<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File No. 1-15213
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BRAUN CONSULTING, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 36-3702425
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 WEST MONROE, SUITE 300, CHICAGO, ILLINOIS 60603
(Address of principal executive offices) (Zip Code)
312-984-7000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal year, if changed since last
report)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Number of shares outstanding as of September 30, 1999--16,447,989
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<PAGE>
PART I--CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Consulting services........... $ 11,729 $ 7,098 $ 31,791 $ 18,482
Product sales................. 337 97 794 918
---------- ---------- ---------- ----------
Total revenues.............. 12,066 7,195 32,585 19,400
---------- ---------- ---------- ----------
Costs and expenses:
Project personnel and
expenses..................... 6,279 4,139 17,278 11,141
Cost of products sold......... 252 94 653 851
Selling and marketing
expenses..................... 1,069 564 2,942 1,693
Merger costs.................. -- -- 170 --
General and administrative
expenses..................... 3,025 1,912 7,874 5,440
Stock compensation............ 188 12 440 180
---------- ---------- ---------- ----------
Total costs and expenses.... 10,813 6,721 29,357 19,305
---------- ---------- ---------- ----------
Operating income................ 1,253 474 3,228 95
Interest (income) expense--net.. (111) 40 (31) 97
---------- ---------- ---------- ----------
Income (loss) from continuing
operations..................... 1,364 434 3,259 (2)
Gain on sale of discontinued
operations..................... -- -- -- 153
---------- ---------- ---------- ----------
Income before provision for
income taxes................... 1,364 434 3,259 151
Provision (benefit) for income
taxes.......................... 438 -- 448 (3)
---------- ---------- ---------- ----------
Net income...................... $ 926 $ 434 $ 2,811 $ 154
========== ========== ========== ==========
Pro forma (Note 6)
Income before provision for
income taxes................. $ 1,364 $ 434 $ 3,259 $ 151
Pro forma provision for income
taxes........................ 620 232 1,467 79
---------- ---------- ---------- ----------
Pro forma net income.......... $ 744 $ 202 $ 1,792 $ 72
========== ========== ========== ==========
Earnings per share--basic:
Continuing operations......... $ 0.09 $ 0.04 $ 0.25 $ --
Discontinued operations....... -- -- -- 0.01
Pro forma net income (Note 6). 0.05 0.02 0.14 0.01
Earnings per share--diluted:
Continuing operations......... $ 0.08 $ 0.03 $ 0.23 $ --
Discontinued operations....... -- -- -- 0.01
Pro forma net income (Note 6). 0.05 0.02 0.13 0.01
Weighted average shares:
Basic......................... 14,674,224 11,717,430 13,054,800 11,523,242
Diluted....................... 16,346,899 12,864,068 14,098,190 12,714,392
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------ ------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 4,403 $ 570
Marketable securities............................. 18,135 --
Accounts receivable (less allowances of $183 at
September 30, 1999, and
$90 at December 31, 1998)........................ 9,382 6,548
Accounts receivable--employees.................... 54 357
Receivable from Wincite--current portion.......... 114 114
Prepaid expenses and other current assets......... 861 251
------- ------
Total current assets............................ 32,949 7,840
Receivable from Wincite............................. -- 95
Equipment, furniture and software--net.............. 2,811 1,831
Intangibles (net of accumulated amortization of $108
in 1999 and $71 in 1998)........................... 42 79
------- ------
Total assets.................................... $35,802 $9,845
======= ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Notes payable..................................... $ 550 $2,745
Accounts payable.................................. 1,502 1,124
Accrued offering expenses......................... 1,000 --
Accrued compensation.............................. 2,030 871
Income taxes payable.............................. 438 --
Other accrued liabilities......................... 674 206
Unearned revenue.................................. 695 270
Distribution payable to stockholders.............. -- 1,002
------- ------
Total current liabilities....................... 6,889 6,218
Deferred income taxes............................... 558 --
Stockholders' equity:
Common stock, $.001 par value at September 30,
1999; no par value at December 31, 1998;
authorized 50,000,000 shares at September 30,
1999 and 100,000,000 shares at December 31, 1998;
issued and outstanding 16,447,989 shares at
September 30, 1999 and 11,964,002 shares at
December 31, 1998................................ 16 804
Additional paid-in capital........................ 28,425 --
Notes receivable from stockholders................ -- (38)
Unearned deferred compensation.................... (624) (320)
Retained earnings................................. 538 3,181
------- ------
Total stockholders' equity...................... 28,355 3,627
------- ------
Total liabilities and stockholders' equity...... $35,802 $9,845
======= ======
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September
30,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 2,811 $ 154
Net gain from discontinued operations, net of provision
(benefit) for income taxes............................... -- 153
-------- -------
Income from continuing operations, net of provision
(benefit) for income taxes............................... 2,811 1
Adjustments to reconcile income from continuing
operations, net of provision (benefit) for income taxes,
to net cash flows from operating activities:
Compensation expense related to stock options........... 440 180
Deferred income taxes................................... (3) --
Depreciation and amortization........................... 608 454
Changes in assets and liabilities:
Accounts receivable................................... (2,493) (1,226)
Prepaid expenses and other current assets............. (490) (146)
Accounts payable...................................... 378 108
