SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): February 6, 2001
BREAKAWAY SOLUTIONS, INC.
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(Exact Name of Registrant as Specified in Charter)
DELAWARE 000-27269 04-3285165
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(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
3 CLOCK TOWER PLACE, 4TH FLOOR
MAYNARD, MASSACHUSETTS 01754
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(Address of Principal Executive Offices) (Zip Code)
(978) 461-7800
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(Registrant's Telephone Number, Including Area Code)
2 SEAPORT LANE
BOSTON, MASSACHUSETTS 02210
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(Former Name or Former Address, if Changed Since Last Report)
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Current Report on Form 8-K contains forward-looking statements
which reflect the current judgment of Breakaway Solutions, Inc., a Delaware
corporation (the "Company" or the "Registrant"), on certain issues relating to
the Registrant's recently announced financing transactions with ICG Holdings,
Inc., a Delaware corporation, SCP Private Equity Partners II, L.P., a Delaware
limited partnership, and Invest Inc., a Delaware corporation. Because these
statements apply to future events, they are subject to risks and uncertainties
that could cause the actual results to differ materially. Important factors
which could cause actual results to differ materially include: the Registrant's
ability to raise additional capital; equity dilution; likely variation in the
Registrant's quarterly revenues and operating results; the Registrant's ability
to retain personnel and customers; delays relating to regulatory review of
stockholder materials and required notice and waiting periods for a special
meeting of the Registrant's stockholders, the Registrant's ability to realize
benefits from acquisitions and strategic alliances; the adoption and acceptance
of application hosting services by collaborative enterprises; product acceptance
and customer demand; competition; risks in conducting business outside the
United States; and the other risks described under the heading "Factors that May
Affect Future Results" in the Registrant's Annual Report on Form 10-K for the
period ended December 31, 1999 and in the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 2000, on file with the Securities and
Exchange Commission ("SEC"), which factors are incorporated herein by reference.
ITEM 5. OTHER EVENTS
OVERVIEW
On February 16, 2001, Breakaway Solutions, Inc., a Delaware corporation
(the "Company" or the "Registrant"), entered into several financing arrangements
with ICG Holdings, Inc., a Delaware corporation ("ICG Holdings"), and SCP
Private Equity Partners II, L.P., a Delaware limited partnership ("SCP"). These
financing arrangements included an amendment to the Company's outstanding loan
agreement with ICG Holdings, a separate loan agreement with SCP and a preferred
stock purchase agreement with both ICG Holdings and SCP. ICG Holdings is a
wholly owned subsidiary of Internet Capital Group, Inc., a Delaware corporation
and the Company's largest stockholder ("ICG"). Walter W. Buckley, III, a
director of the Company, is President, Chief Executive Officer and a director of
ICG and is President and a director of ICG Holdings.
On February 6, 2001, Invest Inc., a Delaware corporation ("Invest")
consummated an investment in the Company under which it received 4,285,714
shares of Common Stock at a per share purchase price of $0.70 and warrants to
purchase up to 4,285,714 shares of Common Stock at a per share exercise price of
$0.70. A former director of the Company is the sole director and sole
stockholder of Invest.
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LOAN AGREEMENTS
On January 19, 2001, the Company entered into a loan agreement with
ICG Holdings (the "Original ICG Holdings Loan"). On February 8, 2001, the
Original ICG Holdings Loan was amended to increase the maximum amount which
could be borrowed thereunder to $7,400,000. On February 16, 2001, the Company
again amended the Original ICG Holdings Loan (the "Amended ICG Holdings Loan"
together with the Original ICG Holdings Loan, the "ICG Holdings Loan"),
primarily to increase the maximum amount which the Company may borrow under,
and extend the maturity date of, the Original ICG Holdings Loan, as well as
to facilitate the Company entering into a similar loan agreement with SCP. As
amended on February 16, 2001, the maximum amount which the Company may borrow
under the ICG Holdings Loan is $10,000,000 and all principal and interest
thereunder is due and payable in full on April 9, 2001. The interest rate
applied to borrowings under the ICG Holdings Loan remains at 12% per annum
(or 18% after an event of default) and all principal and interest remains
fully secured by substantially all of the Company's assets. All borrowings
under the ICG Holdings Loan, as amended, are subject to the discretion of ICG
Holdings.
