<PAGE>
As filed with the Securities and Exchange Commission on August 17, 2000
Registration No. 333-31674
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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LOGICAL DESIGN SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 7371 22-3710893
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
131 Madison Avenue
Morristown, New Jersey 07960
(973) 971-0100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Marilynne White, Esq.
General Counsel
Logical Design Solutions, Inc.
131 Madison Avenue
Morristown, New Jersey 07960
(973) 971-0100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Joseph W. Armbrust, Jr., Esq. Philip J. Boeckman, Esq.
Michael T. Kohler, Esq. Cravath, Swaine & Moore
Brown & Wood LLP Worldwide Plaza
One World Trade Center 825 Eighth Avenue
New York, New York 10048 New York, New York 10019
(212) 839-5300 (212) 474-1000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
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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 of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. [_]
--------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
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If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, AUGUST 17, 2000
PROSPECTUS
3,500,000 Shares
[LOGO]Logical Design Solutions
Common Stock
$ per share
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We are selling 3,500,000 shares of our common stock. The underwriters named
in this prospectus may purchase up to 525,000 additional shares of our common
stock from the selling stockholders that we identify in this prospectus to
cover over-allotments. We will not receive any proceeds from the sale of shares
by the selling stockholders.
This is an initial public offering of our common stock. We currently expect
the initial public offering price to be between $12.00 and $14.00 per share. We
have applied to have our common stock included for quotation on the Nasdaq
National Market under the symbol "LDSI".
--------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds, before expenses, to Logical Design Solutions $ $
==== ====
</TABLE>
If the underwriters exercise in full their option to purchase additional
shares of our common stock to cover over-allotments, the proceeds to the
selling stockholders will be $ . The underwriters are offering the shares
subject to various conditions. The underwriters expect to deliver the shares to
purchasers on or about , 2000.
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Salomon Smith Barney Lehman Brothers
SG Cowen
, 2000
<PAGE>
[Inside cover page]
GRAPHIC:
[Graphic representation of the Logical Approach. Arrows in circular arrangement
labeled with each phase of the Logical Approach: strategy, blueprinting,
construction and assessment. Circular arrangement of aspects of the Logical
Approach performed within these phases: usability engineering, visual design,
engagement management, quality assurance and project management.]
[Left side of gatefold]
GRAPHIC:
[Picture of user at our Usability Center. User sits at computer terminal while
two evaluators at console observe through a glass window.]
[Right side of gatefold]
GRAPHIC:
[The words "usability," "design," "strategy" and "technology" are superimposed
across the top of the second and third pages of the fold out.]
<PAGE>
You should rely only on the information contained in this prospectus.
Neither we nor any of the underwriters or the selling stockholders have
authorized anyone to provide you with different information. We are not making
an offer of these securities in any state where the offer is not permitted.
You should not assume that the information provided by this prospectus is
accurate as of any date other than the date on the front of this prospectus.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 1
Risk Factors............................................................... 6
Forward-Looking Statements and Market Data................................. 14
Trademarks................................................................. 14
Information in this Prospectus............................................. 14
Use of Proceeds............................................................ 15
Dividend Policy............................................................ 15
Capitalization............................................................. 16
Dilution................................................................... 17
Selected Financial Data.................................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 20
Business................................................................... 30
Management................................................................. 41
Related Party Transactions................................................. 51
Principal Stockholders..................................................... 56
Selling Stockholders....................................................... 57
Description of Capital Stock............................................... 58
Shares Eligible for Future Sale............................................ 61
Underwriting............................................................... 63
Legal Matters.............................................................. 65
Experts.................................................................... 65
Where You Can Find More Information........................................ 65
Index to Financial Statements.............................................. F-1
</TABLE>
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Until , 2000 (25 days after the commencement of this offering), all
dealers that buy, sell or trade the common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
i
<PAGE>
PROSPECTUS SUMMARY
This summary does not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including the more detailed information regarding Logical
Design Solutions, the risks of purchasing our common stock discussed under
"Risk Factors," and our financial statements and the accompanying notes. Unless
the context otherwise requires, references to "we," "us" or "our company" are
to Logical Design Solutions, Inc.
Logical Design Solutions
Logical Design Solutions is a professional services provider of e-business
solutions primarily to Fortune 500 companies. We assist our clients in defining
strategies utilizing Internet technologies and use our experience in creative
design and systems engineering to design, architect, develop and implement
solutions to execute those strategies. We work with our clients to anticipate
and evolve their e-business initiatives across industry and technology trends.
Our solutions enable our clients to conduct business with their employees,
customers and partners using emerging technologies.
Over our 10-year history, we have evolved our business from developing
company-wide internal sites to developing complex internal and external
solutions that link companies with their outside partners. The e-business
solutions we develop provide our clients with the ability to interact and
transact business electronically with their diverse range of business
constituents. We believe one of our main strengths has been our ability to
extend our clients' e-business models to this increasingly diverse universe of
users while managing complex content and creating an interactive, targeted user
experience.
We offer our services to market leaders in the following targeted industries
in which we have knowledge and experience: communications, financial services,
healthcare, manufacturing and publishing. We focus on building long-term
relationships with our clients. For example, AT&T was our first client in 1990
and we continue to provide e-business solutions for them today. We have
developed a blue-chip client list with significant repeat business. Our top ten
clients in 1999 based on revenues on a pro forma basis, giving effect to our
acquisition of Jump! Information Technologies, Inc., were Lucent Technologies,
AT&T, The Thomson Corporation, Aetna/US Healthcare, The Chase Manhattan Bank,
Winstar Communications, The MONY Group, SBC Communications, Johnson & Johnson
and Philip Morris Companies. Our top four clients each provided us with more
than $1.5 million in revenues in 1999 and each of our top ten clients generated
more than $250,000 in revenues in 1999.
During the first six months of 2000, we had revenues of $16.7 million and
incurred a net loss of $16.2 million. Net loss in the first six months includes
non-cash charges of $3.8 million relating to the increase in market value of
our redeemable warrants and $14.2 million relating to stock-based compensation.
In 1999, we had revenues of $15.8 million and incurred a net loss of $8.9
million. In 1999, on a pro forma basis, we had revenues of $17.9 million and
incurred a net loss of $9.0 million. Net loss in 1999 includes non-cash charges
of $7.5 million relating to the increase in market value of our redeemable
warrants and $1.1 million relating to stock-based compensation. In 1998, we had
revenues of $11.3 million and incurred a net loss of $614,000. Net loss in 1998
includes a non-cash charge of $366,000 relating to the increase in market value
of our redeemable warrants.
Our Market Opportunity
A growing number of organizations are demanding more advanced, customized
Internet solutions. The availability of high quality professionals experienced
in designing, developing and implementing advanced Internet solutions is
limited, making the market for recruiting and retaining these individuals
extremely competitive. As a result, an increasing number of businesses, from
start-ups to established companies, engage professional services firms that
have focused on hiring and training these professionals to help them design and
1
<PAGE>
implement these solutions. However, the availability of high quality
professionals who can perform the services we offer is limited. As with any
professional services firm, if our employees leave or we need to increase their
compensation to retain them, we may be prevented from operating at a profit.
A March 2000 study by International Data Corporation estimates that the
worldwide market for Internet services will grow from $16.2 billion in 1999 to
$99.1 billion in 2004, representing a compound annual growth rate of nearly
44%. Logical Design Solutions believes organizations are increasingly searching
for a single-source professional services firm that integrates the strategy,
design and technology skills specifically required for offering comprehensive
e-business solutions. Furthermore, we believe that organizations will
increasingly look to e-business solutions providers that can combine industry
knowledge and effective program management to formulate a focused, strategic
and integrated approach to e-business and to efficiently design and implement
large-scale, complex e-business solutions.
Our Approach to Market
Our approach to market includes the following elements:
Industry Expertise. Led by industry managers with long-term industry and
consulting experience, our focus on specific industries forms the foundation
for our business development efforts. We sell our services primarily to
executive level management using our reputation of experience in their
industry, a client list of major corporations and case studies that support our
ability to deliver end-to-end solutions in similar situations.
Integrated Solutions. We offer our clients a suite of comprehensive services
that includes the strategy, design and technology capabilities necessary to
develop e-business solutions. Our methodology, the Logical Approach, enables us
to provide these services in an integrated manner to bridge between business
and information technology units.
User Experience. Our commitment to advancing the user experience is
reflected in our Usability Center, our user testing and research center. At our
Usability Center, we analyze user requirements, navigate content presentation
and test Web sites based on the experiences of representative users.
Long-Term Client Relationships. We focus on building long-term relationships
with our clients. We strive to become our clients' e-business partner of choice
and assist our clients in managing the evolution of their e-business.
Our Growth Strategy
Our goal is to expand upon our position as a provider of e-business
solutions to Fortune 500 companies in the markets we target. To achieve this
goal, we pursue the following strategies:
. deepening client relationships;
. penetrating further into our targeted industries;
. continuing to develop leading-edge technology capabilities;
. retaining and hiring outstanding professionals; and
. expanding geographically.
Our Approach to Engagements: The Logical Approach
In each of our engagements, we employ our proprietary methodology, the
Logical Approach, to advise our clients on e-business strategies and to design
and implement customized, complex e-business solutions. Using our Logical
Approach, we service our engagements with a team of professionals from the
business strategy,
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creative design and technology development areas, coordinated by a dedicated
project manager. We integrate industry-specific strategy with enterprise level
design and technological capabilities to provide customized e-business
solutions. To accomplish this, we use the comprehensive methodology of the
Logical Approach to apply, integrate and coordinate our services over several
phases of the engagement.
Our Incorporation and Offices
We started our business in 1990 as a New Jersey corporation. We recently
reorganized as a Delaware corporation. Our principal offices are located at 131
Madison Avenue in Morristown, New Jersey 07960. Our telephone number is (973)
971-0100.
The Offering
<TABLE>
<S> <C>
Common stock offered....................... 3,500,000 shares
Common stock outstanding after this
offering(1)................................ 13,626,401 shares
Use of proceeds............................ For repayment of indebtedness and general
corporate purposes, including working
capital, expansion of operations and sales
and marketing capabilities and possible
acquisitions. If the underwriters' over-
allotment option is exercised, we will not
receive any proceeds from the sale of shares
by the selling stockholders.
Proposed Nasdaq National Market symbol..... "LDSI"
</TABLE>
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(1) Includes 2,150,000 shares of common stock issuable upon the exercise of
warrants outstanding with an exercise price of $0.01 per share. Excludes
the following shares of common stock that may be issued in the future:
. 2,258,900 shares issuable under our 1997 Stock Plan and our 1999 Stock
Plan upon the exercise of outstanding employee options at a weighted
average exercise price of $3.09 per share, including 1,000,000 shares
issuable pursuant to options granted to our Chief Executive Officer in
March 2000 as contemplated in the purchase agreement relating to our
1997 issuance of warrants and debentures;
. 28,000 shares issuable upon the exercise of outstanding director options
at an exercise price of $5.00 per share;
. 56,000 shares issuable upon the exercise of outstanding director options
at the initial public offering price; and
. 1,890,200 unissued shares authorized for future awards under our 1999
Stock Plan, our 2000 Non-Employee Director Plan and our Employee Stock
Purchase Plan.
3
<PAGE>
Summary Financial Data
You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes, all of which
appear elsewhere in this prospectus. The summary financial data for each of the
years in the five-year period ended December 31, 1999 have been derived from
our audited financial statements. The summary financial data for the six months
ended June 30, 1999 and 2000 are derived from our unaudited financial
statements, and, in our opinion, include all adjustments (consisting only of
normal, recurring adjustments) necessary to present fairly this information in
accordance with generally accepted accounting principles applied on a
consistent basis. The results for the six months ended June 30, 2000 are not
necessarily indicative of the results for the full year. Statement of
operations data for the years ended December 31, 1995, 1996 and 1997 reflect
our combined results with an affiliated company, Logical Design Solutions
International, Inc. Effective December 31, 1997, Logical Design Solutions
International, Inc. merged with and into us and ceased to exist. Statement of
operations data for the year ended December 31, 1999 include the results of
operations of Jump! Information Technologies, Inc. from the date of its
acquisition on November 10, 1999 through December 31, 1999. Pro forma statement
of operations data for the year ended December 31, 1999 reflect the acquisition
of Jump! as if this transaction had occurred on January 1, 1999. The
supplemental pro forma operating data give effect to the exercise of our
redeemable warrants that will occur upon consummation of this offering as if it
had occurred on January 1, 1999. The pro forma balance sheet data give effect
to the exercise of our redeemable warrants and assume that the market price of
our common stock at the time of exercise was equal to $13.00 (the midpoint of
the expected price range of this offering). The pro forma as adjusted balance
sheet data give effect to our sale of the shares of common stock offered by
this prospectus, the application of a portion of the proceeds received thereby
and the exercise of all of our outstanding redeemable warrants upon
consummation of this offering.
<TABLE>
<CAPTION>
Pro Forma
Actual For Jump! Actual
--------------------------------------- ------------ -----------------
Six Months
Year Ended December 31, Year Ended Ended June 30,
--------------------------------------- December 31, -----------------
1995 1996 1997 1998 1999 1999 1999 2000
------ ------ ------- ------- ------- ------------ ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $4,502 $7,325 $11,052 $11,330 $15,839 $17,940 $ 6,599 $ 16,668
Gross profit............ 2,214 3,986 6,675 5,768 8,298 9,293 3,433 10,399
Operating expenses:
Selling, general and
administrative........ 1,203 2,082 3,491 4,768 6,978 7,779 3,031 6,465
Depreciation and
amortization.......... 91 139 336 653 942 1,160 458 698
Stock-based
compensation.......... -- -- -- -- 1,077 1,077 82 14,225
------ ------ ------- ------- ------- ------- ------- --------
Total................ 1,294 2,221 3,827 5,421 8,997 10,016 3,571 21,388
------ ------ ------- ------- ------- ------- ------- --------
Income (loss) from
operations............. 920 1,765 2,848 347 (699) (723) (138) (10,989)
Increase in market value
of redeemable
warrants............... -- -- (288) (366) (7,505) (7,505) (3,520) (3,752)
Net income (loss)....... $ 884 $1,716 $ 1,597 $ (614) $(8,944) $(9,011) $(4,024) $(16,158)
====== ====== ======= ======= ======= ======= ======= ========
Basic net income (loss)
per common share....... $ 0.23 $ 0.22 $ 0.20 $ (0.08) $ (1.14) $ (1.13) $ (0.51) $ (2.03)
====== ====== ======= ======= ======= ======= ======= ========
Diluted net income
(loss) per common
share.................. $ 0.23 $ 0.22 $ 0.17 $ (0.08) $ (1.14) $ (1.13) $ (0.51) $ (2.03)
====== ====== ======= ======= ======= ======= ======= ========
Weighted average common
shares outstanding..... 3,927 7,850 7,850 7,850 7,868 7,962 7,851 7,975
====== ====== ======= ======= ======= ======= ======= ========
Weighted average common
shares and common share
equivalents............ 3,927 7,850 9,532 7,850 7,868 7,962 7,851 7,975
====== ====== ======= ======= ======= ======= ======= ========
Supplemental Pro Forma
Operating Data:(1)
Pro forma net loss..... $(1,439) $(12,406)
======= ========
Pro forma net loss per
common share.......... $ (0.14) $ (1.23)
======= ========
Pro forma weighted-
average common shares
outstanding........... 10,018 10,125
======= ========
</TABLE>
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(1) Giving further effect to our repayment of the senior and junior
subordinated debentures with proceeds of this offering as if they occurred
on January 1, 1999, would result in pro forma net losses of $(279) and
$(12,982) and pro forma net losses per common share of $(0.03) and $(1.20)
for the year ended December 31, 1999 and the six months ended June 30,
2000, respectively.
4
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<TABLE>
<CAPTION>
June 30, 2000
----------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.......................... $ 2,167 $ 2,189 $33,762
Working capital.................................... 6,571 6,592 36,973
Total assets....................................... 17,464 17,485 47,736
Senior subordinated debentures..................... 6,040 6,040 --
Junior subordinated debentures..................... 1,482 1,482 --
Redeemable warrants................................ 14,184 -- --
Stockholders' equity (deficiency).................. (9,878) 4,327 42,100
</TABLE>
5
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RISK FACTORS
An investment in our common stock involves risks. You should carefully
consider the risks described below and the other information in this prospectus
including our financial statements and the related notes before you decide to
buy our common stock. The trading price of our common stock could decline due
to any of these risks, and you could lose part or all of your investment.
We have a limited number of significant clients. If we lose a major client or
significant project, our revenues could be adversely affected.
We generate substantially all of our revenue from a limited number of major
clients. If we lose any major clients or any of our clients cancel or
significantly reduce a large project's scope, our results of operations could
be materially and adversely affected by the loss of revenue, and we would have
to seek to replace the client with new business. For the first six months of
2000, our three largest clients, Aetna/US Healthcare, AT&T and Lucent,
accounted for approximately 23%, 20% and 11%, respectively, of our revenue. Our
contract with Aetna/US Healthcare expires in the third quarter of 2000. In
1999, our three largest clients, Lucent, AT&T and Aetna/US Healthcare,
accounted for approximately 28%, 24% and 12%, respectively, of our revenue
(24%, 22% and 10%, respectively, on a pro forma basis including our acquisition
of Jump! Information Technologies, Inc.). In addition, Research Institute of
America, a subsidiary of The Thomson Corporation, contributed approximately 13%
of our revenue on a pro forma basis in 1999. Our five largest clients
contributed approximately 74% of our revenue in 1999, on both an actual and a
pro forma basis. In 1998, our two largest clients, AT&T and Lucent, accounted
for approximately 47% and 26%, respectively, of our revenue. Our largest
clients have historically been AT&T and Lucent, which is a spin-off from AT&T.
Mimi Brooks, our Chairwoman and Chief Executive Officer, was employed with AT&T
before she left to found our company in 1990. Our five largest clients
contributed approximately 83% of our revenue in 1998. This risk is particularly
relevant in the context of the recent trend toward consolidation in our
targeted industries. If one of our major clients were to be acquired, there can
be no assurance that the acquiring company will continue to use our services
and our revenues could decrease materially. There is also the risk that one or
more of our major customers will replace us with one of our competitors or
their in-house information technology department.
We have a recent history of significant losses and expect to incur significant
losses in the future.
We incurred net losses of $8.9 million and $614,000 during the years ended
December 31, 1999 and December 31, 1998, respectively. In addition, after
giving pro forma effect to our acquisition of Jump!, our net loss for 1999
would have been $9.0 million. Our net loss for the six months ended June 30,
2000 amounted to $16.2 million. We have been in business since 1990, and, as of
June 30, 2000, we had an accumulated deficit of $25.4 million. We expect to
continue to incur significant losses for the foreseeable future. We also expect
to continue to incur increasing selling, general and administrative expenses.
As a result, we will need to generate significant increases in revenues to
achieve profitability. If we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis in the future.
We may not be able to hire and retain highly skilled employees, which could
affect our ability to compete effectively.
Our business is people intensive and if we cannot recruit and retain highly
qualified employees, our business would suffer substantially. To succeed, we
must hire, train, motivate, retain and manage employees who are highly skilled
in the rapidly changing extranet, intranet and Internet technologies.
Individuals who have these skills and can perform the services we offer are
scarce. Competition for these individuals, therefore, is intense. We might not
be able to hire enough of them or to effectively train, motivate, retain and
manage the employees we do hire. This could hinder our ability to complete
existing projects and bid for new projects. In addition, because the
competition for qualified employees in our industry is intense, hiring,
training, motivating, retaining and managing employees with the strategic,
technical and creative skills we need is both time-
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consuming and expensive. The competition for employees has increased our cash
and non-cash compensation costs. These costs may increase after the offering
because prospective employees may perceive that the stock option component of
our compensation may not be as valuable as it was prior to the offering.
In addition, we use subcontractors to supplement our staffing requirements
and satisfy particular skills required on individual client engagements.
Subcontractors generally cost us more than our own personnel and, consequently,
we usually generate lower gross margins when using subcontractors. To the
extent we continue to use subcontractors, our gross margins may be lower.
We are growing quickly. Future growth of our business could make it difficult
to manage our resources.
Our rapid growth has stretched, and could continue to stretch, our
management, personnel, systems and resources. Our business has grown
substantially, both organically and through our acquisition of Jump! in late
1999, and we intend to continue to expand our operations in the foreseeable
future. Our sales have increased from $4.5 million in 1995 to $15.8 million in
1999 ($17.9 million in 1999 on a pro forma basis including our acquisition of
Jump!). In the first six months of 2000 we had sales of $16.7 million compared
to $6.6 million for the first six months of 1999. As we grow quickly and add
employees, managing employee utilization will be more difficult and may lead to
more volatility in our margins. To grow our company, we must not only replace
the employees who leave, but also hire significant numbers of new employees.
Our number of employees increased from 101 to 135 during 1999, and we have
hired 61 additional employees from January 1, 2000 through August 15, 2000. We
expect that we will need to continue to hire and retain management personnel
and other employees and continue to invest in our systems and facilities. Our
management has limited experience managing a business of our size and no
experience managing a public company. We are a small company and our ability to
absorb mistakes is more limited than many of our competitors. If we do not
manage the growth of our business effectively, our results of operations and
financial condition could be materially affected by a lack of adequate
personnel, systems or resources.
We have many client contracts that can be cancelled without penalty. If clients
terminate contracts with us on little or no notice, our results of operations
could suffer.
Most of our clients can reduce or cancel their contracts for our services
without penalty and with little or no notice. If a significant client or a
number of small clients terminate, significantly reduce or modify business
relationships with us, our results of operations could be materially and
adversely affected by the loss of revenue, and we would have to seek to replace
the client with new, significant business. Consequently, you should not predict
or anticipate our future revenue based on the number of clients we have, the
length of time we have had them or the number and size of our existing
engagements. When a client postpones, modifies or cancels an engagement, we
must seek to shift our employees to other engagements to minimize the resulting
adverse impact on our operating results. In addition, our operating expenses
are relatively fixed and cannot be reduced on short notice.
The form of our contracts with our clients may result in difficulty in
collecting fees, protecting our intellectual property and protecting ourselves
from liability.
Our work is typically performed for clients on the basis of a written
statement of work that is accepted by the client, which acceptance may be oral.
To the extent the statements of work do not fully set forth our legal rights,
we could experience difficulty in collecting fees, protecting our intellectual
property and protecting ourselves from liability.
We depend on fixed-price and retainer contracts, and our business may be
negatively impacted if we fail to accurately estimate the time and resources
necessary for our services.
As part of our strategy, we generally enter into fixed-price and retainer
fee contracts, rather than contracts based on payment for time and materials.
In order to manage our growth effectively, we must set fixed-price
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and retainer fees accurately, maintain high employee utilization rates and
maintain the quality of our services. If we miscalculate the resources or time
we need for these contracts, our gross margins could decrease materially.
Often, we fix the price before we finalize the design specifications, which
increases the risk that we will misprice these contracts. The increasing
complexity of our engagements, as described below, makes accurately estimating
our time and resources more difficult.
We expect to incur significant charges to operations during 2000 that will
adversely affect our net income and may cause our stock price to decline.
During the remainder of 2000, we expect to record several significant
charges to operations. These charges include the following: (1) an anticipated
charge of $975,000 in connection with stock-based compensation in addition to
the $14.2 million charge for stock-based compensation that we incurred in the
first six months of 2000; (2) an anticipated charge of $13.8 million at the
time of the offering, assuming an initial public offering price of $13.00, for
the accretion to fair market value of our redeemable warrants; and (3) an
anticipated charge of $1.5 million at the time of the offering for the
accretion to redemption value of our senior subordinated debentures. These
charges will have a significant adverse impact on our net income in 2000 and
they may cause our stock price to decline after this offering. In addition, we
will continue to incur non-cash charges in connection with our stock-based
compensation from 2001 through 2004, which will negatively impact our net
income. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
The increased size and complexity of our engagements may make it more difficult
to meet client expectations and a failure to do so could damage our reputation
and business.
The complexity and average dollar size of our engagements has grown
significantly while the timeframe for completing engagements has generally
decreased. As our client engagements become larger and more complex and must be
completed in shorter timeframes, it becomes more difficult to manage the
development process and the likelihood and consequences of any mistakes
increase. Any inability by us to complete client solutions in a timely manner,
any defects contained in the solutions we deliver and any other failure by us
to achieve client expectations, could have a material adverse effect on our
reputation with the affected client and generally within our industry.
The e-business professional services market is highly competitive and has low
barriers to entry. If we cannot effectively compete, our revenues may decline.
Our market is new, intensely competitive, highly fragmented and subject to
rapid technological change. We expect competition to intensify and increase
over time because:
. there are few barriers to entering the e-business professional services
market;
. our industry is consolidating; and
. many of our competitors are forming strategic relationships.
We compete against other e-business professional services firms, as well as
a number of different types of companies that are not exclusively in the e-
business professional services business. These competitors, which generally
offer some of the professional services we offer, include:
. traditional strategic consulting firms;
. interactive advertising agencies;
. professional services groups of computer equipment companies;
. traditional systems integrators; and
. internal information technology departments of current or potential
clients.
8
<PAGE>
Many of our competitors have longer operating histories, greater name
recognition, larger established client bases, longer client relationships and
significantly greater financial, technical, personnel and marketing resources
than we do. These competitors may be in a stronger position to respond quickly
to new or emerging technologies and changes in client requirements. These
competitors may also be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and make more attractive offers to
potential clients, employees and strategic partners. Furthermore, our
competitors may perform e-business services that are equal or superior to our
services or that achieve greater market acceptance than our services. We have
no patented or other proprietary technology that would preclude or inhibit
competitors from duplicating our services. We must rely on the skills of our
personnel and the quality of our client service. We cannot assure you that we
will be able to compete successfully against existing or future competitors.
Our quarterly revenues and operating results are likely to fluctuate
significantly, which may cause our stock price to decline.
Our quarterly revenues and operating results have varied in the past and are
likely to vary significantly from quarter to quarter. This fluctuation may
cause our operating results to be below the expectations of securities analysts
and investors, and the price of our stock may fall. Factors that could cause
quarterly fluctuations include:
. the loss of a significant customer or engagement;
. our employee utilization rate, including our ability to transition
employees quickly from completed or terminated engagements to new
engagements;
. the introduction of new services or changes in pricing policies by us or
our competitors;
. our ability to manage costs, including employee costs and our selling,
general and administrative expenses;
. our clients' information technology budgeting;
. delays in commencing services on client projects; and
. the seasonality of our client engagements.
As a result of these factors, we believe that quarter-to-quarter comparisons
of our revenues and operating results are not necessarily meaningful.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview" for further discussion of the factors that may cause
our quarterly results to fluctuate.
Lack of growth or decline in Internet usage will cause our business to suffer.
We have derived a substantial portion of our revenue from projects involving
the Internet. If Internet usage does not continue to grow, our ability to
increase our revenues from these projects will be limited. The Internet is new
and rapidly evolving, and a number of factors may inhibit Internet usage. These
factors include inadequate network infrastructure, security concerns,
inconsistent service quality and lack of cost-effective, high-speed service.
For example, recent attacks by computer hackers on major e-commerce Web sites
have heightened concerns regarding the security and reliability of the
Internet. On the other hand, if Internet usage grows, the Internet
infrastructure may not support the demands this growth will place on it. The
Internet's performance and reliability may decline. In addition, outages and
delays have occurred throughout the Internet network infrastructure and have
interrupted Internet service. If these outages or delays occur frequently in
the future, Internet usage could grow more slowly or decline.
We have also derived a majority of our revenue from extranet and intranet
projects, and the usage of extranets and intranets may be affected by many of
the same factors affecting Internet usage.
9
<PAGE>
We may also incur substantial costs to keep up with changes surrounding the
Internet. Unresolved critical issues concerning the commercial use and
government regulation of the Internet include the following:
. security;
. cost and ease of Internet access;
. intellectual property ownership;
. privacy;
. taxation; and
. liability issues.
Any costs we incur because of these factors could cause our gross margins to
decrease materially.
We plan to expand our international operations, which may subject us to
additional business risks.
We have recently begun operations in the United Kingdom to support our
existing customers and we plan to expand our international operations. In order
to operate internationally, we may be required to overcome cultural, linguistic
and nationalistic barriers and adapt to foreign business practices. Further,
international operations are subject to a number of other risks and potential
costs, including unexpected changes in regulatory requirements, adverse tax
consequences, difficulties and costs associated with staffing and managing
international operations and political and economic instability. We cannot
assure you that we will be able to overcome these barriers, or that we will not
incur significant costs in addressing these potential risks.
If we fail to keep pace with changing technologies, we may lose clients.
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. If we cannot
keep pace with these changes in a timely and cost-effective manner, we could
lose clients to competitors and our revenues could decrease. To achieve our
goals, we need to develop strategic e-business solutions that keep pace with
continuing changes in industry standards, information technology and client
preferences. We will have to improve the performance features and reliability
of our services to adapt to rapidly changing technologies. We could also incur
substantial costs to keep pace with changing technologies.
Our efforts to increase recognition of the Logical Design Solutions brand
nationally may not be successful, which may limit our ability to expand our
client base and attract acquisition candidates and employees.
We believe that building the Logical Design Solutions brand is critical for
expanding our client base, hiring and retaining employees and attracting
acquisition candidates. Historically, our branding efforts have been on a
regional basis and otherwise narrowly focused. Many of our competitors are
already nationally recognized and have active national advertising campaigns.
If we do not build the Logical Design Solutions brand on a national basis, we
may not be able to effect our growth strategy. We also believe that reputation
and name recognition will grow in importance as the number of companies
competing in the market for e-business professional services increases. The
branding of our name will also depend largely on our success in providing high
quality, reliable and cost-effective services. If clients do not perceive our
services as meeting their needs, or if we fail to market our services
effectively, we may be unsuccessful in maintaining and strengthening our brand.
If we fail to promote and maintain our brand, or incur excessive expenses to do
so, we could lose market share and our ability to grow our revenue may be
negatively impacted.
We depend on our Chief Executive Officer and our Chief Technology Officer, and
the loss of either of them may adversely affect our ability to attract and
retain customers and to compete effectively.
We believe that our success depends on the continued employment of our
founder, President and Chief Executive Officer, Mimi Brooks, and our Chief
Technology Officer, David W. Stoltzfus. If Ms. Brooks or Mr. Stoltzfus were
unable or unwilling to continue in their present positions, it would be very
difficult to replace
10
<PAGE>
them and our business could be adversely affected. Ms. Brooks is particularly
important to our business in providing strategic direction and managing our
customer relationships. Mr. Stoltzfus is particularly important to our business
in setting the strategic direction for our use of technology and building our
technological capabilities.
Future acquisitions or expansion could disrupt our ongoing business, distract
our management and employees, increase our expenses and adversely affect our
results of operations and your investment.
A component of our growth strategy is to expand geographically and by
acquisition. Establishing new office locations will likely require substantial
financial and management resources. We cannot assure you that we will select
appropriate markets to enter, open new offices efficiently or manage new
offices profitably. Our failure to accurately assess these issues could
negatively impact our business. To date, we have made one acquisition. We may
not be able to make additional acquisitions on commercially acceptable terms,
or at all. Any acquisitions we may make in the future will also involve risks.
If we do acquire a company, we could have difficulty retaining and assimilating
that company's personnel. We may also incur substantial goodwill in connection
with any acquisitions which will cause our annual amortization charge to
increase. In addition, we could have difficulty integrating acquired products,
services or technologies into our operations. These difficulties could disrupt
our ongoing business, distract our management and employees, increase our
expenses and decrease revenue or gross margins. Furthermore, we may incur debt
or issue equity securities to pay for any future acquisitions. If we issue
equity securities, your ownership share of our company will be reduced.
If we are unable to protect our intellectual property or if others claim we are
infringing on their intellectual property, we could incur significant expenses
or be prevented from providing our services.
Litigation to enforce our intellectual property rights, which consist of a
combination of copyright, trademark and trade secret laws and contractual
restrictions, could be expensive, divert management resources and may not
adequately protect our business. Existing trade secret and copyright laws
afford us only limited protection. Third parties may attempt to disclose,
obtain or use our processes and methodologies. This is particularly true in
foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States. Others may independently
develop and obtain patents or copyrights for technologies that are similar or
superior to our processes and methodologies.
Some intellectual property rights developed during client engagements are
retained by the clients as our customer contracts are work-for-hire
arrangements. Although we believe that our services do not infringe upon the
intellectual property rights of third parties or our clients, we cannot assure
you that claims will not be asserted against us in the future by third parties
or our clients that our solutions or technologies are infringing upon their
intellectual property rights. We expect that the risk of infringement claims
against us and our clients will increase if more of our competitors obtain
patents for software products and processes.
We typically indemnify our clients against claims that we have violated a
third party's intellectual property rights. Assertion of claims against us or
our clients could result in litigation, and we may not be able to prevail in
the litigation or be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable terms, or
at all. Any of these claims, regardless of their outcome, could harm our
reputation, damage our relationships with clients, result in substantial costs
to us and divert management's attention from our operations.