Accrued income taxes.................................. 438 --
Accrued liabilities................................... 2,630 212
Unearned revenue...................................... 425 24
-------- -------
Net cash flows from continuing operations............. 4,744 (393)
Net cash flows from discontinued operations........... -- 25
-------- -------
Net cash flows from operating activities............ 4,744 (368)
Cash flows from investing activities:
Purchases of marketable securities........................ (19,235) --
Sales of marketable securities............................ 1,100 --
Purchases of equipment, furniture and software............ (1,551) (1,159)
Proceeds from sale of discontinued operations............. 95 138
-------- -------
Net cash flows from investing activities............ (19,591) (1,021)
Cash flows from financing activities:
Borrowings................................................ 1,165 4,095
Repayment of debt......................................... (3,360) (3,745)
Exercise of stock options................................. 186 29
Distributions paid to stockholders........................ (3,804) (76)
Net proceeds from initial public offering................. 24,493 --
-------- -------
Net cash flows from financing activities............ 18,680 303
-------- -------
Net increase (decrease) in cash and cash equivalents........ 3,833 (1,086)
Cash and cash equivalents, January 1........................ 570 953
-------- -------
Cash and cash equivalents, September 30..................... $ 4,403 $ (133)
======== =======
Supplemental disclosure of cash flow information:
Interest paid--net........................................ $ 12 $ 97
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(amounts in thousands, except for share and per share data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared from the records of Braun Consulting, Inc. (the "Company"), and, in
the opinion of management, include all adjustments (consisting only of normal
and recurring adjustments) necessary to present fairly the Company's financial
position, results of operations and of cash flows as of the dates and for the
periods presented. The consolidated balance sheet as of December 31, 1998,
presented herein, has been derived from the audited consolidated financial
statements for the year then ended.
Accounting policies followed by the Company are described in Note 1 to the
audited consolidated financial statements for the year ended December 31,
1998, included in the Form S-1 filed by the Company with the Securities and
Exchange Commission (SEC File No. 333-79251). Certain other information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted for purposes of the consolidated interim financial
statements. The consolidated interim financial statements should be read in
conjunction with the audited consolidated financial statements, including the
notes thereto, for the year ended December 31, 1998.
The consolidated results of operations for the periods presented herein are
not necessarily indicative of the results to be expected for the full year.
2. Acquisition
Pursuant to a Stock Purchase Agreement dated May 4, 1999 by and among the
Company, Vertex Partners, Inc. ("Vertex") and the stockholders of Vertex, the
Company acquired all of the outstanding stock of Vertex in exchange for
1,512,373 shares of the Company's common stock. The Company accounted for the
acquisition as a pooling-of-interests and the accompanying unaudited
consolidated financial statements for the nine months ended September 30, 1999
and 1998 have been restated to include the Vertex information.
Selected financial data of Braun Consulting, Inc. and Vertex prior to their
merger were as follows:
<TABLE>
<CAPTION>
Braun
Consulting Vertex Combined
---------- ------ --------
<S> <C> <C> <C>
Nine months ended September 30, 1999
Revenues...................................... $27,302 $5,283 $32,585
Income from continuing operations............. 2,460 799 3,259
Net income.................................... 2,022 789 2,811
Nine months ended September 30, 1998
Revenues...................................... 17,263 2,137 19,400
Income (loss) from continuing operations...... 943 (945) (2)
Net income (loss)............................. 1,096 (942) 154
</TABLE>
3. Cash and Cash Equivalents
Cash and cash equivalents include cash deposits in banks and highly liquid
investments with original maturities of three months or less at the time of
purchase.
4. Marketable Securities
Marketable securities represent available-for-sale securities, which are
recorded at fair market value, which approximates cost as of September 30,
1999. Realized gains and losses from sales of available-for-sale securities
were not material for any period presented. Interest on marketable securities
is included in interest income.
5
<PAGE>
BRAUN CONSULTING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Equipment, Furniture and Software
Equipment, furniture, and software are stated at cost, less accumulated
depreciation of $1,950 at September 30, 1999 and $1,381 at December 31, 1998.
6. Pro forma Information
Prior to the termination of its status as an S corporation on July 28,
1999, the Company was treated as an S corporation for federal and certain
state income tax purposes. The pro forma information is presented to show what
the significant effects on the historical information might have been had the
Company not been treated as an S corporation for tax purposes.
On a pro forma basis, the effective income tax rate was 45.5% for the three
months ended September 30, 1999 and 45.0% for the nine months then ended. For
1998, the pro forma effective tax rates were 53.5% for the three months ended
September 30 and 52.3% for the nine months ended September 30.
7. Earnings Per Share
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed based on the weighted average number of common shares outstanding
plus the dilutive effect of stock options outstanding during the period.
8. S Corporation Distributions
In connection with the termination of the Company's status as an S
corporation on July 28, 1999, the Company declared and subsequently paid S
corporation distributions of approximately $3,804 representing certain taxed
but undistributed earnings through that date.
