes necessary to comply with any federal or local laws and regulations to the common areas of the Building or Project and to the Leased Premises; the cost of such changes made by Landlord shall be Operating Costs in accordance with Section 3.3 of the Lease. c. Nuisances or Waste: Not do or permit anything to be done in or about the Leased Premises, or bring or keep anything in the Leased Premises that may increase Landlord's fire and extended coverage insurance premium, damage the Building or the Project, constitute waste, constitute an immoral purpose, or be a nuisance, public or private, or menace or other disturbance to tenants of adjoining premises or anyone else. d. Hazardous Substances: (i) comply with all Environmental Laws; (ii) not cause or permit any Hazardous Materials to be treated, stored, disposed of, generated, or used in the Leased Premises or the Project, provided, however, that Tenant may store, use or dispose of products customarily found in offices and used in connection with the operation and maintenance of property if Tenant complies with all Environmental Laws and does not contaminate the Leased Premises, Project or environment; (iii) promptly after receipt, deliver to Landlord any communication concerning any past or present, actual or potential violation of Environmental Laws, or liability of either party for Environmental Damages. Environmental Laws mean all applicable present and future statutes, regulations, rules, ordinances, codes, permits or orders of all governmental agencies, departments, commissions, boards, bureaus, or instrumentalities of the United States, state and their political subdivisions and all applicable judicial, administrative and regulatory decrees and judgments relating to the protection of public health or safety or of the environment. Hazardous Materials include substances (i) which require remediation under any Environmental Laws; or (ii) which are or become defined as a "hazardous waste', "hazardous substance", pollutant or contaminant under any Environmental Laws; or (iii) which are toxic, explosive, corrosive, flammable, infectious, radioactive, 5 10 carcinogenic or mutagenic; or (iv) which contain petroleum hydrocarbons, polychlorinated biphenyls, asbestos, asbestos containing materials or urea formaldehyde. e. Alterations and Improvements: Make no alterations or improvements to the Leased Premises without the prior written approval of Landlord and Landlord's mortgagee, if any. Any such alterations or improvements by Tenant shall be done in a good and workmanlike manner, at Tenant's expense, by a licensed contractor approved by Landlord in conformity with plans and specifications approved by Landlord. If requested by Landlord, Tenant will post a bond or other security reasonably satisfactory to Landlord to protect Landlord against liens arising from work performed for Tenant. Landlord's approval of the plans and specifications for Tenant's alterations or improvements shall create no responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with all laws, rules and regulations of governmental agencies or authorities. f. Liens: Keep the Leased Premises, the Building and the Project free from liens arising out of any work performed, materials furnished or obligations incurred by or for Tenant. If, at any time, a lien or encumbrance is filed against the Leased Premises, the Building or the Project as a result of Tenant's work, materials or obligations, Tenant shall promptly discharge such lien or encumbrance. If such lien or encumbrance has not been removed within 30 days from the date it is filed, Tenant agrees to deposit with Landlord cash or a bond, which shall be in a form and be issued by a company acceptable to Landlord in its sole discretion, in an amount equal to 150% of the amount of the lien, to be held by Landlord as security for the lien being discharged. g. Rules and Regulations: Observe, perform and abide by all the rules and regulations promulgated by Landlord from time to time. SCHEDULE 2 sets forth Landlord's rules and regulations in effect on the date hereof. h. Signage: Obtain the prior approval of the Landlord before placing any sign or symbol in doors or windows or elsewhere in or about the Leased Premises, or upon any other part of the Building or Project including building directories. Any signs or symbols which have been placed without Landlord's approval may be removed by Landlord. Upon expiration or termination of this Lease, all signs installed by Tenant shall be removed and any damage resulting therefrom shall be promptly repaired, or such removal and repair may be done by Landlord and the cost charged to Tenant as Rent. Landlord, at Landlord's expense, shall supply Tenant with a building standard signage at suite entry and in lobby building directory. 6.2 INSURANCE; Tenant shall, at its own expense, procure and maintain during the Lease Term; (i) fire and extended casualty insurance covering Tenant's trade fixtures, merchandise and other personal property located in the Leased Premises, in an amount not less than 100% of their actual replacement cost, and (ii) worker's compensation insurance in at least the statutory amounts, and (iii) commercial general liability insurance with respect to the Leased Premises and Tenant's activities in the Leased Premises and in the Building and the Project, providing bodily injury and broad form property damage coverage with a maximum $5,000 deductible, or such other amount approved by Landlord in writing, and minimum coverage as follows: a. $1,000,000 with respect to bodily injury or death to any one person; b. $5,000,000 with respect to bodily injury or death arising out of any one occurrence; c. $1,000,000 with respect to property damage or other loss arising out of any one occurrence. Nothing in this paragraph 6.2 shall prevent Tenant from obtaining insurance of the kind and in the amounts provided for under this paragraph under a blanket insurance policy covering other properties as well as the Leased Premises, provided, however, that any such policy of blanket insurance (i) shall specify the amounts of the total insurance allocated to the Leased Premises, which amounts shall not be less than the amounts required by subparagraphs a. through c. above, and (ii) such amounts so specified shall be sufficient to prevent any one of the assureds from becoming a coinsurer within the terms of the applicable policy, and 6 11 (iii) shall, as to the Leased Premises, otherwise comply as to endorsements and coverage with the provisions of this paragraph. Tenant's insurance shall be with a company which has a rating equal to or greater than Best's Insurance Reports classification of A, Class X or its equivalent, as such classification is determined as of the Lease Commencement Date. Landlord and Landlord's mortgagee, if any, shall be named as "additional insureds' under Tenant's insurance, and such Tenant's insurance shall be primary and non-contributing with Landlord's insurance. Tenant's insurance policies shall contain endorsements requiring 30 days notice to Landlord and Landlord's mortgagee, if any, prior to any cancellation, lapse or nonrenewal or any reduction in amount of coverage. Tenant shall deliver to Landlord as a condition precedent to its taking occupancy of the Leased Premises certificates of insurance (with respect to the liability policy) and evidence of insurance (ACCORD Number 27) or equivalent (with respect to the property policy), or certified copies of either of the policies. 6.3 REPAIRS: Tenant, at its sole expense, agrees to maintain the interior of the Leased Premises in a neat, clean and sanitary condition. If Tenant fails to maintain or keep the Leased Premises in good repair and such failure continues for 5 days after written notice from Landlord or if such failure results in a nuisance or health or safety risk, Landlord amy perform any such required maintenance and repairs and the cost thereof shall be payable by Tenant as Rent within 10 days of receipt of an invoice from Landlord. Tenant shall also pay to Landlord the costs of any repair to the Building or Project necessitated by any act or neglect of Tenant. 6.4 ASSIGNMENT AND SUBLETTING: Tenant shall assign, mortgage, pledge, or encumber this Lease, or permit all or any part of the Leased Premises to be subleased without the prior written consent of Landlord and Landlord's mortgagee, if any, which consent shall not be unreasonably withheld or delayed. Any transfer of this Lease by merger, consolidation, reorganization or liquidation of Tenant, or by operation of law, or change in ownership of or power to vote the majority of the outstanding voting stock of a corporate Tenant, or by change in ownership of a controlling partnership interest in a partnership Tenant, shall constitute an assignment for the purposes of this paragraph. However, a public offering or debt restructuring which may result in a change of control but not a substantial diminution of the financial strength of Tenant, or an acquisition, consolidation or merger in which Tenant is the surviving entity shall not constitute an assignment requiring Landlord's consent, provided Landlord is notified within 20 days of such transaction and is given any financial information as may be reasonably required by Landlord. Notwithstanding the foregoing, Tenant shall have the right to assign or sublease part or all of the Leased Premises to any of its subsidiaries, affiliates or any parent liable on its obligations as set forth herein; (ii) any such assignee or sublessee shall assume and be bound by all covenants and obligations of Tenant herewith; (iii) the proposed assignee or sublessee or sublessee is, in Landlord's good faith judgment, compatible with other tenants in the Building and seeks to use the Leased Premises only for the Permitted Purpose and for a use that is not prohibited under the terms of a lease with another tenant in the Building; and (iv) such use would not result in a material change in the number of personnel working in, or members of the general public visiting, the Leased Premises. In addition to other reasonable bases, Tenant hereby agrees that Landlord shall be deemed to be reasonable in withholding its consent, if: (a) such proposed assignment or sublease is for less than the whole of the Leased Premises or is for a term less than the whole of the remaining Lease Term; or (b) such proposed assignment or sublease is to any party who is then a tenant of the Building or the Project if Landlord has comparable area; or (c) Tenant is in default under any of the terms, covenants, conditions, provisions and agreements of this Lease at the time of request for consent or on the effective date of such subletting or assignment; or (d) the proposed subtenant or assignee is, in Landlord's good faith judgment, incompatible with other tenants in the Building, or seeks to use any portion of the Leased Premises for a use not consistent with other uses in the Building, or is financially incapable of assuming the obligations of this Lease; (e) the proposed assignee of sublessee or its business is subject to compliance with additional requirements of the law (including related regulation) commonly known as the "Americans with Disabilities Act" beyond those requirements which are applicable to the Tenant, unless the proposed assignee or sublessee shall: (i) first consent thereto, and (ii) comply with all Landlord's conditions for or contained in such consent, including without limitation, requirements for security to assure the lien-free completion of such improvements. Tenant shall submit to Landlord the name of a proposed assignee or subtenant, the terms of the proposed 7 12 assignment or subletting, the nature of the proposed subtenant's business and such information as to the assignee's or subtenant's financial responsibility and general reputation as Landlord may reasonably require. No subletting or assignment, even with the consent of Landlord, shall relieve Tenant of its primary obligation to pay the Rent and to perform all of the other obligations to be performed by Tenant hereunder. The acceptance of Rent by Landlord from any other person or entity shall not be deemed to be waived by Landlord of any provision of this Lease or to be a consent to any assignment, subletting or other transfer. Consent to one assignment, subletting or other transfer shall not be deemed to constitute consent to any subsequent assignment, subletting or transfer. In lieu of giving any consent to a sublet or an assignment of all the Leased Premises, Landlord may within 10 days after notification by Tenant, at Landlord's option, elect to terminate this Lease. In the case of a proposed subletting of a portion of the Leased Premises, Landlord may, at Landlord's option, elect to terminate the Lease with respect to that portion of the Leased Premises being proposed for subletting. The effective date of any such termination shall be 30 days after the proposed effective date of any proposed assignment or subletting. However, if Landlord elects to terminate this lease or a portion of the Leased Premises, Tenant shall have the option to withdraw its request for consent within 10 days after Tenant's notification by Landlord of its election to terminate. Seventy Five Percent (75%) of any proceeds in excess of Base Rent and Tenant's Pro Rata Share of Excess Operating Costs which is received by Tenant pursuant to an assignment or subletting consented to by Landlord, less reasonable brokerage commissions actually paid by Tenant, and less other costs incurred by Tenant in connection with making the space available for lease, shall be remitted to Landlord as extra Rent within 10 days of receipt by Tenant. For purposes of this paragraph, all money or value in whatever form received by Tenant from or on account of any party as consideration for an assignment or subletting shall be deemed to be proceeds received by Tenant pursuant to an assignment or subletting. 6.5 ESTOPPEL CERTIFICATE: From time to time and within 10 days after request by Landlord or Tenant, the other party Tenant shall execute and deliver a certificate to any proposed lender or purchaser, or to the requesting party, together with a true and correct copy of this Lease, certifying with any appropriate exceptions, (i) that this Lease is in full force and effect without modification or amendment, (ii) the amount of Rent payable by Tenant and the amount, if any, of Prepaid Rent and Deposit paid by Tenant to Landlord, (iii) the nature and kind of concessions, rental or otherwise, if any, which Tenant has received or is entitled to receive, (iv) that Tenant has not assigned its rights under this Lease or sublet any portion of the Leased Premises, (v) that Landlord or Tenant has performed all of its obligations due to be performed under this Lease and that there are no defenses, counterclaims, deductions or offsets outstanding or other excuses for Tenant's or Landlord's performance under this Lease, (vi) that such proposed lender or purchaser may rely on the information contained in the certificate, and (vii) any other fact reasonably requested by the requesting party or such proposed lender or purchaser. ARTICLE SEVEN LANDLORD'S RESERVED RIGHTS 7.1 SUBSTITUTE PREMISES: Landlord shall have the right at any time, upon giving Tenant 60 days written notice, to relocate at Landlord's expense the Leased Premises on any floor of the Building or elsewhere in the Project, provided that Tenant's Square Footage shall be approximately the same. Should Landlord give Tenant written notice of the relocation of the Leased Premises after Tenant has commenced or completed the approved installation of partitions or other improvements, Landlord shall furnish Tenant with similar partitions or other improvements of equal quality. Landlord hereby agrees to pay expenses resulting from relocating the Tenant to a space with communication, electronic and air-conditioning infrastructure at least equal to that which existed in the original Leased Premises ????????????????????????? will be substantially completed before Tenant is required to vacate the original Leased Premises) including moving expenses, telephone installation, computer wires, wiring and installation, and the cost of stationery to replace that made obsolete as a result of the move. The relocation of the Leased Premises shall not affect any of the clauses or conditions of this Lease, including the Rent. 7.2 ADDITIONAL RIGHTS RESERVED TO LANDLORD: Without notice and without liability to Tenant or without effecting an eviction or disturbance of Tenant's use or possession, Landlord shall have the right to (i) grant utility easements or other easements in, or replat, subdivide or make other changes in the legal status of the land underlying the Building or the Project as Landlord shall deem appropriate in its sole discretion, provided such changes do not substantially interfere with Tenant's use of the Leased Premises 8 13 for the Permitted Purpose; (ii) enter the Leased Premises at reasonable times and at any time in the event of an emergency to inspect, alter or repair the Leased Premises or the Building and to perform any acts related to the safety, protection, reletting, sale or improvement of the Leased Premises or the Building; (iii) change the name or street address of the Building or the Project; (iv) install and maintain signs on and in the Building and the Project; and (v) make such rules and regulations as, in the sole judgment of Landlord, may be needed from time to time for the safety of the tenants, the care and cleanliness of the Leased Premises, the Building and the Project and the preservation of good order therein. ARTICLE EIGHT CASUALTY AND UNTENANTABILITY 8.1 CASUALTY AND UNTENANTABILITY: If the Building is made substantially untenantable or if Tenant's use and occupancy of the Leased Premises are substantially interfered with due to damage to the common areas of the Building or if the Leased Premises are made wholly or partially untenantable by fire or other casualty, Landlord may, by notice to Tenant within 45 days after the damage, terminate this Lease or if the Leased Premises or Building are damaged so that they cannot reasonably be restored within 120 days after the damage, Tenant may, by notice to Landlord within 45 days after the damage, terminate this Lease. In either case, termination shall effective as of the date of the casualty. If the Leased Premises are made partially or wholly untenantable by fire or other casualty and this Lease is not terminated as provided above, Landlord shall restore the Leased Premises to the condition they were in on the Lease Commencement Date, not including any personal property of Tenant or alterations performed by Tenant. If the Landlord does not terminate this Lease as provided above, and Landlord fails within 120 days from the date of such casualty to restore the damaged common areas thereby eliminating substantial interference with Tenant's use and occupancy of the Leased Premises, or fails to restore the Leased Premises to the condition they were in on the Lease Commencement Date, not including any personal property or alterations performed by Tenant, Tenant may terminate this Lease as of the end of such 120 day period. In the event of termination of this Lease pursuant to this Article Eight, Rent shall be prorated on a per diem basis and paid to the date of the casualty, unless the Leased Premises shall be tenantable, in which case Rent shall be payable to the date of the lease termination. If the Leased Premises are untenantable and this Lease is not terminated, Rent shall abate on a per diem basis from the date of the casualty until the Leased Premises are ready for occupancy by Tenant. If part of the Leased Premises are untenantable, Rent shall be prorated on a per diem basis and apportioned in accordance with the part of the Leased Premises which is usable by Tenant until the damaged part is ready for Tenant's occupancy. Notwithstanding the foregoing, if any damage was proximately caused by an act or omission of Tenant, its employees, agents, contractors, licensees or invitees, then, in such event, Tenant agrees that Rent shall not abate or be diminished during the term of this Lease. ARTICLE NINE CONDEMNATION 9.1 CONDEMNATION: If all or any part of the Leased Premises shall be taken under power of eminent domain or sold under imminent threat to any public authority or private entity having such power, this Lease shall terminate as to the part of the Leased Premises so taken or sold, effective as of the date possession is required to be delivered to such authority. In such event, Base Rent shall abate in the ratio that the portion of Tenant's Square Footage taken or sold bears to Tenant's Square Footage. If a partial taking or sale of the Leased Premises, the Building or the Project (i) reduces Tenant's Square Footage resulting in a inability of Tenant to use the Leased Premises for the Permitted Purpose, or (ii) renders the Building or the Project not commercially viable to Landlord in Landlord's sole opinion, either Tenant in the case of (i), or Landlord in the case of (ii), may terminate this Lease by notice to the other party within 30 days after the terminating party receives written notice of the portion to be taken or sold. Such 9 14 termination shall be effective 180 days after notice thereof, or when the portion is taken or sold, whichever is sooner. All condemnation awards and similar payments shall be paid and belong to Landlord, except any amounts awarded or paid specifically to Tenant for removal and reinstallation of Tenant's trade fixtures, personal property or Tenant's moving costs. ARTICLE TEN WAIVER AND INDEMNITY 10.1 WAIVER AND INDEMNITY: Except for those claims arising from Landlord's breach of this Lease, negligence or willful misconduct, Tenant, to the extent permitted by law, waives all claims it may have against Landlord, and against Landlord's agents and employees for any damages sustained by Tenant or by any occupant of the Leased Premises, or by any other person, resulting from any cause arising at any time. Tenant agrees to hold Landlord harmless and indemnified against claims and liability for injuries to all persons and for damage to or loss of property occurring in or about the Leased Premises or the Building, due to Tenant's breach of this Lease or any act of negligence or willful misconduct or default under this Lease by Tenant, its contractors, agents, employees, licensees and invitees. Landlord agrees to hold Tenant harmless and indemnified against claims and liability for injuries to all persons and for damage to or loss of property occurring in or about the Building to the extent due to Landlord's breach of this Lease or any act of negligence or willful misconduct or default under this Lease by Landlord, its contractors, agents, employees, and licensees. Tenant agrees to indemnify, defend, reimburse and hold Landlord harmless against any Environmental Damages incurred by Landlord arising from Tenant's breach of paragraph 6.1(d) of this Lease. Environmental Damages means all claims, judgments, losses, penalties, fines, liabilities, encumbrances, liens, costs and reasonable expenses of investigation, defense or good faith settlement resulting from violations of Environmental Laws, and including, without limitation: (i) damages for personal injury and injury to property or natural resources; (ii) reasonable fees and disbursement of attorneys, consultants, contractors, experts and laboratories; and (iii) costs of any cleanup, remediation, removal, response, abatement, containment, closure, restoration or monitoring work required by any Environmental Law and other costs reasonably necessary to restore full economic use of the Leased Premises or Project. 10.2 WAIVER OF SUBROGATION: Tenant and Landlord release each other and waive any right of recovery against each other for loss or damage to the waiving party or its respective property, which occurs in or about the Leased Premises or Building, whether due to the negligence of either party, their agents, employees, officers, contractors, licensees, invitees or otherwise, to the extent that such loss or damage is insurable against under the terms of standard fire and extended coverage insurance policies. Tenant and Landlord agree that all policies of insurance obtained by either of them in connection with the Leased Premises shall contain appropriate waiver of subrogation clauses. 