While we provide customized technology solutions for specific client
engagements, part of our marketing and design strategy includes the reuse of
components of these solutions. Issues relating to the ownership of and rights
to use solutions can be complicated and there can be no assurance that disputes
will not arise that affect our ability to resell or reuse these solutions. Some
of our contracts may limit our ability to resell or reuse a solution and could
require us to incur additional expenses to develop new solutions for future
projects.
We are, and will continue to be, controlled by our founder and Chief Executive
Officer, Mimi Brooks, which could result in her taking actions that other
stockholders do not approve.
After this offering, our founder, President and Chief Executive Officer,
Mimi Brooks, will own approximately 52% of our outstanding common stock (or
55.1% if Ms. Brooks exercises her options), 49% (or
11
<PAGE>
52.9% if Ms. Brooks exercises her options) if the underwriters' over-allotment
option is exercised in full. However, Ms. Brooks and her spouse are currently
in divorce proceedings in which the parties are contesting their respective
shares of their marital estate, which includes the shares of common stock held
by Ms. Brooks. We cannot assure you that the interests of Ms. Brooks or her
spouse, if he obtains shares of our common stock in the divorce proceedings,
will not conflict with your interests. The significant concentration of our
common stock and the voting power of that common stock in a single stockholder
could have a depressive effect on our stock price, since that stockholder will
be able to control most matters requiring stockholder approval. Among other
things, Ms. Brooks will be able to control or influence to a significant extent
the outcome of all matters required to be submitted to our stockholders for
approval, including decisions relating to the election of directors and
significant corporate matters such as decisions about acquisitions, sales of
assets, mergers or similar transactions and amendments to our certificate of
incorporation and bylaws.
Anti-takeover provisions of our amended and restated certificate of
incorporation and by-laws and provisions of Delaware law could delay or prevent
a change of control that you may favor.
Provisions of our amended and restated certificate of incorporation and
bylaws that will become effective upon the closing of this offering and
provisions of applicable Delaware law may discourage, delay or prevent a merger
or other change of control that stockholders may consider favorable. The
provisions of our amended and restated certificate of incorporation and bylaws,
among other things, will:
. divide our board of directors into three classes, with members of each
class to be elected in staggered three-year terms;
. limit the right of stockholders to remove directors;
. regulate how stockholders may present proposals or nominate directors
for election at annual meetings of stockholders; and
. authorize our board of directors to issue preferred stock in one or more
series, without stockholder approval.
The provisions of our amended and restated certificate of incorporation and
bylaws and provisions of Delaware law could:
. have the effect of delaying, deferring or preventing a change of control
of our company;
. discourage bids for our common stock at a premium over the market price;
or
. impede the ability of the holders of our common stock to change our
management.
See "Description of Capital Stock--Anti-Takeover Effects of Our Amended and
Restated Certificate of Incorporation and Bylaws and Provisions of Delaware
Law."
This offering's net proceeds may be allocated in ways with which you and other
stockholders may not agree.
We have not determined how most of the proceeds of this offering will be
spent. Approximately $9.0 million of the net proceeds will be used to repay our
outstanding senior subordinated debentures and junior subordinated debentures.
Our management may spend net proceeds from this offering remaining after the
repayment of that debt in ways with which you and our other stockholders may
not agree. See "Use of Proceeds."
The total price investors will pay for our common stock in this offering will
substantially exceed the value of our assets after subtracting our liabilities.
The price you will pay for our common stock will be substantially higher
than the book value per share of our outstanding stock after this offering. You
will suffer immediate and substantial dilution. Based on an assumed initial
public offering price of $13.00 per share, the dilution will be $9.95 per share
in the net tangible book value of the common stock issued in this offering. In
addition, investors in this offering will contribute 99.8% of the total amount
paid by all investors in our company but will own only 25.7% of the shares
outstanding.
12
<PAGE>
Our stock has not traded publicly, and after this offering its market price may
fluctuate widely.
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could fluctuate substantially due
to:
. future announcements concerning us or our competitors;
. quarterly fluctuations in operating results;
. technological innovations;
. changes in earnings estimates or recommendations by analysts; or
. general economic conditions.
In addition, the stock prices of many technology companies fluctuate widely
for reasons that may be unrelated to operating results and such fluctuations
have been increasingly intense in recent months. Fluctuations in our common
stock's market price may affect our visibility and credibility in the e-
business solutions market.
Future sales of our common stock in the public market could lower our stock
price and impair our ability to raise funds in new stock offerings.
After this offering, we will have 13,626,401 shares of common stock
outstanding. Sales of a large number of shares, or the availability of a large
number of shares for sale, could adversely affect the market price of our
common stock and could impair our ability to raise funds in additional stock
offerings. Following the expiration of a 180-day "lock up" period to which
substantially all of the shares held by our current stockholders will be
subject, the holders whose shares are subject to that lock-up period will in
general be entitled to dispose of their shares. Moreover, Salomon Smith Barney
Inc. may in its sole discretion and at any time without notice, release all or
any portion of the securities subject to the lock-up agreements.
The shares of common stock sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
the shares are purchased by an affiliate of ours, the sales of which will be
limited by Rule 144 under the Securities Act. Holders of restricted shares
generally will be entitled to sell these shares in the public market without
registration either under Rule 144 or any other applicable exemption under the
Securities Act.
As soon as practicable after this offering, we intend to register the shares
of common stock subject to outstanding stock options or reserved for issuance
under our stock plans. As of June 30, 2000, options to purchase 2,286,900
shares of common stock were outstanding.
After this offering, the holders of approximately 2,150,000 shares of our
common stock will have rights, subject to some conditions, to require us to
file registration statements covering their shares or to include their shares
in registration statements that we may file for ourselves or other
stockholders. By exercising their registration rights and selling a large
number of shares, these holders could cause the price of our common stock to
decline. Furthermore, if we were to include in a company-initiated registration
statement shares held by those holders pursuant to the exercise of their
registration rights, those sales could impair our ability to raise needed
capital by depressing the price at which we could sell our common stock.
You should be aware that there are benefits of this offering to existing
stockholders.
The underwriters named in this prospectus may purchase up to 525,000
additional shares of common stock from several of our existing stockholders to
cover over-allotments. The average price per share paid by these existing
stockholders is $0.01 per share. Based on an assumed initial offering price of
$13.00 per share and assuming the underwriters exercise the over-allotment
option in full, the net price per share that will be paid to the selling
stockholders is $12.09. Therefore, the average realized gain per share to the
selling stockholders would be $12.08. See "Dilution."
Further, our senior subordinated debentures and junior subordinated
debentures are held by some of our existing stockholders. We intend utilize a
portion of the proceeds of this offering to pay off these debentures.
13
<PAGE>
FORWARD-LOOKING STATEMENTS AND MARKET DATA
Many statements made in this prospectus under captions "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and elsewhere are forward-looking
statements that are not based on historical facts and may prove to be
inaccurate. The words "expects," "anticipates," "estimates," "intends,"
"believes" and similar expressions are intended to identify forward-looking
statements. Forward-looking statements involve risks and uncertainties, and
there are important factors that could cause actual results to differ
materially from those expressed or implied by forward-looking statements. The
forward-looking statements made in this prospectus are based on management's
good faith best estimates through the date on which the statements are made.
This prospectus contains estimates of market size and growth and other
information related to the Internet. These estimates have been included in a
study published by International Data Corporation, a market research firm.
These estimates are based on various assumptions about events, trends and
activities. We have not independently verified the information and assumptions
on which these market estimates are based. However, we have no reason for
believing that the information and assumptions on which the market estimates
are based are incorrect or not reasonable. If any of the assumptions are wrong,
then the market estimates may also be wrong.
TRADEMARKS
"Logical Design Solutions" is a registered trademark of Logical Design
Solutions, Inc. and "The Logical Approach" is a service mark of Logical Design
Solutions, Inc. This prospectus also includes trademarks and trade names of
other parties.
INFORMATION IN THIS PROSPECTUS
Except as otherwise indicated, all information in this prospectus reflects
the amendment and restatement of our certificate of incorporation, which will
occur prior to the closing of this offering, and assumes no exercise of the
underwriters' option to purchase additional shares of common stock from the
selling stockholders to cover over-allotments.
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<PAGE>
USE OF PROCEEDS
We will receive estimated proceeds of approximately $40.6 million from this
offering, net of underwriting discounts and estimated expenses, and based on an
assumed initial public offering price of $13.00 per share, the midpoint of the
expected price range. If the underwriters' over-allotment option is exercised,
we will not receive any proceeds from the sale of shares by the selling
stockholders.
We intend to use approximately $31.6 million of the offering's net proceeds
for general corporate purposes, including working capital, expansion of
operations and sales and marketing activities and increases in personnel. The
allocation of the proceeds to each of these uses has not been specifically
identified. The amounts we actually expend for general corporate purposes will
vary significantly depending on a number of factors, including the amount of
cash we generate from operations. As a result, we will retain broad discretion
in the allocation and use of the net proceeds of this offering.
We will use approximately $9.0 million to pay off the total amount of
outstanding principal and accrued interest on our senior subordinated
debentures and junior subordinated debentures. The senior subordinated
debentures and the junior subordinated debentures are held by:
. Mimi Brooks, our founder, Chief Executive Officer and Chairwoman;
. Samedan, Inc., which is wholly-owned by Paul F. Lozier, one of our
directors;
. Summit Partners, which is a significant stockholder affiliated with
Kevin Mohan, one of our directors; and
. Darren Bryden, a significant stockholder and former director and
executive officer.
Therefore, these related parties will receive a significant portion of the
proceeds of this offering.
The $5.54 million aggregate principal amount of outstanding senior
subordinated debentures accrue interest at a rate of 9.0% per annum and mature
on March 19, 2002. The senior subordinated debentures were issued at an
original issue discount of approximately $300,000 plus an additional discount
of $2.3 million attributable to our redeemable warrants issued in connection
with the senior subordinated debentures, resulting in an effective yield of
21%. The $1.11 million aggregate principal amount of outstanding junior
subordinated debentures accrue interest at 9.0% per annum and mature on March
19, 2003. We used the funds received from the issuance of the senior
subordinated debentures for working capital purposes. The junior subordinated
debentures were issued in connection with our conversion from a subchapter "S"
corporation to a subchapter "C" corporation and represented a distribution of
the retained earnings in the company. See "Related Party Transactions."
We may use a portion of the proceeds for strategic acquisitions. From time
to time, in the ordinary course of business, we evaluate potential
acquisitions. We have no present understandings or agreements with respect to
any acquisition.
Pending use of the net proceeds for the above purposes, we intend to invest
the funds in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We intend to retain future earnings, if any, to finance the expansion of our
business and do not expect to pay any cash dividends in the foreseeable future.
See "Management's Discussion and Analysis of Financial Conditions and Results
of Operations--Liquidity and Capital Resources."
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<PAGE>
CAPITALIZATION
The following table presents our capitalization as of June 30, 2000 on an
actual basis, a pro forma basis to reflect the issuance of 2,150,000 shares of
common stock upon the exercise of outstanding warrants at an exercise price of
$0.01 per share upon consummation of this offering and a pro forma as adjusted
basis. The pro forma as adjusted basis presentation reflects:
. the issuance of 2,150,000 shares of common stock upon the exercise of
outstanding warrants at an exercise price of $0.01 per share upon
consummation of this offering;
. amendment and restatement of our certificate of incorporation which will
occur prior to the closing of this offering to increase the number of
common shares authorized to 60,000,000 and authorize the issuance of
10,000,000 shares of preferred stock; and
. our sale of 3,500,000 shares of common stock in this offering at an
assumed initial public offering price of $13.00 per share, the midpoint
of the expected price range, and the application of a portion of the
offering proceeds to repay all our outstanding debt.
The pro forma as adjusted basis presentation assumes no exercise of the
underwriters' option to purchase additional shares to cover over-allotments and
also does not include 2,286,900 shares of common stock issuable upon exercise
of stock options outstanding as of June 30, 2000. You should read this
information together with the financial statements and notes to those financial
statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 2,167 $ 2,189 $ 33,762
======== ======== ========
Capital lease obligations--current............. $ 78 $ 78 $ 78
======== ======== ========
Senior subordinated debentures................. $ 6,040 $ 6,040 $ --
Junior subordinated debentures................. 1,482 1,482 --
Capital lease obligations, less current
portion....................................... 159 159 159
Redeemable warrants............................ 14,184 -- --
Stockholders' equity (deficiency)
Preferred stock, par value $0.01 per share;
no shares
authorized (actual and pro forma);
10,000,000 shares authorized, none issued
and outstanding (pro forma as adjusted)..... -- -- --
Common stock, par value $0.01 per share;
15,000,000 shares authorized, 7,976,401
shares issued and outstanding (actual);
10,126,401 shares issued and outstanding
(pro forma); 60,000,000 shares authorized,
13,626,401 shares issued and outstanding
(pro forma as adjusted)..................... 80 101 137
Additional paid-in capital................... 19,103 47,053 86,425
Deferred stock compensation.................. (3,634) (3,634) (3,634)
Accumulated deficit.......................... (25,427) (39,193) (40,828)
-------- -------- --------
Total stockholders' equity (deficiency)...... (9,878) 4,327 42,100
-------- -------- --------
Total capitalization....................... $ 11,987 $ 12,008 $ 42,259
======== ======== ========
</TABLE>
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<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000, was approximately
$2.4 million, or $.24 per share of common stock. We have determined pro forma
net tangible book value per share by subtracting intangible assets from pro
forma stockholders' equity and dividing that number by 10,126,401 pro forma
shares of common stock outstanding as of June 30, 2000. The preceding pro forma
information gives effect to the exercise of warrants to purchase 2,150,000
shares of common stock at $0.01 per share prior to completion of this offering.
If we sell 3,500,000 shares of common stock in this offering at an assumed
initial public offering price of $13.00 per share and assuming our receipt of
the estimated net proceeds therefrom, our pro forma adjusted net tangible book
value as of June 30, 2000, would have been approximately $41.6 million, or
$3.05 per share. This represents an immediate increase in the net tangible book
value of $2.81 per share to existing stockholders and an immediate dilution of
$9.95 per share to new investors. The following table illustrates this per
share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $13.00
Pro forma net tangible book value as of June 30, 2000............. $0.24
Increase per share of common stock attributable to the offering... 2.81
-----
Pro forma net tangible book value after the offering.............. 3.05
------
Net tangible book value dilution to new investors................. $ 9.95
======
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 2000, the
total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
stockholders and by new investors (at an assumed initial offering price of
$13.00 per share and without giving effect to the underwriting discount and
estimated offering expenses).
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Paid
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 10,126,401 74.3% $ 100,859 0.2% $0.01
New investors................. 3,500,000 25.7 45,500,000 99.8 13.00
---------- ---- ----------- ---- -----
Total....................... 13,626,401 100% $45,600,859 100% $3.35
========== ==== =========== ==== =====
</TABLE>
The table above does not include options outstanding as of June 30, 2000 to
purchase a total of 2,286,900 shares of common stock with a weighted average
per share exercise price of $3.12. If the options were to be exercised in full
for cash, pro forma net tangible book value per share after the offering would
be $3.06, the increase per share attributable to new investors would be $2.82,
and the dilution per share to new investors would be $9.94. The table above
also does not include director options to purchase 56,000 shares of common
stock issued subsequent to December 31, 1999 exercisable at the initial public
offering price.
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<PAGE>
SELECTED FINANCIAL DATA
The following tables contain selected financial data as of December 31 in
each of the years 1995 through 1999 and for each of the years in the five-year
period ended December 31, 1999. The selected financial data for each of the
years in the five-year period ended December 31, 1999 have been derived from
our financial statements, which have been audited by Ernst & Young LLP,
independent auditors. The selected financial data for the six months ended June
1999 and 2000 are derived from our unaudited financial statements, and, in our
opinion, include all adjustments necessary to present fairly this information
in accordance with generally accepted accounting principles applied on a
consistent basis. The results for the six months ended June 2000 are not
necessarily indicative of the results for the full year. Statement of
operations data for the years ended 1995, 1996 and 1997 reflect our combined
results with an affiliated company, Logical Design Solutions International,
Inc. Effective December 31, 1997, Logical Design Solutions International merged
with and into us and ceased to exist. The selected financial data are qualified
by reference to, and should be read in conjunction with, our financial
statements and the notes to those financial statements, included elsewhere in
this prospectus.
Statement of operations data for the year ended December 31, 1999 include
the results of operations of Jump! Information Technologies, Inc. from the
effective date of its acquisition on November 10, 1999. The pro forma statement
of operations data assume that the acquisition of Jump! occurred on January 1,
1999. The pro forma data may not, however, be indicative of the results of
operations that actually would have occurred had the Jump! acquisition occurred
at the beginning of the period presented or of the results of operations that
we may achieve in the future. The pro forma statement of operations data should
be read in conjunction with our unaudited pro forma financial information and
our financial statements and Jump!'s financial statements, which have been
audited by Ernst & Young LLP, included elsewhere in this prospectus. The
supplemental pro forma operating data give effect to the exercise of our
redeemable warrants that will occur upon consummation of this offering as if it
had occurred on January 1, 1999. The pro forma balance sheet data give effect
to the exercise of our redeemable warrants and assume that the market price of
our common stock at the time of exercise was equal to $13.00 (the midpoint of
the expected price range of this offering). The pro forma as adjusted balance
sheet data give effect to our sale of the shares of common stock offered in
this prospectus, the application of a portion of the proceeds received thereby
and the exercise of all of our outstanding redeemable warrants upon
consummation of this offering.
18
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Actual For Jump! Actual
----------------------------------------- ------------ -----------------
Year Ended Six Months
Year Ended December 31, December 31, Ended June 30,
----------------------------------------- ------------ -----------------
1995 1996 1997 1998 1999 1999 1999 2000
------ ------ ------- ------- ------- ------------ ------- --------
(in thousands, except per share data)
Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $4,502 $7,325 $11,052 $11,330 $15,839 $17,940 $ 6,599 $ 16,668
Cost of revenue......... 2,288 3,339 4,377 5,562 7,541 8,647 3,166 6,269
------ ------ ------- ------- ------- ------- ------- --------
Gross profit............ 2,214 3,986 6,675 5,768 8,298 9,293 3,433 10,399
------ ------ ------- ------- ------- ------- ------- --------
Operating expenses:
Selling, general and
administrative........ 1,203 2,082 3,491 4,768 6,978 7,779 3,031 6,465
Depreciation and
amortization.......... 91 139 336 653 942 1,160 458 698
Stock-based
compensation.......... -- -- -- -- 1,077 1,077 82 14,225
------ ------ ------- ------- ------- ------- ------- --------
Total................ 1,294 2,221 3,827 5,421 8,997 10,016 3,571 21,388
------ ------ ------- ------- ------- ------- ------- --------
Income (loss) from
operations............. 920 1,765 2,848 347 (699) (723) (138) (10,989)
Increase in market value
of redeemable
warrants............... -- -- (288) (366) (7,505) (7,505) (3,520) (3,752)
Interest expense, net... (25) (1) (510) (724) (962) (959) (471) (602)
Other income............ 9 8 12 14 20 25 4 10
------ ------ ------- ------- ------- ------- ------- --------
Income (loss) before
income taxes........... 904 1772 2,062 (729) (9,146) (9,162) (4,125) (15,333)
Income tax provision
(benefit).............. 20 56 465 (115) (202) (151) (101) 825
------ ------ ------- ------- ------- ------- ------- --------
Net income (loss)....... $ 884 $1,716 $ 1,597 $ (614) $(8,944) $(9,011) $(4,024) $(16,158)
====== ====== ======= ======= ======= ======= ======= ========
Basic net income (loss)
per common share....... $ 0.23 $ 0.22 $ 0.20 $ (0.08) $ (1.14) $ (1.13) $ (0.51) $ (2.03)
====== ====== ======= ======= ======= ======= ======= ========
Diluted net income
(loss) per common
share.................. $ 0.23 $ 0.22 $ 0.17 $ (0.08) $ (1.14) $ (1.13) $ (0.51) $ (2.03)
====== ====== ======= ======= ======= ======= ======= ========
Weighted average common
shares outstanding..... 3,927 7,850 7,850 7,850 7,868 7,962 7,851 7,975
====== ====== ======= ======= ======= ======= ======= ========
Weighted average common
shares and common share
equivalents............ 3,927 7,850 9,532 7,850 7,868 7,962 7,851 7,975
====== ====== ======= ======= ======= ======= ======= ========
Supplemental Pro Forma
Operating Data:(1)
Pro forma net loss..... $(1,439) $(12,406)
======= ========
Pro forma net loss per
common share.......... $ (0.14) $ (1.23)
======= ========
Pro forma weighted-
average common shares
outstanding........... 10,018 10,125
======= ========
</TABLE>
--------
(1) Giving further effect to our repayment of the senior and junior
subordinated debentures with proceeds of this offering as if they occurred
on January 1, 1999, would result in pro forma net losses of $(279) and
$(12,982) and pro forma net losses per common share of $(0.03) and $(1.20)
for the year ended December 31, 1999 and the six months ended June 30,
2000, respectively.
<TABLE>
<CAPTION>
December 31, June 30, 2000
------------------------------------- ---------------------------
Pro Pro Forma
1995 1996 1997 1998 1999 Actual Forma As Adjusted
------ ------ ------ ------- ------- ------- ------ -----------
(in thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 306 $1,355 $5,104 $ 3,510 $ 1,432 $ 2,167 $2,189 $33,762
Working capital......... 827 1,740 6,051 5,327 5,378 6,571 6,592 36,973
Total assets............ 1,828 3,594 9,429 10,352 12,051 17,464 17,485 47,736
Capital lease
obligations, less
current portion........ 10 2 -- 275 199 159 159 159
Senior subordinated
debentures............. -- -- 3,558 4,400 5,424 6,040 6,040 --
Junior subordinated
debentures............. -- -- 1,194 1,301 1,418 1,482 1,482 --
Redeemable warrants..... -- -- 2,560 2,926 10,431 14,184 -- --
Stockholders' equity
(deficiency)........... 1,031 2,257 29 (284) (7,960) (9,878) 4,327 42,100
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected Financial
Data," our financial statements and the notes to those financial statements
elsewhere in this prospectus.
Overview
Our revenue is generally comprised of fees generated for professional
services. We provide our services on a fixed-price, retainer and time and
materials basis. In 1999, approximately 40% of our revenue was derived from
fixed-price contracts, 38% from retainer contracts and 22% from time and
materials contracts. On a pro forma basis, after giving effect to our
acquisition in November 1999 of Jump! Information Technologies, Inc., time and
material contracts would have generated approximately 31% of our 1999 revenues,
as all of Jump!'s contracts were time and material contracts. For the first six
months of 2000, approximately 18% of our revenue was derived from fixed-price
contracts, 39% from retainer contracts and 43% from time and material
contracts. For fixed-price and retainer-based engagements, we evaluate the
technical complexity, work effort required and the project's timetable to
estimate and propose fixed prices for these projects. A senior management team
member must approve all of our fixed-price proposals. For these contracts, we
recognize revenue using a percentage-of-completion method primarily based on
costs incurred. We make provisions for estimated losses on uncompleted
contracts on a contract-by-contract basis and recognize these provisions in the
period in which the losses are determined. To date, these losses have not been
significant. Several of our larger clients have entered into retainer-based
billing arrangements. Under these arrangements, clients are invoiced an equal
amount on a monthly basis over the term of the contract for the core engagement
team. The retainer agreements also provide for additional staff to be added to
the engagement on an as-needed basis. Fees associated with the additional staff
are recorded on a time and materials basis and are invoiced to the client on a
monthly basis. Most retainer agreements are for a term of one year, and include
a renewal clause. This provides us with greater predictability of revenues and
to date has usually resulted in higher utilization for the core engagement
team. For time and materials contracts we recognize revenue as we perform
services and incur costs. We are generally reimbursed for reasonable expenses
under all of our contracts.
Revenue from a limited number of clients has comprised a substantial portion
of our revenues and is expected to represent a substantial portion of our
revenues in the foreseeable future. In 1997 and 1998, our five largest clients
accounted for approximately 82% and 83% of our revenue, respectively. In 1999,
our five largest clients accounted for approximately 74% of our revenue on both
an actual and a pro forma basis (giving effect to our acquisition of Jump!),
and Lucent, AT&T and Aetna/US Healthcare accounted for approximately 28%, 24%
and 12%, respectively (24%, 22% and 10%, respectively, on a pro forma basis).
For the first six months of 2000, our five largest clients accounted for
approximately 71% of our revenue, and Aetna/US Healthcare, AT&T and Lucent
accounted for approximately 23%, 20% and 11% of our revenue, respectively.
AT&T, Lucent and Aetna/US Healthcare accounted for approximately 55%, 26% and
14% of our retainer-based revenue in 1999, respectively. Aetna/US Healthcare,
AT&T and Lucent accounted for approximately 42%, 47% and 1%, respectively, of
our retainer-based revenue in the first six months of 2000. Our contract with
Aetna/US Healthcare expires in the third quarter of 2000. Any cancellation,
deferral or significant reduction in work performed for these principal clients
or a significant number of smaller clients could have a material adverse effect
on our business, financial condition and results of operations.
Cost of revenue represents our most significant expense and consists
primarily of salaries, bonuses and associated employee benefits for personnel
directly assigned to client projects and non-reimbursed direct expenses
incurred to complete projects. We plan to increase the number of our project
personnel in order to support our planned growth. We have hired 61 additional
employees from January 1, 2000 through August 15, 2000. There is increased
competition for qualified personnel that has increased and will continue to
increase our cash and non-cash compensation costs. Our gross margins are
impacted by our employee utilization. Employee utilization can be affected by
multiple factors, including rapid growth and reductions in the number or size
of projects in any period. Reduction in employee utilization rates could cause
further decline in gross profit as a percentage of revenue. Cost of revenue
also includes fees paid to subcontractors for work performed on our
20
<PAGE>
projects. Subcontractors generally cost us more than our own personnel and,
consequently, we usually generate lower gross margins when using
subcontractors. In the first six months of 2000 and in 1999, subcontractors
accounted for approximately 11% and 13% of our cost of revenue, respectively.
In 1998 and 1997, subcontractors accounted for approximately 3% and 12% of our
cost of revenue, respectively. Subcontractors are called upon to supplement our
staffing requirements and satisfy particular skills required on individual
client engagements.
Selling, general and administrative costs consist of salaries and bonuses
for executive and selected senior management, finance, recruiting, selling and
marketing and administrative personnel and associated employee benefits,
facilities costs, computer and office equipment, operating leases, training,
promotional expenses, travel expenses and all other corporate costs. Our sales
and marketing expenses are expected to increase as a percentage of revenue in
the future as we enhance our selling efforts. We expect selling, general and
administrative expenses to increase in absolute dollars as we expand our direct
sales force, open new offices, increase our recruiting efforts and incur
additional costs related to the growth of our business and operation as a
public company.
Depreciation and amortization consists of depreciation of property and
equipment using the straight-line method, generally over three to seven years,
based on the estimated useful lives of the respective assets. Goodwill from the
Jump! acquisition described below is being amortized over three years. We
expect to expand some of our current offices and expand geographically by
opening new offices in 2000 and 2001. This will require us to purchase
additional furniture, office equipment and computer and networking equipment,
all of which will increase our depreciation expense. If we make more
acquisitions, we may also have more goodwill to amortize.
Stock-based compensation expense in 1999 consists of grants to employees of
options to purchase approximately 380,000 shares of our common stock at an
exercise price below the deemed fair market value for financial reporting
purposes of the common stock on the dates of grant. In addition, in connection
with the acquisition of Jump!, we issued 109,500 shares of our common stock to
the former stockholders of Jump! which are subject to repurchase provisions.
These 1999 option grants and stock issuances resulted in a non-cash
compensation charge of $6.5 million, of which $1.1 million was recorded through
December 31, 1999. In addition, since January 1, 2000, we have granted to our
employees and our Chief Executive Officer options to purchase 1,096,725 shares
of our common stock at exercise prices below the deemed fair market value for
financial reporting purposes of the common stock on the dates of grant. Stock-
based compensation expense of $14.2 million was recorded for the six months
ended June 30, 2000. The remaining balance of $3.1 million from the 1999 option
grants and stock issuances and the remaining balance of $500,000 resulting from
the 2000 grants, based on deemed fair market value at the date of grant, will
be amortized over the remaining vesting schedule as follows:
<TABLE>
<CAPTION>
Amount of Remaining
Deferred Stock
Compensation
-------------------
<S> <C>
Year Ended December 31,
2000 (not including six months ended June 30,
2000)............................................ $ 975,000
2001.............................................. 1,318,000
2002.............................................. 742,000
2003.............................................. 599,000
</TABLE>
Increase in market value of redeemable warrants consists primarily of the
impact of accreting to fair market value our redeemable warrants, the value of
which increased substantially in 1999 based on a substantial increase in the
valuation of our company.
During the remainder of 2000, we will also record significant charges to
operations in connection with the accretion to fair market value of the
redeemable warrants immediately prior to their exercise in connection with this
offering and the accretion to redemption value of the senior subordinated
debentures. Based upon the
21
<PAGE>
midpoint of the expected price range of this offering, the remaining fiscal
2000 charge related to the redeemable warrants is estimated to be approximately
$13.8 million. Based upon an assumed redemption date of September 30, 2000, the
remaining charge for the year ended December 31, 2000 relating to the accretion
to redemption value of the senior subordinated debentures will be approximately
$1.5 million.
Interest expense represents the accrual of interest on our senior and junior
debentures which is added to the principal over the term of the debentures. As
described in this prospectus under the caption "Related Party Transactions,"
the debentures were issued in 1997 to Summit Ventures IV, L.P. and other
investors, including our officers and directors. Interest income consists of
interest earned on funds held in a money market account.
In addition to the impact of the aforementioned non-cash charges, our
financial results may fluctuate from quarter to quarter based on such factors
as the type of project, number, complexity, size, scope and lead time of
projects in which we are engaged. More specifically, these fluctuations can
result from the contractual terms and degree of completion of these projects,
any delays incurred in connection with projects, employee utilization rates,
the adequacy of provisions for losses, the accuracy of estimates of resources
required to complete ongoing projects and general economic conditions.
In any given quarter, most of our revenues have been attributable to a
limited number of customers and we expect this to continue. As a result, the
cancellation or deferral of any of these engagements in a particular quarter
could significantly reduce our revenues, which would hurt our financial
performance. In addition, most of our operating expenses, particularly
personnel and rent, are relatively fixed and based upon anticipated revenues.
Consequently, unanticipated variations in the number, or progress toward
completion, of our projects may cause significant variations in operating
results in any particular quarter and could result in losses for that quarter.
An unanticipated termination of a major project, a client's decision not to
proceed with a project we anticipated or the completion during a quarter of
several major client projects, could result in underutilized employees and have
a material adverse effect on us. Further, a failure to book an expected order
in a given quarter or the need to provide training to our employees on new
technologies would not be offset by a corresponding reduction in costs and
could adversely affect our operating results. As a result of these factors, we
believe that period-to-period comparisons of our revenues and operating results
are not necessarily meaningful.
The sales cycle for our services is variable and several months may elapse
from the time we contact a potential client to the time we obtain approval to
commence an engagement. To market our services successfully, we typically must
educate our potential clients on the types and benefits of our services, which
can require significant time and resources. In addition, our clients often must
complete thorough internal and external pricing analyses and operating
comparisons, competitive evaluations and internal approval processes before
purchasing our services. Once a client contracts to purchase our services, the
time required to begin rendering our services may take longer than we plan.
Delays in obtaining client approvals or implementing services for our clients
may adversely effect our revenues and reputation and cause our operating
results to fluctuate.
In addition, we generally experience more activity in the second half of the
year, as clients attempt to complete projects by year end, than in the
beginning of the year, when many projects are just being contemplated and not
yet underway. Also, our work associated with developing and updating employee
self-service extranets for benefit plans has generally resulted in increased
activity in the second and third quarters as clients prepare for employee open
enrollment periods. If we do not have a sufficient number of employees
available to handle this increased activity, we generally hire subcontractors
to staff these projects. In the past, increased activity in the third quarter
has caused us to increase our use of subcontractors in that quarter, which has
had a negative affect on our gross margins in that quarter.
Jump! Acquisition
In November 1999, we completed a merger with Jump! Information Technologies,
Inc. by exchanging 109,500 shares of our common stock, subject to our right to
repurchase the shares upon the stockholders of Jump! ceasing to be employed by
us, and $525,000 in cash for all of the common stock of Jump!. In addition,
22
<PAGE>
Jump!'s employee options were converted into options to purchase 25,339 shares
of our common stock, of which 12,668 were unvested. We incurred acquisition
costs of $149,000 and issued 12,671 vested stock options valued at $168,000
associated with the Jump! acquisition, which are included in goodwill. The
109,500 shares of common stock we issued to the two founders of Jump! are
subject to repurchase provisions upon any cessation of employment and,
including the unvested stock options granted to Jump! employees, resulted in
stock-based compensation of $432,000 and deferred compensation charges of $1.3
million, based upon the estimated fair market value of the shares at December
31, 1999, which will be charged to operations over the vesting or repurchase
periods, as the case may be. Since these charges are based upon the fair market
value of the stock over the vesting schedule or repurchase period, as the case
may be, the amounts could be higher than those estimated at December 31, 1999.