9. Public Offering
On August 13, 1999, the Company closed its initial public offering of
securities and issued 4,000,000 shares of common stock at $7.00 per share.
Proceeds to the Company from its initial public offering, net of underwriting
discounts and costs of the offering, were approximately $24,500.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Braun Consulting, Inc. (the "Company") is an Internet professional services
provider delivering comprehensive business solutions to clients. Its service
approach combines strategy, advanced Internet application development skills
and information technology. The Company identifies these comprehensive
business solutions as "eSolutions" which are designed to help clients enable
electronic commerce, improve customer relationships, drive revenue growth and
provide a measurable return on their investments.
The Company derives substantially all of its revenues from fees for
consulting services, the majority of which are billed on a time-and-materials
basis. Invoices are typically issued semi-monthly to monitor client
satisfaction and manage outstanding accounts receivable balances. Revenues on
time-and-materials contracts are recognized as the services are provided. A
percentage of the Company's projects are billed on a fixed-price basis, which
is distinguishable from the general method of billing on a time-and-materials
basis. The Company recognizes revenue on fixed-price projects as services are
performed over the life of the contract. Losses on contracts, if any, are
provided for in full in the period when determined. Fixed-price contracts are
attractive to clients, and, while subject to increased risks, provide
opportunities for increased margins.
The Company also realizes a limited amount of revenue from product sales as
a value-added reseller of software products. These products are resold
primarily as an accommodation to clients who prefer to retain a single-source
provider.
The Company's most significant expense is project personnel and expenses,
which consists primarily of project personnel salaries, bonuses and benefits,
and non-reimbursed expenses incurred to complete projects. The Company seeks
to manage its costs by adding a variable portion of employee compensation
payable upon the achievement of measurable performance goals.
The Company's project personnel and expenses as a percentage of revenue are
also related to consultant utilization. The Company manages utilization by
monitoring project requirements and timetables. The number of consultants
assigned to a project will vary according to the size, complexity, duration
and demands of the project. Project completions and scheduling delays may
result in periods when consultants are not fully utilized. An unexpected
termination of a significant project could also cause lower consultant
utilization, resulting in a higher than expected number of unassigned
consultants. In addition, the Company does not fully utilize its consulting
personnel on billable projects during the initial months of their employment.
During that time, they undergo training and become integrated into the
Company's operations.
Statements in this Quarterly Report on Form 10-Q that are not strictly
historical are "forward-looking" statements that involve risks or
uncertainties, many of which are not under the control of the Company. The
risks and uncertainties include, but are not limited to, competition, general
economic conditions, the number of projects undertaken and completed during a
period, attracting and retaining highly skilled employees, as well as other
risks identified in the Company's prospectus dated August 10, 1999. The
Company is under no duty to update any of the forward-looking statements after
the date of this report or to conform these statements to actual results or
changes in its expectations.
7
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, selected
consolidated statements of income data as a percentage of total revenues:
<TABLE>
<CAPTION>
Three
Months Nine Months
Ended Ended
September September
30, 30,
------------ ------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Consulting services............................... 97.2% 98.7% 97.6% 95.3%
Product sales..................................... 2.8 1.3 2.4 4.7
----- ----- ----- -----
Total revenues.................................. 100.0 100.0 100.0 100.0
Costs and expenses:
Project personnel and expenses.................... 52.0 57.5 53.0 57.4
Cost of products sold............................. 2.1 1.3 2.0 4.4
Selling and marketing expenses.................... 8.9 7.8 9.0 8.7
Merger costs...................................... -- -- 0.5 --
General and administrative expenses............... 25.0 26.6 24.2 28.0
Stock compensation................................ 1.6 0.2 1.4 0.9
----- ----- ----- -----
Total costs and expenses........................ 89.6 93.4 90.1 99.4
Operating income.................................... 10.4 6.6 9.9 0.6
Interest (income) expense--net...................... (0.9) 0.6 (0.1) 0.5
----- ----- ----- -----
Income from continuing operations................... 11.3 6.0 10.0 0.1
Gain on sale of discontinued operations............. -- -- -- 0.8
----- ----- ----- -----
Income before provision for income taxes............ 11.3 6.0 10.0 0.9
Provision (benefit) for income taxes................ 3.6 -- 1.4 --
----- ----- ----- -----
Net income.......................................... 7.7% 6.0% 8.6% 0.9%
===== ===== ===== =====
Pro forma (Note 6)
Income before provision for income taxes.......... 11.3% 6.0% 10.0% 0.9%
Pro forma provision for income taxes.............. 5.1 3.2 4.5 0.4
----- ----- ----- -----
Pro forma net income.............................. 6.2% 2.8% 5.5% 0.5%
===== ===== ===== =====
</TABLE>
8
<PAGE>
Total Revenues. Total revenues increased 67.7% to $12.1 million for the
three months ended September 30, 1999 from $7.2 million for the three months
ended September 30, 1998. Total revenues increased 68.0% to $32.6 million for
the nine months ended September 30, 1999 from $19.4 million for the nine
months ended September 30, 1998. These increases primarily reflect increases
in the volume of consulting services provided to existing and new clients. The
Company decreased its focus on product sales in 1998, but still sells some
products as an accommodation to clients. As a result, product sales declined
for the nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998.