10.3 LIMITATION OF LANDLORD'S LIABILITY: The obligations of Landlord under this Lease do not constitute personal obligations of the individual partners, shareholders, directors, officers, employees or agents of Landlord, and Tenant shall look solely to Landlord's interest in the Building and land and to no other assets of Landlord for satisfaction of any liability in respect of this Lease. Tenant will not seek recourse against the individual partners, shareholders, directors, officers, employees or agents of Landlord or any of their personal assets for such satisfaction. Notwithstanding any other provisions contained herein, Landlord shall not be liable to Tenant, its contractors, agents or employees for any consequential damages or damages for loss of profits. ARTICLE ELEVEN TENANT'S DEFAULT AND LANDLORD'S REMEDIES 11.1 TENANT'S DEFAULT: It shall be an "Event of Default" if Tenant shall (i) fail to pay any monthly installment of Base Rent or Tenant's Pro Rate Share of Excess Operating Costs, or any other sum payable hereunder within 10 days after such payment is due and payable; Landlord agrees to provide written notice once in a 12 month period during the lease term. (ii) violate or fail to perform any conditions, covenants, or agreements herein made by Tenant respecting Tenant's insurance requirements as specified in paragraph 6.2, and such violation or failure shall continue for 5 business days after written notice thereof to Tenant by Landlord; (iii) violate or fail to perform any of the other conditions, covenants or agreements herein made by Tenant, and such violation or failure shall continue for 15 days after written notice thereof to Tenant by Landlord; provided, however, if such default is of a nature that it cannot reasonably be 10 15 cured within 15 days, it shall not be an Event of Default if Tenant commences to cure within such 15 day period and diligently prosecutes such cure to completion within the time reasonably required for such cure, not to exceed 60 days; (iv) make a general assignment for the benefit of its creditors or file a petition for bankruptcy or other reorganization, liquidation, dissolution or similar relief; (v) have a proceeding filed against Tenant seeking any relief mentioned in (iv) above; (vi) have a trustee, receiver or liquidator appointed for Tenant or a substantial part of its property; (vii) abandon or vacate the Leased Premises and any portion of Rent is delinquent; (viii) default under any other lease, if any, within the Building or the Project; or (ix) if Tenant is a partnership, if any partner of the partnership is involved in any of the acts or events described in subparagraphs (i) through (viii) above. 11.2 REMEDIES OF LANDLORD: If an Event of Default occurs, Landlord, may, at it option, within 5 days after written notice to Tenant, reenter the Leased Premises, remove all persons therefrom, take possession of the Leased Premises, and remove all of Tenant's personal property at Tenant's risk and expense and, either (i) terminate this Lease and Tenant's right of possession of the Leased Premises or (ii) maintain this Lease in full force and effect and endeavor to relet all or part of the Leased Premises for such rent and upon such terms as Landlord deems reasonable and necessary, and Tenant shall be liable for all damages sustained by Landlord, including but not limited to, any deficiency in Rent for the period of time which would have remained in the Lease Term in the absence of any termination, leasing fees, attorneys' fees, other marketing and collection costs, the cash value of any concessions granted to Tenant and all expenses of placing the Leased Premises in first class rentable condition. Landlord retains the right to terminate this Lease, at any time, notwithstanding that Landlord fails to terminate this Lease initially. If Landlord is unable after diligent efforts to relet the Leased Premises within 60 days after termination of this Lease, Landlord may elect at any time thereafter to have Tenant immediately pay, as liquidated damages and not as a penalty, all Rent then due and the present value (discounted at 10%) of all Rent which would have become due (based on Base Rent and Tenant's Pro Rata Share of Excess Operating Costs payable at the time of such election and the cash value of any concessions granted to Tenant) for the period of time which would have remained in the Lease Term in the absence of any termination. The remedies granted to Landlord herein shall be cumulative and shall not exclude any other remedy allowed by law, and shall not prevent the enforcement of any claim Landlord may have against Tenant for anticipatory breach of the unexpired term of this Lease, including without limitation, a claim for attorney's fees incurred by Landlord. ARTICLE TWELVE TERMINATION 12.1 SURRENDER OF LEASED PREMISES: On expiration of this Lease, if no Event of Default exists, Tenant shall surrender the Leased Premises in the same condition as when the Lease Term commenced, ordinary wear and tear or damage from casualty excepted. Except for furnishings, trade fixtures and other personal property installed at Tenant's expense, all alterations, additions or improvements, whether temporary or permanent in character, made in or earlier termination of the Lease Term shall remain on the Leased Premises without compensation to Tenant, except if requested by Landlord, Tenant, at its expense and without delay, shall remove any alterations, additions or improvements made to the Leased Premises by Tenant and designated by Landlord to be removed, at the time Landlord consented to the installation and repair any damage to the Leased Premises or the Building caused by such removal. Tenant shall have no obligation to remove or restore any alterations made as part of the initial Tenant build-out. If Tenant fails to repair the Leased Premises, Landlord may complete such repairs and Tenant shall reimburse Landlord for such repair and restoration. Landlord shall have the option to require Tenant to remove all its property. If Tenant fails to remove such property as required under this Lease, Landlord may dispose of such property in its sole discretion without any liability to Tenant, and further may charge the cost of any such disposition to Tenant. 12.2 HOLD OVER TENANCY: If Tenant shall hold over after the Lease Expiration Date, Tenant may be deemed, at Landlord's option, to occupy the Leased Premises as a tenant from month to month, which 11 16 tenancy may be terminated by one month's written notice. During such tenancy, Tenant agrees to pay to Landlord, monthly in advance, an amount equal to double of all Rent which would become due (based on Base Rent and Tenant's pro Rata Share of Excess Operating Costs payable for the last month of the Lease Term, together with all other amounts payable by Tenant to Landlord under this Lease), and to be bound by all of the terms, covenants and conditions herein specified. If Landlord relets the Leased Premises or any portion thereof to a new tenant and the term of such new lease commences during the period for which Tenant holds over, Landlord shall also be entitled to recover from Tenant all costs and expenses, attorneys fees, damages or loss of profits incurred by Landlord as a result of Tenant's failure to deliver possession of the Leased Premises to Landlord when required under this Lease. ARTICLE THIRTEEN MISCELLANEOUS 13.1 QUIET ENJOYMENT: If and so long as Tenant pays all Rent and keeps and performs each and every term, covenant and condition herein contained on the part of Tenant to be kept and performed, Tenant shall quietly enjoy the Leased Premises without hindrance by Landlord. 13.2 ACCORD AND SATISFACTION: No receipt and retention by Landlord of any payment tendered by Tenant in connection with this Lease shall constitute an accord and satisfaction, or a compromise or other settlement, notwithstanding any accompanying statement, instruction or other assertion to the contrary unless Landlord expressly agrees to an accord and satisfaction, or a compromise or other settlement, in a separate writing duly executed by Landlord. Landlord will be entitled to treat any such payments as being received on account of any item or times of Rent, interest, expense or damage due in connection herewith, in such amounts and in such order as Landlord may determine at its sole option. 13.3 SEVERABILITY: The parties intend this Lease to be legally valid and enforceable in accordance with all of its terms to the fullest extent permitted by law. If any term hereof shall be invalid or unenforceable, the parties agree that such term shall be stricken from this Lease to the extent unenforceable, the same as if it never had been contained herein. Such invalidity or unenforceability shall not extent to any other term of this Lease, and the remaining terms hereof shall continue in effect to the fullest extent permitted by law, the same as if such stricken term never had been contained herein. 13.4 SUBORDINATION AND ATTORNMENT: Tenant acknowledges that this Lease is subordinate to all leases in which Landlord currently is lessee and to any mortgage or deed of trust now in force against the Building and to all advances made or hereafter to be made thereunder and, provided the holder thereof agrees in writing for Tenant's benefit not to disturb Tenant's rights under this Lease so long as there is no Event of Default under this Lease, Tenant agrees that this Lease shall be subordinate to any future leases in which Landlord is lessee and to any future first mortgage or deed of trust hereafter in force against the Building and to all advances made or hereafter to be made thereunder (all such existing and future leases, mortgages and deeds of trust referred to collectively as "Superior Instruments"). Tenant also agrees that if the holder of any Superior Instrument elects to have this Lease superior to its Superior Instrument and gives notice of its election to Tenant, then this Lease shall be superior to the lien of any such lease, mortgage or deed of trust and all renewals, replacements and extensions thereof, whether this Lease is dated before or after such lease, mortgage or deed of trust. If requested in writing by Landlord or any first mortgagee or ground lessor of Landlord, Tenant agrees to execute a subordination agreement required to further effect the provisions of this paragraph. In the event of any transfer in lieu of foreclosure or termination of a lease in which Landlord is lessee or the foreclosure of any Superior Instrument, or sale of the Property pursuant to any Superior Instrument, Tenant shall attorn to such purchaser, transferee or lessor and recognize such party as landlord under this Lease, provided such party acquires and accepts the Leased Premises subject to this Lease. The agreement of Tenant to attorn contained in the immediately preceding sentence shall survive any such foreclosure sale or transfer. 12 17 13.5 ATTORNEY'S FEES: If the services of an attorney are required by any party to secure the performance under this Lease or otherwise upon the breach or default of the other party to the Lease, or if any judicial remedy is necessary to enforce or interpret any provision of the Lease, the prevailing party shall be entitled to reasonable attorney's fees, costs and other expenses, in addition to any other relief to which such prevailing party may be entitled. 13.6 APPLICABLE LAW: This Lease shall be construed according to the laws of the state in which the Leased Premises are located. 13.7 BINDING EFFECT; GENDER: This Lease shall be binding upon and inure to the benefit of the parties and their successors and assigns. It is understood and agreed that the terms "Landlord" and "Tenant" and verbs and pronouns in the singular number are uniformly used throughout this Lease regardless of gender, number or fact of incorporation of the parties hereto. 13.8 TIME: Time is of the essence of this Lease. 13.9 ENTIRE AGREEMENT: This Lease and the schedules and addenda attached set forth all the covenants, promises, agreements, representations, conditions, statements and understandings between Landlord and Tenant concerning the Leased Premises and the Building and the Project, and there are no representations, either oral or written between them other than those in this Lease. This Lease shall not be amended or modified except in writing signed by both parties. Failure to exercise any right in one or more instances shall not be construed as a waiver of the right to strict performance or as an amendment to this Lease. 13.10 NOTICES: Any notice or demand provided for or given pursuant to this Lease shall be in writing and served on the parties at the addresses listed in paragraph 1.1(m) and paragraph 1.1(n). Any notice shall be either (i) personally delivered to the addressee set forth above, in which case it shall be deemed delivered on the date of delivery to said addressee; or (ii) sent by registered or certified mail/return receipt requested, in which case it shall be deemed delivered 3 business days after being deposited in the U.S. Mail; (iii) sent by a nationally recognized overnight courier, in which case it shall be deemed delivered 1 business day after deposit with such courier; or (iv) sent by telecommunication ("Fax") during normal business hours in which case it shall be deemed delivered on the day sent, provided an original is received by the addressee after being sent by a nationally recognized overnight courier within 1 business day of the Fax. The addresses and Fax numbers listed in paragraphs 1.1(m) and 1.1(n) may be changed by written notice to the other parties, provided, however, that no notice of a change of address or Fax number shall be effective until the date of delivery of such notice. Copies of notices are for informational purposes only and a failure to give or receive copies of any notice shall be deemed a failure to give notice. 13.11 HEADINGS: The headings on this Lease are included for convenience only and shall not be taken into consideration in any construction or interpretation of this Lease or any of its provisions. 13.12 BROKERAGE COMMISSIONS: Tenant and Landlord each represents to the other that no broker or agent was instrumental in procuring or negotiating or consummating this Lease other than Broker of Record whose compensation shall be paid by Landlord, and Cooperating Broker, if any, whose compensation shall be paid by Broker of Record, and Tenant and Landlord each agree to defend, indemnify and hold harmless the other party against any loss, cost, expense or liability for any compensation, commission, fee or charge, including reasonable attorney's fees, resulting from any claim of any other broker, agent or finder claiming under or through the indemnifying party in connection with this Lease or its negotiation. 13 18 SUBMISSION OF THIS INSTRUMENT FOR EXAMINATION OR SIGNATURE BY TENANT DOES NOT CONSTITUTE A RESERVATION OF OR OPTION FOR LEASE, AND IT IS NOT EFFECTIVE AS A LEASE OR OTHERWISE UNTIL EXECUTION AND DELIVERY BY BOTH LANDLORD AND TENANT. This Lease is executed as of the date first written above. TENANT: LANDLORD: The Management Network Group, Inc. LIGHTON PLAZA, L.L.C. - ----------------------------------- a Kansas limited liability company a Kansas corporation By: /s/ RICHARD P. NESPOLA By: Allstate Insurance Company ------------------------------- a member Its President & CEO --------------------------- By: By: /s/ [Signature Illegible] ------------------------------- ------------------------------ Its Authorized Signatory Its --------------------------- Where Tenant is a corporation, this Lease shall be signed by a President or Vice President and Secretary or Assistant Secretary of Tenant. Any other signatories shall require a certified corporate resolution. 14 19 SCHEDULE 1 DESCRIPTION OF THE PREMISES AND FLOOR PLAN The Network Management Group Inc. Lighton Plaza I 7300 College Boulevard Suite 302 Overland Park, Kansas 2,351 rentable square feet 20 SCHEDULE 2 RULES AND REGULATIONS 1. The sidewalks, entrances, halls, corridors, elevators and stairways of the Building and Project shall not be obstructed or used as a waiting or lounging place by tenants, and their agents, servants, employees, invitees, licensees and visitors. All entrance doors leading from any Leased Premises to the hallways are to be kept closed at all times. 2. Landlord reserves the right to refuse admittance to the Building after reasonable business hours, as established from time to time, to any person not producing both a key to the Leased Premises and/or a pass issued by Landlord. In case of invasion, riot, public excitement or other commotion, Landlord also reserves the right to prevent access to the Building during the continuance of same. Landlord shall in no case be liable for damages for the admission or exclusion of any person to or from the Building. 3. Landlord will furnish each tenant with two keys to each door lock on the Leased Premises, and Landlord may make a reasonable charge for any additional keys and access cards requested by any tenant. No tenant shall have any keys made for the Leased Premises; nor shall any tenant alter any lock, or install new or additional locks or bolts, on any door without the prior written approval of Landlord. If Landlord approves any lock alteration or addition, the tenant making such alteration shall supply Landlord with a key for any such lock or bolt. Each tenant, upon the expiration or termination of its tenancy, shall deliver to Landlord all keys and access cards in any such tenant's possession for all locks and bolts in the Building. 4. No tenant shall cause any unnecessary labor by reason of such tenant's carelessness or indifference in the preservation of good order and cleanliness of the Leased Premises. Tenants will see that (i) the windows are closed, (ii) the doors securely locked, and (iii) all water faucets and other utilities are shut off (so as to prevent waste or damage) each day before leaving the Leased Premises. In the event tenant must dispose of crates, boxes, etc. which will not fit into office waste paper baskets, it will be the responsibility of tenant to dispose of same. In no event shall tenant set such items in the public hallways or other areas of the Building or garage facility, excepting tenant's owned Leased Premises, for disposal. 5. Landlord reserves the right to prescribe the date, time, method and conditions that any personal property, equipment, trade fixtures, merchandise and other similar items shall be delivered to or removed from the Building. No iron safe or other heavy or bulky objects shall be delivered to or removed from the Building, except by experienced safe men, movers or riggers approved in writing by Landlord. All damage done to the Building by the delivery or removal of such items, or by reason of their presence in the Building, shall be paid to Landlord, immediately upon demand, by the tenant by, through, or under whom such damage was done. There shall not be used in any space, or in the public halls of the Building, either by tenant or by jobbers or others, in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires. 6. Tenant shall not cover or obstruct any skylights, windows, doors and transoms that reflect or admit light into passageways or into any other part of the Building. 7. The toilet rooms, toilets, urinals, wash bowls and water apparatus shall not be used for any purpose other than those for which they were constructed or installed, and no sweepings, rubbish, chemicals, or other unsuitable substances shall be thrown or placed therein. The expense of any breakage, stoppage or damage resulting from violation(s) of this rule shall be borne by the tenant by whom, or by whose agents, employees, invitees, licensees or visitors, such breakage, stoppage or damage shall have been caused. 8. No sign, name, placard, advertisement or notice visible from the exterior of any Leased Premises, shall be inscribed, painted or affixed by any tenant on any part of the Building or Project without the prior written approval of Landlord. All signs or letterings on doors, or otherwise, approved by Landlord shall be inscribed, 21 painted or affixed at the sole cost and expense of the tenant, by a person approved by Landlord. A directory containing the names of all tenants in the Building shall be provided by Landlord at an appropriate place on the first floor of the Building. 9. No signalling, telegraphic or telephonic instruments or devices, or other wires, instruments or devices, shall be installed by Tenant in connection with any Leased Premises without the prior written approval of Landlord or specifically identified and located on Construction Documents as defined in Schedule 6. Such installations, and the boring or cutting for wires, shall be made at the sole cost and expense of the tenant and under control and direction of Landlord. Landlord retains, in all cases, the right to require (i) the installation and use of such electrical protecting devices that prevent the transmission of excessive currents of electricity into or through the Building, (ii) the changing of wires and of their installation and arrangement underground or otherwise as Landlord may direct, and (iii) compliance on the part of all using or seeking access to such wires with such rules as Landlord may establish relating thereto. All such wires used by tenants must be clearly tagged at the distribution boards and junction boxes and elsewhere in the Building, with (i) the number of the Leased Premises to which said wires lead, (ii) the purpose for which said wires are used, and (iii) the name of the company operating same. 10. Tenant, their agents, servants or employees, shall not (a) go on the roof of the Building, (b) use any additional method of heating or air conditioning the Leased Premises, (c) sweep or throw any dirt or other substance from the Leased Premises into any of the halls, corridors, elevators, or stairways of the Building, (d) bring in or keep in or about the Leased Premises any vehicles or animals of any kind, (e) install any radio or television antennae or any other device or item on the roof, exterior walls, windows or windowsills of the Building, (f) place objects against glass partitions, doors or windows which would be unsightly from the interior or exterior of the Building, (g) use any Leased Premises (i) for lodging or sleeping, (ii) for cooking (except that the use by any tenant of Underwriter's Laboratory-approved equipment for microwaving, brewing coffee, tea and similar beverages shall be permitted, provided that such use is in compliance with law), (iii) for any manufacturing, storage or sale of merchandise or property of any kind, (h) cause or permit unusual or objectionable odor to be produced or permeate from the Leased Premises, including, without limitation, duplicating or printing equipment fumes, and (i) install or operate any vending machines in the Leased Premises unless specifically identified and located on Construction Documents as defined in Schedule 6. Tenant, its agents, servants and employees, invitees, licensees, or visitors shall not permit the operation of any musical or sound producing instruments or device which may be heard outside Leased Premises, Building or garage facility, or which may emit electrical waves which will impair radio or television broadcast or reception from or into the Building. 11. No canvassing, soliciting, distribution of hand bills or other written material, or peddling by Tenant shall be permitted in the Building or the Project, and tenants shall cooperate with Landlord in prevention and elimination of same. 12. Tenant shall give Landlord prompt notice of all accidents to or defects in air conditioning equipment, plumbing, electrical facilities or any part or appurtenances of Leased Premises. 13. If any Leased Premises becomes infested with vermin by acts of Tenant, the Tenant, at its sole cost and expense, shall cause its premises to be exterminated from time to time to the satisfaction of the Landlord and shall employ such exterminators as shall be approved by Landlord. 14. No curtains, blinds, shades, screens, awnings or other coverings or projections of any nature shall be attached to or hung in, or used in connection with any door, window or wall of the premises of the Building by Tenant without the prior written consent of Landlord. 15. Landlord shall have the right to prohibit any advertising by tenant which, in Landlord's opinion, tends to impair the reputation of Landlord or of the Building, or its desirability as an office building for existing or 22 prospective tenants who require the highest standards of integrity and respectability, and upon written notice from Landlord, tenant shall refrain from or discontinue such advertising. 16. Wherever the word "tenant" occurs, it is understood and agreed that it shall also mean tenant's associates, employees, agents and any other person entering the Building or the Leased Premises under the express or implied invitation of tenant. Tenant shall cooperate with Landlord to assure compliance by all such parties with rules and regulations. 17. Landlord will not be responsible for lost or stolen personal property, equipment, money or any article taken from Leased Premises, Building or garage facilities regardless of how or when loss occurs. 18. All contractors and or technicians performing work for Tenant within the Leased Premises, Building or garage facilities shall be referred to Landlord for approval before performing such work. This shall apply to all work including, but not limited to, installation of telephones, electrical devises and attachments, and all installations affecting floors, walls, windows, doors, ceilings, equipment of any other physical feature of the Building, Leased Premises or garage facilities. 