<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
CLARANT WORLDWIDE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7379 75-2783690
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
</TABLE>
------------------------------
2665 VILLA CREEK DRIVE, SUITE 200
DALLAS, TEXAS 75234
(972) 488-7202
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
GUILLERMO G. MARMOL
CHIEF EXECUTIVE OFFICER AND PRESIDENT
CLARANT WORLDWIDE CORPORATION
2665 VILLA CREEK DRIVE, SUITE 200
DALLAS, TEXAS 75234
(972) 488-7202
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
WITH A COPY TO:
<TABLE>
<S> <C>
JOHN B. WATKINS, ESQUIRE R.W. SMITH, JR., ESQUIRE
WILMER, CUTLER & PICKERING PIPER & MARBURY L.L.P.
2445 M STREET, N.W. 36 SOUTH CHARLES STREET
WASHINGTON, D.C. 20037 BALTIMORE, MARYLAND 21201
(202) 663-6000 (410) 539-2530
</TABLE>
------------------------------
APPROXIMATE DATE THE REGISTRANT PROPOSES TO BEGIN SELLING SECURITIES TO THE
PUBLIC: From time to time after the effective date of this registration
statement.
------------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
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, other than securities offered in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED TO BE REGISTERED PER SHARE (1) PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share $175,000,000 $ $ $48,650
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933. The proposed maximum
offering price includes amounts attributable to shares that may be purchased
by the underwriters to cover over-allotments.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT FILES
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
IS TO BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR
UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE ON THE DATE THE SEC, ACTING
UNDER SECTION 8(A), DETERMINES.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION,
DATED JUNE 7, 1999
THE INFORMATION IN THIS 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 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.
<PAGE>
Shares
[LOGO]
CLARANT WORLDWIDE CORPORATION
Common Stock
---------
This is the initial public offering of Clarant Worldwide Corporation and we are
offering shares of our common stock. We anticipate that the initial public
offering price will be between $ and $ per share.
We have filed an application for the common stock to be quoted on the Nasdaq
National Market under the symbol "CWWW."
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ---------
<S> <C> <C>
Public Offering Price.................................................... $ $
Underwriting Discounts and Commissions................................... $ $
Proceeds, Before Expenses, to Clarant.................................... $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Clarant has granted the underwriters the right to purchase up to shares to
cover any over-allotments, at any time until 30 days after the date of this
prospectus.
DEUTSCHE BANC ALEX. BROWN
HAMBRECHT & QUIST
SOUNDVIEW TECHNOLOGY GROUP
, 1999
<PAGE>
THIS PROSPECTUS INCLUDES TRADEMARKS AND TRADE NAMES OF OTHER PARTIES.
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO LEARN ABOUT
THIS OFFERING AND OUR BUSINESS YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING
THE HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS AND THE RELATED NOTES
BEGINNING ON PAGE F-1. SIMULTANEOUSLY WITH THE COMPLETION OF THIS OFFERING, WE
WILL ACQUIRE EIGHT BUSINESSES IN EXCHANGE FOR CASH AND SHARES OF OUR COMMON
STOCK. WE WILL REFER TO THE EIGHT BUSINESSES WE ARE ACQUIRING AS THE "COMPANIES"
OR THE "EIGHT COMPANIES". IN THIS PROSPECTUS, WE SPEAK AS IF WE HAVE ALREADY
ACQUIRED THESE COMPANIES. UNLESS OTHERWISE INDICATED, (1) ALL REFERENCES TO
"CLARANT WORLDWIDE CORPORATION," "CLARANT," "US," "WE" AND "OUR" REFER TO
CLARANT WORLDWIDE CORPORATION AND THE EIGHT BUSINESSES THAT WILL BE ACQUIRED
SIMULTANEOUSLY WITH THE CLOSING OF THIS OFFERING, AND (2) THE INFORMATION
PRESENTED ASSUMES (A) THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED,
(B) THE CLOSING OF THE ACQUISITIONS OF EIGHT COMPANIES SIMULTANEOUSLY WITH THE
CLOSING OF THIS OFFERING, AND (C) THE COMPLETION OF A 71,354-FOR-ONE STOCK
SPLIT.
CLARANT WORLDWIDE CORPORATION
OUR BUSINESS
We are a leading provider of Internet and electronic commerce professional
services to Fortune 500 companies, Internet-based companies and other
organizations. We focus on enabling traditional businesses to develop and expand
Internet and electronic commerce business models. We also provide services to
primarily Internet-based businesses enabling them to conduct business more
effectively.
Our services are designed to rapidly improve a client's competitive position
through the development of innovative business strategies and the integration of
emerging and existing technologies. We provide a wide range of services, from
assisting our clients to conceive their Internet and electronic commerce
strategies to developing and implementing their Internet and electronic commerce
capabilities. We believe that our approach, which integrates our strategy,
creative and technology disciplines, allows us to deliver reliable,
comprehensive, secure, scalable and expandable Internet and electronic commerce
business solutions in rapid time frames.
We perform services for more than 100 clients, including Ameritrade, AT&T
Corp., Bell Atlantic Corporation, International Business Machines Corporation,
Microsoft Corporation, United Air Lines, Inc., and Wells Fargo Bank, N.A. Our
clients are diversified across many industries, including technology, financial,
retailing, media and communications. We also work with companies that do
business primarily over the Internet. As of March 31, 1999, our 570 employees
were located throughout the U.S. in California, Colorado, the District of
Columbia, Florida, Georgia, Illinois, Maryland, Massachusetts, Missouri,
Nebraska, New York, North Carolina, Pennsylvania, Texas, Virginia, Washington
and Wisconsin. On a pro forma combined basis, we had $49.9 million of revenues
for the 12 months ended December 31, 1998 and $17.7 million of revenues for the
three months ended March 31, 1999.
OUR MARKET OPPORTUNITY
The Internet is continuing to develop as an interactive platform through
which companies market, operate and manage their businesses and conduct
transactions. The explosive growth of the Internet and its potential to create
new opportunities and pose fundamental threats to the competitive positions of
traditional businesses present enormous challenges for the managers of
companies. This is leading to the rapid growth of, and demand for, professional
services relating to the Internet and electronic commerce.
2
<PAGE>
The need for organizations to quickly and effectively act has led to the
demand for coordinated strategic, creative and technology solutions. Traditional
professional services firms can typically provide expert services in either
strategy consulting, creative solutions or technology solutions but usually not
all three. Furthermore, the need to integrate these disciplines exceeds the
capabilities of most traditional service firms, especially given the rapid time
frames needed for developing Internet and electronic commerce businesses. As a
result, we believe there is great demand for professional services firms that
can effectively and timely provide integrated services and client focus in all
three disciplines.
OUR STRATEGY
We intend to expand our leading position as a provider of Internet and
electronic commerce professional services to Fortune 500 companies,
Internet-based companies and other organizations. Our strategy for achieving
this objective is to:
- Leverage our three main practice areas;
- Expand long-term client relationships;
- Operate as a single, fully integrated firm;
- Maintain leading edge professional capabilities and technology solutions;
- Expand our breadth of services and geographic scope; and
- Provide value-added services.
OUR OFFICES AND HISTORY
We have leased offices located in Atlanta, Georgia; Chicago, Illinois;
Dallas, Texas; Herndon, Virginia; Houston, Texas; Larchmont, New York; New York
City, New York; San Francisco, California; and Seattle, Washington. Our
principal business office is currently located at 2665 Villa Creek Drive, Suite
200, Dallas, Texas 75234, and our telephone number is (972) 488-7202. We were
incorporated in Delaware on August 21, 1998.
3
<PAGE>
THE OFFERING
The following table presents a summary of this offering. Following this
offering, there will be outstanding options to purchase 8,578,991 shares of
common stock, including options to purchase 1,962,483 shares that will be
exercisable immediately following this offering.
<TABLE>
<S> <C>
Stock offered by Clarant..................... shares of common stock, assuming the
underwriters do not exercise their over-
allotment option; or shares, assuming
the underwriters exercise their overallotment
option in full.
Stock outstanding after this offering........ shares of common stock, assuming the
underwriters do not exercise their over-
allotment option; or shares,
assuming the underwriters exercise their
over-allotment option in full.
Use of proceeds.............................. We will use the proceeds of this offering to
pay the cash portion of the purchase prices
payable in the acquisitions of eight
companies, repay indebtedness and for general
corporate purposes, including working
capital, as well as future acquisitions.
Proposed Nasdaq symbol....................... "CWWW"
Dividend policy.............................. We do not anticipate paying dividends on our
common stock.
</TABLE>
4
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
We were incorporated in August 1998 and have not conducted any operations as
yet, except for negotiating and documenting the acquisitions of the eight
companies we will acquire simultaneously with the closing of this offering,
preparing this prospectus and the related documents for this offering and
developing our management team and corporate structure. Each of our eight
companies has been operating for at least 18 months. We present below our
summary unaudited pro forma combined financial data based on historical data for
the 12 months ended December 31, 1998 and the three months ended March 31, 1998
and 1999, considering our combined historical results and those of the companies
we will acquire. We also present below the unaudited pro forma combined balance
sheet data as of March 31, 1999 based on historical data and as adjusted for the
eight acquisitions and this offering. The unaudited pro forma combined statement
of operations data for the 12 months ended December 31, 1998 and the three
months ended March 31, 1998 and 1999 assume that the eight acquisitions and this
offering were consummated on January 1, 1998. The unaudited pro forma combined
balance sheet data assume that the eight acquisitions and this offering were
consummated on March 31, 1999.
The unaudited summary pro forma financial data do not necessarily indicate
the operating results or financial position which would have resulted from our
operation on a combined basis during the period presented, nor do these
unaudited pro forma data necessarily represent any future operating results or
financial position. In addition to these unaudited summary pro forma combined
financial data, you should also refer to the more complete financial information
included elsewhere in this prospectus, including more complete historical
results for the eight companies that we will acquire and our unaudited pro forma
combined financial statements and the accompanying notes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED ----------------------------
DECEMBER 31, 1998 1998 1999
--------------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ 49,884 $ 10,204 $ 17,705
Cost of services(1)(2).................................. 31,714 6,672 10,208
----------- ------------- -------------
Gross profit............................................ 18,170 3,532 7,497
Selling, general and administrative expenses(1)(2)(3)... 23,586 5,908 7,133
Equity based compensation expense(4).................... 6,621 1,655 4,851
Intangibles amortization(5)............................. 71,350 17,829 18,232
----------- ------------- -------------
Loss from operations.................................... (83,387) (21,860) (22,719)
Interest and other income, net.......................... (177) (28) (56)
----------- ------------- -------------
Loss before income taxes................................ (83,564) (21,888) (22,775)
Income taxes(6)......................................... -- -- --
----------- ------------- -------------
Net loss................................................ $ (83,564) $ (21,888) $ (22,775)
----------- ------------- -------------
----------- ------------- -------------
Net loss per share...................................... $ (2.04) $ (0.54) $ (0.56)
Shares used in computing pro forma net loss per
share(7).............................................. 40,909,091 40,909,091 40,909,091
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------
PRO FORMA PRO FORMA
COMBINED AS ADJUSTED(8)
----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
UNAUDITED PRO FORMA COMBINED
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 2,087 $
Working capital (deficit)........................................................... (85,419 (9)
Total assets........................................................................ 242,021
Long-term debt, net of current maturities........................................... 595
Stockholders' equity................................................................ 140,542
</TABLE>
5
<PAGE>
- ------------------------
(1) The unaudited pro forma combined statement of operations data reflect pro
forma changes in salaries, bonuses and benefits to the stockholders and
management of our eight companies that we will acquire that have been agreed
to prospectively. Compensation expense was reduced by $1.9 million for the
year ended December 31, 1998, and $189,000 for the three months ended March
31, 1999 and was increased by $40,000 for the three months ended March 31,
1998.