These shares will no longer be subject to the repurchase provisions upon the
completion of this offering. We accounted for this transaction as a purchase.
The historical information presented in this section includes the results of
operations of Jump! since the date of its acquisition.
Both founders of Jump! are no longer employed by us. We plan to repurchase
the 109,500 shares of our common stock which they own pursuant to the terms of
the shareholders agreement. The parties are currently in dispute with regard to
the calculation of the purchase price. Options exercisable to purchase an
aggregate of 18,250 shares issued to the founders of Jump! terminated pursuant
to the terms of their employment agreements.
Results of Operations
For the first six months of 2000, we had revenues of $16.7 million and
incurred a net loss of $16.2 million. Net loss for the first six months of 2000
includes non-cash charges of $3.8 million relating to the increase in market
value of our redeemable warrants and $14.2 million relating to stock-based
compensation. We had revenues of $15.8 million and $11.3 million and incurred
net losses of $8.9 million and $614,000 in 1999 and 1998, respectively. In
1999, on a pro forma basis, we had revenues of $17.9 million and incurred a net
loss of $9.0 million. Net losses for 1999 and 1998 include non-cash charges for
the increase in market value of our redeemable warrants of $7.5 million and
$366,000, respectively, and stock-based compensation charges of $1.1 million
and $0, respectively. In addition, we incurred non-cash charges for interest
expense related to the accretion to redemption value of our senior subordinated
debentures of $385,000 in 1999 and $265,000 in 1998. Our loss from operations
in both 1999 and 1998 were negatively impacted by increased selling, general
and administrative expenses and personnel costs incurred by us in anticipation
of future growth.
The following table presents, for the periods indicated, the relative
composition of revenue and selected statements of operations data as a
percentage of revenue:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended June
December 31, 30,
--------------------- -------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue............................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue....................... 39.6 49.1 47.6 48.0 37.6
----- ----- ----- ----- -----
Gross profit.......................... 60.4 50.9 52.4 52.0 62.4
----- ----- ----- ----- -----
Operating expenses:
Selling, general and
administrative..................... 31.6 42.1 44.1 46.0 38.8
Depreciation and amortization....... 3.0 5.8 5.9 6.9 4.2
Stock-based compensation............ -- -- 6.8 1.2 85.3
----- ----- ----- ----- -----
Total............................. 34.6 47.9 56.8 54.1 128.3
----- ----- ----- ----- -----
Income (loss) from operations......... 25.8 3.0 (4.4) (2.1) (65.9)
Increase in market value of redeemable
warrants............................. (2.6) (3.2) (47.3) (53.3) (22.5)
Interest expense, net................. (4.5) (6.2) (6.0) (7.1) (3.6)
----- ----- ----- ----- -----
Income (loss) before income taxes..... 18.7 (6.4) (57.7) (62.5) (92.0)
Income tax provision (benefit)........ 4.2 (1.0) (1.3) (1.5) 4.9
----- ----- ----- ----- -----
Net income (loss)..................... 14.5 % (5.4)% (56.4)% (61.0)% (96.9)%
===== ===== ===== ===== =====
</TABLE>
23
<PAGE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenue. Revenue increased $10.1 million, or 152.6%, to $16.7 million for
the six months ended June 30, 2000 from $6.6 million in the comparable period
in 1999. This increase in revenue reflects increases in the number of billed
employee hours, per hour rates and the number of client engagements undertaken.
The number of clients increased from 28 for the six months ended June 30, 1999
to 39 during the six months ended June 30, 2000. The increase in revenues also
reflects the addition of $906,000 of revenues in the first six months of 2000
attributable to a client of Jump!, which was not acquired by us until November
1999.
Cost of Revenue. Cost of revenue increased $3.1 million, or 98%, to $6.3
million for the six months ended June 30, 2000 from $3.2 million for the six
months ended June 30, 1999. The increase was due primarily to increases in the
number of personnel needed to service the increasing number and complexity of
our engagements. Salary costs also increased as a result of annual salary
adjustments. Our professional staff increased to 183 at June 30, 2000 from 102
at June 30, 1999.
Gross Profit. Gross profit increased $7.0 million, or 203%, to $10.4 million
for the six months ended June 30, 2000 from $3.4 million in the comparable
period in 1999. The gross profit dollar increase reflects the increase in
volume during 2000. As a percentage of revenue, gross profit increased to 62.4%
during the six months ended June 30, 2000 as compared to 52.0% during the
comparable period in 1999. The increase reflects an increase in our employee
utilization and higher rates per hour. The increase was partially offset by
higher salary costs.
Selling, General and Administrative. Selling, general and administrative
costs increased $3.4 million, or 113.3%, to $6.5 million for the six months
ended June 30, 2000 from $3.0 million in the comparable period in 1999. This
increase was due primarily to increased salaries for sales, marketing and
administrative personnel. Selling and marketing costs increased $1.3 million,
or 123%, to $2.3 million for the six months ended June 30, 2000 from $1.0
million for the six months ended June 30, 1999. The increase was due to
increased personnel-related costs and sales promotion efforts. Facility and
related costs increased $172,000, or 30.0%, to $749,000 during the six months
ended June 30, 2000 from $577,000 during the six months ended June 30, 1999.
The increase in facility and related costs was due to the addition of the
Chantilly, Virginia office in November 1999. As a percentage of revenue,
selling, general and administrative expenses decreased to 38.8% during the six
months ended June 30, 2000, as compared to 46.0% during the six months ended
June 30, 1999.
Depreciation and Amortization. Depreciation and amortization costs increased
$239,000, or 52.1%, to $698,000 during the six months ended June 30, 2000 from
$459,000 during the six months ended June 30, 1999. This increase was due
primarily to fixed asset acquisitions to support our growth and goodwill
associated with the acquisition of Jump!. Goodwill charged to operations in the
first six months of 2000 totaled $120,000.
Stock-based Compensation. For the six months ended June 30, 2000, stock-
based compensation increased to $14.2 million from $82,000 for the six months
ended June 30, 1999. This increase is primarily due to fully vested employee
stock options issued below their fair market value during March 2000, including
options to purchase 1,000,000 shares of our common stock granted to our Chief
Executive Officer in March 2000 as contemplated in the purchase agreement
relating to our 1997 issuance of warrants and debentures.
Increase in Market Value of Redeemable Warrants. For the six months ended
June 30, 2000, the increase in market value for our redeemable warrants was
$3.8 million compared to $3.5 million for the six months ended June 30, 1999.
The increase is the result of a higher estimated fair value of the redeemable
warrants as of June 30, 2000 compared to the prior period.
Interest Expense, Net. Interest expense, net increased $131,000, or 27.8%,
to $602,000 during the six months ended June 30, 2000 from $471,000 during the
six months ended June 30, 1999. The increased interest expense was due
primarily to the effect of compounding interest expense incurred on our senior
and junior debentures. Interest expense of $690,000 was offset by interest
income of $87,000 earned during the six months ended June 30, 2000.
24
<PAGE>
Income Tax Provision (Benefit). The $101,000 income tax benefit for the six
months ended June 30, 1999 represents a benefit from combined federal and state
income taxes at an effective rate of 2.4%. The income tax provision of $825,000
for the six months ended June 30, 2000 is based on a combined federal and state
effective rate of 5.4%. These effective rates are lower than the statutory rate
primarily due to the impact of the accretion to market value of the redeemable
warrants in 1999 and 2000 and the impact of stock-based compensation and the
utilization of net operating loss carryforwards in 2000.
1999 Compared to 1998
Revenue. Revenue increased $4.5 million, or 39.8%, to $15.8 million in 1999
from $11.3 million in 1998. This increase in revenue reflects increases in the
number of billed employee hours, the number of clients and the complexity of
engagements undertaken. The number of clients increased from 32 in 1998 to 44
in 1999. Jump! accounted for $266,000, or 5.9%, of the increase in our 1999
revenues.
Cost of Revenue. Cost of revenue increased $2.0 million, or 35.6%, to $7.5
million in 1999 from $5.6 million in 1998. The increase during 1999 was due
primarily to increases in the number of personnel needed to service the
increasing number and complexity of our engagements. Salary costs also
increased in 1999. Our professional staff increased to 95 at December 31, 1999
from 77 at December 31, 1998. As a percentage of revenue, cost of revenue
decreased to 47.6% during 1999 as compared to 49.1% during 1998.
Gross Profit. Gross profit increased $2.5 million, or 43.9%, to $8.3 million
in 1999 from $5.8 million in 1998. The gross profit dollar increase reflects
the increase in revenue during 1999. As a percentage of revenue, gross profit
increased to 52.4% during 1999 as compared to 50.9% during 1998. The percentage
increase reflects an increase in our employee utilization, which was partially
offset by increased salary costs.
Selling, General and Administrative. Selling, general and administrative
costs increased $2.2 million, or 46.4%, to $7.0 million in 1999 from $4.8
million in 1998. This increase was due primarily to increased salaries for
sales, marketing and administrative personnel and increased facility costs.
Selling and marketing costs increased $1.3 million, or approximately 136%, to
$2.2 million in 1999 from $924,000 in 1998. The increase was due to increased
personnel-related costs and sales promotion efforts. Facility and related costs
increased approximately $434,000, or approximately 53%, to $1.25 million in
1999 from $816,000 in 1998. The increase in facility and related costs was due
to the addition of the New York City office in July 1998. As a percentage of
revenue, selling, general and administrative expenses increased to 44.1% in
1999 as compared to 42.1% in 1998.
Depreciation and Amortization. Depreciation and amortization costs increased
$289,000, or 44.2%, to $942,000 in 1999 from $653,000 in 1998. This increase
was due primarily to a full year of depreciation on the fixed assets in our New
York City office, which opened in July 1998, and goodwill associated with the
acquisition of Jump!. Goodwill charged to operations in 1999 totaled $33,000.
Stock-based Compensation. We incurred charges of $1.1 million in 1999 for
costs associated with our employee stock option plan. We had no stock-based
compensation in 1998.
Increase in Market Value of Redeemable Warrants. The increase in market
value for redeemable warrants amounted to $7.5 million in 1999 compared to
$366,000 in 1998. This increase in value is based on the substantial increase
in the valuation of our company at December 31, 1999 compared to the prior
year.
Interest Expense, Net. Interest expense, net increased $239,000, or 32.9%,
to interest expense of $963,000 in 1999 from interest expense of $724,000 in
1998. The increased interest expense is due to the accrual of interest on our
senior and junior debentures which is added to the principal over the term of
the debentures. Interest expense of $1.2 million was offset by interest income
of $201,000 earned during 1999.
Income Tax Provision (Benefit). Operating losses generated in 1999 were
carried forward for tax purposes creating a future tax benefit. The $202,000
income tax benefit in 1999 represents a benefit from
25
<PAGE>
combined federal and state income taxes at an effective rate of 2.3%. The
income tax benefit of $115,000 in 1998 represented a benefit from combined
federal and state income taxes at an effective rate of 15.8%. These effective
tax rates are lower than the statutory rate primarily due to the impact of the
accretion to market value of the redeemable warrants.
1998 Compared to 1997
1998 was a building year for us. We opened our New York City office in July
1998, reorganized our professional staff into areas of expertise and rearranged
our sales organization using a vertical market approach.
Revenue. Revenue increased $277,000, or 2.5%, to $11.3 million in 1998 from
$11.1 million in 1997. Our ability to increase our revenues in 1998 was
negatively impacted by the factors set forth above.
Cost of Revenue. Cost of revenue increased $1.2 million, or 27.1%, to $5.6
million in 1998 from $4.4 million in 1997. This increase was due primarily to
the cost of additional professional staff and increased salary costs. We had 77
professional staff at December 31, 1998 and 63 at December 31, 1997. As a
percentage of revenue, cost of revenue increased to 49.1% during 1998 as
compared to 39.6% during 1997.
Gross Profit. Gross profit decreased $907,000, or 13.6%, to $5.8 million in
1998 from $6.7 million in 1997. The gross profit decrease reflects the increase
in cost of revenue during 1998. As a percentage of revenue, gross profit
decreased to 50.9% during 1998 as compared to 60.4% during 1997. The percentage
decrease reflects the increase in the number of employees, increased salary
costs and a reduction in utilization.
Selling, General and Administrative. Selling, general and administrative
costs increased $1.3 million, or 36.6%, to $4.8 million in 1998 from $3.5
million in 1997. This increase was due primarily to increases in personnel, the
leasing of our New York City office and related facility costs to support
growth of our operations. Selling and marketing cost increased $110,000, or
approximately 14%, to $924,000 in 1998 from $814,000 in 1997. The increase was
due to increased personnel related costs and sales promotion efforts. Facility
and related costs increased approximately $334,000, or approximately 69%, to
$816,000 in 1998 from $482,000 in 1997. The increase in facility and related
costs was due to the addition of our New York City office in July 1998. As a
percentage of revenue, selling, general and administrative expenses increased
to 42.1% in 1998 compared to 31.6% in 1997.
Depreciation and Amortization. Depreciation and amortization costs increased
$317,000, or 94.5%, to $653,000 in 1998 from $336,000 in 1997. This increase
was due primarily to depreciation on our New York City office fixed assets
purchased in 1998.
Increase in Market Value of Redeemable Warrants. The increase in market
value of redeemable warrants amounted to $366,000 in 1998 compared to $288,000
in 1997. The increase in this charge is due to the redeemable warrants being
outstanding for a full year in 1998 compared to approximately nine months in
1997.
Interest Expense, Net. Interest expense, net increased $214,000, or 42%, to
$724,000 in 1998 from $510,000 in 1997. This increase was due primarily to
interest expense we incurred from our senior and junior debentures. Interest
expense of $985,000 was offset by interest income of $261,000 earned in 1998.
Income Tax Provision (Benefit). Operating losses generated in 1998 were
carried back for tax purposes creating a tax benefit. The $115,000 tax benefit
in 1998 represents a benefit from combined federal and state income taxes at an
effective rate of 15.8%. The income tax expense of $465,000 in 1997 represented
an expense from combined federal and state income taxes at an effective rate of
22.6%.
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<PAGE>
Quarterly Results of Operations
The following tables set forth unaudited quarterly financial data for the
periods indicated. We derived this data from unaudited financial statements,
and, in the opinion of our management, they include all adjustments, which
consist only of normal recurring adjustments, necessary to present fairly the
financial results for the periods. Results of operations for any previous
fiscal quarter do not necessarily indicate what results may be for any future
period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30,
1998 1998 1999 1999 1999 1999 2000 2000
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $2,774 $2,955 $ 3,234 $ 3,365 $ 4,212 $ 5,028 $ 7,778 $ 8,890
Cost of revenue......... 1,456 1,523 1,582 1,584 2,216 2,159 2,820 3,449
------ ------ ------- ------- ------- ------- -------- -------
Gross profit............ 1,318 1,432 1,652 1,781 1,996 2,869 4,958 5,441
------ ------ ------- ------- ------- ------- -------- -------
Operating expenses:
Selling, general and
administrative........ 1,289 1,417 1,425 1,608 1,492 2,453 2,958 3,507
Depreciation and
amortization.......... 194 209 223 234 225 260 334 364
Stock-based
compensation.......... -- -- 12 70 175 820 13,072 1,153
------ ------ ------- ------- ------- ------- -------- -------
Total.................. 1,483 1,626 1,660 1,912 1,892 3,533 16,364 5,024
------ ------ ------- ------- ------- ------- -------- -------
Income (loss) from
operations............. (165) (194) (8) (131) 104 (664) (11,406) 417
Increase in market value
of redeemable
warrants............... (90) (95) (1,749) (1,771) (1,936) (2,049) (1,876) (1,876)
Other income (expense).. (195) (142) (234) (232) (249) (227) (303) (289)
------ ------ ------- ------- ------- ------- -------- -------
Income (loss) before
income taxes........... (450) (431) (1,991) (2,134) (2,081) (2,940) (13,585) (1,748)
Income tax provision
(benefit).............. (71) (68) (49) (52) (46) (55) 572 253
------ ------ ------- ------- ------- ------- -------- -------
Net income (loss)....... $ (379) $ (363) $(1,942) $(2,082) $(2,035) $(2,885) $(14,157) $(2,001)
====== ====== ======= ======= ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30,
1998 1998 1999 1999 1999 1999 2000 2000
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of
Revenue:
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 52.5 51.5 48.9 47.1 52.6 43.0 36.3 38.8
----- ----- ----- ----- ----- ----- ------ -----
Gross profit............ 47.5 48.5 51.1 52.9 47.4 57.0 63.7 61.2
----- ----- ----- ----- ----- ----- ------ -----
Operating expenses:
Selling, general and
administrative........ 46.5 48.0 44.1 47.8 35.4 48.8 38.0 39.4
Depreciation and
amortization.......... 7.0 7.1 6.9 7.0 5.3 5.2 4.3 4.1
Stock-based
compensation.......... -- -- 0.4 2.0 4.2 16.3 168.1 13.0
----- ----- ----- ----- ----- ----- ------ -----
Total.................. 53.5 55.1 51.4 56.8 44.9 70.3 210.4 56.5
----- ----- ----- ----- ----- ----- ------ -----
Income (loss) from
operations............. (6.0) (6.6) (0.3) (3.9) 2.5 (13.3) (146.7) 4.7
Increase in market value
of redeemable
warrants............... (3.2) (3.2) (54.1) (52.6) (45.9) (40.7) (24.1) (21.1)
Other income (expense).. (7.0) (4.8) (7.2) (6.9) (6.0) (4.5) (3.9) (3.3)
----- ----- ----- ----- ----- ----- ------ -----
Income (loss) before
income taxes........... (16.2) (14.6) (61.6) (63.4) (49.4) (58.5) (174.7) (19.7)
Income tax provision
(benefit).............. (2.6) (2.3) (1.5) (1.5) (1.1) (1.1) 7.3 2.8
----- ----- ----- ----- ----- ----- ------ -----
Net income (loss)....... (13.6)% (12.3)% (60.1)% (61.9)% (48.3)% (57.4)% (182.0)% (22.5)%
===== ===== ===== ===== ===== ===== ====== =====
</TABLE>
We believe that period to period comparisons of our operating results are
not necessarily meaningful and that you should not rely on these comparisons as
indicators of future performance. See "Risk Factors--Our quarterly revenues and
operating results are likely to fluctuate significantly, which may cause our
stock price to decline."
27
<PAGE>
Liquidity and Capital Resources
In June 1997, we entered into a $1.5 million line of credit with First Union
National Bank to be used for working capital purposes. The interest rate on
amounts borrowed is at First Union's prime rate. The credit facility expired in
June 2000, and was renewed and amended to increase allowable borrowings to $2.0
million. This credit line expires June 30, 2001. The credit facility contains
restrictions on us, including a prohibition on the payment of cash dividends by
us, and requires us to comply with financial tests and to maintain specified
financial ratios. As of the date of this prospectus, we had no outstanding
borrowings under the credit facility.
On March 4, 1998, First Union extended to us an irrevocable standby letter
of credit in the amount of $549,000, as security for our New York office lease,
to expire on June 1, 1999. The letter of credit has been automatically extended
and will continue to automatically extend for annual periods through June 1,
2005. The amount of funds available decreases to $320,500 for the third year of
the letter, to $274,500 for the fourth year of the letter and to $137,250 after
the fourth year until the letter's expiration. The funds will only be made
available if and when we are in default on the terms of our office lease.
On February 9, 2000, First Union extended to us a standby letter of credit
in the amount of $970,667, as security for our new Morristown, New Jersey
office lease, to expire on June 15, 2010. The amount of funds available
decreases to $767,000 for the fourth, fifth and sixth years of the letter and
to $546,000 after the sixth year until the letter's expiration. The funds will
only be made available if and when we are in default on the terms of our office
lease.
Cash and cash equivalents were $2.2 million at June 30, 2000, $1.4 million
at December 31, 1999 and $3.5 million at December 31, 1998. Net cash provided
by operating activities was $2.7 million for the six months ended June 30,
2000. In 1999, our net cash used in operating activities was approximately
$850,000, compared to net cash provided by operating activities of
approximately $514,000 in 1998. We experienced an increased use of cash in
1999, primarily attributable to an expansion of our business and an increase in
our accounts receivable. Accounts receivable increased to $5.5 million at
December 31, 1999 from $2.8 million at December 31, 1998. This increase in
accounts receivable is attributable to our increased revenues in the third and
fourth quarters of 1999 compared to the same period in 1998. The average age of
our outstanding accounts receivables were approximately 87 days and 94 days as
of December 31, 1999 and 1998, respectively. As of June 30, 2000, we have
collected approximately $5.3 million of the $5.5 million of accounts receivable
outstanding at December 31, 1999. In 1999, we also spent approximately
$493,000, net of cash acquired, in connection with our acquisition of Jump!.
Unbilled engagement revenues were approximately $108,000 at June 30, 2000,
approximately $287,000 at December 31, 1999 and approximately $17,000 at
December 31, 1998. All unbilled engagement revenues receivables as of June 30,
2000 are expected to be invoiced during 2000. Unbilled engagement revenues
represent engagement revenues recognized in excess of amounts billed.
Capital expenditures of approximately $1.9 million, $680,000, $1.8 million
and $750,000 for the first six months ended June 30, 2000 and for 1999, 1998
and 1997, respectively, were used primarily for computer equipment, office
equipment and leasehold improvements related to our growth. Capital
expenditures for 2000 are expected to be approximately $3.0 million, including
the $1.9 million incurred in the first six months of 2000, and will be made
principally for computer equipment, internally used software purchases, office
furniture and leasehold improvements to support our growth. Our capital
expenditure budget for 2000 includes our move from our previous Morristown
facility to our larger current facility, also in Morristown. Our capital
expenditure budget for 2000 does not include any other amounts we may spend on
expanding existing offices or building or acquiring new offices.
In the first six months of 2000 and in 1999 and 1998, net cash used in
financing activities was not significant. In 1997, our net cash provided by
financing activities was approximately $2.0 million. We generated approximately
$4.9 million of cash from the issuance of the senior subordinated debentures
and redeemable warrants, net of deferred financing costs, and made cash
distributions to stockholders of approximately $2.9 million, an amount based on
estimated available subchapter "S" earnings and estimated required personal
income tax payments.
28
<PAGE>
We anticipate that the net proceeds of this offering, together with existing
sources of liquidity and funds generated from operations, should provide
adequate cash to fund our currently anticipated cash needs through at least the
next 18 months. To the extent we are unable to fund our operations from cash
flows, we may need to obtain financing from external sources in the form of
either additional equity or indebtedness. There can be no assurance that
additional financing will be available to us at all, or that, if available, the
financing will be obtainable on terms favorable to us.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities," which establishes accounting and reporting standards of derivative
instruments, including some derivative instruments embedded in other contracts,
and for hedging activities. In July 1999, the FASB approved SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. We do not currently engage in derivative activity and do not expect the
adoption of this standard to have a material effect on our results of
operations, financial position or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, or SAB
101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related to
revenue recognition policies. The SEC subsequently issued SAB 101A, which
delayed the implementation date of revenue recognition provisions of SAB 101.
We adopted SAB 101 in the second quarter of 2000. The adoption of SAB 101 did
not have an effect on our historical revenue recognition.
Quantitative and Qualitative Disclosures About Market Risk
We do not currently hold any derivative instruments and we do not engage in
hedging activities. Also, we do not have any outstanding variable interest rate
debt and currently do not enter into any transaction denominated in a foreign
currency. Thus, our direct exposure to interest rate and foreign exchange
fluctuations is minimal.
29
<PAGE>
BUSINESS
Overview
Logical Design Solutions is a professional services provider of e-business
solutions primarily to Fortune 500 companies. We assist our clients in defining
strategies utilizing Internet technologies and use our experience in creative
design and systems engineering to design, architect, develop and implement
solutions to execute those strategies. We work with our clients to anticipate
and evolve their e-business initiatives across industry and technology trends.
Our solutions enable our clients to conduct business with their employees,
customers and partners using emerging technologies.
Since 1995, we have focused on providing solutions based on Internet
technologies. We have evolved our business from developing business-to-employee
high-volume, secure corporate intranet sites to developing complex business-to-
business extranets that link companies with their outside partners. Over the
last two years, we have extended our reach to service the diverse range of
constituents of our clients' businesses. We believe one of our main strengths
has been our ability to extend our clients' e-business models to an
increasingly diverse universe of users while managing complex content and
creating an interactive, targeted user experience. In 1999, approximately 80%
of our revenues were attributable to clients with which we had repeat business.
In each of our engagements we employ our proprietary methodology, the
Logical Approach, to advise our clients on e-business strategies and to design
and implement customized, complex e-business solutions. We focus on providing
our services to market leaders in the following targeted industries in which we
have knowledge and experience: communications, financial services, healthcare,
manufacturing and publishing.
We focus on building long-term relationships with our clients. For example,
AT&T was our first client in 1990 and we continue to provide e-business
solutions for them today. We have developed a blue-chip client list with
significant repeat business. Our top ten clients in 1999 based on revenues on a
pro forma basis, giving effect to our acquisition of Jump! Technologies, Inc.,
were Lucent Technologies, AT&T, The Thomson Corporation, Aetna/US Healthcare,
The Chase Manhattan Bank, Winstar Communications, The MONY Group, SBC
Communications, Johnson & Johnson and Philip Morris Companies. Our top four
clients each provided us with more than $1.5 million in revenues in 1999 and
each of our top ten clients generated more than $250,000 in revenues in 1999.
Industry Background
Increasing acceptance of the Internet and related corporate extranet and
intranet technologies has created numerous opportunities for companies seeking
growth and increased efficiencies in highly competitive and rapidly changing
markets. An intranet is a network that provides similar services (distribution
of information) within an organization to those provided by the Internet but
that is not necessarily connected to the Internet. An extranet is the extension
of a company's intranet out onto the Internet to allow selected customers,
suppliers and others to access the company's private data and applications via
the Internet. The Internet enables companies, consumers, business partners,
suppliers and employees to interact and transact business on a one-to-one and
one-to-many basis. In order to achieve this manner of connectivity, a growing
number of organizations are demanding more advanced, customized Internet
solutions. In addition, organizations are seeking to differentiate themselves
from their competitors by providing enhanced experiences for their end-users
with features that are easy to use and offer personalized service.
Although companies are eager to capture the opportunities presented by the
Internet, the strategy, design and implementation of an effective e-business
solution requires special skills and expertise. These special skills include:
. assessing the strategic implications of the Internet for a business;
. integrating new and existing business processes;
30
<PAGE>
. developing creative initiatives for brand, content and user experience;
and
. implementing the advanced technology required to support these
solutions.
The availability of high quality professionals experienced in designing,
developing and implementing advanced Internet solutions is limited, making the
market for recruiting and retaining these individuals extremely competitive. As
a result, an increasing number of businesses, from start-ups to established
companies, engage professional services firms to help them design and implement
these solutions. A March 2000 study by International Data Corporation estimates
that the worldwide market for Internet services will grow from $16.2 billion in
1999 to $99.1 billion in 2004, representing a compound annual growth rate of
nearly 44%.
Logical Design Solutions believes organizations are increasingly searching
for a single-source professional services firm that integrates the strategy,
design and technology skills specifically required for offering comprehensive
e-business solutions. Furthermore, we believe that organizations will
increasingly look to e-business solutions providers that can combine industry
knowledge and effective program management to formulate a focused, strategic
and integrated approach to e-business and to efficiently design and implement
large-scale, complex e-business solutions.
Our Approach to Market
Our approach to market includes the following elements:
Industry Expertise
Led by industry managers with long-term industry and consulting experience,
our focus on targeted industries and industry practice models form the
foundation for our business development efforts. We target the following
industries: communications, financial services, healthcare, manufacturing and
publishing. We sell our services primarily to executive level management using
our reputation of experience in their industry, a client list of major
corporations and case studies that support our ability to deliver end-to-end
solutions in similar situations. During our sales process, we seek to
demonstrate our ability to work within complex technical situations, while
bringing a business focus to the potential engagement.
Integrated Solutions
We offer our clients a suite of comprehensive services that covers strategy,
design and technology. Our methodology, the Logical Approach, enables us to
provide these services in an integrated manner to bridge between business and
information technology units. By using our multidisciplinary teams of
strategists, designers and technologists we provide the diverse skills required
to deliver comprehensive solutions. This ability to provide comprehensive
services offers our clients a single source in building an e-business solution.
User Experience
We seek to use our experience and credentials in usability engineering as a
competitive differentiator. We believe our usability capabilities help our
clients assess the needs of their increasingly demanding and diverse customer
base and engineer a user experience that is personalized, measurable and a
competitive market advantage. Our commitment to advancing the user experience
is reflected in our Usability Centers, located in our New York and New Jersey
facilities, which we use to analyze user requirements, navigate content
presentation and test Web sites. Our focus on the end user's experience is
designed to provide our clients' employees, customers and partners with a
positive user experience, which leads to higher levels of customer satisfaction
and loyalty.
Long-Term Client Relationships
We focus on building long-term relationships with our clients. We strive to
become our clients' e-business partner of choice and assist our clients in
managing the evolution of their e-business. As we work with our clients, we
gain knowledge about their business, technical environment and internal
decision-making processes.
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<PAGE>
We become familiar with a client's business and work closely with the client to
understand, predict and address its evolving business needs. Our focus on long-
term relationships has resulted in significant repeat business from our
clients.
Our Growth Strategy
Our goal is to expand upon our position as a provider of e-business
solutions to Fortune 500 companies in the markets we target. To achieve this
goal, we pursue the following strategies:
Deepen Client Relationships
We focus on growing our business with existing clients and expanding these
relationships into new engagements. By offering our clients integrated
strategy, design and technology e-business solutions, we strive to be the
primary e-business services provider for our clients. We also believe that our
record of client satisfaction has led to long-term relationships with our
clients and to an increase in the amount, scope and complexity of services
requested by many of our clients. For instance, we began our work for AT&T in
1990 and we continue to provide a range of e-business solutions for them today.
In addition, our relationship with AT&T allowed us to obtain Lucent as a client
immediately following its spin-off from AT&T. Lucent remains a major client
today.
Further Penetrate our Targeted Industries
We have assembled industry practice groups of professionals experienced in
the business practices and processes of our targeted industries. We believe
that our industry focus enables us to provide effective solutions tailored to
the special needs of our clients. In each of our targeted industry groups, we
develop industry-specific offerings and capitalize on referrals from existing
clients. In addition, our industry experience reduces the knowledge asset
transfer on new engagements, improves efficiency of implementation and reduces
project delivery times by, among other things, allowing us to use those
elements of our e-business solutions for which there is repeat customer demand.
We intend to continue to utilize our knowledge and industry experience to
further penetrate and broaden our presence in our targeted industries.
Continue to Develop Leading-Edge Technology Capabilities
We believe being able to deliver integrated, quality technical capabilities
is an important competitive advantage in our industry. Our technical
specialists in systems engineering and application development allow us to
offer customized, complex e-business solutions. We intend to continue to hire
additional software engineers and develop new technology skill-sets to deliver
quality solutions and meet the evolving needs of clients. We work with emerging
technologies and stay current with industry developments through our dedicated
team of technical specialists who evaluate new technologies and work on
innovative solutions.
Retain and Hire Outstanding Professionals
Retaining and attracting outstanding professionals is essential to our
growth. We focus on maintaining a culture that fosters innovation and
emphasizes professional development and plan to continue to do so. We support
each professional's development in their primary discipline through training
that is focused on their specific areas of expertise. We have developed a
consistent and cohesive corporate culture by primarily growing organically. Our
company culture encourages our professionals to work closely in
multidisciplinary groups to facilitate the development of integrated solutions
for our clients. We intend to continue to offer competitive compensation
packages, including equity participation through stock options for all of our
professionals.
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<PAGE>
Expand Geographically
We believe that significant opportunities exist for our services beyond our
current locations, including serving existing and new clients in other markets.
We have expanded, and intend to continue to expand, our geographic presence,
both nationally and internationally, based on our clients' needs, our focus on
specific industries and market opportunities. For example, we have recently
begun operations in the United Kingdom to support existing clients. We intend
to continue to expand primarily through organic growth, which may be
supplemented by strategic acquisitions. Our strategic acquisition of Jump! in
November 1999 added a geographical presence for us in the Washington, D.C.
metropolitan area, expanded upon our technological capabilities and added a
client relationship with Research Institute of America, part of The Thomson
Corporation, a publishing conglomerate.
Our Approach to Engagements: The Logical Approach
In each of our client engagements, we apply the Logical Approach. Using our
Logical Approach, we service our engagements with a multidisciplinary team led
by a dedicated project manager who coordinates business strategy, design and
technology services. We integrate industry-specific strategy with enterprise
level design and technological capabilities to provide customized e-business
solutions. Our Logical Approach also provides for an ongoing process for
evaluating and tailoring a company's e-business solution. Ongoing assessments
of business and market trends, technology trends, competition, user
requirements, and application requirements provide continual feedback on the
company's e-business strategy.