19. Showcases and any other articles shall not be placed in front of or affixed to any part of the exterior of the Building, nor placed in the halls, corridors or vestibules by Tenant without the prior written consent of Landlord. 20. The Tenant shall not do anything in the Leased Premises, or bring or keep anything herein, which will in any way increase or tend to increase the risk of fire or rate of insurance, or which shall conflict with the Regulations of the Fire Department, any fire laws, with any insurance policy on the Building or any part thereof, or with any rules or ordinances established by any governmental authority. 21. The requirements of Tenant will be attended to only upon application to the Managing Agent, Employees of Landlord shall not perform any work or do anything outside of their regular dates unless under special instructions from Landlord, and no employee will admit any person (Tenant or otherwise) to any office without specific instructions from Landlord. 22. No Tenant shall obtain for use upon the Leased Premises ice, drinking water, towel or other similar service or accept barbering or other personal services on the Leased Premises, except for persons authorized by Landlord and at the hours and under regulations fixed by Landlord. 23. Landlord reserves the right to make reasonable amendments, modifications and additions to the rules and regulations heretofore set forth, and to make additional reasonable rules and regulations, as in Landlord's sole judgment may from time to time be needed for the safety, care, cleanliness and preservation of good order of the Building. 23 SCHEDULE 3 UTILITY SERVICES The Landlord shall provide, as part of Operating Costs, except as otherwise provided, the following services: (1) Air Conditioning and heat for normal purposes only, to provide in Landlord's judgment, comfortable occupancy Monday through Friday from 7:00 a.m. to 6:00 p.m., and Saturday from 9:00 a.m. to 12:00 noon, Sundays and holidays excepted. Tenant agrees not to use any apparatus or device, in or upon or about the Leased Premises, and Tenant further agrees not to connect any apparatus or device with the conduits or pipes, or other means by which such services are supplied, for the purpose of using additional or unusual amounts of such services, without written consent of Landlord. (2) Electric power for lighting and operating of office machines shall be available 24 hours a day, seven days a week. Electric power furnished by Landlord is intended to be that consumed in normal office use for lighting and small office machines including desktop computers, copiers and fax machines. (3) Water for drinking, lavatory and toilet purposes from the regular Building supply (at the prevailing temperature) through fixtures installed by Landlord, (or by Tenant with Landlord's written consent). 24 SCHEDULE 4 MAINTENANCE SERVICES (1) In order that the Building may be kept in a state of cleanliness, each tenant shall during the term of each respective lease, permit Landlord's employees (or Landlord's agent's employees) to take care of and clean the Leased Premises and tenants shall not employ any person(s) other than Landlord's employees (or Landlord's agent's employees) for such purpose. (2) Landlord shall supply public restroom supplies, public area lamp replacement, window washing with reasonable frequency, and janitorial services to the common areas of the Building and Leased Premises during the time and in the manner that such janitorial services are customarily furnished in general office buildings in the area. (3) Landlord agrees to maintain the exterior and common areas of Building to include maintenance of the structure, roof, mechanical, electrical and HVAC equipment, architectural finish, lawn and shrub care, snow removal and so on, excluding only those items specifically excepted elsewhere in this Lease. 25 SCHEDULE 5 PARKING Landlord hereby grants to Tenant a license to the use during the term of this Lease the spaces described in Article 1.1j. Said parking spaces shall be made available to Tenant on an allocated basis and Tenant agrees to comply with such reasonable rules and regulations as may be made by Landlord from time to time in order to insure the proper operation of the parking facilities. In consideration of the right to use said parking spaces, Tenant shall pay to Landlord on the first day of each calendar month, the amount specified in Article 1.1j, in addition to the Rent and other charges payable by Tenant under this Lease. Tenant agrees not to overburden the parking facilities and agrees to cooperate with Landlord and other tenants in the use of parking facilities. Landlord reserves the right in its sole discretion to determine whether parking facilities are becoming crowded, and in such event, to allocate specific parking spaces among Tenant and other tenants or to take such other steps necessary to correct such condition, including but not limited to policing and towing, and if Tenant, its agents, officers, employees, contractors, licensees or invitees are deemed by Landlord to be contributing to such condition, to charge to Tenant as Rent that portion of the cost thereof which Landlord reasonably determines to be caused thereby. Landlord may, in its sole discretion, change the location and nature of the parking spaces available to Tenant, provided that after such change, there shall be available to Tenant approximately the same number of spaces as available before such change. 26 SCHEDULE 6 1. Definitions. The terms defined in this paragraph, for purposes of this Schedule, shall have the meanings specified below, and, in addition to the terms defined below, terms defined in the Lease shall, for purposes of this Schedule, have the meanings specified in the Lease. 1.01 "Leasehold Improvements" means those items which are supplied, installed and finished by Landlord, according to and described in the Construction Documents (as hereinafter defined) and which shall be paid for by Landlord (subject to the Allowance) as provided for in paragraph 2.03 below. 1.02 "Construction Documents" means the approved construction drawings, plans and specifications, referred to in paragraph 2.03. 1.03 "Substantial Completion" means that the Leasehold Improvements have been substantially completed according to the Construction Documents, except for items which will not materially affect the use of the Leased Premises or which customarily are deemed to be "punchlist work". Landlord shall attain a Certificate of Occupancy prior to Tenant's occupancy or rent commencement. 2. Construction Documents: Payments 2.01 The parties have approved a preliminary floor plan for the Leased Premises, a copy of which is attached to the Lease as Schedule 1 (the "Preliminary Plan"). 2.02 Landlord shall cause to be prepared and submitted to Tenant for approval all drawings, plans and specifications necessary to construct the Leasehold Improvements. Within twenty (20) business days from the date the documents are submitted ("Document Approval Period"), Tenant shall approve or disapprove the documents. If Tenant fails to respond within the Document Approval Period, Landlord shall have the right to terminate this Lease. If the Tenant disapproves the documents within the Approval Period, then the Landlord and Tenant shall attempt to resolve the objections of Tenant; and if a resolution cannot be reached within twenty (20) days of Tenant's notice of disapproval, then either Tenant or Landlord shall have the right to terminate the Lease by written notice to the other. The fees and expenses for preparing the drawings, plans and specifications shall be included in the Final Cost (defined in paragraph 2.03 below). 2.03 Upon Tenant's approval of the final form of the drawings, plans and specifications, which shall constitute the Construction Documents, Landlord shall prepare an analysis of the cost of constructing the Leasehold Improvements according to the Construction Documents (the "Final Cost") and submit such analysis to Tenant for its approval. Within twenty (20) business days from the date the Final Cost has been submitted ("Cost Approval Period"), Tenant shall approve or disapprove the Final Cost. If Tenant fails to respond within the Cost Approval Period, it shall be conclusively presumed that Tenant has approved the Final Costs. If Tenant does not approve the Final Cost, it shall promptly notify Landlord, in which case Tenant and Landlord shall use their best efforts to amend the Construction Documents in a manner satisfactory to each. If they are unable to do so within 10 days after Tenant notifies Landlord as provided in the preceding sentence, either party may terminate the Lease by delivering written notice to the other. Tenant acknowledges that Landlord's sole monetary obligation is to pay the costs attributable to the construction of the Leasehold Improvements, up to an aggregate maximum limit of $10.00 per square foot of Tenant's Square Footage (the "Allowance"), and Tenant shall pay all other costs of the construction of the Leasehold Improvements 1 27 ("Tenant's Share"). In addition, all costs attributable to tenant requested and approved changes and variations from the Construction Documents in excess of the Final Cost (including, without limitation, any fees and expenses of the Consultants and any increased costs of construction) shall be paid by Tenant. Any additional costs not authorized by Tenant, in excess of final cost, shall not be the responsibility of Tenant. 3. Leasehold Improvements 3.01 The following provisions shall apply to the construction of the Leasehold Improvements: (a) All work involved in the completion of the Leasehold Improvements shall be carried out by Landlord and its agents and contractors under the sole direction of Landlord. Tenant shall cooperate with Landlord and its agents and contractors to promote the efficient and expeditious completion of the Leasehold Improvements; and (b) Landlord agrees to construct the Leasehold Improvements in accordance with the Construction Documents, provided Tenant has complied with all the applicable provisions of this Schedule and the Lease. 3.02 If there are any changes in the Leasehold Improvements requested by, or on behalf of, Tenant from the work as reflected in the Construction Documents, each such change must receive the prior written approval of Landlord, and Tenant shall bear the cost of all such changes. 3.03 Landlord shall have no obligation to commence construction of any work in the Leased Premises until (a) Tenant has approved the Construction Documents and the Final Cost for the construction of the Leasehold Improvements as required by the provisions hereof, and (b) Landlord shall have received Tenant's advance payment in an amount equal to the Tenant's Share, if any. 4. Lease Commencement Date 4.01 Landlord shall notify Tenant when Substantial Completion has been achieved and the Lease Commencement Date shall be established as set forth in the Lease. Notwithstanding anything to the contrary contained in the Lease or this Schedule, the Lease Commencement Date shall not be extended for any delay in Substantial Completion to the extent that such delay is caused in whole or in part by any act or omission attributable to Tenant, including without limitation: (a) Tenant's request for any Leasehold Improvements which require materials which need to be ordered and are not immediately available; (b) Tenant's failure to furnish promptly information concerting Tenant's requirements pertaining to construction of the Leasehold Improvements or any other information requested by the Landlord as necessary or useful to prepare the Construction Documents; (c) Tenant's failure to approve promptly the Construction Documents and Final Cost; and (d) Tenant's request for any changes in the Leasehold Improvements from the work as reflected in the Construction Documents. 4.02 In any event, Rent payable under the Lease shall not abate by reason of any delay, expense or other burden arising out of or incurred in connection with the design or construction of the Leasehold Improvements to the extent that such delay, expense or other burden is caused in whole 2 28 or in part by any act or omission attributable to Tenant (including, without limitation, the acts and omissions referred to in subparagraphs (a) through (d) of paragraph 4.01 above). 5. Tenant's Access to Leased Premises 5.01 Landlord, in its sole discretion, may permit Tenant and Tenant's agents or independent contractors to enter the Leased Premises prior to the scheduled Lease Commencement Date in order that Tenant may do other work as may be required by Tenant to make the Leased Premises ready for Tenant's use and occupancy. Such permission must be in writing prior to entry. If Landlord permits such prior entry, then such license shall be subject to the condition that Tenant and Tenant's agents, contractors, workmen, mechanics, suppliers, and invitees shall work in harmony with and not interfere with Landlord and its agents and contractors in doing work in the Leased Premises or the Building or with other tenants and occupants of the Building or the Project. If at any time such entry shall cause or threaten to cause disharmony or interference, Landlord, in its sole discretion, shall have the right to withdraw and cancel such license upon notice to Tenant. Tenant agrees that any such entry into the Leased Premises shall be deemed to be under all of the terms, covenants, conditions and provisions of the Lease, except as to the covenant to pay periodic Rent. Tenant further agrees that, to the extent permitted by law, Landlord and its principals shall not be liable in any way for any injury or death to any person or persons, loss or damage to any of the Leasehold Improvements or installations made in the Leased Premises or loss or damage to property placed therein or there about, the same being at Tenant's sole risk. 5.02 In addition to any other conditions or limitations on such license to enter the Leased Premises prior to the Lease Commencement Date, Tenant expressly agrees that none of its agents, contractors, workmen, mechanics, suppliers or invitees shall enter the Leased Premises prior to the Lease Commencement Date unless and until each of them shall furnish Landlord with satisfactory evidence of insurance coverage, financial responsibility and appropriate written releases of mechanics' or materialmen's lien claims. 6. Miscellaneous Provisions. Landlord and Tenant further agree as follows: 6.01 Except as herein expressly set forth with respect to the Leasehold Improvements, Landlord has no agreement with Tenant and has no obligation to do any work with respect to the Leased Premises. Any other work in the Leased Premises which may be permitted by Landlord pursuant to the terms and conditions of the Lease shall be done at Tenant's sole cost and expense and in accordance with the terms and conditions of the Lease. 6.02 This Schedule shall not be deemed applicable to: (a) any additional space added to the original Leased Premises at any time, whether by the exercise of any options under the Lease or otherwise, or (b) any portion of the original Leased Premises or any additions thereto in the event of a renewal or extension of the original Lease Term, whether by the exercise of any options under the Lease or any amendment or supplement thereto. The construction of any additions or improvements to the Leased Premises not contemplated by this Schedule shall be effected pursuant to a separate work letter agreement or other document, in the form then being used by Landlord and specifically addressed to the allocation of costs relating to such construction. 3 29 SCHEDULE 7 CERTIFICATE OF ACCEPTANCE TENANT _____________________________ LEASED PREMISES ____________________ LOCATED AT _________________________ This letter is to certify that: 1. The above referenced Leased Premises have been accepted by the Tenant for possession. 2. The Leased Premises are substantially complete in accordance with the plans and specifications used in connection with the demised premises. 3. The Leased Premises can now be used for intended purposes. The execution of this certificate shall not relieve the Landlord of its obligation to expeditiously complete all work to which the Tenant is entitled under the terms of its lease with the Landlord. Neither this certificate, nor Tenant's occupancy of the Leased Premises, shall be construed to relieve the Landlord of its responsibility to remedy, correct, replace, reconstruct or repair any deviation, deficiency or defect in the work or in the materials or equipment furnished by the Landlord, without cost to Tenant, if a claim with respect thereto is made by Tenant. Commencement Date ___________________, 19____. Expiration Date _____________________, 19____. Executed this ____ day of ___________, 19____. TENANT By: __________________________ Authorized Signatory 30 FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE (the "Amendment") is made this 11th day of May, 1999, by and between ASP Lighton, L.L.C. ("Landlord"), and The Management Network Group Inc. ("Tenant"). RECITALS A. Tenant is leasing approximately 2,351 rentable square feet of space ("Leased Premises") in the office building commonly known as Lighton Plaza I, 7300 College Boulevard, Suite 302, Overland Park, Kansas (the "Building"), pursuant to a Lease dated April 23, 1998 and Certificate of Acceptance dated September 10, 1998, between ASP Lighton L.L.C. and Tenant (the "Lease"). The Leased Premises are more particularly described in the Lease. B. Lighton Plaza L.L.C., subsequently conveyed its interest in the building to ASP Lighton LLC. C. Landlord and Tenant desire to amend the Lease to expand Tenant's space in the Building on the terms and conditions contained herein. NOW, THEREFORE, in consideration of the Leased Premises, the Lease, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant do hereby modify and amend the Lease as follows: 1. Demise. In addition to the currently leased space of approximately 2,351 rentable square feet ("Existing Space") as shown on EXHIBIT A, Landlord agrees to demise and lease to Tenant, and Tenant agrees to lease from Landlord, as of the Additional Space Commencement Date, approximately 1,006 rentable square feet of additional space as shown on EXHIBIT B ("Additional Space"). All references in the Lease to the Leased Premises after the Additional Space Commencement Date shall be deemed to refer to both the Existing Space and the Additional Space, together comprising approximately 3,357 rentable square feet as shown on EXHIBIT C. Paragraph 1.1a is amended accordingly as of the Additional Space Commencement Date. 2. Term of Lease of Additional Space. Except as such date may be extended pursuant to paragraph 3 below, the lease of the Additional Space shall commence on June 1, 1999 (the "Additional Space Commencement Date"). The lease of the Additional Space shall terminate on August 31, 2003 at the same time the lease of the Existing Space terminates. 3. Improvements. Improvements to be Additional Space shall be constructed and paid for in the same manner as described in Article Four and Schedule 6 of Lease, with the following modifications: a. All defined terms therein shall be modified to refer only to the Additional Space and the lease thereof; 31 b. The phrase "Lease Commencement Date" shall be modified to read "Additional Space Commencement Date"; c. The twenty (20) day time periods set forth in Section 2 of Schedule 6 shall be modified to be fourteen (14) day time periods; and d. Landlord's monetary obligation for construction of Leasehold Improvements to the Additional Space shall be $8,648.00. Notwithstanding anything to the contrary in this First Amendment or the Lease, Tenant shall have the right to install and remove a white noise sound masking system. 4. Tenant's Square Footage. Paragraph 1.1d of the Lease is hereby amended as of the Additional Space Commencement Date to increase Tenant's Square Footage to 3,357 rentable square feet. 5. Base Rent. Paragraph 1.1f of the Lease is hereby amended as of the Additional Space Commencement Date so that Base Rent shall mean:
DATE $/RSF/YEAR RENT ANNUALLY MONTHLY RENT - --------------- ---------- ------------- ------------------- 6/1/99*-8/31/99 21.80 N/A $6,098.46 per month 9/1/99-8/31/00 22.15 $74,357.04 $6,196.42 per month 9/1/00-8/31/01 22.65 $76,034.40 $6,336.20 per month 9/1/01-8/31/02 23.15 $77,713.92 $6,476.16 per month 9/1/02-8/31/03 23.65 $79,392.48 $6,616.04 per month
* or such later Additional Space Commencement Date. 6. Additional Rent. Paragraph 1.1g of the Lease is hereby amended as of the Additional Space Commencement Date to increase Tenant's Pro Rata Share to 2.86% (3,357 rentable square feet (divided by) 117,564 rentable square feet). 7. Parking. Paragraph 1.1j of the Lease is hereby amended as of the Additional Space Commencement Date to increase the Authorized Number of Parking Spaces from 9 to 13. 8. Landlord's Mailing Address. Paragraph 1.1n of the Lease is hereby amended to change Landlord's mailing address to: ASP Lighton, L.L.C., 315 Noel Road, LB54, Suite 2300, Dallas, Texas, Attention: Asset Manager. 9. Ratification. Except as is explicitly amended hereby, the demised premises shall be leased to Tenant on the terms and conditions contained in the Lease. The Lease shall remain in full force and effect and is hereby restated, ratified, and confirmed in accordance with its original terms, as amended hereby. All capitalized terms not defined herein shall have the meaning ascribed to such terms in the Lease. 32 IN WITNESS WHEREOF, the parties hereto have executed this First Amendment to Lease on the date indicated above. Landlord: ASP LIGHTON, L.L.C. By: /s/ SCOTT R. FITZGERALD ---------------------------- Scott R. Fitzgerald Its: Vice President --------------------------- Tenant: THE MANAGEMENT NETWORK GROUP INC. a Kansas corporation By: /s/ RICHARD P. NESPOLA ---------------------------- Richard P. Nespola, President and CEO 33 EXHIBIT A The Network Management Group Inc. Lighton Plaza I 7300 College Boulevard Suite 302 Overland Park, Kansas Existing Space Approximately 2,351 rentable square feet [DIAGRAM] 34 EXHIBIT B The Network Management Group Inc. Lighton Plaza I 7300 College Boulevard Suite 311 Overland Park, Kansas Additional Space Approximately 1,005 rentable square feet [DIAGRAM] 35 EXHIBIT C The Network Management Group Inc. Lighton Plaza I 7300 College Boulevard Suite 302 & 311 Overland Park, Kansas Existing Space and Additional Space Approximately 3,357 rentable square feet [DIAGRAM] 36 [PANASONIC CREDIT COMPANY LOGO] EQUIPMENT LEASE AGREEMENT Agreement #_____________ - -------------------------------------------------------------------------------- SUPPLIER: Unisource, Inc. LESSEE: The Management Network Group, Inc. 8266 Nieman Rd. 7300 College Blvd. Suite 302 Lenexa, KS 66214 Overland Park, KS 66210
Quantity Equipment Model & Description Serial Number 1 UF-770 01981001155 - -------- -------------------------------------------- -------------------- - -------- -------------------------------------------- -------------------- - -------- -------------------------------------------- --------------------
[ ] See attached schedule for additional Equipment
TRANSACTION TERMS: [ ] ADVANCE RENT $ N/A RENT $137.50 (plus applicable taxes) LEASE TERM 12 months (plus applicable taxes) PAYABLE: (check one) [x] Monthly [ ] Other ( ) [ ] SECURITY DEPOSIT $ N/A PURCHASE OPTION AT END OF LEASE TERM: (check one) [ ] 1.00 [X] Fair Market Value or [ ] Other ( ) LEASE RATE FACTOR: ---------------- Equipment Location (if different from Lessee address above): -------------------------------------- Lessee Contact/Telephone: Phyllis - 345-9315 ------------------------------------------------------------------------
WE HAVE WRITTEN THIS LEASE IN PLAIN LANGUAGE BECAUSE WE WANT YOU TO UNDERSTAND ITS TERMS. PLEASE READ YOUR COPY OF THIS LEASE CAREFULLY AND FEEL FREE TO ASK US ANY QUESTIONS YOU MAY HAVE. THE WORDS "YOU" AND "YOUR" MEAN THE LESSEE NAMED ABOVE. THE WORDS "WE", "US", AND "OUR" REFER TO THE LESSOR NAMED BELOW. IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS LEASE (INCLUDING THOSE ON THE REVERSE SIDE) SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. TERMS OR ORAL PROMISES WHICH ARE NOT CONTAINED IN THIS WRITTEN LEASE MAY NOT BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THIS LEASE ONLY BY ANOTHER WRITTEN AGREEMENT BETWEEN YOU AND US. YOU AGREE TO COMPLY WITH THE TERMS AND CONDITIONS OF THIS LEASE. THIS LEASE IS NOT CANCELABLE, YOU AGREE THAT THE EQUIPMENT WILL BE USED FOR BUSINESS PURPOSES ONLY AND NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES. YOU CERTIFY THAT ALL THE INFORMATION GIVEN IN THIS LEASE AND YOUR APPLICATION WAS CORRECT AND COMPLETE WHEN THIS LEASE WAS SIGNED. THIS LEASE IS NOT BINDING UPON US OR EFFECTIVE UNTIL AND UNLESS WE EXECUTE THIS LEASE. THIS LEASE WILL BE GOVERNED BY THE LAWS OF THE STATE OF MISSOURI. YOU AGREE TO THE JURISDICTION AND VENUE OF FEDERAL COURTS IN MISSOURI AND STATE COURTS IN RANDOLPH COUNTY, MISSOURI.