(2) Excludes compensation expense related to non-recurring issuances of equity
and equity appreciation rights of seven of our companies. Compensation
expense was reduced by $1.9 million for the year ended December 31, 1998,
and $8.1 million for the three months ended March 31, 1999.
(3) Includes adjustments to increase expenses related to additional compensation
expense to our new corporate management and the estimated incremental costs
associated with being a public company. Selling, general and administrative
expense was increased by $5.5 million, for the year ended December 31, 1998,
$1.4 million for the three months ended March 31, 1998 and $1.4 million for
the three months ended March 31, 1999.
(4) Consists of compensation expense related to shares of common stock and
options issued to the management of Clarant at less than fair market value,
equity based compensation of Align Solutions Corp. (the accounting
acquiror), and the reclassification of compensation expense related to
shares sold to Clarant management at less than fair market value in 1998.
(5) Consists of amortization over a three-year period of $209.0 million of
goodwill and $4.8 million of other intangible assets to be recorded as a
result of the acquisitions and the granting of certain options. The
amortization is computed on the basis described in the notes to the
unaudited pro forma combined financial statements. No amounts have been
included for contingent consideration that may be payable to the former
owners of our eight companies. None of this contingent consideration is
expected to be compensatory.
(6) We have not demonstrated that we will generate future taxable income;
therefore, a net deferred tax asset for the pro forma loss before income
taxes has not been recognized.
(7) Includes (i) 20,485,125 shares of common stock to be issued to the former
owners of the eight companies we will acquire; (ii) 7,848,966 shares issued
to our initial stockholder and an executive officer; and (iii) shares
sold in this offering.
(8) Adjusted to reflect the sale of the shares of common stock at
an assumed initial public offering price of $ per share offered hereby and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
(9) Includes the effect of liabilities in the amount of $71.2 million payable to
the former owners of the eight companies we are acquiring, representing the
cash portion of the initial purchase prices to be paid for the acquisition
of common equity and $18.3 million of cash for other equity securities and
the repayment of debt of a company from a portion of the net proceeds of
this offering.
6
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS AND THE OTHER INFORMATION
IN THIS PROSPECTUS BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. AN INVESTMENT IN
OUR COMMON STOCK INVOLVES RISK. THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. THE RISKS DESCRIBED
BELOW ARE NOT THE ONLY RISKS WE MAY FACE.
IF WE DO NOT COMPLETE THE EIGHT ACQUISITIONS SIMULTANEOUSLY WITH THIS OFFERING,
OUR ACTUAL RESULTS OF OPERATIONS MAY DIFFER FROM OUR EXPECTED RESULTS OF
OPERATIONS.
Our results of operations may differ from those we anticipate or that are
described in the pro forma combined financial statements included in this
prospectus, if one or more of the intended acquisitions does not close. The
closings for the acquisitions of our eight companies are conditioned upon the
completion of this offering by December 31, 1999, other customary closing
conditions as well as rights to consent to or request changes to the acquisition
agreement schedules; which if not waived, consented to, or changed as requested,
could result in termination of an acquisition agreement. In addition, each
company can choose not to close an acquisition if the initial public offering
price is less than $9.90 per share. We may not be able to complete the
acquisition of one or more of the companies at the time of this offering or at
all, if any of these conditions have not been met on or before the closing of
this offering. If we fail to close one or more of these acquisitions, we may
proceed with this offering, in which case we will use the proceeds of this
offering intended for that acquisition for general corporate purposes, including
potential other acquisitions. See "Use of Proceeds."
SOME OF OUR COMPANIES HAVE A HISTORY OF OPERATING LOSSES. IF THESE LOSSES
CONTINUE, WE MAY NOT BE PROFITABLE IN THE FUTURE.
Our companies incurred historical combined net losses of approximately $5.2
million for the 12 months ended December 31, 1998 and $10.7 million for the
three months ended March 31, 1999. After this offering and completion of the
acquisitions, we will have significantly increased expenses compared to those of
the individual companies. We expect to incur increasing sales and marketing,
infrastructure development and general and administrative expenses until we have
integrated the companies. As a result, we will need to generate substantially
higher revenues to achieve profitability. Even if we do achieve profitability,
we may not be able to sustain or increase it in the future. You should not view
our historical growth rates as indicative of our future revenues. See "Selected
Unaudited Pro Forma Combined Financial Data," "Selected Historical Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE EACH OF THE COMPANIES WE ACQUIRE, OUR
FINANCIAL RESULTS WILL SUFFER.
We will combine eight independent Internet and electronic commerce
professional services providers into a single company. Our success will depend
heavily on our ability to integrate the operations and management of our
professional services providers. Failure to successfully integrate any of the
companies we acquire may cause significant operating inefficiencies and
adversely affect our profitability. Our professional services providers have
generally not worked together before and may have previously competed against
each other, served the same clients and/or provided duplicative services. We
will commit substantial resources to integrate these businesses. In particular,
to successfully integrate our newly acquired companies, we must:
- install and standardize adequate operational, financial and control
systems;
- deploy common equipment and telecommunications facilities;
- implement and integrate new and existing marketing and sales efforts; and
7
<PAGE>
- create a unified brand identity.
If we acquire additional companies in the future as expected, we will face
similar integration risks.
In addition, during our beginning stage of development and operation, we may
encounter expenses and difficulties that we may not expect or are beyond our
control. We may not be able to achieve or maintain profitability for any of the
companies we acquire or for ourselves as a whole.
WE MAY NOT BE ABLE TO HIRE, TRAIN AND RETAIN SKILLED EMPLOYEES, WHICH COULD
IMPEDE OUR ABILITY TO COMPETE SUCCESSFULLY.
As a services company, our future success depends in large part on our
ability to hire, train and retain skilled consulting, creative, technical and
other professionals. If we cannot hire, train and retain a sufficient number of
qualified employees, we may not be able to adequately staff projects, our
expenses could increase and we may be unable to expand our business as quickly
as we would like. Such skilled personnel are in short supply and competition for
these people is intense. In addition, to maintain our competitive position and
to grow our business, we must make sure our employees maintain and develop their
technical expertise and business skills to satisfy the increasingly
sophisticated needs of our clients. This process could be time consuming and
expensive and may not be successful.
We plan to grant stock options to attract and retain qualified employees.
The trading price of our stock after this offering will affect the incentive
value of these stock options. We cannot determine whether prospective employees
will consider our stock options a valuable incentive. If they do not, we may
face more difficulty and expense in hiring qualified personnel.
WE DEPEND ON THE SERVICES OF OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL. THE
LOSS OF SENIOR MANAGERS OR OTHER KEY PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS.
We believe that our success will depend on our continued employment of
senior management and key strategic, creative and technical personnel.
Competition for qualified management personnel and other key personnel is
intense. In addition, personal relationships are critical in obtaining and
maintaining client engagements in our industry. Our personnel could join with a
competitor or start a new business and compete with us, which may result in the
loss of client relationships or business opportunities. The loss of management
personnel, other key personnel or client relationships could seriously harm our
business. We cannot assure you that we will be able to prevent the unauthorized
disclosure or use of our proprietary knowledge, practices and procedures if our
senior managers or other key personnel leave us.
IF WE HAVE TO PAY ADDITIONAL CONSIDERATION TO THE FORMER OWNERS OF OUR
PROFESSIONAL SERVICES PROVIDERS, YOUR INVESTMENT IN US MAY BE DILUTED.
We have agreed to pay the former owners of our professional services
providers additional consideration upon satisfaction of certain financial and
operational conditions. Payment of these obligations in cash may substantially
deplete our cash reserves or require us to borrow funds. Payment of these
obligations in our common stock will dilute the value of your investment in us.
Regardless of the form of payment, the additional consideration will create
additional goodwill and increase the related amortization expense. We cannot
predict the amount of additional consideration that we will have to pay to the
former owners of our professional services providers, although the total of such
additional consideration will not exceed $182.4 million. For a more detailed
discussion of these contingent consideration arrangements, see "About Clarant
Worldwide Corporation."
8
<PAGE>
OUR REVENUES ARE DIFFICULT TO PREDICT AND WE MAY NOT BE ABLE TO REDUCE EXPENSES
IF REVENUES DECLINE.
Our clients generally retain us on an engagement-by-engagement basis. Most
of our client engagements are under short-term contracts. If a client defers,
modifies or cancels an engagement or chooses not to retain us for additional
phases of a project, we may not be able to rapidly redeploy our employees or
other resources to other engagements. Under these engagements, the client can
generally reduce the scope of or cancel our services without penalty and with
little or no notice. A number of factors unrelated to our work product or the
progress of the project, such as general business conditions or the client's
financial state, could cause cancellations or delays.
Our operating expenses are relatively fixed. We incur costs based on our
expectation of future revenues. Our failure to accurately predict our revenues
may seriously harm our financial condition and results of operations. We
generally cannot reduce our expenses on short notice to compensate for
unanticipated variations in the number or size of engagements in progress.
WE MAY LOSE MONEY ON FIXED FEE CONTRACTS IF WE MISCALCULATE THE RESOURCES
REQUIRED TO COMPLETE A PROJECT.
We have generally entered into contracts with our clients on a fixed-fee,
fixed timeframe, basis. A miscalculation of the resources or time needed to
complete fixed-fee engagements could seriously harm our operating results. The
risk of such miscalculations for us is high because we work with complex
technologies in compressed time frames.
UNDERUTILIZATION OF OUR EMPLOYEE RESOURCES MAY ALSO ADVERSELY AFFECT OUR
OPERATING REVENUES.
We generally establish our personnel levels based on our expectations of
client demand. If we hire more employees than our engagements require, or if we
are unable to effectively redeploy our employees from project to project, our
operating margins may decline and we may suffer losses. We have hired a large
number of administrative and support personnel to support our anticipated
growth. These personnel costs and expenses constitute the substantial majority
of our operating expenses.
WE MAY NOT SUCCESSFULLY DEVELOP BRAND AWARENESS OF OUR SERVICES, AND OUR BRAND
REPUTATION MAY DEPEND UPON THE SUCCESS OR FAILURE OF OUR CLIENTS.
Developing and maintaining widespread awareness of the "Clarant Worldwide
Corporation" brand name is an important element of our business strategy. If we
do not successfully promote and maintain our brand name without significant
expense, our operating margins and growth may decline. We plan to increase our
marketing expenses to promote our brand name, which may reduce our operating
margins. In addition, our brand name will replace the current brand names of our
acquired companies, which may disrupt our business and adversely affect our
revenues and profitability. The public may closely associate our brand with the
business success or failure of some of our high-profile clients, many of whom
are pursuing unproven business models in competitive markets. As a result, the
failure or difficulties of one of our high-profile clients may damage our brand
name.
OUR LACK OF COMBINED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT OUR
SUCCESS.
We have no combined operating history upon which you can evaluate our
business and prospects. We will combine eight professional services providers
into a new company, and we may not be able to achieve or maintain profitability
of any of our businesses or overall. The pro forma financial information
included in this prospectus is based on the separate pre-acquisition financial
information of the acquired businesses. As a result, our historical results of
operations and pro forma financial information may not give you an accurate
indication of our future results of operations or prospects. In addition,
companies like us in an early stage of development frequently
9
<PAGE>
encounter risks, expenses and difficulties associated with starting a new
business, many of which may be unexpected or beyond our control.
WE ARE AFFECTED BY SEASONAL FACTORS THAT COULD CAUSE OUR REVENUES TO FLUCTUATE
FROM QUARTER TO QUARTER.
Our industry is affected by seasonal factors. Our revenues and income are
generally higher in the first and second calendar quarters, and lower during the
third and fourth calendar quarters as a result of the summer and end-of-year
holiday seasons. As a result of these factors, we believe that period-to-period
comparisons of our results of operations will not reliably indicate our future
performance. It is likely that in some future quarter or quarters our operating
results will be below the expectations of public market analysts or investors.
Such shortfalls may significantly affect the market price of our common stock.