Project Personnel and Expenses. Project personnel and expenses consist
primarily of salaries and benefits for personnel dedicated to client projects,
including non-billable and training time, and non-reimbursed direct expenses
incurred to complete projects. These costs represent the most significant
expense the Company incurs in providing its services. Project personnel and
expenses increased 51.7% to $6.3 million for the three months ended September
30, 1999 from $4.1 million for the three months ended September 30, 1998, and
increased 55.1% to $17.3 million for the nine months ended September 30, 1999
from $11.1 million for the nine months ended September 30, 1998. The increase
in project personnel and expenses for the nine months ended September 30, 1999
was due primarily to an increase in project personnel to 265 as of September
30, 1999 as compared to 197 as of September 30, 1998. Project personnel and
expenses decreased as a percentage of consulting services to 53.5% for the
three months ended September 30, 1999 from 58.3% for the three months ended
September 30, 1998 and to 54.3% of consulting services for the nine months
ended September 30, 1999 from 60.3% for the nine months ended September 30,
1998. The improvements in margins resulted from increases in billing rates,
better utilization of professional staff and increases in the volume of
consulting services.
Selling and Marketing Expenses. Selling and marketing expenses consist
primarily of salaries, employee benefits and travel costs of selling and
marketing personnel and promotional costs. Selling and marketing expenses
increased 89.5% to $1.1 million for the three months ended September 30, 1999
from $564 thousand for the three months ended September 30, 1998 and increased
73.8% to $2.9 million for the nine months ended September 30, 1999 from $1.7
million for the nine months ended September 30, 1998. Selling and marketing
expenses increased as a percentage of consulting services to 9.1% for the
three months ended September 30, 1999 from 7.9% for the three months ended
September 30, 1998 and to 9.3% of consulting services for the nine months
ended September 30, 1999 from 9.2% for the nine months ended September 30,
1998. The increase in selling and marketing expenses primarily results from an
increase in selling and marketing personnel and the funding of business
development costs to increase lead generation activities and to broaden market
awareness of the Company. The selling and marketing department consisted of 22
employees at September 30, 1999 as compared to 15 employees at September 30,
1998.
General and Administrative Expenses. General and administrative expenses
consist primarily of the costs associated with the Company's executive
management, finance, internal systems, occupancy and administrative groups,
including personnel devoted to recruiting and employee retention and training
costs. Occupancy costs include depreciation, amortization, facility and
equipment leases, travel and all other office and corporate costs. General and
administrative costs increased 58.2% to $3.0 million for the three months
ended September 30, 1999 from $1.9 million for the three months ended
September 30, 1998 and increased 44.7% to $7.9 million for the nine months
ended September 30, 1999 from $5.4 million for the nine months ended September
30, 1998. General and administrative costs decreased as a percentage of
consulting revenues to 25.8% for the three months ended September 30, 1999
from 26.9% for the three months ended September 30, 1998 and to 24.8% for the
nine months ended September 30, 1999 from 29.4% for the nine months ended
September 30, 1998. The increase in general and administrative expenses was
due to the addition of personnel, largely because of the increase in
consulting volume, and costs associated with new offices in Cleveland, Boston
and Denver and expansion of offices in Chicago and Indianapolis after
September 30, 1998. The number of general and administrative employees
increased to 44 at September 30, 1999 from 36 at September 30, 1998.
Stock Compensation. Stock compensation results from the difference between
the price at which certain employee stock options were granted and the
estimated fair market value at date of grant. Compensation expense is recorded
over the period in which the options become exercisable. Compensation expense
increased to $188
9
<PAGE>
thousand for the three months ended September 30, 1999 from $12 thousand for
the three months ended September 30, 1998 and to $440 thousand for the nine
months ended September 30, 1999 from $180 thousand for the nine months ended
September 30, 1998. The increases in stock compensation expense were primarily
the result of options granted in January and May 1999.
Interest (Income) Expense--Net. Interest expense in the three and nine
months ended September 30, 1998 primarily resulted from borrowings under a
revolving line of credit. A significant portion of the proceeds from the
initial public offering, net of underwriter fees and costs of the offering,
was invested in marketable securities resulting in net interest income for the
three and nine months ended September 30, 1999 of $111 thousand and $31
thousand, respectively.
Pro Forma Provision for Income Taxes. Until its S corporation status was
terminated as of July 28, 1999, the Company operated as an S corporation and
was not subject to federal and certain state income taxes. Pro forma income
taxes have been presented to show what estimated income taxes would have been
had the Company not elected S corporation status. On a pro forma basis, the
effective income tax rate was 45.5% for the three months ended September 30,
1999 and 45.0% for the nine months then ended. For 1998, the pro forma
effective tax rates were 53.5% for the three months ended September 30 and
52.3% for the nine months ended September 30.