Also on February 16, 2001, the Company entered into a loan agreement
with SCP under substantially the same terms as the ICG Holdings Loan (the "SCP
Loan"). Under the terms of the SCP Loan, the Company may borrow up to
$10,000,000 at an interest rate of 12% per annum (or 18% after an event of
default). Principal and interest are due and payable in full on April 9, 2001
and are fully secured by substantially all of the Company's assets. All
borrowings under the SCP Loan are subject to the discretion of SCP.
As of February 16, 2001, the aggregate outstanding balance of
principal and interest under the ICG Holdings Loan and the SCP Loan was
approximately $12,300,000. ICG Holdings and SCP have entered into an
agreement to administer certain of the Company's obligations, and the
security interests in the collateral under the ICG Holdings Loan and the SCP
Loan.
In connection with the Company entering into the ICG Holdings Loan, on
January 19, 2001, the Company issued to ICG Holdings warrants to purchase up to
9,737,447 shares of the Company's Common Stock, $0.000125 par value per share
(the "Common Stock"), at a per share exercise price of $0.6875 (the `Loan
Warrants"). In connection with the Company entering into the SCP Loan, ICG
Holdings surrendered from the Loan Warrants warrants to purchase up to 6,491,631
shares of Common Stock. Those surrendered Loan Warrants were reissued to SCP on
February 16, 2001. ICG Holdings and SCP are parties to a registration rights
agreement with the Company granting ICG Holdings and SCP "piggy-back" and Form
S-3 registration rights with respect to the shares of Common Stock issuable upon
exercise of the Loan Warrants.
PREFERRED STOCK PURCHASE AGREEMENT
In addition to entering into the amendment to the ICG Holdings Loan and
the SCP Loan, on February 16, 2001, the Company also entered into a Series A
Preferred Stock Purchase Agreement with ICG Holdings and SCP (the "Purchase
Agreement"). Under the terms of the Purchase Agreement, the Company agreed to
issue to SCP and to ICG Holdings (i) an aggregate of up to 428,572 shares of the
Company's Series A Preferred Stock, $0.0001 par value per share (the "Series A
Preferred"), at a per share purchase price of $70.00 and (ii) warrants to
purchase an aggregate of up to 42,857,200 shares of
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Common Stock at a per share exercise price of $0.70 (the "Purchase Agreement
Warrants").
The closing of the Purchase Agreement is subject to numerous
conditions, including, without limitation, (i) authorization by the Company's
stockholders of the issuance of securities under the Purchase Agreement
consistent with the requirements of the Nasdaq National Market (the "Securities
Issuance Authorization"), (ii) approval by the Company's stockholders of an
amendment to the Company's Third Amended and Restated Certificate of
Incorporation (the "Restated Charter") increasing from 80,000,000 to 245,000,000
the number of shares of Common Stock authorized for issuance by the Company (the
"Charter Amendment Approval"), (iii) completion to the satisfaction of SCP and
ICG Holdings of their review of the Company and its business, (iv) execution by
certain members of the Company's management and key employees of noncompetition,
lock-up, forebearance of change in control benefits and other similar
agreements, (v) satisfaction by the Company of various operational and financial
parameters and (vi) absence of the occurrence of any material adverse change to
the Company.
The Company expects to hold a special meeting of its stockholders to
seek the Securities Issuance Authorization and the Charter Amendment Approval in
early April 2001. The Company's board of directors has fixed February 8, 2001 as
the record date (the "Record Date") for determining holders of Common Stock who
are entitled to vote at the special meeting. SCP has advised the Company that it
has received commitments from certain members of the management and one former
director of the Company holding an aggregate of approximately 10,000,0000
outstanding shares of Common Stock, or approximately 19.8% of the 50,586,028
shares of Common Stock issued and outstanding as of the Record Date, to vote for
the Securities Issuance Authorization and the Charter Amendment Approval. These
stockholders, together with ICG, hold an aggregate of approximately 25,100,000
outstanding shares of Common Stock, or approximately 49.6% of the outstanding
shares of the Common Stock as of the Record Date.
If the Closing of the Purchase Agreement has not occurred on or
prior to April 10, 2001, SCP and ICG Holdings may terminate the Purchase
Agreement. Upon such termination, if the closing did not occur because the
Company obtained alternative financing, was acquired or entered into an
agreement for alternative financing or to be acquired, the Company will be
required to pay to SCP a break-up fee in the amount of $20,000,000. If the
closing did not occur for certain other reasons, the Company will be required
to pay to SCP a break-up fee in the amount of $5,000,000.