Several other factors may cause our revenues and operating results to vary
from quarter-to-quarter, including:
- the number, size and type of client engagements we commence and complete
during a quarter;
- modification or termination of material contracts;
- the amount and timing of expenditures by our clients for Internet and
electronic commerce professional services;
- our ability to adequately staff our projects and effectively utilize our
employees;
- the fixed personnel and other costs we incur in advance of the quarter;
- the number, type, timing and costs of acquisitions completed during a
quarter;
- our ability to manage costs, including personnel costs and support
services costs; and
- our introduction of new services.
WE MAY INCUR UNEXPECTED OR UNQUANTIFIABLE LIABILITIES AND EXPENSES ARISING FROM
THE OPERATION OF A COMPANY BEFORE WE ACQUIRED IT OR THE INDEMNIFICATION
PROVISIONS OF THE ACQUISITION AGREEMENTS.
When we acquire companies, we may acquire liabilities and expenses which we
did not know about at the time we negotiated these acquisitions. We may also
acquire contingent liabilities which become realized, or liabilities which prove
to be larger than anticipated. Certain former owners of each company will be
required to indemnify us against certain liabilities related to the operation of
such company before we acquired it. However, in some cases such indemnification
may be limited in amount or these former owners may not have the financial
ability to meet their responsibilities. In addition, for some liabilities we may
have no recourse against the former owners of the acquired company. The
acquisition agreements include provisions whereby each company indemnifies us
for breaches of its representations and warranties and information provided by
it for use in this prospectus and we indemnify each company for liabilities
arising out of breaches of each other party's representations and warranties,
information provided by any other party for use in this prospectus and other
matters traditionally covered under the indemnification terms of similar
contracts. There is no assurance that any party will meet its obligations to
indemnify any other party. In addition, the SEC's position is that
indemnification for securities law violations is against public policy.
10
<PAGE>
POTENTIAL INTERNATIONAL ACQUISITIONS AND EXPANSION WILL INVOLVE ADDITIONAL
FINANCIAL AND OPERATIONAL RISK.
We intend to expand our business by providing Internet and electronic
commerce professional services to companies operating outside of the U.S. An
inability to successfully establish and expand our international operations
could seriously harm our business prospects. We intend to acquire existing
companies and open offices in those markets and otherwise market our business
abroad. We may be unable to successfully market, sell, deliver and support our
services internationally. In addition to other risks described in this section,
international expansion poses additional risks, including:
- intense competition for qualified personnel outside of the U.S.;
- international legal and regulatory requirements;
- problems in collecting accounts receivable and longer payment cycles;
- the impact of recessions in economies outside the U.S.;
- higher marketing costs;
- fluctuations in currency exchange rates;
- restrictions on the import and export of certain technologies;
- reduced protection for intellectual property rights in some countries;
- potentially adverse tax consequences; and
- increases in tariffs, duties, price controls, restrictions on foreign
currencies and other trade barriers.
THE NATURE OF THE SERVICES WE PROVIDE COULD EXPOSE US TO SIGNIFICANT LIABILITY
TO CLIENTS WHO ARE NOT SATISFIED WITH OUR SERVICES.
We create, implement and maintain Internet and electronic commerce systems
and other applications that are critical to our clients' businesses. Any defects
or errors in these systems or applications or failure to meet clients'
expectations could result in:
- delayed or lost client revenues;
- rendering additional services to a client at no charge;
- negative publicity regarding us and our services; and
- claims for substantial damages against us, regardless of fault.
The successful assertion of a large claim against us could seriously harm
our business, financial condition and operating results. Our contracts generally
limit our damages arising from negligent acts, errors, mistakes or omissions in
rendering services to our clients. However, we cannot be sure that these
contractual provisions will protect us from liability for damages in the event
we are sued. Our general liability insurance coverage may not cover one or more
large claims, or the insurer may disclaim coverage as to any future claim. In
addition, our general liability insurance coverage may not continue to be
available on reasonable terms or at all.
OUR FAILURE TO PROTECT OR MAINTAIN OUR INTELLECTUAL PROPERTY RIGHTS COULD COST
US MONEY, PLACE US AT A COMPETITIVE DISADVANTAGE AND ADVERSELY AFFECT OUR
BUSINESS.
The steps we have taken to protect our proprietary intellectual property
rights may not prevent or deter someone else from using or claiming rights to
our intellectual property. Third party infringement or misappropriation of our
trade secrets, copyrights, trademarks or other proprietary
11
<PAGE>
information could seriously harm our business. In addition, although we believe
that our proprietary rights do not infringe on the intellectual property rights
of others, other parties may claim that we have violated their intellectual
property rights. Such claims, even if not true, could result in significant
legal and other costs and may distract our management. We also license certain
technologies from third parties. We cannot assure you that these licenses will
continue on reasonable terms or at all, or that we will successfully license new
technologies developed by third parties. Our failure to do so could result in
loss of revenues and higher expenses. Pursuant to our acquisition agreement
relating to the Brand Dialogue-New York business of Young & Rubicam, for a
period of six months, we have a limited license to use the name "Brand Dialogue"
solely for the purpose of identifying "Brand Dialogue-New York" as the name of
the business when it was owned by Young & Rubicam.
WE SOMETIMES AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS WHICH
COULD REDUCE THE NUMBER OF OUR PROSPECTIVE CLIENTS.
Many of the engagements we perform for clients are competitively sensitive.
As a result, we sometimes agree not to perform services for our clients'
competitors or in a particular field for limited periods of time. These
agreements could preclude or reduce opportunities from prospective clients and
reinforce the importance of our client selection.
WE MAY NEED, BUT NOT BE ABLE, TO OBTAIN ADDITIONAL FINANCING ON REASONABLE TERMS
OR AT ALL.
We expect that the net proceeds from this offering, after paying the cash
portion of the purchase price for our companies, will meet our working capital
and capital expenditure needs for at least the next 12 months. After that, we
may need to raise additional funds. If we need additional capital and cannot
raise it on acceptable terms, we may not be able to acquire additional
companies, open or expand offices in the U.S. and abroad, make capital
expenditures, hire and train additional personnel or otherwise expand our
business. We cannot be certain that we will be able to obtain additional
financing on favorable terms, if at all.
A SIGNIFICANT PORTION OF OUR ASSETS ARE INTANGIBLE. AMORTIZATION OF OUR
INTANGIBLE ASSETS WILL ADVERSELY IMPACT OUR NET INCOME AND WE MAY NEVER REALIZE
THE FULL VALUE OF OUR INTANGIBLE ASSETS.
The acquisition of our companies simultaneously with the closing of this
offering will create significant goodwill on our financial statements. We will
amortize such goodwill over a period of three years, which will negatively
affect our operating results in those periods. At March 31, 1999, after giving
pro forma effect to the acquisition of our companies, we would have had goodwill
of approximately $218.1 million. We have agreed to pay the former owners of our
companies additional consideration under certain conditions, payable in the form
of cash and/or stock. Regardless of the form of payment, any additional
consideration will create additional goodwill and increase the related
amortization expense.
WE MAY EXPERIENCE PROBLEMS RELATED TO THE YEAR 2000 ISSUE THAT COULD ADVERSELY
AFFECT OUR BUSINESS.
Many currently installed computer systems and software products are coded to
accept only two-digit year entries in the date code field. Consequently, on
January 1, 2000, many of these systems could fail or malfunction because they
may not be able to distinguish 21st century dates from 20th century dates.
Although we believe that our principal internal systems are Year 2000 compliant,
some systems are not yet certified. Because we depend substantially upon the
proper functioning of our computer systems, a failure of our systems to
correctly recognize dates beyond December 31, 1999 could materially disrupt our
operations and seriously harm our business.
12
<PAGE>
The Year 2000 problem could also adversely affect our business by causing
the systems of our clients, potential clients, vendors or other business
partners to fail. The Year 2000 problem could result in systemic failures or
miscalculations. Our clients and prospective clients which experience Year 2000
problems could defer projects that use or could use our services and decrease
demand for our services. The Year 2000 problem may also affect third parties
that license software products which we incorporate into the business systems
that we create for our clients. We generally discuss Year 2000 issues with these
suppliers and sometimes perform internal testing on their products, but we
cannot guarantee that the software licensed by these suppliers is Year 2000
compliant. Any failure on our part to provide Year 2000 compliant systems to our
clients could result in financial
loss, harm to our reputation and liability to others and could seriously harm
our business, financial condition and operating results. For information on our
efforts to handle the Year 2000 issue, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year 2000 Readiness Disclosure
Statement."
THE SALE OR AVAILABILITY FOR SALE OF ADDITIONAL SHARES OF OUR COMMON STOCK AFTER
THIS OFFERING COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Sales of a substantial number of shares of common stock after this offering
could adversely affect the market price of our common stock. A reduction in the
price of our common stock could impair our ability to raise capital through the
sale of additional equity securities or our ability to use shares as a currency
to make acquisitions. For a description of the shares of our common stock that
will be available for future sale following this offering, see "Shares Eligible
for Future Sale."
Upon completing this offering, shares of our common stock will
be outstanding and 28,334,091 of these shares will be "restricted securities."
Up to 398,966 shares may be forfeited under an agreement among us, Commonwealth
Principals II LLC and Guillermo G. Marmol, our Chief Executive Officer and
President, to preserve the tax-deferred nature of the transactions in which we
will acquire our eight companies. If the full number of shares is forfeited,
shares of our common stock will be outstanding, of which 27,935,125 shares
will be "restricted securities." We may issue additional "restricted securities"
as contingent consideration in connection with the acquisitions of our
companies. See "About Clarant Worldwide Corporation" for a discussion of how
this additional consideration will be determined.
The shares of common stock sold in this offering will be freely tradable
without further restriction or registration under the Securities Act, except for
shares purchased by an affiliate of ours. Sales of shares purchased by an
affiliate will be limited by Rule 144 under the Securities Act. Holders of
restricted shares generally will be entitled to sell their shares in the public
market without registration either under Rule 144 or any other applicable
exemption under the Securities Act.
After completion of this offering we intend to file one or more registration
statements under the Securities Act to register 12,838,602 shares of common
stock subject to outstanding stock options and reserved for issuance under our
1999 Long-Term Incentive Plan. Upon completion of this offering, options to
purchase 7,578,991 shares will be outstanding under our 1999 Long-Term Incentive
Plan, including options issued on conversion of options issued by one of our
eight acquired companies, and options to purchase 1,000,000 shares will be
outstanding outside of the plan.
In addition, upon completion of this offering, the holders of 20,485,125
shares of common stock and 1,000,000 shares issuable on exercise of options
granted in connection with the acquisition of Brand Dialogue-New York will have
piggyback registration rights to register the shares of common stock that they
receive whenever we propose to register any shares of common stock for our own
or another's account under the Securities Act. Young & Rubicam will also have
one demand registration right to register any or all of the shares of common
stock it receives in connection with the sale of Brand Dialogue-New York
(including shares issued as contingent consideration and shares issued upon
exercise of Young & Rubicam's option), beginning 18 months from the closing of
this offering.
13
<PAGE>
WE FACE INTENSE COMPETITION IN OUR INDUSTRY AND LOW BARRIERS TO ENTRY MAY
ENCOURAGE ADDITIONAL COMPETITORS IN THE FUTURE, WHICH MAY NEGATIVELY IMPACT OUR
OPERATING RESULTS.
Competition in the Internet and electronic commerce professional services
market is intense. We expect competition to persist and intensify in the future.
We compete against companies selling Internet and electronic commerce software
and services, and the in-house development efforts of companies seeking to
engage in electronic commerce. Our current competitors include, and may in the
future include, the following:
- Internet consulting firms and online agencies, such as AGENCY.COM, AppNet,
iXL Enterprises, Modem Media . Poppe Tyson, Organic Online, Proxicom,
Razorfish, Scient, US Interactive, USWeb/CKS and Viant;
- general management consulting firms, such as Bain & Company, Boston
Consulting Group, Booz Allen & Hamilton and McKinsey & Company, Inc.;
- the professional services groups of computer equipment companies, such as
Compaq, Hewlett-Packard and IBM;
- systems integrators, such as Andersen Consulting, Cambridge Technology
Partners, Sapient, and consulting arms of the "Big Five" accounting firms;
and
- internally developed solutions of current and potential clients.