Liquidity and Capital Resources. In August 1999, the Company sold 4,000,000
shares of common stock in its initial public offering. Of the net proceeds of
approximately $24.5 million, approximately $3.8 million was used for
distribution to stockholders of previously taxed but undistributed S
corporation income. The remainder of the net proceeds, plus cash generated
from operations, was used to invest in marketable securities with a cost of
approximately $18.1 million at September 30, 1999. The Company has a $3.0
million line of credit with the LaSalle National Bank, which expires on
January 31, 2000 and bears interest at the Bank's prime interest rate. At
September 30, 1999, $550,000 of borrowings was outstanding under the line of
credit and the remainder of the line of credit was available. Capital
expenditures of approximately $1.5 million for the nine months ended September
30, 1999 and approximately $1.2 million for the nine months ended September
30, 1998, were primarily used for computers, office equipment and leasehold
improvements related to the Company's growth.
Management believes that the cash and cash equivalents of $4.4 million,
marketable securities of $18.1 million and additional borrowings available
under the line of credit at September 30, 1999 plus cash generated from
operations will be sufficient to meet working capital and capital expenditure
requirements for at least the next 24 months.
Market Risk. The Company's investment in marketable securities of
approximately $18.1 million at September 30, 1999 primarily consists of
investments in U.S. Treasury and municipal government obligations and highly
rated corporate notes and bonds. The Company does not invest in complex
derivatives. The fair market value of marketable securities represents the
Company's cost at September 30, 1999.
Year 2000 Readiness. On January 1, 2000, many computer systems and software
products could fail or malfunction because they may not be able to distinguish
21st century dates from 20th century dates. As a result, computer systems and
software used by many companies, including the Company, the Company's clients
and the Company's potential clients, may need to be upgraded to comply with
such "Year 2000" requirements.
The Company believes that its principal internal systems, including its
hardware and software, are Year 2000 compliant. The Company has reviewed Year
2000 issues with the suppliers of its principal internal systems. The
Company's review of its Year 2000 readiness programs, including its assessment
of its internal systems as well as those of third parties with whom it has
material interactions, is complete.
The Company funded its Year 2000 plan from operating cash flows and has not
separately accounted for these costs in the past. To date, these costs have
not been material.
10
<PAGE>
The Year 2000 problem may also affect software or code that the Company
develops or third-party software products that are incorporated into the
eSolutions the Company creates for its clients. The Company's clients license
software directly from third parties and the Company does not guarantee that
the software licensed from these suppliers is Year 2000 compliant. However,
any failure on the Company's part to provide Year 2000 compliant eSolutions to
the Company's clients could result in financial loss, harm to its reputation
and liability to others and could seriously harm its business.
The Company does not currently have any negative information concerning the
general Year 2000 compliance status of its clients, nor does it intend to
examine its clients for general Year 2000 compliance. If the Company's clients
are not Year 2000 compliant, they may experience material costs to remedy
problems or they may face litigation costs. In either case, Year 2000 issues
could reduce or eliminate the budgets that current or potential clients could
have for purchases of the Company's services. In addition, the Company
anticipates that many of its clients may limit eSolutions spending as they
attend to Year 2000 issues. As a result, the Company's business, financial
condition and operating results could be harmed.
The most reasonably likely worst case scenario for Year 2000 problems for
the Company would be the system failure at a significant client or clients,
which interrupts the Company's project work for an indefinite period of time.
The failure of any significant client to remedy the situation and renew the
Company's project work could negatively impact its operating results.
The Company's Year 2000 contingency plan to address the most reasonably
likely worst case scenario is to maintain a significant number of projects at
the end of 1999 so the potential loss of a significant client has a minimal
effect on the Company's business.
Quantitative and Qualitative Disclosure About Market Risk. Changes in
market interest rates from June 30, 1999 did not have a significant impact on
the fair value of the Company's term and revolving bank debt and/or fixed rate
debt at September 30, 1999.
Recent Accounting Pronouncement. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000 (January 1, 2001 for the Company). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. SFAS No. 133 requires
the recognition of all derivatives as either assets or liabilities in the
statements of financial position and the measurement of those instruments at
fair value. The Company has no derivative exposure and expects that the
adoption of SFAS No. 133 will not have any impact on its financial position or
its results of operations.
Legal Proceedings. The Company is not involved in any material legal
proceedings.
PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the period covered by this report, pursuant to Rule 701, the Company
has sold and issued pursuant to the 1998 Employee Long-Term Stock Investment
Plan, an aggregate of 86,021 shares of common stock upon the exercise of
options by 23 employees at a weighted average exercise price of $1.38 per
share. During the period covered by this report, the Company has sold and
issued pursuant to the 1998 Executive Long-Term Stock Investment Plan, an
aggregate of 12,502 shares of common stock upon the exercise of options by 1
employee at a weighted average exercise price of $3.00 per share. These
issuances were made in reliance on Rule 701. None of the foregoing
transactions involved any underwriter, underwriting discount or commissions,
or any public offerings.
On August 10, 1999, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-1 (File No. 333-
79251) for the Company's initial public offering of 4,000,000 shares and the
offering of up to 600,000 shares of the Company's common stock by seven
selling stockholders
11
<PAGE>
at an aggregate offering price of $28.0 million for the shares offered by the
Company and $4.2 million for the shares offered by the selling stockholders.