The Logical Approach is a comprehensive methodology which integrates
multidisciplinary tasks across four phases: strategy, blueprint, construction
and post-implementation assessment. The Logical Approach is a scalable process
and we can customize the specific phases necessary to suit the parameters of
each client engagement. The inclusion of any phase or phases depends on the
type of solution required and the scope of the work.
Strategy
We believe that a client's e-business strategy should be integrated with its
overall business strategy. We enable our clients to develop a viable,
successful e-business strategy that balances enterprise objectives with user
needs and competitive market challenges. Our Usability Center helps tailor the
e-business strategy to specific user requirements. We work with senior business
managers to define the e-business strategy and the supporting strategic
technology plan. In developing an e-business strategy, we focus on designing
solutions that will meet our client's business objectives, such as reducing
costs, generating revenue through new channels or developing targeted, one-to-
one marketing initiatives. Our strategic consultants focus on understanding and
applying the appropriate e-business models to our clients' business. We assess
and define business requirements to solidify the e-business strategy, taking
into account numerous factors that may affect the strategy, such as industry
trends, shifts in a client's business direction and escalating competitive
forces.
Blueprint
During the blueprint phase we develop an integrated schematic of how to
bridge the gap between e-business strategy and construction. To establish a
blueprint, we examine the aspects of the client's technology and business that
are critical to a successful e-business initiative. We also refine the
functional and creative requirements that support the business strategy. The e-
business blueprint comprises the following elements:
. Infrastructure Migration Plan. Our consultants review and analyze the
client's current computer environment to ensure that it is stable and
reliable and that it can be expanded to handle the new requirements of
the e-business strategy. We identify gaps in the client's computer
environment and outline a plan to evolve the environment based on the e-
business strategy. We focus on utilizing the client's investment in
currently installed technology and mitigating the potential risks from
new technology.
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. Business Assimilation Plan. Our business analysts review and analyze the
client's current workflows, policies and procedures to identify areas
that will be significantly impacted by the e-business strategy. We
identify individual project releases to address these areas and plan
these releases to coincide with the delivery of specific e-business
functions and features.
. Marketing and Communications Plan. Our marketing consultants collaborate
with the client's corporate communications organization to establish or
enhance its online brand. Our consultants also collaborate with the
client to define strategies for communicating and introducing the e-
business capabilities to its employees, customers and partners.
. Internal Staff Skills and Capability. Our business analysts collaborate
with the client's internal information technology team to determine what
new capabilities will be required to implement and maintain its e-
business initiative.
. Release Plan. Our project managers develop a release plan which provides
an integrated, phased approach to delivering e-business capabilities for
the client. The release plan offers a functional view of what
capabilities will be delivered, over what time period and to which
constituents. It takes into account the schedules and resources outlined
in each of the plans listed above to ensure that there is a
comprehensive approach to rolling out the e-business solution.
Construction
During the construction phase, we integrate project management, software
engineering, software quality management and creative disciplines. We seek to
build e-business sites that deliver quality functionality and enhanced user
experiences on reliable and scalable infrastructures. We leverage systems and
processes already in place as well as pre-built, customizable modules of code
and design. We develop e-business solutions that use the latest proven
technologies to transform business processes. We offer technology
implementation services, including applications architecture design, technical
infrastructure design, custom application development, legacy and third party
software integration, as well as technology advisory services. Before we
deliver the application to our clients, as part of this phase, we conduct a
comprehensive series of test cases on the different applications.
As part of the construction process, we utilize our creative abilities to
address navigation, layout, information architecture, personalization and
branding. We seek to create e-business solutions that have direct, immediate
and relevant appeal and utility. As e-business solutions have become an
important point of contact with employees, customers and partners, the user
interface of these applications has become an increasingly visible component.
Recognizing this importance, among other things, we test the user interface of
our proposed solutions through representative users at our Usability Center. We
aim to provide intuitive, visually appealing and highly usable solutions
designed with the end user in mind.
Post-Implementation Assessment
After the client's site is constructed and delivered, we provide a wide
range of services aimed at ensuring that the site is achieving and continues to
achieve the client's e-business strategic objectives. A key technique that we
deploy is testing and focus group sessions in our Usability Centers. These
tests and sessions help to ensure that the user is able to easily achieve the
benefits for which the e-business solution was designed. We also conduct
analysis of other sites to ensure that the client's site remains competitive
within the marketplace. Finally, we monitor industry trends and explore ways to
enhance and tailor the site. The results of our testing and analysis are then
fed back into the strategy phase of the Logical Approach, helping to make the
Logical Approach an ongoing process.
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Clients
We focus on providing our services to market leaders in the following
targeted industries: communications services, financial services,
manufacturing, healthcare and publishing. We utilize our industry experience in
serving our clients in each industry. The following is a representative sample
of our current clients.
Communications Services Manufacturing
AT&T International Paper
Cable and Wireless Johnson & Johnson
SBC Communications Lucent Technologies
NCR
Verizon Communications
Winstar Communications Philip Morris Companies
Financial Services Publishing
The Chase Manhattan Bank The McGraw Hill Companies
Lehman Brothers The Thomson Corporation
Met Life
The MONY Group Time Warner
Salomon Smith Barney
Healthcare
Aetna/US Healthcare
Pfizer
We seek to develop long-term relationships with our clients. We become
familiar with a client's business and work closely with the client to
understand, project and address the client's evolving strategic business needs.
In the six months ended June 30, 2000, our five largest clients accounted
for approximately 71% of our revenue. Our three largest clients in the first
six months of 2000, Aetna/US Healthcare, AT&T and Lucent, accounted for
approximately 23%, 20% and 11%, respectively, of our revenue. Our contract with
Aetna/US Healthcare expires in the third quarter of 2000. In 1999, our five
largest clients accounted for approximately 74% of our revenue on both an
actual and a pro forma basis including our acquisition of Jump!. Our three
largest clients in 1999, Lucent, AT&T and Aetna/US Healthcare, contributed
approximately 28%, 24% and 12%, respectively, of our revenue (approximately
24%, 22% and 10%, respectively, on a pro forma basis). In addition, Research
Institute of America, a subsidiary of The Thomson Corporation, contributed
approximately 13% of our revenue on a pro forma basis in 1999. In 1998, our
five largest clients accounted for approximately 83% of our revenue. Our two
largest clients in 1998, AT&T and Lucent, contributed approximately 47% and
26%, respectively, of our revenue. In 1997, our five largest clients accounted
for approximately 82% of our revenue. Our two largest clients in 1997, AT&T and
Lucent, contributed approximately 42% and 24%, respectively, of our revenue. No
other clients contributed over 10% of our revenue in the first six months of
2000 or in 1999, 1998 or 1997.
Client Case Studies
We manage a significant range of e-business engagements including:
. customer self-service solutions for billing, customer care and the
personalized delivery of information;
. enterprise self-service solutions for human resources, content
management, corporate communications and financial applications, such as
pension plans and profit sharing arrangements; and
. corporate e-business presence solutions, .com sites, corporate extranets
and new channel development sites.
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Set forth below are several representative client engagements:
AT&T
We began our relationship with AT&T in 1990, developing corporate
information systems, and AT&T remains a major client today. Over our 10-year
history with AT&T, we have utilized emerging technologies-- moving from CD-Rom
delivery to intranet, extranet and Internet-based solutions. Examples of
specific initiatives performed for AT&T include:
. Health and Insurance Information Center. In 1995, we created a
customized health and insurance intranet that allows employees to access
their benefits data, search provider directories, model the impact of
lifestyle changes on their benefits, enroll for benefits and compare
carrier options online. With this intranet, employees can now self-
manage many aspects of their human resources benefits and programs.
. Pension Update Information Center. In 1997, we created an extranet-
based self-service pension planning center, allowing employees to
personalize benefit amounts, receive detailed pension plan information
and model various retirement scenarios to project their pension benefits
under different retirement scenarios. This center has engaged and
assisted AT&T employees in learning about their pension benefits.
. Benefit Decisions 2000. In 1999, we created an Internet site providing
information on health and welfare plans for employees joining AT&T
through mergers and acquisitions. Through this Internet site, employees
from merged or acquired entities can, before joining AT&T, learn about
the enrollment process, model various benefit options and enroll in
specific benefit plans. This Internet site enhances communication of
benefit information and options to newly acquired employees and has
improved the transition of these employees into AT&T's core human
resources systems.
Our initiatives for AT&T support approximately 100 classes of users. Each
user class has its own profile and associated business rules that control the
type of pension and benefits modeling and content available to the user. The
solutions interface to existing enterprise resource planning systems and to
multiple external healthcare provider sites.
Lucent Technologies
Lucent became our client upon its spin-off from AT&T in September 1996 and
remains a major client today. We developed e-business strategies for Lucent, as
well as designed and implemented solutions that allow Lucent to better interact
with its employees and customers. Examples of e-business solutions developed
for Lucent include:
. Benefits Central. In 1997, we designed and implemented Benefits Central,
a personalized and secure intranet site, providing approximately 100,000
Lucent employees worldwide direct access to information about their
health and welfare benefits. This site provides online enrollment in
benefit plans, access to health provider listings, compensation and
financial information, as well as allows Web-enabled access to Lucent
stock quotes. The Benefits Central site utilizes XML, or Extensible
Markup Language, and hardware and software that allows the exchange of
information between the Web application and existing data sources. XML
is a standardized language used for the markup of documents that enables
companies to structure information so that it can be accessed from
various sources. This architectural approach allows the application to
be independent of the data source, the database that contains corporate
employee demographics and other benefit related data. Benefit Central
provides a self-service functionality to Lucent employees.
. NetCare Professional Services. In 1998, we designed, developed and
launched an e-commerce Internet site for Lucent products and Lucent's
NetCare management services division. This Internet site presents a
personalized site to each of NetCare's customers, incorporates a single
consistent interface for Lucent's extensive product line and provides
Lucent with a channel to efficiently communicate new information to its
customers. The Internet site also provides customer service,
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logging customer requests, registrations, feedback and content updates.
The NetCare site uses scalable technologies such as application servers,
relational databases and LDAP, or Lightweight Directory Access Protocol,
directories. LDAP is a protocol for updating and searching online
directory services. This Internet site became a major customer service
delivery channel for the NetCare management services division.
. The Solution Advisor. In 1999, we developed the marketing/customer
service application called Find Your Solution for Lucent's enterprise
division, which services its small-medium business market. This site
operates as a component of Lucent's company Web site. Lucent's
enterprise customers can access this application to assist them in
making voice and data networking communication decisions. Through an
online questionnaire, prospective customers provides information about
their industry, company and communications goals. Based on that input,
Find Your Solution provides them suggested solutions and Lucent product
information.
. Zingo. In 1999, we helped Lucent's wireless division develop a custom
mobile portal for small devices such as wireless phones and hand-held
computers. In addition to designing the portal's interface and branding
approach, we provided overall project management and coordination of the
multiple vendors who were engaged for this effort. This experimental
platform was targeted at telecommunications service providers and
enabled access to multiple third party applications.
The MONY Group
The MONY Group entered into a retainer contract with us in mid-1999 to
advise and assist them on their e-business initiatives. We provide advice,
design and enhancement development in an ongoing fashion for many areas of
MONY's public Web site. This support includes assistance with application
development, look and feel enhancements, navigation, design and content
analysis and creation. Among the projects are:
. Strategic Planning. We conducted a strategic infrastructure planning
effort, the purpose of which was to define the foundational
infrastructure for developing and deploying internally and externally
focussed e-business applications. We assembled and worked with a
steering committee made up of architects representing various areas
within MONY. The results of this joint effort was an infrastructure
recommendation and migration strategy to evolve to an e-business
environment.
. Weekly Activity Report. We redesigned and implemented a process to allow
MONY's independent international finance representatives to acquire
templates and file required reports via the Internet. MONY experienced
increased efficiencies by migrating from a telephone-based to an
Internet-based system. The new system has been designed by
representatives with hierarchical security within which to access
information.
. Trusted Advisor-Rep World. At the end of 1999, we built the Trusted
Advisor Internet site to provide financial planners, who represent
MONY's products, access to content information such as tax rules and
changes, research on investment products, forms and estate planning
tools.
. Broker Insight. We created an Internet application to support MONY's
global network of brokers. This system linked MONY's brokers with the
compliance documents, rules and sales tools they needed to provide
enhanced customer service to their and MONY's customer base.
Sales and Marketing
We primarily market our services to Fortune 500 companies. Our sales and
marketing organization is built around five industry practices and staffed
with professionals with industry and e-business experience. Each industry
practice team is led by a practice manager who has long-term industry and
consulting experience. Account executives and account managers report to the
industry practice managers. Account executives are responsible for generating
leads, qualifying opportunities and driving new revenue.
Account managers are responsible for strategic account management, proposal
development and revenue growth with key current clients. Our account
management model is focused around growing existing engagements and leveraging
them into new engagements through cross and up sell business development. This
focus allows us to build a more solid understanding of the business issues
facing each client.
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We have recently added channel managers to our industry teams. Channel
managers are responsible for establishing and expanding partner relationships
into additional revenue streams. We seek additional business and technical
partnerships to drive new revenue, enhance our technology strength and provide
us with a first glance view of technology trends.
Currently the sales teams for our five industry practices are composed of a
total of 15 individuals. Our marketing team of four individuals provides both
corporate-wide and industry specific marketing support to drive our business
development. Marketing programs include corporate branding, public relations
programs, client success stories, advertising and promoting our executives for
speaking opportunities and sponsored event management.
Technological Capabilities
Our current technical organization is organized into separate areas of
expertise. Our senior level technology professionals average at least 10 years
of experience in large-scale application development and reports to our Chief
Technology Officer. This senior group provides overall leadership to our staff
on technology direction and engineering best practices as well as researching
emerging technologies. Our technical specialists in systems engineering and
application development design and deliver our e-business solutions. Our system
engineers have extensive experience across a broad range of Internet-based
technologies. We identify specific areas of concentration, which we view as
essential to deliver business-critical e-business solutions. These areas
include technologies for system reliability, scalability, security and
management. They also include areas of concentration focused on the user for
relationship management and personalization. In addition to specific products
and technologies, our specialists and architects understand distributed
computing architectures, which are the structure and organization of a computer
application that functions across many different computers in various
locations, which are essential for delivering e-business solutions.
Strategic Affiliation with the Sun Microsystems / Netscape Alliance
We have established a strategic, non-exclusive affiliation with the Sun
Microsystems / Netscape Alliance. This affiliation provides us with early
access to training, product support and technology. In addition, this
relationship with the Alliance has led to several engagements, including with
Winstar Communications and Carrier Corporation. The primary goals of our
affiliation with the Alliance are:
. to deepen our technical capability and understanding of industry leading
products and technologies that are commonly deployed in e-business
applications;
. to create or identify new revenue opportunities through referrals and
joint marketing; and
. to enhance our position as an industry leader in bill presentment and
call analysis solutions.
We intend to seek out additional strategic alliances and affiliations with
other technology service providers to increase our business opportunities.
Competition
We compete with other providers of e-business professional services. The
market for these services has grown dramatically in recent years as a result of
the increasing use of Internet technologies by businesses to interact and
transact with their employees, customers and partners. Our market is intensely
competitive, highly fragmented and subject to rapid technological change. We
expect competition to persist and intensify in the future. Our current and
potential competitors include:
. e-business professional services firms, such as Agency.com, Diamond
Technology Partners, iXL, Organic, Proxicom, Razorfish, Sapient, Scient,
USWeb/CKS and Viant;
. traditional strategic consulting firms, such as Booz-Allen & Hamilton,
Boston Consulting Group and McKinsey;
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. interactive advertising agencies, such as Modem Media.Poppe Tyson and
OgilvyOne;
. professional services groups of computer equipment companies, such as
Hewlett-Packard and IBM;
. traditional systems integrators, such as Andersen Consulting, Cambridge
Technology Partners, EDS and PricewaterhouseCoopers; and
. internal information technology departments of current or potential
clients.
We believe the principal competitive factors in our market are:
. industry specific business knowledge and experience;
. breadth and integration of service offerings;
. cost and quality of service;
. client relationships;
. strategic expertise, technical knowledge and creative skills;
. ability to attract and retain quality professionals; and
. brand recognition and reputation.
Competition is intense in our industry. Our ability to compete favorably
across these competitive factors may be beyond our control.
Many of our competitors have longer operating histories, greater name
recognition, larger established client bases, longer client relationships and
significantly greater financial, technical, personnel and marketing resources
than we do. These competitors may be in a stronger position to respond quickly
to new or emerging technologies and changes in client requirements. These
competitors may also be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and make more attractive offers to
potential clients, employees and strategic partners. Further, our competitors
may perform e-business services that are equal or superior to our services or
that achieve greater market acceptance than our services. There are relatively
low barriers to entry into the e-business professional services industry. We
have no patented or other proprietary technology that would preclude or inhibit
competitors from entering the e-business professional services market.
Therefore, we must rely on the skill of our personnel and the quality of our
client service. The costs to develop and provide e-business services are low.
Therefore, we expect to continually face additional competition from new
entrants into the market in the future. See "Risk Factor--The e-business
professional services market is highly competitive and has low barriers to
entry. If we cannot effectively compete, our revenues may decline."
Personnel
As of August 15, 2000, we had 196 employees. Of these, 145 were consulting
and service delivery professionals and 51 were management and administrative
personnel performing sales, marketing, human resources, finance, accounting,
legal and administrative functions.
None of our employees are represented by a labor union nor have we ever
experienced a work stoppage. We believe our employee relations are good.
Intellectual Property
We rely on a combination of trade secret, nondisclosure and other
contractual agreements, and copyright and trademark laws to protect our
intellectual property. We enter into confidentiality agreements with our
employees, generally require that our consultants and clients enter into
confidentiality agreements and limit access to and distribution of our
information. There can be no assurance that the steps we have taken in this
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regard will be adequate to deter misappropriation of our proprietary
information or that we will be able to detect unauthorized use and take
appropriate steps to enforce our rights. We do not have any patents or patent
applications pending.
Generally, our client contracts provide a work-for-hire intellectual
property right for each client in the custom work developed specifically for
that client. The intellectual property rights in work done prior to the client
contract or independent of the services provided that client remain with us.
See "Risk Factors--If we are unable to protect our intellectual property or if
others claim we are infringing on their intellectual property, we could incur
significant expenses or be prevented from providing our services."
Facilities
Our headquarters and principal administrative, finance, legal, sales and
marketing operations are located in an approximately 52,000 square-foot
facility in Morristown, New Jersey. 34,667 square feet are currently occupied
by us under a lease, the term of which extends to February 2010. The remaining
space is occupied by unrelated entities until the end of 2000 at which time we
will take over the remaining space on the same lease terms we currently have.
We also lease office space in New York City and Chantilly, Virginia. Our office
in New York City is in an approximately 18,000 square-foot facility under a
lease that expires in July 2005. The lease for our 9,946 square-foot Chantilly,
Virginia facility expires in February 2006.
Legal Proceedings
We are from time to time involved in litigation incidental to the conduct of
our business. We are not a party to any lawsuit or proceeding that, in the
opinion of our management, is likely to have a material adverse effect on us.
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MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth, as of August 15, 2000, the name, age and
position within Logical Design Solutions of each of our directors, executive
officers and key employees.
<TABLE>
<CAPTION>
Name Age Position(s) With Company
---- --- ------------------------
<S> <C> <C>
Mimi Brooks........ 40 President, Chief Executive Officer and Chairwoman
David W.
Stoltzfus......... 43 Vice President, Chief Technology Officer and Director
Joanne Voelcker.... 48 Vice President and Chief Operating Officer
John P. Fee........ 40 Vice President--Strategic Planning
E. Bruce
Lovenberg......... 43 Vice President, Chief Financial Officer and Secretary
Marilynne N.
White............. 43 Vice President, General Counsel and Assistant Secretary
Thomas Shea........ 40 Vice President--Sales
Paul F. Lozier..... 54 Director
Kevin McGilloway... 52 Director
Kevin Mohan........ 37 Director
Frank A. Pinto..... 56 Director
</TABLE>
Mimi Brooks is our founder and has served as President, Chief Executive Officer
and Chairwoman of our board of directors since its inception in 1990. Prior to
founding our company, Ms. Brooks served as a human resources information
systems executive for AT&T.
David W. Stoltzfus has been Vice President and Chief Technology Officer since
joining us in 1997 and a director since 1999. Prior to joining us, Mr.
Stoltzfus was employed with The Vanguard Group since 1988 where his most recent
position was Principal in Charge of Enterprise Architecture and was an officer
of The Vanguard Group since 1994.
Joanne Voelcker has been Vice President and Chief Operating Officer since May
2000. Prior to joining us, Ms. Voelcker was employed with The Vanguard Group
since 1994. During her tenure at The Vanguard Group. Ms. Voelcker served as
Principal in Charge of Corporate-Wide Systems from 1999 until May 2000,
Principal in Charge of Strategic Technology Research from 1998 until 1999,
Principal in Charge of Online Services from 1996 until 1998 and Vice President
of Technology Infrastructure Management from 1994 until 1996.
John P. Fee has been Vice President for Strategic Planning since June 2000.
Prior to that time, Mr. Fee served as Chief Operating Officer since joining us
in 1999. Prior to joining us, Mr. Fee served as Vice President of Thomson
Consulting, a division of The Thomson Corporation, a publishing conglomerate,
since April 1997. Mr. Fee served as Chief Information Officer of Gemini
Consulting, a division of The Cap Gemini Group, from October 1995 to March
1997, where he also served as a member of the Cap Gemini IT Strategy Board. Mr.
Fee served as an account executive at Computer Systems Advisor, a provider of
business modeling solutions, from September 1989 to October 1995.
E. Bruce Lovenberg has been Vice President, Chief Financial Officer and
Secretary since joining us in 1996. Prior to joining us, Mr. Lovenberg was a
Senior Manager at Ernst & Young since 1985, where he served as Practice Leader
for the New Jersey--Entrepreneurial Services Group consulting practice. Mr.
Lovenberg is a Certified Public Accountant.
Marilynne N. White has been Vice President and General Counsel since joining us
in 1999 and was elected Assistant Secretary in June 2000. Prior to joining us,
Ms. White was a vertical markets executive at Thomson Consulting from 1998 to
1999. Ms. White served as Vice President of Marketing and Sales at United Press
International from 1997 to 1998 and as senior advisor at the Office of
Agreements' Compliance within the U.S. Department of Commerce from 1996 to
1997. Ms. White earned a J.D. degree from Georgetown University Law School in
1995.
Thomas J. Shea has been Vice President of Sales since June 1995. Prior to
that, Mr. Shea held various executive and managerial positions at Dun &
Bradstreet Information Services from 1985 to 1995.
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Paul F. Lozier has served as a member of our board of directors since March
1997. Mr. Lozier has been President of Samedan, Inc., a corporate finance
consulting firm, since 1996. Prior to that time, from 1977 to 1996, Mr. Lozier
held various positions at Merrill Lynch, Pierce, Fenner & Smith Incorporated,
including serving as a Managing Director of Merrill Lynch Investment Banking
from 1988 to 1994. Mr. Lozier is also a director of The Bank of the Somerset
Hills.
Kevin McGilloway has served as a member of our board of directors since March
2000. Mr. McGilloway has been Chief Information Officer and Managing Director
at Lehman Brothers Inc. since November 1994. Lehman Brothers Inc. is one of the
lead underwriters for this offering.
Kevin Mohan has served as a member of our board of directors since March 1997.
Mr. Mohan has been a General Partner of Summit Partners, a venture capital
firm, since December 1997. Prior to that, from September 1994 to December 1997,
Mr. Mohan was a Vice President of Summit Partners. Mr. Mohan is also a director
of several privately held companies.
Frank A. Pinto has served as a member of our board of directors since March
2000. Mr. Pinto has been employed by Sun Microsystems Inc. since 1988 where his
most recent position was Vice President Computer Systems World Wide Sales.
Several of our directors were elected to the board pursuant to a
shareholders agreement that terminates as of the closing of this offering. The
shareholders agreement provides that Ms. Brooks is to be a director. Pursuant
to the shareholders agreement, Mr. Stoltzfus and Mr. Lozier were designated as
directors by Ms. Brooks and Mr. Mohan was designated by Summit Ventures IV,
L.P.
We intend to elect one additional independent director to our board within
90 days following this offering. We will be required to have three independent
directors, as defined by the Nasdaq National Market, to maintain the listing of
our common stock on the Nasdaq National Market.
Classes of Directors
We plan to adopt a provision in our certificate of incorporation which will
divide our board of directors into three classes, denominated as Class I, Class
II and Class III. Members of each class hold office for staggered three-year
terms. At each annual meeting of our stockholders commencing in 2001, the
successors to the directors whose term expires at that meeting will be elected
to serve until the third annual meeting after their election or until their
successor has been elected and qualified. Mr. Mohan and Mr. Stoltzfus will
serve as the Class I directors whose terms expire at the 2001 annual meeting of
stockholders. Mr. McGilloway and Mr. Pinto will serve as the Class II directors
whose terms expire at the 2002 annual meeting of stockholders. Ms. Brooks and
Mr. Lozier will serve as Class III directors whose terms expire at the 2003
annual meeting of stockholders. With respect to each class, a director's term
will be subject to the election and qualification of their successors, or their
earlier death, resignation or removal. These provisions, when taken in
conjunction with other provisions of our amended and restated certificate of
incorporation authorizing the board of directors to fill vacant directorships,
may delay a stockholder from removing incumbent directors and simultaneously
gaining control of the board of directors by filling the vacancies with its own
nominees.
Board Committees
The audit committee reviews, acts on and reports to the board of directors
with respect to various auditing and accounting matters. These matters include
the selection of our auditors, the scope of the annual audits, fees to be paid
to the auditors, the performance of our independent auditors and our accounting
practices. The audit committee currently consists of Mr. Lozier and Mr. Pinto.
It is anticipated that following the consummation of this offering, one
additional director who will be appointed to our board will join Mr. Lozier and
Mr. Pinto as a member of the audit committee.
The compensation committee determines the salaries and incentive
compensation of our officers and provides recommendations for the salaries and
incentive compensation of other employees and consultants. The compensation
committee also administers our various incentive compensation, stock and
benefit plans. The compensation committee currently consists of Mr. Pinto. It
is anticipated that following the consummation of this offering, one additional
director who will be appointed to our board will join Mr. Pinto as a member of
the compensation committee.
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Director Compensation
We do not currently compensate our directors who are also our employees.
Each non-employee director currently receives $1,000 of cash compensation per
meeting attended and is reimbursed for reasonable travel expenses for each
board meeting attended. Our directors will also be eligible for equity awards
under our 1999 Stock Plan and our 2000 Stock Plan for Non-Employee Directors,
see "--Stock Plans" below for a description of these plans.
Executive Compensation
The following table summarizes the compensation paid to or earned by our
Chief Executive Officer and all other executive officers whose salary and bonus
for services rendered in all capacities to us for the fiscal year ended
December 31, 1999 exceeded $100,000. We will use the term "named executive
officers" to refer to these people later in this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------ ------------
Securities
Name and Principal Underlying All Other
Position(s) Year Salary Bonus Other(1) Options/SARS Compensation(2)
------------------ ---- -------- ------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Mimi Brooks
President, Chief
Executive
Officer and
Chairwoman............. 1999 $174,583 $75,000 $1,890 -- $4,800
David W. Stoltzfus
Chief Technology
Officer................ 1999 166,875 100,000 1,360 15,000 4,800
E. Bruce Lovenberg
Vice President,
Chief Financial Officer
and Secretary.......... 1999 124,750 30,000 -- 15,000 4,643
Thomas Shea
Vice President--Sales.. 1999 134,167 20,000 -- 15,000 4,625
</TABLE>
--------
(1) Represents the value of leased automobiles provided by us.
(2) Contributions by us to our 401(k) plan made during 1999 for the named
officers.
Option Grants in Last Fiscal Year
The following table summarizes the options granted to each of the named
executive officers during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
Potential Potential
Individual Grants Realizable Realizable
--------------------------------------------- Value at Value at
Percent of Assumed Assumed
Number of Total Options Initial Annual Rates of
Securities Granted to Offering Stock Price
Underlying Employees in Price of $13.00 Appreciation for
Options Fiscal Exercise Expiration Per Share Option Term(1)
---------- ------------- -------- ---------- --------------- -----------------
Name Granted(2) Year Price Date 0% 5% 10%
---- ---------- ------------- -------- ---------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Mimi Brooks............. -- -- -- -- -- -- --
David W. Stoltzfus...... 15,000 2.8% $2.20 1/1/09 $162,000 $251,315 $381,988
E. Bruce Lovenberg...... 10,000 1.9 2.20 1/1/09 108,000 167,543 254,658
5,000 0.9 2.20 12/31/09 54,000 87,960 140,062
Thomas Shea............. 10,000 1.9 2.20 1/1/09 108,000 167,543 254,658
5,000 0.9 2.20 12/31/09 54,000 87,960 140,062
</TABLE>
--------
(1) The dollar amounts under these columns represent the potential realizable
value of each grant assuming that the market value of our stock, based upon
an assumed initial public offering price per share of $13.00
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(the midpoint of the offering price range), appreciates from the date of
grant to the expiration of the option at annualized rates of 5% and 10%.
These assumed rates of appreciation have been specified by the SEC for
illustrative purposes only and are not intended to forecast future
financial performance or possible future appreciation of our stock. The
actual amount the executive officer may realize will depend on the extent
to which the stock price exceeds the exercise price of the options on the
date the option is exercised.
(2) Represent incentive stock options granted under our 1999 Stock Plan. The
options vest over a four-year period with 25% vesting on each anniversary
of the date of grant.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table presents information with respect to stock options
owned by the named executive officers at December 31, 1999. No stock options
were exercised by the named executive officers during the fiscal year ended
December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value Of Unexercised
Options at In-The-Money Options at
December 31, 1999 December 31, 1999(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mimi Brooks(2).............. -- -- -- --
David W. Stoltzfus.......... 100,000 115,000 $1,096,000 $1,258,000
E. Bruce Lovenberg.......... 50,000 65,000 548,000 710,000
Thomas Shea................. 75,000 90,000 822,000 984,000
</TABLE>
--------
(1) There was no public trading market for the common stock as of December 31,
1999. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $13.00 per share, less the
applicable exercise price per share, multiplied by the number of shares
underlying these options.
(2) The table does not include options granted to Ms. Brooks subsequent to
December 31, 1999. For a description of these options, see "Stock Options
Granted in March 2000" below.
Stock Plans
1997 Stock Plan. The 1997 Stock Plan was designed to attract, incent and
retain the best available personnel and to promote the success of our
business, through grants of incentive stock options, nonqualified stock
options and stock purchase rights. We adopted the 1997 Stock Plan effective as
of September 10, 1997 following approval by the stockholders on September 10,
1997. As of June 30, 2000, there were options to purchase 983,100 shares of
common stock outstanding under this plan, at a weighted average exercise price
of $2.13 per share. As of this date, there are no further shares available for
issuance under the 1997 Stock Plan.
1999 Stock Plan. The 1999 Stock Plan is designed to attract, incent and
retain the best available personnel and to promote the success of our
business, through grants of incentive stock options, nonqualified stock
options and stock purchase rights. The administrator administers the 1999
Stock Plan and determines to whom options and purchase rights are to be
granted and the terms and conditions, including the number of shares and the
period of exercisability, thereof. We adopted the 1999 Stock Plan effective as
of November 9, 1999 following approval by the stockholders on October 28,
1999. The 1999 Stock Plan was amended and restated by our board of directors
on March 1, 2000, and our stockholders approved it as so amended on ,
2000.
Subject to adjustment as provided in the 1999 Stock Plan, the number of
shares of common stock that may be issued under the 1999 Stock Plan may not in
the aggregate exceed 2,750,000 shares, which may be shares of original
issuance or shares of restricted stock repurchased by us at their original
purchase price or a combination thereof. Our service providers, including
officers, directors and consultants, may be selected by the administrator to
receive benefits under the 1999 Stock Plan.
The administrator, which may be our full board of directors or the
compensation committee of the board, may grant incentive stock options to
employees that entitle the optionee to purchase shares of common stock. If
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the optionee owns stock representing more than 10% of the voting power of all
classes of stock, the exercise price will be not less than 110% of the fair
market value on the date of grant. Any other employee will have an exercise
price of not less than the fair market value on the date of grant. To the
extent that the fair market value of the incentive stock options exercisable
for the first time by the optionee during a calendar year exceeds $100,000,
these options will be treated as nonqualified stock options. The term of each
option will be stated in the applicable option agreement. In the case of an
incentive stock option, the term will be no longer than ten years from the date
of grant (five years in the case of an incentive stock option granted to an
optionee who, at the time of the grant, owned stock representing more than 10%
of the voting power of our capital stock).
The administrator may grant nonqualified stock options and stock purchase
rights to employees, directors or consultants that entitle the optionee to
purchase shares of common stock. The exercise price of a nonqualified option
will be determined by the administrator, except that a nonqualified option that
is intended to qualify as "performance-based compensation" for federal tax
purposes will have an exercise price of no less than 100% of the fair market
value on the date of grant.