ACCEPTED BY: PROPOSED BY: LESSOR: PANASONIC COMMUNICATIONS & SYSTEMS COMPANY, LESSEE: The Management Network Group Inc. DIVISION OF MATSUSHITA ELECTRIC CORPORATION OF AMERICA ------------------------------------- 1961 Hirst Drive, Moberly, MO 65270 (legal name) BY: BY: x /s/ PHYLLIS THOMPSON ------------------------------------- -------------------------------------- (Signature of Authorized Signer) TITLE: ------------------------------------- -------------------------------------- (Printed Name and Title) DATE: DATE: 11-24-99 FED TAX ID#: 481129619 -------------------------------------- ---------- -----------------------
UNCONDITIONAL GUARANTY In consideration of Lessor entering into the above Lease in reliance on this guaranty, the undersigned, together and separately, unconditionally and irrevocably guarantee to Lessor, its successors and assigns, the prompt payment and performance of all obligations under the Lease. We agree that (a) this is a guaranty of payment and not of collection, and that Lessor can proceed directly against us without disposing of any security or seeking to collect from Lessee, (b) we waive all defenses and notices, including those of protest, presentment and demand, (c) Lessor may renew, extend or otherwise change the terms of the Lease without notice to us and we will be bound by such changes, and (d) we will pay all of Lessor's costs of enforcement and collection. This guaranty survives the bankruptcy of Lessee and binds our administrators, successors and assigns. Our obligations under this guaranty continue even if Lessee becomes insolvent or bankrupt or is discharged from bankruptcy and we agree not to seek to be repaid by Lessee in the event we must pay Lessor. THIS GUARANTY WILL BE GOVERNED BY THE SAME STATE LAW AS THE LEASE. WE AGREE TO JURISDICTION AND VENUE IN THE STATE AND FEDERAL COURTS IN THE SAME STATE AND COUNTY.
PERSONAL: PERSONAL: By Individually By Individually ------------------------------ ------------------------------ Address: Address: ------------------------------------------------------ ------------------------------------ Social Security Number: Social Security Number: ---------------------------------------- ---------------------- Witness: Witness: ------------------------------------------------------- ------------------------------------
EX-10.8 12 NONCOMPETITION AGREEMENT 1 EXHIBIT 10.8 NONCOMPETE AGREEMENT THIS NONCOMPETE AGREEMENT (the "Agreement") is dated as of February 12, 1998, by and among Behrman Capital II L.P., a Delaware limited partnership, and Strategic Entrepreneur Fund II, L.P., a Delaware limited partnership (collectively, "Parent"), The Management Network Group, Inc., a Kansas corporation (the "Company"), Richard Nespola, Micky Woo, Alan Staples, and Ralph Peck, each an individual (collectively, the "Non-Competing Parties"). WHEREAS, pursuant to the transactions contemplated that in certain Agreement and Plan of Merger, as amended, (the "Merger Agreement") among the Company, Parent, Behrman Capital TMNG, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent ("Merger Sub") and the Non-Competing Parties dated January 7, 1998, Merger Sub is merging with and into the Company, and immediately following the merger, in which the Company will be the surviving entity, Parent will own 60% of the fully diluted and outstanding shares of common stock of the Company and the Non-Competing Parties will own 40% of the fully diluted and outstanding shares of common stock of the Company; WHEREAS, immediately prior to the closing of the transactions contemplated by the Merger Agreement, the Non-Competing Parties were the sole stockholders of the Company; WHEREAS, each of the Non-Competing Parties acknowledges and agrees that he has expertise in the data communications and/or telecommunications services consulting business. Furthermore, each of the Non-Competing Parties' reputation is an integral part of the Company's business success throughout the areas where the Company's business is conducted. If any Non-Competing Party in any manner uses his reputation in competition with the data communications and/or telecommunications services consulting business of the Company, the Company (and the Parent as the principal stockholder of the Company) will be deprived of the benefits bargained for pursuant to this Agreement and the Merger Agreement. Since each Non-Competing Party has the ability to compete with the Company in the operation of the Company's business and operations, the Company desires that the Non-Competing Parties enter into this Agreement. But for the Non-Competing Parties' entry into this Agreement, neither the Company nor the Parent would have entered into the Merger Agreement. Each Non-Competing Party, in exchange for the merger consideration to be paid pursuant to the Merger Agreement and related agreements, is willing to enter this Agreement; WHEREAS, each Non-Competing Party has obtained the advice of counsel in connection with executing this document; and WHEREAS, Parent requires that each Non-Competing Party and the Company enter into this Agreement as a condition to Parent consummating the transactions contemplated by the Merger Agreement. 2 NOW, THEREFORE, in order to induce Parent to consummate the transactions contemplated by the Merger Agreement, each Non-Competing Party hereby agrees with Parent and the Company as follows: 1. Defined Terms. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Merger Agreement. 2. Term. Subject to the provisions herein, the term (the "Term") of this Agreement shall commence on the date hereof and shall expire on the seventh anniversary of the date of this Agreement. Notwithstanding the foregoing, (a) in the event that the Company terminates Micky Woo's employment pursuant to Section 8 of that certain Employment Agreement entered into between the Company and Micky Woo as of the date hereof, the Term applicable to Micky Woo and his obligations hereunder shall expire on the earlier of the seventh anniversary of the date of this Agreement or the third anniversary of such employment termination, (b) in the event that the Company terminates Alan Staples' employment pursuant to Section 8 of that certain Employment Agreement entered into between the Company and Alan Staples as of the date hereof, the Term applicable to Alan Staples and his obligations hereunder shall expire on the earlier of the seventh anniversary of the date of this Agreement or the third anniversary of such employment termination and (c) in the event that the Company terminates Ralph Peck's employment pursuant to Section 8 of that certain Employment Agreement entered into between the Company and Ralph Peck as of the date hereof, the Term applicable to Ralph Peck and his obligations hereunder shall expire on the earlier of the seventh anniversary of this date of this Agreement or the second anniversary of such employment termination. 3. Non-Competition. During the Term, each Non-Competing Party shall not, unless acting in accordance with the prior written consent of Parent and the Company (which consent may be withheld in the Company's and Parent's sole and absolute discretion), directly or indirectly, own, manage, join, operate or control, or participate in the ownership, management, operation or control of, or be connected as a director, officer, employer, employee, partner, consultant, independent contractor or otherwise with, or permit his name to be used by or in connection with, any Person which provides, sells, distributes or markets any products or services that compete with the Company in the data communications and/or telecommunications services consulting business in the United States of America and the dependent territories in the United States of America, and each and every country in the world; it being understood that the foregoing shall not limit a Non-Competing Party from making passive investments in less than 5% of the outstanding equity securities in any entity listed for trading on a national stock exchange or quoted on any recognized automatic quotation system. As used in this Agreement, "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. 4. Non-Solicitation. During the Term, each Non-Competing Party shall not nor shall he permit any of his respective Affiliates, officers, directors, employees, agents or representatives to, directly or indirectly, (a) solicit, encourage, or take any other intentional action which is reasonably intended to induce any Person employed by, or providing consulting services (directly or indirectly) on behalf of, the Company or any of its Affiliates (A) to terminate his or 2 3 her employment with, or stop providing consulting services (directly or indirectly) on behalf of, the Company or such Affiliates or (B) provide his or her employment or consulting services, directly or indirectly, to or on behalf of any Non-Competing Party; or (b) interfere in any manner with the contractual relationship (whether direct or through a third party) or employment relationship between the Company or any of its Affiliates and any such Person. As used in this Agreement, "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person. 5. Incorporation of Recitals. The recitals in this Agreement, including the terms defined therein, are hereby incorporated as substantive terms and provisions of this Agreement. 6. Injunctive Relief. Each Non-Competing Party hereby acknowledges and agrees that it would be impossible to fully compensate the Company and Parent for damages resulting from the breach or threatened breach of Sections 3 and 4 of this Agreement and, accordingly, that the Company and/or Parent shall be entitled to temporary and permanent injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, to enforce such Sections without the necessity of proving actual damages therewith. This provision with respect to injunctive relief shall not, however, diminish the Company's and/or Parent's right to claim and recover damages or enforce any other of its legal and/or equitable rights or defenses. Buyer and the Company hereby acknowledge and agree that nothing contained in this Agreement shall give Buyer or the Company any legal or equitable right to enjoin the payment to the Non-Competing Parties of any funds payable to the Non-Competing Parties from the Escrow Account(s) (as defined in the Merger Agreement) created by the Escrow Agreement executed by the parties hereto on the date hereof. 7. Assignment. Neither this Agreement nor any of the rights or obligations hereunder may be assigned by any party without the prior written consent of the other parties except that the Company and Parent may, without such consent, assign all such rights and obligations to another Person (a) as permitted by, and in accordance with, the Merger Agreement, or (b) incident to a transfer of all or substantially all of the assets of the Company to such Person, whether by merger, sale, lease, consolidation or otherwise. 8. Severable Provisions. In the event that any of the provisions of this Agreement should ever be adjudicated by a court of competent jurisdiction to exceed the time or geographic or other limitations permitted by applicable law, then such provisions shall be deemed reformed to the maximum time or geographic or other limitations permitted by applicable law, as determined by such court in such action. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, which shall continue in full force and effect. Without limiting the foregoing, the covenants contained herein shall be construed as separate covenants, covering their respective subject matters, with respect to each of the separate cities, counties and states of the United States, and each other country, and political subdivision thereof, in which the Company now or subsequently transacts any business. Each of the obligations of the Non-Competing Parties is independent and several under this Agreement. A violation or breach of this Agreement by any Non-Competing Party shall not be deemed to be a 3 4 violation or breach by any other Non-Competing Party, so long as such other Non-Competing Party did not actively participate in the activity leading to the breach or violation. 9. Binding Agreement. Subject to the provisions of Section 7, this Agreement shall inure to the benefit of and shall be binding upon the parties hereto, and their respective successors and assigns. 10. Descriptive Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11. Entire Agreement. This Agreement constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties or any of them, with respect to the subject matter hereof. No modification of this Agreement shall be valid unless made in writing and signed by the parties hereto. 12. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Kansas without giving effect to the provisions thereof relating to conflicts of law. 13. Notices. All notices, claims, demands and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by telecopy or mailed by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified by like notice): a. If to any Non-Competing Party, to his address as set forth in the records of the Company. with a copy to: Shughart, Thomson & Kilroy 12 Wyandotte Plaza 120 West 12th Street Kansas City, MO 64105 Attention: Jacob W. Bayer, Jr. Facsimile Number: (816) 374-0509 b. If to Parent, to: c/o Behrman Capital II L.P. 126 East 56th Street New York, New York 10022 Attention: Grant G. Behrman Facsimile Number: (212) 980-7024 with a copy to: 4 5 Latham & Watkins 75 Willow Road Menlo Park, CA 94025 Attention: Peter F. Kerman Facsimile Number: (650) 463-2600 14. Attorneys' Fees. In the event that any party shall bring an action in connection with the performance, breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the losing party in such action, as determined by the court or either body having jurisdiction, all reasonable costs and expense of litigation or arbitration, including reasonable attorney's fees, court costs, costs of investigation and other costs reasonably related to such proceeding. 5 6 IN WITNESS WHEREOF, this Noncompete Agreement is executed as of this day and year first above written. NON-COMPETING PARTIES: ---------------------------------------- Richard P. Nespola ---------------------------------------- Micky K. Woo ---------------------------------------- Alan H. Staples ---------------------------------------- Ralph R. Peck PARENT: BEHRMAN CAPITAL II L.P., a Delaware limited partnership By: Behrman Brothers, LLC, its general partner By: --------------------------------- Grant G. Behrman, Managing Member STRATEGIC ENTREPRENEUR FUND II, L.P., a Delaware limited partnership By: ------------------------------------- Grant G. Behrman, General Partner THE COMPANY: THE MANAGEMENT NETWORK GROUP; INC. a Kansas corporation By: ------------------------------------- Its ---------------------------------- 6 EX-10.9 13 EMPLOYEEMENT AGREEMENT BETWEEN REGISTRANT/NESPOLA 1 EXHIBIT 10.9 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of February 12, 1998, is entered into by and between THE MANAGEMENT NETWORK GROUP, INC., a Kansas corporation (the "Company"), with offices at 11613 Tomahawk Creek Parkway, Suite D, Leawood, Kansas 66211, and RICHARD P. NESPOLA, an individual ("Employee"), residing at 11613 Tomahawk Creek Parkway, Suite D, Leawood, Kansas 66211. RECITALS The Company wishes to obtain the services of Employee and Employee wishes to perform such services on the terms and conditions contained herein. Therefore, the parties hereby agree as follows: 1. Employment. Subject to the terms and conditions of this Agreement, effective as of the date first written above (the "Effective Date"), the Company hereby employs Employee as President and Chief Executive Officer of the Company to perform the duties described in Section 4 hereof. 2. Term. The term of this Agreement shall begin on the Effective Date and will continue until February 11, 2003, unless extended on terms mutually agreed upon between Employee and the Company's Board of Directors or unless earlier terminated pursuant to the provisions of Sections 7 or 8 hereof. The period from the Effective Date until the date of termination of employment pursuant to this Agreement is herein referred to as the "Term". 3. Compensation. 3.1. Salary. Subject to the adjustment provisions herein, Employee shall be paid $15,384.62 in biweekly installments based upon an annual base salary of $400,000, pro rated to the number of months in 1998 that this Agreement is in effect. For each fiscal year of the Term commencing on or after January 1, 1999, Employee's annual base salary for such fiscal year may be increased or decreased by such amounts as determined by the Board of Directors of the Company, provided, however, that in no event shall the Board of Directors decrease Employee's annual base salary below $400,000. Amounts paid pursuant to this Section 3 are hereinafter referred to as "Base Salary." 3.2. Bonus. In addition to Employee's Base Salary and subject to such deductions as are required by law, Employee shall be entitled to receive a bonus ("Bonus") to be paid as provided in this Section 3.2. With respect to each fiscal year commencing with the fiscal year ending December 31, 1998, the Board of Directors of the Company may in its discretion create a bonus pool (the "Bonus Pool"). The amount of funds allocated and distributed from such Bonus Pool, if any, to Employee shall be determined in the sole discretion of the Board of Directors of the Company and the funds remaining in such Bonus Pool and not distributed to Employee shall be allocated among, and distributed to, officers of the Company other than 1 2 Employee, in the sole discretion of Employee or any successor President and Chief Executive Officer of the Company. 3.3. Other Compensation. As a part of Employee's compensation package, the Board of Directors of the Company shall periodically (and in any event, annually) review Employee's compensation and consider such modifications as may be appropriate for the President and Chief Executive Officer of the Company. In connection with such review, the Board of Directors may consider extraordinary bonuses and other forms of compensation to Employee as a result of successful acquisitions by the Company, the initial public offering of the Company's (or any successor entity's) common stock or similar events. 4. Duties. Employee shall, during the term hereof, be an officer of the Company and have the title of President and Chief Executive Officer of the Company, and shall perform such duties as and have such authority as are customary and usual for such position and as may be directed by the Board of Directors of the Company. Without limiting the generality of the foregoing: 4.1. Full Time. Employee shall devote Employee's full working time to the business of the Company and shall, in accordance with the highest professional standards, seek to maximize the financial success of the Company's business and to optimize the goodwill and reputation of the Company within its industry and with its customers. During the term of this Agreement, Employee agrees that he will not become involved in the active ownership or management of any business enterprise that will interfere with the performance of his duties hereunder. Employee further warrants that he will not engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that is or may be in conflict with or that might place him in a conflicting position to that of the Company. So that the Company may be aware of the extent of any other demands upon Employee's time and attention, Employee shall disclose in confidence to the Company the nature and scope of any other business activity in which he is or becomes engaged during his employment with the Company. Employee also warrants that he is not a party to any valid or binding agreement or legal relationship whose performance or execution would interfere with the performance of his duties under this Agreement. Employee may serve as a director of other corporations or entities with the prior approval of the Board of Directors, which approval will not be unreasonably withheld. 4.2. Reporting. Employee shall report to the Board of Directors of the Company. 5. Expenses. Employee will be authorized to incur reasonable and necessary expenses in connection with the discharge of Employee's duties and in promoting the business of the Company. The Company will reimburse Employee for all such reasonable and necessary expenses in accordance with its expense reimbursement policy and upon presentation of a properly itemized account of such expenditures, setting forth the business reasons for such expenditures. 6. Other Benefits; Vacation. Except as otherwise set forth herein, Employee shall be entitled to paid vacation and the other fringe benefits as set forth below. 2 3 6.1. Annual Accrual of Vacation. Employee shall be entitled to four (4) weeks paid vacation for each year of service under this Agreement, during which time Employee's compensation shall be paid in full. On the first day of the term of this Agreement, and on each anniversary date during the term of this Agreement, Employee shall earn the four (4) weeks of paid vacation time. Employee may accumulate vacation time to a maximum of six (6) weeks and may carry such accumulated (earned and unused) vacation time from one year of service to another of service, subject to such maximum. At the end of each year of service during the term of this Agreement, Employee shall have the option to require the Company to pay to Employee an amount for any part or all of the Employee's earned and unused vacation time. Upon termination of employment, the Company shall purchase any earned and unused vacation time up to the maximum carry-over vacation time of six (6) weeks. 6.2. Fringe Benefits. Employee shall be entitled to use of an automobile of his choice provided by the Company with all operating expenses paid by the Company, and shall receive such pension, profit sharing and fringe benefits such as hospitalization, medical, life and other insurance benefits, vacation, sick pay and short-term disability as the Board of Directors of the Company may, from time to time, determine to provide for the key executives of the Company. Employee shall be provided a health club membership (and dues), including initiation fees, for a club of his choice. Employee shall be entitled to (i) executive health benefits providing for annual physicals and supplementary medical coverage consistent with his status as President and Chief Executive Officer and may submit to the Board of Directors other executive plans, and (ii) reimbursement for estate and financial planning services in an amount not to exceed $10,000 per year. The benefits described in this Section 6.2 are collectively referred to herein as "Fringe Benefits." 7. Termination By the Company Due To Death, Disability or Cause. 7.1. Death, Disability. In the event of Employee's death during the Term, this Agreement and the employment of Employee hereunder shall terminate automatically as of the date of death, except that Sections 10, 11, 12, 13, 14 and 15 shall survive such termination. In the event of Employee's Disability (as hereinafter defined) for ninety (90) consecutive calendar days or one hundred and twenty (120) calendar days in the aggregate during any twelve (12) months of the Term, the Company shall have the right, by written notice to Employee, to terminate this Agreement and the employment of Employee hereunder as of the date of such notice, except that Sections 10, 11, 12, 13, 14 and 15 shall survive such termination. "Disability" for the purposes of this Agreement shall mean Employee's physical or mental disability so as to render Employee substantially incapable of carrying out Employee's duties under this Agreement. In the event of termination pursuant to this Section 7.1, the Company shall not be under any further obligation to Employee hereunder except to (a) promptly pay Employee (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) continue Employee's Fringe Benefits for a period of six months from the date of termination. 