Because barriers to entry in our market are low, we also expect other companies
to enter our market. In addition, current and potential competitors have
established, or may establish, cooperative relationships among themselves or
with vendors. Accordingly, new competitors or alliances among competitors may
emerge and rapidly acquire significant market share.
Most of our current competitors have longer operating histories than us.
Many of our competitors have larger client bases, larger professional staffs,
greater brand recognition and greater financial, technical, marketing and other
resources than us. Many of our competitors also have well-established
relationships with our current and potential clients and vendors and may be able
to respond more quickly to new or emerging technologies and changes in customer
requirements. In addition, some of our competitors may develop services that are
superior to, or have greater market acceptance than, the services we offer. Our
competitors may also be able to devote more resources to the development,
promotion and sale of their services than we can. Competitors that offer more
standardized services than we do may have a substantial cost advantage and could
force us to lower our prices. Each of these factors may place us at a
disadvantage in responding to our competitors' pricing strategies, technological
advances, marketing campaigns, strategic partnerships and other initiatives. We
cannot assure you that we will compete successfully with existing or new
competitors, and our failure to do so could seriously harm our business,
financial condition and operating results.
We contract separately for each stage of development of a client's Internet
and electronic commerce business. We cannot guarantee you that our existing or
future clients will retain us on later stages of work.
WE MAY NOT BE ABLE TO KEEP UP WITH THE LATEST TECHNOLOGICAL DEVELOPMENTS IN OUR
INDUSTRY.
Rapid technological change and frequent introductions of new products and
services characterize our market and the technologies our clients use. Our
failure to successfully respond to these technological developments or to
respond in a timely or cost-effective way could seriously harm our business and
operating results. Our success will depend on our ability to offer services that
keep pace with continuing changes in technology, industry standards and client
preferences.
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<PAGE>
OUR SUCCESS DEPENDS ON THE CONTINUED DEVELOPMENT OF THE INTERNET AND ELECTRONIC
COMMERCE BUSINESS AND OUR ABILITY TO ADAPT TO CHANGES IN THE INTERNET AND
ELECTRONIC COMMERCE BUSINESS.
We cannot be certain that the market for Internet and electronic commerce
services will continue to grow. Consumers and businesses may reject the Internet
or electronic commerce as viable commercial mediums for a number of reasons,
including:
- inadequate network infrastructure;
- insufficiency of telecommunications services to support electronic
commerce and the Internet;
- delays in the development of technologies that facilitate use, and improve
the security, of the Internet and electronic commerce;
- delays in the development of new protocols to handle increased levels of
Internet activity;
- increased governmental regulation;
- changes in sales tax laws; and
- failure of companies to meet their customers' expectations and service
requirements in delivering goods and services via electronic commerce and
over the Internet.
If a viable and sustainable market for our Internet and electronic commerce
services does not continue to develop, or if we cannot differentiate our
services from those of our competitors, our revenue and operating margins may
decline and we may experience losses. In addition, Internet and electronic
commerce professional services are new and constantly changing. Technological
developments, changes in use of the Internet, and other factors over which we
have no control will affect the types of services our clients require. As a
result, we will need to, but may not be able to, rapidly master and develop an
evolving set of skills and capabilities.
NEW LAWS OR REGULATIONS AFFECTING THE INTERNET, ELECTRONIC COMMERCE OR COMMERCE
IN GENERAL COULD ADVERSELY AFFECT OUR BUSINESS.
Congress and other domestic and foreign governmental authorities have
adopted and are considering legislation affecting use of the Internet, including
laws relating to the use of the Internet for commerce and distribution. The
adoption or interpretation of laws regulating the Internet, or of existing laws
governing such things as consumer protection, libel, property rights and
personal privacy, could hamper the growth of the Internet and its use as a
communications and commercial medium. If this occurs, companies may decide not
to use our services and our business and operating results would suffer.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH MAY NOT PROVE TO BE
ACCURATE OR COMPLETE.
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology. These statements are
only predictions. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of such statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus to conform such statements to actual results and do not intend
to do so.
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<PAGE>
ABOUT CLARANT WORLDWIDE CORPORATION
We formed Clarant Worldwide Corporation, Inc. in August 1998 for the purpose
of acquiring a group of existing Internet and electronic commerce professional
services companies providing a wide range of services throughout the United
States. Simultaneously with the closing of this offering, we will close the
acquisitions of eight companies. We will consummate the acquisitions in
accordance with written agreements negotiated with the current owners of these
companies. The closings of the acquisitions of our eight companies are
conditioned upon the completion of this offering by December 31, 1999, other
customary closing conditions as well as rights to consent to the acquisition
agreement schedules, which if not waived, consented to or changed as requested,
could result in termination of an acquisition agreement. In addition, each
company can choose not to close the acquisition if the initial public offering
price is less than $9.90 per share. Except in the case of Brand Dialogue-New
York, the acquisitions have been structured as mergers whereby the companies
will survive as our wholly-owned subsidiaries. We will acquire assets of Brand
Dialogue-New York and may contribute those assets to a newly formed subsidiary.
The acquisition consideration and the terms of the agreements have been
negotiated at arms-length.
OUR COMPANIES
The purchase price for the eight companies will consist of an initial
payment at the time of closing and the ability to earn contingent payments, as
follows:
PURCHASE PRICE
The initial purchase price for each company has been determined based upon a
variety of factors, including that company's revenue and pre-tax income. The
initial purchase price will consist of a fixed number of shares of common stock
and a cash payment, except that the initial purchase price for Brand
Dialogue-New York will consist entirely of stock. The purchase price for all
companies, based on an assumed initial public offering price of $11.00 per
share, will be $314.8 million. An aggregate of 20,485,125 shares of common stock
will be issued for all companies. The number of shares of common stock payable
for each company is fixed, except in the case of RSI Group, Inc. and
subsidiaries where the number of shares will increase if the initial public
offering price is between $9.90 and $11.00. Any such additional shares issued to
the stockholders of RSI will be transferred to them by Commonwealth Principals
II LLC. Based on an $11.00 price per share, the aggregate cash consideration for
all companies will be $89.5 million. The cash portion of the purchase price will
adjust so that it will always equal approximately 39.7% of the market value of
the share portion of the purchase price as of the closing of this offering.
CONTINGENT CONSIDERATION
The former owners of each company will be eligible to receive two payments
of contingent consideration: one based on the financial results of the
individual company and one based on the consolidated financial results of the
eight companies. The contingent consideration for each company will be based on
a percentage of the amount, if any, by which the actual revenues and actual
pre-tax income of the company for the period beginning July 1, 1999, and ending
December 31, 1999, exceeds the budgeted revenue and budgeted pre-tax income,
respectively, of the company for that period. The contingent consideration based
on the financial results of the combined companies will be a percentage of the
amount, if any, by which the combined actual revenue and combined actual pre-tax
income of the eight companies for the period beginning January 1, 2000, and
ending June 30, 2000, exceeds our budgeted revenues and our budgeted pre-tax
income, respectively, for that same period.
The maximum aggregate contingent consideration that each company can earn
for individual company contingent consideration and combined company contingent
consideration is 50% of the initial purchase price for that company or total
contingent consideration of $157.4 million. In
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<PAGE>
addition, the former owners of Potomac Partners Management Consulting, LLC will
be eligible to earn up to an additional $25 million in contingent consideration
as described below.
The payment of the contingent consideration based on each company's
performance and on combined company performance will be made within 30 days
after such amount is finally determined, using a combination of cash and stock.
The portion of the contingent consideration to be paid in stock will be
determined by us, in our sole discretion, provided that cash will comprise no
less than 25% and no more than 50% of the contingent consideration amount. The
actual number of shares of common stock will be determined based on the average
closing price of our common stock for the 30 trading days prior to the date of
determination of the amount of contingent consideration.
In addition to the contingent consideration described above, former owners
of Potomac Partners will be eligible to receive contingent consideration based
on revenues derived from specific contracts with a specific client entered into
by us or Potomac Partners after the date of the Potomac Partners' acquisition
agreement. The former owners of Potomac Partners will receive amounts equal to
150% of the revenues received for management consulting services (excluding such
revenues generated between July 1, 1999 and December 31, 1999) and 40% of the
revenues received for other services, rendered pursuant to those client
contracts between July 1, 1999 and June 30, 2002, up to a maximum amount of
$25.0 million. We will pay the contingent consideration within 30 days after
completion of our annual audit for each of our fiscal years ending December 31,
1999, December 31, 2000, December 31, 2001 and December 31, 2002. For purposes
of calculating the individual company contingent consideration as described
above that may be earned by the former owners of Potomac Partners between July
1, 1999 and December 31, 1999, the revenues received by Potomac Partners for
management consulting services pursuant to those client contracts will be
included in the actual revenue amounts used in that calculation. For purposes of
calculating the portion of the combined company contingent consideration that
may be earned by the former owners of Potomac Partners, we will not include any
revenues earned from those client contracts in determining Potomac Partners'
portion of the combined company contingent consideration. In determining the
portion of combined company contingent consideration that may be earned by the
former owners of the other companies, we will include all revenues earned from
those client contracts.
INDIVIDUAL COMPANY INFORMATION
The following shows the consideration to be paid in stock and cash for each
company based on an assumed initial public offering price of $11.00 per share:
<TABLE>
<CAPTION>
MAXIMUM
CONTINGENT
INITIAL PURCHASE PRICE CONSIDERATION
--------------------------------------- ------------------------
VALUE TOTAL COMPANY COMBINED
NAME HEADQUARTERS CASH OF STOCK CONSIDERATION PORTION PORTION
- ------------------------------------- ------------- --------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Align Solutions Corp. Houston, TX $ 33,840 $ 67,560 $ 101,400 $ 25,350 $ 25,350
Brand Dialogue-New York New York, NY -- 50,700 50,700 12,675 12,675
Free Range Media, Inc. Seattle, WA 9,310 21,090 30,400 7,600 7,600
Integrated Consulting, Inc. dba i.con Dallas, TX 4,489 8,911 13,400 3,350 3,350
interactive
InterActive8, Inc. New York, NY 10,887 19,513 30,400 7,600 7,600
MultiMedia Resources, LLC Larchmont, 3,150 7,350 10,500 2,625 2,625
NY
Potomac Partners Management Reston, VA 22,628 38,172 60,800 15,200 15,200
Consulting, LLC
RSI Group, Inc. and subsidiaries Dallas, TX 5,160 12,040 17,200 4,300 4,300
--------- ----------- --------------- ----------- -----------
Total $ 89,464 $ 225,336 $ 314,800 $ 78,700 $ 78,700
--------- ----------- --------------- ----------- -----------
--------- ----------- --------------- ----------- -----------
<CAPTION>
ASSUMED
DEBT
AS OF MARCH
NAME 31, 1999
- ------------------------------------- -------------
<S> <C>
Align Solutions Corp. $ 1,366
Brand Dialogue-New York --
Free Range Media, Inc. --
Integrated Consulting, Inc. dba i.con 222
interactive
InterActive8, Inc. 997
MultiMedia Resources, LLC --
Potomac Partners Management --
Consulting, LLC
RSI Group, Inc. and subsidiaries 873
-------------
Total $ 3,458
-------------
-------------
</TABLE>
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<PAGE>
In addition, the former owners of Potomac Partners are eligible to receive
up to $25.0 million in additional contingent consideration, as described above.
OPTION GRANTS
Preceding the trading of our common stock, we will grant to Young & Rubicam
Inc. an immediately exercisable ten year option to purchase 1,000,000 shares of
common stock at an exercise price equal to the initial public offering price.