The offering commenced on August 10, 1999. On August 13, 1999, the Company
closed its offering of 4,000,000 shares of the Company's common stock at an
aggregate offering price of $28.0 million, or $7.00 per share. On August 27,
1999, the selling stockholders closed their offering of 182,300 shares of the
Company's common stock at an aggregate offering price of $1,276,100, or $7.00
per share. The selling stockholders' offering terminated before the sale of
all 600,000 shares registered and offered.
The managing underwriters for the initial public offering were Donaldson,
Lufkin & Jenrette Securities Corporation, Salomon Smith Barney Inc., Adams
Harkness & Hill, Inc. and DLJdirect Inc. Underwriting discounts and
commissions for the shares the Company and the selling stockholders sold in
the initial public offering totaled $1.96 million and $89,327, respectively.
In addition, in connection with the Company's initial public offering, the
Company paid an estimated $1.5 million in other expenses for total
underwriting discounts and commissions and other expenses of approximately
$3.5 million. None of the Company's expenses in connection with the offering
were paid directly or indirectly to directors or officers of the Company, to
persons owning 10% or more of the Company's common stock, or to other
affiliates of the Company. After deducting total underwriting discounts and
commissions and other expenses, the Company received approximately $24.5
million in proceeds from the initial public offering.
The Company used approximately $3.8 million of the net proceeds from the
offering to declare S corporation distributions representing taxed but
undistributed earnings through July 28, 1999, the date that the Company
terminated its status as an S corporation. These S corporation distributions
were paid to the persons who were stockholders of the Company prior to the
initial public offering, and include officers, directors, including a 10%
stockholder, and affiliates of the Company. The Company has used none of the
proceeds to repay outstanding borrowings under its lines of credit, and
approximately $200,000 for general corporate purposes including working
capital expenditures. We expect to continue to use the net proceeds for
general corporate purposes, including working capital. A portion of the
proceeds may also be used for the acquisition of businesses. Pending such
uses, the Company has invested approximately $22.2 million of the net proceeds
in marketable securities and cash equivalents, including U.S. Treasury and
municipal government obligations and highly rated corporate notes and bonds.
Except for the payment of the S corporation distributions, none of the net
proceeds to the Company were paid directly or indirectly to directors or
officers of the Company, to persons owning 10% or more of the Company's common
stock, or to other affiliates of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
On August 2, 1999, prior to the Company's initial public offering, the
Company solicited the consent of its stockholders by written consent. The
consent requested stockholder approval to change the Company's state of
incorporation from Illinois to Delaware by merging the Company into a newly-
formed Delaware corporation. The holders of 12,431,616 shares of the Company's
common stock, representing 100% of the outstanding shares at the time,
consented to the reincorporation.
On August 4, 1999, prior to the Company's initial public offering, a
special meeting of the Company's stockholders was held. At the special
meeting, the stockholders voted to approve the 1999 Independent Director Stock
Option Plan. All of the holders of the Company's 12,433,390 shares of common
stock voted for approval of the 1999 Independent Director Stock Option Plan.
There were no votes against or abstaining.
At the time of the written consent and at the time of the special meeting,
the Company was not subject to Regulation 14A under the Securities Exchange
Act of 1934, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S> <C>
10 1999 Independent Director Stock Option Plan.
27 Financial Data Schedule.
</TABLE>
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Braun Consulting, Inc.
(Registrant)
/s/ John C. Burke
By: _________________________________
John C. Burke
Chief Financial Officer
(Duly Authorized and Chief
Accounting Officer)
November 12, 1999
Date:
_________________________
13
<PAGE>
Exhibit 10
BRAUN CONSULTING, INC.
1999 INDEPENDENT DIRECTOR STOCK OPTION PLAN
ARTICLE I
---------
PURPOSE
Braun Consulting, Inc., a Delaware corporation (the "Company"), is
dependent for the successful conduct of its business on the initiative, effort
and judgment of its directors. This 1999 Independent Director Stock Option Plan
(the "Plan") is intended to provide the independent directors of the Company
additional compensation for their service as directors and an incentive, through
options to acquire stock in the Company, to increase the value of the Company's
Common Stock, $0.001 par value per share ("Common Stock").
ARTICLE II
------------
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(the "Board"). Subject to the express provisions of the Plan and the policies
of each stock exchange on which any of the Company's stock at any time may be
traded, the Board shall have plenary authority (i) to construe and interpret the
Plan, (ii) to define the terms used therein, (iii) to prescribe, amend and
rescind rules and regulations relating to the Plan, and (iv) to make all other
determinations necessary or advisable for the administration of the Plan. All
determinations and interpretations made by the Board shall be binding and
conclusive on all participants in the Plan and their legal representatives and
beneficiaries. No member of the Board shall be liable for any action, failure
to act, determination or interpretation made in good faith with respect to the
Plan or any transaction under the Plan.