Subject to adjustment as provided in the 1999 Stock Plan, no employee,
director or consultant will be granted, in any two fiscal years after the
offering, options to purchase more than 500,000 shares. In connection with his
or her initial service, an employee, director or consultant may be granted
options to purchase up to an additional 500,000 shares, which will not count
against the two fiscal year limit. A cancelled option will be counted against
the two fiscal year and the initial service limits.
The administrator may provide that the option price generally is payable at
the time of exercise in cash, by check, by promissory note, by surrender of
shares and by other forms of cashless exercise, including under a formal
cashless exercise program and by a reduction in any amount owed by us to the
optionee.
Stock purchase rights may be issued by the administrator alone or in
addition to other grants under this plan or cash awards outside this plan. The
administrator will determine the terms, conditions and restrictions to the
offer, including the number of shares that the offeree is entitled to purchase,
the price to be paid, the period to accept the offer and the form of the
restricted stock purchase agreement. Execution of the restricted stock purchase
agreement will be an acceptance of the offer. Unless the administrator
determines otherwise, the agreement will give us an option to repurchase the
shares at the price paid by the purchaser upon the voluntary or involuntary
termination of the purchaser's services to us. Upon exercise of the stock
purchase option, the purchaser will have rights equivalent to those of a
shareholder.
Options or purchase rights are not transferable by a participant except if
the administrator makes the right transferable or if transferred by will or the
laws of descent and distribution. If the administrator makes an option or a
purchase right transferable, the option or purchase right will contain
additional terms and conditions that the administrator deems appropriate. An
option or a purchase right may be exercised within 12 months following the
death of the optionee, by the optionee's estate or by the person who acquires
the right by bequest or inheritance, if the optionee would have been entitled
to exercise the right on the date of death.
In the event of a merger by us into another corporation or the sale of
substantially all the assets, each option or purchase right will be assumed or
substituted by the successor corporation or by a parent or subsidiary of the
successor corporation. All options or purchase rights will fully vest if the
successor refuses to assume or substitute those outstanding options or purchase
rights.
To the extent the administrator determines it to be desirable to qualify the
options as "performance-based compensation", the plan shall be administered by
a compensation committee of not less than two nonemployee directors who are
"non-employee directors" within the meaning of Rule 16b-3 and "outside
directors" within the meaning of Section 162(m) of the Code. In connection with
its administration of the stock plans, the compensation committee is authorized
to interpret the stock plans and related agreements and other documents. The
1999 Stock Plan may be amended from time to time by the board of directors,
with shareholder approval to the extent necessary and desirable to comply with
applicable law.
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<PAGE>
As of June 30, 2000 there were options to purchase 1,275,800 shares of
common stock outstanding under this plan, at a weighted average exercise price
of $3.83 per share. The total number of stock options or other awards that will
be granted under the 1999 Stock Plan in the future is not determinable at this
time. The 1999 Stock Plan is not the exclusive means by which we may grant
equity-based incentive awards and in no way limits our ability to grant equity-
based awards outside the 1999 Stock Plan.
Tax Consequences of 1997 Stock Plan and 1999 Stock Plan. In general, a
participant will recognize ordinary income upon the exercise of a nonqualified
stock option in an amount equal to the difference between the option price paid
for the shares of common stock and the fair market value of such shares. The
participant's basis for capital gains purposes in the shares acquired is equal
to the sum of the exercise price paid and the amount taxable as ordinary
income. Upon the sale or other disposition of the shares, any appreciation (or
depreciation) in the value of the shares after the date of exercise generally
will be treated as capital gain (or loss) to the participant, and will be long-
term capital gain (or loss) if such shares were held for more than one year
after the date of exercise.
A participant will not recognize income upon the exercise of an incentive
stock option. However, the excess of the fair market value on the date of
exercise of the shares acquired over the option exercise price will generally
be included in alternative minimum taxable income. Whether a participant is
subject to the alternative minimum taxable income will depend on such
participant's other taxable income.
If a participant does not dispose of shares acquired pursuant to an
incentive stock option before the later of two years from the date of grant of
such option and one year after the date of exercise of the option, any gain or
loss realized on a subsequent disposition of such shares will be treated as a
long-term capital gain or loss. If, however, a participant disposes of shares
acquired pursuant to an incentive stock option before the expiration of the
one-year and two-year periods described above (a "disqualifying disposition"),
an amount equal to the excess of the fair market value of the shares at the
time of the option's exercise (or the proceeds of the disposition, if less)
over the option price will, in the year of disposition, be taxable to the
participant as ordinary income and deductible by us. If the shares are disposed
of at a loss, the loss will be a capital loss.
A participant's basis for capital gains purposes in shares acquired pursuant
to the exercise of an incentive stock option will be the amount paid by the
participant upon exercise of the option. However, if the participant does not
hold the shares for the one-year and two-year holding periods discussed above,
the participant's basis in the shares is increased by an amount equal to the
amount taxable as ordinary income.
If a participant uses previously acquired shares to pay all or a portion of
the option price on the exercise of a stock option (whether or not an incentive
stock option), no gain or loss is recognized with respect to the previously
acquired shares. The shares received upon exercise of the option, to the extent
of the number of previously acquired shares exchanged therefor, will have the
same basis and holding period for capital gain purposes as the previously
acquired shares.
If the option is a nonqualified stock option, the additional shares received
have a basis equal to the sum of the cash paid on exercise and the ordinary
income taxable to the participant as a result of the exercise. If the option is
an incentive stock option, the additional shares have a basis equal to the cash
paid on exercise (plus, if the one-year and two-year periods discussed above
have not been met with respect to shares acquired upon the previous exercise of
an incentive stock option, the amount includable in income). In each case, the
holding period for capital gain purposes begins on the date of the exercise of
the option.
The use of shares previously acquired by exercising an incentive stock
option in satisfaction of all or part of the exercise price for another option
(whether or not an incentive stock option) is a disposition of the previously
acquired shares for purposes of determining whether such shares have been held
for the one-year and two-year periods discussed above. All shares acquired upon
the exercise of an incentive stock option, including the previously acquired
shares, are considered to have been acquired upon the date of exercise for
purposes of these holding periods.
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<PAGE>
A participant who purchases shares of common stock using a stock purchase
right will recognize ordinary income equal to the excess of the fair market
value of the shares (determined without regard to any restrictions on the
shares other than a restriction which by its terms will never lapse) over the
amount (if any) paid for such shares. The participant normally will recognize
this income in the first taxable year in which the shares are either no longer
subject to a risk of forfeiture or transferable. However, a participant may
elect to recognize such income when he or she purchases the shares. Any
appreciation or depreciation in such shares from the time the restrictions
lapse (or, if earlier, the date on which the participant elects to recognize
income in respect of such shares) will generally be treated as capital gain (or
loss) to the participant, and will be long-term capital gain (or loss) if such
shares were held for more than one year after the date of exercise.
We will be entitled to an income tax deduction that generally corresponds in
time and amount to the amount of any ordinary income recognized by a
participant, provided that, among other things, the income meets the test of
reasonableness, is an ordinary and necessary business expense, is not an
"excess parachute payment" within the meaning of Section 280G of the Code and
is not disallowed by the $1 million limitation on specified executive
compensation.
2000 Stock Plan for Non-Employee Directors. The 2000 Stock Plan for Non-
Employee Directors is designed to attract, incent and retain the best available
members of the board of directors and to promote the success of our business,
through grants of nonqualified stock options. The administrator administers the
plan and determines to whom options are to be granted and the terms and
conditions, including the number of shares and the period of exercisability,
thereof. We adopted the 2000 Stock Plan for Non-Employee Directors effective as
of March 1, 2000, and the stockholders approved the plan on , 2000.
Subject to adjustment as provided in the 2000 Stock Plan for Non-Employee
Directors, the number of shares of common stock that may be issued under the
plan may not in the aggregate exceed 500,000 shares, which may be shares of
original issuance or shares of restricted stock repurchased by us at their
original purchase price or a combination thereof. Our non-employee directors
may be selected by the administrator to receive benefits under the 2000 Stock
Plan for Non-Employee Directors.
The administrator, which will be our full board of directors, may grant
nonqualified stock options to our non-employee directors that entitle the
optionee to purchase shares of common stock. The term of each option will be
stated in the applicable option agreement. The administrator will determine the
exercise price of a nonqualified option, which may be equal to, less than or
greater than the fair market value per share on the date of grant. Each option
shall become cumulatively exercisable upon the completion of their periods of
service or the occurrence of events as the administrator will determine.
The administrator may provide that the option price generally is payable at
the time of exercise in cash, by check, promissory note, by surrender of shares
and other forms of cashless exercise, including under a formal cashless
exercise program and by a reduction in any amount owed by us to the optionee.
Options are not transferable by a participant except if the administrator
makes the right transferable or if transferred by will or the laws of descent
and distribution. If the administrator makes an option or a purchase right
transferable, the option or purchase right will contain additional terms and
conditions that the administrator deems appropriate. An option may be exercised
within 12 months following the death of the optionee, by the optionee's estate
or by the person who acquires the right by bequest or inheritance, if the
optionee would have been entitled to exercise the right on the date of death.
In the event of a merger by us into another corporation or the sale of
substantially all the assets, each option or purchase right will be assumed or
substituted by the successor corporation or by a parent or subsidiary of the
successor corporation. All options or purchase rights will fully vest if the
successor refuses to assume or substitute those outstanding options or purchase
rights.
The 2000 Stock Plan for Non-Employee Directors may be amended from time to
time by the board of directors, with shareholder approval to the extent
necessary and desirable to comply with applicable law.
47
<PAGE>
As of June 30, 2000, there were option rights to purchase 28,000 shares of
common stock, at an exercise price of $5.00 per share, and 56,000 shares of
common stock, at an exercise price equal to the initial public offering price,
outstanding under this plan. The total number of stock options or other awards
that will be granted under the 2000 Stock Plan for Non-Employee Directors in
the future is not determinable at this time. The 2000 Stock Plan for Non-
Employee Directors is not the exclusive means by which we may grant equity-
based incentive awards and in no way limits our ability to grant equity-based
awards outside the 2000 Stock Plan for Non-Employee Directors.
Tax Consequences of the 2000 Stock Plan for Non-Employee Directors. In
general, a participant will recognize ordinary income upon the exercise of a
nonqualified stock option in an amount equal to the difference between the
option price paid for the shares of common stock and the fair market value of
such shares. The participant's basis for capital gains purposes in the shares
acquired is equal to the sum of the exercise price paid and the amount taxable
as ordinary income. Upon the sale or other disposition of the shares, any
appreciation (or depreciation) in the value of the shares after the date of
exercise generally will be treated as capital gain (or loss) to the
participant, and will be long-term capital gain (or loss) if such shares were
held for more than one year after the date of exercise.
We will be entitled to an income tax deduction that generally corresponds in
time and amount to the amount of any ordinary income recognized by a
participant, provided that, among other things, the income meets the test of
reasonableness, is an ordinary and necessary business expense and is not an
"excess parachute payment" within the meaning of Section 280G of the Code.
Stock Options Granted in March 2000
In March 2000, as contemplated by the 1997 purchase agreement relating to
the sale of debentures and warrants, we granted options to purchase 1,000,000
shares of our common stock to Ms. Mimi Brooks, our President and Chief
Executive Officer. These options have an exercise price of $3.35 per share with
respect to 500,000 shares and an exercise price of $4.82 per share with respect
to the other 500,000. All of these options have a 10-year term and were vested
immediately upon grant. The options are non-qualified stock options under the
Internal Revenue Code and will result in compensation income to Ms. Brooks at
the time of exercise equal to the difference between the exercise price and the
fair market value at that date. We will be entitled to a compensation deduction
for tax purposes that generally will correspond in time and amount to the
income recognized by Ms. Brooks. As described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," these options will
also result in compensation expense for financial accounting purposes in the
first quarter of fiscal 2000.
401(k) Profit Sharing Plan
Our 401(k) Profit Sharing plan covers all of our employees. The 401(k) plan
is intended to qualify under Section 401(k) of the Code. Consequently,
contributions to the 401(k) plan by employees or by us, and the investment
earnings thereon, are not taxable to employees until withdrawn from the 401(k)
plan. Further, contributions by us, if any, will be deductible by us when made.
Employees may elect to contribute up to 15% of their current compensation to
the 401(k) plan, up to the statutorily prescribed annual limit, which was
$10,500 in 1999. The 401(k) plan permits, but does not require, additional
matching contributions to the 401(k) plan by us on behalf of all participants
in the 401(k) plan. In 1999, we contributed $230,400 to the 401(k) plan.
Employee Stock Purchase Plan
The Board of Directors adopted an Employee Stock Purchase Plan (the "ESPP"),
effective immediately prior to the pricing of this offering. The ESPP was
approved by our stockholders on , 2000. A total of 1,000,000 shares of
our common stock are reserved for issuance under the ESPP. Unless sooner
terminated at the discretion of the Board of Directors, the ESPP will terminate
on March 31, 2010.
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The ESPP is administered by the Compensation Committee. The Compensation
Committee has the authority to interpret the ESPP, to prescribe, amend and
rescind rules and regulations relating to it, and to make all other
determinations necessary or advisable in administering the ESPP.
The purpose of the ESPP is to provide eligible employees of the Company and
designated subsidiaries with an opportunity to purchase common stock through
payroll deductions. The ESPP is neither subject to the provisions of ERISA nor
qualified under Section 401 of the Internal Revenue Code.
All employees of the Company and designated subsidiaries are eligible to
participate in the ESPP, other than employees whose customary employment is 20
hours or less per week or whose customary employment is for not more than five
months in any calendar year.
A participant in the ESPP may authorize contributions to the plan through
salary deductions from base compensation. The amounts so deducted and
contributed are applied to the purchase of full shares of common stock during
specified offering periods. The purchase price charged to participants for such
shares is 85% of the lesser of the fair market value of the shares on the date
of purchase or on the first day of the applicable offering period. The fair
market value of shares purchased by any employee during any calendar year
generally may not exceed $25,000. The initial offering period under the ESPP
will begin on the effective date of the plan and end two years later.
Subsequent offering periods will begin on each January 1 and July 1 (beginning
with July 1, 2000) and also end two years later. Shares will be purchased for
participating employees on specified days in each offering period. Shares
purchased under the ESPP will be held in separate accounts for each
participant. Although the offering periods will overlap, an employee may
participate in only one offering period at a time.
Participants may decrease their payroll deductions at any time but not more
than once during any calendar quarter. Participants may increase or decrease
their payroll deductions for any subsequent offering period by notifying the
ESPP administrator no later than 15 days prior to such offering period.
Participants may also withdraw from participation in the ESPP at any time on or
prior to the 15th day of the last month of the offering period. If a
participant withdraws from the ESPP, any contributions which have not been used
to purchase shares will be refunded. A participant who has withdrawn may not
participate in the ESPP again until the next offering period.
In the event of retirement or other termination of employment, any
contributions which have not yet been used to purchase shares will be refunded
and a certificate issued for the full shares in the participant's account.
Alternatively, a participant may elect to have his or her shares sold and the
proceeds, less selling expenses, remitted to him or her. In the event of a
participant's death, any contributions which have not yet been used to purchase
shares and all shares in such participant's account will be delivered to the
participant's beneficiary designated in writing and filed with us, or, if no
beneficiary has been designated or survives the participant, to the
participant's estate.
The ESPP is intended to qualify under Sections 421 and 423 of the Code. In
general, under Section 423, a participant who purchases common stock through
the ESPP will not recognize any income, and we will not be entitled to a
deduction for tax purposes, at the time of the purchase for the difference
between the then fair market value of the common stock and the purchase price
(i.e., the discount below fair market value). If the participant holds the
common stock until at least two years after the beginning of the offering
period and one year after the date of purchase, the participant generally
recognizes ordinary taxable income at the time of sale or other taxable
disposition of the common stock equal to the lesser of: (i) the amount by which
the fair market value of the common stock when granted exceeds the purchase
price (i.e., the discount below fair market value); or (ii) the amount, if any,
by which the common stock's fair market value at the time of the sale or other
taxable disposition exceeds the purchase price. The participant's tax basis in
the common stock will be increased by the amount recognized as ordinary income
and any further gain recognized on the sale or other taxable disposition will
be treated, under current tax rules, as long-term capital gain. In general, we
will not be allowed a tax deduction for any income recognized by the employee
pursuant to either purchase of the shares
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or the sale of such shares with respect to any such disposition. However, if
the participant disposes of shares of common stock acquired under the ESPP for
at least one year after the date of purchase (a "disqualifying disposition"),
the participant will recognize compensation income, and we generally will be
entitled to a tax deduction equal to the excess of the fair market value of the
shares on the date of purchase over the purchase price (i.e., the discount
below fair market value) regardless of the amount received by the participant
in connection with the disqualifying disposition. The participant's tax basis
in the shares disposed of will be increased by the amount recognized as
ordinary income and any further gain or loss realized upon the disqualifying
disposition will be short-term or long-term capital gain or loss, depending
upon the length of time between the purchase and the disqualifying disposition
of the shares.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee during 1999 were Ms. Brooks and
Messrs. Lozier and Mohan. The compensation committee is currently comprised
solely of Mr. Pinto. It is anticipated that an additional independent director
will be appointed to our board of directors within 90 days of the completion of
this offering who will join Mr. Pinto on the Compensation Committee. No
executive officer of our company serves on the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee. For
more information about transactions and relationships between us and Ms. Brooks
and Messrs. Lozier and Mohan you should see the "--Directors, Executive
Officers and Key Employees" and "Related Party Transactions" sections of this
prospectus.
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RELATED PARTY TRANSACTIONS
Investment by Summit, Paul F. Lozier and Samedan, Inc.
Subordinated Debenture and Warrant Purchase Agreement
In March 1997, Summit Ventures IV, Summit Investors III, Samedan, Inc., and
Mr. Paul F. Lozier (the investors), and Ms. Mimi Brooks and Mr. Darren Bryden
(the principal shareholders) entered into a 9% senior subordinated debenture
and warrant purchase agreement and related agreements with us. Ms. Brooks is
our President and Chief Executive Officer and Chairwoman of our board of
directors and held these positions in March 1997. In March 1997, Mr. Bryden
served as our Executive Vice President. Mr. Mohan, who is a General Partner of
Summit Partners, and Mr. Lozier are currently directors of our company.
Under the purchase agreement, we agreed to issue and the investors agreed to
buy a total of approximately $5.5 million principal amount of 9% senior
subordinated debentures due March 2002 and warrants to purchase 2,150,000
shares of our common stock (giving effect to the anti-dilution provisions of
the warrant agreement discussed below), for a total consideration of
approximately $5.1 million in cash. The proceeds from the sale of the senior
subordinated debentures and the warrants were used to provide working capital
and to fund business expansion. The purchase agreement contains various
financial and negative covenants that restrict our ability to take specified
actions. The covenants will no longer apply to us upon consummation of this
offering.
Sale of Senior Subordinated Debentures
Pursuant to the purchase agreement, on March 19, 1997, we issued
approximately $5.5 million aggregate principal amount at maturity of 9% senior
subordinated debentures due March 2002. The senior subordinated debentures are
junior in right of payment to all senior debt. The senior subordinated
debentures bear interest from the date of issuance until the date of payment of
principal in full at the rate of 9.0%. Interest is computed on the basis of a
360-day year and the actual number of days elapsed on the unpaid principal
amount of senior subordinated debentures. Interest accrues and is compounded
annually on the senior subordinated debentures and will be paid upon payment of
principal. The net proceeds from the offering of the senior subordinated
debentures and warrants accompanying the senior subordinated debentures were
approximately $5.1 million after deducting the discount payable to the
purchasers and the offering expenses.
The principal amount of the senior debentures is payable in full on March
19, 2002, but we may prepay the senior subordinated debentures at any time in
whole or in installments of $100,000, without premium or penalty. The senior
subordinated debentures will be repaid in full with a portion of the proceeds
of this offering.
Warrant Agreement
Pursuant to the purchase agreement described above, we also entered into a
warrant agreement in connection with the issuance to the investors of the
warrants to purchase 2,150,000 shares of common stock. The warrant agreement
sets forth the provisions of the warrants and the terms and conditions on which
the warrants may be issued, exchanged, exercised and replaced. Under the
warrant agreement, each warrant certificate entitles the holder to purchase the
number of shares of common stock specified on the warrant certificate at a
purchase price of $0.01 per share at any time on or after March 20, 1997 and on
or before the expiration date, which is April 19, 2004.
The shares of common stock issuable upon exercise of the warrants are
subject to anti-dilution adjustments upon extraordinary distribution of our
assets, declaration or payment of a share dividend, combination of its
outstanding common stock into a smaller number of shares of common stock, or
issuance of any shares of its capital stock in a reclassification of its common
stock (including any reclassification in connection with a consolidation or
merger in which our company survives). In addition, in the event of a
consolidation or merger in which our company does not survive, a liquidating
dividend with respect to the common stock or a tender
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offer or exchange offer with respect to the common stock (other than a tender
offer opposed by our board of directors), the warrant holder will have the
right to receive the consideration with respect to the shares for which the
warrant is exercisable, reduced by the exercise price.
The holders of the warrants have agreed to exercise all of the warrants upon
the completion of this offering. Any warrants not exercised will terminate the
first business day following the completion of this offering.
Shareholders Agreement
On March 19, 1997, as a condition to the purchase agreement entered into on
the same date, we entered into a shareholder agreement with the principal
shareholders and investors. The agreement entitles the shareholders to a right
of first refusal and a right of participation on transfers by a principal
shareholder and preemptive rights to acquire a pro rata share of new securities
issued by us. The preemptive rights do not apply to this offering. The parties
also agreed to vote all shares owned by them for the election of directors
pursuant to the terms of the shareholders agreement.
In May 2000, Mr. Lozier assigned a warrant exercisable to purchase 28,000
shares of our common stock to the Paul F. Lozier Charitable Remainder Unitrust
of 2000. The trust has agreed to be bound by the terms of the shareholders
agreement.
Pursuant to its terms, the shareholders agreement will terminate immediately
prior to the consummation of this offering.
Samedan Engagement Letter
On March 8, 1997, we entered into an engagement letter with Samedan, Inc.
pursuant to which Samedan agreed to act as our financial advisor to assist us
in raising capital for a one-year term. Samedan, Inc., which is wholly-owned by
Mr. Lozier, was paid a fee of $200,000 in connection with the issuance of the
debentures and warrants, $80,000 of which was paid in cash. In consideration of
the remaining $120,000 of the fee and a cash payment of $123,402, Samedan
received $243,402 principal amount of senior subordinated debentures and
Mr. Lozier received warrants to acquire 100,000 shares.
Registration Rights Agreement
In connection with the purchase agreement, on March 19, 1997, we entered
into a registration rights agreement with Summit Ventures IV, L.P., Summit
Investors III, L.P., and Paul F. Lozier to provide these investors with demand
and "piggyback" registration rights with respect to shares of common stock
issuable upon exercise of the warrants acquired under the purchase agreement or
otherwise.
Registration demand rights granted under the agreement require us, at any
time, to register our common stock held by investors in connection with a firm
commitment underwriting upon written request by investors that hold in the
aggregate at least 25% of our outstanding common stock held by or issuable to
all investors party to the agreement, or any lesser percentage if the
anticipated aggregate price to the public of the offering would exceed $10
million. Investors meeting these requirements may collectively initiate up to
two demand right registrations. After any demand registration request, we are
obligated to promptly give written notice of the proposed registration to other
investors and use all commercially reasonable efforts to effect the
registration of the common stock issuable upon exercise of the warrants.
Additional investors may join in the demand registration upon a written request
given within 30 days after receipt of the notice from us. The number of
securities registered may be limited by the managing underwriter for marketing
purposes and, under those circumstances, the number of securities registered
will be divided pro rata among all investors that request registration. We are
only permitted to include shares held by us or the joining investors in the
demand
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<PAGE>
registration if we have the consent of the investors initially requesting
registration or if inclusion of the additional shares of common stock will not
reduce the number or the offering price of shares to be registered by those
investors.
The investors party to the agreement also have "piggyback" registration
rights. If we determine to register any securities on our own account, for
security holders or for holders exercising registration rights other than the
rights described above, we are obligated to give notice to investors including
the number of shares to be registered and the name of the proposed underwriter.
Investors will have 20 days from the date of delivery of the written notice to
request registration of the common stock issuable upon the exercise of their
warrants. We are obligated to use our best efforts to register all securities
specified in timely written requests submitted by investors in response to our
notice. Any limitation by the underwriter on the number of securities to be
registered will first exclude securities not held by investors party to the
agreement and their assignees and then exclude securities pro rata based upon
the total number of securities held by the holders requesting registration. We
are obligated to pay all expenses associated with the registration, except for
underwriting discounts and selling commissions, and to keep the holders advised
as to initiation and completion of each registration. Expenses payable by the
holders will be borne by the holders pro rata on the basis of the number of
shares registered by each. The investors have agreed to waive their piggyback
registration rights in connection with this offering.
We are not obligated to effect a registration of securities under the
agreement if:
. we receive a written opinion that registration is not required under the
securities laws;
. we have obtained a no-action letter from the Securities and Exchange
Commission stating that registration is not required; or
. we determine in good faith that use of a prospectus would require
disclosure of material information for which we have a bona fide
business purpose for preserving as confidential and the securities laws
do not otherwise require disclosure of the information.
The investors party to the agreement are obligated to refrain from selling
registrable securities during any period when, and to the same extent that, our
officers are restricted in connection with an offering of securities by us.
Issuance of Junior Subordinated Debentures
In connection with the sale of the senior subordinated debentures and
warrants, we and Logical Design Solutions International, Inc., which was an
affiliated company, agreed to convert from a subchapter "S" corporation to a
subchapter "C" corporation. Prior to the closing of the sale in connection with
the conversion, we issued $1,114,289 aggregate principal amount of 9% junior
subordinated debentures due March 2003 to the principal shareholders, an amount
representing their retained earnings in the companies. Ms. Brooks received and
currently holds $1,073,900 principal amount of the debentures. The terms of the
junior subordinated debentures are identical to those of the senior
subordinated debentures in all material respects, except that the junior
subordinated debentures are payable one year after the senior subordinated
debentures and are junior in right of payment to all senior debt, including the
senior subordinated debentures. Upon specified events of default, including
failure to pay interest or principal when due and failure to perform or observe
any of the covenants, under the purchase agreement, and in some cases only with
the consent of the holder or holders of greater than 50% of the principal
amount of the senior subordinated debentures, the unpaid principal amount and
accrued and unpaid interest in the senior and junior subordinated debentures
will automatically become due and payable.
In addition, prior to the closing of the sale, we and Logical Design
Solutions International, Inc. distributed to the principal shareholders cash
equal to the amount of estimated federal and state income taxes payable by
these shareholders for periods prior to the closing date of the sale. In the
purchase agreement, the parties agreed
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that appropriate adjustments would be made in the case of an overdistribution.
During 1998, final subchapter "S" tax calculations and income tax returns were
prepared and returns filed for us and Logical Design Solutions International,
Inc., which resulted in the finalization of taxes payable and earnings
available for distribution to the principal shareholders. This resulted in a
reclassification of a part of the distributions to the principal shareholders
as loans by us to them in amounts equal to the overdistribution, which
included accrued interest from the closing date of the sale, as agreed to by
us, the principal shareholders and the investors. As a result of the
reclassification, Ms. Brooks executed a promissory note to us in the amount of
$401,932. The note accrues interest at a 9.0% rate compounded annually. The
principal amount of the loan plus accrued interest is due and payable on March
19, 2003. $457,820 of principal and accrued interest was outstanding as of
June 30, 2000 on the note from Ms. Brooks.
The junior subordinated debentures will be repaid in full with a portion of
the proceeds of this offering.
Jump! Transaction
In November 1999, we completed a merger with Jump! Information
Technologies, Inc., by exchanging 109,500 shares of our common stock and
$525,000 in cash for all of the common stock of Jump!. In addition, Jump!'s
options were converted into options to purchase 25,339 shares of our common
stock. We incurred acquisition costs of $149,000 and issued 12,671 vested
stock options valued at $168,000 associated with the Jump! acquisition, which
are included in goodwill. We accounted for this transaction as a purchase.
Mr. Allan Von Dette and Mr. William Engel, the Jump! shareholders, entered
into a shareholders agreement at the time of the acquisition governing their
rights and obligations with respect to the shares of common stock held by them
and in the escrow account described below. The agreement prohibits either
shareholder from selling or transferring any common stock without first giving
us and the non-selling shareholders a right of first refusal.
Under the shareholders agreement, we have agreed to repurchase any shares
of a Jump! shareholder whose employment with the firm is terminated. If the
termination is a voluntary resignation or an involuntary termination by us
with just cause, the repurchase price will be zero based on a termination date
prior to January 1, 2000, 25% of the fair market value of our common stock as
of the date of the shareholders agreement based on a date of termination from
and including January 1, 2000 and prior to March 31, 2000, 50% from and
including March 31, 2000 and prior to June 30, 2000, 75% from and including
June 30, 2000 and prior to September 30, 2000 and 100% of the fair market
value of our common stock as of the date of the shareholders agreement from
September 30, 2000. If the employment is terminated for any other reason, we
will repurchase the shares for 100% of the fair market value of our common
stock as of the date of the shareholders agreement. This agreement will
terminate upon the consummation of this offering.
Of the 109,500 shares issued in the acquisition of Jump!, 68,182 were
deposited into an escrow account as security for any general or tax
indemnification obligations by the sellers resulting from the acquisition. The
general indemnification covers any loss, liability, claim or damage from
failure of a representation or warranty or breach of any covenant in the Jump!
stock purchase agreement. The tax indemnification will indemnify against
liability for the taxes of Jump! for any pre-closing period, including real,
personal and intangible property taxes, and any liability of the sellers or
persons affiliated with Jump!. The sellers maintain the rights to dividends
and voting rights on the shares that are held in the escrow account.
The escrowed property will not to be distributed until the release of all
the escrow property on November 10, 2000. In the event of a merger, however,
if we are not the survivor of the merger, then one half of the escrow property
will be distributed to the Jump! shareholders, provided the Jump! shareholders
are still employed by us.
In the event of an initial public offering by us prior to termination of
the escrow account, the Jump! shareholders are permitted to substitute $75,000
for the escrow shares. Also, if the Jump! shareholders'
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<PAGE>
employment is terminated, we are obligated to repurchase the shares in
accordance with the Jump! shareholder agreement, and the Jump! shareholders
must deposit up to $75,000 of the proceeds from our repurchase into the escrow
account.
Messrs. Engel and Von Dette are no longer employed by us. We plan to
repurchase the 109,500 shares of our common stock which they own pursuant to
the terms of the shareholders agreement. The parties are currently in dispute
with respect to the calculation of the purchase price. Options exercisable to
purchase an aggregate of 18,250 shares issued to Messrs. Engel and Von Dette
terminated pursuant to the terms of their employment agreements.
Other Transactions
During 1998, Mr. Bryden, who was a director of our company, served as our
Executive Vice President until January 1999 and is beneficial owner of
approximately 6.3% of our outstanding common stock prior to this offering,
borrowed a total of $247,100 from us. Mr. Bryden executed a promissory note,
dated November 17, 1998, and a mortgage note and second mortgage, each dated
June 11, 1998 and each in favor of us. The promissory note is in the amount of
$66,100 with interest compounded annually at a rate of 8.5%. Under the mortgage
note and second mortgage, Mr. Bryden borrowed $181,000, interest compounded
annually at a rate of 8.5%. As security for the payment of the promissory note
and second mortgage, Mr. Bryden has executed a stock pledge agreement in favor
of us, dated as of June 11, 1998, under which he has pledged all shares of our
capital stock owned by him up to a maximum of $250,000 in market value. As of
June 30, 2000, $284,832 of principal and accrued interest is outstanding on the
loan to Mr. Bryden. In June 2000, Mr. Bryden assigned 280,000 shares of common
stock to The Bryden Family Limited Partnership, of which Mr. Bryden is the sole
general partner. The Bryden Family Limited Partnership has agreed to be bound
by the terms of the stock pledge agreement and the shareholders agreement,
dated March 19, 1997, described above.
In 1999 we were paid fees for professional services rendered to Lehman
Brothers Inc., of which one of our directors, Mr. Kevin McGilloway, is Chief
Information Officer. We received approximately $100,000 for our services in
1999. As of June 30, 2000, we received over $1 million for our services from
Lehman. Furthermore, Lehman is one of the lead underwriters for this offering.
We may contract or transact with affiliates in the future. Any contemplated
contract or transaction with an affiliate will be approved in accordance with
Delaware law. The contract or transaction will be approved by the affirmative
vote of a majority of disinterested directors, or of shareholders entitled to
vote thereon, after disclosure of all material facts of the affiliate's
relationship with us and the affiliate's interests in the contract or
transaction.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of common stock as of
June 30, 2000 and as adjusted to reflect the sale of common stock in this
offering by:
. each person (or group of affiliated persons) who is the beneficial
owner of more than 5% of the outstanding common stock;
. each of the named executive officers;
. each of our directors; and
. all of the executive officers and directors as a group.