In addition, immediately preceding the trading of our common stock, we
intend to grant options for an aggregate of 2,205,000 shares of common stock
exercisable at the initial public offering price to employees and officers of
the companies who will become our employees at the closing of the acquisitions.
One-sixth of the options will become exercisable every six months over 36 months
from the date of grant.
CONVERSION OF EXISTING OPTIONS
At the closing of the acquisitions, we will grant to some former owners,
employees and affiliates of one of our companies on conversion of outstanding
options issued by that company, options for 1,570,776 shares of our common
stock.
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<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $ million in net
proceeds (or $ million net proceeds if the underwriters' over-allotment
option is exercised in full) from this offering assuming an initial public
offering price of $ per share. This amount reflects deductions from the
gross proceeds of the offering of approximately $ million, which will be
retained by the underwriters as discounts and commissions and $ million,
representing our estimated expenses for this offering and the acquisitions of
our companies.
We expect to use approximately $89.5 million of the net proceeds from the
offering to pay the cash portion of the purchase prices payable for the
acquisition of our companies based on an assumed initial public offering price
of $11.00 per share, of which $4.1 million will be used to repay assumed notes
payable to several former owners of our companies which are due on demand with
open maturity dates and accrue interest at rates ranging from 9.25% to prime
plus 1% (8.75% at March 31, 1999).
We expect to use approximately $4.5 million of the proceeds to repay
advances made to us by Commonwealth Principals II LLC to pay our expenses until
the closing of this offering, which advances earn interest at the prime rate
(7.75% at May 20, 1999).
We will use the remainder of the net proceeds of approximately $ million
for general corporate purposes, which may include future acquisitions, working
capital and the payment of any additional amounts payable to former owners of
our eight companies under the contingent consideration provisions of the
acquisition agreements. This use of proceeds does not include the net proceeds
from the exercise of the underwriters' over-allotment option. Until we use the
net proceeds of this offering, we intend to invest these net proceeds in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have not paid, and do not intend to pay, dividends on our common stock in
the foreseeable future. Instead, we will retain our earnings to finance the
expansion of our business and for general corporate purposes. Our Board of
Directors will have the authority to declare and pay dividends on the common
stock at any time, in its discretion, as long as there are funds legally
available for that distribution.
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<PAGE>
CAPITALIZATION
The following table shows our capitalization at March 31, 1999 on an actual
basis, a pro forma combined basis and on a pro forma as adjusted basis. The pro
forma combined presentation considers the combined historical balance sheets for
Clarant and the eight companies we will acquire upon the closing of this
offering, and applies pro forma adjustments to the historical information. The
pro forma as adjusted presentation reflects the pro forma adjustments and also
the closing of this offering, the acquisition of the eight companies
simultaneously with this offering and the application of the estimated net
proceeds we will receive in this offering. The pro forma as adjusted column
below assumes that we will issue 20,485,125 shares of common stock in connection
with the acquisitions of our eight companies and that our two initial
stockholders will forfeit 398,966 shares of common stock to preserve the tax
treatment of the acquisitions. See "Use of Proceeds," and "Selected Unaudited
Pro Forma Combined Financial Data." For a description of the pro forma
adjustments, you should refer to our unaudited pro forma combined financial
statements and notes included elsewhere in this prospectus.
The pro forma as adjusted column does not include shares to be issued
if the underwriters exercise their over-allotment option in full; 8,578,991
shares of common stock issuable on exercise of stock options to be outstanding
at closing; and an indeterminable number of shares that may be issued in payment
of contingent consideration under the acquisition agreements as described under
"About Clarant Worldwide Corporation." See "Shares Available for Future Sale."
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
<S> <C> <C> <C>
PRO FORMA PRO FORMA
ACTUAL COMBINED AS ADJUSTED
--------- ----------- ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt and current portion of long-term debt......................... $ 50 $ 2,913 $
Due to affiliates/stockholders................................................ -- 71,202
Acquisition-related obligations............................................... -- 18,262
Long-term debt, less current portion.......................................... -- 595
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value per share:
10,000,000 shares authorized; no shares issued and outstanding on an actual
basis; no shares issued and outstanding on a pro forma combined basis; no
shares issued and outstanding on a pro forma as adjusted basis............ -- -- --
Common stock, $0.01 par value per share:
100,000,000 shares authorized; 7,848,966 shares issued and outstanding on an
actual basis; 28,334,091 shares issued and outstanding on a pro forma
combined basis; shares issued and outstanding on a pro forma as
adjusted basis............................................................ 78 283
Additional paid-in capital.................................................... 329 144,517
Retained earnings (deficit)................................................... (477) (4,258)
--------- -----------
Total stockholders' equity.................................................. (70) 140,542
--------- -----------
Total capitalization...................................................... $ (20) $ 233,514
--------- -----------
--------- -----------
</TABLE>
20
<PAGE>
DILUTION
Our pro forma net tangible book value at March 31, 1999 was $(82.3) million,
or $(2.91) per share of common stock. Pro forma net tangible book value per
share of common stock is calculated by dividing the pro forma net tangible book
value of our company by the number of shares of common stock outstanding on a
pro forma basis after giving effect to the acquisitions of our companies. Our
pro forma as adjusted net tangible book value at March 31, 1999 would have been
$37.6 million, or $.92 per share of common stock, assuming an initial public
offering price of $11.00 per share, no exercise of the underwriters'
over-allotment option, no payments under the contingent consideration provisions
of the acquisition agreements for our companies, no exercise of stock options
outstanding at closing and no changes in the pro forma net tangible book value
of our company, other than to give effect to the sale of the shares of common
stock offered by this prospectus, and the application of the net offering
proceeds as described under "Use of Proceeds."
This pro forma as adjusted net tangible book value represents an immediate
increase in net tangible book value of $3.83 per share to our existing
stockholders, including the former owners of our companies who will receive
shares of our common stock as partial payment for their equity interests in the
companies upon completion of this offering, and an immediate dilution in pro
forma as adjusted net tangible book value of $10.08 per share to new investors
purchasing shares in this offering. The following table illustrates this pro
forma per share dilution as of March 31, 1999:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........ $ 11.00
Pro forma net tangible book value per share at March
31, 1999............................................. $ (2.91)
Pro forma increase per share attributable to investors
who buy shares in this offering...................... 3.83
---------
Pro forma as adjusted net tangible book value per share
after the offering................................... $ .92
---------
Pro forma dilution per share to investors who buy
shares in this offering.............................. $ 10.08
---------
---------
</TABLE>
If all our options to purchase 8,578,991 shares of common stock expected to
be outstanding at closing of this offering were exercised in accordance with
their terms as of March 31, 1999, our pro forma net tangible book value, as
adjusted (based on the assumptions described above), would have been $2.17 per
share of common stock, representing immediate dilution of $5.08 per share to
investors purchasing shares in this offering.
The following table summarizes, as of March 31, 1999, on a pro forma as
adjusted basis (based upon the above assumptions), (1) the number of shares of
our common stock purchased by existing stockholders, including the former owners
of the eight companies who will receive shares of common stock as a partial
payment for their equity interests in the eight companies upon completion of
this offering, (2) the number of shares of common stock purchased by investors
who buy shares in this offering, (3) the total consideration paid to us, (4) the
average price paid to us and (5) the percentage ownership held by existing
stockholders (including the former owners of the eight acquired companies) and
by new investors in this offering:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
------------------------- --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------------- --------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................... 7,848,966 19.19% $ 200,001 .05% $ .03
Former owners of our companies................. 20,485,125 50.07 225,336,375 61.93 11.00
Investors who buy shares in this offering...... 12,575,000 30.74 138,325,000 38.02 11.00
-------------- --------- ---------------- ---------
Total.................................... 40,909,091 100.00% $ 363,861,376 100.00%
-------------- --------- ---------------- ---------
-------------- --------- ---------------- ---------
</TABLE>
21
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
We were incorporated in August 1998 and have not conducted any operations as
yet, except for negotiating and documenting the acquisitions of the eight
companies we will acquire simultaneously with the closing of this offering,
preparing this prospectus and the related documents for this offering and
developing our management team and corporate structure. Each of our eight
companies has been operating for at least 18 months. We present below our
summary unaudited pro forma combined financial data based on historical data for
the 12 months ended December 31, 1998 and the three months ended March 31, 1998
and 1999, considering our combined historical results and those of the companies
we will acquire. We also present below the unaudited pro forma combined balance
sheet data as of March 31, 1999 based on historical data and as adjusted for the
eight acquisitions and this offering. The unaudited pro forma combined statement
of operations data for the 12 months ended December 31, 1998 and the three
months ended March 31, 1998 and 1999 assume that the eight acquisitions and this
offering were consummated on January 1, 1998. The unaudited pro forma combined
balance sheet data assume that the eight acquisitions and this offering were
consummated on March 31, 1999.
The unaudited selected pro forma financial data do not necessarily indicate
the operating results or financial position which would have resulted from our
operation on a combined basis during the period presented, nor do these
unaudited pro forma data necessarily represent any future operating results or
financial position. In addition to these unaudited selected pro forma financial
data, you should also refer to the more complete financial information included
elsewhere in this prospectus, including more complete historical results for the
companies that we will acquire and our unaudited pro forma combined financial
statements and the accompanying notes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED ----------------------------
DECEMBER 31, 1998 1998 1999
--------------------- ------------- -------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ 49,884 $ 10,204 $ 17,705
Cost of services(1)(2).................................. 31,714 6,672 10,208
----------- ------------- -------------
Gross profit............................................ 18,170 3,532 7,497
Selling, general and administrative expenses(1)(2)(3)... 23,586 5,908 7,133
Equity based compensation expense(4).................... 6,621 1,655 4,851
Intangibles amortization(5)............................. 71,350 17,829 18,232
----------- ------------- -------------
Loss from operations.................................... (83,387) (21,860) (22,719)
Interest and other income, net.......................... (177) (28) (56)
----------- ------------- -------------
Loss before income taxes................................ (83,564) (21,888) (22,775)
Income taxes(6)......................................... -- -- --
----------- ------------- -------------
Net loss................................................ $ (83,564) $ (21,888) $ (22,775)
----------- ------------- -------------
----------- ------------- -------------
Net loss per share...................................... $ (2.04) $ (0.54) $ (0.56)
Shares used in computing pro forma net loss per
share(7).............................................. 40,909,091 40,909,091 40,909,091
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------
PRO FORMA PRO FORMA
COMBINED AS ADJUSTED(8)
----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
UNAUDITED PRO FORMA COMBINED
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 2,087 $
Working capital (deficit)........................................................... (85,419)(9)
Total assets........................................................................ 242,021
Long-term debt, net of current maturities........................................... 595
Stockholders' equity................................................................ 140,542
</TABLE>
22
<PAGE>
- ------------------------
(1) The unaudited pro forma combined statement of operations data reflect pro
forma changes in salaries, bonuses and benefits to the stockholders and
management of our eight companies that we will acquire that have been agreed
to prospectively. Compensation expense was reduced by $1.9 million for the
year ended December 31, 1998 and $189,000 for the three months ended March
31, 1999 and was increased by $40,000 for the three months ended March 31,
1998.
(2) Excludes compensation expense related to non-recurring issuances of equity
and equity appreciation rights of seven of our companies. Compensation
expense was reduced by $1.9 million for the year ended December 31, 1998,
and $8.1 million for the three months ended March 31, 1999.
(3) Includes adjustments to increase expenses related to additional compensation
expense to our new corporate management and the estimated incremental costs
associated with being a public company. Selling, general and administrative
expense was increased by $5.5 million for the year ended December 31, 1998,
$1.4 million for the three months ended March 31, 1998 and $1.4 million for
the three months ended March 31, 1999.
(4) Consists of compensation expense related to shares of common stock and
options issued to the management of Clarant at less than fair market value,
equity based compensation of Align Solutions Corp. (the accounting
acquiror), and the reclassification of compensation expense related to
shares sold to Clarant management at less than fair market value in 1998.
