<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1997
REGISTRATION NO. 333-26185
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
STREAM INTERNATIONAL HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 7379 364003866
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
---------------
275 DAN ROAD,
CANTON, MASSACHUSETTS 02021
(617) 575-6800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STEPHEN D.R. MOORE
STREAM INTERNATIONAL HOLDINGS INC.
275 DAN ROAD
CANTON, MASSACHUSETTS 02021
(617) 575-6800
FAX (617) 575-6973
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE AND FAX
NUMBERS, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
MARK G. BORDEN, ESQ. EDWIN L. MILLER, JR., ESQ.
HALE AND DORR LLP TESTA, HURWITZ & THIBEAULT, LLP
60 STATE STREET 125 HIGH STREET
BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110
(617) 526-6000 (617) 248-7000
FAX (617) 526-5000 FAX (617) 248-7100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
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, 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 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,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM AMOUNT
AMOUNT MAXIMUM AGGREGATE OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING PRICE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) (1) FEE (2)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share......... $ $150,000,000 $45,455
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933,
as amended.
(2) Previously paid. ---------------
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
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
JULY 10, 1997
Shares
LOGO
Common Stock
--------
Of the shares of Common Stock offered hereby, are being sold by
Stream International Inc. ("Stream" or the "Company") and are being sold by
R.R. Donnelley & Sons Company ("R.R. Donnelley") and certain of its affiliates
(collectively, the "Selling Stockholders"). The Company will not receive any
proceeds from the sale of the shares by the Selling Stockholders. Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be
between $ and $ per share. See "Underwriting" for the factors to be
considered in determining the initial public offering price. Application has
been made for quotation of the Common Stock on the Nasdaq National Market under
the symbol "STRM."
Upon completion of this offering, R.R. Donnelley and certain of its
affiliates will own approximately % of the outstanding Common Stock of the
Company (approximately % if the Underwriters' over-allotment option is
exercised in full). See "Principal and Selling Stockholders."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 6.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY (1) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
- --------------------------------------------------------------------------------
Total (2)........................ $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Before deducting expenses of the offering payable by the Company, estimated
at $1,800,000.
(2) R.R. Donnelley and certain of its affiliates have granted the Underwriters
a 30-day option to purchase up to additional shares of Common Stock
solely to cover over-allotments, if any. To the extent that the option is
exercised, the Underwriters will offer the additional shares at the Price
to Public shown above. If the option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Selling
Stockholders will be $ , $ and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1997.
Joint Lead Managers
Alex. Brown & Sons Lehman Brothers
Incorporated
--------
J.P. Morgan & Co.
Salomon Brothers Inc
Smith Barney Inc.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[INSIDE COVER PAGE OF PROSPECTUS]
[LEFT PANEL]
TOP LEFT OF PANEL: PHOTOGRAPH OF A GLOBE SHOWING NORTH AMERICA
MIDDLE RIGHT OF PANEL: "TECHNICAL SUPPORT SERVICES"
TOP RIGHT OF PANEL: PARAGRAPH WRITTEN IN ORANGE LETTERING "STREAM CURRENTLY
HANDLES CALLS FROM MORE THAN 4,400 WORKSTATIONS IN TEN CALL CENTERS IN THE
UNITED STATES, GERMANY, FRANCE, THE UNITED KINGDOM AND THE NETHERLANDS."
PARAGRAPH WRITTEN IN BLUE LETTERING "STREAM HAS PURSUED A STRATEGY OF
GEOGRAPHIC EXPANSION, WITH FIVE CALL CENTERS IN EUROPE, A JOINT VENTURE IN
JAPAN AND SUPPORT CAPABILITIES IN ELEVEN LANGUAGES."
BOTTOM OF PANEL: GRAPHICAL IMAGE OF WORLD MAP INDICATING LOCATIONS OF STREAM
CALL CENTERS
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
[MIDDLE PANEL]
TOP CENTER: PARAGRAPH IN BLUE LETTERING "STREAM PROVIDES TECHNICAL SUPPORT
SERVICES VIA TELEPHONE, E-MAIL AND THE INTERNET PRIMARILY TO THE CUSTOMERS OF
SOFTWARE PUBLISHERS, HARDWARE MANUFACTURERS AND ONLINE SERVICE PROVIDERS, AND
DIRECTLY TO CORPORATE CUSTOMERS."
TOP CENTER: "MARKET FOCUS AND CUSTOMER SERVICES"
MIDDLE UPPER LEFT OF PANEL: PHOTOGRAPH OF THE LEFT SIDE OF A COMPUTER
MONITOR
MIDDLE UPPER RIGHT OF PANEL: PHOTOGRAPH OF THE RIGHT SIDE OF A COMPUTER
MONITOR DISPLAYING A GRAPH
MIDDLE LOWER LEFT OF PANEL: PHOTOGRAPH OF COMPUTER HARDWARE
MIDDLE OF LOWER RIGHT OF PANEL: PHOTOGRAPH OF COMPUTER HARDWARE
BOTTOM OF PANEL: FOUR PARAGRAPHS ALIGNED SIDE-BY-SIDE ENTITLED: "SOFTWARE
PUBLISHER," "HARDWARE MANUFACTURER," "ONLINE SERVICE PROVIDER," AND "CORPORATE
HELP DESK." THE FOLLOWING PARAGRAPH FOLLOWS THE HEADING "SOFTWARE PUBLISHER:"
"STREAM SUPPORT SERVICES ADDRESS OPERATING ENVIRONMENTS, APPLICATIONS,
DATABASES, COMMUNICATION AND NETWORK TOOLS, AND SYSTEM TOOLS." THE FOLLOWING
PARAGRAPH FOLLOWS THE HEADING "HARDWARE MANUFACTURER:" "STREAM PROVIDES
SUPPORT FOR A VARIETY OF HARDWARE PRODUCTS, INCLUDING PCS, PERIPHERALS AND
REMOTE ACCESS SERVERS, AS WELL AS THEIR ASSOCIATED SOFTWARE APPLICATIONS." THE
FOLLOWING PARAGRAPH FOLLOWS THE HEADING "ONLINE SERVICE PROVIDER:" "STREAM
SUPPORTS INTERNET AND INTRANET PRODUCTS THROUGH THE TELEPHONE AND E-MAIL." THE
FOLLOWING PARAGRAPH FOLLOWS THE HEADING "CORPORATE HELP DESK:" "STREAM
SUPPORTS LARGE CORPORATIONS THAT OUTSOURCE HARDWARE AND SOFTWARE HELP DESK
SUPPORT TO THIRD PARTIES."
[RIGHT PANEL]
TOP MIDDLE PANEL: PARAGRAPH IN BLUE LETTERING "STREAM IS A LEADING PROVIDER
OF OUTSOURCE TECHNICAL SUPPORT SERVICES. ITS SCALE OF OPERATIONS AND
INFRASTRUCTURE ALLOW IT TO IMPLEMENT SUPPORT FOR THE GROWING INFORMATION
TECHNOLOGY INDUSTRY."
RIGHT MIDDLE PANEL: "TECHNICAL SUPPORT SPECIALISTS"
LEFT CENTER OF PANEL: PHOTOGRAPH OF STREAM TRAINING SESSION IN PROGRESS AND
ORANGE INDICATOR WITH ORANGE LETTERING "ONGOING SERVICE AGENT TRAINING"
MIDDLE OF PANEL: PHOTOGRAPH OF STREAM SERVICE AGENT AT A WORKSTATION
HANDLING A TELEPHONE SUPPORT REQUEST AND ORANGE INDICATOR WITH ORANGE
LETTERING "HIGHLY-SKILLED SERVICE PROFESSIONALS." PHOTOGRAPH OF COMPUTER
MONITOR AND PHOTOGRAPH OF MAN MONITORING COMPUTER EQUIPMENT WITH ORANGE
INDICATOR AND ORANGE LETTERING "FOCUS ON TECHNOLOGY AND TECHNICAL SUPPORT."
BOTTOM OF PANEL: ORANGE LETTERING "STREAM'S SERVICE AGENTS ANSWER QUESTIONS,
DIAGNOSE PROBLEMS AND RESOLVE TECHNICAL DIFFICULTIES, RANGING FROM SIMPLE
ERROR MESSAGES TO WIDE AREA NETWORK FAILURES."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and the notes thereto
appearing elsewhere in this Prospectus.
THE COMPANY
Stream is a leading worldwide provider of outsource technical support
services. The Company provides support services via the telephone, e-mail and
the Internet primarily to customers of leading software publishers, hardware
manufacturers and online service providers. The Company's service agents answer
questions, diagnose problems and resolve technical difficulties, ranging from
simple error messages to wide area network failures. The Company employs more
than 3,700 service agents, who resolve inquiries in 11 languages at ten call
centers located in the U.S., France, Germany, the Netherlands and the U.K. By
focusing on technical support, a more complex activity than traditional
teleservices, Stream believes that it is able to differentiate itself from its
competitors and provide its clients with high quality service and a cost-
effective solution to their technical support needs.
Stream's clients include software publishers such as Microsoft, Netscape,
SunSoft and Symantec; hardware manufacturers such as Apple Computer and
Hewlett-Packard; and online service providers such as CompuServe, The Microsoft
Network and Sprint. The Company also provides support for companies in emerging
market segments such as online financial services and interactive video
services. In addition, the Company provides corporate help desk services to
major corporations, including Norrell Services and Shell. The Company has
recently begun to offer its services directly to end users in the consumer/SOHO
market. Stream's corporate client base has grown from three clients in 1992 to
137 clients as of June 1, 1997, and the Company currently supports over 250
products for its top ten clients.
The Company's commitment to quality service has been critical to its ability
to establish and maintain client relationships. The Company has won numerous
awards for its services, including Software Support Professionals Association
STAR Awards for Software Technical Assistance for the last four years and
EuroChannel's Innovator Award in 1996. The Company was also recently given
special recognition by Microsoft for excellence in technical support. The
Company's ability to provide high quality service is enhanced by its advanced
technologies and systems, including automatic call distributors, computer
telephony integration, call tracking software and relational database
information systems. In addition, Stream utilizes sophisticated in-house and
client database technology to capture and utilize information gathered from the
millions of support requests received annually. Because of the complex nature
of its services, Stream believes a key component of its success is its ability
to attract, retain and manage a well-trained work force. The Company employs
experts in numerous products and platforms, ranging from advanced programming
languages such as C++, JAVA and VisualBasic to common desktop applications.
Growing product complexity, shorter product life cycles and an increasing
number of products and multi-vendor computer and network configurations have
increased the demand for technical support services. At the same time, software
publishers, hardware manufacturers, online service providers and other
organizations are finding it increasingly difficult and expensive to service
all their needs in-house. Technical support is especially challenging to
undertake as a non-core function because of the need for ongoing
capital investment in specialized equipment, the attendant workforce management
challenge and the inherent need for scale. As a result, companies are
increasingly outsourcing these services to third-party providers as part of an
overall effort to focus internal resources on core competencies, improve
operating efficiencies and reduce costs. Dataquest estimates that outsource
technical support services provided by third parties to software publishers,
hardware manufacturers and online service providers totaled approximately $2
billion in 1996. In addition, corporations are increasingly seeking to
outsource their internal help desk functions. The Gartner Group predicts that
more than 40% of companies with internal help desks will outsource a portion of
this function by 1998, compared to 15% in 1995.
3
<PAGE>
The Company believes it is well-positioned to capitalize on the accelerating
trend toward outsourcing technical support services. Key elements of the
Company's growth strategy include: (i) expanding relationships with existing
clients as they develop new products and continue to outsource technical
support activity, (ii) establishing new client relationships, especially in the
online service provider and corporate help desk markets, (iii) capitalizing on
the growth of technology-enabled products as companies increasingly incorporate
technology into products and services and (iv) pursuing strategic alliances and
acquisitions.
THE REORGANIZATION
The Company's outsource technical support business began in 1992 as a unit of
Corporate Software Incorporated ("CSI"), which sold and licensed software
products and services to major corporations (to be known as "Corporate Software
& Technology" or the "Corporate Software & Technology Business" after this
offering). CSI established its technical support business unit in response to
demands from key clients that were increasingly seeking to outsource technical
support. In December 1993, Software Holdings, Inc. ("SHI"), which was organized
by members of management of CSI, certain affiliates of Bain Capital, Inc.
("Bain") and certain other investors, purchased CSI from its public
stockholders. In 1995, CSI and the Global Software Services Division (to be
known as "Modus Media International" or the "MMI Business" after this offering)
of R.R. Donnelley combined to form the Stream family of companies (the "CSI-MMI
Merger"). Modus Media International is a leading provider of outsource
manufacturing services to major software publishers and OEMs.
Prior to the closing of this offering, the Company will effect a
reorganization (the "Reorganization") pursuant to which the Company will (i)
contribute to two wholly-owned subsidiaries (the "Spin-Off Subsidiaries") its
Corporate Software & Technology Business and MMI Business, (ii) contribute to
PLEX LLC ("PLEX"), a limited liability company wholly-owned by the Company, the
capital stock of the Spin-Off Subsidiaries and (iii) distribute to the
Company's stockholders all of the equity interests in PLEX (the "Spin-Off
Distribution"). Accordingly, upon consummation of the Reorganization, the only
business conducted by the Company will be the outsource technical support
business. The consummation of the Reorganization is a condition to the closing
of this offering. Purchasers of Common Stock in this offering will not receive
any part of the Spin-Off Distribution.
R.R. Donnelley and certain of its affiliates own approximately % of the
outstanding Common Stock of the Company. Upon the closing of this offering,
R.R. Donnelley and its affiliates will own approximately % of the outstanding
Common Stock of the Company ( % if the Underwriters' over-allotment option is
exercised in full). R.R. Donnelley has agreed that for a period of three years
following the closing of this offering it will not purchase any additional
shares of Common Stock that would result in it and its affiliates owning over
49.9% of the Company's outstanding Common Stock. See "Certain Transactions" and
"The Reorganization."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.... shares
Common Stock offered by the Selling
Stockholders.......................... shares
Common Stock to be outstanding after
the offering.......................... shares (1)
Use of proceeds........................ Repayment of certain indebtedness to
R.R. Donnelley, capital expenditures,
working capital, potential acquisitions
and general corporate purposes
Proposed Nasdaq National Market symbol. STRM
</TABLE>
- --------
(1) Excludes options to purchase shares of Common Stock outstanding as of
May 1, 1997. The Company plans upon the closing of this offering to grant
options to employees for approximately shares of Common Stock at an
exercise price equal to the initial public offering price.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (1):
Revenues............... $2,842 $14,074 $37,388 $78,243 $155,498 $33,729 $49,352
Cost of services....... 1,560 9,905 22,891 57,338 117,309 26,841 35,450
Selling, general and
administrative
expenses.............. 872 3,661 10,646 23,994 39,110 8,204 11,023
Nonrecurring charges
(2)................... -- -- -- -- 4,500 -- 2,000
Income (loss) from op-
erations.............. 410 508 3,851 (3,089) (5,421) (1,316) 879
Income (loss) from
operations excluding
nonrecurring charges.. 410 508 3,851 (3,089) (921) (1,316) 2,879
Net income (loss)...... 227 284 2,127 (2,272) (4,685) (969) 118
Pro forma net income
(loss) per
common share (3)...... $ $ $ $ $ $ $
Pro forma weighted
average common shares
outstanding (3).......
OPERATING DATA (AT PE-
RIOD END):
Call centers........... 1 5 6 10 11 11 10
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA (4) AS ADJUSTED (5)
------- ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA (1):
Cash and cash equivalents............... $ 321 $ $
Working capital......................... 17,021
Total assets............................ 75,233
Long-term obligations, net of current
portion................................ 3,740
Total stockholders' equity.............. 47,663
</TABLE>
- --------
(1) Gives effect to the Reorganization. The historical consolidated financial
data may not be indicative of the Company's future performance and do not
necessarily reflect what the financial position and results of operations
of the Company would have been had the Company operated as a separate,
stand-alone entity during the periods covered.
(2) During the fiscal year ended December 31, 1996, the Company recorded a pre-
tax charge of $4,500,000 associated with the consolidation of certain
European facilities, recruitment of certain members of management and
establishment of new compensation and benefit plans. During the period
ended March 31, 1997, the Company recorded an additional charge of
$2,000,000 associated with the consolidation of certain European locations
primarily for employee termination benefits. See Note 5 of Notes to
Consolidated Financial Statements.
(3) Gives effect to (i) the automatic conversion of all outstanding shares of
Class B Common Stock into shares of Class A Common Stock, and the
reclassification of all shares of Class A Common Stock as Common Stock,
(ii) a one-for reverse stock split of the Company's Common Stock and
(iii) the exercise in full of the Incentive Option described below, in each
case prior to the closing of this offering.
(4) Reflects the Company's assumption of approximately $50 million of
indebtedness to R.R. Donnelley and the exercise in full of the Incentive
Option.
(5) Adjusted to give effect to the receipt and application by the Company of
the estimated net proceeds to the Company from the sale of shares in this
offering based upon an assumed initial public offering price of $ per
share. See "Use of Proceeds."
--------
Unless otherwise indicated, all information in this Prospectus assumes and
gives effect to: (i) the consummation of the Reorganization prior to the
closing of this offering, (ii) the automatic conversion of all outstanding
shares of Class B-V Common Stock and Class B-N Common Stock (collectively,
"Class B Common Stock") into shares of Class A Common Stock, and the
reclassification of all shares of Class A Common Stock as Common Stock prior to
the closing of this offering, (iii) a one-for- reverse stock split of the
Company's Common Stock effective prior to the closing of this offering, (iv)
the issuance by the Company prior to the closing of this offering of shares
of Common Stock to certain stockholders of the Company upon their exercise of
the Incentive Option granted to them in connection with the CSI-MMI Merger (the
"Incentive Option") and (v) no exercise of the Underwriters' over-allotment
option. See "Certain Transactions," "The Reorganization" and "Underwriting."
5
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements that involve
substantial known and unknown risks and uncertainties. When used in this
Prospectus, the terms "anticipates," "expects," "estimates," "believes" and
similar terms as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements may differ materially from those expressed or
implied by such forward-looking statements. In addition to the other
information presented in this Prospectus, the following factors should be
considered carefully in evaluating an investment in the shares of Common Stock
offered by this Prospectus.
Dependence on Key Clients. An aggregate of approximately 40%, 56% and 73% of
the Company's revenues in 1996, 1995 and 1994, respectively, were attributable
to Microsoft Corporation ("Microsoft"), including The Microsoft Network
("MSN"). In addition, approximately 13%, 12% and 12% of the Company's revenues
in 1996 were attributable to Hewlett-Packard Company, Incorporated ("Hewlett-
Packard"), Compaq Computer Corporation ("Compaq") and CompuServe Incorporated
("CompuServe"), respectively. In the first quarter of 1997, Microsoft
accounted for approximately 42% of the Company's revenues and Hewlett-Packard,
Compaq and CompuServe accounted for approximately 23%, 7%, and 2%,
respectively. It is expected that the Company's current relationship with
Compaq will terminate by the end of the third quarter of 1997. In addition,
there can be no assurance that the Company's revenues from other key clients
will not decline in future periods. The Company's ten largest clients
accounted for approximately 92% of the Company's revenues in 1996.
The Company's agreements with its clients have limited terms, typically one
year, and the Company's agreements with several of its key clients are
scheduled to expire, subject to renewal, on or prior to September 30, 1997.
There can be no assurance that the Company's clients will renew or extend
their current agreements. In addition, the Company's clients typically utilize
additional technical support providers and retain broad discretion over the
ongoing allocation of support requests among such providers. The loss of, or
the failure to retain a significant amount of business with, any key client
could have a material adverse effect on the Company. In addition, many of the
Company's agreements with its key clients generate revenues based on the
number of support requests received by the Company or the time spent on such
requests. Consequently, the amount of revenues generated from a client is
generally dependent upon consumers' use of the client's products and the
support needs of such products. With respect to client agreements that provide
for pricing on a per-call basis, the Company's profitability may be adversely
affected if the Company receives fewer support requests than anticipated or
the time spent in resolving inquiries is greater than anticipated.
The Company's agreements with key clients provide that, in the event the
Company fails to meet specified performance criteria, the clients can
terminate the agreements on short notice. Any failure by the Company to meet
performance requirements or a cancellation of, or decrease in, the services
requested by a key client could have a material adverse effect on the Company.
In addition, the Company may be required to rapidly expand its operations to
meet the demands of its clients. Such rapid changes to the size of the
Company's operations and employee base could involve significant costs,
including costs associated with employee hiring and training, the purchase of
additional workstations, equipment and technology and the establishment of
additional call centers. Certain client agreements also provide that specified
information obtained by the Company as a result of support requests is the
property of the client, and therefore, upon the termination of any such client
relationship, the Company will be required to discontinue use of such
information. There can be no assurance that such contract terms will not have
a material adverse effect on the Company. See "Business--Clients."
History of Operating Losses. The Company has incurred operating losses in
each of the last two fiscal years. At March 31, 1997, the Company's
accumulated deficit was approximately $4.2 million. In order to achieve
profitability, the Company must continue to successfully market and sell its
support services to major clients, improve operating efficiencies and
otherwise manage costs, including costs
6
<PAGE>
associated with future growth. There can be no assurance the Company will
achieve profitability in 1997, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Competition. The industry in which the Company competes is extremely
competitive and highly fragmented. The Company believes many of its clients
purchase technical support services primarily from a limited number of
preferred vendors. The Company's competitors include corporations that may
possess greater resources, greater name recognition and a more established
client base than the Company. The Company believes its principal competitors
are currently National TechTeam, Inc. ("National TechTeam"), SITEL Corporation
("SITEL"), Sykes Enterprises, Incorporated ("Sykes") and TeleTech Holdings,
Inc. ("TeleTech"). In addition, the Company competes with the internal
technical support divisions of organizations that provide technical support
through in-house personnel. As a result of this competition, client agreements
may be subject to pricing pressure, and competition for contracts for certain
of the Company's services may take the form of competitive bidding in response
to requests for proposals. In addition, clients may require vendors to provide
services in multiple locations and meet client volume and satisfaction
thresholds. Such pricing pressures and contract terms could have a material
adverse effect on the Company. There can be no assurance that the Company will
be able to compete effectively with existing or future competitors or in-house
technical support operations. See "Business--Competition."
Ability to Manage Growth. The Company has significantly expanded its
operations since it began providing outsource technical support services in
1992. Since 1992, the number of call centers has increased from one to ten,
and since 1994, the number of employees, including temporary and part-time
employees, of the Company has grown from approximately 1,300 to over 4,000.
This expansion has placed significant demands on the Company's operational,
administrative and financial resources, and any continued growth may place
additional significant strain on its resources. The Company's future
performance and profitability will depend in part on its ability to
successfully attract and retain qualified management personnel to manage the
growth and operations of the Company's business as well as its ability to hire
a significant number of additional service agents as required. In addition,
the Company anticipates that it will add workstation capacity in both the
United States and Europe in 1997. The failure to establish additional
workstations, call centers or other facilities as needed in a timely and cost-
effective manner could have a material adverse effect on the Company. Any
future strategic alliances or acquisitions of businesses, operations or
technology, and the attendant challenge of integrating technology, personnel
and quality assurance procedures, could also place significant demands on the
Company. There can be no assurance that the Company will have sufficient
resources or otherwise be able to maintain its historic rate of growth. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--Operations and Quality Assurance," "Business--
Facilities," "Business--Employees" and "Management."
Ownership by R.R. Donnelley. R.R. Donnelley and certain of its affiliates,
who are the Selling Stockholders in this offering, own approximately % of
the outstanding Common Stock of the Company. Upon the closing of this
offering, R.R. Donnelley and its affiliates will own approximately % of the
outstanding Common Stock of the Company ( % if the Underwriters' over-
allotment option is exercised in full). As a result, R.R. Donnelley will have
significant influence over the outcome of corporate actions requiring
stockholder approval, including the election of directors of the Company. In
addition, upon the closing of this offering one member of the Board of
Directors of the Company will be designated by R.R. Donnelley. The significant
ownership interest of R.R. Donnelley may discourage certain types of
transactions involving an actual or potential change of control of the
Company, including transactions in which the holders of the Company's Common
Stock might receive a premium for their shares over the prevailing market
price of the Common Stock.
Risks Relating to the Reorganization. The Company has historically depended
on the businesses being transferred to the Spin-Off Subsidiaries and on R.R.
Donnelley for certain financial, tax, insurance, payroll, employee benefits,
information technology and other services. In connection with the
7
<PAGE>
Reorganization, the Company will enter into agreements with the Spin-Off
Subsidiaries (collectively, the "Transitional Service Agreements") for the
continued provision after the Reorganization of certain services formerly
shared among such entities or provided by R.R. Donnelley. Pursuant to the
Transitional Service Agreements, the Company will receive from the Spin-Off
Subsidiaries certain financial, tax, insurance, payroll, employee benefits,
information technology and other services, and the Company will provide to the
Spin-Off Subsidiaries certain legal services, outsource technical support for
certain clients of the Spin-Off Subsidiaries and information technology
services. Each party to the Transitional Service Agreements is generally
prohibited from hiring the employees of the other party and from using or
disclosing the other party's confidential information other than in connection
with the performance of its obligations under such agreements.