7.2. Cause. The Company shall have the right to discharge Employee and terminate this Agreement for Cause (as hereinafter defined) during the Term by written notice to Employee and this Agreement shall be deemed terminated as of the date of such notice, except 3 4 that Sections 10, 11, 12, 13, 14 and 15 shall survive such termination. For the purpose of this Agreement, "Cause" shall mean (a) conviction of, or a plea of nolo contendere to, a felony, (b) gross neglect, gross misconduct or gross failure in the carrying out of Employee's duties in accordance with Section 4 hereof, (c) the engaging by Employee in a material act or acts of dishonesty affecting the Company, any affiliate or any client of the Company, or (d) drunkenness or the illegal use of drugs by Employee materially interfering with performance of Employee's obligations under this Agreement. In the event of a termination pursuant to this Section 7.2, the Company shall not be under any further obligation to Employee hereunder, except to promptly pay Employee (a) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination and (b) reimbursement for expenses accrued and payable under Section 5 hereof. 7.3. Termination By the Company Other Than Due to Death, Disability or Cause. This Agreement and the employment of Employee hereunder may be terminated by the Company other than due to death, Disability or Cause by giving thirty (30) days' prior written notice to the Employee at any time, during the Term and such termination shall be effective as of the date of termination stated in such notice, except that Sections 10, 11, 12, 13, 14 and 15 shall survive such termination. In the event of a termination pursuant to this Section 7.3, the Company shall not be under any further obligation to Employee hereunder, except to (a) promptly pay Employee (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) pay Employee the Severance Benefits (as defined below) pursuant to Section 7.4. 7.4. Severance Benefits. "Severance Benefits" shall mean, for purposes of this Agreement, (a) one-half of Employee's Base Salary as of the date of termination (the "Severance Base Salary") for a period of six full calendar months from the date of termination and (b) continuation of all of Employee's Fringe Benefits for a period of twelve full calendar months from the date of termination. Any Severance Base Salary payable under this Agreement shall be paid to Employee in six equal installments on the last business day of each of the six calendar months following the date of termination of employment. To the extent any of the Fringe Benefits are not readily available to Employee following termination of employment, the monthly cost thereof shall be paid to Employee on the last business day of each of the twelve calendar months following the date of termination of employment. 8. Termination by the Employee. The Employee shall have the right to terminate Employee's employment under this Agreement by giving thirty (30) days prior written notice to the Company at any time, and such termination shall be effective as of the date of termination stated in such notice, except that Sections 10, 11, 12, 13, 14 and 15, shall survive such termination. 8.1. Termination Other Than for Constructive Termination. In the event Employee terminates employment under this Section 8, the Company shall not be under any further obligation to Employee hereunder, except to promptly pay Employee (a) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, and (b) reimbursement for expenses accrued and payable under Section 5 hereof. 4 5 8.2. Constructive Termination. Notwithstanding anything in this Agreement to the contrary, a termination will be deemed to have occurred pursuant to this Section 8 if there should occur the following ("Constructive Termination"): (a) a material adverse change in Employee's position causing it to be of materially less stature or responsibility without Employee's written consent, and such a materially adverse change shall in all events be deemed to occur if Employee no longer serves as President and Chief Executive Officer, unless Employee consents in writing to such change, (b) a reduction, without Employee's written consent or except as expressly permitted by this Agreement, in Employee's Base Salary and Fringe Benefits by more than five percent (5%), or (c) a relocation of his principal place of employment by more than 50 miles without Employee's consent. In the event Employee terminates his employment due to a Constructive Termination, the Company shall not be under any further obligation to Employee hereunder, except to pay Employee (a) within thirty (30) days of such termination (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) Severance Benefits pursuant to Section 7.4. 9. Change In Control Benefits. Should there occur a Change in Control (as defined below), then the following provisions shall become applicable: 9.1. During the period (if any) following a Change in Control that Employee shall continue to provide services under this Agreement, then the terms and provisions of this Agreement shall continue in full force and effect. 9.2. Notwithstanding any other provision of Sections 7 or 8, in the event of (a) a termination by the Company pursuant to Section 7.3 at any time within twelve (12) months after a Change in Control or (b) a Constructive Termination by the Company pursuant to Section 8 at any time within twelve (12) months after a Change in Control or (c) a material reduction in Employee's line of reporting responsibility solely by virtue of the Company being acquired and made part of a larger entity where the Employee's line of reporting responsibility is not comparable to those of other executives of the acquiring entity who are the senior managers of the acquiring entity's subsidiaries, divisions or other major operating units, the Company shall (x) pay Employee within thirty (30) days of such event (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of such event, (ii) reimbursement for expenses accrued and payable under Section 5 hereof, (y) pay Employee Severance Benefits pursuant to Section 7.4 and (z) pay $500,000 to a charitable organization designated in writing by Employee within thirty (30) days of such event. For purposes of this Section 9, a Change of Control shall be deemed to occur upon: 5 6 (I) the sale, lease, conveyance or other disposition of all or substantially all of the Company's assets as an entirety or substantially as an entirety to any person, entity or group of persons acting in concert other than in the ordinary course of business; (II) any transaction or series of related transactions (as a result of a tender offer, merger, consolidation or otherwise) that results in any Person (as defined in Section 13(h)(8)(E) under the Securities Exchange Act of 1934) becoming the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 50% of the aggregate voting power of all classes of common equity of the Company, except if such Person is (A) a subsidiary of the Company, (B) an employee stock ownership plan for employees of the Company or (C) a company formed to hold the Company's common equity securities and whose stockholders constituted at the time such company became such holding company, substantially all the stockholders of the Company; or (III) the liquidation or winding up of the business of the Company. 10. Confidentiality. Employee agrees that during and after the Term any confidential information concerning the Company or its business or any Affiliates of the Company (including, without limitation, trade secrets, plans, processes, customer lists, contracts and compilations of information, records and specifications) which comes to Employee in the course of Employee's employment and which is not (independent of disclosure by Employee) public knowledge or general knowledge in the trade, shall remain confidential and, except as required by legal process, may not be used or made available for any purpose except as necessary in the performance of Employees duties hereunder. Employee agrees that, upon termination of Employee's employment hereunder, Employee will promptly deliver to the Company all materials constituting confidential information (including all copies thereof) that are in the possession of, or under the control of, the Employee, and Employee will not make or retain any copies or extracts of such materials. 11. Remedies. 11.1. Nothing herein contained is intended to waive or diminish any rights the Company or Employee may have at law or in equity at any time to protect and defend its legitimate property interests including its business relationship with third parties, the foregoing provisions being intended to be in addition to and not in derogation or limitation of any other rights the Company or Employee may have at law or in equity. 11.2. A breach by Employee of the provisions of Section 10 of this Agreement may cause the Company irreparable injury and damage. Employee therefore agrees that damages may be an inadequate remedy and the Company shall be entitled to seek injunctive and/or other equitable relief to prevent any breach of Section 10 of this Agreement and to secure its enforcement. 12. Employee for Hire. In addition to Employee's services, the Company shall own forever and throughout the world (exclusively during the current and renewed or extended term of copyright anywhere in the world and thereafter, non-exclusively) all rights of any kind or 6 7 nature now or hereafter known in and to all of the products of Employee's services performed under this Agreement in any capacity and any and all parts thereof, including, without limitation, copyright, patent and all other property or proprietary rights in or to any ideas, concepts, designs, drawings, plans, prototypes or any other similar creative works and to the product of any or all of such services under this Agreement ("Inventions"), Employee acknowledging and agreeing that for copyright purposes, Employee is performing services as the Company's employee-for-hire; provided, however, that such term shall not include Inventions that do not relate to the Company's current business or research and development and were developed without use of any Company trade secret information or Company facilities or equipment. Without limiting the generality of the previous sentence, Employee acknowledges and agrees that all memoranda, notes, records and other documents made or compiled by Employee or made available to Employee during the Term of this Agreement concerning the Company business shall be the Company's property and shall be delivered by Employee to the Company upon termination of this Agreement or at any other time at the Company's request. In addition, the Employee hereby agrees to assign to Company in writing (and take any and all other actions as shall be reasonably requested by Company in order to carry out the intent of this Section) any and all rights, title or interest of Employee in any such copyrights, patents, property or proprietary rights relating to such Inventions. 13. Notices. Any notices pertaining to this Agreement shall be addressed to the parties at their addresses stated on the first page hereof. All notices shall be in writing and shall be deemed duly given if personally delivered or sent by registered or certified mail, overnight or express mail. If sent by registered or certified mail, notice shall be deemed to have been received and effective five days after mailing; if by overnight or express mail, notice shall be deemed received the next business day after being sent. Any party may change its address for notice hereunder by giving notice of such change in the manner provided herein. 14. Entire Agreement. This Agreement contains the entire agreement of the parties respecting the subject matter contained herein. No modification of any provision hereof shall be effective except by a written agreement signed by all of the parties hereto. 15. Arbitration (a) It is understood and agreed between the parties hereto that, except with respect to claims for workers' compensation or unemployment compensation benefits, any and all claims, grievances, demands, controversies, causes of action or disputes of any nature whatsoever (including but not limited to tort and contract claims, and claims upon any law, statute, order, or regulation) (hereinafter "Claims"), arising out, in connection with, or in relation to (i) this Agreement, (ii) questions of arbitrability under this Agreement, or (iii) any relationship between Employee and the Company before, at the time of entering, during the term of, upon or after expiration or termination of this Agreement, shall be resolved by final, binding, nonjudicial arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), which rules are incorporated herein by reference. Such dispute resolution process shall be confidential and shall be conducted in accordance with the Kansas Rules of Evidence. (b) Notwithstanding any contrary provision that may be contained in the applicable AAA rules, the parties hereby agree that discovery shall be permitted in connection 7 8 with any arbitration pursuant to this Agreement, in accordance with the provisions of the Kansas Code of Civil Procedure. Neither party nor the arbitrator shall disclose the existence, content, or results of any arbitration hereunder without the prior written consent of all parties. Except as provided herein, the Federal Arbitration Act shall govern the interpretation, enforcement and all proceedings pursuant to this Section 15(b). The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the State of Kansas, or federal law, or both, as applicable. The arbitrator is without jurisdiction to apply any different substantive law. The arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under Kansas law. The arbitrator shall render an award and a written, reasoned opinion in support thereof. Such award may include attorneys' fees and costs to the prevailing party. Judgment upon the award may be entered in any court having jurisdiction thereof. (c) Adherence to this dispute resolution process shall not limit the Company's right to obtain any provisional remedy, including but without limitation, injunctive or similar relief, from any court of competent jurisdiction in the event of a breach of Section 10 of this Agreement. This dispute resolution process shall survive the termination of Employee's employment. (d) In the event that any party shall bring an action in connection with the performance , breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the losing party in such action as determined by the court or either body having jurisdiction, all reasonable costs and expense of litigation or arbitration, including reasonable attorney's fees, court costs, costs of investigation and other costs reasonably related to such proceeding. (e) By signing this Agreement, both Employee and the Company are giving up their respective right to a jury trial. 8 9 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first set forth above. THE COMPANY: THE MANAGEMENT NETWORK GROUP, INC., a Kansas corporation By: ------------------------------------- Alan H. Staples, Secretary EMPLOYEE: ---------------------------------------- RICHARD P. NESPOLA 9 EX-10.10 14 EMPLOYMENT AGREEMENT BETWEEN REGISTRANT/WOO 1 EXHIBIT 10.10 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of February 12, 1998, is entered into by and between THE MANAGEMENT NETWORK GROUP, INC., a Kansas corporation (the "Company"), with offices at 11613 Tomahawk Creek Parkway, Suite D, Leawood, Kansas 66211, and MICKY K. WOO, an individual ("Employee"), residing at 38 Devonshire Drive, Oak Brook, Illinois 60523. RECITALS The Company wishes to obtain the services of Employee and Employee wishes to perform such services on the terms and conditions contained herein. Therefore, the parties hereby agree as follows: 1. Employment. Subject to the terms and conditions of this Agreement, effective as of the date first written above (the "Effective Date"), the Company hereby employs Employee as an Officer of the Company to perform the duties described in Section 4 hereof. 2. Term. The term of this Agreement shall begin on the Effective Date and will continue until February 11, 2003, unless extended on terms mutually agreed upon between Employee and the Company's Board of Directors or unless earlier terminated pursuant to the provisions of Sections 7 or 8 hereof. The period from the Effective Date until the date of termination of employment pursuant to this Agreement is herein referred to as the "Term". 3. Compensation. 3.1. Salary. Subject to the adjustment provisions herein, Employee shall be paid $9,615.39 in biweekly installments based upon an annual base salary of $250,000, pro rated to the number of months in 1998 that this Agreement is in effect. For each fiscal year of the Term commencing on or after January 1, 1999, Employee's annual base salary for such fiscal year may be increased or decreased by such amounts as proposed by the President and Chief Executive Officer of the Company and approved by the Board of Directors of the Company; provided, however, that in no event shall the Board of Directors decrease Employee's annual base salary below $250,000. Amounts paid pursuant to this Section 3 are hereinafter referred to as "Base Salary." 3.2. Bonus. In addition to Employee's Base Salary and subject to such deductions as are required by law, Employee shall be entitled to receive a bonus ("Bonus") to be paid as provided in this Section 3.2. With respect to each fiscal year commencing with the fiscal year ending December 31, 1998, the Board of Directors of the Company may in its discretion create a bonus pool (the "Bonus Pool"). The amount of funds remaining in such Bonus Pool, if any, and not otherwise allocated and distributed by the Board of Directors of the Company to the President and Chief Executive Officer of the Company may be allocated and distributed to Employee in such amounts, if any, as determined by the President and Chief Executive Officer of the Company, in his sole discretion. 1 2 4. Duties. Employee shall, during the term hereof, be an officer of the Company, and shall perform such duties as and have such authority as are customary and usual for such position and as may be directed by the President and Chief Executive Officer of the Company. Without limiting the generality of the foregoing: 4.1. Full Time. Employee shall devote Employee's full working time to the business of the Company and shall, in accordance with the highest professional standards, seek to maximize the financial success of the Company's business and to optimize the goodwill and reputation of the Company within its industry and with its customers. During the term of this Agreement, the Employee agrees that he will not become involved in the active ownership or management of any business enterprise that will interfere with the performance of his duties hereunder. Employee further warrants that he will not engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that is or may be in conflict with or that might place him in a conflicting position to that of the Company. So that the Company may be aware of the extent of any other demands upon Employee's time and attention, Employee shall disclose in confidence to the Company the nature and scope of any other business activity in which he is or becomes engaged during his employment with the Company. Employee also warrants that he is not a party to any valid or binding agreement or legal relationship whose performance or execution would interfere with the performance of his duties under this Agreement. 4.2. Reporting. Employee shall report to the President and Chief Executive Officer of the Company. 5. Expenses. Employee will be authorized to incur reasonable and necessary expenses in connection with the discharge of Employee's duties and in promoting the business of the Company. The Company will reimburse Employee for all such reasonable and necessary expenses in accordance with its expense reimbursement policy and upon presentation of a properly itemized account of such expenditures, setting forth the business reasons for such expenditures. 6. Other Benefits; Vacation. Except as otherwise set forth herein, Employee shall be entitled to paid vacation and the other fringe benefits as set forth below. 6.1. Annual Accrual of Vacation. Employee shall be entitled to four (4) weeks paid vacation for each year of service under this Agreement, during which time Employee's compensation shall be paid in full. On the first day of the term of this Agreement, and on each anniversary date during the term of this Agreement, Employee shall earn the four (4) weeks of paid vacation time. Employee may accumulate vacation time to a maximum of six (6) weeks and may carry such accumulated (earned and unused) vacation time from one year of service to another of service, subject to such maximum. At the end of each year of service during the term of this Agreement, Employee shall have the option to require the Company to pay to Employee an amount for any part or all of the Employee's earned and unused vacation time. Upon termination of employment, the Company shall purchase any earned and unused vacation time up to the maximum carry-over vacation time of six (6) weeks. The amount to be paid shall be determined as provided in the following paragraph. 2 3 6.1.1. Termination of Employment. Upon termination of employment for any reason, the Company shall pay to Employee, as a part of the final compensation payment, an amount for the earned and unused vacation time. 6.2. Fringe Benefits. Employee shall be entitled to such pension, profit sharing and fringe benefits such as hospitalization, medical, life and other insurance benefits, vacation, sick pay and short-term disability as determined by the President and Chief Executive Officer of the Company and approved by the Board of Directors of the Company, which approval shall not be unreasonably withheld ("Fringe Benefits"). 7. Termination By the Company Due To Death, Disability or Cause. 7.1. Death, Disability. In the event of Employee's death during the Term, this Agreement and the employment of Employee hereunder shall terminate automatically as of the date of death, except that Sections 10, 11, 12, 13, 14 and 15 shall survive such termination. In the event of Employee's Disability (as hereinafter defined) for ninety (90) consecutive calendar days or one hundred and twenty (120) calendar days in the aggregate during any twelve (12) months of the Term, the Company shall have the right, by written notice to Employee, to terminate this Agreement and the employment of Employee hereunder as of the date of such notice, except that Sections 10, 11, 12, 13, 14 and 15 shall survive such termination. "Disability" for the purposes of this Agreement shall mean Employee's physical or mental disability so as to render Employee substantially incapable of carrying out Employee's duties under this Agreement. In the event of termination pursuant to this Section 7.1, the Company shall not be under any further obligation to Employee hereunder except to (a) promptly pay Employee (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) continue Employee's Fringe Benefits for a period of six months from the date of termination. 7.2. Cause. The Company shall have the right to discharge Employee and terminate this Agreement for Cause (as hereinafter defined) during the Term by written notice to Employee and this Agreement shall be deemed terminated as of the date of such notice, except that Sections 10, 11, 12, 13, 14 and 15 shall survive such termination. For the purpose of this Agreement, "Cause" shall mean (a) conviction of, or a plea of nolo contendere to, a felony, (b) gross neglect, gross misconduct or gross failure in the carrying out of Employee's duties in accordance with Section 4 hereof, (c) the engaging by Employee in a material act or acts of dishonesty affecting the Company, any affiliate or any client of the Company, or (d) drunkenness or the illegal use of drugs by Employee materially interfering with performance of Employee's obligations under this Agreement. In the event of a termination pursuant to this Section 7.2, the Company shall not be under any further obligation to Employee hereunder, except to promptly pay Employee (a) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination and (b) reimbursement for expenses accrued and payable under Section 5 hereof. 