The persons named in this table have sole voting power for all shares of
common stock shown as beneficially owned by them, subject to community property
laws where applicable and except as indicated in the footnotes to this table.
Beneficial ownership is determined in accordance with the rules of the SEC. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
held by that person that are currently exercisable or exercisable within 60
days after June 30, 2000, are deemed outstanding. These shares, however, are
not deemed outstanding for the purpose of computing the percentage ownership of
any other person. Unless otherwise indicated, the address of each person named
below is c/o Logical Design Solutions, Inc., 131 Madison Avenue, Morristown,
New Jersey 07960.
The "Percent of Total After Offering" percentages include 2,150,000 shares
issuable upon the exercise of warrants which must be exercised prior to the
completion of this offering and assume that the option granted to the
underwriters to purchase additional shares is not exercised.
<TABLE>
<CAPTION>
Number of Percent of Total
Shares -----------------
Beneficially Before After
Name Owned Offering Offering
---- ------------ -------- --------
<S> <C> <C> <C>
Mimi Brooks(1)................................. 8,065,001 89.8% 55.1%
Summit Partners(2)............................. 2,050,000 20.4 15.0
Darren Bryden(3)............................... 785,000 9.8 5.8
E. Bruce Lovenberg(4).......................... 77,500 * *
David W. Stoltzfus(4).......................... 153,750 1.9 1.1
Thomas Shea(4)................................. 115,000 1.4 *
Paul F. Lozier(5).............................. 128,000 1.6 *
Kevin McGilloway(6)............................ -- -- --
Kevin Mohan(7)................................. 2,050,000 20.4 15.0
Frank A. Pinto(6).............................. -- -- --
All executive officers and directors as a group
(11 persons).................................. 10,601,751 92.1 70.6
</TABLE>
--------
* Less than 1% of the outstanding shares.
(1) Includes 1,000,000 shares of common stock issuable upon the exercise of
stock options granted in March 2000. A total of 325,841 of these shares are
subject to the underwriters' over-allotment option. Ms. Brooks and her
spouse are currently in divorce proceedings in which the parties are
contesting their respective shares of their marital estate, which includes
the shares of common stock held by Ms. Brooks. See "Selling Stockholders."
(2) Represents 1,947,705 shares of common stock held by Summit Ventures IV,
L.P. and 102,295 shares held by Summit Investors III, L.P., issuable upon
the exercise of warrants, which are exercisable at any time at the option
of the holders. Summit has agreed to exercise these warrants prior to the
completion of this offering. A total of 94,547 of these shares are subject
to the underwriters' over-allotment option. See "Selling Stockholders." The
address of Summit Partners, L.L.C. is 600 Atlantic Avenue, Suite 2800,
Boston, MA 02210. Summit Partners, L.L.C., through an investment committee,
has voting and dispositive authority over the shares held by Summit
Ventures IV, L.P. and Summit Investors III, L.P.
(3) Includes 280,000 shares held by The Bryden Family Limited Partnership, of
which Mr. Bryden is the sole general partner. A total of 100,000 shares
held by Mr. Bryden in his individual capacity shares are subject to the
underwriters' over-allotment option. See "Selling Stockholders." Mr.
Bryden's address is 156 Smoke Rise Road, Basking Ridge, NJ 07920.
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(4) Represents shares of common stock issuable upon the exercise of stock
options.
(5) Includes (a) 72,000 shares of common stock issuable upon the exercise of
warrants held by Mr. Lozier in his individual capacity, which are
exercisable at any time at the option of the holder, (b) 28,000 shares of
common stock issuable upon the exercise of warrants held by the Paul F.
Lozier Charitable Remainder Unitrust of 2000 for the benefit of Mr. Lozier
and his wife, which are exercisable at any time at the option of the holder
and (c) 28,000 shares of common stock issuable upon the exercise of stock
options granted in March 2000 to Mr. Lozier in his individual capacity. Mr.
Lozier has agreed to exercise his warrants prior to the completion of this
offering. A total of 4,612 shares held by Mr. Lozier in his individual
capacity are subject to the underwriters' over-allotment option. See
"Selling Stockholders." Mr. Lozier's address is 40 Dellwood Drive, Madison,
NJ 07940.
(6) Excludes options to purchase 28,000 shares granted upon acceptance of the
directorship. The grant of options is contingent upon consummation of the
initial public offering and the options are exercisable at the initial
public offering price. Options to purchase 7,000 shares are exercisable
immediately upon consummation of the offering. The remaining options become
exercisable in equal amounts, on each of the first three anniversaries of
the grant date.
(7) Represents 1,947,705 shares of common stock held by Summit Ventures IV,
L.P. and 102,295 shares held by Summit Investors III, L.P., issuable upon
the exercise of warrants, which are exercisable at any time at the option
of the holders. Mr. Mohan is (i) a general partner of Stamps, Woodsum & Co.
IV, which is the general partner of Summit Ventures IV, L.P. and (ii) a
general partner of Summit Investors III, L.P. Mr. Mohan expressly disclaims
beneficial ownership of these shares, except as to his proportionate
interest in Summit Ventures IV, L.P. and Summit Investors III, L.P. The
address of Summit Partners, L.L.C. is 600 Atlantic Avenue, Suite 2800,
Boston, MA 02210.
SELLING STOCKHOLDERS
The stockholders named in the following table have granted the underwriters
an option to purchase 525,000 additional shares solely to cover over-
allotments. The respective number of shares subject to the option by each
selling stockholder is set forth opposite their name and assumes that the
option is exercised in full. If the underwriters exercise only a portion of the
option, the number of shares to be sold by the selling stockholders will be
proportionately reduced on a pro rata basis.
The "Beneficial Ownership After the Offering" share numbers and percentages
include 2,150,000 shares issuable upon the exercise of warrants which must be
exercised prior to the completion of this offering and assume that the option
granted to the underwriters to purchase additional shares is exercised in full.
<TABLE>
<CAPTION>
Shares
to be Sold
Beneficial Ownership in the Beneficial Ownership
Prior to the Over-Allotment After the
Offering(1) Option Offering(1)
-------------------- -------------- --------------------
Name Number Percentage Number Percentage
---- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Mimi Brooks(2)........ 8,065,001 89.8% 325,841 7,739,160 52.9%
Summit Partners(3).... 2,050,000 20.4 94,547 1,955,453 14.4
Paul F. Lozier(4)..... 128,000 1.6 4,612 123,388 *
Darren Bryden(5)...... 785,000 9.8 100,000 685,000 5.0
-------
Total............... 525,000
=======
</TABLE>
--------
(1) See the footnotes of the table under the heading "Principal Stockholders"
for information concerning calculation of the beneficial ownership of each
of the selling stockholders.
(2) Ms. Brooks is our founder, Chief Executive Officer and Chairwoman.
(3) Summit Partners is affiliated with Kevin Mohan, one of our directors.
(4) Mr. Lozier is one of our directors.
(5) Mr. Bryden is a former executive and former member of our board of
directors.
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DESCRIPTION OF CAPITAL STOCK
General
Upon the closing of the offering, our authorized capital stock will consist
of 60,000,000 shares of common stock, par value $.01 per share, and 10,000,000
shares of preferred stock, par value $.01 per share. The following information
relates only to our amended and restated certificate of incorporation, which
will be adopted prior to the closing of this offering.
Common Stock
As of the date of this prospectus, there were 7,976,401 shares of common
stock outstanding and held of record by 15 stockholders. Based upon the number
of shares outstanding as of the date of this prospectus and giving effect to
the issuance of 3,500,000 shares of common stock by us in this offering and
giving effect to the exercise of our redeemable warrants, there will be
13,626,401 shares of common stock outstanding upon completion of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. They do not have cumulative voting
rights. As a result, 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,
dividends, if any, as the board of directors may declare out of funds legally
available, subject to any preferential dividend rights of any then-outstanding
preferred stock. Upon our liquidation, dissolution or winding up, the holders
of common stock are entitled to receive ratably our net assets available after
the payment of all debts and other liabilities and subject to the prior rights
of any then-outstanding preferred stock. Holders of the common stock have no
preemptive, subscription, redemption or conversion rights. 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 we may designate and issue in the future. See "--
Preferred Stock."
Preferred Stock
As of the date of this prospectus, we had no outstanding shares of preferred
stock.
Following the closing of this offering, the board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of 10,000,000 shares of preferred stock in one or more series.
The board of directors may fix or alter the designations, preferences, rights
and any qualification, limitations or restrictions of the shares of any series,
including the dividend rights, dividend rates, conversion rights, voting
rights, redemption terms and prices, liquidation preferences and the numbers of
shares constituting any series. As of the closing of this offering, no shares
of preferred stock will be outstanding. Although the ability of the board of
directors to designate and issue preferred stock could provide flexibility in
possible acquisitions or other corporate purposes, issuance of preferred stock
may have adverse effects on the holders of common stock. The effects include:
. restrictions on dividends on the common stock if dividends on the
preferred stock have not been paid;
. dilution of voting power of the common stock to the extent the preferred
stock has voting rights; or
. deferral of participation in our assets upon liquidation until
satisfaction of any liquidation preference granted to holders of the
preferred stock.
In addition, issuance of preferred stock could make it more difficult for a
third party to acquire a majority of the outstanding voting stock and
accordingly may be used as an "anti-takeover" device. The board of directors,
however, currently does not contemplate the issuance of any preferred stock and
is not aware of any pending transactions that would be affected by that
issuance.
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Anti-Takeover Effects of Our Amended and Restated Certificate of Incorporation
and Bylaws and Provisions of Delaware Law
Our amended and restated certificate of incorporation and bylaws, which will
become effective prior to the closing of this offering, and provisions of
Delaware corporate law may hinder or delay a third party's attempt to acquire
us. They may also make it difficult for the stockholders to remove incumbent
management.
Classified Board of Directors; Removal; Vacancies. Our amended and restated
certificate of incorporation divides the board of directors into three classes.
The directors in each class serve three-year terms. The directors' terms are
staggered by class. Our classified board of directors is intended to provide
continuity and stability in the board of director's membership and policies.
However, a classified board of directors makes it more difficult for
stockholders to change the board of directors' composition quickly. Also, under
the amended and restated certificate of incorporation, directors may be removed
only for cause by a two-thirds stockholder vote. In addition, a majority of the
directors then in office can fill board vacancies and newly created
directorships resulting from any increase in the size of the board of
directors. This is true even if those directors do not constitute a quorum or
if only one director is left in office. These provisions could prevent
stockholders, including parties who want to take over or acquire us, from
removing incumbent directors without cause and filling the resulting vacancies
with their own nominees.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our amended and restated bylaws will establish an
advance notice procedure regarding nominations of directors by stockholders and
other stockholder proposals. The advance notice procedure will not apply to
nominations of directors by the board of directors. For matters a stockholder
wishes to bring before an annual meeting of stockholders, the stockholder must
deliver us notice not less than 60 days nor more than 90 days before the first
anniversary of the preceding year's annual meeting of nominations and other
business to be brought before a an annual meeting of our stockholders. The
stockholder must put information in the notice regarding
. the stockholder and its holdings;
. the background of any nominee for director;
. the written consent to being named as a nominee and to serving as a
director if elected;
. any business desired to be brought before the meeting;
. the reasons for conducting the business at the meeting; and
. any material interest of the stockholder in the business proposed.
At a special meeting of stockholders called to elect directors, stockholders
can make a nomination only if they deliver to us a notice that complies with
the above requirements no later than the tenth day following the day on which
public announcement of the special meeting is made. The bylaws could preclude a
nomination for the election of directors or the conduct of any business not
stated in the notice at a particular meeting if the proper procedures are not
followed. This may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of us.
Special Stockholders' Meetings. Our amended and restated certificate of
incorporation and bylaws will permit special meetings of the stockholders to be
called only by the board of directors, the Chairperson of the board, the Chief
Executive Officer or the President or holders of at least 75% of our securities
that are outstanding and entitled to vote in an election of directors.
Limitations on Stockholder Action by Written Consent. Our amended and
restated certificate of incorporation will place limits on the stockholders'
ability to act by written consent. Specifically, any action to be taken at a
stockholders' meeting may be taken without a meeting only if consented to
generally by stockholders having voting power of at least 75% of the voting
power of all shares of each class or series entitled to vote on the action.
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Authorized But Unissued Shares. Without stockholder approval, we can issue
shares of common stock and preferred stock up to the number of shares
authorized for issuance in our amended and restated certificate of
incorporation, except as limited by Nasdaq rules. We could use these additional
shares for a variety of corporate purposes. These purposes include future
securities offerings to raise additional capital, corporate acquisitions and
employee benefit plans. Our ability to issue these shares of common stock and
preferred stock could make it more difficult or discourage an attempt to obtain
control of us by means of a proxy contest, tender offer, merger or otherwise.
Section 203 of Delaware Law. After this offering is completed, Section 203
of the Delaware General Corporation Law will apply to us. This section will
prohibit us from engaging in a "business combination" with an "interested
stockholder." This restriction will apply for 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 (1) mergers, (2) asset sales and (3) other transactions
resulting in a financial benefit to an interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of our voting
stock. Section 203 could delay, defer or prevent a change in our control. It
might also reduce the price that investors might be willing to pay in the
future for shares of common stock.
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation will provide that our
directors shall not be personally liable to us or our stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (1)
for any breach of the director's duty of loyalty to us or our stockholders, (2)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (3) under a provision of Delaware law relating
to unlawful payment of dividends or unlawful stock purchase or redemption of
stock or (4) for any transaction from which the director derives an improper
personal benefit. As a result of this provision, we and our stockholders may be
unable to obtain monetary damages from a director for breach of his or her duty
of care.
Our amended and restated bylaws will provide for the indemnification of
directors and officers and any person who is or was serving at our request as a
director, officer, employee, partner or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise to the fullest extent authorized by, and subject to the conditions
set forth in, the Delaware General Corporation Law against all expenses,
liabilities and losses. The indemnification provided under the bylaws will
include the right to be paid by us the expenses in advance of any proceeding
for which indemnification may be had in advance of its final disposition.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is First Union
National Bank.
Listing
We have applied to have our common stock listed on the Nasdaq National
Market under the trading symbol "LDSI."
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SHARES ELIGIBLE FOR FUTURE SALE
Sales, or the availability for sale, of substantial amounts of our common
stock in the public market could adversely affect our common stock's prevailing
market price. Upon completion of this offering, we will have outstanding an
aggregate of 13,626,401 shares of our common stock, assuming no exercise of
outstanding options. Of these shares, all of the shares sold in this offering
will be freely tradeable without restriction or further registration under the
Securities Act, unless the shares are purchased by our "affiliates" as that
term is defined in Rule 405 under the Securities Act. The remaining shares of
common stock held by existing stockholders are "restricted securities" as that
term is defined in Rule 144 under the Securities Act. Restricted securities may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701. These two rules are
summarized below. Furthermore, as described below, holders of some of our
common stock have rights to have their shares registered and we plan to file a
registration statement to cover the shares issued under our option plans.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
this offering closes, a person who has beneficially owned common stock for at
least one year would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 136,264 shares of common stock immediately after
this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice of Form 144 with respect to such sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Unless
otherwise restricted, these shares may be sold immediately upon the completion
of this offering.
Rule 701
As of June 30, 2000, options to purchase 2,286,900 shares of common stock
were outstanding.
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase common stock from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell these shares 90 days
after the effective date of this offering in reliance on Rule 144, without
having to comply with some of the restrictions, including the holding period
contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of these options, including exercises after the date of this
prospectus. Securities issued in reliance on Rule 701 are restricted securities
and may be sold:
. beginning 90 days after the date of this prospectus;
61
<PAGE>
. by persons other than affiliates subject only to the manner of sale
provisions of Rule 144; and
. by affiliates under Rule 144 without compliance with its one year
minimum holding period requirement.
Lock-Up Agreements
All of our officers and directors, and holders of substantially all of our
stock have signed lock-up agreements. Under these agreements, they agreed,
among other things, not to transfer or dispose of any shares of common stock,
or any securities convertible into shares of common stock, for a period of 180
days after the date of this prospectus. Transfers or dispositions can be made
sooner with the prior written consent of Salomon Smith Barney Inc. This consent
may be given at any time without public notice.
Registration Rights
Upon completion of this offering, stockholders owning an aggregate of
2,150,000 shares of common stock will have registration rights as to their
shares. All of these shares of common stock are subject to lock-up agreements.
These stockholders, or their transferees, will be entitled to request that we
register their shares and are entitled to piggyback registration rights. See
"Related Party Transactions--Registration Rights Agreement." After
registration, these shares will be freely tradeable without restriction under
the Securities Act, unless the shares are purchased by affiliates.
Stock Plans
As soon as practicable after this offering, we intend to file registration
statements on Form S-8 under the Securities Act covering the shares of common
stock reserved for issuance under our stock option plans. The registration
statements are expected to automatically become effective upon filing.
Accordingly, shares registered under these registration statements will,
subject to vesting provisions and Rule 144 volume limitations applicable to our
affiliates, be available for sale in the open market shortly after this
offering closes, and in the case of our officers, directors and stockholders
who have entered into lock-up agreements, after the 180-day lock-up agreements
expire.
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and we have agreed to sell to such underwriter, the number of shares
set forth opposite the name of that underwriter.
<TABLE>
<CAPTION>
Number
Name of shares
---- ---------
<S> <C>
Salomon Smith Barney Inc........................................
Lehman Brothers Inc.............................................
SG Cowen Securities Corporation.................................
---------
Total......................................................... 3,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the shares, other than those covered by the over-
allotment option described below, if they purchase any of the shares.
The underwriters, for whom Salomon Smith Barney Inc., Lehman Brothers Inc.
and SG Cowen Securities Corporation are acting as representatives, propose to
offer some of the shares directly to the public at the public offering price
set forth on the cover page of this prospectus and some of the shares to
dealers at the public offering price less a concession not in excess of $
per share. The underwriters may allow, and the dealers may reallow, a discount
not in excess of $ per share on sales to other dealers. If all the shares
are not sold at the initial offering price, the representatives may change the
public offering price and other selling terms. The representatives have advised
us that the underwriters do not intend to confirm any sales to any accounts
over which they exercise discretionary authority.
The selling stockholders have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to
525,000 additional shares of our common stock at the public offering price less
the underwriting discount. The underwriters may exercise this option solely for
the purpose of covering over-allotments, if any, in connection with this
offering. To the extent this option is exercised, each underwriter will be
obligated, subject to some conditions, to purchase a number of additional
shares approximately proportionate to such underwriter's initial purchase
commitment.
At our request, the underwriters will reserve up to 5% of the shares of our
common stock to be sold in this offering, at the initial public offering price,
to our directors, officers and employees, as well as to some of our customers
and suppliers. This directed share program will be administered by Salomon
Smith Barney Inc. The number of shares of common stock available for sale to
the general public will be reduced to the extent these individuals purchase
reserved shares. Any reserved shares which are not so purchased will be offered
by the underwriters to the general public on the same basis as the other shares
offered by this prospectus. We have agreed to indemnify the underwriters
against some liabilities and expenses, including liabilities under the
Securities Act of 1933, in connection with sales of the directed shares.
We, our executive officers and directors and holders of substantially all of
our existing outstanding shares have agreed that, for a period of 180 days from
the date of this prospectus, we will not, without prior written consent of
Salomon Smith Barney Inc., dispose of or hedge, any shares of our common stock
or any securities convertible into, or exercisable or exchangeable for, our
common stock. Salomon Smith Barney Inc., in its sole discretion, may release
any of the securities subject to these lock-up agreements at any time without
notice.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock
will be negotiated among us, the selling stockholders and the representatives.
Among the factors to be considered in determining the public offering price
will be:
. our record of operation;
. our current financial condition;
63
<PAGE>
. our future prospects;
. our markets;
. the economic conditions in and future prospects for the industry in
which we compete;
. our management; and
. currently prevailing general conditions in the equity securities
markets, including current market valuations of publicly traded
companies considered comparable to us.
The prices at which the shares will sell in the public market after this
offering may, however, be lower than the price at which they are sold by the
underwriters. Additionally, an active trading market in our common stock may
not develop and continue after this offering.
We have applied to have our common stock included for quotation on the
Nasdaq National Market under the symbol "LDSI."
The following table shows the underwriting discount that we and the selling
stockholders will pay to the underwriters in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share....................................... $ $
Total......................................... $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell shares of common stock in the open market.
These transactions may include short sales, syndicate covering transactions and
stabilizing transactions. Short sales involve syndicate sales of common stock
in excess of the number of shares to be purchased by the underwriters in the
offering, which creates a syndicate short position. "Covered" short sales are
sales of shares made in an amount up to the number of shares represented by the
underwriters' over-allotment option. In determining the source of shares to
close out the covered syndicate short position, the underwriters will consider,
among other things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase shares through the
over-allotment option. Transactions to close out the covered syndicate short
involve either purchases of the common stock in the open market after the
distribution has been completed or the exercise of the over-allotment option.
The underwriters may also make "naked" short sales of shares in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares of common stock in the open market. A naked short position
is more likely to be created if the underwriters are concerned that there may
be downward pressure on the price of the shares in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of bids for or purchases of shares in the open
market while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchase shares originally sold by that syndicate
member.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the common stock. They may also cause the price
of the common stock to be higher than the price that would otherwise exist in
the open market in the absence of these transactions. The underwriters may
conduct these transactions on the Nasdaq National Market or in the over-the-
counter market, or otherwise. If the underwriters commence any of these
transactions, they may discontinue them at any time.
We estimate that our total expenses for this offering, excluding the
underwriting discount, will be $1.7 million.
64
<PAGE>
Lehman Brothers Inc., one of the representatives, is a client of ours and,
as of June 30, 2000, we received over $1 million in fees for services rendered
to this client. Further, Kevin McGilloway, who was elected in March 2000 to
serve as a member of our board of directors, is the Chief Information Officer
of Lehman Brothers Inc. Upon Mr. McGilloway's acceptance of his directorship
with us, he was granted options to purchase 28,000 shares exercisable at the
initial public offering price. The grant of the options is contingent upon
consummation of the initial public offering.
Salomon Smith Barney Inc., one of the representatives, is also one of our
clients. As of June 30, 2000, we received approximately $300,000 in fees for
services rendered to Salomon Smith Barney.
The representatives or their respective affiliates may in the future perform
various investment banking and advisory services for us from time to time, for
which they will receive customary fees. The representatives may, from time to
time, engage in transactions with and perform services for us in the ordinary
course of business.
We and the selling stockholders have agreed to indemnify the underwriters
against some liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments the underwriters may be required to make in
respect of any of those liabilities.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby and other
legal matters will be passed upon for us by Brown & Wood LLP, New York, New
York. Legal matters in connection with the offering will be passed upon for the
underwriters by Cravath, Swaine & Moore, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1999 and 1998 and for each of the three years in
the period ended December 31, 1999 as set forth in their report. We have
included our financial statements in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the financial
statements of Jump! Information Technologies, Inc. as of December 31, 1998 and
for the periods from January 1, 1999 to November 9, 1999 and March 6, 1998
(inception) to December 31, 1998 as set forth in their report. We have included
these financial statements in this prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1. It includes
exhibits and schedules. This prospectus is part of the registration statement.
It does not contain all of the information that is in the registration
statement. The registration statement contains more information about us and
the common stock. Statements contained in this prospectus concerning the
provisions of documents filed as exhibits to the registration statement are
necessarily summaries which disclose the material terms of such documents. Each
of these statements is qualified in its entirety by reference to the copy of
the applicable document filed with the SEC. You may read and copy all or any
portion of the registration statement at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room's operations. The registration statement is also available to you on the
SEC's Internet site (http://www.sec.gov). We intend to furnish our stockholders
with annual reports containing financial statements audited by our independent
accountants and make available quarterly reports containing unaudited financial
statements for the first three quarters of each fiscal year. These reports are
also available to you on the SEC's Internet site.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Unaudited Pro Forma Financial Information
<TABLE>
<S> <C>
Overview.................................................................. F-2
Unaudited Pro Forma Statement of Operations for the year ended December
31, 1999................................................................. F-3
Notes to Unaudited Pro Forma Statement of Operations for the year ended
December 31, 1999........................................................ F-3
Logical Design Solutions, Inc.
Report of Independent Auditors............................................ F-4
Balance Sheets at December 31, 1998 and 1999 and June 30, 2000
(Unaudited).............................................................. F-5
Statements of Operations for each of the three years in the period ended
December 31, 1999 and the six months ended June 30, 1999 and 2000
(Unaudited).............................................................. F-6
Statements of Changes in Stockholders' Equity (Deficiency) for each of the
three years in the period ended December 31, 1999 and the six months
ended June 30, 2000 (Unaudited).......................................... F-7
Statements of Cash Flows for each of the three years in the period ended
December 31, 1999 and the six months ended June 30, 1999 and 2000
(Unaudited).............................................................. F-8
Notes to Financial Statements............................................. F-10
Jump! Information Technologies, Inc.
Report of Independent Auditors............................................ F-25
Balance Sheet at December 31, 1998........................................ F-26
Statements of Income for the period from March 6, 1998 (inception) to
December 31, 1998 and
January 1, 1999 to November 9, 1999...................................... F-27
Statements of Cash Flows for the period from March 6, 1998 (inception) to
December 31, 1998 and January 1, 1999 to November 9, 1999................ F-28
Notes to Financial Statements............................................. F-29
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statement of operations for the year ended
December 31, 1999 set forth below presents our results of operations for 1999
as if the acquisition of Jump! Information Technologies, Inc. on November 10,
1999 had occurred at January 1, 1999. The unaudited pro forma statement of
operations for the fiscal year ended December 31, 1999 combines, with
appropriate adjustments, our audited results of operations for our year ended
December 31, 1999 and the audited results of operations of Jump! for the period
ended November 10, 1999.
The unaudited pro forma statement of operations has been prepared on the
basis of preliminary assumptions and estimates. The unaudited pro forma
statement of operations may not be indicative of the results of operations that
would have been achieved if the acquisition of Jump! Information Technologies,
Inc. had been effected on the date indicated or which may be achieved in the
future. The unaudited pro forma statement of operations and notes thereto
should be read in conjunction with "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements of Logical Design Solutions and Jump! Information
Technologies, Inc., all included elsewhere in this prospectus.
F-2
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Jump! Actual
(January 1,
1999-
LDS November 9, Pro Forma LDS
Actual 1999)(1) Adjustments Pro Forma
------- ------------ ----------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue.......................... $15,839 $2,101 $ -- $17,940
Cost of revenue.................. 7,541 1,106 -- 8,647
------- ------ ----- -------
Gross profit................... 8,298 995 -- 9,293
------- ------ ----- -------
Operating expenses:
Selling, general and
administrative................ 6,978 801 -- 7,779
Depreciation and amortization.. 942 13 205(2) 1,160
Stock-based compensation....... 1,077 -- -- 1,077
------- ------ ----- -------
Total........................ 8,997 814 205 10,016
------- ------ ----- -------
Income (loss) from operations.... (699) 181 (205) (723)
Increase in market value of
redeemable warrants............. (7,505) -- -- (7,505)
Interest expense, net............ (1,163) -- -- (1,163)
Interest income.................. 201 3 -- 204
Other income..................... 20 5 -- 25
------- ------ ----- -------
Income (loss) before income
taxes........................... (9,146) 189 (205) (9,162)
Income tax provision (benefit)... (202) 72 (21)(3) (151)
------- ------ ----- -------
Net income (loss)................ $(8,944) $ 117 $(184) $(9,011)
======= ====== ===== =======
Basic net income (loss) per
common share.................... $ (1.14) -- -- $ (1.13)
======= ====== ===== =======
Diluted net income (loss) per
common share.................... $ (1.14) -- -- $ (1.13)
======= ====== ===== =======
Weighted average common shares
outstanding..................... 7,868 -- 94(4) 7,962
======= ====== ===== =======
Weighted average common shares
and common share equivalents.... 7,868 -- 94(4) 7,962
======= ====== ===== =======
</TABLE>
--------
Notes to Unaudited Pro Forma Statement of Operations
(1) In November 1999, Logical Design Solutions, Inc. ("LDS" or the "Company")
acquired 100% of the outstanding stock of Jump! Information Technologies,
Inc. ("Jump!"), a publishing and information services e-business solutions
provider located in Chantilly, Virginia, for a purchase price of
approximately $842,000 that consisted of (i) $525,000 of cash, (ii)
$167,000 relating to 12,671 vested stock options and (iii) $149,000 in
closing costs. The Company also issued 109,500 shares of common stock in
connection with this acquisition. The fair value of the total assets and
total liabilities related to this acquisition was $578,000 and $452,000,
respectively, and goodwill amounted to $715,000. Goodwill is being
amortized over an estimated useful life of three years.
The Company accounted for the above acquisition as a purchase. Accordingly,
the acquired assets and liabilities assumed have been recorded at their
estimated fair values at the date of acquisition. The results of operations
of the acquired business is included in the Company's results of operations
from the acquisition date.
(2) To record amortization expense related to goodwill for January 1, 1999
through November 9, 1999.
(3) To adjust the benefit for income taxes as if Jump! was acquired on January
1, 1999.
(4) To adjust the weighted average common shares outstanding as if the stock
issued in connection with the acquisition had been issued on January 1,
1999.
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Logical Design Solutions, Inc.