The Transitional Service Agreements generally terminate on the one-year
anniversary of the closing of this offering, provided that the party receiving
the services may terminate the agreement with respect to some or all of such
services upon 90 days' notice. After such termination, the Company will be
required to provide such services internally or find a third-party provider of
such services. There can be no assurance that the Company will be able to
secure the provision of such services on comparable terms, and the failure to
do so could have a material adverse effect on the Company. The Company's
historical financial statements reflect an allocation of expenses in
connection with the services covered by the Transitional Service Agreements.
The Company has incurred, and anticipates incurring in the future, higher
payroll costs associated with the hiring of additional dedicated personnel and
the addition of certain officers to replace employees who, until the
Reorganization, provided services to the Spin-Off Subsidiaries and to the
Company. These payroll costs were previously allocated in part to the
businesses being transferred to the Spin-Off Subsidiaries. In addition,
certain of the Company's services have been sold to corporate accounts on a
bundled basis with software provided by the businesses being contributed to
the Spin-Off Subsidiaries. There can be no assurance that the Company will not
encounter difficulties in achieving sales of such services through its own
sales agents and without being bundled with such software. In addition, the
Company's reputation and the goodwill associated with its name could be
materially adversely affected by the actions and reputation of the Spin-Off
Subsidiaries, the businesses of which, until the Reorganization, will operate
as units of Stream and, in some cases, under the Stream name.
The Spin-Off Subsidiaries are currently wholly owned by the Company.
Following the Reorganization approximately 48.0% of the outstanding capital
stock of each of the Spin-Off Subsidiaries will be indirectly owned (through
ownership interests in PLEX) by R.R. Donnelley and its affiliates. None of the
agreements to be entered into by the Company with the Spin-Off Subsidiaries
resulted from "arm's length" negotiations. In addition, the Company did not
retain separate counsel from that retained by the Spin-Off Subsidiaries in
negotiating such agreements. The Company believes, however, that the terms of
the Transitional Service Agreements are on a basis at least as favorable to
the Company as those that would have been obtained from third parties on an
arm's length basis and that they will be adequate to allow the Company to
continue its business as previously conducted on an independent basis. These
agreements may be modified in the future and additional arrangements may be
entered into between the Company, the Spin-Off Subsidiaries and R.R.
Donnelley. The Company intends that, insofar as a determination can
objectively be made, each future agreement or transaction between the Company
and any affiliated parties (including the Spin-Off Subsidiaries and R.R.
Donnelley) will be on terms at least as favorable to the Company as could be
obtained from unaffiliated parties for comparable services or arrangements.
In connection with the Reorganization, the Company will contribute to the
Spin-Off Subsidiaries its Corporate Software & Technology Business and MMI
Business and their related assets and liabilities. In addition, all of the
indebtedness of the Company to R.R. Donnelley prior to the Reorganization,
other than approximately $50 million, will be retained by the Spin-Off
Subsidiaries, and R.R. Donnelley will release the Company from such
indebtedness retained by the Spin-Off Subsidiaries. Each Spin-Off Subsidiary
and PLEX will indemnify the Company from and against the respective
liabilities assumed by such Spin-Off
8
<PAGE>
Subsidiary in the Reorganization, and R.R. Donnelley will indemnify the
Company for three years following this offering against any such assumed
liabilities not paid by such entities (up to an aggregate of $100 million).
The Company will, however, generally remain contingently liable for all such
assumed liabilities. There can be no assurance that claims relating to such
liabilities will not be asserted against the Company or that, if any such
claim is successfully asserted, the Company will be able to collect any
indemnified amounts from the Spin-Off Subsidiaries, PLEX or R.R. Donnelley on
a timely basis, if at all. Any failure to collect such indemnified amounts, or
delay in doing so, could have a material adverse effect on the Company.
Until the expiration of the applicable statutes of limitations, R.R.
Donnelley has agreed to indemnify the Company in respect of any tax payable by
the Company with respect to (i) any gain realized by the Company as a result
of the Reorganization or the Spin-Off Distribution, which is not intended to
be tax-free to the stockholders of the Company or to the Company, and (ii) any
other income tax liabilities of the Company relating to the Spin-Off
Subsidiaries' businesses, after taking into account the net operating loss
carryforwards and other tax attributes of the Company. The Company will,
however, remain contingently liable for all such taxes and liabilities, and
there can be no assurance any indemnified amounts will be collected from R.R.
Donnelley. See "The Reorganization."
Fluctuations in Quarterly Operating Results. The Company could experience
quarterly variations in revenues and operating income as a result of many
factors, including the introduction of new products, platforms, or
technologies by clients or potential clients, the introduction of new services
by the Company, actions taken by competitors, the timing of the establishment
or termination of client agreements, the allocation of support requests by
clients among various support providers, the timing of additional selling,
general and administrative expenses incurred to acquire and support new or
additional business and changes in the Company's revenue mix among its various
service offerings. The Company's revenues in the fourth quarter of fiscal 1995
and 1996 increased in part due to the seasonally higher volume of calls
attributable to its hardware manufacturer clients. In addition, the Company
believes that its revenues and operating profits for the second quarter of
1997 were, and expects that those for the third quarter of 1997 will be, lower
than for the first quarter of 1997 due primarily to a reduction in call
volumes from certain of the Company's consumer PC clients as well as
seasonality. Many of the factors that could cause such variations are outside
of the control of the Company. In connection with certain contracts, the
Company could incur costs in periods prior to recognizing revenues under those
contracts. The Company must plan its operating expenditures based on revenue
forecasts, and a revenue shortfall below such forecasts in any quarter would
likely adversely affect the Company's operating results for that quarter. The
Company's revenues may be difficult to forecast because the Company's sales
cycle is relatively long and may depend on factors such as the size and scope
of assignments, the degree of penetration of clients' new products and general
economic conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Attraction and Retention of Employees and Key Executives. The Company's
business involves the delivery of professional services and is highly labor-
intensive. The Company's growth and success depend largely upon its ability to
attract, develop, motivate and retain highly skilled technical employees. The
Company's industry is characterized by high personnel turnover. In addition,
qualified technical employees are in great demand and are likely to remain a
limited resource for the foreseeable future. There can be no assurance that
the Company will be able to attract and retain sufficient numbers of highly
skilled technical employees in the future. The inability to hire and retain
technical personnel could have a material adverse effect on the Company,
including its ability to secure client arrangements and meet client demands.
In addition, a significant portion of the Company's costs consist of wages to
hourly workers. An increase in hourly wages, costs of employee benefits or
employment taxes could have a material adverse effect on the Company. The
success of the Company is also partially dependent upon the efforts, direction
and guidance of its key executives. The Company carries no key person life
insurance. The loss of any of
9
<PAGE>
the Company's key executives or its inability to attract and retain key
executives in the future could have a material adverse effect on the Company.
See "Business--Operations and Quality Assurance," "Business--Employees" and
"Management."
Risks Relating to International Operations. A portion of the Company's
operations are conducted outside the U.S., and the Company intends to further
expand its international operations. Currently, the Company operates five call
centers in Europe, has approximately 520 permanent full-time employees outside
of the U.S., participates in a joint venture in Japan and sells its services to
clients in seven countries. In 1996, revenues from the Company's services
outside the U.S. totaled approximately $21 million, representing 13% of the
Company's total revenues. International revenues have increased in absolute
dollars and as a percentage of revenues in each year since 1993, and the
Company anticipates that international revenues will continue to account for an
increasing percentage of its total revenues.
The Company's European operations, which began in 1994, are less mature than
its U.S. operations and have incurred operating losses since inception. Several
of these facilities were not originally designed or sited for use as call
centers. As part of the Company's plan to lower costs and to build its European
business, the Company is reorganizing and consolidating certain of its European
operations and recorded a restructuring charge of $3.0 million in 1996 in
connection with this reorganization. The Company has recorded an additional
charge of approximately $2.0 million in the first quarter of 1997 in connection
with this reorganization, and the Company expects its European operations to
continue to incur operating losses in 1997. The ability of the European
operations to achieve profitability will depend upon market growth and the
Company's ability to continue to constrain costs.
The Company may encounter difficulties in marketing, selling and delivering
its services outside of the U.S. due to differences in cultures, languages and
employment policies and differing political, social and economic systems. The
Company is subject to risks associated with international operations and sales,
including changes in foreign regulatory requirements, devaluations of currency
and fluctuations in currency exchange rates, trade barriers and political and
economic instability. Such risks could have a material adverse effect on the
Company. See "Business--International Operations."
Dependence on Growth of Outsource Technical Support Services Market. The
Company derives all of its revenues from the sale of outsource technical
support services. Accordingly, the Company's business and growth depend in
large part on the industry trend toward outsourcing technical support services,
an increasing number of products requiring support and an increasing demand for
support services by corporations and individual end users. There can be no
assurance that these trends will continue, as organizations may elect to
perform such services in-house or the demand for support services may not
continue to increase. A significant change in the direction of these trends
could have a material adverse effect on the Company. See "Business--Industry
Background" and "Business--Competition."
Risk of Emergency Interruption of Call Center Operations. The Company's
business is highly dependent on its computer and telecommunications equipment
and software systems. The Company has taken precautions to protect itself and
its clients from events that could interrupt delivery of the Company's
services. These precautions include off-site storage of backup data, fire
protection, physical security systems and rerouting of telephone calls to one
or more of the Company's other call centers in the event of an emergency. There
can be no assurance, however, that natural disaster, human error, equipment
malfunction or inadequacy, or other event would not result in a prolonged
interruption in the Company's ability to provide support services to its
clients. The temporary or permanent loss of the Company's computer or telephone
equipment or systems, through casualty, operating malfunction or otherwise,
could have a material adverse effect on the Company. The Company's property and
business interruption insurance may not be adequate to compensate the Company
for all losses that it may incur. See "Business--Operations and Quality
Assurance" and "Business--Facilities."
Risks Associated with Rapidly Changing Technology. The Company's business is
highly dependent on its computer and telecommunications equipment and software
systems. The Company's failure to
10
<PAGE>
maintain the quality of its technological capabilities or to respond
effectively to technological changes could have a material adverse effect on
the Company. The Company's future success will also be highly dependent on its
ability to enhance existing services, service new products and platforms and
introduce new services to respond to changing technological developments. There
can be no assurance that the Company can successfully develop and bring to
market any new services in a timely manner, that such services will be
commercially successful or that competitors' technologies or services will not
render the Company's services noncompetitive or obsolete. In addition, the
Company is planning to implement a new workforce management system in late
1997, which is designed to increase the utilization of service agents through
improved scheduling. There can be no assurance the Company will be able to
implement such system in a timely and cost-effective manner, that the
establishment of such system will not cause interruptions to the Company's
operations or that, once established, such system will be effectively utilized.
The introduction of new products or platforms by clients or potential clients
that require a lower level of expert technical support, that require the
Company to hire or train additional employees or implement new systems or that
are not supported by the Company and reduce the usage of products supported by
the Company could have a material adverse effect on the Company. See
"Business--Technology."
Intellectual Property Risks. The Company licenses third party software that
is important to its operations and the provision of its services, such as
Aspect Telecommunication Corporation's automatic call distribution system and
Scopus Technology, Inc.'s call tracking system. The inability of the Company to
continue to license such software on commercially reasonable terms could have a
material adverse effect on the Company. In addition, due to the nature of the
Company's business, while the Company has implemented numerous policies and
procedures to safeguard the confidential information of its clients, there can
be no assurance that the Company will not be subject to a claim that it
improperly used or disclosed proprietary client information. See "Business--
Intellectual Property."
Antitakeover Provisions. The Company's Amended and Restated Certificate of
Incorporation, as in effect upon the closing of this offering (the "Certificate
of Incorporation"), requires that any action required or permitted to be taken
by stockholders of the Company must be effected at a duly called annual or
special meeting of stockholders and requires reasonable advance notice by a
stockholder of a proposal or director nomination which such stockholder desires
to present at any annual or special meeting of stockholders. Special meetings
of stockholders may be called only by the Chairman of the Board of Directors,
the Chief Executive Officer or, if none, the President of the Company or by the
Board of Directors. The Certificate of Incorporation also provides for a
classified Board of Directors.
The authorized but unissued capital stock of the Company includes 1,000,000
shares of preferred stock. The Board of Directors is authorized without further
action by the stockholders to provide for the issuance of such preferred stock
in one or more series and to fix the designations, preferences, powers and
relative, participating, optional or other rights and restrictions thereof.
Accordingly, the Company may issue a series of preferred stock in the future
that will have preference over the Common Stock with respect to the payment of
dividends and upon liquidation, dissolution or winding-up or that could
otherwise adversely affect holders of the Common Stock or discourage or make
difficult any attempt to obtain control of the Company. Also, Section 203 of
the Delaware General Corporation Law, as amended from time to time (the
"DGCL"), which is applicable to the Company following this offering, prohibits
certain business combinations with certain stockholders for a period of three
years after they acquire 15% or more of the outstanding voting stock of a
corporation. The Company has exempted R.R. Donnelley and its affiliates (and
their direct transferees who acquire up to a 25% equity interest in the
Company) from this restriction. These provisions, and other provisions of the
Certificate of Incorporation, the Company's By-laws and the DGCL, may have the
effect of deterring hostile takeovers or delaying or preventing changes in
control or changes in management of the Company, including transactions in
which stockholders might otherwise receive a premium for their shares over
then-current market prices. In addition, these provisions may limit the ability
of stockholders to approve transactions that they may deem to be in their best
interests. See "Description of Capital Stock--Preferred Stock" and "Description
of Capital Stock--Delaware Law and Certain Charter and By-Law Provisions."
11
<PAGE>
Shares Eligible for Future Sale. Sales of a substantial number of shares of
the Company's Common Stock in the public market after this offering, or the
perception that such sales could occur, could adversely affect the market
price of the shares of the Company's Common Stock. Of the shares of Common
Stock to be outstanding upon completion of this offering, the shares
offered hereby will be freely tradeable without restriction. All of the
remaining shares of Common Stock are "restricted securities" as that term
is defined in Rule 144 promulgated under the Securities Act of 1933, as
amended (the "Act"). Of these restricted securities, approximately shares
that are not subject to the lock-up agreements described below will become
eligible for sale in the public market immediately after this offering
pursuant to Rule 144(k) under the Act and approximately shares which are
not subject to such lock-up agreements will become eligible for sale in the
public market 90 days following the date of this Prospectus pursuant to Rule
144 or Rule 701 under the Act. Taking into consideration the effect of lock-up
agreements entered into by all officers and directors and certain stockholders
of the Company, an additional shares will become eligible for sale in the
public market upon expiration of the lock-up agreements 180 days after the
date of this Prospectus, subject to the provisions of Rules 144 and 701. In
addition, shares of Common Stock subject to outstanding options and not
subject to lock-up agreements will become eligible for public sale 90 days
after the date of this Prospectus. The Company intends to file a Registration
Statement on Form S-8 enabling option holders to sell shares for which options
are exercisable and which do not qualify for an exemption under Rule 701 under
the Act. The holders of approximately shares of Common Stock to be
outstanding upon the closing of this offering are entitled to certain rights
with respect to registration of such shares for sale to the public beginning
181 days after the effective date of this offering. See "Management--
Compensation of Directors," "Management--Executive Compensation,"
"Management--Employee Benefit Plans," "Description of Capital Stock" and
"Shares Eligible for Future Sale."
No Prior Market; Potential Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock of the Company,
and there can be no assurance that an active public market will develop or be
sustained after this offering. The initial public offering price will be
determined by negotiations between the Representatives of the Underwriters and
a Pricing Committee of the Board of Directors that will include a
representative of R.R. Donnelley. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
market price of the Common Stock may be volatile and may be significantly
affected by factors such as actual or anticipated fluctuations in the
Company's operating results, announcements of new services by the Company or
its competitors, developments with respect to conditions and trends in the
technical support industry, governmental regulation, changes in estimates by
securities analysts of the Company's future financial performance, general
market conditions and other factors. In addition, the stock market has from
time to time experienced significant price and volume fluctuations that have
adversely affected the market prices of securities of companies for reasons
unrelated or disproportionate to their operating performance. These broad
market fluctuations may adversely affect the market price of the Common Stock.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such a company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which would
have a material adverse effect on the Company.
Dilution; Potential Need for Additional Financing. Purchasers of shares of
Common Stock in this offering will experience an immediate and substantial
dilution in the net tangible book value of the Common Stock from the initial
public offering price. Additional dilution is likely to occur upon exercise of
outstanding options. In addition, the Company could in the future require
additional financing. There can be no assurance such financing would be
available on acceptable terms, if at all, and any future equity financing
could cause additional dilution to stockholders of the Company. See "Dilution"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
12
<PAGE>
THE COMPANY
The Company was incorporated in Delaware in February 1995 and changed its
name to "Stream International Holdings Inc." in February 1996. Prior to and
after the Reorganization, the Company's outsource technical support business
has been and will be operated as a subsidiary of Stream International Holdings
Inc. The only business conducted by the Company after the Reorganization will
be the outsource technical support business. In connection with the
Reorganization, Stream International Holdings Inc. will change its name to
"Stream International Inc." Unless the context otherwise requires, references
in this Prospectus to "Stream" or the "Company" refer to Stream International
Holdings Inc. and its subsidiaries after giving effect to the foregoing name
change and the Reorganization, and references to the "Parent Company" refer to
Stream International Holdings Inc. prior to the Reorganization. The Company's
executive offices are located at 275 Dan Road, Canton, Massachusetts 02021,
and its telephone number is (617) 575-6800.
"Stream" is a service mark of the Company. All other service marks,
trademarks and trade names used in this Prospectus are the property of their
respective owners.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company hereby are estimated to be $ after deducting
the underwriting discounts and commissions and estimated offering expenses
payable by the Company and assuming an initial public offering price of $
per share. The Company will not receive any proceeds from the sale of shares
by the Selling Stockholders in this offering.
The Company currently plans to use the net proceeds of this offering as
follows: (i) approximately $50 million will be used to repay indebtedness to
R.R. Donnelley assumed by the Company in connection with the Reorganization
and (ii) approximately $15 million to $20 million will be used to fund capital
expenditures primarily for the expansion of operations. For information
regarding the loans from R.R. Donnelley to be assumed by the Company, see
"Certain Transactions" and "The Reorganization." Any remaining net proceeds of
this offering are expected to be used for working capital and general
corporate purposes. A portion of the proceeds of this offering may also be
used to fund potential acquisitions, although the Company is currently not a
party to any commitments or negotiations with respect to any such transaction.
Pending application of the proceeds of this offering, the Company intends to
invest the net proceeds of this offering in short-term, investment-grade,
interest-bearing instruments.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to finance
the operations and development of the business and does not anticipate paying
cash dividends in the foreseeable future. Payment of future dividends, if any,
will be at the discretion of the Company's Board of Directors after taking
into account various factors, including the Company's financial condition,
operating results, current and anticipated cash needs and plans for expansion.
In addition, any bank credit facility entered into by the Company may contain
certain restrictions on the payment of cash dividends.
13
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1997 (i) the actual
capitalization of the Company, (ii) the capitalization of the Company giving
pro forma effect to the automatic conversion of outstanding shares of Class
B Common Stock into approximately shares of Class A Common Stock, the
reclassification of all shares of Class A Common Stock as Common Stock, the
assumption of approximately $50 million in indebtedness to R.R. Donnelley and
the exercise in full of the Incentive Option, in each case prior to the
closing of this offering and (iii) such pro forma capitalization of the
Company as adjusted to reflect the receipt and application by the Company of
the estimated net proceeds to the Company from the sale of shares in this
offering based upon an assumed initial public offering price of $ per
share. See "Use of Proceeds." This table should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term obligations.......................... $ 1,824 $ $
======= ===== =====
Long-term obligations, net of current portion... $ 3,740 $ $
------- ----- -----
Stockholders' equity (1):
Net parent company investment................. 47,672
Preferred Stock, $.01 par value; 1,000,000
shares authorized, no shares issued or
outstanding pro forma and pro forma as
adjusted..................................... --
------- ----- -----
Common Stock, $.01 par value; shares
authorized, shares issued and outstanding
pro forma, shares issued and outstanding
pro forma as adjusted........................ --
------- ----- -----
Additional paid-in capital.................... --
Cumulative translation adjustments ........... (9)
------- ----- -----
Total stockholders' equity.................... 47,663
------- ----- -----
Total capitalization.......................... $51,403 $ $
======= ===== =====
</TABLE>
- --------
(1) Excludes shares of Common Stock reserved for issuance pursuant to the
Company's stock plans, under which options to purchase shares were
outstanding at May 1, 1997. See "Management--Compensation of Directors,"
"Management--Executive Compensation" and "Management--Employee Benefit
Plans."
14
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1997, giving pro
forma effect to the Reorganization and the assumption by the Company, in
connection with the Reorganization, of approximately $50 million of
indebtedness to R.R. Donnelley, was $ . Net tangible book value per share
represents the amount of the Company's total tangible assets reduced by the
amount of its total liabilities and divided by the total number of shares of
Common Stock outstanding, giving pro forma effect to the conversion of all
shares of Class B Common Stock into Class A Common Stock and the
reclassification of Class A Common Stock as Common Stock, the one-for-
reverse stock split of the Common Stock and the exercise of the Incentive
Option, in each case prior to the closing of this offering. Without taking
into account any other changes in such net tangible book value after March 31,
1997, other than to give effect to the receipt and application by the Company
of the net proceeds from the sale of the shares of Common Stock offered
hereby by the Company at an assumed initial public offering price of $ per
share after deducting the underwriting discounts and commissions and estimated
offering expenses, the pro forma net tangible book value of the Company as of
December 31, 1996 would have been $ or $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $ per share to purchasers of Common Stock in this offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $
Pro forma net tangible book value per share at March 31, 1997....... $
Increase per share attributable to new investors....................
----
Pro forma net tangible book value per share after the offering........
----
Dilution per share to new investors................................... $
====
</TABLE>
The following table summarizes, on a pro forma basis as set forth above, as
of March 31, 1997, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price
paid per share by the existing stockholders and by the investors purchasing
shares of Common Stock offered hereby (at an assumed initial public offering
price of $ per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... (1) % $ % $
New investors........... (2) $
------- --------- --------- ----------
Total................... 100.0% $ 100.0%
======= ========= ========= ==========
</TABLE>
- --------
(1) Sales by the Selling Stockholders in this offering will cause the number
of shares held by existing stockholders to be reduced to shares or %
of the total number of shares of Common Stock outstanding after this
offering, and will increase the number of shares held by new investors to
or % of the total number of shares of Common Stock outstanding after
this offering. See "Principal and Selling Stockholders."
(2) Before deducting the underwriting discounts and commissions and estimated
offering expenses.
As of March 31, 1997, there were shares of Common Stock issuable upon
the exercise of outstanding options at a weighted average exercise price of
$ per share. The issuance of shares upon exercise of these options is not
reflected in the preceding tables. If all of the options outstanding as of
March 31, 1997 were exercised in full, the dilution per share to purchasers of
Common Stock in this offering would be $ . Such exercises would increase the
number of shares held by existing stockholders to shares, or % of the
total number of shares of Common Stock to be outstanding after this offering,
and would (i) decrease the number of shares held by the purchasers of Common
Stock in this offering to % of the total number of shares of Common Stock to
be outstanding after this offering, (ii) increase the total consideration paid
to the Company by existing stockholders to $ , or % of the total
consideration paid to the Company and (iii) increase the average price per
share paid by existing stockholders to $ .
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial data presented below as of December 31,
1995 and 1996, and for each of the three years in the period ended December 31,
1996, are derived from the Company's Consolidated Financial Statements,
included elsewhere in this Prospectus, and have been audited by Arthur Andersen
LLP, independent public accountants. The selected consolidated financial data
presented below as of December 31, 1993 and 1994 and for each of the two years
in the period ended December 31, 1993 are derived from internal company records
and are unaudited. The selected consolidated financial data presented below as
of March 31, 1997 and for the three-month periods ended March 31, 1996 and 1997
are derived from the Company's unaudited Consolidated Financial Statements that
are included elsewhere in this Prospectus and include, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information set forth therein. The
historical consolidated financial data give effect to the Reorganization and
exclude the results of the Spin-Off Subsidiaries, may not be indicative of the
Company's future performance and do not necessarily reflect what the financial
position and results of operations of the Company would have been had the
Company operated as a separate, stand-alone entity during the periods covered.
See "Consolidated Financial Statements." These data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and
related Notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $2,842 $14,074 $37,388 $78,243 $155,498 $33,729 $49,352
Operating expenses:
Cost of services...... 1,560 9,905 22,891 57,338 117,309 26,841 35,450
Selling, general and
administrative
expenses............. 872 3,661 10,646 23,994 39,110 8,204 11,023
Nonrecurring charges
(1).................. -- -- -- -- 4,500 -- 2,000
------ ------- ------- ------- -------- ------- -------
Income (loss) from
operations............ 410 508 3,851 (3,089) (5,421) (1,316) 879
Interest expense....... -- -- -- -- 188 51 51
Provision (benefit) for
income taxes.......... 183 224 1,724 (817) (924) (398) 710
------ ------- ------- ------- -------- ------- -------
Net income (loss)...... $ 227 $ 284 $ 2,127 $(2,272) $ (4,685) $ (969) $ 118
====== ======= ======= ======= ======== ======= =======
Pro forma net income
(loss) per common
share (2).............
Pro forma weighted
average common shares
outstanding (2).......