ARTICLE III
-------------
ELIGIBILITY AND PARTICIPATION
Under the Plan each Eligible Director (as defined below) shall, effective
as of the date of his initial election or appointment to the Board, be granted a
stock option to purchase from the Company 4,000 shares of Common Stock, and
effective as of each anniversary date of his election to the Board while he
remains a member of the Board, be granted a stock option to purchase from the
Company 4,000 shares of Common Stock, at a price determined as set forth in
Article IV below. A person shall be an "Eligible Director" if such person (a)
is not, or has not been, an employee of the Company and (b) does not receive
remuneration, either directly or indirectly, in any capacity other than as a
director. For purposes of this Article, remuneration includes any payment in
exchange for goods or services and is deemed to be paid to the director if paid
to the director personally or to an entity in which the director has a
beneficial ownership interest of greater than 25%.
<PAGE>
ARTICLE IV
----------
TERMS AND CONDITIONS OF STOCK OPTIONS;
STOCK OPTION PRICE; TRANSFERABILITY
(a) Each stock option granted under the Plan shall be evidenced by a
Director Stock Option Agreement (the "Agreement") in such form as may be
hereafter approved by the Board on the advice of counsel to the Company. The
Agreement shall be executed by the Company and the optionee. The sale of the
shares issued on the exercise of a stock option by any person subject to Section
16 of the 1934 Act shall not be allowed until at least six months after the
later of (i) the approval of this Plan by the stockholders of the Company in
accordance with Article VIII hereof or (ii) the grant of the stock option. Such
determination for each stock option is to be made prior to or at the time that
stock option is granted.
(b) The per share stock option price shall be an amount equal to the Fair
Market Value (as defined below) of the Common Stock on the date of grant of the
stock option. In no event shall the stock option price be less than the par
value of the Company's Common Stock.
(c) Except as set forth below, the stock options granted hereunder shall
not be transferable otherwise than by will or operation of the laws of descent
and distribution or pursuant to a qualified domestic relations order as defined
in the Internal Revenue Code of 1986, as amended (the "Code"), or Title I of the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder. During the lifetime of the optionee, stock options granted hereunder
shall be exercisable only by the optionee, the optionee's guardian or legal
representative. In addition to non-transferable stock options, the Board may
allow stock options to be granted that are transferable, without payment of
consideration, to immediate family members of the optionee or to trusts or
partnerships for such family members; the Board may also amend outstanding
options to provide for such transferability.
(d) No stock option granted hereunder shall be exercisable unless the Plan
and all shares issuable on the exercise thereof have been registered under the
Securities Act of 1933, as amended (the "1933 Act") and all other applicable
securities laws, and there is available for delivery a prospectus meeting the
requirements of Section 10 of the 1933 Act, or the Company shall have first
received the opinion of its counsel that registration under the 1933 Act and all
other applicable securities laws is not required in connection with such
issuance. At the time of exercise, if the shares with respect to which the stock
option is being exercised have not been registered under the 1933 Act and all
other applicable securities laws, the Company may require the optionee to
provide the Company whatever written assurance counsel for the Company may
require that the shares are being acquired for investment and not with a view to
the distribution thereof, and that the shares will not be disposed of without
the written opinion of such counsel that registration under the 1933 Act and all
other applicable securities laws is not required. Share certificates issued to
the optionee upon exercise of the stock option shall bear a legend to the
foregoing effect to the extent counsel for the Company deems it advisable.
(e) For purposes of the Plan, the term "Fair Market Value" on any date
shall mean (i) if the Common Stock is not listed or admitted to trade on a
national securities exchange and if bid and asked prices for the Common Stock
are not so furnished through NASDAQ or a similar organization, the value
established by the Board for purposes of the Plan; (ii) if the Common
2
<PAGE>
Stock is listed or admitted to trade on a national securities exchange or
national market system, the average of the high and low prices of the Common
Stock, as published in the Wall Street Journal, so listed or admitted to trade
on such date or, if there is no trading of the Common Stock on such date, then
the average of the high and low prices on the next preceding date on which there
was trading in such shares; or (iii) if the Common Stock is not listed or
admitted to trade on a national securities exchange or national market system,
the mean between the bid and asked price for the Common Stock on such date, as
furnished by the National Association of Securities Dealers, Inc. through NASDAQ
or a similar organization if NASDAQ is no longer reporting such information. In
addition to the above rules, Fair Market Value shall be determined without
regard to any restriction other than a restriction which, by its terms, will
never lapse.
ARTICLE V
----------
SHARES SUBJECT TO PLAN AND DURATION OF PLAN
The Plan shall expire and terminate on the earlier of (i) the date ten
years from the effective date of this Plan, or (ii) the date on which there have
been granted to Eligible Directors pursuant to the Plan stock options to
purchase an aggregate of 100,000 shares of the Common Stock. No individual may
be granted options to purchase more than 50,000 shares under the Plan. Shares
subject to stock options under the Plan may be either authorized and unissued
shares or issued shares that have been acquired by the Company and held in its
treasury, in the sole discretion of the Board. When stock options have been
granted under the Plan and have lapsed unexercised or partially unexercised or
have been surrendered for cancellation by the optionee thereof, the unexercised
shares which were subject thereto may be reoptioned under the Plan.