(5) Consists of amortization over a three-year period of $209.0 million of
goodwill and $4.8 million of other intangible assets to be recorded as a
result of the acquisitions and the granting of certain options. The
amortization is computed on the basis described in the notes to the
unaudited pro forma combined financial statements. No amounts have been
included for contingent consideration that may be payable to the former
owners of our eight companies. None of this contingent consideration is
expected to be compensatory.
(6) We have not demonstrated that we will generate future taxable income;
therefore, a net deferred tax asset for the pro forma loss before income
taxes has not been recognized.
(7) Includes (i) 20,485,125 shares of common stock to be issued to the former
owners of the eight companies we will acquire; (ii) 7,848,966 shares issued
to our initial stockholder and an executive officer; and (iii) shares
sold in this offering.
(8) Adjusted to reflect the sale of the shares of common stock at
an assumed initial public offering price of $ per share offered hereby and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
(9) Includes the effect of liabilities in the amount of $71.2 million payable to
the former owners of the eight companies we are acquiring, representing the
cash portion of the initial purchase prices to be paid for the acquisition
of common equity and $18.3 million of cash for other equity securities and
the repayment of debt of a company from a portion of the net proceeds of
this offering.
23
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
We will acquire eight companies simultaneously with and as a condition to
the closing of this offering. Align Solutions Corp. ("Align"), one of the eight
companies, has been identified as the "accounting acquiror" for financial
statement presentation purposes.
Our balance sheet data as of December 31, 1998 and the statement of
operations data for the period from our inception on August 21, 1998 to December
31, 1998 have been derived from our audited financial statements included
elsewhere in this prospectus.
The selected historical financial data of our companies are derived in part
from the more detailed historical financial statements and the related notes of
our companies included elsewhere in this prospectus. The balance sheet data as
of December 31, 1997 and 1998 and the statement of operations data for the years
ended December 31, 1996, 1997 and 1998 for Free Range Media, Inc.; Integrated
Consulting, Inc. dba i.con interactive; InterActive8, Inc.; Multimedia
Resources, LLC; and RSI Group, Inc. and subsidiaries have been derived from the
audited financial statements included elsewhere in this prospectus.
The balance sheet data as of December 31, 1997 and 1998 and the statement of
operations data for the period from its inception on October 16, 1996 to
December 31, 1996 and the years ended December 31, 1997 and 1998 for Align
Solutions Corp. have been derived from the audited financial statements included
elsewhere in this prospectus.
The balance sheet data as of December 31, 1997 and 1998 and the statement of
operations data for the period from its inception on November 10, 1997 to
December 31, 1997 and the year ended December 31, 1998 for Potomac Partners
Management Consulting, LLC, have been derived from the audited financial
statements included elsewhere in this prospectus.
The balance sheet data as of December 31, 1997 and 1998 and the statement of
operations data for the period from its inception on April 1, 1996 to December
31, 1996 and the years ended December 31, 1997 and 1998 for Brand Dialogue-New
York have been derived from the audited financial statements included elsewhere
in this prospectus.
24
<PAGE>
The following selected historical financial data should be read together
with the historical financial statements and notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. All our companies have fiscal years ending
December 31.
The following table shows selected historical financial data for Clarant and
our companies for the stated periods.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
CLARANT WORLDWIDE CORPORATION
Revenues........................................ $ -- $ -- $ -- $ -- $ --
Gross profit.................................... -- -- -- -- --
Operating loss.................................. -- -- (245) -- (232)
ALIGN SOLUTIONS CORP.
Revenues........................................ $ 112 $ 3,268 $ 9,226 $ 1,299 $ 4,341
Gross profit.................................... 32 1,485 4,098 542 1,974
Operating income (loss)......................... (201) (149) 1 (152) (3,318)
BRAND DIALOGUE-NEW YORK
Revenues........................................ $ 1,922 $ 4,011 $ 7,237 $ 1,410 $ 2,701
Operating income................................ 577 1,171 964 24 441
FREE RANGE MEDIA, INC.
Revenues........................................ $ 2,940 $ 1,982 $ 3,521 $ 338 $ 2,211
Gross profit (loss)............................. 924 341 272 (180) 749
Operating loss.................................. (1,081) (2,644) (4,650) (1,270) (426)
INTEGRATED CONSULTING, INC., DBA I.CON INTERACTIVE
Revenues........................................ $ 443 $ 849 $ 2,140 $ 456 $ 825
Gross profit.................................... 311 582 1,424 343 575
Operating income (loss)......................... (4) 32 41 127 120
INTERACTIVE8, INC.
Revenues........................................ $ 1,713 $ 2,818 $ 4,097 $ 737 $ 1,613
Gross profit (loss)............................. 657 1,184 2,064 304 (1,489)
Operating income (loss)......................... 197 (198) (355) (386) (1,953)
MULTIMEDIA RESOURCES, LLC
Revenues........................................ $ 1,928 $ 3,476 $ 2,068 $ 652 $ 742
Gross profit.................................... 943 1,039 312 213 428
Operating income................................ 523 502 37 132 336
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
Revenues........................................ $ -- $ 372 $ 4,886 $ 976 $ 2,060
Gross profit (loss)............................. -- 82 (200) 322 (4,171)
Operating income (loss)......................... -- (4) (1,076) 142 (4,660)
RSI GROUP, INC. AND SUBSIDIARIES
Revenues........................................ $ 16,133 $ 15,724 $ 16,927 $ 4,338 $ 3,253
Gross profit.................................... 4,470 4,074 4,656 1,188 889
Operating income (loss)......................... 365 329 403 227 (825)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
CLARANT WORLDWIDE CORPORATION
Total assets................................................................ $ -- $ 162 $ 56
Long-term debt.............................................................. -- -- 50
Total equity (deficit)...................................................... -- 162 (70)
ALIGN SOLUTIONS CORP.
Total assets................................................................ $ 1,328 $ 3,066 $ 13,489
Long-term debt.............................................................. 297 227 254
Total equity................................................................ 601 1,468 10,797
BRAND DIALOGUE-NEW YORK
Total assets................................................................ $ 1,449 $ 2,127 $ 4,427
Long-term debt.............................................................. -- -- --
Total equity................................................................ 833 1,058 2,350
FREE RANGE MEDIA, INC.
Total assets................................................................ $ 900 $ 1,696 $ 2,772
Long-term debt.............................................................. -- -- --
Total equity (deficit)...................................................... 577 (2,583) (3,059)
INTEGRATED CONSULTING, INC., DBA I.CON INTERACTIVE
Total assets................................................................ $ 248 $ 498 $ 772
Long-term debt.............................................................. -- 64 124
Total equity................................................................ 63 103 204
INTERACTIVE8, INC.
Total assets................................................................ $ 793 $ 1,439 $ 1,835
Long-term debt.............................................................. 178 723 947
Total deficit............................................................... (43) (246) (2,199)
MULTIMEDIA RESOURCES, LLC
Total assets................................................................ $ 804 $ 346 $ 795
Long-term debt.............................................................. -- -- --
Total equity................................................................ 455 174 461
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
Total assets................................................................ $ 427 $ 2,072 $ 2,133
Long-term debt.............................................................. -- -- --
Total equity (deficit)...................................................... 297 (246) (5,135)
RSI GROUP, INC. AND SUBSIDIARIES
Total assets................................................................ $ 3,533 $ 3,936 $ 3,109
Long-term debt.............................................................. 89 98 84
Total equity................................................................ 1,076 1,098 1,002
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Historical Financial Data," "Pro Forma Selected Unaudited Combined Financial
Data," our unaudited pro forma combined financial statements and the related
notes and the historical financial statements and the related notes of our
companies appearing elsewhere in this prospectus. A number of statements in this
prospectus address activities, events or developments that we expect may occur
in the future, including such matters as our strategy for internal growth;
additional capital expenditures, including the amount and nature of the
expenditures; acquisitions of assets and businesses; industry trends; and other
similar matters. These statements are based on assumptions and analyses made in
light of our perception of historical trends, current business and economic
conditions, and expected future developments, as well as other factors we
believe are reasonable or appropriate. Whether actual results and developments
will conform with our expectations and predictions, however, is subject to a
number of risks and uncertainties, including those set forth in "Risk Factors;"
general economic, market or business conditions; the business opportunities we
may pursue; changes in laws or regulations; and other factors, many of which are
beyond our control. Consequently, we can not assure you that our actual results
or developments will be realized or, even if substantially realized, that they
will have the expected consequences to, or effects on, our business or
operations.
OVERVIEW
Clarant was established to provide a single source integrated Internet and
electronic commerce solution to clients on a local and national level. Clarant
was formed in August 1998 to consolidate the operations of eight Internet and
electronic commerce businesses into a nationally recognized Internet and
electronic commerce services firm. Our services focus on strategy consulting and
creative and technology solutions. We also provide value-added services that
assist clients in establishing, developing and maintaining their Internet and
electronic commerce-related businesses. Our companies and their principal
business locations are:
<TABLE>
<S> <C>
Align Solutions Corp. Houston, Texas
Brand Dialogue-New York New York, New York
Free Range Media, Inc. Seattle, Washington
Integrated Consulting, Inc. dba i.con Dallas, Texas
interactive
InterActive8, Inc. New York, New York
Multimedia Resources, LLC Larchmont, New York
Potomac Partners Management Consulting, LLC Reston, Virginia
RSI Group, Inc. and subsidiaries Dallas, Texas
</TABLE>
Our customers generally retain us on a project-by-project basis. We
typically do not have material contracts that commit a customer to use our
services on a long-term basis. Revenue is recognized primarily using the
percentage of completion method on a contract-by-contract basis. Our use of the
percentage of completion method of revenue recognition requires management to
estimate the degree of completion of each project. To the extent these estimates
prove to be inaccurate, the revenues and gross profits reported for periods
during which work on the project is ongoing may not accurately reflect the final
financial results of the project. We make provisions for estimated losses on
uncompleted contracts on a contract-by-contract basis and recognize such
provisions in the period in which the losses are determined.
We provide our services primarily on a fixed-price, fixed-time frame basis.
We use internally developed processes to estimate and propose fixed prices for
such projects. The estimation process accounts for standard billing rates
particular to each project based upon the level of expertise and number of
consultants required, the technology environment, the overall technical
complexity and
27
<PAGE>
whether strategic, creative or technology solutions or value-added services are
being provided to the client. We also provide services on a time and materials
basis.
Align has been identified as the "accounting acquiror" for our financial
statement presentation, and its assets and liabilities are being recorded at
historical cost levels. Each of the remaining acquisitions of our companies will
be accounted for using the purchase method of accounting. Accordingly, the
purchase prices for those companies have been allocated based on preliminary
estimates of the fair value of the tangible assets and liabilities to be
assumed, as of March 31, 1999. The excess of the fair value of the consideration
paid over the fair value of the net assets to be acquired, other than those of
Align, totals approximately $209.0 million and is recorded as goodwill on our
pro forma balance sheet. Because the Internet and electronic commerce industries
are in the early stage of development and are continuing to evolve rapidly, the
recorded goodwill from the acquisitions will be amortized on a straight line
basis over three years, the estimated period of benefit. The pro forma impact of
this amortization expense, none of which is deductible for tax purposes, is
approximately $69.7 million per year. See the notes to our unaudited pro forma
combined financial statements. In addition, pro forma amortization expense
includes approximately $1.6 million per year related to the estimated fair value
of options to be granted to the owners of Brand Dialogue-New York.