OPERATING DATA (AT
PERIOD END):
Call centers........... 1 5 6 10 11 11 10
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
MARCH 31,
1993 1994 1995 1996 1997
------ ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (3):
Cash and cash equivalents............ $ 2 $ 162 $ 21 $ 1,142 $ 321
Working capital ..................... 34 3,469 13,350 19,910 17,021
Total assets......................... 7,559 20,593 53,598 76,987 75,233
Long-term obligations, net of current
portion............................. 938 2,505 1,734 3,952 3,740
Total stockholders' equity........... 3,198 12,603 40,964 52,663 47,663
</TABLE>
- --------
(1) During the fiscal year ended December 31, 1996, the Company recorded a pre-
tax charge of $4,500,000 associated with the consolidation of certain
European facilities, recruiting certain members of management and
establishing new compensation and benefit plans. Excluding such charges,
loss from operations, net loss and pro forma net loss per common share for
1996 would have been $921,000, $1,385,000 and $ , respectively. During the
period ended March 31, 1997, the Company recorded an additional charge of
$2,000,000 associated with the consolidation of certain European locations
primarily for employee termination benefits. Excluding such charges, income
from operations, net income and pro forma net income per common share for
the three months ended March 31, 1997 would have been $2,879,000,
$1,338,000 and $ , respectively. See Note 5 of Notes to Consolidated
Financial Statements.
(2) Gives effect to (i) the automatic conversion of all outstanding shares of
Class B Common Stock into shares of Class A Common Stock, and the
reclassification of all shares of Class A Common Stock as Common Stock,
(ii) a one-for- reverse stock split of the Company's Common Stock and
(iii) the exercise in full of the Incentive Option, in each case prior to
the closing of this offering.
(3) Balance sheet data are not available for 1992 since the Company was treated
as a cost center of CSI.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's outsource support business began in 1992 as a unit of CSI,
which sold and licensed software products and services to major corporations.
CSI began providing technical support in the mid-1980s as part of a bundled
product offering. In response to demands from key clients that were seeking to
outsource technical support, CSI established a separate business unit to
provide such support. In 1995, CSI and the Global Software Services Division
of R.R. Donnelley combined to form the Stream family of companies, consisting
of the Company's outsource technical support business, the MMI Business and
the Corporate Software & Technology Business. Prior to the closing of this
offering, the Company will spin-off the MMI Business and Corporate Software &
Technology Business to its stockholders. See "The Reorganization."
From its inception, the Company's primary strategic focus has been to grow
revenues and increase market share. The Company has made significant
investments in its infrastructure, including investments in call centers,
workstations, divisional and corporate personnel, management and systems. In
late 1996, the Company implemented a number of initiatives designed to improve
profitability, particularly with respect to its cost of services. These
included aligning management compensation plans with profitability targets,
reorganizing call center supervisor and management structures to improve
efficiency and eliminating an employee home computer reimbursement plan.
Future initiatives that the Company plans to undertake include the
implementation of a new workforce management system in late 1997, which is
designed to increase the utilization of service agents through improved
scheduling. In 1997, the Company plans to open one new call center and has
closed one small call center in the U.S. The Company also plans to consolidate
two of its call centers into one new center in Europe during the remainder of
1997. In 1998, in order to increase capacity, the Company plans to open one
new call center in the U.S. and one in Europe.
The Company's European operations, which began in 1994, are less mature than
its U.S. operations and have incurred operating losses since inception.
Several of these facilities were not originally designed or sited for use as
call centers. As part of the Company's plan to lower costs and build its
European business, the Company is reorganizing and consolidating certain of
its European operations and recorded a restructuring charge of $3.0 million in
1996 in connection with this reorganization. The Company has recorded an
additional charge of approximately $2.0 million in the first quarter of 1997
in connection with this reorganization, and the Company expects its European
operations to continue to incur operating losses in 1997. The ability of the
European operations to achieve profitability will depend upon market growth
and the Company's ability to continue to constrain costs.
The Company seeks to develop long term relationships with its clients and
expects that a substantial portion of its revenue growth will be generated by
existing clients. In 1996, revenues from existing clients (companies that were
clients of the Company in both 1995 and 1996) increased approximately 85%. The
Company's revenues are recognized as services are rendered. These services are
generally billed on a per- minute, per-incident, per-call or per-agent basis.
In connection with the Reorganization, the Company will enter into
agreements pursuant to which it will obtain certain transitional services from
the Spin-Off Subsidiaries and provide certain transitional services to the
Spin-Off Subsidiaries. See "The Reorganization."
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
-------------------------- -------------
1994 1995 1996 1996 1997
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of services............... 61.2 73.3 75.4 79.6 71.8
Selling, general and
administrative expenses....... 28.5 30.7 25.2 24.3 22.3
Nonrecurring charges........... -- -- 2.9 -- 4.1
------- ------- ------- ----- -----
Income (loss) from operations.... 10.3 (4.0) (3.5) (3.9) 1.8
Interest expense................. -- -- 0.1 0.2 0.1
Provision (benefit) for income
taxes........................... 4.6 (1.1) (0.6) (1.2) 1.4
------- ------- ------- ----- -----
Net income (loss)................ 5.7% (2.9)% (3.0)% (2.9)% 0.2%
======= ======= ======= ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
Revenues. Revenues increased $15.7 million, or 46.6%, to $49.4 million in
the three months ended March 31, 1997 from $33.7 million in the three months
ended March 31, 1996. International revenues increased $0.5 million, or 10.6%,
to $5.2 million in the three months ended March 31, 1997 from $4.7 million in
the three months ended March 31, 1996. These increases were due primarily to
growth in call volumes in North America from customers of online service
providers and hardware manufacturers.
Cost of Services. Cost of services includes primarily labor wages and
benefits and communications expenses directly related to technical support
activities. Cost of services increased $8.7 million, or 32.5%, to $35.5
million in the three months ended March 31, 1997 from $26.8 million in the
three months ended March 31, 1996. As a percentage of revenues, cost of
services decreased to 71.8% in the three months ended March 31, 1997 from
79.6% in the three months ended March 31, 1996. This decrease was due
primarily to the increased utilization of the Company's call center
infrastructure in North America in 1997 as a result of the increased call
volume from customers of online service providers and hardware manufacturers.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses include
all other costs associated with supporting the Company's business, including
management, sales and marketing, facilities cost, depreciation and human
resource management. SG&A expenses increased $2.8 million, or 34.1%, to $11.0
million in the three months ended March 31, 1997 from $8.2 million in the
three months ended March 31, 1996. As a percentage of revenues, SG&A expenses
decreased to 22.3% in the three months ended March 31, 1997 from 24.3% in the
three months ended March 31, 1996. This decrease was due primarily to the
leveraging of these costs over a larger revenue base.
Nonrecurring Charges. During the three months ended March 31, 1997, the
Company recorded a pre-tax charge of $2.0 million related to employee
termination benefits associated with the consolidation of certain European
locations. See Note 5 of Notes to Consolidated Financial Statements.
Income (Loss) from Operations. Income from operations increased $2.2 million
to $0.9 million from a loss from operations of $1.3 million in the three
months ended March 31, 1996. Excluding the nonrecurring charge recorded in the
quarter ended March 31, 1997, income from operations was $2.9 million.
18
<PAGE>
Net Income (Loss). Net income increased $1.1 million to $0.1 million in the
three months ended March 31, 1997 from a net loss of $1.0 million in the three
months ended March 31, 1996. The Company recorded a tax provision of $0.7
million in the three months ended March 31, 1997 as compared to a tax benefit
of $0.4 million in the three months ended March 31, 1996. The related current
tax liability (refund due) is reflected as an increase (decrease) in net
parent company investment. After the closing of this offering, the Company
will file tax returns as a stand alone entity. Excluding the nonrecurring
charge recorded in the quarter ended March 31, 1997, net income was $1.3
million.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues increased $77.3 million, or 98.8%, to $155.5 million in
1996 from $78.2 million in 1995. This increase consisted of $66.4 million of
revenues from existing clients and $10.9 million of revenues from new clients.
International revenues increased $13.0 million, or 166.7%, to $20.8 million in
1996 from $7.8 million in 1995. The Company increased its capacity through the
opening of a call center in North America in the fourth quarter of 1995 and
two call centers in Europe in 1996. The Company closed one call center in
Europe in 1996.
Cost of Services. Cost of services increased $60.0 million, or 104.7%, to
$117.3 million in 1996 from $57.3 million in 1995. As a percentage of
revenues, cost of services increased to 75.4% in 1996 from 73.3% in 1995. This
increase was due in part to the addition of service agents and other employees
associated with the expansion of call center capacity in Europe. The European
call centers were not fully utilized throughout the year, and as a result,
cost of services was incurred without a commensurate increase in revenues.
SG&A Expenses. SG&A expenses increased $15.1 million, or 62.9%, to $39.1
million in 1996 from $24.0 million in 1995. As a percentage of revenues, these
expenses decreased to 25.2% in 1996 from 30.7% in 1995. This decrease was due
primarily to the leveraging of these expenses over a larger revenue base.
Nonrecurring Charges. During the fiscal year ended December 31, 1996, the
Company recorded a pre-tax charge of $4.5 million. Of the total pre-tax
charge, $2.4 million is attributable to lease obligations associated with the
consolidation of certain European locations, $1.4 million relates to certain
other assets not expected to be utilized after the Reorganization and $0.7
million relates to recruitment of certain members of management and
establishment of new compensation and benefits plans. See Note 5 of Notes to
Consolidated Financial Statements.
Income (Loss) from Operations. Loss from operations increased $2.3 million
to $5.4 million in 1996 from $3.1 million in 1995, as the result of the
foregoing factors. Excluding the nonrecurring charge recorded in 1996, loss
from operations in 1996 was $0.9 million.
Net Income (Loss). Net loss increased to $4.7 million in 1996 from $2.3
million in 1995. The Company recorded a tax benefit of $0.9 million in 1996 as
compared to $0.8 million in 1995. Excluding the nonrecurring charge incurred
in 1996, the net loss was $1.4 million.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Revenues. Revenues increased $40.8 million, or 109.1%, to $78.2 million in
1995 from $37.4 million in 1994. This increase consisted of $26.7 million of
revenues from existing clients and $14.1 million of revenues from new clients.
International revenues increased $5.4 million, or 225.0%, to $7.8 million in
1995 from $2.4 million in 1994. The Company increased its capacity through the
opening of a call center in North America in the fourth quarter of 1994 and
three call centers in North America and two in Europe in 1995. The Company
closed one call center in Europe in 1995.
19
<PAGE>
Cost of Services. Cost of services increased $34.4 million, or 150.2%, to
$57.3 million in 1995 from $22.9 million in 1994. As a percentage of revenues,
cost of services increased to 73.3% in 1995 from 61.2% in 1994. This increase
was due primarily to the addition of service agents and call center management
associated with the expansion of call center capacity in both domestic and
European operations. The new call centers were not fully utilized throughout
the year, and as a result, cost of services was incurred without a
commensurate increase in revenues.
SG&A Expenses. SG&A expenses increased $13.4 million, or 126.4%, to $24.0
million in 1995 from $10.6 million in 1994. As a percentage of revenues, these
expenses increased to 30.7% in 1995 from 28.5% in 1994. This increase was due
primarily to increased expenses incurred following the CSI-MMI Merger and
costs associated with the addition of two new call centers in the second half
of 1995.
Income (Loss) from Operations. Loss from operations increased $7.0 million
to a loss of $3.1 million in 1995 from income of $3.9 million in 1994, as the
result of the foregoing factors.
Net Income (Loss). Net loss increased to $2.3 million in 1995 from net
income of $2.1 million in 1994. The Company recorded a tax benefit of $0.8
million in 1995 as compared to a tax provision of $1.7 million in 1994.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain unaudited financial data of the
Company for each of the quarters in 1995 and 1996 and the quarter ended March
31, 1997. This information has been derived from unaudited financial
statements that, in the opinion of management, reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such quarterly information. The operating results for any
quarter are not necessarily indicative of results to be expected for any
future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995
--------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................. $13,215 $14,423 $20,258 $30,347
Operating expenses:
Cost of services................... 8,297 10,344 15,692 23,005
Selling, general and administrative
expenses.......................... 4,049 4,743 6,356 8,846
Nonrecurring charges............... -- -- -- --
------- ------- ------- -------
Income (loss) from operations........ 869 (664) (1,790) (1,504)
Interest expense..................... -- -- -- --
Net income (loss).................... $ 422 $ (479) $(1,162) $(1,053)
======= ======= ======= =======
<CAPTION>
QUARTER ENDED
--------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................. $33,729 $37,154 $38,516 $46,099
Operating expenses:
Cost of services................... 26,841 27,102 29,637 33,729
Selling, general and administrative
expenses.......................... 8,204 9,411 10,035 11,460
Nonrecurring charges............... -- -- -- 4,500
------- ------- ------- -------
Income (loss) from operations........ (1,316) 641 (1,156) (3,590)
Interest expense..................... 51 49 45 43
Net income (loss).................... $ (969) $ 370 $ (890) $(3,196)
======= ======= ======= =======
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------
MARCH 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Revenues............................................. $49,352
Operating expenses:
Cost of services................................... 35,450
Selling, general and administrative expenses....... 11,023
Nonrecurring charges............................... 2,000
-------
Income (loss) from operations........................ 879
Interest expense..................................... 51
Net income (loss).................................... $ 118
=======
</TABLE>
While the effects of seasonality on the Company's business often are
obscured by the addition of new clients or new products, the Company's
business tends to be seasonally slower in the third quarter and stronger in
the fourth quarter. The third quarter is affected by lower computer purchase
levels by corporations and consumers during the summer months in both North
America and Europe. The fourth quarter is seasonally strong due to increased
computer purchases and usage in both consumer and corporate markets. The
Company believes that its revenues and operating profits for the second
quarter of 1997 were, and expects that those for the third quarter of 1997
will be lower than for the first quarter of 1997 due primarily to a reduction
in call volumes from certain of the Company's consumer PC clients as well as
seasonality.
The Company could experience quarterly variations in revenues and operating
income as a result of many factors, including the introduction of new
products, platforms or technologies by clients or potential clients, the
introduction of new services by the Company, actions taken by competitors, the
timing of the establishment or termination of client agreements, the
allocation of support requests by clients among various support providers, the
timing of additional selling, general and administrative expenses incurred to
acquire and support new or additional business and changes in the Company's
revenue mix among its various service offerings. Many of the factors that
could cause such variations are outside of the control of the Company. In
connection with certain contracts, the Company could incur costs in periods
prior to recognizing revenues under those contracts. The Company must plan its
operating expenditures based on revenue forecasts, and a revenue shortfall
below such forecasts in any quarter would likely adversely affect the
Company's operating results for that quarter. The Company's revenues may be
difficult to forecast because the Company's sales cycle is relatively long and
may depend on factors such as the size and scope of assignments, the degree of
penetration of clients' new products and general economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has been operated as a division, and since the
CSI-MMI Merger in 1995 its primary source of liquidity has been investments
from the Parent Company. The Company expects to seek to establish a bank line
of credit for up to $30 million following the closing of this offering.
Net cash provided by operating activities increased $2.8 million to $5.7
million in the three months ended March 31, 1997 compared to $2.9 million in
the three months ended March 31, 1996. This increase was the result of an
increase of $3.5 million in net income before depreciation and other non-cash
charges, including a nonrecurring charge of $2.0 million, to $5.3 million in
the three months ended March 31, 1997, compared to $1.8 million in the three
months ended March 31, 1996, offset somewhat by changes in working capital.
Net cash used in investing activities decreased $7.9 million to a use of $1.1
million in the three months ended March 31, 1997 from $9.0 million in the
three months ended March 31, 1996. In the three months ended March 31, 1996,
the Company opened two new call centers, while no new call centers were opened
in the three months ended March 31, 1997. Net cash used in financing
activities increased $12.0 million to a use of $5.4 million in the three
months ended March 31, 1997 from $6.6 million provided by financing activities
in the three months ended March 31, 1996. These amounts represent primarily
transfers to the Parent Company.
21
<PAGE>
Net cash provided by operating activities increased $6.7 million to $1.4
million in 1996 compared to a use of $5.3 million in 1995. This increase was
the result of an increase of $7.3 million in net income before depreciation
and other non-cash charges, including a nonrecurring charge of $4.5 million,
to $11.5 million in 1996, compared to $4.2 million in 1995, offset somewhat by
changes in working capital. Net cash used in investing activities decreased
$4.4 million to $19.7 million in 1996 compared to $24.1 million in 1995,
principally due to less rapid expansion of call center facilities. In 1996, as
part of the Company's effort to relocate high-cost call centers to lower-cost
facilities and labor markets, the Company opened two new call centers while
closing one call center in Europe. In 1995, the Company opened three new call
centers in North America and two new call centers in Europe while closing one
call center in Europe. Net cash provided by financing decreased $9.9 million
to $19.3 million in 1996 compared to $29.2 million in 1995. These amounts
represent primarily transfers from the Parent Company. The decrease was the
result of lower cash requirements necessary to fund the Company's expansion.
Net cash used by operating activities increased $5.4 million to a use of
$5.3 million in 1995 compared to cash provided by operating activities of $0.1
million in 1994. The increase in cash used by operating activities was the
result of a decrease of $0.2 million in net income before depreciation and
other non-cash charges to $4.2 million in 1995 from $4.4 million in 1994, as
well as changes in working capital associated with the Company's growth. Net
cash used in investing activities increased by $18.0 million in 1995 to $24.1
million compared to $6.1 million in 1994, principally due to the Company's
accelerated expansion in call center facilities. In 1995, the Company opened
three new call centers in North America and two new call centers in Europe
while closing one in Europe. Net cash provided by financing increased $23.1
million to $29.2 million in 1995 compared to $6.1 million in 1994. These
amounts represent primarily transfers from the Parent Company necessary to
fund the Company's expansion.
Capital expenditures were $20.0 million, $24.1 million and $7.7 million in
1996, 1995 and 1994, respectively. Historically, capital expenditures have
been, and future expenditures are anticipated to be, primarily for facilities
and equipment to support expansion of the Company's operations and additions
to the Company's call and data management systems. The Company typically
leases facilities under operating lease arrangements and expects to continue
to do so. Including the proposed addition of one call center in the U.S., the
Company plans to make capital expenditures of approximately $15 million to $20
million in 1997, of which approximately $2.1 million has been incurred through
March 31, 1997. In addition to capital expenditures, the addition of new call
centers requires expenditures relating to employee hiring and training. The
Company currently intends to fund the opening of new call centers through the
net proceeds of this offering, funds generated from operations, lease
arrangements and a credit facility that is expected to be available.
The Company believes that funds generated from operations, the net proceeds
of this offering, and credit expected to be available under a credit facility
will be sufficient to finance its current operations, planned capital
expenditures and internal growth for at least 12 months. However, if the
Company were to make any significant acquisitions for cash, it may be
necessary to obtain additional debt or equity financing.
22
<PAGE>
BUSINESS
Stream is a leading worldwide provider of outsource technical support
services. The Company provides support services via the telephone, e-mail and
the Internet primarily to customers of leading software publishers, hardware
manufacturers and online service providers. The Company's service agents
answer questions, diagnose problems and resolve technical difficulties,
ranging from simple error messages to wide area network failures. The Company
employs more than 3,700 service agents, who resolve inquiries in 11 languages
at ten call centers located in the U.S., Germany, France, the U.K. and the
Netherlands. By focusing on technical support, a more complex activity than
traditional teleservices, Stream believes that it is able to differentiate
itself from its competitors and provide its clients with high quality service
and a cost-effective solution to their technical support needs.
Stream's clients include software publishers such as Microsoft, Netscape,
SunSoft and Symantec; hardware manufacturers such as Apple Computer and
Hewlett-Packard; and online service providers such as CompuServe, The
Microsoft Network ("MSN") and Sprint. The Company also provides support for
companies in emerging market segments such as online financial services and
interactive video services. In addition, the Company provides corporate help
desk services to major corporations, including Norrell Services and Shell. The
Company has recently begun to offer its services directly to end users in the
consumer/small office/home office ("SOHO") market. Stream's corporate client
base has grown from three clients in 1992 to 137 clients as of June 1, 1997,
and the Company currently supports over 250 products for its top ten clients.
INDUSTRY BACKGROUND
Information technology continues to proliferate due in part to increased
usage of computers and peripherals, growth in the mobile workforce, increased
international demand and popularization of the Internet. With growing product
complexity, shorter product life cycles and an increasing number of products
and multi-vendor computer and network configurations, users need greater
levels of assistance to more effectively utilize their technology. As a
result, the demand for technical support services via the telephone, e-mail
and the Internet is increasing.
As the volume and complexity of technical support increases, software
publishers, hardware manufacturers, online service providers and other
organizations are finding it increasingly difficult and expensive to service
all their support needs in-house. It is estimated that one in six employees of
software publishers performs technical support functions, up from one in
twelve employees in 1989, and that the cost of technical support now amounts
to approximately 4% and 8% of the revenues of hardware manufacturers and
software publishers, respectively. In addition, technical support is
especially challenging to undertake as a non-core function because of the need
for ongoing capital investment in specialized equipment, the attendant
workforce management challenge and the inherent need for scale. As a result,
companies are increasingly outsourcing technical support services to third-
party technical support providers as part of an overall effort to focus
internal resources on core competencies, improve operating efficiencies and
reduce costs. Through the development of sophisticated computer and
telecommunications technologies, including advanced call management, call
tracking, and database management systems, these outsource providers have
increased the efficiency and effectiveness of their technical support
programs.
Outsource technical support services have three primary components: (i)
managing product support for technology vendors, including software
publishers, hardware manufacturers and online service providers; (ii)
providing help desk services to large corporations; and (iii) providing
support services directly to consumers. New applications for technical support
services are expected to develop as technology is increasingly used in
consumer products and services, such as online banking and personal digital
systems. Dataquest estimates that outsource technical support services
provided by third parties to software publishers, hardware manufacturers and
online service providers totaled approximately $2 billion
23
<PAGE>
in 1996. In addition, corporations are increasingly seeking to outsource their
internal help desk functions. The Gartner Group predicts that more than 40% of
companies with internal help desks will outsource a portion of this function
by 1998, compared to 15% in 1995.
BUSINESS STRATEGY
Stream believes that it is well-positioned to capitalize on the accelerating
trend toward outsourcing technical support services. Key elements of the
Company's business strategy include the following:
Leverage Leading Market Position. The Company believes that it has developed
a scale of operations and technical support expertise that differentiate it
from its competitors. The Company's expertise, reputation and position as a
leading worldwide provider of outsource technical support services have helped
it build a client base that includes many leading information technology
providers. The Company believes that its scale of operations and
infrastructure enable it to implement effectively and in a timely manner large
support programs for new products and clients. The Company plans to leverage
its reputation, scale and expertise to continue to effectively service its
existing clients as well as attract new clients.
Focus on Technical Support Services. By focusing on technical support, a
more complex activity than traditional teleservices, Stream believes that it
is able to differentiate itself from its competitors and provide its clients
with high quality service and a cost-effective solution to their technical
support needs. Currently, the Company's clients include principally software
publishers, hardware manufacturers, online service providers and, to a lesser
extent, major corporations outsourcing corporate help desk functions. As new
uses for technology continue to develop, such as online banking and personal
digital systems, the Company expects to leverage its technical support
expertise to expand its client base and service offerings.
Emphasize Quality Service. Stream's commitment to quality service is
critical to its clients and has contributed to the Company's reputation as a
preferred vendor of technical support services. Accordingly, the Company
encourages its clients to include quality assurance procedures and performance
requirements in their agreements with the Company. The Company has won
numerous awards for its services, including Software Support Professionals
Association STAR Awards for Software Technical Assistance for the last four
years and EuroChannel's Innovator Award in 1996. Stream was also recently
given special recognition by Microsoft for excellence in technical support.
Utilize Sophisticated Technology Infrastructure. The Company utilizes
sophisticated telecommunications and computer technology, open systems
architecture and knowledgebase management, which enable it to offer high
quality technical support. Through the use of this advanced technology,
support requests and related information are relayed seamlessly between Stream
and its clients, allowing for a connection that is transparent to the end
user. Stream's use of an open architecture-based system allows the Company to
add new capacity and technology as needed. The Company also uses sophisticated
in-house and client database technology to capture and utilize information
gathered from the millions of support requests it receives annually.
Expand Multinational Presence. The Company believes that the trend toward
outsourcing technical support occurring in the U.S. is also occurring in
international markets. In addition, Stream believes that many companies,
including certain of its existing clients, are seeking large and sophisticated
technical support providers with international support capabilities. To
address these opportunities, Stream has expanded geographically, with five
call centers in Europe, the establishment of a joint venture in Japan with
Fujitsu Limited ("Fujitsu") and support capabilities in 11 languages. In order
to better serve its clients, Stream has grown its call center network
internally, rather than through acquisitions, which has
24
<PAGE>
enabled the Company to maintain its quality standards and use compatible
technology throughout its network of call centers.
Maintain Excellence in Human Resource Management. Because of the complex
nature of its services, Stream devotes significant resources to attract,
retain and manage a well-trained work force. The Company located its initial
call centers in metropolitan areas near colleges and universities in order to
have access to a large number of skilled employees. Over two-thirds of the
Company's 3,700 service agents are permanent full-time employees, and the
Company employs experts in numerous products and platforms, ranging from
advanced programming languages such as C++, JAVA and VisualBasic to common
desktop applications.