ARTICLE VI
----------
ADJUSTMENTS
(a) Adjustments Upon Changes in Capitalization. Subject to any required
action by the Company's directors and stockholders, the number of shares
provided for in each outstanding stock option and the price per share thereof,
and the number of shares provided for in the Plan, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of the
Company's Common Stock resulting from a subdivision or consolidation of shares
or the payment of a stock dividend (but only on the Common Stock), a stock
split, a reverse stock split, or any other increase or decrease in the number of
such shares effected without receipt of consideration by the Company, and shall
also be proportionately adjusted in the event of a spin-off, spin-out, or other
distribution of assets to stockholders of the Company, to the extent necessary
to prevent dilution of the interests of grantees pursuant to the Plan or of the
other stockholders of the Company, as applicable. If the Company shall engage in
a merger, consolidation, reorganization or recapitalization, each outstanding
stock option (or if such transaction involves less than all of the shares of the
Company's Common Stock, then a number of stock options proportionate to the
number of such involved shares), shall become exercisable for the securities and
other consideration to which a holder of the number of shares of the Company's
Common Stock subject to each such stock option would have been entitled to
receive in any such merger, consolidation, reorganization or recapitalization.
3
<PAGE>
(b) Significant Event. In the event of a potential merger or
consolidation involving the Company regardless of whether the Company is the
surviving entity of such merger or consolidation, a potential liquidation or
dissolution of the Company, a potential sale or other disposition by the Company
of all or substantially all of its assets, or a potential sale or other
disposition by the stockholders of the Company of all or substantially all of
the outstanding Common Stock to one purchaser (any such merger, consolidation,
liquidation, dissolution, or sale being referred to herein as a "Significant
Event"), then the Company shall have the option of terminating all outstanding
stock options upon the actual occurrence of the Significant Event, by notice to
all optionees at least 15 days before the occurrence of the Significant Event.
Any exercise by an optionee in these circumstances may be conditioned upon the
occurrence of the Significant Event. Upon the actual occurrence of the
Significant Event, each outstanding stock option shall terminate if the Company
exercises its option under this paragraph (b). If the potential Significant
Event does not in fact occur for any reason, then the Company's exercise of its
option under this paragraph (b) shall have no effect and his or her rights will
be the same as if the Company had never exercised its option under this
paragraph (b).
(c) Change of Par Value. In the event of a change in the Company's Common
Stock which is limited to a change of all of its authorized shares with par
value into the same number of shares with a different par value or without par
value, the shares resulting from any such change shall be deemed to be Common
Stock within the meaning of the Plan.
(d) Miscellaneous. The adjustments provided for in this Article shall be
made by the Board whose determination in that respect shall be final, binding
and conclusive. Except as hereinbefore expressly provided in this Article, the
holder of a stock option shall not be entitled to the privilege of stock
ownership as to any shares of Common Stock or other stock not actually issued
and delivered to the holder. Any issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall not
affect and no adjustment by reason thereof shall be made with respect to the
number or price of shares of the Company's Common Stock subject to any stock
option. The grant of a stock option pursuant to the Plan shall not affect in any
way the right or power of the Company to, among other things, make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve or liquidate or sell or
transfer all or any part of its business or assets.
4
<PAGE>
ARTICLE VII
------------
AMENDMENT OR DISCONTINUANCE
The Board may at any time and from time to time amend the Plan, as it shall
deem advisable, provided that the Plan may not be amended more than once every
six months, other than to comport with changes in the Code, ERISA, or the rules
thereunder. In addition to Board approval of any amendment to the Plan, if the
Board further determines on advice of counsel that it is necessary or desirable
to obtain stockholder approval of any amendment to the Plan in order to comply
with Rule 16b-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934, or any successor rule, as it shall read as of the time of
amendment, or for any other reason, then the effectiveness of any such amendment
may be conditioned upon its approval by the holders of a majority of the
outstanding voting stock of the Company (voting as a single class), and entitled
to vote on, and voted for or against approval of, the amendment at a meeting of
such stockholders duly held in accordance with the applicable laws of the state
or other jurisdiction in which the Company is incorporated, or such other
stockholder approval as may be specified by the Board.
No change may be made in, and no amendment, rescission, suspension or
termination of the Plan shall have an effect on, stock options previously
granted under the Plan which may impair or alter the rights or obligations of
the holders thereof, except that any change may be made in stock options
previously granted with the consent of the optionees.
ARTICLE VIII
-------------
EFFECTIVE DATE; STOCKHOLDER APPROVAL
The Plan shall be effective as of August 5, 1999, the date on which it
received the approval of a majority of the disinterested members of the Board.
However, the Plan and all stock options granted under the Plan shall be void if
the Plan is not approved by the stockholders within 12 months from the date the
Plan is approved by the Board. The Plan shall be deemed approved by the holders
of the outstanding voting stock of the Company by the affirmative votes of the
holders of a majority of the outstanding voting stock of the Company present, or
represented, and entitled to vote at a meeting of such stockholders duly held in
accordance with the applicable laws of the state or other jurisdiction in which
the Company is incorporated. No stock option granted under the Plan shall be
exercisable in whole or in part unless and until such stockholder approval is
obtained.
5
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<PAGE>
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<PERIOD-END> SEP-30-1999
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