7.3. Termination By the Company Other Than Due to Death, Disability or Cause. This Agreement and the employment of Employee hereunder may be terminated by the Company other than due to death, Disability or Cause by giving thirty (30) days' prior written notice to the Employee at any time, during the Term and such termination shall be effective as of 3 4 the date of termination stated in such notice, except that Sections 10, 11, 12, 13, 14 and 15 shall survive such termination. In the event of a termination pursuant to this Section 7.3, the Company shall not be under any further obligation to Employee hereunder, except to (a) promptly pay Employee (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) pay Employee the Severance Benefits (as defined below) pursuant to Section 7.4. 7.4. Severance Benefits. "Severance Benefits" shall mean, for purposes of this Agreement, (a) one-half of Employee's Base Salary as of the date of termination (the "Severance Base Salary") for a period of six full calendar months from the date of termination and (b) continuation of all of Employee's Fringe Benefits for a period of twelve full calendar months from the date of termination. Any Severance Base Salary payable under this Agreement shall be paid to Employee in six equal installments on the last business day of each of the six calendar months following the date of termination of employment. To the extent any of the Fringe Benefits are not readily available to Employee following termination of employment, the monthly cost thereof shall be paid to Employee on the last business day of each of the twelve calendar months following the date of termination of employment. 8. Termination by the Employee. The Employee shall have the right to terminate Employee's employment under this Agreement by giving thirty (30) days prior written notice to the Company at any time, and such termination shall be effective as of the date of termination stated in such notice, except that Sections 10, 11, 12, 13, 14 and 15, shall survive such termination. 8.1. Termination Other Than for Constructive Termination. In the event Employee terminates employment under this Section 8, the Company shall not be under any further obligation to Employee hereunder, except to promptly pay Employee (a) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, and (b) reimbursement for expenses accrued and payable under Section 5 hereof. 8.2. Constructive Termination. Notwithstanding anything in this Agreement to the contrary, a termination will be deemed to have occurred pursuant to this Section 8 if there should occur the following ("Constructive Termination"): (a) a material adverse change in Employee's position causing it to be of materially less stature or responsibility without Employee's written consent, and such a materially adverse change shall in all events be deemed to occur if Employee no longer serves as an officer of the Company, unless Employee consents in writing to such change, (b) a reduction, without Employee's written consent or except as expressly permitted by this Agreement, in Employee's Base Salary and Fringe Benefits by more than five percent (5%), or (c) a relocation of his principal place of employment by more than 50 miles without Employee's consent. 4 5 In the event Employee terminates his employment due to a Constructive Termination, the Company shall not be under any further obligation to Employee hereunder, except to pay Employee (a) within thirty (30) days of such termination (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) Severance Benefits pursuant to Section 7.4. 9. Change In Control Benefits. Should there occur a Change in Control (as defined below), then the following provisions shall become applicable: 9.1. During the period (if any) following a Change in Control that Employee shall continue to provide services under this Agreement, then the terms and provisions of this Agreement shall continue in full force and effect. 9.2. Notwithstanding any other provision of Sections 7 or 8, in the event of (x) a termination by the Company pursuant to Section 7.3 at any time within twelve (12) months after a Change in Control or (y) a Constructive Termination by the Company pursuant to Section 8 at any time within twelve (12) months after a Change in Control, the Company shall pay Employee (a) within thirty (30) days of such termination (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of such termination, and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) Severance Benefits pursuant to Section 7.4. For purposes of this Section 9, a Change of Control shall be deemed to occur upon: (I) the sale, lease, conveyance or other disposition of all or substantially all of the Company's assets as an entirety or substantially as an entirety to any person, entity or group of persons acting in concert other than in the ordinary course of business; (II) any transaction or series of related transactions (as a result of a tender offer, merger, consolidation or otherwise) that results in any Person (as defined in Section 13(h)(8)(E) under the Securities Exchange Act of 1934) becoming the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 50% of the aggregate voting power of all classes of common equity of the Company, except if such Person is (A) a subsidiary of the Company, (B) an employee stock ownership plan for employees of the Company or (C) a company formed to hold the Company's common equity securities and whose stockholders constituted at the time such company became such holding company, substantially all the stockholders of the Company; or (III) the liquidation or winding up of the business of the Company. 10. Confidentiality. Employee agrees that during and after the Term any confidential information concerning the Company or its business or any Affiliates of the Company (including, without limitation, trade secrets, plans, processes, customer lists, contracts and compilations of information, records and specifications) which comes to Employee in the course of Employee's employment and which is not (independent of disclosure by Employee) public knowledge or general knowledge in the trade, shall remain confidential and, except as required by 5 6 legal process, may not be used or made available for any purpose except as necessary in the performance of Employees duties hereunder. Employee agrees that, upon termination of Employee's employment hereunder, Employee will promptly deliver to the Company all materials constituting confidential information (including all copies thereof) that are in the possession of, or under the control of, the Employee, and Employee will not make or retain any copies or extracts of such materials. 11. Remedies. 11.1. Nothing herein contained is intended to waive or diminish any rights the Company or Employee may have at law or in equity at any time to protect and defend its legitimate property interests including its business relationship with third parties, the foregoing provisions being intended to be in addition to and not in derogation or limitation of any other rights the Company or Employee may have at law or in equity. 11.2. A breach by Employee of the provisions of Section 10 of this Agreement may cause the Company irreparable injury and damage. Employee therefore agrees that damages may be an inadequate remedy and the Company shall be entitled to seek injunctive and/or other equitable relief to prevent any breach of Section 10 of this Agreement and to secure its enforcement. 12. Employee for Hire. In addition to Employee's services, the Company shall own forever and throughout the world (exclusively during the current and renewed or extended term of copyright anywhere in the world and thereafter, non-exclusively) all rights of any kind or nature now or hereafter known in and to all of the products of Employee's services performed under this Agreement in any capacity and any and all parts thereof, including, without limitation, copyright, patent and all other property or proprietary rights in or to any ideas, concepts, designs, drawings, plans, prototypes or any other similar creative works and to the product of any or all of such services under this Agreement ("Inventions"), Employee acknowledging and agreeing that for copyright purposes, Employee is performing services as the Company's employee-for-hire; provided, however, that such term shall not include Inventions that do not relate to the Company's current business or research and development and were developed without use of any Company trade secret information or Company facilities or equipment. Without limiting the generality of the previous sentence, Employee acknowledges and agrees that all memoranda, notes, records and other documents made or compiled by Employee or made available to Employee during the Term of this Agreement concerning the Company business shall be the Company's property and shall be delivered by Employee to the Company upon termination of this Agreement or at any other time at the Company's request. In addition, the Employee hereby agrees to assign to Company in writing (and take any and all other actions as shall be reasonably requested by Company in order to carry out the intent of this Section) any and all rights, title or interest of Employee in any such copyrights, patents, property or proprietary rights relating to such Inventions. 13. Notices. Any notices pertaining to this Agreement shall be addressed to the parties at their addresses stated on the first page hereof. All notices shall be in writing and shall be deemed duly given if personally delivered or sent by registered or certified mail, overnight 6 7 or express mail. If sent by registered or certified mail, notice shall be deemed to have been received and effective five days after mailing; if by overnight or express mail, notice shall be deemed received the next business day after being sent. Any party may change its address for notice hereunder by giving notice of such change in the manner provided herein. 14. Entire Agreement. This Agreement contains the entire agreement of the parties respecting the subject matter contained herein. No modification of any provision hereof shall be effective except by a written agreement signed by all of the parties hereto. 15. Arbitration (a) It is understood and agreed between the parties hereto that, except with respect to claims for workers' compensation or unemployment compensation benefits, any and all claims, grievances, demands, controversies, causes of action or disputes of any nature whatsoever (including but not limited to tort and contract claims, and claims upon any law, statute, order, or regulation) (hereinafter "Claims"), arising out, in connection with, or in relation to (i) this Agreement, (ii) questions of arbitrability under this Agreement, or (iii) any relationship between Employee and the Company before, at the time of entering, during the term of, upon or after expiration or termination of this Agreement, shall be resolved by final, binding, non-judicial arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), which rules are incorporated herein by reference. Such dispute resolution process shall be confidential and shall be conducted in accordance with the Kansas Rules of Evidence. (b) Notwithstanding any contrary provision that may be contained in the applicable AAA rules, the parties hereby agree that discovery shall be permitted in connection with any arbitration pursuant to this Agreement, in accordance with the provisions of the Kansas Code of Civil Procedure. Neither party nor the arbitrator shall disclose the existence, content, or results of any arbitration hereunder without the prior written consent of all parties. Except as provided herein, the Federal Arbitration Act shall govern the interpretation, enforcement and all proceedings pursuant to this Section 15(b). The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the State of Kansas, or federal law, or both, as applicable. The arbitrator is without jurisdiction to apply any different substantive law. The arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under Kansas law. The arbitrator shall render an award and a written, reasoned opinion in support thereof. Such award may include attorneys' fees and costs to the prevailing party. Judgment upon the award may be entered in any court having jurisdiction thereof. (c) Adherence to this dispute resolution process shall not limit the Company's right to obtain any provisional remedy, including but without limitation, injunctive or similar relief, from any court of competent jurisdiction in the event of a breach of Section 10 of this Agreement. This dispute resolution process shall survive the termination of Employee's employment. (d) In the event that any party shall bring an action in connection with the performance, breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the 7 8 losing party in such action as determined by the court or either body having jurisdiction, all reasonable costs and expense of litigation or arbitration, including reasonable attorney's fees, court costs, costs of investigation and other costs reasonably related to such proceeding. (E) BY SIGNING THIS AGREEMENT, BOTH EMPLOYEE AND THE COMPANY ARE GIVING UP THEIR RESPECTIVE RIGHT TO A JURY TRIAL. 9 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first set forth above. THE COMPANY: THE MANAGEMENT NETWORK GROUP, INC., a Kansas corporation By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- EMPLOYEE: ---------------------------------------- Micky K. Woo 8 EX-10.11 15 EMPLOYMENT AGREEMENT BETWEEN REGISTRANT/PECK 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of February 12, 1998, is entered into by and between THE MANAGEMENT NETWORK GROUP, INC., a Kansas corporation (the "Company"), with offices at 11613 Tomahawk Creek Parkway, Suite D, Leawood, Kansas 66211, and RALPH R. PECK, an individual ("Employee"), residing at 4923 Rutherford Court, Granite Bay, California 95746. RECITALS The Company wishes to obtain the services of Employee and Employee wishes to perform such services on the terms and conditions contained herein. Therefore, the parties hereby agree as follows: 1. Employment. Subject to the terms and conditions of this Agreement, effective as of the date first written above (the "Effective Date"), the Company hereby employs Employee as an Officer of the Company to perform the duties described in Section 4 hereof. 2. Term. The term of this Agreement shall begin on the Effective Date and will continue until February 11, 2003, unless extended on terms mutually agreed upon between Employee and the Company's Board of Directors or unless earlier terminated pursuant to the provisions of Sections 7 or 8 hereof. The period from the Effective Date until the date of termination of employment pursuant to this Agreement is herein referred to as the "Term". 3. Compensation. 3.1. Salary. Subject to the adjustment provisions herein, Employee shall be paid $9,615.39 in biweekly installments based upon an annual base salary of $250,000, pro rated to the number of months in 1998 that this Agreement is in effect. For each fiscal year of the Term commencing on or after January 1, 1999, Employee's annual base salary for such fiscal year may be increased or decreased by such amounts as proposed by the President and Chief Executive Officer of the Company and approved by the Board of Directors of the Company; provided, however, that in no event shall the Board of Directors decrease Employee's annual base salary below $250,000. Amounts paid pursuant to this Section 3 are hereinafter referred to as "Base Salary." 3.2. Bonus. In addition to Employee's Base Salary and subject to such deductions as are required by law, Employee shall be entitled to receive a bonus ("Bonus") to be paid as provided in this Section 3.2. With respect to each fiscal year commencing with the fiscal year ending December 31, 1998, the Board of Directors of the Company may in its discretion create a bonus pool (the "Bonus Pool"). The amount of funds remaining in such Bonus Pool, if any, and not otherwise allocated and distributed by the Board of Directors of the Company to the President and Chief Executive Officer of the Company may be allocated and distributed to Employee in such amounts, if any, as determined by the President and Chief Executive Officer of the Company, in his sole discretion. 1 2 4. Duties. Employee shall, during the term hereof, be an officer of the Company, and shall perform such duties as and have such authority as are customary and usual for such position and as may be directed by the President and Chief Executive Officer of the Company. Without limiting the generality of the foregoing: 4.1. Full Time. Employee shall devote Employee's full working time to the business of the Company and shall, in accordance with the highest professional standards, seek to maximize the financial success of the Company's business and to optimize the goodwill and reputation of the Company within its industry and with its customers. During the term of this Agreement, Employee agrees that he will not become involved in the active ownership or management of any business enterprise that will interfere with the performance of his duties hereunder. Employee further warrants that he will not engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that is or may be in conflict with or that might place him in a conflicting position to that of the Company. So that the Company may be aware of the extent of any other demands upon Employee's time and attention, Employee shall disclose in confidence to the Company the nature and scope of any other business activity in which he is or becomes engaged during his employment with the Company. Employee also warrants that he is not a party to any valid or binding agreement or legal relationship whose performance or execution would interfere with the performance of his duties under this Agreement. 4.2. Reporting. Employee shall report to the President and Chief Executive Officer of the Company. 5. Expenses. Employee will be authorized to incur reasonable and necessary expenses in connection with the discharge of Employee's duties and in promoting the business of the Company. The Company will reimburse Employee for all such reasonable and necessary expenses in accordance with its expense reimbursement policy and upon presentation of a properly itemized account of such expenditures, setting forth the business reasons for such expenditures. 6. Other Benefits; Vacation. Except as otherwise set forth herein, Employee shall be entitled to paid vacation and the other fringe benefits as set forth below. 6.1. Annual Accrual of Vacation. Employee shall be entitled to four (4) weeks paid vacation for each year of service under this Agreement, during which time Employee's compensation shall be paid in full. On the first day of the term of this Agreement, and on each anniversary date during the term of this Agreement, Employee shall earn the four (4) weeks of paid vacation time. Employee may accumulate vacation time to a maximum of six (6) weeks and may carry such accumulated (earned and unused) vacation time from one year of service to another of service, subject to such maximum. At the end of each year of service during the term of this Agreement, Employee shall have the option to require the Company to pay to Employee an amount for any part or all of the Employee's earned and unused vacation time. Upon termination of employment, the Company shall purchase any earned and unused vacation time up to the maximum carry-over vacation time of six (6) weeks. The amount to be paid shall be determined as provided in the following paragraph. 2 3 6.1.1. Termination of Employment. Upon termination of employment for any reason, the Company shall pay to Employee, as a part of the final compensation payment, an amount for the earned and unused vacation time. 6.2. Fringe Benefits. Employee shall be entitled to such pension, profit sharing and fringe benefits such as hospitalization, medical, life and other insurance benefits, vacation, sick pay and short-term disability as determined by the President and Chief Executive Officer of the Company and approved by the Board of Directors of the Company, which approval shall not be unreasonably withheld ("Fringe Benefits"). 7. Termination By the Company Due To Death, Disability or Cause. 7.1. Death, Disability. In the event of Employee's death during the Term, this Agreement and the employment of Employee hereunder shall terminate automatically as of the date of death, except that Sections 10, 11, 12, 13, 14 and 15 shall survive such termination. In the event of Employee's Disability (as hereinafter defined) for ninety (90) consecutive calendar days or one hundred and twenty (120) calendar days in the aggregate during any twelve (12) months of the Term, the Company shall have the right, by written notice to Employee, to terminate this Agreement and the employment of Employee hereunder as of the date of such notice, except that Sections 10, 11, 12, 13, 14 and 15 shall survive such termination. "Disability" for the purposes of this Agreement shall mean Employee's physical or mental disability so as to render Employee substantially incapable of carrying out Employee's duties under this Agreement. In the event of termination pursuant to this Section 7.1, the Company shall not be under any further obligation to Employee hereunder except to promptly pay Employee (a) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination and (b) reimbursement for expenses accrued and payable under Section 5 hereof. 7.2. Cause. The Company shall have the right to discharge Employee and terminate this Agreement for Cause (as hereinafter defined) during the Term by written notice to Employee and this Agreement shall be deemed terminated as of the date of such notice, except that Sections 10, 11, 12, 13, 14 and 15 shall survive such termination. For the purpose of this Agreement, "Cause" shall mean (a) conviction of, or a plea of nolo contendere to, a felony, (b) gross neglect, gross misconduct or gross failure in the carrying out of Employee's duties in accordance with Section 4 hereof, (c) the engaging by Employee in a material act or acts of dishonesty affecting the Company, any affiliate or any client of the Company, or (d) drunkenness or the illegal use of drugs by Employee materially interfering with performance of Employee's obligations under this Agreement. In the event of a termination pursuant to this Section 7.2, the Company shall not be under any further obligation to Employee hereunder, except to (a) promptly pay Employee (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) continue Employee's Fringe Benefits for a period of six months from the date of termination. 7.3. Termination By the Company Other Than Due to Death, Disability or Cause. This Agreement and the employment of Employee hereunder may be terminated by the Company other than due to death, Disability or Cause by giving thirty (30) days' prior written notice to the Employee at any time, during the Term and such termination shall be effective as of 3 4 the date of termination stated in such notice, except that Sections 10, 11, 12, 13, 14 and 15 shall survive such termination. In the event of a termination pursuant to this Section 7.3, the Company shall not be under any further obligation to Employee hereunder, except to (a) promptly pay Employee (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) pay Employee the Severance Benefits (as defined below) pursuant to Section 7.4. 