GROWTH STRATEGY
Stream's objective is to expand and enhance its position as a leading
provider of outsource technical support services via the telephone, e-mail and
the Internet. Key elements of the Company's growth strategy include the
following:
Expand Relationships with Existing Clients. Stream believes there is a
significant opportunity to increase sales to its core client base of software
publishers, hardware manufacturers and online service providers as these
clients increasingly outsource technical support activities. To date, a large
portion of the Company's growth has been attributable to increased sales to
existing clients. For example, revenues from companies that were clients of
the Company in both 1995 and 1996 increased approximately 85% in 1996. The
Company targets opportunities to increase the size of its current technical
support programs and also seeks to support additional products on behalf of
its clients. For example, since 1992 the number of product lines supported by
the Company for a large software publisher has increased from three to 14. In
addition, during 1996 the number of product lines supported for a large
hardware manufacturer increased from one to eight.
Establish New Client Relationships. The Company seeks to establish new
client relationships, particularly in emerging segments of the information
technology market. For example, the Company began supporting Netscape's
Internet browser in 1994. The Company believes there are also opportunities to
add new clients in the corporate help desk market as a result of the
continuing trend of large corporations to outsource their internal technical
support activities. Stream believes its reputation for quality service and
existing support capabilities provide it with the opportunity to become a
preferred provider of these services. In addition, the Company believes that
it will benefit from any future growth in the consumer/SOHO market. As a
result of its efforts to diversify its client base, Stream has increased its
number of corporate clients from three clients in 1992 to 137 as of June 1,
1997.
Capitalize on Growth of Technology-Enabled Products. The Company believes
that advances in information technology will create opportunities to sell new
services to existing clients and to serve emerging client segments. In
particular, Stream believes that companies in all industries will increasingly
incorporate information technology into their products and services and
consequently will need to provide technical support services for new
applications, including online banking and interactive video services such as
the digital satellite system.
Pursue Strategic Alliances and Acquisitions. While the Company's growth to
date has been through the internal establishment of additional call centers,
the Company may in the future selectively pursue strategic alliances and
acquisitions that extend its presence into new markets or industries, expand
its client base, add new services or expand its operations. In particular, as
the industry consolidates, the Company believes there will be opportunities
both domestically and internationally for acquisitions of businesses with
compatible technologies and quality standards. The Company may also seek to
establish additional strategic alliances, such as the Company's joint venture
with Fujitsu that gives the Company a presence in Japan.
25
<PAGE>
SERVICES
The Company provides telephone-based and electronic support services to end
users of hardware and software products and online services. Assistance is
delivered through direct interaction with end users and corporate help desk
personnel. Services include resolution of problems relating to the
configuration and set-up, installation and interoperability of different
products, and the level of support requests ranges from simple error messages
to complex wide area network failures. These services cover a broad set of
technologies, including operating environments, applications, databases,
communication and network products, systems tools, development environments
and Internet/intranet products. The Company provides support for multiple
stages of a product's life cycle, including alpha and beta support, initial
release, upgrade introduction and sunset product support.
The Company's technical support services are provided 24 hours a day, seven
days a week, primarily through telephone dialogues with Company service
agents. Technical support is also offered through online connections and e-
mail. In response to the growing demand for electronic support, the Company
anticipates that it will expand its electronic support offerings and, in 1997,
offer support via its site on the World Wide Web.
The Company offers the following technical support packages:
Custom Outsource Support. Stream provides custom outsource support services
to large clients with substantial support demands. The Company tailors these
programs to meet the needs of a specific client and will typically provide a
dedicated team of service agents, interface with the client's systems and
adhere to the client's queue times and other service requirements. Clients
that use custom outsource support generally commit to purchase a minimum
support request volume. While custom outsource support typically involves
support of multiple client products under various agreements that often
contain initial terms of one year, the Company's overall relationships with
its custom outsource support clients tend to be longer-term in nature. The
Company negotiates each custom outsource support agreement individually.
Pricing is typically on a per-minute, per-incident, per-call or, for certain
low-volume applications, per-agent basis. Custom outsource support accounted
for a substantial majority of the Company's revenues in 1996.
Multi-Client Support. Multi-client support is offered primarily to clients
whose call volume does not warrant custom outsource support and to corporate
help desk clients. Multi-client support is "cross-queued" so that a single
service agent is trained to handle products of multiple clients. This permits
small and medium-sized companies and corporate help desk clients to utilize
the Company's expertise and infrastructure on a more cost-effective basis. As
with custom outsource support, the Company negotiates each multi-client
support contract individually, and pricing is typically on a per-minute, per-
incident, per call or per-agent basis.
Individual End User Support. End user support services are offered through
packages of telephone support sold directly to end users. In 1997, the Company
plans to launch its Internet-based electronic support service, which will
provide end users with a variety of ways to obtain answers to technical
support questions on the World Wide Web, including Web responses and online
chat. Individual end user support services are currently priced on a per-
incident basis depending on response time and service level.
CLIENTS
The Company's clients include leading software publishers, hardware
manufacturers, online service providers and Fortune 1000 corporations. In
1996, each of Microsoft (including MSN), Hewlett Packard, Compaq and
CompuServe accounted for over 10% of the Company's revenues. The Company's ten
largest clients accounted for approximately 92% of the Company's revenues in
1996. See "Risk Factors--Dependence on Key Clients." The Company sells its
technical support services to four client segments:
26
<PAGE>
Information Technology Companies. A substantial majority of the Company's
revenues to date have been derived from support services provided to
information technology companies. The Company believes there is a significant
opportunity to increase sales to this core client base as these clients
increasingly outsource technical support activities. The Company's information
technology clients include software publishers such as Microsoft, Netscape,
SunSoft and Symantec; hardware manufacturers such as Apple Computer and
Hewlett-Packard; and online service providers such as CompuServe, MSN and
Sprint. The Company also provides support for companies in emerging market
segments such as online financial services and interactive video services.
Corporate Help Desks. A segment targeted by the Company for future growth is
the corporate help desk support market. Currently, only a small percentage of
the Company's revenues are generated from large corporations that outsource
hardware and software help desks to third parties or use third party providers
to augment their internal support staff. The Company plans to increase its
focus on this market with targeted marketing programs and a variety of pricing
options. The Company's corporate help desk clients include Norrell Services
and Shell.
Individual End Users. An additional segment targeted by the Company for
growth is the consumer/SOHO market. In order to reduce costs, the Company
believes hardware manufacturers and software publishers will over time begin
to shift a portion of their increasing support burden directly to individual
end users. Although these end users are expected to continue to represent a
small percentage of the Company's business, the Company believes the aggregate
number of support requests from individual end users will increase. The
Company intends to market support services to individual end users through
VARs, systems integrators, retail establishments and direct-to-consumer
programs.
Other. Along with continued focus on its traditional client base, the
Company intends to pursue new areas of technical assistance for specific
vendors in other technology-enabled industry segments, including financial
services, consumer electronics, entertainment products, cable television,
insurance and health care.
Microsoft Relationship
Stream has been providing technical support for Microsoft, the Company's
largest client, since 1992. While revenues from Microsoft have increased each
year since 1992, the Microsoft relationship accounted for approximately 40% of
the Company's total revenues in 1996 as compared to 56% in 1995 and 73% in
1994. The Company's relationship with Microsoft is multi-faceted and includes
support for many of Microsoft's desktop and language products and MSN. The
primary Microsoft agreement, which relates to support of desktop and language
products, continues to be subject to periodic renewal by Microsoft, and the
current term will expire on September 1, 1997 unless renewed by Microsoft.
OPERATIONS AND QUALITY ASSURANCE
Call Center Operations
End users of the Company's services dial a technical support number, which
is often listed in the product manual, and are connected by the client, or in
some cases directly, to an appropriate Stream service agent. The service agent
answers the call and in many cases simultaneously receives on his or her
computer screen information regarding the caller. The service agent may
collect supplemental information from the caller such as location, company,
product or other information relevant for client billing. The service agent is
specially trained in the applicable product and acts as a transparent
extension of the client in answering questions, diagnosing problems and
resolving technical difficulties. Using a variety of tools, including linked
workstations that give each service agent access to common databases of
acquired knowledge, peer support and proprietary materials, the agent resolves
the support request. Following the
27
<PAGE>
resolution of the call, the agent will typically log information regarding the
call into the Company's call tracking system.
Every service agent is equipped with one or more personal computers with
relevant desktop application software releases. Call centers are outfitted
with software libraries where agents can test new versions of a client's
product or view client product demonstrations. Agents use advanced labs and
mini-labs equipped with hardware, software and network configurations that
enable them to replicate the clients' systems when diagnosing problems. The
Company's call centers contain emergency protection, including power backup in
the event of electrical failure, call routing through alternative offices of
its long distance telecommunications carriers, backup servers and files,
halon-protected computer rooms, sprinkler systems and 24-hour security. Call
centers in the U.S. are connected through multiple fiber optic voice/data T1
and T3 circuits provided by third parties to form an integrated and redundant
wide area network, allowing rerouting of telephone calls to other call centers
in the event of a local telecommunications failure. The Company also maintains
tape backups and offsite storage to assure the integrity of its reporting
systems and databases. See "Risk Factors--Risk of Emergency Interruption of
Call Center Operations."
Quality Assurance
The Company monitors and measures the quality and accuracy of its end user
interactions through quality assurance procedures that are currently
implemented at each call center and, in some cases, by its clients. The
Company continuously monitors call pickup time, length of call queue and other
support request information. This data is used for both internal and client
reporting. Stream and its clients also track client satisfaction using surveys
and periodic call monitoring. This monitoring allows the Company to measure
service levels and resource commitments. In addition, mandatory coaching by
consultants, managers, mentors and peers helps teach new ways to approach
technical problems and provides constructive feedback, and employees are
incented to meet internal quality goals. The Company encourages its clients to
include quality assurance procedures and performance requirements in their
agreements with the Company. Accordingly, many of the Company's client
agreements contain provisions defining specific levels of service performance
and satisfaction.
The Company's commitment to quality service has been critical to its ability
to establish and maintain client relationships. The Company has won numerous
awards for its services, including Software Support Professionals Association
STAR Awards for Software Technical Assistance for the last four years and
EuroChannel's Innovator Award in 1996. The Company was also recently given
special recognition by Microsoft for excellence in technical support. The
Company intends to supplement its quality assurance procedures through the
establishment in 1997 of a central quality assurance department, which the
Company believes will further increase the efficiency and effectiveness of the
quality assurance process.
Personnel and Training
Because of the complex nature of its services, Stream devotes significant
resources to attract, retain and manage a well-trained work force. The Company
located its initial call centers in metropolitan areas near colleges and
universities in order to have access to a large number of skilled employees.
Over two-thirds of the Company's 3,700 service agents are permanent full-time
employees. Service agents receive two to four weeks of initial training before
interacting with end users plus a minimum of one to three weeks per year of
on-going training. The Company employs experts in numerous products and
platforms, ranging from advanced programming languages such as C++, JAVA and
VisualBasic to common desktop applications. The Company has an established
career path for its service agents, who over time gain more responsibility and
a broader, more sophisticated product portfolio. See "Risk Factors--Attraction
and Retention of Employees and Key Executives."
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<PAGE>
FACILITIES
The Company currently maintains ten call centers in the U.S. and abroad,
ranging in size from approximately 14,400 to 150,000 square feet. The following
table sets forth certain information as of June 1, 1997 with respect to each
call center:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
FULL-TIME APPROXIMATE
APPROXIMATE LEASE SERVICE NUMBER OF
SITE LOCATION SQUARE FOOTAGE EXPIRATION DATE AGENTS (1) WORKSTATIONS
- ------------- -------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Centers
Beaverton, Oregon
(Gemini Facility).... 22,600 3/31/99 190 244
Beaverton, Oregon
(Murray Facility).... 89,000 9/30/00 621 821
Canton, Massachusetts. 99,900 1/31/00 631 787
Dallas, Texas (LBJ Fa-
cility).............. 97,900 10/31/00 680 718
Dallas, Texas (Trinity
Facility)............ 150,000 9/30/01 1,074 1,200
International Centers
Amsterdam, the Nether-
lands (2)............ 19,900 12/31/99 204 220
Apeldoorn, the Nether-
lands (2)............ 15,300 N/A 27 50
Londonderry, Northern
Ireland (3).......... 30,000 N/A 64 250
Munich, Germany....... 15,500 10/15/06 57 100
Velizy, France........ 14,400 11/15/04 88 108
------- ----- -----
Total............... 554,500 3,636 4,498
</TABLE>
- --------
(1) Includes full-time temporary service agents.
(2) In 1997, the Company plans to consolidate these facilities into a new
approximately 50,400 square foot facility in the Netherlands.
(3) A written lease is presently being negotiated between the landlord of this
facility and the Company.
The Company's multiple time-zone operations permit flexible service
scheduling and more efficient telecommunications management, as work loads can
be shifted from one geographic area to another to aid call handling during peak
periods. The telecommunications and computing networks of each site are linked,
allowing certain cross-site information sharing.
In addition to the consolidation of two call centers in the Netherlands into
a new larger facility, the Company anticipates that it will open at least one
new call center in the U.S. in 1997. See "Risk Factors--Ability to Manage
Growth." New site locations are selected based on access to a well-educated and
technically proficient labor market and on labor and infrastructure costs.
Additionally, in order to minimize start-up costs associated with a new center,
the Company attempts to identify sites where local, state or federal land or
training grants are available. The Company plans to limit the size of new call
centers to 80,000 square feet, which translates into a maximum of approximately
700 service agent workstations. The Company may also seek to establish multiple
site support locations within certain defined geographic areas, allowing for
improved fault tolerance and disaster recovery management. This will help
ensure consistent service levels across the Company's sites in case of
emergency, an important ingredient for client support excellence.
29
<PAGE>
TECHNOLOGY
Stream believes that the effective integration of sophisticated
telecommunications and computer technology is essential to providing rapid,
cost-effective deployment of its technical support services. The Company's
call centers use advanced automatic call distributor systems and a variety of
commercially available and proprietary software to provide effective client
service. The Company's call centers are connected by a worldwide frame relay
network for routing data. In addition, the Company uses a combination of
public (virtual private networks) and private voice facilities to interconnect
its call centers. These worldwide data and voice facilities provide
sophisticated and reliable routing capabilities that enable both data and
voice traffic to be routed around network and facilities failures. Stream's
advanced client/server architecture is closely integrated with its
telecommunications systems and allows (i) rapid deployment of software for
technical support activities, (ii) a high degree of flexibility for modifying
network architecture when required to support client needs and (iii) knowledge
capture and analysis for support service improvement. The Company believes
these systems provide a competitive advantage in retaining existing clients
and attracting new business. As of June 1, 1997, the Company had approximately
50 employees dedicated to information systems management and maintenance.
To provide support for its clients in a timely and cost-effective manner,
Stream also relies on its extensive in-house knowledgebase as well as the
knowledgebases of its clients. The data acquired from many of the millions of
support requests received annually by the Company are captured, processed and
added to the client's database or, in some cases, into the Company's in-house
database. Using linked workstations, many service agents have access to these
common databases of acquired knowledge, often allowing support requests to be
solved quickly without additional research. In this way, Stream's service
agents do not have to continually "reinvent the wheel," which the Company
believes affords a higher level of client satisfaction and increased
productivity. See "Risk Factors--Dependence on Key Clients" and "Risk
Factors--Risks Associated with Rapidly Changing Technology."
INTERNATIONAL OPERATIONS
The Company believes that the trend toward outsourcing technical support
occurring in the U.S. is also occurring in international markets. In addition,
Stream believes that many companies, including certain of its existing
clients, are seeking large and sophisticated technical support providers with
international support capabilities. To address these opportunities, Stream has
expanded geographically, with five call centers in Europe, the establishment
of a joint venture in Japan with Fujitsu and support capabilities in 11
languages. As of June 1, 1997, the Company had approximately 520 permanent
full-time employees located outside of the U.S. and sold its services to
clients in seven countries. In order to better serve its clients, Stream has
grown its call center network internally, rather than through acquisitions,
which has enabled the Company to maintain its quality standards and use
compatible technology throughout its network of call centers.
The Company has entered into a Joint Venture Agreement with Fujitsu pursuant
to which Stream and Fujitsu have become joint owners of a Japanese corporation
that sells and licenses software products and provides computer consulting and
support services. The joint venture licenses certain technology and know-how
from Stream and gives Stream a presence in Japan.
In 1996, revenues from the Company's services outside the U.S. totaled
approximately $21 million, representing 13% of the Company's total revenues.
International revenues have increased in absolute dollars and as a percentage
of revenues in each year since 1993, and the Company anticipates that
international revenues will continue to account for an increasing percentage
of its total revenues. The Company may encounter difficulties in marketing,
selling and delivering its services outside of the U.S. due to differences in
cultures, languages and labor and employment policies and differing political,
social and economic systems, and the Company is subject to risks associated
with international operations and sales. See "Risk Factors--Risks Relating to
International Operations."
30
<PAGE>
SALES AND MARKETING
The Company's sales objective is to develop long-term relationships with
existing and potential clients to become the preferred supplier of their
technical support requirements. As a result of the Company's expertise and
reputation, the Company's client base includes leading information technology
providers. The Company sells its services through a direct sales organization,
including new business account managers dedicated to accounts according to
client segment. Account managers are assigned to a limited number of accounts
in order to develop a complete understanding of each client's particular needs
and to form strong client relationships. Account managers are also encouraged
to sell additional services offered by the Company. Both custom outsource
support services and multi-client support services are sold through dedicated
new business account managers, and corporate help desk services are sold
through telesales agents. In 1997, the Company plans to offer Internet-based
electronic support via its site on the World Wide Web.
Stream invests significant resources during the development of a client
relationship to understand the client's technical support processes, systems
and requirements. The Company assesses the client's needs and goals and, with
input from the client, develops a technical support solution. As part of its
marketing efforts, the Company invites potential and existing clients to visit
its call centers, where the Company can demonstrate its sophisticated
telecommunications and call tracking technology, its quality assurance
procedures and the specialized knowledge of its service agents. The Company
may also emphasize its ability to rapidly accommodate a new client or a
significant increase in business from an existing client through its linked
telecommunications and computing networks and its ability to establish new
call centers in under three months.
In addition to the Vice President, Sales, as of June 1, 1997 the Company
employed six sales account managers responsible for new accounts as well as
four business unit directors and two product managers who are responsible for
maintaining existing client relationships on a day-to-day basis. The Company
plans to add additional sales personnel as necessary to obtain new information
technology clients, better sell additional services to existing clients and
address emerging market segments such as corporate help desks and companies
outside the technology industry offering information technology products and
services.
COMPETITION
The industry in which the Company competes is extremely competitive and
highly fragmented. The Company believes many of its clients purchase technical
support services primarily from a limited number of preferred vendors. The
Company's competitors include corporations that may possess greater resources,
greater name recognition and a more established client base than the Company.
The Company believes its principal competitors are currently National
TechTeam, SITEL, Sykes and TeleTech. In addition, the Company competes with
organizations that provide technical support through in-house personnel. As a
result of this competition, client agreements may be subject to pricing
pressure, and competition for contracts for certain of the Company's services
may take the form of competitive bidding in response to requests for
proposals. In addition, clients may require vendors to provide services in
multiple locations and meet client volume and satisfaction thresholds. Such
pricing pressures and contract terms could have a material adverse effect on
the Company.
The Company believes that the principal competitive factors in the technical
support services industry are pricing structure, reputation for quality,
ability to support a wide range of products from a variety of suppliers, wide
geographic coverage and the capability to deliver tailored client solutions.
While the Company believes it competes favorably based on these factors, there
can be no assurance that the Company will be able to compete effectively with
existing or future competitors or in-house technical support operations. See
"Risk Factors--Competition" and "Risk Factors--Dependence on Growth of
Outsource Technical Support Services Market."
31
<PAGE>
INTELLECTUAL PROPERTY
The Company relies upon a combination of contractual provisions and trade
secret laws to protect the proprietary information used in connection with its
support services. The Company attempts to protect its trade secrets and other
proprietary information through agreements with employees, consultants and
clients. The Company does not hold any patents and does not have any patent
applications pending. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate to deter
misappropriation of its proprietary rights or third party development of
comparable proprietary technology. The Company also licenses third party
software that is important to its operations and the provision of its
services, such as Aspect Telecommunication Corporation's automatic call
distribution system and Scopus Technology, Inc.'s call tracking system. The
inability of the Company to continue to license such software on commercially
reasonable terms could have a material adverse effect on the Company. In
addition, due to the nature of the Company's business, while the Company has
implemented numerous policies and procedures to safeguard the confidential
information of its clients, there can be no assurance that the Company will
not be subject to a claim that it improperly used or disclosed proprietary
client information. See "Risk Factors--Intellectual Property Risks."
EMPLOYEES
As of June 1, 1997, the Company had approximately 3,340 permanent full-time
employees, consisting of 2,989 service agents, 336 management, administration
and finance personnel and 15 sales and marketing personnel. As of such date,
the Company also had approximately 647 temporary and 82 part-time service
agents. The Company's employees are not represented by any labor union, and
the Company believes its relationship with its employees is good. See "Risk
Factors--Attraction and Retention of Employees and Key Executives."
32
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
POST-REORGANIZATION. The executive officers, directors and key employees of
the Company effective upon the consummation of the Reorganization and the
closing of this offering and their ages as of May 1, 1997 are as follows:
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION
- -------------------------------- --- --------
<S> <C> <C>
Stephen D.R. Moore.................. 45 Chief Executive Officer and Chairman of the Board
Judith G. Salerno................... 43 President, Chief Operating Officer and Director
Jeffrey D. Glidden.................. 47 Chief Financial Officer and Vice President, Finance
Jonathan S. Lavine(1)(2)............ 31 Director
Daniel I. Malina.................... 38 Director
Mark E. Nunnelly(1)(2).............. 38 Director
OTHER KEY EMPLOYEES
- -------------------
Lynda M. Avallone................... 41 Treasurer
Alicia T. Brophey................... 49 Vice President, General Counsel and Corporate
Secretary
James T. Jarratt.................... 53 Senior Vice President, Operations
Robert M. Johnson................... 38 Vice President, Marketing and Business
Development
Lewis Legon......................... 48 Vice President, Human Resources
Lloyd R. Linnell.................... 43 Vice President, Information Technology, and Chief
Information Officer
Julie M. Schoenfeld................. 39 Vice President, Sales
Joseph P. Texeira................... 40 Corporate Controller
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Moore will serve as Chief Executive Officer and Chairman of the Board of
the Company upon the closing of this offering. He has served as Chief
Executive Officer of the Parent Company's outsource technical support business
unit since 1996, President and Chief Operating Officer and a Director of the
Parent Company since 1996 and Co-President of the Parent Company from 1995 to
1996. Mr. Moore was President of CSI from 1992 to 1995, and Vice President of
European Operations of CSI from 1989 to 1992. From 1986 to 1989, Mr. Moore
served as Managing Director of Softsel Computer Products, Inc., a U.K.-based
distributor.
Ms. Salerno will serve as President and Chief Operating Officer and a
Director of the Company upon the closing of this offering. She has served as
President and Chief Operating Officer of the Parent Company's outsource
technical support business unit since 1996. Ms. Salerno served as the Parent
Company's Senior Vice President, Service Operations, from 1995 to 1996, Vice
President, Support Services, of CSI from 1993 to 1995 and Director, Support
Services, of CSI from 1990 to 1993. Ms. Salerno has also held management
positions with Ashton-Tate, SoftBridge Microsystems Corporation, G.E. Software
International and Chase Econometrics/Interactive Data Corp.
Mr. Glidden will serve as Chief Financial Officer and Vice President,
Finance, of the Company upon the closing of this offering. He has served as
Chief Financial Officer of the Parent Company's outsource technical support
business unit since May 1997. From 1991 to May 1997, Mr. Glidden served as
Chief Financial Officer and Senior Vice President of Banyan Systems
Incorporated, an enterprise directory software company, and served as Banyan's
acting President and Chief Executive Officer from November 1996 to February
1997. Previously, he served as Vice President of Atwell Group, Inc., a
financial advisory services company, from 1989 to 1991, and as Vice President
and Treasurer of Imagitex, Inc., an image processing hardware and software
systems manufacturing company, from 1982 to 1989.
33
<PAGE>
Mr. Lavine will serve as a Director of the Company upon the closing of this
offering. Mr. Lavine has been a Principal at Bain Capital, Inc. since 1995 and
was an Associate at Bain Capital from 1993 to 1995. In 1992, Mr. Lavine was a
consultant at McKinsey & Co. Previously, Mr. Lavine worked in the mergers and
acquisitions department of Drexel Burnham Lambert, Incorporated. Mr. Lavine is
also a Director of Clarity Telecom, Inc. and American Pad & Paper Company.
Mr. Malina will serve as a Director of the Company upon the closing of this
offering. Mr. Malina has been Vice President, Corporate Development of R.R.
Donnelley since March 1996. He served as Director, Corporate Development of
R.R. Donnelley from November 1994 to March 1996. Mr. Malina joined R.R.
Donnelley in 1994. Prior to joining R.R. Donnelley, he was with Bell & Howell,
an information services company specializing in mail-processing systems,
document management products and electronic database publishing systems. He
served as Vice President and General Manager of its NB/Microseal Division from
January 1994 to November 1994. Prior to serving in that capacity, he served at
Bell & Howell as Director, Business Development from January 1991 to January
1994. Mr. Malina is a Director of Donnelley Enterprise Solutions Incorporated.
Mr. Nunnelly has served as a Director of the Parent Company since 1995. Mr.