At the closing of the Purchase Agreement, the outstanding principal
balance under both the ICG Holdings Loan and the SCP Loan, plus interest, will
be used to fund the purchase price for the shares of Series A Preferred to be
issued at the Closing. Consequently, although the Company will no longer have
any repayment obligations
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under the ICG Holdings Loan and the SCP Loan, the Company will receive only
additional cash at the closing equal to the purchase price for the shares of
Series A Preferred issued at the Closing, net of the aggregate outstanding
balance of principal and interest under the ICG Loan and the SCP Loan.
Pursuant to the Purchase Agreement, at the closing, the Company will
enter into an Investor Rights Agreement with SCP and ICG Holdings (the "Rights
Agreement") under which it will agree to, within 30 days of the closing of the
Purchase Agreement, register with the SEC under the Securities Act of 1933, as
amended (the "Securities Act"), the shares of Common Stock issuable by the
Company upon conversion of the Series A Preferred and upon exercise of the
Purchase Agreement Warrants for resale by SCP and ICG Holdings.
The Rights Agreement also provides that for so long as SCP holds at
least 50% of the shares of Series A Preferred originally issued to SCP under the
Purchase Agreement, the Company shall use its best efforts to (i) maintain a
board of directors consisting of seven members, two of which shall be selected
by SCP and one of which shall be selected by both SCP and ICG and (ii) reserve
one seat on each committee of the board of directors for one of the directors
selected by SCP, to the extent consistent with applicable director independence
requirements. SCP has advised the Company that it expects Wayne Weisman, an
affiliate of SCP, to be one of the directors selected by SCP. The Company has
also been advised by SCP and ICG Holdings that SCP has agreed that for so long
as ICG Holdings owns at least 10% of the Company on a primary basis, if Walter
W. Buckley vacates his position as a director of the Company, SCP will support
in his place a director designated by ICG Holdings. It is another condition to
closing the Purchase Agreement that Christopher H. Greendale shall have resigned
as a director of the Company. That director position shall remain vacant until
filled by a director selected by SCP and ICG Holdings.
The Series A Preferred has not yet been designated by the Company. In
connection with the closing of the Purchase Agreement, the Company will file a
Certificate of Designations with the Secretary of State of the State of Delaware
designating the Series A Preferred. The rights, preferences and powers of the
Series A Preferred to be set forth in that Certificate of Designations will
include the following:
VOTING RIGHTS. In general, shares of the Series A Preferred will vote
on an as-converted basis with the shares of Common Stock as the same class. In
addition, the vote of the holders of at least a majority of the outstanding
shares of Series A Preferred will be required for the Company to effect certain
transactions, including, without limitation, (i) issuing stock with rights,
preferences or privileges senior to or on a parity with the Series A Preferred
or otherwise amending the Restated Charter or the Company's by-laws or
recapitalizing or reclassifying the Company's securities so as to adversely
affect or diminish the rights, preferences or privileges of the Series A
Preferred, (ii) increasing the shares of capital stock authorized for issuance
by the Company, (iii) entering into a reorganization, merger or consolidation of
the Company involving a change in control of the Company or a sale of
substantially all of the assets of the Company, (iv) liquidating, dissolving or
winding-up the Company, (v) effecting certain redemptions and repurchases
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of the Company's capital stock and (vi) effecting certain dividend payments on
any shares of the Company's capital stock.
LIQUIDATION PREFERENCE. Upon a voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of the Series A Preferred
will be entitled to be paid out of the Company's assets available for
distribution prior to any distribution to the holders of Common Stock an amount
equal to $70.00 per share (as adjusted for stock splits, stock dividends and
similar events), plus any accrued but unpaid dividends on the Series A
Preferred. After payment of these preferential amounts, the remaining assets
available for distribution will be distributed ratably to the holders of the
Series A Preferred, on an as-converted basis, and the holders of the Common
Stock. A merger, consolidation, change of control or sale of all or
substantially all of the Company's assets will be deemed to be a liquidation of
the Company.