7.4. Severance Benefits. "Severance Benefits" shall mean, for purposes of this Agreement, (a) one-half of Employee's Base Salary as of the date of termination (the "Severance Base Salary") for a period of six full calendar months from the date of termination and (b) continuation of all of Employee's Fringe Benefits for a period of twelve full calendar months from the date of termination. Any Severance Base Salary payable under this Agreement shall be paid to Employee in six equal installments on the last business day of each of the six calendar months following the date of termination of employment. To the extent any of the Fringe Benefits are not readily available to Employee following termination of employment, the monthly cost thereof shall be paid to Employee on the last business day of each of the twelve calendar months following the date of termination of employment. 8. Termination by the Employee. The Employee shall have the right to terminate Employee's employment under this Agreement by giving thirty (30) days prior written notice to the Company at any time, and such termination shall be effective as of the date of termination stated in such notice, except that Sections 10, 11, 12, 13, 14 and 15, shall survive such termination. 8.1. Termination Other Than for Constructive Termination. In the event Employee terminates employment under this Section 8, the Company shall not be under any further obligation to Employee hereunder, except to promptly pay Employee (a) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, and (b) reimbursement for expenses accrued and payable under Section 5 hereof. 8.2. Constructive Termination. Notwithstanding anything in this Agreement to the contrary, a termination will be deemed to have occurred pursuant to this Section 8 if there should occur the following ("Constructive Termination"): (a) a material adverse change in Employee's position causing it to be of materially less stature or responsibility without Employee's written consent, and such a materially adverse change shall in all events be deemed to occur if Employee no longer serves as an officer of the Company, unless Employee consents in writing to such change, (b) a reduction, without Employee's written consent or except as expressly permitted by this Agreement, in Employee's Base Salary and Fringe Benefits by more than five percent (5%), or (c) a relocation of his principal place of employment by more than 50 miles without Employee's consent. 4 5 In the event Employee terminates his employment due to a Constructive Termination, the Company shall not be under any further obligation to Employee hereunder, except to pay Employee (a) within thirty (30) days of such termination (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) Severance Benefits pursuant to Section 7.4. 9. Change In Control Benefits. Should there occur a Change in Control (as defined below), then the following provisions shall become applicable: 9.1. During the period (if any) following a Change in Control that Employee shall continue to provide services under this Agreement, then the terms and provisions of this Agreement shall continue in full force and effect. 9.2. Notwithstanding any other provision of Sections 7 or 8, in the event of (x) a termination by the Company pursuant to Section 7.3 at any time within twelve (12) months after a Change in Control or (y) a Constructive Termination by the Company pursuant to Section 8 at any time within twelve (12) months after a Change in Control, the Company shall pay Employee (a) within thirty (30) days of such termination, (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of such termination, and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) Severance Benefits pursuant to Section 7.4. For purposes of this Section 9, a Change of Control shall be deemed to occur upon: (I) the sale, lease, conveyance or other disposition of all or substantially all of the Company's assets as an entirety or substantially as an entirety to any person, entity or group of persons acting in concert other than in the ordinary course of business; (II) any transaction or series of related transactions (as a result of a tender offer, merger, consolidation or otherwise) that results in any Person (as defined in Section 13(h)(8)(E) under the Securities Exchange Act of 1934) becoming the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 50% of the aggregate voting power of all classes of common equity of the Company, except if such Person is (A) a subsidiary of the Company, (B) an employee stock ownership plan for employees of the Company or (C) a company formed to hold the Company's common equity securities and whose stockholders constituted at the time such company became such holding company, substantially all the stockholders of the Company; or (III) the liquidation or winding up of the business of the Company. 10. Confidentiality. Employee agrees that during and after the Term any confidential information concerning the Company or its business or any Affiliates of the Company (including, without limitation, trade secrets, plans, processes, customer lists, contracts and compilations of information, records and specifications) which comes to Employee in the course of Employee's employment and which is not (independent of disclosure by Employee) public knowledge or general knowledge in the trade, shall remain confidential and, except as required by 5 6 legal process, may not be used or made available for any purpose except as necessary in the performance of Employees duties hereunder. Employee agrees that, upon termination of Employee's employment hereunder, Employee will promptly deliver to the Company all materials constituting confidential information (including all copies thereof) that are in the possession of, or under the control of, the Employee, and Employee will not make or retain any copies or extracts of such materials. 11. Remedies. 11.1. Nothing herein contained is intended to waive or diminish any rights the Company or Employee may have at law or in equity at any time to protect and defend its legitimate property interests including its business relationship with third parties, the foregoing provisions being intended to be in addition to and not in derogation or limitation of any other rights the Company or Employee may have at law or in equity. 11.2. A breach by Employee of the provisions of Section 10 of this Agreement may cause the Company irreparable injury and damage. Employee therefore agrees that damages may be an inadequate remedy and the Company shall be entitled to seek injunctive and/or other equitable relief to prevent any breach of Section 10 of this Agreement and to secure its enforcement. 12. Employee for Hire. In addition to Employee's services, the Company shall own forever and throughout the world (exclusively during the current and renewed or extended term of copyright anywhere in the world and thereafter, non-exclusively) all rights of any kind or nature now or hereafter known in and to all of the products of Employee's services performed under this Agreement in any capacity and any and all parts thereof, including, without limitation, copyright, patent and all other property or proprietary rights in or to any ideas, concepts, designs, drawings, plans, prototypes or any other similar creative works and to the product of any or all of such services under this Agreement ("Inventions"), Employee acknowledging and agreeing that for copyright purposes, Employee is performing services as the Company's employee-for-hire; provided, however, that such term shall not include Inventions that do not relate to the Company's current business or research and development and were developed without use of any Company trade secret information or Company facilities or equipment. Without limiting the generality of the previous sentence, Employee acknowledges and agrees that all memoranda, notes, records and other documents made or compiled by Employee or made available to Employee during the Term of this Agreement concerning the Company business shall be the Company's property and shall be delivered by Employee to the Company upon termination of this Agreement or at any other time at the Company's request. In addition, the Employee hereby agrees to assign to Company in writing (and take any and all other actions as shall be reasonably requested by Company in order to carry out the intent of this Section) any and all rights, title or interest of Employee in any such copyrights, patents, property or proprietary rights relating to such Inventions. 13. Notices. Any notices pertaining to this Agreement shall be addressed to the parties at their addresses stated on the first page hereof. All notices shall be in writing and shall be deemed duly given if personally delivered or sent by registered or certified mail, overnight 6 7 or express mail. If sent by registered or certified mail, notice shall be deemed to have been received and effective five days after mailing; if by overnight or express mail, notice shall be deemed received the next business day after being sent. Any party may change its address for notice hereunder by giving notice of such change in the manner provided herein. 14. Entire Agreement. This Agreement contains the entire agreement of the parties respecting the subject matter contained herein. No modification of any provision hereof shall be effective except by a written agreement signed by all of the parties hereto. 15. Arbitration (a) It is understood and agreed between the parties hereto that, except with respect to claims for workers' compensation or unemployment compensation benefits, any and all claims, grievances, demands, controversies, causes of action or disputes of any nature whatsoever (including but not limited to tort and contract claims, and claims upon any law, statute, order, or regulation) (hereinafter "Claims"), arising out, in connection with, or in relation to (i) this Agreement, (ii) questions of arbitrability under this Agreement, or (iii) any relationship between Employee and the Company before, at the time of entering, during the term of, upon or after expiration or termination of this Agreement, shall be resolved by final, binding, nonjudicial arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), which rules are incorporated herein by reference. Such dispute resolution process shall be confidential and shall be conducted in accordance with the Kansas Rules of Evidence. (b) Notwithstanding any contrary provision that may be contained in the applicable AAA rules, the parties hereby agree that discovery shall be permitted in connection with any arbitration pursuant to this Agreement, in accordance with the provisions of the Kansas Code of Civil Procedure. Neither party nor the arbitrator shall disclose the existence, content, or results of any arbitration hereunder without the prior written consent of all parties. Except as provided herein, the Federal Arbitration Act shall govern the interpretation, enforcement and all proceedings pursuant to this Section 15(b). The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the State of Kansas, or federal law, or both, as applicable. The arbitrator is without jurisdiction to apply any different substantive law. The arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under Kansas law. The arbitrator shall render an award and a written, reasoned opinion in support thereof. Such award may include attorneys' fees and costs to the prevailing party. Judgment upon the award may be entered in any court having jurisdiction thereof. (c) Adherence to this dispute resolution process shall not limit the Company's right to obtain any provisional remedy, including but without limitation, injunctive or similar relief, from any court of competent jurisdiction in the event of a breach of Section 10 of this Agreement. This dispute resolution process shall survive the termination of Employee's employment. (d) In the event that any party shall bring an action in connection with the performance, breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the 7 8 losing party in such action as determined by the court or either body having jurisdiction, all reasonable costs and expense of litigation or arbitration, including reasonable attorney's fees, court costs, costs of investigation and other costs reasonably related to such proceeding. (e) BY SIGNING THIS AGREEMENT, BOTH EMPLOYEE AND THE COMPANY ARE GIVING UP THEIR RESPECTIVE RIGHT TO A JURY TRIAL. 8 9 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first set forth above. THE COMPANY: THE MANAGEMENT NETWORK GROUP, INC., a Kansas corporation By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- EMPLOYEE: ---------------------------------------- Ralph R. Peck 9 EX-10.12 16 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.12 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of September ___, 1999, is entered into by and between THE MANAGEMENT NETWORK GROUP, INC., a Kansas corporation (the "Company"), with offices at 7300 College Boulevard, Overland Park, Kansas 66210, and DONALD KLUMB, an individual ("Employee"), residing at 4145 W. 124th Terrace, Leawood, Kansas 66209. RECITALS The Company wishes to obtain the services of Employee and Employee wishes to perform such services on the terms and conditions contained herein. Therefore, the parties hereby agree as follows: 1. EMPLOYMENT. Subject to the terms and conditions of this Agreement, effective as of July ____, 1999 (the "Effective Date"), the Company hereby employs Employee as Chief Financial Officer of the Company to perform the duties described in Section 4 hereof. 2. TERM. The term of this Agreement shall begin on the Effective Date and will continue until ____________, 2001 unless extended on terms mutually agreed upon between Employee and the Company or unless earlier terminated pursuant to the provisions of Sections 7 or 8 hereof. The period from the Effective Date until the date of termination of employment pursuant to this Agreement is herein referred to as the "Term". 3. COMPENSATION. 3.1 SALARY. Subject to the adjustment provisions herein, Employee shall be paid biweekly installments based upon an annual base salary of $180,000. After ___________, 2001, the annual base salary may be increased or decreased by such amounts as are mutually agreeable to Employee and the Company. Amounts paid pursuant to this Section 3.1 are hereinafter referred to as "Base Salary." 3.2 BONUS. In addition to Employee's Base Salary and subject to such deductions as are required by law, Employee shall be entitled to receive a bonus ("Bonus") for each fiscal year during the Term in such amount as shall be determined in the sole discretion of the President of the Company. Before the beginning of each quarter (measured from the Effective Date), the President shall provide Employee in writing, mutually agreed upon objective performance criteria for the following quarter. Within 15 days following the Effective Date, the President shall establish the objective criteria for the first quarter. Upon successful completion of such criteria, or in the event the Company fails to provide such criteria on a timely basis, the Employee shall earn and be paid, one quarter of the maximum Bonus amount established for the year. For the first year of employment, the maximum Bonus amount shall be $40,000. 2 3.3 OTHER COMPENSATION. As a part of Employee's compensation package, the President and Chief Executive Officer of the Company shall periodically (and in any event, annually) review Employee's compensation and consider such modifications as may be appropriate for the Chief Financial Officer of the Company. In connection with such review, the President and Chief Executive Officer may consider extraordinary bonuses and other forms of compensation to Employee as a result of successful acquisitions by the Company, the initial public offering of the Company's (or any successor entity's) common stock or similar events. 4. DUTIES. Employee shall, during the term hereof, be an officer of the Company and have the title of Chief Financial Officer of the Company, and shall perform such duties as and have such authority as are customary and usual for such position and as may be directed by the President and Chief Executive Officer of the Company. Without limiting the generality of the foregoing: 4.1 FULL TIME. Employee shall devote Employee's full working time to the business of the Company and shall, in accordance with the highest professional standards, seek to maximize the financial success of the Company's business and to optimize the goodwill and reputation of the Company within its industry and with its customers. During the term of this Agreement, Employee agrees that he will not become involved in the active ownership or management of any business enterprise that will interfere with the performance of his duties hereunder. Employee further warrants that he will not engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that is or may be in conflict with or that might place him in a conflicting position to that of the Company. So that the Company may be aware of the extent of any other demands upon Employee's time and attention, Employee shall disclose in confidence to the Company the nature and scope of any other business activity in which he is or becomes engaged during his employment with the Company. Employee has disclosed to Company his involvement in the management of certain family-owned businesses, Ultra Rev, Inc. and F. P. Furlong Company, Inc., and Company hereby consents to Employee's continued involvement in such businesses, so long as such involvement does not materially affect the ability of Employee to discharge his responsibilities to Company under this Agreement. Employee also warrants that he is not a party to any valid or binding agreement or legal relationship whose performance or execution would interfere with the performance of his duties under this Agreement. Employee may serve as a director of other corporations or entities with the prior approval of the President and Chief Executive Officer, which approval will not be unreasonably withheld. 4.2 REPORTING. Employee shall report to the President and Chief Executive Officer of the Company. 5. EXPENSES. Employee will be authorized to incur reasonable and necessary expenses in connection with the discharge of Employee's duties and in promoting the business of the Company. The Company will reimburse Employee for all such reasonable and necessary expenses in accordance with its expense reimbursement policy and upon presentation of a properly itemized account of such expenditures, setting forth the business reasons for such expenditures. 3 6. OTHER BENEFITS. Except as otherwise set forth herein, Employee shall be entitled to paid vacation and the other fringe benefits as set forth below. 6.1 ANNUAL ACCRUAL OF VACATION. Employee shall be entitled to three (3) weeks paid vacation for each year of service under this Agreement, during which time Employee's compensation shall be paid in full. On the first day of the term of this Agreement, and on each anniversary date during the term of this Agreement, Employee shall earn the three (3) weeks of paid vacation time. Employee may accumulate vacation time to a maximum of four (4) weeks and may carry such accumulated (earned and unused) vacation time from one year of service to another year of service, subject to such maximum. At the end of each year of service during the term of this Agreement, Employee shall have the option to require the Company to pay to Employee an amount for any part or all of the Employee's earned and unused vacation time. Upon termination of employment, the Company shall purchase any earned and unused vacation time up to the maximum carry-over vacation time of four (4) weeks. 6.2 FRINGE BENEFITS. Employee shall be entitled to such pension, profit sharing and fringe benefits such as hospitalization, medical, life and other insurance benefits, vacation, sick pay and short-term and long-term disability as the Board of Directors of the Company may, from time to time, determine to provide for the key executives of the Company. The benefits described in this Section 6.2 are collectively referred to herein as "Fringe Benefits." 7. TERMINATION BY THE COMPANY DUE TO DEATH, DISABILITY OR CAUSE. 7.1 DEATH, DISABILITY. In the event of Employee's death during the Term, this Agreement and the employment of Employee hereunder shall terminate automatically as of the date of death, except that Sections 10, 11, 12, 13 and 14 shall survive such termination. In the event of Employee's Disability (as hereinafter defined) for ninety (90) consecutive calendar days or one hundred and twenty (120) calendar days in the aggregate during any twelve (12) months of the Term, the Company shall have the right, by written notice to Employee, to terminate this Agreement and the employment of Employee hereunder as of the date of such notice, except that Sections 10, 11, 12, 13 and 14 shall survive such termination. "Disability" for the purposes of this Agreement shall mean Employee's physical or mental disability so as to render Employee substantially incapable of carrying out Employee's duties under this Agreement. In the event of termination pursuant to this Section 7.1, the Company shall not be under any further obligation to Employee hereunder except to (a) promptly pay Employee (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (iii) if the termination is due to Disability, payment of Employee's monthly Base Salary on the last day of each of the 3 months immediately following termination, and (b) continue Employee's Fringe Benefits for a period of six months from the date of termination. 7.2 CAUSE. The Company shall have the right to discharge Employee and terminate this Agreement for Cause (as hereinafter defined) during the Term by written notice to Employee and this Agreement shall be deemed terminated as of the date of such notice, except that Sections 10, 11, 12, 13 and 14 shall survive such termination. For the purpose of this Agreement, 3 4 "Cause" shall mean (a) conviction of, or a plea of nolo contendere to, a felony, (b) the wilful, deliberate and persistent failure by Employee to perform Employee's duties in accordance with Section 4 hereof (other than as a result of Disability) which failure is not remedied within a reasonable period of time after receipt of written notice from the Company, (c) the engaging by Employee in a material act or acts of dishonesty affecting the Company, any affiliate or any client of the Company, or (d) drunkenness or the illegal use of drugs by Employee materially interfering with performance of Employee's obligations under this Agreement. In the event of a termination pursuant to this Section 7.2, the Company shall not be under any further obligation to Employee hereunder, except to promptly pay Employee (a) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, (b) reimbursement for expenses accrued and payable under Section 5 hereof, and (c) any other benefits required by applicable law (e.g. COBRA), if eligible. 7.3 TERMINATION BY THE COMPANY OTHER THAN DUE TO DEATH, DISABILITY OR CAUSE. This Agreement and the employment of Employee hereunder may be terminated by the Company other than due to death, Disability or Cause by giving thirty (30) days' prior written notice to the Employee at any time, during the Term and such termination shall be effective as of the date of termination stated in such notice, except that Sections 10, 11, 12, 13 and 14 shall survive such termination. In the event of a termination pursuant to this Section 7.3, the Company shall not be under any further obligation to Employee hereunder, except to (a) promptly pay Employee (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) pay Employee the Severance Benefits (as defined below) pursuant to Section 7.4. 7.4 SEVERANCE BENEFITS. For purposes of this Agreement, "Severance Benefits" shall mean (a) if notice of termination is given to Employee during the first twelve (12) months of employment (i) three (3) months of Employee's Base Salary payable on the last business day of each of the three (3) full calendar months following termination, and (ii) continuation of Employee's Fringe Benefits for a period of four (4) full calendar months from the date of termination, and (b) if notice of termination is given to Employee following the first twelve (12) months of employment (i) six (6) months of Employee's Base Salary payable on the last business day of each of the six (6) full calendar months following termination, and (ii) continuation of all of Employee's Fringe Benefits for a period of eight full calendar months from the date of termination. To the extent any of the Fringe Benefits are not readily available to Employee following termination of employment, the monthly cost thereof shall be paid to Employee on the last business day of each of the calendar months for which Employee is entitled to receive Fringe Benefits following the date of termination of employment. 