PRO FORMA COMBINED RESULTS OF OPERATIONS
Our pro forma combined results of operations for the periods presented do
not represent combined results of operations presented in accordance with
generally accepted accounting principles, but are only a summation of the
revenues, operating expenses and general and administrative expenses of our
companies on a pro forma basis. The pro forma combined results may not be
comparable to, and may not be indicative of, our post-combination results of
operations because: (i) our companies were not under common control or
management during the periods presented; (ii) we will incur incremental costs
related to our new corporate management and the costs of being a public company;
and (iii) the combined data do not reflect potential benefits and cost savings
we may realize when operating as a combined entity. The following discussion
should be read in conjunction with our unaudited pro forma combined financial
statements and the related notes and the historical financial statements and the
related notes of the eight companies we will acquire appearing elsewhere in this
prospectus. The following table sets forth the combined results of operations of
the companies we will acquire on a pro forma basis:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED MARCH
DECEMBER 31, 31,
-------------- ------------------------
1998 1998 1999
-------------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues.............................................. $ 49,884 $ 10,204 $ 17,705
Cost of services...................................... 31,714 6,672 10,208
-------------- ----------- -----------
Gross profit.......................................... 18,170 3,532 7,497
Selling, general and administrative................... 23,586 5,908 7,133
Equity-based compensation expense..................... 6,621 1,655 4,851
Intangibles amortization.............................. 71,350 17,829 18,232
-------------- ----------- -----------
Loss from operations.................................. $ (83,387) $ (21,860) $ (22,719)
-------------- ----------- -----------
-------------- ----------- -----------
</TABLE>
CLARANT WORLDWIDE CORPORATION--UNAUDITED PRO FORMA COMBINED RESULTS OF
OPERATIONS--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1999
REVENUES. Revenues increased approximately $7.5 million, or 74%, from $10.2
million for the three months ended March 31, 1998 to $17.7 million for the same
period in 1999. This increase
28
<PAGE>
resulted primarily from an increase in the number of clients and size and scope
of engagements. No client contributed in excess of 10% of our revenues during
the period.
COST OF SERVICES. Cost of services increased approximately $3.5 million, or
53%, from $6.7 million for the three months ended March 31, 1998 to $10.2
million for the same period in 1999. The increase resulted from costs related to
salary, benefits and travel directly related to the increased number of client
projects. Gross profit margins increased from 35% for the three months ended
March 1998 to 45% for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $1.2 million, or 21%, from $5.9 million for
the three months ended March 31, 1998 to $7.1 million for the same period in
1999. The increase resulted from additional expenses related to the development
of infrastructure necessary to support sales growth. Selling, general and
administrative expenses as a percentage of revenues decreased from 58% for the
three months ended March 31, 1998 to 40% for the three months ended March 31,
1999.
EQUITY BASED COMPENSATION EXPENSE. Equity based compensation expense is
comprised of $3.2 million for Align's employee stock options granted at less
than fair market value during the three months ended March 31, 1999, 1.7 million
for stock issuances and stock options to be granted at less than fair market
value to Clarant management upon completion of the offering for both the three
months ended March 31, 1998 and March 31, 1999.
CLARANT WORLDWIDE CORPORATION--UNAUDITED PRO FORMA COMBINED RESULTS OF
OPERATIONS FOR 1998
REVENUES. Pro forma consolidated revenues for the twelve months ended
December 31, 1998 were $49.8 million and cost of services for the same period
were $31.7 million with a gross profit margin of 36%.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $23.6 million, for the year ended December 31, 1998, or 47% of
revenues.
EQUITY BASED COMPENSATION EXPENSE. Equity based compensation expense is for
stock issuances and stock options to be granted at less than fair market value
to Clarant management upon completion of the offering.
SEASONALITY AND CYCLICALITY; POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS
We believe that the market for Internet and electronic commerce related
professional services is influenced by general economic conditions and
particularly by the level of technological change. Increased levels of
technological change drive the need for professional services we provide. We
also believe that the industry tends to experience periods of decline and
recession during economic downturns. If the industry does experience sustained
periods of economic recessions, any such decline may have a material adverse
effect on our operating results.
Other factors which could cause quarterly fluctuations and influence
operating results are:
- the number, size and type of client engagements we commence and complete
during a quarter;
- modification or termination of material contracts;
- the amount and timing of expenditures by our clients for Internet and
electronic commerce professional services;
- our ability to adequately staff our projects and effectively utilize our
employees;
29
<PAGE>
- the fixed personnel and other costs we incur in advance of the quarter;
- the number, type, timing and costs of acquisitions completed during a
quarter;
- our ability to manage costs, including personnel costs and support
services costs; and
- our introduction of new services.
We plan our operating expenditures based on revenue forecasts, and a revenue
shortfall below such forecasts in any quarter would likely adversely affect our
operating results for that quarter. See "Risk Factors--We are affected by
seasonal factors that could cause our revenues to fluctuate from quarter to
quarter."
ALIGN SOLUTIONS CORP.--RESULTS OF OPERATIONS
Align Solutions Corp. ("Align") has offices in Houston and Dallas, Texas and
Atlanta, Georgia and has 145 employees. The following table sets forth certain
selected financial data for Align on a historical basis for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1996(1) 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues................................................... $ 112 $ 3,268 $ 9,226 $ 1,299 $ 4,341
Cost of services........................................... 80 1,783 5,128 757 2,367
--------- --------- --------- --------- ---------
Gross profit............................................... 32 1,485 4,098 542 1,974
Selling, general and administrative........................ 233 1,634 4,097 694 5,292
--------- --------- --------- --------- ---------
Operating income (loss).................................... $ (201) $ (149) $ 1 $ (152) $ (3,318)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Inception - October 1996
ALIGN SOLUTIONS CORP.--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $3.0 million, or 234%, from $1.3
million for the three months ended March 31, 1998 to $4.3 million for the same
period in 1999. This increase resulted primarily from an increase in the number
of clients and size and scope of engagements. For the three months ended March
31, 1999, Enron Energy Services contributed 29% of total revenues. No other
client contributed 10% or more of Align's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $1.6 million, or
213%, from $757,000 for the three months ended March 31, 1998 to $2.4 million
for the same period in 1999. The increase resulted from the salary, benefits and
travel expenses directly associated with the increased number of client
projects. Gross profit margin increased from 42% for the three months ended
March 31, 1998 to 45% for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $4.6 million, or 663%, from $694,000 for the
three months ended March 31, 1998 as compared to $5.3 million for the same
period in 1999. The increase primarily resulted from compensation charges of
$3.2 million related to stock options issued below fair market value during the
three months ended March 31, 1999. The remainder of the increase was due to
additional personnel costs.
30
<PAGE>
ALIGN SOLUTIONS CORP.--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $6.0 million, or 182%, from $3.2
million for the year ended December 31, 1997 to $9.2 million for the same period
in 1998. This increase resulted primarily from an increase in the number of
clients and the size and scope of engagements. For the year ended December 31,
1998, Enron Energy Services contributed 19% of total revenues and Administaff
contributed 21% of total revenues. No other client contributed 10% or more of
Align's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $3.3 million, or
188%, from $1.8 million for the year ended December 31, 1997 to $5.1 million for
the same period in 1998. The increase resulted from costs of salary, benefits
and travel expenses directly associated with the increased number of client
projects. Gross profit margin decreased from 45% for the year ended December 31,
1997 to 44% for the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $2.5 million, or 151%, from $1.6 million for
the year ended December 31, 1997 to $4.1 million for the same period in 1998.
The increase resulted from the addition of personnel to support revenue growth
targets. Additionally, accounting, administrative, and recruiting personnel were
added to support the increase in consulting services.
ALIGN SOLUTIONS CORP.--1996 COMPARED TO 1997
REVENUES. Revenues increased approximately $3.2 million, or 2,818%, from
$112,000 for the period ended December 31, 1996 to $3.3 million for the year
ended December 31, 1997. Align was founded in October 1996 and thus 1996
reflects only three months of operations.
For the period ended December 31, 1996, revenues from Chevron and Internet
Commerce Corporation accounted for 60% of total revenues. For the year ended
December 31, 1997, Nitro contributed 12% of total revenues and Chevron
contributed 14% of total revenues. No other client accounted for 10% or more of
Align's revenues in these periods.
COST OF SERVICES. Cost of services increased approximately $1.7 million, or
2,129%, from $80,000 for the period ended December 31, 1996 to $1.8 million for
the year ended December 31, 1997. The increase resulted primarily from a full
year's operations and expenses in 1997 compared to three months of operations in
1996. Gross profit margin increased from 29% for the year ended December 31,
1996 to 45% for the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $1.4 million, or 601%, from $233,000 for the
period from inception to December 31, 1996 to $1.6 million for the year ended
December 31, 1997. The increase resulted from 1997 being the first full year of
Align's operations.
31
<PAGE>
BRAND DIALOGUE-NEW YORK (THE NEW YORK BRANCH OF A YOUNG & RUBICAM
DIVISION)--RESULTS OF OPERATIONS
Brand Dialogue-New York (a wholly-owned business of Young & Rubicam Inc.) is
located in New York City and has 79 employees. The following table shows certain
selected financial data for Brand Dialogue-New York on a historical basis for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1996(1) 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues...................................................... $ 1,922 $ 4,011 $ 7,237 $ 1,410 $ 2,701
Compensation expense, including employee benefits............. 943 1,842 4,596 1,005 1,560
General and administrative expenses........................... 402 998 1,677 381 700
--------- --------- --------- --------- ---------
Operating income.............................................. $ 577 $ 1,171 $ 964 $ 24 $ 441
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Inception-April 1996
BRAND DIALOGUE-NEW YORK--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $1.3 million, or 92%, from $1.4
million for the three months ended March 31, 1998 to $2.7 million for the same
period in 1999. This increase resulted primarily from an increase in the number
of clients, increased business from new clients and higher revenues from
existing clients. For the three months ended March 31, 1999,
contributed % of total revenues, contributed % of total revenues,
contributed % of total revenues and contributed % of
total revenues. No other client contributed 10% or more of Brand Dialogue-New
York's revenues during the period.
COMPENSATION EXPENSE, INCLUDING EMPLOYEE BENEFITS. Compensation expense
increased approximately $555,000, or 55%, from $1.0 million for the three months
ended March 31, 1998 to $1.6 million for the same period in 1999. The increase
resulted from salary increases, benefits and additional staffing to support new
business growth.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by approximately $319,000, or 84%, from $381,000 for the three months
ended March 31, 1998 as compared to $700,000 for the same period in 1999. This
increase was primarily a result of higher facilities, selling and recruiting
expenses necessary to support Brand Dialogue-New York's growth.
BRAND DIALOGUE-NEW YORK--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $3.2 million, or 80%, from $4.0
million for the year ended December 31, 1997 to $7.2 million for the same period
in 1998. This increase resulted primarily from increased business from new
clients and higher revenues from existing clients. For the year ended December
31, 1998, contributed % of total revenues, contributed %
of total revenues, contributed % of total revenues and
contributed % of total revenues. No other client contributed 10% or more of
Brand Dialogue-New York's revenues during the period.
COMPENSATION EXPENSE, INCLUDING EMPLOYEE BENEFITS. Compensation expense
increased approximately $2.8 million, or 150%, from $1.8 million for the year
ended December 31, 1997 to
32
<PAGE>
$4.6 million for the same period in 1998. The increase resulted from the
addition of employees and employee-related costs associated with the overall
growth in business.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by approximately $679,000, or 68%, from $998,000 for the year ended
December 31, 1997 as compared to $1.7 million for the same period in 1998. The
increase primarily resulted from additional facilities costs, marketing expenses
and recruiting fees.
BRAND DIALOGUE-NEW YORK--1996 COMPARED TO 1997
REVENUES. Revenues increased approximately $2.1 million, or 109%, from $1.9
million for the period ended December 31, 1996 to $4.0 million for the year
ended December 31, 1997. This increase was primarily due to 1997 being the first
full year of operations. Brand Dialogue-New York was started in April 1996.
Further, this increase is due to additional business from new clients and higher
revenues from existing clients. For the year ended December 31, 1997,
contributed % of total revenues, contributed % of total revenues,
contributed % of total revenues and contributed % of
total revenues. No other client contributed 10% or more of Brand Dialogue-New
York's revenues during the period.