Nunnelly has been a Managing Director of Bain Capital, Inc. since 1992, and a
General Partner of Bain Venture Capital since 1990. Prior to joining Bain
Venture Capital, Mr. Nunnelly was a Partner at Bain & Company, where he
managed several relationships in the manufacturing sector, and he also was
employed by Procter & Gamble Company Inc. in product management. He is a
Director of several companies, including Dade International Inc.
Ms. Avallone will serve as Treasurer of the Company upon the closing of this
offering. She has served as Treasurer of the Parent Company's outsource
technical support business since June 1997. From 1994 to 1997, Ms. Avallone
was Treasurer of Augat Inc., a manufacturer of connector products. She was
previously employed by The Timberland Company as Director of Tax, and also has
tax and audit experience with Arthur Andersen & Co. and Coopers & Lybrand.
Ms. Brophey will serve as Vice President, General Counsel and Corporate
Secretary of the Company upon the closing of this offering. She served as
General Counsel of CSI from 1994 to 1995 and has served as Vice President and
General Counsel of the Parent Company since 1995. From 1980 to 1994, Ms.
Brophey served as Corporate Counsel of Wang Laboratories, Inc.
Mr. Jarratt will serve as Senior Vice President, Operations, of the Company
upon the closing of this offering. He has served as Senior Vice President,
Operations, of the Parent Company's outsource technical support business since
June 1997. From 1995 to 1997, Mr. Jarratt served as Senior Vice President and
General Manager of Risk Management Services for Equifax, a supplier of
decision supported information to financial and insurance companies, and
previously as its Vice President and Chief Operating Officer. From 1993 to
1995, he served as General Manager/Vice President of Operations at NeoData, a
provider of integrated direct marketing services. He was also previously
employed by Citibank and Frito-Lay Inc.
Mr. Johnson will serve as Vice President, Marketing and Business
Development, of the Company upon the closing of this offering. He has served
as Vice President, Marketing and Business Development, of the Parent Company
since 1996. From 1992 to 1996, Mr. Johnson served as Director and Principal
Analyst of Software Services Research at Dataquest, a research company. He was
also previously employed by Computer Associates International and CSI as
Manager, Service Marketing.
Mr. Legon will serve as Vice President, Human Resources, of the Company upon
the closing of this offering. He has served as Vice President, Human
Resources, of the Parent Company's outsource technical support business since
June 1997. From 1996 to 1997, he served as Vice President, Human Resources
Worldwide, for Genzyme, a biotechnology company. From 1992 to 1995, he served
as Vice President, Human Resources, for Deknatel Snowden Pencer, a medical
device company, which merged with Genzyme in 1995. He was also previously
employed by Parker Brothers and Erewhon, Inc.
34
<PAGE>
Mr. Linnell will serve as Vice President, Information Technology, and Chief
Information Officer of the Company upon the closing of this offering. He has
served as Vice President, Information Technology, of the Parent Company since
1996. From 1991 to 1995, Mr. Linnell held various positions at US West's
Technologies Division, a telecommunications company, most recently as Vice
President, Billing and Corporate Data. He was also previously employed by Bell
Communications Research, Inc. and Bell Telephone Laboratories, Inc.
Ms. Schoenfeld will serve as Vice President, Sales, of the Company upon the
closing of this offering. She has served as Vice President, Sales, of the
Parent Company since 1995. From 1994 to 1995, she managed the corporate end
user help desk business unit of CSI. Ms. Schoenfeld was Regional Sales
Director for Interbase Database Products at Borland International, a software
company, from 1989 to 1993, and was also previously employed by Avant-Garde
Computing, Inc., Hewlett-Packard and Procter & Gamble Company Inc.
Mr. Texeira will serve as the Corporate Controller of the Company upon the
closing of this offering. He has served as Director, Finance for Support
Services, of the Parent Company since 1996. From 1988 to 1995, Mr. Texeira
held various positions at New England Business Service, Inc., a business forms
company, most recently as Controller, Computer Forms and Software Division. He
was previously employed by Deloitte & Touche LLP.
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the directors and executive officers of
the Company.
PRE-REORGANIZATION. The executive officers and directors of the Parent
Company prior to the consummation of the Reorganization and the closing of
this offering and their ages as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Terence M. Leahy.......... 41 Chief Executive Officer and Director
Stephen D.R. Moore........ 45 President and Director
Gene S. Morphis........... 49 Senior Vice President and Chief Financial Officer
Morton H. Rosenthal....... 43 Chairman of the Board of Directors
Stephen J. Baumgartner.... 46 Director
Cheryl A. Francis......... 43 Director
Morton H. Meyerson........ 59 Director
Mark E. Nunnelly.......... 38 Director
Robert F. White........... 42 Director
</TABLE>
Mr. Leahy has served as Chief Executive Officer and a Director of the Parent
Company since 1996. He served as the Co-President of the Parent Company from
1995 to 1996. Prior to the CSI-MMI Merger, Mr. Leahy was employed by R.R.
Donnelley, including as the President of the MMI Business from 1994 to 1995,
as the Operations President, Americas, of the Documentation Services Group
from 1993 to 1994 and as the Senior Vice President and Director of Software
Sales of the Documentation Services Group from 1990 to 1993.
Mr. Moore's business experience is described above.
Mr. Morphis has served as the Senior Vice President and Chief Financial
Officer of the Parent Company since 1995. He served as Chief Financial Officer
of CVS, a chain drugstore retailer, from 1992 to 1995. Mr. Morphis held
various positions at American Woodmark from 1989 to 1992, at Curtis Mathis
from 1987 to 1988 and at Zale Corp. from 1980 to 1987.
Mr. Rosenthal has served as Chairman of the Board of Directors of the Parent
Company since 1995 and served as Chief Executive Officer in 1995. He was a
founder of CSI and served as its Chairman and Chief Executive Officer.
Mr. Baumgartner has served as a Director of the Parent Company since 1996.
He has been an officer of R.R. Donnelley since 1993, serving as Executive Vice
President and Sector President, Global Commercial Print Sector, since 1996,
Executive Vice President and Chief Administrative Officer from 1995
35
<PAGE>
to 1996 and Senior Vice President, Human Resources, Compensation and Benefits,
from 1993 to 1995. Prior to joining R.R. Donnelley he was employed by FRC
Management, Inc., a real estate development company, from 1991 to 1993.
Ms. Francis has served as a Director of the Parent Company since 1995. She
has served as Executive Vice President and Chief Financial Officer of R.R.
Donnelley since 1995. Previously, she served as Treasurer of FMC Corporation,
a diversified manufacturing company, from 1993 to 1995 and as Adjunct Faculty
Member, University of Chicago Graduate School of Business, from 1991 to 1993.
Mr. Meyerson has served as a Director of the Parent Company since 1995. He
has served as Chairman of the Board of Directors of Perot Systems Corp., an
outsourcing technical services and consulting company, since 1992. Mr.
Meyerson serves on the Board of Directors of Crescent Real Estate Equities,
Co. and Ensco International Incorporated.
Mr. Nunnelly's business experience is described above.
Mr. White has served as a Director of the Parent Company since 1995. Mr.
White has been a Managing Director of Bain Capital, Inc. since 1993, and a
General Partner of Bain Venture Capital since 1987. Prior to joining Bain
Venture Capital, Mr. White was a Manager at Bain & Company and a Senior
Accountant with Price Waterhouse LLP. He is a Director of Brookstone, Inc.
BOARD CLASSES AND COMMITTEES
The Board of Directors will be divided into three classes, each of whose
members serve for a staggered three-year term. The Board will be comprised of
two Class I Directors (Messrs. Moore and Nunnelly), two Class II Directors
(Ms. Salerno and Mr. Malina), and one Class III Director (Mr. Lavine). At each
annual meeting of stockholders, a class of directors is elected for a three-
year term to succeed the directors of the same class whose terms are then
expiring. The terms of the Class I Directors, Class II Directors and Class III
Directors will expire upon the election and qualification of successor
directors at the annual meeting of stockholders held following the end of
calendar years 1997, 1998 and 1999, respectively.
The Board of Directors has appointed a Compensation Committee effective upon
the closing of this offering (consisting of Messrs. Lavine and Nunnelly),
which will establish and approve salaries and incentive compensation for
certain senior officers and employees and administer and grant stock options
pursuant to the Company's stock option plans. The Board of Directors has also
appointed an Audit Committee effective upon the closing of this offering
(consisting of Messrs. Lavine and Nunnelly), which will review the results and
scope of the audit and other services provided by the Company's independent
public accountants.
COMPENSATION OF DIRECTORS
Non-employee members of the Board of Directors will be paid an annual fee of
$15,000 and will be reimbursed for out-of-pocket expenses.
In July 1997, the Company adopted the 1997 Director Stock Option Plan (the
"Director Plan"). Under the terms of the Director Plan, options to purchase
shares of Common Stock will be granted to each non-employee director upon
the closing of this offering. Thereafter, options to purchase shares of
Common Stock will be granted to each new non-employee director upon his or her
initial election to the Board of Directors. Annual options to purchase
shares of Common Stock will be granted to each non-employee director on the
date of each annual meeting of stockholders. The options will vest in three
annual installments, with 50% of the options vesting on the first anniversary
of the date of grant and 25% vesting on each of the second and third
anniversaries. The exercisability of these options will be accelerated upon
the occurrence of an Acquisition Event (as defined in the Director Plan). A
total of shares of Common Stock may be issued upon the exercise of stock
options granted under the Director Plan. The exercise price of options granted
under the Director Plan will equal the closing price of the Common Stock on
the date of grant.
36
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee upon the closing of this
offering will be Messrs. Lavine and Nunnelly. See "Certain Transactions."
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation
paid by the Company in the fiscal year ended December 31, 1996 to the
Company's Chief Executive Officer and its one other executive officer whose
total annual salary and bonus exceeded $100,000 in fiscal 1996 (the Chief
Executive Officer and such other executive officer are hereinafter referred to
as the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION (1) SALARY BONUS OPTIONS (2) COMPENSATION
- ------------------------------- ------------------- ------------ ------------
<S> <C> <C> <C> <C>
Stephen D.R. Moore.............. $372,561 $187,501 -- $ --
Chief Executive Officer
Judith G. Salerno............... 227,147 81,440 6,500 (3)
President and Chief Operating
Officer
</TABLE>
- --------
(1) Excludes Messrs. Rory J. Cowan, Terence M. Leahy, Gene S. Morphis and
Morton H. Rosenthal, who were executive officers of the Parent Company in
1996, but only a small portion of whose compensation is included in the
historical financial statements of the Company. See "Executive Officers,
Directors and Other Key Employees--Pre-Reorganization."
(2) The share number below has been adjusted to reflect the reverse stock
split of the Common Stock to be effected prior to the closing of this
offering.
(3) Includes a $2,250 matching contribution made by the Company on behalf of
Ms. Salerno pursuant to the Company's 401(k) Plan and $4,250 in life
insurance premiums payed on behalf of Ms. Salerno. Does not include $7,251
cash value on life insurance policy.
Option Grants in Last Fiscal Year. The following table sets forth certain
information concerning grants of stock options for Common Stock made during
fiscal 1996 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS (2) AT ASSUMED ANNUAL
----------------------------------------------- RATES OF STOCK
NUMBER OF PERCENT PRICE APPRECIATION
SHARES OF TOTAL FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM (4)(6)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION -------------------
NAME (1) GRANTED FISCAL YEAR (3) SHARE (4) DATE (5) 5% 10%
- -------- ---------- --------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stephen D.R. Moore -- -- $-- -- $ -- $ --
Judith G. Salerno
</TABLE>
- --------
(1) Excludes Messrs. Cowan, Leahy, Morphis and Rosenthal, who were executive
officers of the Parent Company in 1996, but only a small portion of whose
compensation is included in the historical financial statements of the
Company. See "Executive Officers, Directors and Other Key Employees--Pre-
Reorganization."
(2) These stock options are exercisable in eight equal semi-annual
installments commencing on the date of grant.
(3) Represents percentage of total options granted to employees of the Parent
Company in fiscal 1996.
(4) These numbers have been adjusted to reflect the Spin-Off Distribution, as
described below.
(5) The expiration date of an option is the tenth anniversary of the date on
which the option was originally granted.
(6) The amounts shown in this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5%
and 10%, compounded annually from the date the respective options were
granted to their expiration date. The gains shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise. Actual gains, if any, on stock option
exercises will depend on the future performance of the Common Stock, the
optionholders' continued employment through the option period, and the
date on which the options are exercised.
37
<PAGE>
In connection with the Reorganization, the Company will adjust the exercise
prices of all outstanding options to reflect the Spin-Off Distribution and
will grant to each optionee new options ("New Options") for a number of equity
units in PLEX equal to the number of shares covered by his or her option to
purchase Common Stock of the Company (the "Original Option"). The exercise
prices of both options will, in the aggregate, equal the exercise price of the
Original Option, and the exercise price of each option will be determined
based on the relative values of PLEX and the Company's outsource technical
support business, as determined by the Board of Directors of the Parent
Company prior to the closing of this offering. The allocation of such options
is intended to preserve in the options the amount of gain inherent in the
Original Option prior to the Reorganization. All optionees will therefore
retain their Original Options, with an adjusted exercise price, and will
receive New Options to purchase equity units in PLEX. The New Options will
have vesting schedules equivalent to that of the Original Options and, with
respect to employees of the Company, will continue to vest as long as the
optionee is employed by the Company. Similarly, all employees of the Parent
Company who become employees of one of the Spin-Off Subsidiaries after the
Reorganization will retain their Original Options for shares of Common Stock
of the Company, with an adjusted exercise price, and receive New Options in
PLEX, and will continue to vest with respect to all of such options as long as
they remain in the employ of the particular Spin-Off Subsidiary to which they
are assigned in the Reorganization. In addition, the vesting of all New
Options that are granted with respect to Original Options to purchase Class B
Common Stock will be fully accelerated upon the completion of the
Reorganization. As a result of the foregoing, Mr. Moore and Ms. Salerno will
receive options to purchase and equity units in PLEX, respectively.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values. The following table sets forth certain information concerning each
stock option exercise during fiscal 1996 by each of the Named Executive
Officers and the number and value of unexercised options held by each of the
Named Executive Officers on December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER UNDERLYING VALUE OF UNEXERCISED
OF SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE YEAR-END FISCAL YEAR-END (2)
NAME (1) ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Stephen D.R. Moore...... -- -- / /
Judith G. Salerno....... -- -- / /
</TABLE>
- --------
(1) Excludes Messrs. Cowan, Leahy, Morphis and Rosenthal, who were executive
officers of the Parent Company in 1996, but only a small portion of whose
compensation is included in the historical financial statements of the
Company. See "Executive Officers, Directors and Other Key Employees--Pre-
Reorganization."
(2) Based on the fair market value of the Common Stock as of December 17, 1996
($ per share), as determined by the Board of Directors, less the option
exercise price, multiplied by the number of shares underlying the options.
Based on a fair market value of $ (the midpoint of the range set forth
on the cover page of this Prospectus), the value of the exercisable and
unexercisable options held as of December 31, 1996 by Mr. Moore would have
been $ and $ , respectively, and the value of the exercisable and
unexercisable options held by Ms. Salerno would have been $ and $ ,
respectively.
Other Arrangements
The Company expects to enter into employment agreements with Mr. Moore and
Ms. Salerno prior to the closing of this offering. In addition, the Company
and each of Mr. Moore and Ms. Salerno have entered into a management retention
agreement pursuant to which such person will receive severance payments equal
to two times his or her annual base salary plus bonus, and certain other
benefits, if he or she is terminated without cause or resigns for good reason
within two years following a change of control of the Company (as defined).
In connection with the hiring of Jeffrey Glidden as Chief Financial Officer,
the Company agreed to pay Mr. Glidden an annual base salary of $220,000, plus
an annual bonus of up to 40% of such salary. Mr. Glidden will receive 18
months of severance payments if his employment is terminated without cause.
Mr. Glidden received options for shares of Common Stock at an exercise
price of $ per share (adjusted for the Spin-Off Distribution).
38
<PAGE>
EMPLOYEE BENEFIT PLANS
1997 Stock Incentive Plan. The Company's 1997 Stock Incentive Plan (the
"1997 Incentive Plan") was adopted by the Company in July 1997. The 1997
Incentive Plan provides for the grant of stock-based awards to employees,
officers and directors of, and consultants or advisors to, the Company and its
subsidiaries. Under the 1997 Incentive Plan, the Company may grant options
that are intended to qualify as incentive stock options ("incentive stock
options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), options not intended to qualify as incentive
stock options ("non-statutory options"), restricted stock and other stock-
based awards. Incentive stock options may be granted only to employees of the
Company. A total of shares of Common Stock may be issued upon the exercise
of options or other awards granted under the 1997 Incentive Plan. The maximum
number of shares with respect to which awards may be granted to any employee
under the 1997 Incentive Plan shall not exceed shares of Common Stock
during any calendar year.
The 1997 Incentive Plan is administered by the Board of Directors and the
Compensation Committee. Subject to the provisions of the 1997 Incentive Plan,
the Board of Directors and the Compensation Committee each has the authority
to select the persons to whom awards are granted and determine the terms of
each award, including the number of shares of Common Stock subject to the
award.
Payment of the exercise price of an award may be made in cash, shares of
Common Stock, a combination of cash or stock or by any other method approved
by the Board or Compensation Committee, consistent with Section 422 of the
Code and Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Unless otherwise permitted by the Company,
awards are not assignable or transferable except by will or the laws of
descent and distribution.
The Board of Directors or Compensation Committee may, in its sole
discretion, amend, modify or terminate any award granted or made under the
1997 Incentive Plan, so long as such amendment, modification or termination
would not materially and adversely affect the participant. The Board or
Compensation Committee may also, in its sole discretion, accelerate or extend
the date or dates on which all or any particular option or options granted
under the 1997 Incentive Plan may be exercised. All awards granted under the
1997 Incentive Plan will accelerate upon an acquisition of the Company.
The Company plans to grant, upon the effectiveness of this offering, options
to employees to purchase up to approximately shares of Common Stock under
the 1997 Incentive Plan, at an exercise price equal to the initial public
offering price.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Company in July 1997
and becomes effective upon the closing of this offering. The Purchase Plan
authorizes the issuance of up to a total of shares of Common Stock to
participating employees.
All employees of the Company, including directors of the Company who are
employees, and all employees of any participating subsidiaries, who have been
employed by the Company for at least months and whose customary employment
is more than 20 hours per week and for more than five months in any calendar
year are eligible to participate in the Purchase Plan. Employees who would
immediately after the grant own 5% or more of the total combined voting power
or value of the stock of the Company or any subsidiary are not eligible to
participate.
On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock.
The employee may authorize an amount at a rate of 2%, 4%, 6%, 8% or 10% to be
deducted by the Company from the employee's pay during the Offering Period. On
the last
39
<PAGE>
day of the Offering Period, the employee is deemed to have exercised the
option, at the option exercise price, to the extent of accumulated payroll
deductions. Under the terms of the Purchase Plan, the option price is an
amount equal to 85% of the fair market value per share of the Common Stock on
either the first day or the last day of the Offering Period, whichever is
lower. In no event may an employee purchase in any one Offering Period a
number of shares which is more than % of the employee's annualized base pay
for the prior six month period divided by 85% of the market value of a share
of Common Stock on the commencement date of the Offering Period. The Board of
Directors may, in its discretion, choose an Offering Period of 12 months or
less for each of the offerings and choose a different Offering Period for each
offering.
If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's
rights under the Purchase Plan terminate upon voluntary withdrawal from the
Purchase Plan at any time, or when such employee ceases to be employed for any
reason, except that upon termination of employment because of death, the
employee's beneficiary has certain rights to elect to exercise the option to
purchase the shares with the accumulated payroll deductions in the
participant's account.
1995 Stock Option Plans. In connection with the CSI-MMI Merger, the Parent
Company adopted the 1995 Stock Option Plan (the "1995 Plan"), covering
shares of Common Stock, the 1995 Replacement Stock Option Plan (the "1995
Replacement Plan"), covering shares of Common Stock and the 1995
California Stock Option Plan (the "1995 California Plan"), covering
shares of Common Stock. As of May 1, 1997, options for a total of shares
of Common Stock were outstanding under these plans. Following this offering,
no further options will be granted under these plans.
The 1995 Plan, 1995 Replacement Plan and 1995 California Plan (collectively,
as amended, the "1995 Plans") provide for the grant of options to employees,
officers and directors of, and consultants or advisors to, the Parent Company
and its subsidiaries. Under the 1995 Plans, the Parent Company may grant
options that are intended to qualify as incentive stock options and non-
statutory options. Payment of the exercise price of an option may be made in
cash, shares of Common Stock, a combination of cash or stock or by any other
method approved by the Board or the Compensation Committee. Options are not
assignable or transferable except by will or the laws of descent and
distribution. All options granted under the 1995 Plans will accelerate upon an
acquisition of the Company.
Savings and Retirement Program. In July 1995, the Company adopted a Savings
and Retirement Program (the "401(k) Plan"), a tax-qualified plan covering all
of its employees, into which the plan of CSI and a portion of the plan of R.R.
Donnelley were previously merged. Each employee may elect to reduce his or her
current compensation by up to 15%, subject to the statutory limit (a maximum
of $9,500 in 1996), and have the amount of the reduction contributed to the
401(k) Plan. The Plan provides that the Company shall make matching
contributions equal to fifty percent (50%) of the employee's contributions to
the 401(k) Plan, not to exceed 3% of the employee's annual compensation. The
401(k) Plan also provides that the Company may, as determined from time to
time by the Board of Directors, provide (i) a discretionary cash contribution,
which will be allocated based on the proportion of the employee's compensation
for the plan year to the aggregate compensation for the plan year for all
eligible employees, and (ii) a profit based contribution, which will be
allocated to those employees working in an operating division that has met its
profitability goals for the year. All employee contributions to the 401(k)
Plan are fully vested at all times and all Company contributions to the 401(k)
Plan vest at a rate of twenty-five percent (25%) a year over a period of four
years. Upon termination of employment, a participant may elect a lump sum
distribution or payments in cash in annual installments not to exceed ten (10)
years. The Company may amend certain provisions of the 401(k) Plan in
connection with the Reorganization.
40
<PAGE>
CERTAIN TRANSACTIONS
CSI-MMI Merger
In December 1993, Software Holdings, Inc. ("SHI"), which was organized by
members of management of CSI (including Messrs. Moore and Rosenthal), certain
affiliates of Bain Capital, Inc. ("Bain") and certain other investors,
purchased CSI from its public stockholders. In April 1995, CSI and the MMI
Business of R.R. Donnelley were combined in a transaction pursuant to which
SHI, which owned all of the outstanding capital stock of CSI, merged with a
wholly-owned subsidiary of the Parent Company, to which R.R. Donnelley had
contributed the MMI Business (the "CSI-MMI Merger"). As a result of the CSI-
MMI Merger, R.R. Donnelley acquired all of the outstanding shares of Class A
Common Stock of the Parent Company, then representing approximately 80% of the
outstanding capital stock of the Parent Company, and the former stockholders
of SHI acquired all of the outstanding shares of Class B-V and Class B-N
Common Stock (collectively, "Class B Common Stock") of the Parent Company,
then representing approximately 20% of the outstanding capital stock of the
Parent Company. In connection with the CSI-MMI Merger, the stockholders of SHI
received cash distributions (net of tax witholding) totaling approximately $23
million, including approximately $12.3 million distributed to certain
affiliates of Bain, $4.2 million to Mr. Rosenthal and $165,000 to Mr. Moore.
In addition, as part of the CSI-MMI Merger, the Parent Company granted to the
former stockholders and optionees of SHI (the "SHI Stockholders"), on a pro
rata basis, an option (the "Incentive Option") to acquire, for $.01 per share,
a number of shares of Common Stock of the Parent Company representing, after
exercise, up to 5% of the then outstanding capital stock of the Parent Company
(on a fully-diluted basis including shares issued in any public offering) to
the extent that the value of the Parent Company exceeded certain levels upon
either a public offering or acquisition of the Parent Company occurring prior
to June 30, 1997. As a result of an amendment to the Incentive Option entered
into in connection with this offering, the Incentive Option will become
exercisable and be exercised as to shares prior to the closing of this
offering, and all share data in this Prospectus gives effect to the issuance
of such shares.
Pursuant to the Restated Certificate of Incorporation of the Parent Company,
as in effect upon the closing of the CSI-MMI Merger, R.R. Donnelley had
certain rights to call all of the outstanding shares of Class B Common Stock
for purchase during specified periods at prices based on a formula, and the
holders of Class B Common Stock had the right to put their shares of Class B
Common Stock to R.R. Donnelley during specified periods at prices based on a
formula. The Restated Certificate of Incorporation also contained certain
rights of first refusal restricting the transfer of shares of Class B Common
Stock; certain rights of holders of Class B Common Stock to participate in
transfers of shares by R.R. Donnelley; certain rights of R.R. Donnelley to
require that holders of Class B Common Stock participate in a sale of shares
to a third party; and certain covenants requiring the approval of the
directors elected by R.R. Donnelley and/or the holders of Class B Common Stock
for specified corporate actions. All of these provisions will terminate upon
the closing of this offering.