8. TERMINATION BY THE EMPLOYEE. The Employee shall have the right to terminate Employee's employment under this Agreement by giving thirty (30) days prior written notice to the Company at any time, and such termination shall be effective as of the date of' termination stated in such notice, except that Sections 10, 11, 12, 13 and 14 shall survive such termination. 4 5 8.1 TERMINATION OTHER THAN FOR CONSTRUCTIVE TERMINATION. In the event Employee terminates employment under this Section 8 for other than Constructive Termination (as defined below), the Company shall not be under any further obligation to Employee hereunder, except to promptly pay Employee (a) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, and (b) reimbursement for expenses accrued and payable under Section 5 hereof. 8.2 DEFINITION. Notwithstanding anything in this Agreement to the contrary, a "Constructive Termination" will be deemed to have occurred pursuant to this Section 8 if there should occur the following: (a) a material adverse change in Employee's position causing it to be of materially less stature or responsibility without Employee's written consent, and such a materially adverse change shall in all events be deemed to occur if Employee no longer serves as Chief Financial Officer, unless Employee consents in writing to such change, (b) a reduction, without Employee's written consent or except as expressly permitted by this Agreement, in Employee's Base Salary and Fringe Benefits by more than five percent (5%), or (c) a relocation of his principal place of employment by more than 50 miles without Employee's consent. 8.3 CONSTRUCTIVE TERMINATION. In the event Employee terminates his employment due to a Constructive Termination, the Company shall not be under any further obligation to Employee hereunder, except to pay Employee (a) within thirty (30) days of such termination (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of termination, and (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (b) Severance Benefits pursuant to Section 7.4 based upon the date of termination of employment. 9. CHANGE IN CONTROL BENEFITS. Should there occur a Change in Control (as defined below), then the following provisions shall become applicable: 9.1 CONTINUATION OF SERVICES. During the period (if any) following a Change in Control that Employee shall continue to provide services under this Agreement, then the terms and provisions of this Agreement shall continue in full force and effect. 9.2 Notwithstanding any other provision of Sections 7 or 8, in the event of (a) a termination by the Company pursuant to Section 7.3 at any time within twelve (12) months after a Change in Control, or (b) a Constructive Termination by the Company pursuant to Section 8 at any time within twelve (12) months after a Change in Control, the Company shall (y) pay Employee within thirty (30) days of such event (i) salary and benefits (and Bonuses, if any) accrued and payable up to the date of such event, (ii) reimbursement for expenses accrued and payable under Section 5 hereof, and (z) pay Employee Severance Benefits pursuant to Section 7.4 based upon the date of termination of employment. 5 6 9.3 DEFINITION. For purposes of this Section 9, a "Change of Control" shall be deemed to occur upon the earlier to occur of an event described below, the Company entering a definitive agreement to accomplish a transaction or event as described below, or a vote of the directors of the Company approving a definitive agreement for such a transaction or event as described below: (a) the sale, lease, conveyance or other disposition of at least fifty percent (50%) of the Company's assets as an entirety or substantially as an entirety to any person, entity or group of persons acting in concert other than in the ordinary course of business; (b) any transaction or series of related transactions (as a result of a tender offer, merger, consolidation or otherwise) that results in any Person (as defined in Section 13(h)(8)(E) under the Securities Exchange Act of 1934) becoming the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 50% of the aggregate voting power of all classes of common equity of the Company, except if such Person is (i) a subsidiary of the Company, (ii) an employee stock ownership plan for employees of the Company or (iii) a company formed to hold the Company's common equity securities and whose stockholders constituted at the time such company became such holding company, substantially all the stockholders of the Company; or (c) the liquidation or winding up of the business of the Company. 10. RESTRICTIONS. 10.1 NON-DISCLOSURE. Employee agrees that during and after the Term any confidential information concerning the Company or its business or any Affiliates of the Company (including, without limitation, trade secrets, plans, processes, customer lists, contracts and compilations of information, records and specifications) which comes to Employee in the course of Employee's employment and which is not (independent of disclosure by Employee) public knowledge or general knowledge in the trade, shall remain confidential and, except as required by legal process, may not be used or made available for any purpose except as necessary in the performance of Employees duties hereunder. Employee agrees that, upon termination of Employee's employment hereunder, Employee will promptly deliver to the Company all materials constituting confidential information (including all copies thereof) that are in the possession of, or under the control of, the Employee, and Employee will not make or retain any copies or extracts of such materials. 10.2 NON-SOLICITATION. During the period of Employee's employment, and for a period of two (2) years following the date of termination of Employee's employment, the Employee shall not directly or indirectly: 6 7 (a) Contact, solicit, advise or consult, any Customer (as hereinafter defined) with which Employee has had direct contact during the Term of, and arising from, his employment by the Company, for the purpose of causing such Customer to purchase, or otherwise obtain products or services which are similar to or in any way compete with the products or services sold or provided by the Company, or (b) Induce, or attempt to induce, any Customer with which Employee has had direct contact during the term of, and arising from, his employment by the Company, to cancel, diminish, decrease or curtail any business relationship, contractual or otherwise, with the Company, or (c) Contact, solicit, induce or attempt to induce or influence any employee, independent contractor or agent of any Customer or Company to terminate his or her employment, engagement or contractual relationship with such Customer or Company. 10.3 COVENANTS AGAINST COMPETITION. During the period of Employee's employment, and for a period of one (1) year following the date of Employee's voluntary termination of employment, the Employee shall not within the Restricted Area (as hereinafter defined), directly or indirectly: (a) Assist or have an interest (whether or not such interest is active), whether as partner, investor, stockholder, officer, director or as any type of principal whatever, in any person, firm, partnership, association, corporation or business organization, entity or enterprise that is or is about to become directly or indirectly engaged in, any business or activity (whether such enterprise is in operation or in the planning or development stage) that competes in any manner with the business conducted by Company. (b) Enter into the employment of or act as an independent contractor or agent for or advisor or consultant to, any person, firm, partnership, association, corporation or business organization, entity or enterprise that is or is about to become directly or indirectly engaged in, any business or activity (whether such enterprise is in operation or in the planning or development stage) that competes in any manner with the business conducted by Company. 10.4 DEFINITIONS. (a) "Customer" shall mean any individual, corporation, partnership, joint venture or other entity, or successors thereof, which has either (i) purchased or contracted for services or products by or through the Company at any time within one (1) year prior to the termination of Employee's employment with the Company, or (ii) has been directly solicited by the Company within six (6) months prior to the termination of Employee's employment with the Company, regardless of whether the Employee shall have direct contact with such individual, corporation, partnership, joint venture or entity. 7 8 (b) "Restricted Area" shall mean collectively Canada, the United States of America and Europe. (c) "Restrictions" shall mean the terms and covenants of Sections 10.1, 10.2 and 10.3, collectively. 10.5 ENFORCEABILITY OF AGREEMENT. (a) Reasonableness of Restrictions. Employee has carefully read and considered the Restrictions and, having done so, agrees that the Restrictions (including, but not limited to, the time period of restriction and the geographical areas of restriction set forth herein) are fair and reasonable and are reasonably required for the protection of the interests of Company, its owners, officers, directors and other employees. Employee has had the opportunity to consult with an attorney prior to the execution of this Agreement, and freely executes this Agreement either (i) following such consultation and with the advice of his attorney, or (ii) after freely waiving such right to consult with an attorney prior to the execution of this Agreement. (b) Severability. In the event that, notwithstanding the foregoing, any part of the Restrictions shall be held to be invalid or unenforceable, the remaining parts thereof shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included therein. Notwithstanding the foregoing, it is the intent and agreement of Company and Employee that the Restrictions shall be given the maximum force, effect and application permissible under law. (c) Time Period. In the event that a Court of competent jurisdiction shall determine by final judgment that the scope or time period of any of the Restrictions is too broad to be capable of enforcement, such court is authorized to modify such covenants and to enforce them to the full scope and extent and for the full time period that the Court deems just and equitable. (d) Passive Interest. The Restrictions shall not be construed to limit in any manner Employee's right to maintain a passive ownership interest in any entity, the securities of which are traded on a national exchange, which may compete with Company, so long as Employee shall not have the right or power to elect a member of the Board of Directors of such entity or to otherwise control the actions of such entity. 11. REMEDIES. 11.1 REMEDIES CUMULATIVE. Nothing herein contained is intended to waive or diminish any rights the Company or Employee may have at law or in equity at any time to protect and defend its legitimate property interests including its business relationship with third parties, the foregoing provisions being intended to be in addition to and not in derogation or limitation of' any other rights the Company or Employee may have at law or in equity. 8 9 11.2 INJUNCTIVE RELIEF. Employee hereby acknowledges and agrees that Company would be irreparably injured, the value of the business of Company would be irreparably damaged and Company could not adequately be compensated by monetary damages, if Employee were to violate the Restrictions. Employee covenants and agrees that, if Employee shall violate any of the Restrictions, Company specifically shall be entitled to injunctive and other equitable relief to enjoin Employee's violations of such Restrictions. The prevailing party in any such injunctive action shall be entitled to reimbursement from the other party for all actual attorney fees expended in such action. 11.3 NOTICE OF VIOLATION. In the event Company believes that Employee is violating any of the Restrictions, Company shall so notify Employee in writing, which notice shall describe with as much specificity as possible, the nature of the alleged violation. Provided that Employee is in violation of the Restrictions, if the Employee does not, within fourteen (14) days following receipt of said notice, cease the conduct, terminate the relationship or otherwise cure such violation, the Company shall have no further obligation to make payments to Employee pursuant to the terms of this Agreement following the date of receipt of such notice. 11.4 ACCOUNTING FOR PROFITS. Employee hereby covenants and agrees that, if Employee shall violate any of the Restrictions, Company shall be entitled to an accounting and repayment of all profits, compensation, commissions, remunerations or benefits which Employee directly or indirectly has realized and/or may realize as a result of, growing out of or in connection with any such violation. 12. EMPLOYEE FOR HIRE. In addition to Employee's services, the Company shall own forever and throughout the world (exclusively during the current and renewed or extended term of copyright anywhere in the world and thereafter, non-exclusively) all rights of any kind or nature now or hereafter known in and to all of the products of Employee's services performed under this Agreement in any capacity and any and all parts thereof, including, without limitation, copyright, patent and all other property or proprietary rights in or to any ideas. concepts, designs, drawings, plans, prototypes or any other similar creative works and to the product of any or all of such services under this Agreement (collectively, "Inventions"). Employee hereby acknowledges and agrees that for copyright purposes, Employee is performing services as the Company's employee-for-hire; provided, however, that for purposes of this Agreement, "Inventions" shall not include those that do not relate to the Company's current business or research and development and were developed without use of any Company trade secret information or Company facilities or equipment. Without limiting the generality of the previous two sentences, Employee acknowledges and agrees that all memoranda, notes, records and other documents made or compiled by Employee or made available to Employee during the Term of this Agreement concerning the Company business shall be the Company's property and shall be delivered by Employee to the Company upon termination of this Agreement or at any other time at the Company's request. In addition, the Employee hereby agrees to assign to Company in writing (and take any and all other actions as shall be reasonably requested by Company in order to carry out the intent of this Section) any and all rights, title or interest of Employee in any such copyrights, patents, property or proprietary rights relating to such Inventions. 9 10 13. STOCK OPTIONS. Employee is hereby granted a non-qualified stock option (the "Option") to acquire 500,000 shares of capital common stock of the Company ("Shares") upon the terms and conditions set forth below. In the event that Employee enters into a subsequent employment agreement with the Company, the provisions of this Section 13 shall survive and be incorporated in such new employment agreement. 13.1 VESTING. Except as provided below, so long as Employee shall remain employed by the Company, the Option to acquire 125,000 Shares shall vest on each of the next following four consecutive annual anniversary dates of the beginning of Employee's employment with the Company (each of such four dates being an "Anniversary Date"). The Shares with respect to which the Option has vested shall be "Vested Shares", and the date upon which such Shares become Vested Shares shall be the "Vesting Date". (a) In the event the Company closes on the sale of Shares in a public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (a "Public Offering") resulting in at least $20,000,000 of gross proceeds to the Company, 75,000 Shares will become Vested Shares on the closing of such Public Offering. In the event of such Public Offering and vesting of 75,000 Shares, an equal amount of the then remaining unvested Shares shall become Vested Shares on each of the remaining Anniversary Dates following the Public Offering. (b) The foregoing notwithstanding, any then remaining unvested Shares shall immediately become Vested Shares, (i) in the event both Micky Woo and Richard Nespola terminate employment with the Company for reasons other than death or disability, or (ii) in the event Employee remains employed by the Company for the shorter of (A) six (6) months following the occurrence of a Change in Control, or (B) upon the closing or occurrence of an event described in Section 9.3(a), (b) or (c), or (iii) upon the occurrence of events resulting from a Change in Control entitling Employee to payment under Section 9.2. 13.2 EXERCISE OF OPTION. Employee may exercise its Option to acquire any or all Vested Shares upon written notice to the Company and payment of the Option Price in cash for such Vested Shares prior to the expiration of the Option. 13.3 OPTION PERIOD. The Option to acquire Vested Shares shall expire five (5) years following the Vesting Date with respect to such vested Shares ("Standard Option Period"), unless earlier terminated in accordance with this Agreement. (a) In the event Employee's employment is terminated, other than for Cause, the Option to acquire Vested Shares as of the date of such termination, shall expire on the earlier of (i) expiration of the Standard Option Period, or (ii) 120 days following the date of termination of employment. 10 11 (b) In the event Employee's employment is terminated for Cause, the Option to acquire Vested Shares shall be deemed to expire as of the date of termination of employment. 13.4 OPTION PRICE. The price at which the Employee may exercise the Option (the "Option Price") shall be $1.00/Share. 14. MISCELLANEOUS. 14.1 NOTICES. Any notices pertaining to this Agreement shall be addressed to the parties at their addresses stated on the first page hereof. All notices shall be in writing and shall be deemed duly given if personally delivered or sent by registered or certified mail, overnight or express mail. If sent by registered or certified mail, notice shall be deemed to have been received and effective three days after mailing; if by overnight or express mail, notice shall be deemed received the next business day after being sent. Any party may change its address for notice hereunder by giving notice of such change in the manner provided herein. 14.2 ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties respecting the subject matter contained herein. No modification of any provision hereof shall be effective except by a written agreement signed by all of the parties hereto. 14.3 ARBITRATION. (a) It is understood and agreed between the parties hereto that, except with respect to claims for workers' compensation or unemployment compensation benefits, any and all claims, grievances, demands, controversies, causes of action or disputes of any nature whatsoever (including but not limited to tort and contract claims, and claims upon any law, statute, order, or regulation) (hereinafter "Claims"), arising out of, in connection with, or in relation to (i) this Agreement, (ii) questions of arbitrability under this Agreement, or (iii) any relationship between Employee and the Company before, at the time of entering, during the term of, upon or after expiration or termination of this Agreement, shall be resolved by final, binding, nonjudicial arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), which rules are incorporated herein by reference. Such dispute resolution process shall be confidential and shall be conducted in accordance with the Kansas Rules of Evidence. (b) Notwithstanding any contrary provision that may be contained in the applicable AAA rules, the parties hereby agree that discovery shall be permitted in connection with any arbitration pursuant to this Agreement, in accordance with the provisions of the Kansas Code of Civil Procedure. Neither party nor the arbitrator shall disclose the existence, content, or results of any arbitration hereunder without the prior written consent of all parties. Except as provided herein, the Federal Arbitration Act shall govern the interpretation, enforcement and all proceedings pursuant to this Section 14.3. The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the State of Kansas, or federal law, or both, as applicable. The arbitrator is without jurisdiction to 11 12 apply any different substantive law. The arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under Kansas law. The arbitrator shall render an award and a written, reasoned opinion in support thereof. Such award may include attorneys' fees and costs to the prevailing party. Judgment upon the award may be entered in any court having jurisdiction thereof. (c) Adherence to this dispute resolution process shall not limit the Company's right to obtain any provisional remedy, including but without limitation, injunctive or similar relief, from any court of competent jurisdiction in the event of a breach of Section 10 of this Agreement. This dispute resolution process shall survive the termination of Employee's employment. (d) In the event that any party shall bring an action in connection with the performance , breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the losing party in such action as determined by the court or either body having jurisdiction, all reasonable costs and expense of litigation or arbitration, including reasonable attorney's fees, court costs, costs of investigation and other costs reasonably related to such proceeding. (e) By signing this Agreement, both Employee and the Company are giving up their respective right to a jury trial. 14.4 PERSONAL COMPUTER. During the Term, the Company shall provide Employee, at Company expense, with a portable personal computer (the "Laptop") with such capabilities and capacity, and including all necessary software, as shall be reasonably necessary to discharge Employee's duties under this Agreement. Upon termination of Employee's employment, the Employee shall promptly deliver to the Company any and all tangible property of the Company, including without limitation the Laptop and any software related thereto and the contents of any files stored therein. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first set forth above. THE COMPANY: THE MANAGEMENT NETWORK GROUP, INC., a Kansas corporation By: --------------------------------- Richard P. Nespola - President and CEO 12 13 EMPLOYEE: ------------------------------------ DONALD KLUMB 13 EX-21.1 17 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES OF TMNG, INC. 1. TMNG.com, Inc, incorporated in the U.S. under the laws of the state of Delaware. 2. TMNG Canada, Ltd., incorporated in Canada 3. TMNG Europe, Ltd., incorporated in England and Wales EX-23.1 18 CONSENT FO DELOITTE & TOUCHE 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of The Management Network Group, Inc. on Form S-1 of our report dated September 13, 1999, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Kansas City, Missouri September 17, 1999 EX-27.1 19 FINANCIAL DATA SCHEDULE
5 YEAR 6-MOS JAN-02-1999 JUL-03-1999 JAN-02-1998 JAN-03-1999 JAN-02-1999 JUL-03-1999 959 933 0 0 9,244 9,475 (120) 193 0 0 10,134 11,052 455 641 30 97 11,006 11,986 4,109 5,321 24,717 21,125 0 0 0 0 17,352 18,482 (35,727) (33,322) 11,006 11,986 0 0 32,103 23,856 0 0 17,411 12,538 6,158 5,300 0 229 2,054 1,116 6,586 4,825 3,386 1,992 3,200 0 0 0 0 0 0 0 3,200 2,833 0.14 0.13 0.14 0.12
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