CONVERSION. The holders of the Series A Preferred have the right, at
any time and at their option to convert the Series A Preferred into a number of
shares of Common Stock determined by dividing $70.00 by the conversion price of
$0.70 per share (the "Conversion Price"). In addition, each share of Series A
Preferred will automatically convert, in accordance with the same formula, upon
(i) the written consent of the holders of at least a majority of the then
outstanding shares of Series A Preferred, (ii) the closing of a firmly
underwritten public offering by the Company pursuant to an effective
registration statement under the Securities Act, at a per share price equal to
at least four times the Conversion Price then in effect and with gross cash
proceeds to the Company of at least $60,000,000 (a "Qualified Public Offering")
or (iii) a consolidation or merger of the Company involving a change in control
of the Company or sale of all or substantially all of the Company's assets for a
minimum consideration payable for each share of Common Stock (on a fully diluted
basis) equal to three times the Conversion price then in effect payable in cash
or liquid securities (a "Qualified Sale"). The Conversion Price is subject to
adjustment in the case of any stock dividend, stock split, combination, capital
reorganization, reclassification or merger or consolidation. Subject to limited
exceptions, the Conversion Price is also subject to adjustment in the case of an
issuance of shares of Common Stock, or securities exercisable for or convertible
into Common Stock, at a per share price less than the Conversion Price then in
effect (a "Dilutive Issuance"). In the event of a Dilutive Issuance, the
Conversion Price will be reduced to equal the per share price of that Dilutive
Issuance.
DIVIDENDS. The shares of Series A Preferred will be entitled to receive
dividends out of funds legally available therefor at the rate of 8.0% per annum.
Such dividends will be payable, when and if declared, at the option of the
Company either in cash or in additional shares of Series A Preferred valued
based upon the original $70.00 per share issue price therefor. Dividends will be
cumulative and accrue quarterly. In the event of a Qualified Public Offering or
a Qualified Public Sale within three years after the closing of the Purchase
Agreement, all issued and outstanding shares of Series A Preferred issued as
dividends will be canceled.
REDEMPTION. At any time after January 20, 2006, each holder of Series A
Preferred will be entitled to have the Company redeem all, but not less than
all, of such
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holder's shares of Series A Preferred for a per share price equal to $70.00 (as
adjusted for stock splits, stock dividends and similar events), plus all accrued
but unpaid dividends. If the Company for any reason fails to redeem any shares
of Series A Preferred required to be redeemed, the Company, among other things,
will be prohibited from incurring any additional indebtedness without the
consent of a majority of the then outstanding shares of Series A Preferred and
dividends will continue to accrue on the shares of Series A Preferred required
to be redeemed.
INVEST TRANSACTION
On February 6, 2001, Invest consummated an investment in the Company
under which it received 4,285,714 shares of Common Stock at a per share purchase
price of $0.70 and warrants to purchase up to 4,285,714 shares of Common Stock
at a per share exercise price of $0.70. Invest is also a party to a registration
rights agreement with the Company under which the Company agreed to, no later
than March 23, 2001, register with the SEC under the Securities Act, the shares
of Common Stock sold to Invest and the shares of Common Stock issuable by the
Company upon the exercise by Invest of its warrants for resale by Invest. The
Company has also agreed to use its best efforts to cause such registration
statement to be declared effective no later than the fifteenth day after the
registration statement is filed with the SEC.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
Not applicable.
(B) PRO FORMA FINANCIAL INFORMATION
Not applicable.
(C) EXHIBITS
The exhibits filed as part of this Current Report on Form 8-K
are listed on the Exhibit Index immediately preceding such exhibits, which
Exhibit Index is incorporated herein by reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
BREAKAWAY SOLUTIONS, INC.
Date: March 2, 2001 By: /s/ GORDON BROOKS
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Gordon Brooks
President and
Chief Executive Officer
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 Series A Preferred Stock Purchase Agreement, dated as of
February 16, 2001, by and among the Registrant, SCP Private
Equity Partners II, L.P. ("SCP") and ICG Holdings, Inc. ("ICG
Holdings").
10.2 Letter Agreement, dated as of February 16, 2001, by and among
the Registrant, ICG Holdings and SCP.
10.3 Amendment to Loan and Security Agreement, dated February 16,
2001, by and between the Registrant and ICG Holdings, Inc.
10.4 Second Amendment to Loan and Security Agreement, dated
February 16, 2001, by and among the Registrant, ICG Holdings
and SCP.
10.5 Amendment to Registration Rights Agreement, dated as of
February 16, 2001, by and among the Registrant, ICG Holdings
and SCP.
10.6 Loan and Security Agreement, dated February 16, 2001, by and
between the Registrant, as borrower and SCP, as lender and
agent thereunder.
10.7 Common Stock Purchase Warrant, issued by the Registrant to ICG
Holdings, dated February 16, 2001.
10.8 Common Stock Purchase Warrant, issued by the Registrant to
SCP, dated February 16, 2001.