In connection with the CSI-MMI Merger, the Parent Company assumed an
incentive plan of SHI (the "TARSAP Plan") pursuant to which the Parent Company
deposited shares of its Common Stock into an escrow account for
distribution either to certain members of management of CSI upon payment of an
exercise price of $ per share or to the Class B Common stockholders,
depending upon the values realized upon any sale of shares of Common Stock of
the Parent Company by the principal stockholders of the Parent Company. As a
result of an amendment to the TARSAP Plan entered into in connection with this
offering, prior to the closing of this offering such members of management
will receive (upon payment of the exercise price) of the shares held in
such escrow account (including shares to Mr. Rosenthal and shares to
Mr. Moore) and such account shall be terminated. The remaining shares will be
distributed to the holders of Class B Common Stock of the Parent Company
(including shares to Mr. Rosenthal and shares to Mr. Moore) on a pro
rata basis. All share data in this Prospectus gives effect to the exercise of
such options upon the closing of this offering and the distribution of the
remaining shares to the holders of Class B Common Stock of the Parent Company
in accordance with the TARSAP Plan.
41
<PAGE>
Pursuant to the terms of the CSI-MMI Merger, the holders of Class B Common
Stock, voting as a group, and R.R. Donnelley were each entitled to elect three
members of the Parent Company's Board of Directors, and together they were
entitled to elect up to two independent directors. Prior to the
Reorganization, the members of the Board elected by the holders of Class B
Common Stock are Mr. Moore, Mr. Nunnelly and Mr. White and the members elected
by R.R. Donnelley are Mr. Baumgartner, Ms. Francis and Mr. Leahy. The
arrangements with respect to the election of directors will terminate upon the
closing of this offering.
Relationship with R.R. Donnelley
In connection with the CSI-MMI Merger, in April 1995 the Parent Company and
R.R. Donnelley entered into various agreements and subleases pursuant to which
the Parent Company purchased certain services and leased certain facilities
from R.R. Donnelley. The amount paid by the Parent Company to R.R. Donnelley
pursuant to these agreements was $4.1 million and $3.4 million in 1995 and
1996, respectively. In addition, the Parent Company shares certain facilities
with R.R. Donnelley. See "The Reorganization" for information concerning the
continuation of certain of these arrangements after the closing of this
offering.
Since April 1995, the Parent Company has borrowed an aggregate of
approximately $ million from R.R. Donnelley. These loans bear interest at
the LIBOR rate at the time of borrowing plus 35 basis points per annum.
Approximately $50 million of such loans will be assumed by the Company in
connection with the Reorganization. The remaining amount of these loans will
be retained by the Spin-Off Subsidiaries, and R.R. Donnelley will release the
Company from the obligation to pay the amount retained by the Spin-Off
Subsidiaries.
The Company has engaged R.R. Donnelley to provide the financial printing
services in connection with this offering. The Company believes that the cost
of such services is comparable to the cost that the Company would incur if
obtaining such printing services from an unrelated party. See "Risk Factors--
Ownership by R.R. Donnelley."
Other
In April 1995, the Parent Company and Bain entered into a management
services agreement pursuant to which Bain agreed to provide to the Parent
Company general executive and management services at a cost to the Parent
Company of $350,000 per year. This arrangement terminated as of July 1996. In
addition, in connection with the CSI-MMI Merger the Parent Company paid to
Bain a fee of $1.5 million.
In September 1995, the Parent Company sold and shares of Common Stock
to Terence M. Leahy, then the Co-President of the Parent Company, and Rory J.
Cowan, then the Chairman of the Board of the Parent Company, respectively, at
a purchase price of per share. In June 1996, the Parent Company sold
shares of Common Stock to an affiliate of Morton H. Meyerson, a director of
the Parent Company, at a purchase price of per share.
In August 1994 and April 1996, Mr. Moore received loans from the Company in
the amounts of $100,000 and $150,000, respectively, relating to certain tax
obligations in connection with his exercise of options and the payment of
income taxes. The loans bear interest at the rates of 5.8% and 7.34%,
respectively, and are due on April 21, 2000. The full principal amount of
these loans is currently outstanding.
Following the Reorganization, it is expected that PLEX will declare a
distribution of $50 million to its unitholders, in part to enable such
unitholders to pay the taxes such unitholders will incur as a result of the
spin-off of PLEX in the Reorganization. Such distribution will be paid in cash
to unitholders and will be paid to optionees through a reduction in the
exercise price of their options.
Messrs. Cowan, Leahy, Morphis and Rosenthal, each of whom is or was a
director or executive officer of the Parent Company prior to the
Reorganization, have entered into various employment and other agreements with
the Parent Company. Such agreements are being assigned to or assumed by the
Spin-Off Subsidiaries in connection with the Reorganization, and the costs and
expenses associated with these individuals are included in the Company's
financial statements based on allocations of time spent by management
providing services to the Company and the Spin-Off Subsidiaries.
42
<PAGE>
THE REORGANIZATION
Prior to the closing of this offering, the Company will effect the
Reorganization pursuant to which the Company will (i) contribute to the Spin-
Off Subsidiaries its Corporate Software & Technology and MMI Businesses, (ii)
contribute to PLEX the capital stock of the Spin-Off Subsidiaries and (iii)
distribute to the Company's stockholders all of the equity interests in PLEX.
Accordingly, upon consummation of the Reorganization, the only business
conducted by the Company will be the outsource technical support business. The
consummation of the Reorganization is a condition to the closing of this
offering. Purchasers of Common Stock in this offering will not receive any
part of the Spin-Off Distribution.
R.R. Donnelley and certain of its affiliates, who are Selling Stockholders
in this offering, own approximately % of the outstanding Common Stock of the
Company. Upon the closing of this offering, R.R. Donnelley and its affiliates
will own approximately % of the outstanding Common Stock of the Company ( %
if the Underwriters' over-allotment option is exercised in full). Following
the Reorganization, R.R. Donnelley and its affiliates will also indirectly own
(through ownership interests in PLEX) approximately 48.0% of the outstanding
capital stock of each of the Spin-Off Subsidiaries. R.R. Donnelley has agreed
that for a period of three years following the closing of this offering it
will not purchase any additional shares of Common Stock that would result in
it and its affiliates owning over 49.9% of the Company's outstanding Common
Stock.
In connection with the Reorganization and prior to the closing of this
offering, the Company will enter into the following arrangements with the
Spin-Off Subsidiaries, PLEX and R.R. Donnelley:
Contribution Agreements. The Company will enter into a Contribution
Agreement with each of the Spin-Off Subsidiaries and PLEX (collectively, the
"Contribution Agreements") providing for the contribution of the Corporate
Software & Technology Business to one Spin-Off Subsidiary (the "Corporate
Software & Technology Subsidiary") and the MMI Business to the other Spin-Off
Subsidiary (the "MMI Subsidiary"), including the assets and liabilities of
such respective businesses, and the contribution of the capital stock of the
Spin-Off Subsidiaries to PLEX. The Contribution Agreements contain general
indemnities between the Company and the Spin-Off Subsidiaries and the
procedures by which indemnification may be claimed. The Contribution
Agreements provide for, on the one hand, each of the Spin-Off Subsidiaries and
PLEX to indemnify the Company against any losses, liabilities or damages
(including attorneys' fees) incurred in connection with any of the liabilities
to be assumed by such Spin-Off Subsidiary pursuant to the Contribution
Agreements and, on the other hand, the Company to similarly indemnify the
Spin-Off Subsidiaries in respect of any liabilities retained by the Company.
In addition, in the event the Spin-Off Subsidiaries and PLEX fail to provide
the required indemnification and a claim for payment is made within three
years of the date of the closing of this offering, R.R. Donnelley has agreed
to provide such indemnification to the Company, up to an aggregate indemnity
of $100 million. The Company will generally remain contingently liable for all
liabilities assumed by the Spin-Off Subsidiaries. There can be no assurance
that claims relating to such liabilities will not be asserted against the
Company or that, if any such claim is successfully asserted, that the Company
will be able to collect any indemnified amounts from the Spin-Off
Subsidiaries, PLEX or R.R. Donnelley on a timely basis, if at all. Any failure
to collect such indemnified amounts, or delay in doing so, could have a
material adverse effect on the Company.
In connection with the Reorganization, the Spin-Off Subsidiaries will retain
their obligation to repay the total amount, other than approximately $50
million, of the loans from R.R. Donnelley to the Parent Company, and R.R.
Donnelley will release the Company from such amounts retained by the Spin-Off
Subsidiaries. The Company will use approximately $50 million of the net
proceeds from this offering to repay in full the amount of the loans from R.R.
Donnelley that it will assume.
Transitional Service Agreements. The Company has historically depended on
the businesses being transferred to the Spin-Off Subsidiaries and on R.R.
Donnelley for certain financial, tax, insurance, payroll, employee benefits,
information technology and other services. In connection with the
Reorganization, the
43
<PAGE>
Company will enter into agreements with the Spin-Off Subsidiaries
(collectively, the "Transitional Service Agreements") for the continued
provision after the Reorganization of certain services formerly shared among
such entities or provided by R.R. Donnelley. Pursuant to the Transitional
Service Agreements, the Company will receive from the Spin-Off Subsidiaries
certain financial, tax, insurance, payroll, employee benefits, information
technology and other services, and the Company will provide to the Spin-Off
Subsidiaries certain legal services, outsource technical support for certain
clients of the Spin-Off Subsidiaries and information technology services. The
Company estimates that annual payments under the Transitional Service
Agreements will total approximately $2.0 million from the Company to the Spin-
Off Subsidiaries and approximately $1.0 million to the Company from the Spin-
Off Subsidiaries. Each party to the Transitional Service Agreements is
generally prohibited from hiring the employees of the other party and from
using or disclosing the other party's confidential information other than in
connection with the performance of its obligations under such agreements.
The Transitional Service Agreements generally terminate on the one-year
anniversary of the closing of this offering, provided that the party receiving
the services may terminate the agreement with respect to some or all of such
services upon 90 days' notice. After such termination, the Company will be
required to provide the services it is receiving under such agreements
internally or find a third-party provider of such services. There can be no
assurance that the Company will be able to secure the provision of such
services on comparable terms, and the failure to do so could have a material
adverse effect on the Company. The Company's historical financial statements
reflect an allocation of expenses in connection with the services covered by
the Transitional Service Agreements.
Tax Sharing Agreement. The Company and the Spin-Off Subsidiaries will enter
into a tax sharing agreement that will define the parties' rights and
obligations with respect to filing of returns, payments, deficiencies and
refunds of federal, state and other income or franchise taxes relating to the
Parent Company's business for tax years prior to and including the year in
which the Reorganization occurs. In general, with respect to periods ending on
or before the last day of the taxable year in which the Reorganization occurs,
the Company is responsible for filing state and consolidated federal tax
returns for the Stream affiliated group. The Spin-Off Subsidiaries shall
reimburse the Company for the payment of taxes attributable to their respective
operations. The Company and the Spin-Off Subsidiaries have agreed to cooperate
with each other and to share information in preparing tax returns and in
dealing with other tax matters. The Company shall be responsible for taxes
attributable to any gain realized by the Company as a result of the
Reorganization or Spin-Off Distribution, subject to indemnification from R.R.
Donnelley as described below.
Tax Reimbursement Agreement. Until the expiration of the applicable statutes
of limitations, R.R. Donnelley has agreed to indemnify the Company in respect
of any tax payable by the Company with respect to (i) any gain realized by the
Company as a result of the Reorganization or the Spin-Off Distribution, which
is not intended to be tax-free to the stockholders of the Company or to the
Company, and (ii) any other income tax liabilities of the Company relating to
the Spin-Off Subsidiaries' businesses, after taking into account the net
operating loss carryforwards and other tax attributes of the Company. The
Company will, however, remain contingently liable for all such taxes and
liabilities, and there can be no assurance any indemnified amounts will be
collected from R.R. Donnelley.
Subcontracts. The Company and the Corporate Software & Technology Subsidiary
will enter into subcontracts pursuant to which the Company will provide support
services to several customer clients of the Corporate Software & Technology
Subsidiary and the Corporate Software & Technology Subsidiary will provide
certain services in connection with the Company's joint venture with Fujitsu.
The Company and the Spin-Off Subsidiaries may also enter into additional
subcontracts relating to bundled products and services.
Subleases. The Company will enter into subleases pursuant to which the
Company will sublease call center space in Apeldoorn from the MMI Subsidiary
and will sublease space in Amsterdam to R.R. Donnelley.
44
<PAGE>
Legal Proceedings. The Company is subject to certain legal proceedings
relating to businesses other than the outsource technical support business.
In connection with the transaction pursuant to which SHI acquired CSI for a
cash payment of $15.00 per share to the public stockholders of CSI, the State
of Wisconsin Investment Board and certain other former holders of an aggregate
of 605,180 shares of Common Stock of CSI (and 136,750 shares that the Parent
Company contends have not properly perfected their appraisal rights) are
currently parties to an appraisal proceeding under Delaware law against CSI.
The action was originally commenced in the Delaware Court of Chancery on May
17, 1994 and is captioned State of Wisconsin Investment Board and Cede & Co.
v. Corporate Software, Inc. Certain of the shares subject to this proceeding
were previously redeemed by the Parent Company for $15.00 per share. While the
Company will remain the named defendant in such proceeding and remain
contingently liable for the outcome, in connection with the Reorganization,
the Company will assign this potential liability to the Corporate Software &
Technology Subsidiary, which will agree to defend such proceeding and
indemnify the Company for any costs and damages incurred as a result thereof.
On February 26, 1997, The Learning Company, Inc., a Delaware corporation,
filed a lawsuit against the Parent Company, captioned The Learning Company,
Inc. v. Stream International Inc., in the Middlesex Superior Court, Cambridge,
Massachusetts. In its complaint, The Learning Company, Inc. alleges that the
Parent Company failed to perform its obligations under a certain services
contract relating to the Parent Company's MMI Business. In connection with
this claim, The Learning Company, Inc. is seeking unspecified damages. While
the Company will remain the named defendant in such proceeding and
contingently liable for the outcome, in connection with the Reorganization,
the Company will assign this potential liability to the MMI Subsidiary, which
will agree to defend such proceeding and indemnify the Company for any costs
and damages incurred as a result thereof.
Pursuant to the Contribution Agreements, any liability relating to these
legal proceedings will be assumed by the respective Spin-Off Subsidiaries and
will be subject to the indemnification obligations of the Spin-Off
Subsidiaries, PLEX and R.R. Donnelley that are described above. See "Risk
Factors--Ownership by R.R. Donnelley," "Risk Factors--Risks Relating to the
Reorganization," "Certain Transactions" and "Principal and Selling
Stockholders."
45
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of May 1, 1997, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by (i) each
person or entity known to the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each of the Company's directors before and after
the Reorganization, (iii) each of the Named Executive Officers, (iv) all
directors and executive officers after the Reorganization as a group and (v)
the Parent Company's Chief Financial Officer.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING (1) OFFERING (1)
NAME AND ADDRESS OF --------------------- SHARES ------------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
R.R. Donnelley & Sons (3) (3) (3)
Company (2) ..........
77 West Wacker Drive
Chicago, Illinois
60601
Bain Capital Funds (4).
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts
02116
DIRECTORS AND NAMED EX-
ECUTIVE OFFICERS
Stephen D.R. Moore (5).
Judith G. Salerno (6)..
Terence M. Leahy (7)...
Morton H. Rosenthal
(8)...................
Gene S. Morphis (9)....
Steven J. Baumgartner..
Cheryl A. Francis......
Jonathan S. Lavine
(10)..................
Daniel I. Malina.......
Morton H. Meyerson
(11)..................
Mark E. Nunnelly (12)..
Robert F. White (13)...
All directors and
executive officers
after the
Reorganization as a
group
(6 persons) (14)......
</TABLE>
- --------
*Less than 1%
46
<PAGE>
(1) Each stockholder possesses sole voting and investment power with respect
to the shares listed, except as otherwise noted. Amounts shown in the
above table and the following notes include shares issuable within the 60-
day period following May 1, 1997 pursuant to the exercise of options. All
share amounts give effect to (i) the issuance of shares of Common Stock
upon exercise of the Incentive Option and (ii) the distribution of shares
of Common Stock pursuant to the TARSAP Plan. See "Certain Transactions."
(2) Includes shares of Common Stock held by R.R. Donnelley & Sons
Company, shares of Common Stock held by R.R. Donnelley International,
Inc. and shares of Common Stock held by R.R. Donnelley Norwest Inc.
(3) R.R. Donnelley has granted to the Underwriters a 30-day option to purchase
up to additional shares of Common Stock solely to cover over-
allotments, if any. This table assumes no exercise of such over-allotment
option.
(4) Includes shares of Common Stock held by Bain Capital Fund IV L.P.,
shares of Common Stock held by Bain Capital Fund IV-B L.P.,
shares of Common Stock held by Information Partners Capital Fund L.P.,
shares of Common Stock held by BCIP Associates and shares of
Common Stock held by BCIP Trust Associates. Bain Capital, Inc. exercises
investment and voting power with respect to each of these funds.
(5) Includes shares subject to outstanding stock options that are
exercisable within the 60-day period following May 1, 1997 and shares
of Common Stock held by Mr. Moore's minor children. Mr. Moore has
investment and voting power over the shares held by his children but
disclaims beneficial ownership of such shares.
(6) Includes shares subject to outstanding stock options that are
exercisable within the 60-day period following May 1, 1997.
(7) Includes shares subject to outstanding stock options that are
exercisable within the 60-day period following May 1, 1997.
(8) Includes shares subject to outstanding stock options that are
exercisable within the 60-day period following May 1, 1997.
(9) Includes shares subject to outstanding stock options that are
exercisable within the 60-day period following May 1, 1997.
(10) Includes the shares described in Note (4) above, as to which Mr. Lavine
shares voting and investment power. Mr. Lavine disclaims beneficial
ownership of such shares.
(11) Includes shares of Common Stock held by Big Bend Investments, L.P.,
a limited partnership, of which Mr. Meyerson is a general and limited
partner.
(12) Includes the shares described in Note (4) above, as to which Mr. Nunnelly
shares voting and investment power. Mr. Nunnelly disclaims beneficial
ownership of such shares.
(13) Includes the shares described in Note (4) above, as to which Mr. White
shares voting and investment power. Mr. White disclaims beneficial
ownership of such shares.
(14) Includes the shares described in Notes (5), (6), (10) and (12) above and
an additional shares issuable upon the exercise of outstanding options
exercisable within the 60-day period following May 1, 1997. Does not
include shares of Common Stock which all executive officers and
directors have the right to acquire upon the exercise of outstanding
options not exercisable within the 60-day period following May 1, 1997.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, the Company's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation")
will authorize the issuance of up to 50,000,000 shares of Common Stock, $.01
par value per share, and 1,000,000 shares of Preferred Stock, $.01 par value
per share. The following summary describes the Company's capital stock as in
effect upon the closing of this offering, after giving effect to the
conversion of all outstanding shares of Class B Common Stock into Class A
Common Stock, the reclassification of the Class A Common Stock as Common Stock
and the filing of the Certificate of Incorporation reflecting such
reclassification, in each case prior to the closing of this offering.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. Upon the liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding Preferred
Stock. Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for,
fully paid and nonassessable. The rights, preferences and privileges of
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 the
Company may designate and issue in the future.
PREFERRED STOCK
Under the terms of the Certificate of Incorporation, the Board of Directors
is authorized, subject to any limitations prescribed by law, without
stockholder approval, to issue shares of Preferred Stock in one or more
series. Each such series of Preferred Stock shall have such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences,
as shall be determined by the Board of Directors. The purpose of authorizing
the Board of Directors to issue Preferred Stock and determine its rights and
preferences is to eliminate delays associated with a stockholder vote on
specific issuances. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, a majority of the
outstanding voting stock of the Company. The Company has no present plans to
issue any shares of Preferred Stock. See "Risk Factors--Antitakeover
Provisions."
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Section 203 prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. Subject to certain
exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock. The Company has exempted R.R. Donnelley and
its affiliates (and their direct transferees who acquire up to a 25% equity
interest in the Company) from this restriction.
48
<PAGE>
The Company has agreed that if it adopts any stockholders' rights plan after
the closing of this offering and before R.R. Donnelley no longer beneficially
owns any shares of Common Stock, it will exempt from the plan R.R. Donnelley
and its affiliates (and their direct transferees who acquire up to a 25%
equity interest in the Company).
The Certificate of Incorporation provides for the division of the Board of
Directors into three classes as nearly equal in size as possible with
staggered three-year terms. Under the Certificate of Incorporation, any
vacancy on the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board, may only be filled by vote of a
majority of the directors then in office. The classification of the Board of
Directors and provisions relating to filling of vacancies could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, control of the Company.
The Certification of Incorporation also provides that after the closing of
this offering, any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting
and may not be taken by written action in lieu of a meeting. The Certificate
of Incorporation further provides that special meetings of the stockholders
may only be called by the Chairman of the Board of Directors, the Chief
Executive Officer or, if none, the President of the Company or by the Board of
Directors. Under the Company's Amended and Restated By-Laws to be effective
upon the closing of this offering (the "By-Laws"), in order for any matter to
be considered "properly brought" before a meeting, a stockholder must comply
with certain requirements regarding advance notice to the Company. The
foregoing provisions could have the effect of delaying until the next
stockholders' meeting stockholder actions which are favored by the holders of
a majority of the outstanding voting stock of the Company. These provisions
may also discourage another person or entity from making a tender offer for
the Company's Common Stock, because such person or entity, even if it acquired
a majority of the outstanding voting stock of the Company, would be able to
take action as a stockholder (such as electing new directors or approving a
merger) only at a duly called stockholders' meeting, and not by written
consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless a corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage.
The Certificate of Incorporation and the By-Laws require the affirmative vote
of the holders of at least two-thirds of the shares of capital stock of the
Company issued and outstanding and entitled to vote to amend or repeal any of
the provisions described in the prior two paragraphs.
The Certificate of Incorporation contains certain provisions permitted under
the DGCL relating to the liability of directors. The provisions eliminate a
director's liability for monetary damages for a breach of fiduciary duty,
except in certain circumstances involving wrongful acts, such as the breach of
a director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. Further, the Certificate of
Incorporation contains provisions to indemnify the Company's directors and
officers to the fullest extent permitted by the DGCL. The Company believes
that these provisions will assist the Company in attracting and retaining
qualified individuals to serve as directors. See "Risk Factors--Antitakeover
Provisions" and "Management."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston Equiserve
L.P.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have shares of
Common Stock outstanding (assuming no exercise of outstanding options other
than the Incentive Option). Of these shares, the shares ( shares if
the over-allotment option is exercised in full) to be sold in this offering
will be freely tradeable by persons other than "affiliates" of the Company (as
defined in Rule 144 under the Act, "Affiliates") without restriction or
further registration under the Act. All of the remaining shares of Common
Stock outstanding will be "restricted securities" (the "Restricted
Securities") within the meaning of Rule 144 under the Act and may not be sold
in the absence of registration under the Act, unless an exemption from
registration is available.
SALES OF RESTRICTED SECURITIES
Of the Restricted Securities, approximately shares of Common Stock will
be eligible for sale in the public market immediately after this offering
pursuant to Rule 144(k); of these, approximately shares are subject to
lock-up agreements (as described below). Approximately additional
Restricted Securities not subject to lock-up agreements will become eligible
for sale in the public market in accordance with Rule 144 or Rule 701 under
the Act beginning 90 days after the date of this Prospectus. Following the
expiration of or release from the lock-up agreements, approximately
additional Restricted Securities will become eligible for immediate sale,
subject, generally, to compliance with Rule 144 or Rule 701. The remainder of
the Restricted Securities held by existing stockholders (including those
subject to lock-up agreements) will become eligible for sale at various times
over a period of less than two years.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned Restricted Securities for at least one year is entitled to sell, within
any three-month period, a number of such shares that does not exceed the
greater of (i) one percent of the then outstanding shares of Common Stock
(approximately shares immediately after this offering) or (ii) the
average weekly trading volume in the Common Stock in the over-the-counter
market during the four calendar weeks preceding the date on which notice of
such sale is filed, provided certain requirements concerning availability of
public information, manner of sale and notice of sale are satisfied. In
addition, Affiliates must comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, in order to sell
shares of Common Stock which are not Restricted Securities. Under Rule 144(k),
a person who is not an Affiliate and has not been an Affiliate for at least
three months prior to the sale and who has beneficially owned Restricted
Securities for at least two years may resell such shares without compliance
with the foregoing requirements. In meeting the one and two year holding
periods described above, a holder of Restricted Securities can include the
holding periods of a prior owner who was not an Affiliate.
OPTIONS
Rule 701 provides that Restricted Securities which were acquired under the
Company's stock plans may be resold by persons, other than Affiliates,
beginning 90 days after the date of this Prospectus, 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, subject to
certain limitations. Rule 701 also provides that the shares of Common Stock
acquired on the exercise of currently outstanding options issued under the
Company's stock plans may be resold by persons, other than Affiliates,
beginning 90 days after the date of this Prospectus, 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, subject to
certain limitations. shares of Common Stock which may be acquired upon
the exercise of outstanding stock options exercisable within 90 days of the
date of this Prospectus may be eligible for resale under Rule 701 beginning 90
days after the date of this Prospectus; of these shares are subject to
lock-up agreements.
50
<PAGE>
The Company intends to file one or more registration statements on Form S-8
under the Act to register all shares of Common Stock subject to outstanding
stock options and Common Stock otherwise issuable pursuant to the Company's
various stock plans that do not qualify for an exemption under Rule 701 from
the registration requirements of the Act. Such registration statements are
expected to become effective upon filing. Shares covered by these registration
statements will thereupon be eligible for sale in the public markets to the
extent applicable.