We have audited the accompanying balance sheets of Logical Design Solutions,
Inc. (the "Company") as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity (deficiency) and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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 our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Logical Design Solutions,
Inc. as of December 31, 1998 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
Metropark, New Jersey /s/ Ernst & Young LLP
February 17, 2000, except for Note 17
as to which the date is July 3, 2000
F-4
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
BALANCE SHEETS
(Pro forma information and information as of and relating to
the six months ended June 30, 2000 is unaudited)
<TABLE>
<CAPTION>
December 31
------------------------
June 30, 2000
June 30, Pro Forma
1998 1999 2000 (Note 16)
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ 3,509,742 $ 1,432,005 $ 2,167,127 $ 2,188,627
Accounts receivable,
less allowance for
doubtful accounts of
$215,566 in 1998 and
$50,000 in 1999 and
2000.................. 2,758,373 5,529,901 8,224,223 8,224,223
Unbilled engagement
revenues.............. 17,365 287,174 107,554 107,554
Prepaid expenses and
other................. 101,041 125,487 1,417,345 1,417,345
Refundable income
taxes................. 375,000 309,137 -- --
Deferred income taxes.. 107,200 40,608 -- --
----------- ----------- ------------ ------------
Total current
assets.............. 6,868,721 7,724,312 11,916,249 11,937,749
Property and equipment,
net..................... 2,527,933 2,554,171 3,955,429 3,955,429
Deferred financing costs,
net of accumulated
amortization of
$134,726, $212,509, and
$250,571 in 1998, 1999
and 2000, respectively.. 245,888 168,105 130,043 130,043
Loans to stockholders.... 653,801 711,346 742,653 742,653
Deferred income taxes.... -- 43,348 -- --
Goodwill, net of
accumulated amortization
of $33,342 and $153,327
in 1999 and 2000,
respectively............ -- 682,572 566,396 566,396
Other assets............. 55,550 167,420 152,821 152,821
----------- ----------- ------------ ------------
$10,351,893 $12,051,274 $ 17,463,591 $ 17,485,091
=========== =========== ============ ============
Liabilities and
stockholders' equity
(deficiency)
Current liabilities:
Capital lease
obligations--current.. $ 70,473 $ 75,703 $ 78,461 $ 78,461
Accounts payable....... 149,124 448,465 1,329,309 1,329,309
Accrued expenses....... 720,443 1,467,361 3,287,576 3,287,576
Unearned engagement
revenues.............. 487,075 305,995 650,018 650,018
Deferred income taxes--
current............... 114,700 48,863 -- --
----------- ----------- ------------ ------------
Total current
liabilities......... 1,541,815 2,346,387 5,345,364 5,345,364
Senior Subordinated
Debentures (redemption
value of $7,048,803 at
December 31, 1999 and
$7,365,999 at June 30,
2000)................... 4,399,599 5,424,063 6,040,450 6,040,450
Junior Subordinated
Debentures--Related
Parties................. 1,301,114 1,417,902 1,481,707 1,481,707
Capital lease
obligations............. 274,921 199,219 159,286 159,286
Deferred income taxes.... -- 36,386 -- --
Other liabilities........ 192,000 156,217 130,716 130,716
Redeemable warrants...... 2,926,381 10,431,337 14,183,815 --
Stockholders' equity
(deficiency):
Common stock, no par
value in 1998 and
1999, $.01 par value
at June 30, 2000;
15,000,000 shares
authorized, 7,850,001,
7,969,801, and
7,976,401 shares
issued and outstanding
at December 31, 1998
and 1999, and June 30,
2000, respectively
(10,126,401 on a pro
forma basis).......... 40,543 6,713,082 79,764 101,264
Additional paid-in
capital............... -- -- 19,103,009 47,053,009
Deferred stock
compensation.......... -- (5,404,671) (3,633,668) (3,633,668)
Accumulated deficit.... (324,480) (9,268,648) (25,426,852) (39,193,037)
----------- ----------- ------------ ------------
Total stockholders'
equity
(deficiency)........ (283,937) (7,960,237) (9,877,747) 4,327,568
----------- ----------- ------------ ------------
$10,351,893 $12,051,274 $ 17,463,591 $ 17,485,091
=========== =========== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
(Pro forma information and information as of and relating to
the six months ended June 30, 1999 and 2000 is unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31 June 30
------------------------------------- ------------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $11,052,478 $11,329,920 $15,839,348 $6,598,550 $ 16,668,106
Cost of revenue......... 4,377,578 5,562,159 7,541,531 3,165,160 6,269,411
----------- ----------- ----------- ----------- ------------
Gross profit............ 6,674,900 5,767,761 8,297,817 3,433,390 10,398,695
Operating expenses:
Selling, general and
administrative........ 3,490,688 4,767,329 6,977,744 3,031,370 6,464,633
Depreciation and
amortization.......... 335,886 653,275 942,131 458,533 697,616
Stock-based
compensation.......... 1,077,037 81,659 14,225,072
----------- ----------- ----------- ----------- ------------
3,826,574 5,420,604 8,996,912 3,571,562 21,387,321
----------- ----------- ----------- ----------- ------------
Income (loss) from
operations............. 2,848,326 347,157 (699,095) (138,172) (10,988,626)
Other income (expense):
Increase in market
value of redeemable
warrants.............. (288,048) (366,333) (7,504,956) (3,519,939) (3,752,478)
Interest expense....... (667,527) (984,880) (1,163,918) (582,512) (689,632)
Interest income........ 157,308 260,890 201,374 111,232 87,325
Other.................. 11,481 14,131 20,071 3,902 10,207
----------- ----------- ----------- ----------- ------------
(786,786) (1,076,192) (8,447,429) (3,987,317) (4,344,578)
----------- ----------- ----------- ----------- ------------
Income (loss) before
income taxes........... 2,061,540 (729,035) (9,146,524) (4,125,489) (15,333,204)
Provision (benefit) for
income taxes........... 465,000 (115,097) (202,356) (101,012) 825,000
----------- ----------- ----------- ----------- ------------
Net income (loss)....... $ 1,596,540 $ (613,938) $(8,944,168) $(4,024,477) $(16,158,204)
=========== =========== =========== =========== ============
Basic net income (loss)
per common share....... $ .20 $ (.08) $ 1.14) $ (0.51) $ (2.03)
=========== =========== =========== =========== ============
Diluted net income
(loss) per common
share.................. $ .17 $ (.08) $ (1.14) $ (0.51) $ (2.03)
=========== =========== =========== =========== ============
Weighted-average common
shares outstanding..... 7,850,001 7,850,023 7,867,786 7,850,615 7,975,494
=========== =========== =========== =========== ============
Weighted-average common
shares and common share
equivalents............ 9,532,262 7,850,023 7,867,786 7,850,615 7,975,494
=========== =========== =========== =========== ============
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Supplemental pro forma net loss, per share and
share data:
Pro forma net loss............................... $ (1,439) $ (12,406)
=========== ============
Pro forma net loss per share..................... $ (0.14) $ (1.23)
=========== ============
Pro forma weighted average common shares
outstanding..................................... 10,017,786 10,125,494
=========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Information as of and relating to the six months ended June 30, 2000 is
unaudited)
<TABLE>
<CAPTION>
Retained Total
Common Stock Additional Deferred Earnings Stockholders'
--------------------- paid-in Stock (Accumulated Equity
Shares Amount capital Compensation Deficit) (Deficiency)
--------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997.... 7,850,001 $ 39,348 $ -- $ -- $ 2,217,539 $ 2,256,887
Distributions to
stockholders............. (3,824,237) (3,824,237)
Net income................ 1,596,540 1,596,540
--------- ----------- ----------- ----------- ------------ ------------
Balance, December 31, 1997.. 7,850,001 39,348 -- -- (10,158) 29,190
Distributions to
stockholders............. (44,348) (44,348)
Reclassification of
distributions............ 343,964 343,964
Stock options exercised... 500 1,195 -- 1,195
Net loss.................. (613,938) (613,938)
--------- ----------- ----------- ----------- ------------ ------------
Balance, December 31, 1998.. 7,850,501 40,543 -- -- (324,480) (283,937)
Issuance of common stock
and vested stock options
in connection with
acquisition.............. 109,500 1,897,737 -- (1,297,600) 600,137
Stock options exercised... 9,800 23,194 -- 23,194
Compensatory stock option
grants................... 4,751,608 -- (4,107,071) 644,537
Net loss.................. (8,944,168) (8,944,168)
--------- ----------- ----------- ----------- ------------ ------------
Balance, December 31, 1999.. 7,969,801 $ 6,713,082 -- $(5,404,671) $ (9,268,648) $ (7,960,237)
Recapitalization.......... (6,633,384) 6,633,384
Stock options exercised... 6,600 66 15,556 15,622
Amortization of deferred
stock compensation....... 1,774,892 1,774,892
Change in vesting
schedules of common stock
issued in connection with
acquisition.............. (216,262) 432,525 216,263
Compensatory stock option
grants .................. 12,888,867 (564,582) 12,324,285
Cancellation of unvested
stock options............ (218,536) 128,168 (90,368)
Net loss.................. (16,158,204) (16,158,204)
--------- ----------- ----------- ----------- ------------ ------------
Balance, June 30, 2000...... 7,976,401 79,764 $19,103,009 $(3,633,668) $(25,426,852) $ (9,877,747)
========= =========== =========== =========== ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(Information as of and relating to
the six months ended June 30, 1999 and 2000 is unaudited)
<TABLE>
<CAPTION>
Year Ended December 31 Six Months Ended June, 30
------------------------------------- ------------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $ 1,596,540 $ (613,938) $(8,944,168) $(4,024,477) $(16,158,204)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation.......... 268,855 474,067 647,728 328,003 422,198
Amortization.......... 67,031 179,208 294,403 130,530 275,418
Deferred income
taxes................ 150,000 (147,200) (50,356) -- (1,293)
Accretion to
redemption value--
Senior Debentures.... 147,278 265,209 384,863 192,431 267,695
Accrued interest--
Senior Debentures.... 392,101 533,954 582,011 291,006 317,196
Accrued interest--
Junior Debentures.... 79,394 107,431 116,788 58,394 63,805
Accrued interest--
loans to
stockholders......... (62,737) (57,545) (28,772) (31,307)
Amortization of
original issuance
discount--Senior
Debentures........... 47,000 42,155 57,590 28,795 31,496
Stock-based
compensation......... 1,077,037 81,659 14,225,072
Accretion of
redeemable warrants.. 288,048 366,333 7,504,956 3,519,939 3,752,478
Other................. (2,449) (6,050) -- --
Changes in operating
assets and
liabilities, net of
effects of business
acquisition:
Accounts receivable,
net................. (1,249,285) 164,323 (2,509,417) (1,039,885) (2,694,322)
Unbilled project
revenues............ 8,952 (8,559) (269,809) (495,737) 179,620
Prepaid expenses and
other............... (31,268) (41,255) (24,446) (747) (1,291,858)
Refundable income
taxes............... (375,000) 65,863 123,690 309,137
Other assets......... 1,683 (12,968) 5,220 4,645 14,599
Accounts payable..... 399,017 (341,994) 228,185 158,874 880,844
Accrued expenses..... 32,296 273,931 157,325 (4,091) 1,354,149
Unearned project
revenues............ 209,262 (396,490) (358,157) (16,702) 344,023
Accrued payroll and
related expenses.... 173,422 123,492 283,407 42,756 466,066
Income taxes
payable............. (36,385) (13,615) -- -- --
Other liabilities.... (39,971) (19,647) (25,501)
----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) operating
activities............. 2,543,941 513,898 (854,543) (669,336) 2,701,311
Cash flows from
investing activities:
Proceeds from sale of
fixed assets.......... 17,156 -- --
Purchases of property
and equipment......... (746,886) (1,785,501) (682,532) (237,241) (1,940,827)
Business acquisition,
net of cash acquired.. (493,384) -- (3,809)
----------- ----------- ----------- ----------- ------------
Net cash used in
investing activities... (746,886) (1,768,345) (1,175,916) (237,241) (1,944,636)
Cash flows from
financing activities:
Issuance of Senior
Debentures and
redeemable warrants... 5,123,902 -- --
Deferred financing
costs................. (257,339) (3,275) -- --
Payments on notes
payable............... (8,321) (2,080) -- --
Payments on capital
lease obligations..... (10,327) (44,256) (70,472) (34,606) (37,175)
Distributions to
stockholders.......... (2,895,948) (44,348) -- --
Proceeds from exercise
of stock options...... 1,195 23,194 3,767 15,622
Loans to stockholders.. (247,100) -- --
----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) financing
activities............. 1,951,967 (339,864) (47,278) (30,839) (21,533)
----------- ----------- ----------- ----------- ------------
Net (decrease) increase
in cash and cash
equivalents............ 3,749,022 (1,594,311) (2,077,737) (937,416) 735,122
Cash and cash
equivalents, beginning
of year................ 1,355,031 5,104,053 3,509,742 3,509,742 1,432,005
----------- ----------- ----------- ----------- ------------
Cash and cash
equivalents, end of
year................... $ 5,104,053 $ 3,509,742 $ 1,432,005 $ 2,572,326 $ 2,167,127
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes.
F-8
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS--(Continued)
(Information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31 June 30
---------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Supplemental cash flow
disclosures:
Income taxes paid............. $351,000 $420,717 $ 7,306 $ -- $ --
======== ======== ========== ======= ======
Interest paid................. $ 1,306 $ 29,585 $ 22,667 $11,886 $9,440
======== ======== ========== ======= ======
Non-cash financing activities:
Issuance of Senior
Subordinated Debentures and
redeemable warrants in lieu
of financial advisory fees... $120,000 $ -- $ -- $ -- $ --
======== ======== ========== ======= ======
Capital lease obligations..... $ -- $389,650 $ -- $ -- $ --
======== ======== ========== ======= ======
Reclassification of
distributions to stockholders
to loans to stockholders..... $ -- $343,964 $ -- $ -- $ --
======== ======== ========== ======= ======
Issuance of common stock and
vested stock options in
connection with business
acquisition.................. $ -- $ -- $1,897,737 $ -- $ --
======== ======== ========== ======= ======
</TABLE>
See accompanying notes.
F-9
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
Description of Business and Organization
Logical Design Solutions, Inc. ("LDS" or the "Company") is a professional
services provider of e-business solutions primarily to Fortune 500 companies.
The Company advises its clients on e-business strategies and designs and
implements customized, complex e-business solutions. LDS focuses on providing
its services in the following targeted industries: communications, financial
services, healthcare, manufacturing and publishing.
Prior to the investment and restructuring discussed in Note 2 and through
December 31, 1997, LDS and an affiliated company known as Logical Design
Solutions International, Inc. ("LDSI") provided the above services. Both LDS
and LDSI were controlled by a common majority stockholder. Effective December
31, 1997 and as contemplated in the March 1997 investment (see Note 2), LDSI
merged with and into LDS and LDSI ceased to exist. Pursuant to that merger, the
100 shares of LDSI common stock issued and outstanding, which were held by the
majority stockholder of LDS, were converted into one share of common stock of
the Company. The accompanying 1997 statements of operations and cash flows of
the Company include the 12 month results of operations of LDS and LDSI on a
combined basis.
In November 1999, the Company acquired 100% of the outstanding capital stock
of Jump! Information Technologies, Inc. ("Jump!") (see Note 3). In December
1999, Jump! was merged into the Company, with the Company being the surviving
corporation.
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 30, 2000
and for each of the six month periods ended June 30, 1999 and 2000 include all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the Company's financial position, results of operations and
cash flows for the periods presented. All such adjustments are of a normal
recurring nature. The results of the Company's operations for the six months
ended June 30, 1999 and 2000 are not necessarily indicative of the results of
operations for a full fiscal year.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid short-term investments with original
maturities of 90 days or less to be cash equivalents. Cash and equivalents
include funds held in a money manager investment account. The amounts invested
in this manner, the cost of which approximates market, were approximately
$3,100,000 and $1,137,000 at December 31, 1998 and 1999, respectively.
F-10
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded using
the straight- line method based on the estimated useful lives of the assets.
Deferred Financing Costs
Costs incurred in connection with the issuance of the Senior Debentures (as
defined below) have been deferred and are being amortized over the life of the
related debt.
Revenue Recognition
In accordance with Statement of Position 81-1, "Accounting for Performance
of Construction-Type and Certain Production-Type Contracts," the Company uses
the percentage-of-completion method of reporting revenues for fixed-fee
engagements in progress measured by the percentage of costs incurred to date to
estimated total costs for each project. Under this method, engagement revenues
are recorded based upon the estimated stage of completion of each engagement.
Under retainer-based engagements, clients are invoiced an equal amount on a
monthly basis over the term of the contract for the core engagement team. The
retainer agreements also provide for additional staff to be added to the
engagement on an as-needed basis. Fees associated with the additional staff are
recorded on a time and materials basis. Under time and materials basis
contracts, revenue is recognized as services are provided. Reimbursable
engagement costs are excluded from revenue as the Company incurs these costs on
behalf of its customers. Revenue from maintenance agreements are recognized
ratably over the terms of the agreements. Maintenance revenue totaling
approximately $225,000, $246,000 and $220,000 in 1997, 1998 and 1999,
respectively, is included in revenues.
Projected or realized losses under contracts are provided for in the period
when the losses are first determined.
Unbilled engagement revenues represent engagement revenues recognized in
excess of amounts billed. Billings in excess of revenue recognized are
classified as unearned engagement revenues.
The Company's normal and customary business practice is to provide its
clients, prior to commencing an engagement, with a statement of work, the terms
of which are agreed to by its clients either orally or in writing. After
acceptance by the client of the statement of work, which the Company believes
to be a binding agreement with its client, the Company will render services and
related invoices. If the client terminates an engagement, the statement of work
specifies that the client must pay for all services rendered prior to
termination. As the Company continues to render services over a number of
statements of work, the Company and the client may negotiate an umbrella
arrangement in the form of a services agreement which generally provides more
detailed terms that apply to multiple projects, including provisions regarding
warranties, indemnification, insurance, intellectual property rights, rights to
audit, non-solicitations and other terms and conditions.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, or SAB
101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related to
revenue recognition policies. The SEC subsequently issued SAB 101A which
delayed the implementation date of certain provisions of SAB 101. The Company
adopted SAB 101 in the second quarter of 2000. The adoption of SAB 101 did not
have an effect on the Company's historical revenue recognition.
F-11
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
Income Taxes
Deferred income taxes are provided for differences between the financial
statement and income tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Prior to March 19, 1997, LDS elected to be taxed under the provisions of
Subchapter "S" of the Internal Revenue Code (Subchapter "S"). Under those
provisions, LDS did not pay federal corporate income taxes on its taxable
income. Instead, the Company's stockholders were liable for individual federal
income tax on the Company's taxable income. Effective March 19, 1997, LDS
became taxable under the provisions of Subchapter "C" of the Internal Revenue
Code (Subchapter "C") (see Note 2). Effective December 31, 1997, LDSI, which
previous to that date was taxed under the provisions of Subchapter "S", became
taxable under the provisions of Subchapter "C" .
Concentrations of Credit Risk
The Company is engaged in providing e-business solutions primarily to
Fortune 500 companies. The Company performs ongoing, informal credit
evaluations of its customers' financial condition and requires no collateral
from its customers. The Company maintains an allowance for potential credit
losses, when necessary. Historically, those losses have been within
management's expectations. During the years ended December 31, 1997, 1998 and
1999, the Company wrote off $16,460, $0, and $215,566, respectively, of
accounts receivable and increased the allowance for doubtful accounts by
$36,460, $215,566 and $50,000, respectively.
In 1997 and 1998, the Company's two largest clients accounted for
approximately 66% and 73% of total revenue and 55% and 66% of total accounts
receivable, respectively. In 1999, the Company's three largest clients
accounted for approximately 64% and 61% of total revenue and total accounts
receivable, respectively. Individual customers who accounted for 10% or more
of the Company's total revenue and the corresponding industry classification
are as follows:
<TABLE>
<CAPTION>
Percentage of
Total Revenue
For Year Ended
Customer Industry December 31,
-------- ----------------- --------------
1997 1998 1999
---- ---- ----
<C> <S> <C> <C> <C>
A Communications 42% 47% 24%
B Manufacturing 24% 26% 28%
C Financial Services -- -- 12%
</TABLE>
The Company periodically has cash balances in excess of Federal Deposit
Insurance Corporation limits.
Research and Development Costs
Research and development expenditures are charged to operations as
incurred. To date, substantially all research and development activities of
the Company have been pursuant to customer engagements and, accordingly, have
been expensed as a cost of the engagements.
F-12
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
Goodwill
Goodwill represents the excess of cost over the fair value of the net assets
acquired and is being amortized on a straight-line basis over an estimated
useful life of three years. Management periodically evaluates the
recoverability of goodwill by comparing anticipated undiscounted future cash
flows from operations to the carrying value of the goodwill. Should the
evaluation indicate that the goodwill is not recoverable, an adjustment would
be recorded.
Impairment of Long-Lived Assets
The Company applies Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. Management periodically evaluates whether events or
circumstances have occurred that indicate that the remaining estimated useful
lives of property and equipment, other identifiable intangible assets and
goodwill may warrant revision or that remaining balances may not be
recoverable.
Stock-Based Compensation
As permitted by Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation ("FAS 123"), which establishes a fair
value based method of accounting for stock-based compensation plans, the
Company has elected to follow Accounting Principal Board Opinion No. 25
Accounting for Stock Issued to Employees ("APB 25"), for recognizing stock-
based compensation expense for financial statement purposes. Under APB 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The fair value of each of the following instruments approximates their
carrying value because of the short maturity of these instruments: cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
other liabilities. The carrying values of capital lease obligations and junior
subordinated debentures approximate fair value since the related interest rates
approximate rates currently available to the Company. The carrying value of
senior subordinated debentures is based upon relative fair values of the
debentures and the warrants at date of issuance with accretion to face value
through the scheduled redemption date. (See Note 6 regarding redemption values
which approximates fair value.) The fair value of the redeemable warrants is
based upon an independent valuation. (See Note 13.)
Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with
Financial Accounting Standards Board Statement No. 128, Earnings Per Share
("FAS 128"). All earnings per share amounts for all periods have been presented
to conform to the requirements of FAS 128.
Supplemental pro forma net loss and pro forma net loss per share
Supplemental pro forma net loss and pro forma net loss per share data have
been calculated assuming that the redeemable warrants were exercised on January
1, 1999.
F-13
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
Comprehensive Income
No statement of comprehensive income has been included in the accompanying
financial statements since there are no differences to be reported from the
accompanying statements of operations or stockholders' equity.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities," which establishes accounting and reporting standards of derivative
instruments, including some derivative instruments embedded in other contracts,
and for hedging activities. In July 1999, the FASB approved SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company does not currently engage in derivative activity and does not
expect the adoption of this standard to have a material effect on its results
of operations, financial position or cash flows.
2. Investment and Restructuring
In March 1997, LDS effected a restructuring (the "Restructuring") in
connection with the issuance of Senior Subordinated Debentures (see Note 6) and
Warrants to purchase common stock to certain investment funds of a venture
capital group and other investors (collectively, the "Investors") (see Notes 1,
10 and 13). In connection with the Restructuring, effective March 19, 1997, LDS
converted from a Subchapter "S" Corporation to a Subchapter "C" Corporation for
income tax purposes.
3. Business Combination
In November 1999, the Company acquired 100% of the outstanding stock of
Jump! Information Technologies, Inc., a publishing and information services e-
business solutions provider located in Chantilly, Virginia, for a purchase
price of approximately $842,000 that consisted of (i) $525,000 of cash, (ii)
$168,000 of vested stock options (12,671 vested stock options were issued) and
(iii) $149,000 in closing costs. The Company also issued 109,500 shares of
common stock in connection with this acquisition. The fair value of the total
assets and total liabilities related to this acquisition was $578,000 and
$452,000, respectively, and goodwill amounted to approximately $715,000.
The Company accounted for the above acquisition as a purchase. Accordingly,
the acquired assets and liabilities assumed have been recorded at their
estimated fair values at the date of acquisition. The results of operations of
the acquired business are included in the Company's results of operations from
the acquisition date.
In connection with the Jump! acquisition, the Company issued 109,500 shares
of its common stock to the former Jump! shareholders and entered into a
shareholders agreement with them governing their rights and obligations with
respect to the 109,500 shares held by them. Under the shareholders' agreement,
the Company will repurchase any shares of a Jump! shareholder whose employment
with the Company is terminated. If the termination is a voluntary resignation
or an involuntary termination by the Company with just cause, the repurchase
price will be zero if the termination occurs prior to January 1, 2000, 25% of
the fair market value of the Company's common stock as of the date of the
shareholders agreement based on a date of termination from and including
January 1, 2000 but prior to March 31, 2000, 50% from and including March 31,
2000 and prior
F-14
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
to June 30, 2000, 75% from and including June 30, 2000 and prior to September
30, 2000 and 100% of the fair market value of the Company's common stock as of
the date of the shareholders agreement from September 30, 2000. If the
employment is terminated for any other reason, the Company will repurchase the
shares for 100% of the fair market value of the Company's common stock as of
the date of the shareholders agreement. This agreement shall terminate upon a
firmly underwritten public offering with gross proceeds to the Company of at
least $10 million.
Based upon the estimated fair market value of these shares at December 31,
1999, the Company recorded $432,500 of stock-based compensation and $1,297,600
of deferred compensation which will be amortized over the vesting period.
Deferred compensation and the related compensation expense will be adjusted on
a prospective basis over the vesting schedule based on changes in fair market
value of the common stock during the period.
One of the former Jump! shareholders was terminated by the Company in June
2000. In accordance with the provisions of the shareholders agreement, the
Company plans to repurchase this individual's shares of common stock for 100%
of their fair market value as of the date of the shareholders agreement.
Accordingly, the remaining 25% of deferred stock compensation related to this
individual that was scheduled to be amortized in the third quarter of 2000 was
accelerated and recognized in the second quarter of 2000 through a charge of
approximately $216,000 to stock-based compensation. The other former Jump!
shareholder voluntarily resigned in July 2000. In accordance with the
provisions of the shareholders agreement, the Company plans to repurchase this
individual's shares of common stock for 75% of their fair market value as of
the date of the shareholders agreement. Accordingly, the remaining 25% of the
deferred stock compensation relating to this individual that was scheduled to
be amortized in the third quarter of 2000 was reversed as of June 30, 2000.
This resulted in a decrease to additional paid-in capital and deferred stock
compensation of approximately $216,000. The repurchase of these shares has not
yet been finalized.
The following table represents the unaudited pro forma results of operations
for the years ended December 31, 1998 and 1999 as if the above acquisition had
occurred on January 1 of the respective year:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Revenue....................................... $12,545,000 $17,940,000
Net loss...................................... $ (764,000) $(9,011,000)
Basic net loss per common share............... $ (.10) $ (1.13)
Diluted net loss per common share............. $ (.10) $ (1.13)
</TABLE>
The pro forma amounts reflect the amortization of the excess of purchase
price over the net assets acquired. The pro forma results are not necessarily
indicative of the results of operations that would have occurred had the
acquisition taken place at the beginning of the period presented nor are they
intended to be indicative of results that may occur in the future.
F-15
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
4. Property and Equipment
Major classes of property and equipment and their related estimated useful
lives as of December 31, 1998 and 1999 and June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Estimated
Useful Life June 30,
(Years) 1998 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Computer equipment...... 3 $ 1,590,602 $ 2,219,004 $ 3,091,646
Office equipment........ 5 354,628 393,438 666,731
Furniture and fixtures.. 7 722,836 907,049 1,608,824
Equipment under capital
lease.................. 3 440,186 440,186 440,186
Leasehold improvements.. * 657,234 657,234 748,050
----------- ----------- -----------
3,765,486 4,616,911 6,555,437
Less accumulated
depreciation and
amortization........... (1,237,553) (2,062,740) (2,600,008)
----------- ----------- -----------
$ 2,527,933 $ 2,554,171 $ 3,955,429
=========== =========== ===========
</TABLE>
--------
* Lesser of term of lease or estimated useful life.
5. Accrued Expenses
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
June 30,
1998 1999 2000
-------- ---------- ----------
<S> <C> <C> <C>
Accrued payroll and related expenses.... $511,034 $ 918,683 $1,429,753
Accrued professional fees............... 76,411 269,245 930,509
Income taxes payable.................... -- 80,697 588,453
Other accrued expenses.................. 132,998 198,736 338,861
-------- ---------- ----------
$720,443 $1,467,361 $3,287,576
======== ========== ==========
</TABLE>
6. Subordinated Debt
Senior Subordinated Debentures
On March 19, 1997, LDS issued Senior Subordinated Debentures ("Senior
Debentures") in the aggregate principal amount of $5,540,736 for an aggregate
cash purchase price of $5,123,902. In connection with the issuance of the
Senior Debentures, LDS also issued a warrant to acquire 2,150,000 shares,
subject to adjustment, of common stock ("Warrants"). Upon issuance, the
Warrants were recorded at their relative fair market value in relation to the
Senior Debentures, resulting in an allocation of $2,272,000 of proceeds from
the Senior Debentures to the Warrants and an effective interest rate of 21.0%
on the Senior Debentures (see Note 13). The accretion to redemption value of
the Senior Debentures, based on deemed fair market value on date of issuance,
is being recorded as interest expense as an adjustment to yield over the five
year life of the Senior Debentures.
F-16
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
The Senior Debentures are payable in full on March 19, 2002 and accrue
interest from the date of issuance until the date of payment of principal at
the rate of 9.0% per year compounded annually. Interest is payable upon payment
of principal which is due March 19, 2002. The redemption value of the Senior
Subordinated Debentures, including accrued interest of approximately $1.5
million, was approximately $7.0 million at December 31, 1999.
Junior Subordinated Debentures
In connection with the above transaction, LDS made distributions to its
management stockholders in the form of Junior Subordinated Debentures ("Junior
Debentures"). The Junior Debentures are payable in full on March 19, 2003 and
accrue interest from the date of issuance until the date of payment of
principal at the rate of 9.0% per year compounded annually. Interest is payable
upon payment of principal which is due March 19, 2003.
7. Lines of Credit
The Company has a line of credit arrangement with a bank which allows for
borrowings up to $1,500,000. Borrowings under this line accrue interest at the
prime rate. This line, which expired on June 30, 2000,was renewed and amended
to increase the allowable borrowings to $2,000,000. As amended, the line
expires on June 30, 2001 and is subject to annual renewal.
The Company also has a $150,000 equipment line of credit. Under this line,
80% of the cost of the equipment purchased is eligible for borrowing.
Borrowings under this line accrue interest at the prime rate plus .25%.
Borrowings under the equipment line are repaid in 36 monthly installments, plus
interest. This line expired on June 30, 2000 and was not renewed.
There were no outstanding borrowings under these lines of credit at December
31, 1999.
The lines of credit contain various financial covenants which require the
Company to, among other requirements, maintain a minimum current ratio and a
maximum debt to equity ratio.
8. Capital Lease Obligations
The Company leases certain office equipment under leases classified as
capital leases for financial reporting purposes. The following is a schedule of
future minimum lease payments under these agreements and the present value of
the payments as of December 31, 1999:
<TABLE>
<S> <C>
Year ended December 31:
2000......................................................... $ 92,983
2001......................................................... 92,983
2002......................................................... 92,983
2003......................................................... 130,995
--------
309,944
Less amount representing interest............................ (35,022)
--------
Present value of minimum lease payments...................... $274,922
========
</TABLE>
F-17
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
9. Commitments
Leases
The Company leases office space, automobiles and office equipment under
noncancelable operating lease agreements which expire through February 2010.
Aggregate annual future minimum lease payments under these noncancelable leases
are, including the new Morristown facility, as follows:
<TABLE>
<S> <C>
Year ended December 31:
2000....................................................... $ 2,480,000
2001....................................................... 2,431,000
2002....................................................... 2,229,000
2003....................................................... 2,306,000
2004....................................................... 2,320,000
2005 and thereafter........................................ 8,857,000
-----------
$20,623,000
===========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$347,500, $617,700 and $934,500, respectively.
Letters of Credit
The Company has outstanding letters of credit of $549,000 and $80,000 at
December 31, 1999.
10. Related Party Transactions
The principal stockholders periodically obtain advances from the Company.
These amounts are recorded in the balance sheet as loans to stockholders.
During 1997, and as contemplated and agreed upon by the parties involved in the
issuance of the Senior Debentures and Junior Debentures (see Note 6), the
principal stockholders also received cash distributions based on estimated
available LDS and LDSI Subchapter "S" earnings and estimated required personal
income tax payments. During 1998, final LDS and LDSI Subchapter "S" income tax
returns were prepared and filed which resulted in the finalization of taxes
payable and earnings available for distribution to stockholders. This resulted
in a reclassification during 1998 of $343,964 between distributions to
stockholders and loans to stockholders as agreed upon by the Company, the
stockholders and the Investors. This excess cash distribution represents
amounts agreed upon by the parties to be retained in the business at the time
of the transaction. The parties agreed to record these amounts as loans to
stockholders. Interest has been accrued on these amounts at 9.0% and is
included in the loans to stockholders' balance. In addition, during 1998 the
Company advanced $247,100 to a principal stockholder in order to purchase a
personal residence. That amount is secured by a note and a second mortgage on
the property. These notes accrue interest payable monthly at 8.5%. The notes,
including all principal and interest, are due between June and August 2003.
Under certain conditions the Company can accelerate the repayment of the notes.
In connection with these advances, the stockholder and the Company executed an
agreement under which the stockholder pledged 785,000 shares of common stock as
collateral for the obligation to the Company.
F-18
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
11. Income Taxes
The provision (benefit) for income taxes for the years ended December 31,
1997, 1998 and 1999 and the six months ended June 30, 2000 consisted of the
following:
<TABLE>
<CAPTION>
June
1997 1998 1999 30, 2000
------------------------------ --------- --------- --------
Subchapter Subchapter
"S" Corp. "C" Corp. Total
---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Current:
Federal....... $205,000 $205,000 $ 25,000 $(152,000) $638,569
State......... $47,000 63,000 110,000 7,103 187,724
------- -------- -------- --------- --------- --------
47,000 268,000 315,000 32,103 (152,000) 826,293
Deferred:
Federal....... 120,000 120,000 (125,000) (6,207) (37,945)
State......... 30,000 30,000 (22,200) (44,149) 36,652
-------- -------- --------- --------- --------
150,000 150,000 (147,200) (50,356) (1,293)
------- -------- -------- --------- --------- --------
Income taxes.... $47,000 $418,000 $465,000 $(115,097) $(202,356) $825,000
======= ======== ======== ========= ========= ========
</TABLE>
The provision (benefit) for income taxes reconciled to the amount computed
by applying the statutory federal rate of 34% to the income (loss) before
income taxes is as follows:
<TABLE>
<CAPTION>
June 30,
1997 1998 1999 2000
----- ----- ----- --------
<S> <C> <C> <C> <C>
Statutory federal income tax................... 34.0% (34.0)% (34.0)% (34.0)%
Increases (decreases):
Increase in market value of redeemable
warrants.................................... 4.8 17.1 29.0 8.3
Increase in valuation allowance.............. -- -- 2.5 30.3
Income attributable to "S" Corporation
periods..................................... (26.8) -- -- --
Establishment of initial deferred tax
liabilities upon conversion from
"S" to "C" Corporation...................... 8.1 -- -- --
Other........................................ 2.5 1.1 0.2 0.8
----- ----- ----- -----
Income taxes................................... 22.6% (15.8)% (2.3)% 5.4%
===== ===== ===== =====
</TABLE>
F-19
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
The significant components of the Company's deferred tax assets and
liabilities at December 31, 1998 and 1999 and June 30, 2000 are as follows:
<TABLE>
<CAPTION>
June 30,
1998 1999 2000
-------- -------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Current:
Allowance for doubtful accounts........ $ 86,200 $ 20,000 $ 20,000
Deferred income........................ -- 12,500 --
Accrued payroll and vacation........... 21,000 8,108 3,500
Stock-based compensation............... -- 430,815 5,690,029
-------- -------- ----------
107,200 471,423 5,713,529
Less valuation allowance............... -- (430,815) (5,629,614)
-------- -------- ----------
107,200 40,608 83,915
Noncurrent:
Net operating loss carryforward........ -- 43,348 --
-------- -------- ----------
Total deferred tax assets.................. 107,200 83,956 83,915
Deferred tax liabilities:
Current:
Cash to accrual conversion--Jump!...... -- (48,863) (40,929)
Cash to accrual conversion--LDSI....... (114,700) -- --
-------- -------- ----------
(114,700) (48,863) (40,929)
Noncurrent:
Depreciation........................... -- (29,500) (36,162)
Amortization........................... -- (6,886) (6,824)
-------- -------- ----------
-- (36,386) (42,986)
-------- -------- ----------
Total deferred tax liabilities............. (114,700) (85,249) (83,915)
-------- -------- ----------
Net deferred tax liabilities............... $ (7,500) $ (1,293) $ --
======== ======== ==========
</TABLE>
As of December 31, 1999, the Company has federal and state net operating
loss carryforwards of approximately $741,000 and $720,000, respectively, which
expect to be fully utilized in 2000.