LOCK-UP AGREEMENTS
Subject to certain limited exceptions, the Company's executive officers and
directors, the Selling Stockholders and certain other stockholders, who in
aggregate hold shares of Common Stock and options to purchase shares
of Common Stock within 90 days of the date of this Prospectus, have agreed,
pursuant to lock-up agreements, not to sell or otherwise dispose of, directly
or indirectly, any shares of Common Stock (or any security convertible into or
exchangeable or exercisable for Common Stock) without the prior written
consent of Alex. Brown & Sons Incorporated and Lehman Brothers Inc. for a
period of 180 days from the date of this Prospectus. In addition, the Company
has agreed pursuant to the Underwriting Agreement not to sell or otherwise
dispose of, directly or indirectly, any shares of Common Stock (or any
security convertible into or exchangeable or exercisable for Common Stock)
without the prior written consent of Alex. Brown & Sons Incorporated and
Lehman Brothers Inc. for a period of 180 days from the date of this
Prospectus, other than pursuant to the Company's stock plans. See
"Underwriting."
REGISTRATION RIGHTS
After the completion of this offering, certain stockholders of the Company
(the "Rightsholders") will be entitled to require the Company to register
under the Act up to a total of shares of outstanding Common Stock (the
"Registrable Shares") under the terms of a certain agreement among the Company
and the Rightsholders (as amended, the "Registration Agreement"). The
Registration Agreement provides that in the event the Company proposes to
register any of its securities under the Act at any time or times, the
Rightsholders, subject to certain exceptions, shall be entitled to include
Registrable Shares in such registration. However, the managing underwriter of
any such offering may exclude for marketing reasons some of such Registrable
Shares from such registration. The Rightsholders have, subject to certain
conditions and limitations, additional rights to require the Company to
prepare and file registration statements with respect to their Registrable
Shares beginning 181 days after the effective date of this offering. The
Company is generally required to bear the expenses of all such registrations,
except underwriting discounts and commissions.
Prior to this offering, there has been no public market for the Common Stock
of the Company, and no predictions can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares for
future sale may have on the market price for the Common Stock. Sales of
substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely effect prevailing market prices for the Common Stock
and could impair the Company's future ability to obtain capital through an
offering of equity securities. See "Risk Factors--Ownership of R.R. Donnelley"
and "Risk Factors--Shares Eligible for Future Sale."
51
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Lehman Brothers Inc., J.P. Morgan Securities
Inc., Salomon Brothers Inc and Smith Barney Inc., have severally agreed to
purchase from the Company and the Selling Stockholders the following
respective numbers of shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Alex. Brown & Sons Incorporated....................................
Lehman Brothers Inc................................................
J.P. Morgan Securities Inc. .......................................
Salomon Brothers Inc...............................................
Smith Barney Inc...................................................
------
Total..........................................................
======
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock 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, the
offering price and other selling terms may be changed by the Representatives
of the Underwriters.
R.R. Donnelley and its affiliates have granted to the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to additional shares of Common Stock at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it shown in the above table bears to , and R.R.
Donnelley and its affiliates will be obligated, pursuant to the option, to
sell such shares to the Underwriters. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the shares are being
offered.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
The Company and certain stockholders of the Company have agreed pursuant to
certain agreements that, subject to certain limited exceptions, they will not,
without the prior written consent of Alex. Brown & Sons Incorporated and
Lehman Brothers Inc., offer, sell or otherwise dispose of any shares of Common
Stock for a period of 180 days from the date of this Prospectus. See "Shares
Eligible for Future Sale."
52
<PAGE>
Certain of the Underwriters from time to time have performed various
services for the Company and its affiliates and R.R. Donnelley, including in
connection with the Reorganization.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase shares of Common
Stock. As an exception to these rules, the Representatives are permitted to
engage in certain transactions that stabilize the price of the Common Stock.
Such transactions may consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock. In addition, if the
Representatives over-allot (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), and thereby create a
short position in the Common Stock in connection with this offering, the
Representatives may reduce that short position by purchasing Common Stock in
the open market. The Representatives also may elect to reduce any short
position by exercising all or part of the over-allotment option described
herein. The Representatives also may impose a penalty bid on certain
Underwriters and selling group members. This means that if the Representatives
purchase shares of Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of this offering. In general, purchases
of a security for the purpose of stabilization or to reduce a syndicate short
position could cause the price of the security to be higher than it might
otherwise be in the absence of such purchases. The imposition of a penalty bid
might have an effect on the price of a security to the extent that it could
discourage resales of the security by purchasers in this offering. Neither the
Company nor any of the Underwriters makes any representation or prediction as
to the direction or magnitude of any effect that the transactions described
above may have on the price of the Common Stock. In addition, neither the
Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
The Representatives of the Underwriters have advised the Company and the
Selling Stockholders that the Underwriters do not intend to confirm sales to
any account over which they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiation between the Representatives of the
Underwriters and a Pricing Committee of the Board of Directors that will
include a representative of R.R. Donnelley. Among the factors to be considered
in such negotiations will be prevailing market conditions, the results of
operations of the Company in recent periods, the market capitalizations and
stages of development of other companies which the Company and the
Representatives of the Underwriters believe to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hale and Dorr LLP, Boston, Massachusetts, and certain
matters will be passed upon for the Underwriters by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts.
53
<PAGE>
EXPERTS
The Consolidated Financial Statements and Schedule included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their reports appearing in this Prospectus and
elsewhere in the Registration Statement, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all
amendments, exhibits and schedules thereto) on Form S-1 under the Act with
respect to the shares of Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission, to
which Registration Statement reference is hereby made. With respect to each
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement and the exhibits thereto may
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Such material
may also be accessed electronically by means of the Commission's home page on
the Internet at http://www.sec.gov.
The Company intends to distribute to its stockholders annual reports
containing audited consolidated financial statements and will make available
copies of quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information.
54
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.......................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and
March 31, 1997................................................... F-3
Consolidated Statements of Income for Each of the Three Years in
the Periods Ended December 31, 1994, 1995 and 1996 and for the
Three Month Periods Ended March 31, 1996 and 1997................ F-4
Consolidated Statements of Stockholders' Investment for Each of
the Three Years in the Periods Ended December 31, 1994, 1995 and
1996 and for the Three Month Period Ended March 31, 1997......... F-5
Consolidated Statements of Cash Flows for Each of the Three Years
in the Periods Ended
December 31, 1994, 1995 and 1996 and for the Three Month Periods
Ended March 31, 1996 and 1997.................................... F-6
Notes to Consolidated Financial Statements........................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stream International Inc.:
We have audited the accompanying consolidated balance sheets of Stream
International Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of income, stockholders' investment and cash
flows for the years ended December 31, 1994, 1995 and 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stream
International Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for the years ended December
31, 1994, 1995 and 1996 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
_____________________________________
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 30, 1997
F-2
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 21 $ 1,142 $ 321
Accounts receivable, less allowance for doubtful
accounts of $156 in 1995, $304 in 1996 and $304
in the quarter ended March 31, 1997............. 21,981 35,636 34,950
Deferred income taxes............................ 190 1,323 2,518
Prepaid expenses................................. 1,706 1,345 2,421
Other current assets............................. 64 339 154
------- ------- -------
Total current assets........................... 23,962 39,785 40,364
------- ------- -------
PROPERTY AND EQUIPMENT:
Building and leasehold improvements.............. 1,454 5,455 4,525
Equipment and furniture.......................... 34,856 53,695 50,123
Construction in process.......................... 2,893 82 384
------- ------- -------
39,203 59,232 55,032
Accumulated depreciation......................... 9,962 22,415 20,927
------- ------- -------
Net property and equipment....................... 29,241 36,817 34,105
OTHER ASSETS....................................... 395 385 764
------- ------- -------
Total assets................................... $53,598 $76,987 $75,233
======= ======= =======
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of long-term debt................ $ -- $ 837 $ 810
Accounts payable................................. 2,708 1,344 1,546
Other accrued liabilities........................ 7,079 11,919 13,794
Nonrecurring charge accrual...................... -- 4,500 6,179
Current portion of capital lease obligation...... 825 1,275 1,014
------- ------- -------
Total current liabilities...................... 10,612 19,875 23,343
------- ------- -------
LONG-TERM DEBT..................................... -- 3,348 3,239
DEFERRED INCOME TAXES.............................. 288 497 487
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATION...... 1,734 604 501
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT:
Net parent company investment.................... 40,947 52,584 47,672
Cumulative translation adjustment................ 17 79 (9)
------- ------- -------
Total stockholders' investment................. 40,964 52,663 47,663
------- ------- -------
Total liabilities and stockholders' investment. $53,598 $76,987 $75,233
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------------
1994 1995 1996 1996 1997
------- ------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................... $37,388 $78,243 $155,498 $ 33,729 $ 49,352
Operating expenses:
Cost of services......... 22,891 57,338 117,309 26,841 35,450
Selling, general and ad-
ministrative
expenses................ 10,646 23,994 39,110 8,204 11,023
Nonrecurring charges..... -- -- 4,500 -- 2,000
------- ------- -------- --------- ---------
33,537 81,332 160,919 35,045 48,473
Income (loss) from opera-
tions..................... 3,851 (3,089) (5,421) (1,316) 879
Interest expense........... -- -- 188 51 51
------- ------- -------- --------- ---------
Income (loss) before income
taxes..................... 3,851 (3,089) (5,609) (1,367) 828
Provision (benefit) for in-
come taxes................ 1,724 (817) (924) (398) 710
------- ------- -------- --------- ---------
Net income (loss).......... $ 2,127 $(2,272) $ (4,685) $(969) $ 118
======= ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED
MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET PARENT COMMON STOCK ADDITIONAL CUMULATIVE
COMPANY ---------------- PAID-IN RETAINED ADJUSTMENT
INVESTMENT SHARES PAR VALUE CAPITAL EARNINGS TRANSLATION TOTAL
---------- ------ --------- ---------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31,
1993................... $ 3,198 0 $0 $ 0 $ 0 $ 0 $ 3,198
Net income.............. 2,127 2,127
Translation adjustment.. (3) (3)
Net transfers from
parent company......... 7,281 7,281
------- --- --- --- --- --- -------
BALANCES AT DECEMBER 31,
1994................... 12,606 0 0 0 0 (3) 12,603
Net loss................ (2,272) (2,272)
Translation adjustment.. 20 20
Net transfers from
parent company......... 30,613 30,613
------- --- --- --- --- --- -------
BALANCES AT DECEMBER 31,
1995................... 40,947 0 0 0 0 17 40,964
Net loss................ (4,685) (4,685)
Translation adjustment.. 62 62
Net transfers from
parent company......... 16,322 16,322
------- --- --- --- --- --- -------
BALANCES AT DECEMBER 31,
1996................... 52,584 0 0 0 0 79 52,663
Net income (unaudited).. 118 118
Translation adjustment.. (88) (88)
Net transfers from (to)
parent Company......... (5,030) (5,030)
------- --- --- --- --- --- -------
BALANCES AT MARCH 31,
1997 (UNAUDITED)....... $47,672 0 $0 $ 0 $ 0 $(9) $47,663
======= === === === === === =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ---------------
1994 1995 1996 1996 1997
------- -------- -------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net income (loss).............. $ 2,127 $ (2,272) $ (4,685) $ (969) $ 118
Adjustments to reconcile net
income (loss) to net cash pro-
vided by (used in)
operating activities:
Nonrecurring charge.......... -- -- 4,500 -- 2,000
Depreciation and amortiza-
tion........................ 2,600 6,233 12,624 2,880 4,355
(Gain) loss on disposal of
fixed assets................ (175) -- 14 -- --
Deferred income taxes........ (187) 285 (924) (78) (1,205)
Changes in assets and liabili-
ties:
Accounts receivable--net..... (4,581) (14,052) (13,655) (1,417) 686
Prepaid expenses............. (475) (1,125) 361 745 (1,779)
Other current assets......... (125) 61 (275) (179) 185
Other noncurrent assets...... (223) (154) 10 (68) (379)
Accounts payable............. 254 2,001 (1,364) 468 202
Accrued liabilities.......... 908 3,735 4,840 1,503 1,875
Nonrecurring charge usage.... -- -- -- -- (321)
------- -------- -------- ------ -------
Net cash provided by (used in)
operating
activities.................... 123 (5,288) 1,446 2,885 5,737
------- -------- -------- ------ -------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Purchase of property and equip-
ment.......................... (7,748) (24,053) (20,014) (9,134) (2,076)
Proceeds from sale of fixed as-
sets.......................... 1,640 -- 280 125 1,000
------- -------- -------- ------ -------
Net cash used in investing activ-
ities........................... (6,108) (24,053) (19,734) (9,009) (1,076)
------- -------- -------- ------ -------
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Payments under capital lease
obligations................... (1,133) (1,433) (1,160) (206) (364)
Net transfers from (to) parent
company....................... 7,281 30,613 16,322 6,768 (5,030)
Net proceeds from long-term
borrowings.................... -- -- 4,185 -- --
------- -------- -------- ------ -------
Net cash provided by (used in)
financing activities.......... 6,148 29,180 19,347 6,562 (5,394)
------- -------- -------- ------ -------
Effect of exchange rate changes
on cash and cash equivalents.... (3) 20 62 (80) (88)
------- -------- -------- ------ -------
NET INCREASE (DECREASE) IN CASH
AND CASH
EQUIVALENTS..................... 160 (141) 1,121 358 (821)
CASH AND CASH EQUIVALENTS AT BE-
GINNING OF PERIOD............... 2 162 21 21 1,142
------- -------- -------- ------ -------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD....................... $ 162 $ 21 $ 1,142 $ 379 $ 321
======= ======== ======== ====== =======
Supplemental disclosure
of noncash financing
activities:
Assets acquired through capital
lease........................... $ 3,601 $ 53 $ 480 $ 462 $ --
Supplemental disclosure of cash
flow information:
Cash paid during the period for
interest........................ $ -- $ -- $ 188 $ 51 $ 51
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(MARCH 31, 1996 AND 1997 INFORMATION IS UNAUDITED)
1. NATURE OF OPERATIONS
Stream International Inc. (the "Company") is a worldwide provider of
outsource technical support services over the telephone, e-mail and the
Internet. The Company provides support services primarily to customers of
leading software publishers, hardware manufacturers and online service
providers. The Company operates call centers in the U.S., France, Germany, the
Netherlands and the United Kingdom.
2. THE REORGANIZATION
The Company's outsource technical support business began in 1992 as a unit
of Corporate Software Incorporated ("CSI"), which sold and licensed software
products and services to major corporations (to be known as the "Corporate
Software & Technology Business"). CSI established its technical support
business unit in response to demands from key clients that were increasingly
seeking to outsource technical support. In 1995, CSI and the Global Software
Services Division (to be known as "Modus Media International" or the "MMI
Business") of R.R. Donnelley & Sons Company ("R.R. Donnelley") combined to
form the Stream family of companies (the "CSI-MMI Merger"). Modus Media
International is a leading provider of outsource manufacturing services to
major software publishers and OEMs.
Historically, the Company conducted its business as a unit of its parent
company, Stream International Holdings Inc. (prior to the Reorganization
described below, the "Parent Company"). Prior to the closing of the proposed
initial public offering (see Note 13), the Parent Company will effect a
reorganization (the "Reorganization"), pursuant to which the Parent Company
will (i) contribute to two wholly-owned subsidiaries (the "Spin-Off
Subsidiaries") its Corporate Software & Technology Business and MMI Business,
(ii) contribute to PLEX LLC ("PLEX"), a limited liability company wholly owned
by the Parent Company, the capital stock of the Spin-Off Subsidiaries and
(iii) distribute to the Parent Company's stockholders all of the equity
interests in PLEX (the "Spin-Off Distribution"). Upon consummation of the
Reorganization, the only business conducted by the Company will be the
outsource technical support business. Accordingly, these financial statements
exclude the results of the Spin-Off Subsidiaries and include only the results
of the outsource technical support business, the business to be conducted by
the Company after the Reorganization. In connection with the Reorganization,
Stream International Holdings Inc. will change its name to "Stream
International Inc." As used herein, the "Company" and "Stream" refer to Stream
International Holdings Inc. after giving effect to the foregoing name change
and the Reorganization.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company
and its foreign operations. The accounts of the Company's foreign operations
have been translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Operating results through the consummation of the Reorganization are
recorded as a return of capital to or contributions from the Parent Company.
INTERIM FINANCIAL STATEMENTS
The unaudited financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and March 31, 1997, in the opinion of management
include all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation of such information. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results for the full year.
F-7
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(MARCH 31, 1996 AND 1997 INFORMATION IS UNAUDITED)
CASH AND CASH EQUIVALENTS
The Company considers all cash and investments with an original maturity of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets
ranging from 3 to 7 years. Leasehold improvements are amortized over the
shorter of the related lease term or the useful life of the asset. Maintenance
and repair costs are charged to expense as incurred. The cost and the related
accumulated depreciation of assets retired or disposed of are eliminated and
any resulting gains or losses are recognized in income.
DEFERRED START-UP COSTS
Deferred start-up costs include costs associated with the hiring and
training of employees for significant new contracts. Deferred start-up costs
are charged to operations over a six month period upon the commencement of the
new contract.
DEFERRED GRANTS
The Company periodically receives grants for the hiring and training of new
employees. These grants are deferred and recognized in the period the related
expense was incurred.
REVENUE RECOGNITION
The Company recognizes revenues at the time services are performed. The
Company has certain contracts which are billed in advance. Amounts billed but
not earned under these contracts are excluded from revenues and included in
deferred income.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Income taxes are determined based on income reported in the financial
statements on a separate return basis, regardless of when such taxes are
payable. Any related current tax liability (benefit) is reflected as an
increase (decrease) in net parent company investment. Future tax benefits
related to foreign subsidiaries are recognized to the extent realization of
such benefits is more likely to occur than not. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount that is
realizable, based upon the realization criteria defined in SFAS 109.
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; however,
management does not believe these differences would have a material effect on
operating results.
Certain costs and expenses allocable to the Company by the Parent Company
have been allocated based on management's estimates. Management believes that
these allocations are based on assumptions that are reasonable under the
circumstances. The historical operating impact may not be indicative of future
results. See Note 6, "Related Party Transactions."
F-8
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(MARCH 31, 1996 AND 1997 INFORMATION IS UNAUDITED)
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS 121") effective January 1, 1996. In accordance with
the requirements of SFAS 121, the Company periodically assessed whether events
or circumstances have occurred that may indicate the carrying value of its
long-lived assets may not be recoverable. When such events or circumstances
indicate the carrying value of an asset may be impaired, the Company uses an
estimate of the future undiscounted cash flows to be derived from the asset
over the remaining useful life of the asset to assess whether or not the asset
is recoverable. If the future undiscounted cash flows to be derived over the
life of the asset do not exceed the asset's net book value, the Company
recognizes an impairment loss for the amount by which the net book value of
the asset exceeds its estimated fair market value. As discussed further in
Note 5, the Company recognized losses relating to certain assets not expected
to be utilized after the Reorganization that totaled approximately $1.4
million during the year ended December 31, 1996. This impairment charge has
been included as a component of the nonrecurring charges in the Company's
Consolidated Statements of Income for the period ended December 31, 1996. No
other impairment losses were recognized during the year ended December 31,
1996.
4. SIGNIFICANT CLIENTS AND CONCENTRATIONS OF CREDIT RISK
A majority of the Company's revenues are attributable to clients operating
in the information technology industry. Revenues from significant clients,
defined as revenues in excess of 10% of total revenues, and the revenues as a
percentage of total sales for the periods ended December 31, 1994, 1995 and
1996 and for the three months ended March 31, 1996 and 1997 are as follows
(dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------- ----------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
$ % $ % $ % $ % $ %
------- --- ------- --- ------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Customer A.............. $25,955 73% $44,207 56% $62,188 40% $13,061 39% $20,926 42%
Customer B.............. * * $ 8,562 11% $18,904 12% $ 6,188 18% * *
Customer C.............. * * * * $19,822 13% * * $11,351 23%
Customer D.............. * * * * $19,067 12% $ 4,617 14% * *
</TABLE>
- --------
* Accounted for less than 10% of total revenues for the period indicated.
The loss of one or more of its significant clients could have a material
adverse effect on the Company's business, operating results or financial
condition.
Financial instruments which potentially subject the Company to
concentrations of credit risk are limited to trade accounts receivable. The
Company does not require collateral or other security to support client
receivables. The Company performs periodic credit evaluations of its clients
to minimize collection risks on trade accounts receivable and maintains
allowances for potentially uncollectible accounts.
5. NONRECURRING CHARGES
During the year ended December 31, 1996, the Company recorded a charge
associated with the consolidation of certain European locations, including the
accrual of remaining lease obligations and the write-off of leasehold
improvements and certain other assets not expected to be utilized after the
Reorganization. The Company also recorded a one-time charge for costs
associated with recruiting certain members of management and establishing new
compensation and benefit plans.
F-9
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(MARCH 31, 1996 AND 1997 INFORMATION IS UNAUDITED)
During the period ended March 31, 1997, the Company recorded an additional
charge associated with the consolidation of certain European locations
relating to employee termination benefits.
6. RELATED PARTY TRANSACTIONS
The Company's net parent company investment represents the Parent Company's
cumulative equity funding of operations and does not constitute intercompany
debt.
Historically, certain treasury, legal, tax, financial, accounting,
information technology and other services were performed centrally. Costs of
those services have been allocated among the Company and the Spin-Off
Subsidiaries using allocation methods that management believes are reasonable.
Total expenses allocated to the Company amounted to $3,170,000, $5,208,000 and
$7,722,000 for the years ended December 31, 1994, 1995 and 1996, respectively,
and $1,620,000 and $239,000 for the three month periods ended March 31, 1996
and 1997, respectively.
The Company and the Spin-Off Subsidiaries will enter into agreements
(collectively, the "Transitional Service Agreements") for the continued
provision following the Reorganization of certain services formerly shared
among such entities or provided by R.R. Donnelley. Pursuant to the
Transitional Service Agreements, the Company will receive from the Spin-Off
Subsidiaries certain financial, tax, insurance, payroll, employee benefits,
information technology and other services and will provide to the Spin-Off
Subsidiaries certain legal services, outsource technical support for certain
clients of the Spin-Off Subsidiaries and information technology services.
The Company and the Spin-Off Subsidiaries will enter into a tax sharing
agreement that will define the parties' rights and obligations with respect to
filing of returns, payments, deficiencies and refunds of federal, state and
other income or franchise taxes relating to the parties' businesses for tax
years prior to and including the year in which the Reorganization occurs. The
Company and the Spin-Off Subsidiaries will agree to cooperate with each other
and to share information in preparing required tax returns and in dealing with
other tax matters.
F-10
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(MARCH 31, 1996 AND 1997 INFORMATION IS UNAUDITED)
7. INCOME TAXES
The components of income/(loss) before income taxes are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Domestic................... $ 4,315 $ (2,045) $ (2,307) $ (990) $ 1,821
Foreign.................... (464) (1,044) (3,302) (377) (993)
------- -------- -------- -------- -------
$ 3,851 $ (3,089) $ (5,609) $ (1,367) $ 828
======= ======== ======== ======== =======
The components of the provision for income taxes are as follows:
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current provision:
Federal................... $ 1,547 $ (893) $ (1) $ (144) $ 1,547
State..................... 364 (209) 1 (33) 368
Foreign................... -- -- -- -- --
------- -------- -------- -------- -------
1,911 (1,102) -- (177) 1,915
------- -------- -------- -------- -------
Deferred provision:
Federal................... (151) 231 (748) (179) (975)
State..................... (36) 54 (176) (42) (230)
------- -------- -------- -------- -------
(187) 285 (924) (221) (1,205)
------- -------- -------- -------- -------
$ 1,724 $ (817) $ (924) $ (398) $ 710
======= ======== ======== ======== =======
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 1994, 1995 and 1996, and for
the three month periods ended March 31, 1996 and 1997:
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Federal statutory rate..... 35.0% (35.0)% (35.0)% (35.0)% 35.0%
State income taxes, net of
federal deduction......... 5.5 (3.3) (2.0) (3.6) 10.9
Change in valuation allow-
ance...................... 4.3 11.9 20.5 9.5 39.8
------- -------- -------- -------- -------
44.8% (26.4)% (16.5)% (29.1)% 85.7%
======= ======== ======== ======== =======
</TABLE>
F-11
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(MARCH 31, 1996 AND 1997 INFORMATION IS UNAUDITED)
The Company's deferred income tax assets and liabilities are summarized as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ---------------
1994 1995 1996 1997
------- ------- -------- ---------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts.... $ 34 $ 62 $ 121 $ 121
Accrued liabilities................ 295 491 1,495 2,681
Foreign operating losses not
benefited and other items......... 180 536 1,586 1,849
------ ------- -------- -------
509 1,089 3,202 4,651
Valuation allowance................ (180) (536) (1,586) (1,849)
------ ------- -------- -------
Total deferred tax asset........ $ 329 $ 553 $ 1,616 $ 2,802
====== ======= ======== =======
Deferred tax liabilities:
Property, plant & equipment........ $ (142) $ (651) $ (790) $ (771)
------ ------- -------- -------
Net deferred tax asset
(liability)....................... $ 187 $ (98) $ 826 $ 2,031
====== ======= ======== =======
</TABLE>
8. DEBT
During 1996, a foreign subsidiary of the Company entered into a Debt
Agreement with a bank to finance capital purchases for the Northern Ireland
facility. The original loan balance of 2.5 million pounds sterling accrues
interest at the London Interbank Market Rate plus 0.65% per annum. The loan is
to be repaid in equal annual installments of 500,000 pounds sterling commencing
October 1997. Under the terms of the agreement, the foreign subsidiary is
required to comply with a number of affirmative and negative covenants. As of
December 31, 1996 and March 31, 1997, the foreign subsidiary was in compliance
with the covenants of the agreement.