12. Employee Benefit Plan
The Company has a 401(k) plan (the "Plan") which covers substantially all
employees, subject to minimum age and service requirements. The Company may
make contributions to the Plan. Any such contributions are determined on an
annual basis and are at the discretion of the Board of Directors. Contributions
for the years ended December 31, 1997, 1998 and 1999 were $142,700, $153,700
and $230,400, respectively.
13. Stockholders' Equity
Effective March 17, 1997, LDS amended its certificate of incorporation to
increase the number of shares authorized to 1,500,000 shares and the Board of
Directors authorized and approved a 3,925-for-one stock split increasing the
number of outstanding shares from 200 shares to 785,000 shares.
F-20
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
Effective September 10, 1997, LDS amended its certificate of incorporation
to increase the number of shares authorized to 15,000,000 shares and the Board
of Directors further authorized and approved a ten-for-one stock split
increasing the number of shares outstanding to 7,850,000.
All per share amounts have been adjusted for the above stock splits, except
as otherwise indicated.
In connection with the issuance of Senior Debentures (see Note 6), LDS also
issued Warrants to certain Investors to acquire 2,150,000 common shares. The
Warrants may be exchanged for an equal number of shares of common stock of
LDS. The Warrants are exercisable on March 19, 2004 at a price of $.01 per
share and expire on March 19, 2004 or earlier as defined in the warrant
agreement. The shares of common stock issuable upon exercise of the Warrants
are subject to demand registration rights on the part of the Investors and
piggyback registration rights. LDS has reserved 2,150,000 shares of common
stock for issuance upon the exercise of the Warrants.
The Warrants are subject to a Redemption Agreement which permits the
Investors to put the Warrants to LDS for redemption at the fair market value
(as agreed upon in good faith between the Company and the Investors) of the
shares of common stock issuable upon the exercise of the Warrants at the
earlier of the occurrence of a liquidity event (as defined) or March 19, 2003.
In the event a redemption request is made on March 19, 2003, the Warrants will
be redeemed 50% on March 19, 2003 and 50% on March 19, 2004. Under the terms
of the Warrant Agreement, each holder of Warrants must immediately exercise
all Warrants held upon the completion of an initial public offering of LDS
common shares.
In accordance with Emerging Issues Task Force No. 96-13, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock, the Company estimated the fair value of the Warrants at
date of issuance. The Company has continued to estimate the fair value of the
Warrants with changes in fair value amortized and reported in the statements
of operations based upon an anticipated date of redemption of the Warrants of
March 19, 2003. At each balance sheet date the fair value was determined by an
independent valuation and, based on these valuations, the Company increased
the carrying value of the Warrants and recorded a charge of $288,048,
$366,333, $7,504,956 and $3,752,478 in the statements of operations for the
years ended December 31, 1997, 1998 and 1999 and the six months ended June 30,
2000, respectively. The estimated fair value of the warrants as of December
31, 1999 was approximately $34 million.
14. Earnings Per Share
The reconciliation of shares used to calculate basic and diluted earnings
per share consists of the following:
<TABLE>
<CAPTION>
June 30,
-------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Weighted-average common
shares outstanding used to
calculate basic earnings
per share.................. 7,850,001 7,850,023 7,867,786 7,850,615 7,975,494
Net effect of dilutive
warrants based on treasury
stock
method using average market
price...................... 1,682,261 * * * *
--------- --------- --------- --------- ---------
Weighted-average common
shares and common share
equivalents used to
calculate diluted earnings
per share.................. 9,532,262 7,850,023 7,867,786 7,850,615 7,975,494
========= ========= ========= ========= =========
</TABLE>
--------
* The dilutive stock options and warrants are not included as their effect is
anti-dilutive.
F-21
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
15. Stock Option Plans
Effective September 10, 1997, the stockholders of the Company approved the
1997 Stock Option Plan ("1997 Plan"). On October 28, 1999, the Board of
Directors adopted the Company's 1999 Stock Option Plan ("1999 Plan"). Under the
Plans (the 1997 Plan and 1999 Plan, collectively), the Company issues options
at exercise prices equal to fair value at the date of grant and no compensation
expense is recorded. Options granted under the Plans are designated as either
nonqualified stock options or incentive stock options. Under the terms of the
1997 Plan, the Company has reserved 1,000,000 shares of common stock for
issuance upon exercise of options. Under the terms of the 1999 Plan, the
Company has reserved 330,000 shares of common stock for issuance upon exercise
of options. No option will have a term in excess of ten years under the Plans.
The administrator, which may be the Board of Directors or a committee thereof,
is responsible for determining the individuals to be granted options, the
number of options each individual will receive, the option price per share and
the exercise period of each option. Options granted pursuant to the Plans
generally vest over a one to four year period from date of grant.
Of the 527,118 stock options issued during the year ended December 31, 1999,
non-qualified options to purchase 130,000 shares and incentive stock options to
purchase 268,818 shares at exercise prices of $2.20 were considered to be below
the deemed fair market value at date of grant for financial reporting purposes.
In accordance with APB 25, compensation expense will be recognized as the
difference between the exercise prices of these options at their respective
grant dates and the deemed fair value for financial reporting purposes of the
common stock. The Company recorded $644,537 of compensation expense during 1999
based on the vesting schedules of these options. In addition, the Company
recorded deferred stock compensation of $4,107,071 as of December 31, 1999;
these amounts are included as a reduction of stockholders' equity and are being
amortized to compensation expense over the vesting period of the options
granted, which range from one to four years from the date of grant.
The following table summarizes information about stock options outstanding
at December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
----------------- ----------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Stock Exercise Stock Exercise Stock
Price Options Price Options Price Options
--------- ------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... $ -- -- $2.04 565,000 $2.12 758,500
Granted............... 2.04 565,000 2.39 204,100 2.20 527,118
Exercised............. -- -- 2.39 (500) 2.37 (9,800)
Canceled.............. -- -- 2.39 (10,100) 2.30 (69,900)
----- ------- ----- ------- ----- ---------
Options outstanding, end
of year................ $2.04 565,000 $2.12 758,500 2.15 1,205,918
===== ======= ===== ======= ===== =========
Options exercisable, end
of year................ $ -- -- $2.11 178,250 $2.13 424,484
===== ======= ===== ======= ===== =========
</TABLE>
F-22
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
The weighted-average fair value of options granted was $.66 per share or
$135,000 and $10.16 per share or $5,400,000 for the years ended December 31,
1998 and 1999, respectively.
<TABLE>
<CAPTION>
Weighted-Average
Option Exercise Outstanding Remaining
Class Price Options Contractual Life
------ -------- ----------- ----------------
<S> <C> <C> <C>
1997................................ $2.04 550,000 7.7 years
1998................................ $2.39 136,600 8.3 years
1999................................ $2.20 519,318 9.5 years
========= =========
1,205,918 8.5 years
========= =========
</TABLE>
Pro forma information regarding net income (loss) is required by FAS 123 and
has been determined as if the Company had been accounting for its employee
stock options under the fair value method of that statement. The fair value of
these options was estimated at the date of grant using the Black-Scholes
option-pricing fair value model with the following weighted-average
assumptions: volatility of 54%, 100% and 90% in 1997, 1998 and 1999,
respectively; risk-free interest rate of 6.8% in 1999 and 5.35% in 1998 and
1997; no dividends; and an expected life of the options of five years for
options granted in 1999 and six years for options granted in 1998 and 1997. Had
compensation cost been recognized based on the fair value of the employee stock
options on the date of grant under the methodology prescribed by FAS 123, the
Company's pro forma net income (loss) would have been approximately $1,570,000,
$(894,000) and $(9,540,000) in 1997, 1998 and 1999, respectively, and pro forma
basic and diluted net (loss) income per common share would have been ($1.21)
and ($.11) in 1999 and 1998, respectively. Pro forma basic and diluted net
income per common share would have been $.20 and $.16 in 1997, respectively.
Option valuation models require the input of highly subjective assumptions
including the expected life of the option and the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
During the six months ended June 30, 2000, 1,109,850 stock options were
granted with a weighted average exercise price of $4.17 per share. The exercise
price of each of these grants was considered to be below the deemed fair market
value at the date of grant for financial reporting purposes. The Company
recorded $12,324,285 of compensation expense during the six months ended June
30, 2000 based on the vesting schedules of these options. In addition, the
Company recorded deferred compensation of $564,582 as of June 30, 2000 that
will be amortized to compensation expense over the vesting period of the
options granted, which ranges from one to four years from the date of grant.
16. Pro Forma Balance Sheet
The Company is planning to file a registration statement with the Securities
and Exchange Commission that would permit the Company to sell shares of common
stock in an initial public offering. The unaudited pro forma balance sheet
reflects the effects of the automatic exercise of all redeemable warrants into
2,150,000 shares of the Company's common stock upon the completion of the
initial public offering and the accretion of the redeemable warrants to fair
market value, based on the midpoint of the expected price range of the
Company's initial public offering.
F-23
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Pro forma information and information as of and relating to the six months
ended June 30, 1999 and 2000 is unaudited)
17. Subsequent Events
Leases
The Company moved its headquarters and principal operations from its
previous Morristown, New Jersey location to a new location, also in Morristown,
in July 2000. In February 2000, the Company entered into a ten year lease for
this new office space. Minimum annual lease payments amount to $1,456,000 for
the first three years of the lease, $1,534,000 for years four through six, and
$1,638,000 for years seven through ten. In connection with the lease agreement,
the Company obtained a letter of credit for $970,667 to be used as security.
The letter of credit requirement is reduced to $767,000 on February 10, 2004,
$546,000 on February 10, 2006, and will be released after lease termination.
Stock Options
Effective March 1, 2000, the Board of Directors amended the Company's 1999
Stock Plan to increase the number of common shares reserved for issuance from
330,000 to 2,750,000. In addition, on this same date, the Board of Directors
approved the 2000 Stock Plan for Non-Employee Directors ("2000 Plan"). Under
the terms of the 2000 Plan, the Company has reserved 500,000 shares of common
stock for issuance upon exercise of options.
Recapitalization
On March 2, 2000, the Company effected a reincorporation merger pursuant to
which the Company reincorporated in the State of Delaware. Pursuant to the
reincorporation merger, the par value of the Company's common stock was changed
from no par value to $0.01 per share.
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Jump! Information Technologies, Inc.
We have audited the accompanying balance sheet of Jump! Information
Technologies, Inc. (the "Company") as of December 31, 1998, and the related
statements of income and cash flows for the periods from March 6, 1998
(inception) to December 31, 1998 and January 1, 1999 to November 9, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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 our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jump! Information
Technologies, Inc. as of December 31, 1998, and the results of its operations
and its cash flows for the periods from March 6, 1998 (inception) to December
31, 1998 and January 1, 1999 to November 9, 1999, in conformity with accounting
principles generally accepted in the United States.
Metropark, New Jersey /s/ Ernst & Young LLP
February 4, 2000
F-25
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
BALANCE SHEET
December 31, 1998
<TABLE>
<S> <C>
Assets
Current assets:
Cash............................................................... $ 24
Accounts receivable................................................ 279,933
Deferred income taxes.............................................. 50,079
--------
Total current assets............................................. 330,036
Computer equipment, net of accumulated depreciation of $7,975........ 36,235
Deferred income taxes................................................ 12,520
Other assets......................................................... 14,270
--------
$393,061
========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses.............................. $ 2,575
Deferred revenue................................................... 124,996
Loan from stockholder.............................................. 23,162
Income taxes payable............................................... 10,209
Deferred income taxes.............................................. 111,973
--------
Total current liabilities........................................ 272,915
Deferred revenue..................................................... 31,251
Stockholders' equity: 1,500
Class A, Voting Common Stock, no par value, 2,100,000 shares
authorized, 2,100,000 shares issued and outstanding...............
Class B, Non-Voting Common Stock, no par value, 500,000 shares
authorized, none issued or outstanding............................ (1,500)
Loan to stockholders............................................... 88,895
--------
Retained earnings.................................................. 88,895
--------
Total stockholders' equity....................................... $393,061
========
</TABLE>
See accompanying notes.
F-26
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
March
6, 1998 January
(inception) 1, 1999
to to
December 31, November
1998 9, 1999
------------ ----------
<S> <C> <C>
Revenue................................................ $1,215,364 $2,100,571
Cost of revenue........................................ 457,614 1,105,822
---------- ----------
Gross profit........................................... 757,750 994,749
Selling, general and administrative.................... 613,878 801,030
Depreciation and amortization.......................... 7,975 12,795
---------- ----------
Income from operations................................. 135,897 180,924
Other income:
Interest income...................................... 2,237 2,773
Other................................................ 10,344 5,443
---------- ----------
Income before provision for income taxes............... 148,478 189,140
Provision for income taxes............................. 59,583 72,208
---------- ----------
Net income............................................. $ 88,895 $ 116,932
========== ==========
</TABLE>
See accompanying notes.
F-27
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March
6, 1998 January
(inception) 1, 1999
to to
December November
31, 1998 9, 1999
----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income......................................... $ 88,895 $ 116,932
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 7,975 12,795
Deferred income taxes............................ 49,374 (5,062)
Changes in operating assets and liabilities:
Accounts receivable............................ (279,933) 17,822
Other assets................................... (14,270) (102,820)
Accounts payable and accrued expenses.......... 2,575 96,679
Deferred revenues.............................. 156,247 20,830
Income taxes payable........................... 10,209 77,270
Other liabilities.............................. 4,187
--------- ---------
Net cash provided by operating activities.......... 21,072 238,633
Cash flows from investing activities
Capital expenditures............................... (44,210) (170,169)
--------- ---------
Net cash used in investing activities.............. (44,210) (170,169)
Cash flows from financing activities
Purchase of treasury stock......................... (15,210)
Loan to stockholders............................... (1,500) 1,500
Proceeds from the sale of common stock............. 1,500
Loan from stockholder.............................. 23,162 (23,162)
--------- ---------
Net cash provided by (used in) financing
activities........................................ 23,162 (36,872)
--------- ---------
Net increase in cash............................... 24 31,592
Cash, beginning of period.......................... -- 24
--------- ---------
Cash, end of period................................ $ 24 $ 31,616
========= =========
Supplemental cash flow disclosures
Income taxes paid.................................. $ -- $ 5,700
========= =========
</TABLE>
See accompanying notes.
F-28
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation and Summary of Significant Accounting Policies
Description of Business and Organization
Jump! Information Technologies, Inc. ("Jump!" or the "Company") is a
publishing and information services e-business solutions provider located in
Chantilly, Virginia.
Jump! was incorporated on March 6, 1998 as Net3 Technologies, Inc. The
Company's name was changed to Jump! Information Technologies, Inc. on November
10, 1998.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Computer Equipment
Computer equipment is recorded at cost. Depreciation is recorded using the
straight line method over the estimated useful life of the assets of three
years.
Revenue Recognition
The Company's revenue is generated from contracts that are billed on a time
and materials basis. Under these contracts, revenue is recognized as services
are provided.
Income Taxes
Deferred income taxes are provided for differences between the financial
statement and income tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Concentrations of Credit Risk
The Company is engaged in providing e-business solutions to its customers.
The Company performs ongoing, informal credit evaluations of its customers'
financial condition and requires no collateral from its customers.
One customer accounted for 100% of total revenue in 1998 and 100% of
accounts receivable at December 31, 1998. This same customer accounted for 96%
of total revenue in 1999. The loss of this customer would have a material
impact on the financial condition of the Company.
Stock-Based Compensation
As permitted by Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation ("FAS 123"), which establishes a fair
value based method of accounting for stock-based compensation plans, the
Company has elected to follow Accounting Principal Board Opinion No. 25
Accounting for Stock Issued to Employees ("APB 25"), for recognizing stock-
based compensation expense for financial statement purposes. Under APB 25,
compensation expense is based on the difference, if any, on the date of grant,
between the fair value of the Company's stock and the exercise price.
F-29
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
2. Commitments
Leases
The Company leases office space under a noncancelable operating lease
agreement which will expire in June 2005. Aggregate annual future minimum lease
payments under this noncancelable lease is as follows:
<TABLE>
<S> <C>
Year ended December 31:
1999........................................................ $ 159,000
2000........................................................ 206,000
2002........................................................ 217,000
2002........................................................ 224,000
2003........................................................ 230,000
2004 and thereafter......................................... 605,000
----------
$1,641,000
==========
</TABLE>
Rent expense for the periods ended December 31, 1998 and November 9, 1999
was approximately $111,000 and $136,000, respectively.
Employment Agreements
The Company has employment contracts with certain key employees. The
agreements provide for minimum salary amounts and discretionary performance
bonus arrangements as determined and approved by the Board of Directors.
3. Related Party Transactions
The initial capital contribution by the founding stockholders was funded
through a $1,500 loan from the Company. That amount is recorded as "loan to
stockholders" and reflected as a reduction to stockholders' equity in the
December 31, 1998 balance sheet.
In December 1998, a Company officer and stockholder loaned the Company
approximately $23,000 for working capital purposes. That amount is classified
as "loan from stockholder" in the December 31, 1998 balance sheet. The loan was
repaid in full in March 1999.
4. Income Taxes
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
December 31, November 9,
1998 1999
------------ -----------
<S> <C> <C>
Current:
Federal....................................... $ 8,861 $64,954
State......................................... 1,348 12,316
------- -------
10,209 77,270
Deferred:
Federal....................................... 41,968 (4,303)
State......................................... 7,406 (759)
------- -------
49,374 (5,062)
------- -------
Income taxes.................................... $59,583 $72,208
======= =======
</TABLE>
F-30
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
The provision for income taxes for the 1998 and 1999 periods differed from
the amount computed by applying the statutory federal rate of 34% to pre-tax
income principally due to the effect of state taxes.
The significant components of the Company's deferred tax assets and
liabilities at December 31, 1998 was as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Deferred revenue........................................... $ 62,599
Deferred tax liabilities:
Cash to accrual conversion................................. (111,973)
---------
Net deferred tax liabilities................................. $ (49,374)
=========
</TABLE>
5. Stockholders' Equity
Effective November 10, 1998, the Company amended its certificate of
incorporation to create two classes of common stock ("Class A, Voting Common
Stock" and "Class B, Non-Voting Common Stock") and increase the number of
shares authorized to 2,100,000 shares of Class A, Voting Common Stock and
500,000 shares of Class B, Non-Voting Common Stock. In addition, the Board of
Directors authorized and approved a 700-for-one stock split of Class A, Voting
Common Stock increasing the number of shares issued and outstanding from 300
shares to 2,100,000 shares. The stock split has been given retroactive effect
in these financial statements.
6. Stock Options
Effective November 10, 1998, the Board of Directors and stockholders
approved the Jump! Information Technologies, Inc. Non-Qualified Stock Option
Plan (the "Plan"). Under the terms of the Plan, the Company has reserved all
500,000 shares of Class B, Non-Voting Common Stock for issuance upon exercise
of options. The Plan is administered by a committee comprised of one or more
individuals appointed by the Board of Directors. This committee is responsible
for determining the individuals to be granted options, the number of options
each individual will receive, the option price per share and the exercise
period of each option. All options expire in ten years from date of grant.
Options granted pursuant to the Plan generally vest over a two year period from
date of grant.
The following table summarizes information about stock options outstanding
at December 31, 1998 and November 9, 1999:
<TABLE>
<CAPTION>
1998 1999
----------------- ------------------
Weighted- Weighted-
Average Average
Exercise Stock Exercise Stock
Price Options Price Options
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
period........................... $-- -- $.25 234,000
Granted......................... .25 234,000 .25 192,000
Exercised....................... .25 (39,000)
Canceled........................ -- -- .25 (156,000)
---- ------- ---- --------
Options outstanding, end of
period........................... $.25 234,000 $.25 231,000
==== ======= ==== ========
Options exercisable, end of
period........................... $-- -- $.25 39,000
==== ======= ==== ========
</TABLE>
F-31
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
The weighted-average fair value of options granted was $.07 per share or
$16,000 for the period ended December 31, 1998 and $.07 per share or $13,000
for the period ended November 9, 1999.
Pro forma information regarding net income is required by FAS 123 and has
been determined as if the Company had been accounting for its employee stock
options under the fair value method of that statement. The fair value of these
options was estimated at the date of grant using the minimum value method for
non-public companies permitted by FAS 123 with the following assumptions:
weighted average risk-free interest rate of 6.71%; no dividends; and weighted
average expected life of the options of five years. Had compensation cost been
recognized based on the fair value of the employee stock options on the date
of grant under the methodology prescribed by FAS 123, the Company's net income
would have decreased by approximately $1,000 in 1998 and $8,000 in 1999.
Option valuation models require the input of highly subjective assumptions
including the expected life of the option. Because the Company's employee
stock options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
7. Subsequent Events
Pursuant to a stock purchase agreement dated November 10, 1999, the
stockholders of the Company sold 100% of the Company's outstanding capital
stock to Logical Design Solutions, Inc. ("LDS"), a third party.
In December 1999, Jump! was merged into its acquirer, LDS, with LDS being
the surviving corporation.
F-32
<PAGE>
[Inside backcover page]
GRAPHIC:
[Logical Design Solutions' Logo is
positioned in the center of the page over
a background of arrows in a circular arrangement.]
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3,500,000 Shares
Logical Design Solutions, Inc.
Common Stock
[LOGO] Logical
Design
Solutions(R)
--------
PROSPECTUS
, 2000
--------
Salomon Smith Barney
Lehman Brothers
SG Cowen
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
Information Not Required In Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of common stock registered
hereby, all of which expenses, except for the Securities and Exchange
Commission registration fee, the National Association of Securities Dealers,
Inc. filing fee, and the Nasdaq National Market listing application fee, are
estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 14,877
National Association of Securities Dealers, Inc. filing fee.... 6,135
Nasdaq National Market listing application fee................. 95,000
Printing and engraving fees and expenses....................... 400,000
Legal fees and expenses........................................ 750,000
Accountants' fees and expenses................................. 375,000
Blue Sky fees and expenses..................................... 15,000
Transfer Agent and Register fees and expenses.................. 20,000
Miscellaneous expenses......................................... 38,988
-----------
Total........................................................ $1,715,000
===========
</TABLE>
--------
* To be provided by amendment
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that the person is or was a director, officer, employee or agent of the
corporation, or is or was servicing at the request of the corporation as
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with the action, suit or proceeding if the
person acted in good faith in a manner the person reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. Section 145 further provides that a corporation
similarly may indemnify the person serving in that capacity who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, against expenses actually and reasonably incurred by the
person in connection with the defense or settlement of the action or suit if
the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except
that no indemnification shall be made in respect of any claim, issue or matter
as to which the person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which the action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, the person is fairly and reasonably entitled to indemnity for the
expenses which the Court of Chancery or other court shall deem proper. The
provisions regarding indemnification and advancement of expenses under Section
145 of the DGCL shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any bylaw, agreement, stockholders' or disinterested directors' vote or
otherwise.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that the provision
shall not eliminate or
II-1
<PAGE>
limit the liability of a director: (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the DGCL (relating to unlawful payment of
dividends and unlawful stock purchase and redemption); or (iv) for any
transaction from which the director derived an improper personal benefit.
As permitted by Section 145(e) of the DGCL, Logical Design Solutions'
amended and restated certificate of incorporation and amended and restated
bylaws will provide that the company shall indemnify its directors, officers
and any person serving at the request of the company as a director, officer,
employee, partner (limited or general) or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise, including service with respect to an employee benefit plan. The
company will also be permitted to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Registrant, or is or was serving at the request of the Registrant as a
director, officer, employee, partner (limited or general) or agent of another
corporation or of a partnership, joint venture, limited liability company,
trust or other enterprise, against any liability asserted against that person
or incurred by that person in any of those capacities, or arising out of that
person's resulting status, and related expenses, whether or not the Registrant
would have the power to indemnify that person against that liability under the
provisions of the DGCL.
Item 15. Recent Sales of Unregistered Securities.
(a) On March 18, 1997, the company issued approximately $1.1 million
aggregate principal amount at maturity of 9% junior subordinated debentures to
Mary K. Brooks and Darren A. Bryden in consideration of certain retained
earnings. These debentures were issued without registration under the
Securities Act in reliance upon an exemption from registration under Section
4(2).
(b) On March 19, 1997, the company issued approximately $5.5 million
aggregate principal amount at maturity of 9% senior subordinated debentures to
Summit Ventures IV, L.P., Summit Investors III, L.P. and Samedan, Inc. and
warrants to acquire 2,150,000 shares of common stock to Summit Ventures IV,
L.P., Summit Investors III, L.P. and Mr. Paul F. Lozier for total consideration
of approximately $5.1 million. These debentures and warrants were issued
without registration under the Securities Act in reliance upon an exemption
from registration under Section 4(2).
(c) Between August 29, 1997 and June 30, 2000, the company granted options
to purchase a total of 2,424,868 shares of common stock under the company's
1997 Stock Plan, the company's 1999 Stock Plan and the company's 2000 Stock
Plan for Non-Employee Directors. During that period, the company issued 16,900
shares of common stock to its employees for a total of $40,012 upon the
exercise of the options. These securities were issued without registration
under the Securities Act in reliance upon an exemption from registration under
Rule 701 and Section 4(2).
(d) On November 10, 1999, the company issued 109,500 shares of its common
stock, along with $525,000, in exchange for all of the outstanding securities
of Jump! Information Technologies, Inc. These shares were issued without
registration under the Securities Act in reliance upon an exemption from
registration under Section 4(2).
(e) On March 2, 2000, the Registrant issued an aggregate of 7,976,401
shares of common stock to the stockholders of Logical Design Solutions, Inc., a
New Jersey corporation ("LDSNJ"), pursuant to a merger in which LDSNJ merged
with and into the Registrant, which prior to the merger had been a wholly-owned
subsidiary of LDSNJ. These securities were issued without registration under
the Securities Act in reliance upon an exemption from registration under
Section 4(2).
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Stock Purchase Agreement, dated November 10, 1999, by and among Allan
Von Dette and William Engel and Logical Design Solutions, Inc.+
3.1 Certificate of Incorporation of Logical Design Solutions, Inc.+
3.2 Form of Amended and Restated Certificate of Incorporation of Logical
Design Solutions, Inc. to be effective upon closing of this offering.*
3.3 Bylaws of Logical Design Solutions, Inc.+
3.4 Form of Amended and Restated Bylaws of Logical Design Solutions, Inc.
to be effective upon closing of this offering.*
4.1 Form of Common Stock Certificate of Logical Design Solutions, Inc.*
4.2 Form of Junior Subordinated Debenture of Logical Design Solutions,
Inc.+
4.3 Form of Senor Subordinated Debenture of Logical Design Solutions,
Inc.+
5.1 Opinion of Brown & Wood LLP.*
10.1 9% Senior Subordinated Debenture and Warrant Purchase Agreement, dated
as of March 19, 1997, among Logical Design Solutions, Inc., principal
stockholders of Logical Design Solutions, Inc., Summit Ventures IV,
L.P., Summit Investors III, L.P., Paul F. Lozier and Samedan, Inc.+
10.2 Warrant Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., principal stockholders of Logical Design Solutions,
Inc., Summit Ventures IV, L.P., Summit Investors III, L.P. and Paul F.
Lozier.+
10.3 Shareholders Agreement, dated as of March 19, 1997, among Logical
Design Solutions, Inc., principal stockholders of Logical Design
Solutions, Inc., Summit Ventures IV, L.P., Summit Investors III, L.P.
and Paul F. Lozier.+
10.4 Registration Rights Agreement, dated as of March 19, 1997, among
Logical Design Solutions, Inc., Summit Ventures IV, L.P., Summit
Investors III, L.P. and Paul F. Lozier.+
10.5 Redemption Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., Summit Ventures IV, L.P., Summit Investors III, L.P.
and Paul F. Lozier.+
10.6 Logical Design Solutions, Inc. Employee Stock Purchase Plan.*
10.7 Logical Design Solutions, Inc. 1997 Stock Plan.+
10.8 Logical Design Solutions, Inc. 1999 Stock Plan.+
10.9 Logical Design Solutions, Inc. 2000 Stock Plan for Non-Employee
Directors.+
10.10 Lease Agreement, dated February 9, 2000, between MSGW Madison, L.L.C.
and Logical Design Solutions, Inc.+
10.11 Software Channel Program Agreement dated August 23, 1999 between Sun
Microsystems, Inc. and Logical Design Solutions, Inc.+
10.12 Sun Professional Services Subcontractor Master Consulting Agreement
dated January 18, 2000 between Sun Microsystems, Inc. and Logical
Design Solutions, Inc.+
23.1 Consent of Brown & Wood LLP (included in Exhibit 5.1).*
23.3 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on signature page).+
27.1 Financial Data Schedule.
</TABLE>
--------
+ Previously filed.
* To be filed by amendment.
II-3
<PAGE>
Item 17. Undertakings
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant under the foregoing provisions, 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 Securities 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 Securities Act and will be governed
by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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 Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Morristown, State of New Jersey, on August 17, 2000.
LOGICAL DESIGN SOLUTIONS, INC.
/s/ Mimi Brooks
By: _________________________________
Mimi Brooks
President, Chief Executive
Officer
and Chairwoman
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Mimi Brooks President, Chief Executive August 17, 2000
___________________________________________ Officer and Chairwoman
Mimi Brooks (Principal Executive
Officer)
/s/ E. Bruce Lovenberg Chief Financial Officer August 17, 2000
___________________________________________ (Principal Financial and
E. Bruce Lovenberg Accounting Officer)
* Chief Technology Officer August 17, 2000
___________________________________________ and Director
David W. Stoltzfus
* Director August 17, 2000
___________________________________________
Paul Lozier
* Director August 17, 2000
___________________________________________
Kevin Mohan
* Director August 17, 2000
___________________________________________
Frank A. Pinto
* Director August 17, 2000
</TABLE>___________________________________________
Kevin McGilloway
----------------
/s/ E. Bruce Lovenberg
*By: ________________________________
E. Bruce Lovenberg
Attorney-in-fact
/s/ Marilynne N. White
*By: ________________________________
Marilynne N. White
Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Stock Purchase Agreement, dated November 10, 1999, by and among Allan
Von Dette and William Engel and Logical Design Solutions, Inc.+
3.1 Certificate of Incorporation of Logical Design Solutions, Inc.+
3.2 Form of Amended and Restated Certificate of Incorporation of Logical
Design Solutions, Inc. to be effective upon closing of this offering.*
3.3 Bylaws of Logical Design Solutions, Inc.+
3.4 Form of Amended and Restated Bylaws of Logical Design Solutions, Inc. to
be effective upon closing of this offering.*
4.1 Form of Common Stock Certificate of Logical Design Solutions, Inc.*
4.2 Form of Junior Subordinated Debenture of Logical Design Solutions, Inc.+
4.3 Form of Senior Subordinated Debenture of Logical Design Solutions, Inc.+
5.1 Opinion of Brown & Wood LLP.*
10.1 9% Senior Subordinated Debenture and Warrant Purchase Agreement, dated
as of March 19, 1997, among Logical Design Solutions, Inc., principal
stockholders of Logical Design Solutions, Inc., Summit Ventures IV,
L.P., Summit Investors III, L.P., Paul F. Lozier and Samedan, Inc.+
10.2 Warrant Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., principal stockholders of Logical Design Solutions,
Inc., Summit Ventures IV, L.P., Summit Investors III, L.P. and Paul F.
Lozier.+
10.3 Shareholders Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., principal stockholders of Logical Design Solutions,
Inc., Summit Ventures IV, L.P., Summit Investors III, L.P. and Paul F.
Lozier.+
10.4 Registration Rights Agreement, dated as of March 19, 1997, among Logical
Design Solutions, Inc., Summit Ventures IV, L.P., Summit Investors III,
L.P. and Paul F. Lozier.+
10.5 Redemption Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., Summit Ventures IV, L.P., Summit Investors III, L.P.
and Paul F. Lozier.+
10.6 Logical Design Solutions, Inc. Employee Stock Purchase Plan.*
10.7 Logical Design Solutions, Inc. 1997 Stock Plan.+
10.8 Logical Design Solutions, Inc. 1999 Stock Plan.+
10.9 Logical Design Solutions, Inc. 2000 Stock Plan for Non-Employee
Directors.+
10.10 Lease Agreement, dated February 9, 2000, between MSGW Madison, L.L.C.
and Logical Design Solutions, Inc.+
10.11 Software Channel Program Agreement dated August 23, 1999 between Sun
Microsystems, Inc. and Logical Design Solutions, Inc.+
10.12 Sun Professional Services Subcontractor Master Consulting Agreement
dated January 18, 2000 between Sun Microsystems, Inc. and Logical Design
Solutions, Inc.+
23.1 Consent of Brown & Wood LLP (included in Exhibit 5.1).*
23.3 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on signature page).+
27.1 Financial Data Schedule.
</TABLE>
--------
+ Previously filed.
* To be filed by amendment.