9. STOCKHOLDERS' INVESTMENT
In connection with the CSI--MMI Merger in 1995, the Parent Company
established the Stream 1995 Stock Option Plan (the "1995 Stock Option Plan"),
the 1995 California Stock Option Plan (the "1995 California Plan") and the 1995
Replacement Option Plan. The 1995 Stock Option Plan and the 1995 California
Plan provided for the issuance of up to an aggregate of 4,000,000 shares at
exercise prices not less than fair market value on the date of grant. The 1995
Replacement Option Plan provided for the issuance of 838,125 shares granted to
replace options previously granted by CSI. This latter plan terminated on
December 31, 1995 except with respect to outstanding options.
At the effective date of the Reorganization, outstanding awards under the
Parent Company's stock option plans will be replaced by substitute awards such
that for each option currently held, the option holder will receive an option
in the Company and an option in PLEX. The substitute awards will have the same
ratio of the exercise price per option to the market value per share, the same
aggregate difference between market value and exercise price and the same
vesting provisions, option periods and other terms and conditions of the
options that they will replace.
F-12
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(MARCH 31, 1996 AND 1997 INFORMATION IS UNAUDITED)
10. EMPLOYEE BENEFIT PLANS
SAVINGS AND RETIREMENT PROGRAM
Substantially all of the Company's domestic employees who meet certain
requirements are eligible to participate in the Parent Company's defined
contribution (401(k)) plan. Participants may make contributions to the plan
from 1% to 15% of their compensation, as defined. The Company contributes an
amount equal to 50% of the employee's contributions to the 401(k) plan, not to
exceed 3% of the employee's annual compensation. Company contributions are
fully vested after four years of service. The portion of the Parent Company's
contributions and costs attributable to the Company amounted to approximately
$215,000, $119,000, $313,000, $78,000, and $177,000, for each of the years
ended December 31, 1994, 1995 and 1996, and the three month periods ended
March 31, 1996 and 1997, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space and various equipment. These leases are
mainly accounted for as operating leases. Rental costs under operating lease
agreements were approximately $2,173,000, $4,000,000, $5,765,000, $1,290,000
and $1,515,000 for the years ended December 31, 1994, 1995 and 1996, and the
three month periods ended March 31, 1996 and 1997, respectively.
The Company leases certain equipment used at its call centers. The leases
are mainly accounted for as capital leases. The gross amounts of property and
equipment representing capital leases in the accompanying consolidated balance
sheets at December 31, 1995 and 1996 and March 31, 1997 were approximately
$3,614,000, $4,094,000 and $3,504,000, respectively. Corresponding amounts of
accumulated depreciation were $2,069,000, $3,071,000 and $2,798,000,
respectively. Depreciation of capital lease assets is included in depreciation
and amortization expenses of property and equipment.
Minimum future lease obligations at December 31, 1996 and March 31, 1997 are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
---------------------- ----------------------
OPERATING CAPITAL OPERATING CAPITAL
LEASES LEASES LEASES LEASES
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31:
1997...................... $ 5,488,000 $1,354,000 $ 4,072,500 $ 973,000
1998...................... 5,468,000 581,000 5,411,000 581,000
1999...................... 4,959,000 50,000 4,902,000 50,000
2000...................... 3,142,000 11,000 3,109,000 11,000
2001...................... 1,240,000 -- 1,209,000 --
Thereafter................ 1,339,000 -- 1,296,000 --
----------- ---------- ----------- ----------
Total minimum payments...... $21,636,000 1,996,000 $19,999,500 1,615,000
=========== ===========
Less: Amount representing
interest................... (117,000) (100,000)
---------- ----------
Present value of minimum
lease payments............. $1,879,000 $1,515,000
========== ==========
</TABLE>
The Company has a 40% ownership interest in a joint venture accounted for
under the equity method. As of December 31, 1996, the Company's share of the
joint venture's cumulative losses exceeded its investment by approximately
$460,000. This amount has not been recorded as the Company has no commitment
to fund the joint venture or guarantee the joint venture's debt.
F-13
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(MARCH 31, 1996 AND 1997 INFORMATION IS UNAUDITED)
In connection with the Reorganization, the Company and the Spin-Off
Subsidiaries will enter into agreements which contain general indemnities
between the Company and the Spin-Off Subsidiaries. Under the agreements each of
the Spin-Off Subsidiaries will indemnify the Company for any losses,
liabilities or damages (including legal fees) in connection with any liability,
claim or action assumed by such Spin-Off Subsidiary and the Company will
indemnify the Spin-Off Subsidiaries in connection with any liability, claim or
action retained by the Company.
In May 1994, certain former stockholders of CSI commenced appraisal
proceedings against CSI in Delaware seeking appraisal rights for their shares
under Section 262 of the Delaware General Corporation Law. One of the Spin-Off
Subsidiaries will agree to indemnify the Company for any liability incurred as
a result of the proceedings.
In February 1997, The Learning Company, Inc. filed a lawsuit against the
Parent Company, alleging that the Parent Company failed to perform its
obligations under a certain services contract relating to the Parent Company's
MMI Business. In connection with this claim, The Learning Company, Inc. is
seeking unspecified damages. While the Company will remain the named defendant
in such proceeding and contingently liable for the outcome, in connection with
the Reorganization, the Company will assign this potential liability to Modus
Media International, which will agree to defend such proceeding and indemnify
the Company for any costs and damages incurred as a result thereof.
In addition, the Company is a party to certain litigation arising in the
ordinary course of business which, in the opinion of management, will not have
a material adverse effect on the operations or financial condition of the
Company. With respect to such matters not involving the outsource technical
support business, the Spin-Off Subsidiaries and R.R. Donnelley will agree to
indemnify the Company for any liability incurred as a result of the
proceedings, subject to certain limitations.
12. GEOGRAPHIC INFORMATION
The Company predominantly provides outsource technical support services to
the information technology industry. A summary of the Company's operations by
geographic area is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
United States................... $35,029 $70,406 $134,741 $29,075 $44,152
Europe.......................... 2,359 7,837 20,757 4,654 5,200
------- ------- -------- ------- -------
$37,388 $78,243 $155,498 $33,729 $49,352
======= ======= ======== ======= =======
Income (loss) from operations:
United States................... $ 3,974 $(1,863) $ (185) $ (827) $ 3,818
Europe.......................... (123) (1,226) (5,236) (489) (2,939)
------- ------- -------- ------- -------
$ 3,851 $(3,089) $ (5,421) $(1,316) $ 879
======= ======= ======== ======= =======
Identifiable assets:
United States................... $19,003 $47,491 $ 65,084 $51,065 $62,203
Europe.......................... 1,590 6,107 11,903 10,542 13,030
------- ------- -------- ------- -------
$20,593 $53,598 $ 76,987 $61,607 $75,233
======= ======= ======== ======= =======
</TABLE>
F-14
<PAGE>
STREAM INTERNATIONAL INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(MARCH 31, 1996 AND 1997 INFORMATION IS UNAUDITED)
13. INITIAL PUBLIC OFFERING (SUBSEQUENT EVENT)
The Company filed a Form S-1 for an initial public offering ("IPO") of
common stock on April 30, 1997. A portion of the shares to be sold are being
sold by certain stockholders of the Company. In addition, the Company will
become liable for approximately $50 million of indebtedness to R.R. Donnelley,
and such debt will be paid out of the proceeds of the IPO. The remaining net
proceeds will be used for general corporate purposes, including working
capital requirements and capital expenditures.
F-15
<PAGE>
[INSIDE BACK COVER PAGE OF PROSPECTUS]
"WORLD-CLASS QUALITY." BELOW THE STATEMENT ARE PICTURES OF THREE AWARDS WITH
THE FOLLOWING CORRESPONDING STATEMENTS: "STREAM HAS WON THE SOFTWARE SUPPORT
PROFESSIONALS ASSOCIATION STAR (SOFTWARE TECHNICAL ASSISTANCE RECOGNITION)
AWARD FOR THE PAST FOUR YEARS." "IN 1996, MICROSOFT RECOGNIZED STREAM FOR
EXCELLENCE IN TECHNICAL SUPPORT." "STREAM WAS AWARDED EUROCHANNEL'S INNOVATOR
AWARD IN 1996."
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 13
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 15
Selected Consolidated Financial and Operating Data........................ 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 23
Management................................................................ 33
Certain Transactions...................................................... 41
The Reorganization........................................................ 43
Principal and Selling Stockholders........................................ 46
Description of Capital Stock.............................................. 48
Shares Eligible for Future Sale........................................... 50
Underwriting.............................................................. 52
Legal Matters............................................................. 53
Experts................................................................... 54
Additional Information.................................................... 54
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
LOGO
Common Stock
------------
PROSPECTUS
------------
Alex. Brown & Sons
INCORPORATED
Lehman Brothers
J.P. Morgan & Co.
Salomon Brothers Inc
Smith Barney Inc.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the Securities and Exchange Commission registration fee and the NASD
filing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 45,455
NASD Filing Fee.................................................. 15,500
NASD Expenses.................................................... 10,000
Nasdaq Listing Fee............................................... 50,000
Blue Sky Fees and Expenses....................................... 5,000
Transfer Agent and Registrar Fees................................ 5,000
Accounting Fees and Expenses..................................... 400,000
Legal Fees and Expenses.......................................... 750,000
Printing, Engraving and Mailing Expenses......................... 400,000
Miscellaneous.................................................... 119,045
----------
Total.......................................................... $1,800,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article SEVENTH of the Registrant's Amended and Restated Certificate of
Incorporation, as in effect upon the closing of this offering (the
"Certificate of Incorporation"), provides that no director of the Registrant
shall be personally liable for any monetary damages for any breach of
fiduciary duty as a director, except to the extent that the Delaware General
Corporation Law prohibits the elimination or limitation of liability of
directors for breach of fiduciary duty.
Article EIGHTH of the Registrant's Certificate of Incorporation provides
that a director or officer of the Registrant (a) shall be indemnified by the
Registrant against all expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with any litigation or other legal proceeding (other than an action by or in
the right of the Registrant) brought against him or her by virtue of his or
her position as a director or officer of the Registrant if he or she acted in
good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the Registrant, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful and (b) shall be indemnified by the Registrant against
all expenses (including attorneys' fees) and amounts paid in settlement
actually and reasonably incurred in connection with any action by or in the
right of the Registrant brought against him or her by virtue of his or her
position as a director or officer of the Registrant if he or she acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed
to, the best interests of the Registrant, except that no indemnification shall
be made with respect to any matter as to which such person shall have been
adjudged to be liable to the Registrant, unless and only to the extent that a
court determines that, despite such adjudication but in view of all of the
circumstances, he or she is entitled to indemnification of such expenses.
Notwithstanding the foregoing, to the extent that a director or officer has
been successful, on the merits or otherwise, including, without limitation,
the dismissal of an action without prejudice, he or she is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
actually and reasonably incurred in connection therewith. Expenses shall be
advanced to a director or officer at his or her request, provided that he or
she undertakes to repay the amount advanced if it is ultimately determined
that he or she is not entitled to indemnification for such expenses.
Indemnification is required to be made unless the Registrant determines by
clear and convincing evidence that the applicable standard of conduct required
for indemnification has not been met. In the event of a determination by the
Registrant that the director or officer did not meet the applicable
II-1
<PAGE>
standard of conduct required for indemnification, or if the Registrant fails
to make an indemnification payment within 60 days after such payment is
claimed by such person, such person is permitted to petition the court to make
an independent determination as to whether such person is entitled to
indemnification. As a condition precedent to the right of indemnification, the
director or officer must give the Registrant notice of the action for which
indemnity is sought and the Registrant has the right to participate in such
action or assume the defense thereof.
Article EIGHTH of the Registrant's Certificate of Incorporation further
provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is
amended to expand the indemnification permitted to directors or officers the
Registrant must indemnify those persons to the full extent permitted by such
law as so amended.
Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Act. Reference is made to the form of Underwriting Agreement filed as Exhibit
1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of capital stock and other securities granted as options or issued
by the Registrant since the Registrant's inception in February 1995. Further
included is the consideration, if any, received by the Registrant for such
shares of capital stock and other securities, as well as information relating
to the section of the Act or rule of the Commission under which exemption from
registration was claimed. All awards of options did not involve any sale under
the Act and none of the securities issued by the Registrant were registered
under the Act. The information presented in this Item 15 has not been adjusted
to reflect the reverse stock split of the Company's Common Stock or the
Reorganization to be effected prior to the consummation of this offering.
(a) Issuances of Capital Stock
1. In April 1995, the Registrant issued in connection with the CSI-MMI
Merger an aggregate of 7,280,000 shares of Class A Common Stock, 119,992
shares of Class B-N Common Stock and 1,623,696 shares of Class B-V Common
Stock.
2. In September 1995, the Registrant issued in connection with a five-for-
one stock split authorized by the Board of Directors an aggregate of
29,120,000 shares of Class A Common Stock, 479,968 shares of Class B-N Common
Stock and 6,494,784 shares of Class B-V Common Stock.
3. In September 1995, the Registrant sold 500,000 shares of Class A Common
Stock to its Chairman of the Board at a purchase price of $6.00 per share and
sold 83,333 shares of Class A Common Stock to its Co-President at a purchase
price of $6.00 per share.
4. In October 1995, the Registrant issued to an employee 900 shares of Class
B-V Common Stock.
5. In June 1996, the Registrant sold an aggregate of 460,133 shares of Class
A Common Stock to employees at a purchase price of $6.00 per share.
6. In June 1996, the Registrant sold to an affiliate of one of its directors
an aggregate of 166,666 shares of Class A Common Stock at a purchase price of
$6.00 per share.
7. In August 1996, the Registrant sold to an employee of the Registrant an
aggregate of 33,500 shares of Class A Common Stock at a purchase price of
$6.00 per share.
II-2
<PAGE>
(b) Grants and Exercises of Stock Options
Since its incorporation in February 1995, the Registrant has issued options
to purchase an aggregate of 4,538,250 shares of Class A Common Stock at a
weighted average exercise price of $ per share and 838,125 shares of Class
B-V Common Stock at a weighted average exercise price of $ per share. During
the same time period, the Registrant has issued a total of 1,981 shares of
Class A Common Stock and 79,752 of Class B-V Common Stock pursuant to the
exercise of options.
The securities issued in the above transactions were offered and sold in
reliance upon the exemptions from registration under Sections 3(b) and 4(2) of
the Act, and Regulation D and Rule 701 thereunder, relative to sales by an
issuer not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1(degrees) Certificate of Incorporation of the Registrant.
3.2(degrees) By-Laws of the Registrant.
3.3* Form of Certificate of Amendment of the Certificate of
Incorporation of the Registrant, to be effective following the
effective date of this offering.
3.4* Form of Amended and Restated Certificate of Incorporation of
the Registrant, to be effective following the closing of this
offering.
3.5* Form of Amended and Restated By-Laws of the Registrant, to be
effective upon the closing of this offering.
4.1* Specimen Certificate for shares of Common Stock, $.01 par
value, of the Registrant.
5* Opinion of Hale and Dorr LLP with respect to the validity of
the securities being offered.
10.1(degrees)+ Microsoft Corporation Product Service Vendor Agreement dated as
of December 14, 1995 between the Registrant and Microsoft
Corporation, as amended.
10.2* Form of 1997 Stock Incentive Plan.
10.3* Form of 1997 Director Stock Option Plan.
10.4(degrees) 1995 Stock Option Plan, as amended.
10.5(degrees) 1995 Replacement Stock Option Plan.
10.6(degrees) 1995 California Stock Option Plan, as amended.
10.6A* Form of amendments to 1995 Stock Option Plan, 1995 Replacement
Stock Option Plan and 1995 California Stock Option Plan.
10.7* Form of Contribution Agreement to be entered into between the
Registrant and the MMI Subsidiary.
10.8* Form of Contribution Agreement to be entered into among the
Registrant, the Corporate Software & Technology Subsidiary,
and a subsidiary of the Registrant.
10.9* Form of Contribution Agreement to be entered into between the
Registrant and PLEX.
10.10* Form of Transitional Service Agreement to be entered into
between the Registrant and the MMI Subsidiary.
10.11* Form of Transitional Service Agreement to be entered into
between the Registrant and the Corporate Software & Technology
Subsidiary.
10.12* Form of Tax Sharing Agreement to be entered into among the
Registrant, the Spin-Off Subsidiaries and PLEX.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.13* Forms of Guarantees to be entered into between the Registrant
and R.R. Donnelley.
10.14* Registration Rights Agreement dated as of April 21, 1995 among
the Registrant and the Stockholders named therein, including
form of amendment thereto.
10.15* Employment Agreement between the Registrant and Stephen D.R.
Moore.
10.16* Employment Agreement between the Registrant and Judith G.
Salerno.
10.17(degrees) Form of Management Retention Agreement entered into by the
Registrant with Stephen D.R. Moore and Judith G. Salerno.
10.18(degrees) Promissory Note and Stock Pledge Agreement dated April 15, 1996
between Judith G. Salerno and the Registrant.
10.19* Promissory Notes and Stock Pledge Agreement between Stephen
D.R. Moore and the Registrant.
10.20* Form of the Tax Reimbursement Agreement to be entered into by
the Registrant and R.R. Donnelley.
11* Calculation of shares used in determining pro forma net income
per common share.
21* Subsidiaries of the Registrant.
23.1* Consent of Hale and Dorr LLP (included in Exhibit 5).
23.2 Consent of Arthur Andersen LLP.
23.3* Consents of Certain Persons Named as Post-Reorganization
Directors.
24(degrees) Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(degrees) Previously filed.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions contained in the Certificate of Incorporation and
By-Laws of the Registrant and the laws of the State of Delaware, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Act, as amended, the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in Canton, Massachusetts, on this
10th day of July, 1997.
STREAM INTERNATIONAL HOLDINGS INC.
/s/ Stephen D.R. Moore
By: -----------------------------------
STEPHEN D.R. MOORE, PRESIDENT
SIGNATURES
Pursuant to the requirements of the Act, this Amendment to Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
Chief Executive
* Officer and July 10, 1997
- ------------------------------------ Director
TERENCE M. LEAHY (Principal
Executive Officer)
Senior Vice
* President July 10, 1997
- ------------------------------------ and Chief
GENE S. MORPHIS Financial Officer
(Principal
Financial and
Accounting
Officer)
* Director July 10, 1997
- ------------------------------------
STEVEN J. BAUMGARTNER
* Director July 10, 1997
- ------------------------------------
CHERYL A. FRANCIS
* Director July 10, 1997
- ------------------------------------
MORTON H. MEYERSON
/s/ Stephen D.R. Moore Director July 10, 1997
- ------------------------------------
STEPHEN D.R. MOORE
II-6
<PAGE>
SIGNATURE TITLE DATE
* Director July 10, 1997
- -------------------------------------
MARK E. NUNNELLY
* Director July 10, 1997
- -------------------------------------
MORTON H. ROSENTHAL
* Director July 10, 1997
- -------------------------------------
ROBERT F. WHITE
/s/ Stephen D.R. Moore July 10, 1997
*By: --------------------------------
STEPHEN D.R. MOORE, ATTORNEY-IN-FACT
II-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTARY SCHEDULE
STREAM INTERNATIONAL INC.
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Stream International Inc. as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31,
1996, included in the Registration Statement, and have issued our report
thereon dated April 30, 1997. Our audit was made for the purpose of forming an
opinion on those financial statements taken as a whole. The schedule listed in
Item 16(b) is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein, in relation to
the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
April 30, 1997
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGE TO
BEGINNING OF COST AND BALANCE AT
DESCRIPTION PERIOD EXPENSES WRITEOFFS END OF PERIOD
- ----------- ------------ --------- --------- -------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts,
for the year ended December 31,
1995........................... $ 86,000 $ 81,000 $(11,000) $156,000
Allowance for Doubtful Accounts,
for the year ended December 31,
1996........................... $156,000 $148,000 $ -- $304,000
Allowance for Doubtful Accounts,
for the period ended March 31,
1997
(Unaudited).................... $304,000 $ -- $ -- $304,000
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1(degrees) Certificate of Incorporation of the Registrant.
3.2(degrees) By-Laws of the Registrant.
3.3* Form of Certificate of Amendment of the Certificate of
Incorporation of the Registrant, to be effective following the
effective date of this offering.
3.4* Form of Amended and Restated Certificate of Incorporation of
the Registrant, to be effective following the closing of this
offering.
3.5* Form of Amended and Restated By-Laws of the Registrant, to be
effective upon the closing of this offering.
4.1* Specimen Certificate for shares of Common Stock, $.01 par
value, of the Registrant.
5* Opinion of Hale and Dorr LLP with respect to the validity of
the securities being offered.
10.1(degrees)+ Microsoft Corporation Product Service Vendor Agreement dated as
of December 14, 1995 between the Registrant and Microsoft
Corporation, as amended.
10.2* Form of 1997 Stock Incentive Plan.
10.3* Form of 1997 Director Stock Option Plan.
10.4(degrees) 1995 Stock Option Plan, as amended.
10.5(degrees) 1995 Replacement Stock Option Plan.
10.6(degrees) 1995 California Stock Option Plan, as amended.
10.6A* Form of amendments to 1995 Stock Option Plan, 1995 Replacement
Stock Option Plan and 1995 California Stock Option Plan.
10.7* Form of Contribution Agreement to be entered into between the
Registrant and the MMI Subsidiary.
10.8* Form of Contribution Agreement to be entered into among the
Registrant, the Corporate Software & Technology Subsidiary,
and a subsidiary of the Registrant.
10.9* Form of Contribution Agreement to be entered into between the
Registrant and PLEX.
10.10* Form of Transitional Service Agreement to be entered into
between the Registrant and the MMI Subsidiary.
10.11* Form of Transitional Service Agreement to be entered into
between the Registrant and the Corporate Software & Technology
Subsidiary.
10.12* Form of Tax Sharing Agreement to be entered into among the
Registrant, the Spin-Off Subsidiaries and PLEX.
10.13* Forms of Guarantees to be entered into between the Registrant
and R.R. Donnelley.
10.14* Registration Rights Agreement dated as of April 21, 1995 among
the Registrant and the Stockholders named therein, including
form of amendment thereto.
10.15* Employment Agreement between the Registrant and Stephen D.R.
Moore.
10.16* Employment Agreement between the Registrant and Judith G.
Salerno.
10.17(degrees) Form of Management Retention Agreement entered into by the
Registrant with Stephen D.R. Moore and Judith G. Salerno.
10.18(degrees) Promissory Note and Stock Pledge Agreement dated April 15, 1996
between Judith G. Salerno and the Registrant.
10.19* Promissory Notes and Stock Pledge Agreement between Stephen
D.R. Moore and the Registrant.
10.20* Form of the Tax Reimbursement Agreement to be entered into by
the Registrant and R.R. Donnelley.
11* Calculation of shares used in determining pro forma net income
per common share.
21* Subsidiaries of the Registrant.
23.1* Consent of Hale and Dorr LLP (included in Exhibit 5).
23.2 Consent of Arthur Andersen LLP.
23.3* Consents of Certain Persons Named as Post-Reorganization
Directors.
24(degrees) Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(degrees) Previously filed.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Stream International
Holdings Inc. on Form S-1 of our report dated April 30, 1997, appearing in the
Prospectus, which is part of this Registration Statement, and of our report
dated April 30, 1997 relating to the financial statement schedule appearing
elsewhere in this Registration Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial and Operating Data" and "Experts" in such Prospectus.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
July 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STREAM
INTERNATIONAL INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 MAR-31-1997
<CASH> 21 1,142 0 321
<SECURITIES> 0 0 0 0
<RECEIVABLES> 22,137 35,940 0 35,254
<ALLOWANCES> (156) (304) 0 (304)
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 23,962 39,785 0 40,634
<PP&E> 39,203 59,232 0 55,032
<DEPRECIATION> (9,962) (22,415) 0 (20,927)
<TOTAL-ASSETS> 53,598 76,987 0 75,233
<CURRENT-LIABILITIES> 10,612 19,875 0 23,343
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> 40,964 52,663 0 47,663
<TOTAL-LIABILITY-AND-EQUITY> 53,598 76,987 0 75,233
<SALES> 0 0 0 0
<TOTAL-REVENUES> 78,243 155,498 33,729 49,352
<CGS> 57,338 117,309 26,841 35,450
<TOTAL-COSTS> 81,332 160,919 35,045 48,473
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 188 51 51
<INCOME-PRETAX> (3,089) (5,609) (1,367) 828
<INCOME-TAX> (817) (924) (398) 710
<INCOME-CONTINUING> (2,272) (4,685) (969) 118
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (2,272) (4,685) (969) 118
<EPS-PRIMARY> 0 0 0 0
<EPS-DILUTED> 0 0 0 0
</TABLE>