COMPENSATION EXPENSE, INCLUDING EMPLOYEE BENEFITS. Compensation expense
increased approximately $899,000, or 95%, from $943,000 for the period ended
December 31, 1996 to $1.8 million for the year ended December 31, 1997. The
increase was proportionate with revenue growth and the result of additions of
personnel and related expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by approximately $596,000, or 148%, from $402,000 for the period ended
December 31, 1996 to $998,000 for the year ended December 31, 1997. The increase
resulted from higher facilities, professional services and allocated
administrative expenses necessary to support Brand Dialogue-New York's growth.
FREE RANGE MEDIA, INC.--RESULTS OF OPERATIONS
Free Range Media, Inc. ("Free Range") is located in Seattle, Washington and
has 76 employees. The following table shows certain selected financial data for
Free Range on a historical basis for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 2,940 $ 1,982 $ 3,520 $ 338 $ 2,211
Cost of services........................................... 2,016 1,641 3,248 518 1,462
--------- --------- --------- --------- ---------
Gross profit............................................... 924 341 272 (180) 749
Selling, general and administrative........................ 2,005 2,985 4,922 1,090 1,175
--------- --------- --------- --------- ---------
Operating loss............................................. $ (1,081) $ (2,644) $ (4,650) $ (1,270) $ (426)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
FREE RANGE MEDIA, INC.--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $1.9 million, or 554%, from
$338,000 for the three months ended March 31, 1998 to $2.2 million for the same
period in 1999. This increase resulted primarily from an increase in the number
of clients, as well as an overall increase in the
33
<PAGE>
size and scope of engagements. For the three months ended March 31, 1999, Key
Bank contributed 25% of total revenues. No other client contributed 10% or more
of Free Range's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $944,000, or
182%, from $518,000 for the three months ended March 31, 1998 to $1.5 million
for the same period in 1999. The increase resulted from the cost of salary,
benefits and travel expenses directly associated with additional client
engagements. Gross profit margin increased from a negative 53% for the three
months ended March 31, 1998 to 34% for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $85,000, or 8%, from $1.1 million for the
three months ended March 31, 1998 to $1.2 million for the same period in 1999.
The increase primarily resulted from the addition of marketing and
administrative personnel necessary to support increased volume, which was
partially offset by expense reductions due to centralization of the sales force.
FREE RANGE MEDIA, INC.--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $1.5 million, or 78%, from $2.0
million for the year ended December 31, 1997 to $3.5 million for the same period
in 1998. This increase resulted primarily from an increase in the number of
clients and the size and scope of engagements. No client contributed 10% or more
of Free Range's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $1.6 million, or
98%, from $1.6 million for the year ended December 31, 1997 to $3.2 million for
the same period in 1998. The increase resulted from the cost of salary, benefits
and travel expenses directly associated with additional client engagements.
Gross profit margin decreased from 17% for the year ended December 31, 1997, to
8% for the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $1.9 million, or 65%, from $3.0 million for
the year ended December 31, 1997 to $4.9 million for the same period in 1998.
This increase resulted from the implementation of a sales model with multiple
offices throughout the U.S. and the investment in infrastructure necessary to
support anticipated growth. Selling, general and administrative expenses as a
percentage of revenues decreased from 151% for the year ended December 31, 1997
to 140% for the year ended December 31, 1998.
FREE RANGE MEDIA, INC.--1996 COMPARED TO 1997
REVENUES. Revenues decreased approximately $958,000, or 33%, from $2.9
million for the year ended December 31, 1996 to $2.0 million for the same period
in 1997. No client accounted for 10% or more of Free Range's revenues in these
periods. This decrease resulted primarily from a restructuring of Free Range's
operations to focus on obtaining multiple engagements from a single client,
rather than performing individual projects for different clients.
COST OF SERVICES. Cost of services decreased approximately $375,000, or
19%, from $2.0 million for the year ended December 31, 1996 to $1.6 million for
the same period in 1997. The decrease resulted from the decrease in staffing.
Gross profit margin decreased from 31% for the year ended December 31, 1996 to
17% for the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $980,000, or 49%, from $2.0 million for the
year ended December 31, 1996 to $2.9
34
<PAGE>
million for the same period in 1997. The increase was primarily attributable to
Free Range's investment in infrastructure necessary to support anticipated
growth.
INTEGRATED CONSULTING, INC.--RESULTS OF OPERATIONS
Integrated Consulting, Inc. dba i.con interactive ("i.con") is headquartered
in Dallas, Texas, and has 32 employees. The following table sets forth certain
selected financial data for i.con on a historical basis for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues....................................................... $ 443 $ 849 $ 2,140 $ 456 $ 825
Cost of services............................................... 132 267 716 113 250
--------- --------- --------- --------- ---------
Gross profit................................................... 311 582 1,424 343 575
Selling, general and administrative............................ 315 550 1,383 216 455
--------- --------- --------- --------- ---------
Operating income (loss)........................................ $ (4) $ 32 $ 41 $ 127 $ 120
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
INTEGRATED CONSULTING, INC.--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $369,000, or 81%, from $456,000
for the three months ended March 31, 1998 to $825,000 for the same period in
1999. This increase resulted primarily from an increase in the number of clients
and the size and scope of engagements. For the three months ended March 31,
1999, Ericsson contributed 13% of total revenues and the Texas Rangers
contributed 12% of total revenues. No other client contributed 10% or more of
i.con's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $137,000, or
121%, from $113,000 for the three months ended March 31, 1998 to $250,000 for
the same period in 1999. The increase resulted from higher salaries, benefits
and travel expenses directly associated with the increased number of client
engagements. Gross profit margin decreased from 75% for the three months ended
March 31, 1998 to 70% for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $239,000, or 111%, from $216,000 for the
three months ended March 31, 1998 to $455,000 for the same period in 1999. The
increase primarily resulted from the addition of marketing and administrative
personnel.
INTEGRATED CONSULTING, INC.--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $1.3 million, or 152%, from
$849,000 for the year ended December 31, 1997 to $2.1 million for the same
period in 1998. This increase resulted primarily from an increase in the number,
size and scope of engagements. For the year ended December 31, 1998, the Dallas
Stars contributed 12% of total revenues. No other client contributed 10% or more
of i.con's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $449,000, or
168%, from $267,000 for the year ended December 31, 1997 to $716,000 for the
same period in 1998. The increase resulted from the cost of salary, benefits and
travel expenses directly associated with client
35
<PAGE>
engagements. Gross profit margin decreased from 69% for the year ended December
31, 1997 to 67% for the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $833,000, or 151%, from
$550,000 for the year ended December 31, 1997 to $1.4 million for the same
period in 1998. The increase primarily resulted from the addition of marketing
and administrative personnel.
INTEGRATED CONSULTING, INC.--1996 COMPARED TO 1997
REVENUES. Revenues increased approximately $406,000, or 92%, from $443,000
for the year ended December 31, 1996 to $849,000 for the same period in 1997.
This increase resulted primarily from an increase in the number of clients and
size and scope of engagements. For the year ended December 31, 1997, S2 Systems
contributed 13% of total revenues and Alcatel Network Systems contributed 10% of
total revenues. No other client contributed 10% or more of i.con's revenues
during the period.
COST OF SERVICES. Cost of services increased approximately $135,000, or
102%, from $132,000 for the year ended December 31, 1996 to $267,000 for the
comparable period in 1997. Gross profit margin decreased from 70% for the year
ended December 31, 1996 to 69% for the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $235,000, or 75%, from $315,000 for the year
ended December 31, 1996 to $550,000 for the same period in 1997. The increase
resulted from increases in marketing and administrative staff.
INTERACTIVE8, INC.--RESULTS OF OPERATIONS
InterActive8, Inc. ("InterActive8") is located in New York, New York, and
has 52 employees. The following table sets forth certain selected financial data
for InterActive8 on a historical basis for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues..................................................... $ 1,713 $ 2,818 $ 4,097 $ 737 $ 1,613
Cost of services............................................. 1,056 1,634 2,033 433 3,102
--------- --------- --------- --------- ---------
Gross profit................................................. 657 1,184 2,064 304 (1,489)
Selling, general and administrative.......................... 460 1,382 2,419 690 464
--------- --------- --------- --------- ---------
Operating income (loss)...................................... $ 197 $ (198) $ (355) $ (386) $ (1,953)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
INTERACTIVE8, INC.--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $876,000, or 118%, from $737,000
for the three months ended March 31, 1998 to $1.6 million for the same period in
1999. This increase resulted primarily from an increase in the number of
clients, including Maybelline, and an increase in the size and scope of
engagements. For the three months ended March 31, 1999, A&E Television Networks
contributed 33% of total revenues and M&M/Mars contributed 15% of total
revenues. No other client contributed 10% or more of InterActive8's revenues
during the period.
36
<PAGE>
COST OF SERVICES. Cost of services increased approximately $2.7 million, or
616%, from $433,000 for the three months ended March 31, 1998 to $3.1 million
for the same period in 1999. The increase resulted from the cost of salary,
benefits and travel expenses directly associated with client engagements as well
as the recognition of compensation expense for equity appreciation rights in the
amount of $2.3 million. Gross profit margin decreased from 41% for the three
months ended March 31, 1998 to a negative 92% for the same period in 1999.
However, excluding equity related compensation expense, the gross profit margin
would have been 50%.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased by approximately $226,000, or 33%, from $690,000 for the
three months ended March 31, 1998 to $464,000 for the same period in 1999. The
decrease resulted from a reduction in administrative and marketing personnel.
INTERACTIVE8, INC.--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $1.3 million, or 45%, from $2.8
million for the year ended December 31, 1997 to $4.1 million for the same period
in 1998. This increase was primarily due to an increase in the number of clients
and size and scope of engagements. For the year ended December 31, 1998, A&E
Television Networks contributed 35% of total revenues and M&M/Mars contributed
10% of total revenues. No other client contributed 10% or more of InterActive8's
revenues during the period.
COST OF SERVICES. Cost of services increased approximately $399,000, or
24%, from $1.6 million for the year ended December 31, 1997 to $2.0 million for
the same period in 1998. The increase resulted from the cost of salary, benefits
and travel expenses for additional professionals which is directly associated
with the increased number of client engagements. Gross profit margin increased
from 42% for the year ended December 31, 1997 to 50% for the same period in
1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $1.0 million, or 75%, from $1.4 million for
the year ended December 31, 1997 to $2.4 million for the same period in 1998.
The increase primarily resulted from the addition of marketing and
administrative personnel associated with the increased volume of business.
INTERACTIVE 8, INC.--1996 COMPARED TO 1997
REVENUES. Revenues increased approximately $1.1 million, or 65%, from $1.7
million for the year ended December 31, 1996 to $2.8 million for the same period
in 1997. This increase resulted primarily from an increase in the number of
clients and size and scope of engagements. For the year ended December 31, 1997,
A&E Television Networks contributed 31% of total revenues, AT&T contributed 14%
of total revenues and M&M/Mars contributed 21% of total revenues. No other
client contributed 10% or more of InterActive8's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $578,000, or
55%, from $1.1 million for the year ended December 31, 1996 to $1.6 million for
the same period in 1997. The increase resulted from the addition of professional
consulting personnel. Gross profit margin increased from 38% for the year ended
December 31, 1996 to 42% for the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $922,000, or 200%, from $460,000 for the
year ended December 31, 1996 to $1.4 million for the same period in 1997. The
increase resulted from increased management compensation expense and increased
selling and administration personnel costs.
37
<PAGE>
MULTIMEDIA RESOURCES, LLC--RESULTS OF OPERATIONS
Multimedia Resources, LLC ("Multimedia") is located in Larchmont, New York
and has eleven employees. The following table sets forth certain selected
financial data for Multimedia on a historical basis for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................................. $ 1,928 $ 3,476 $ 2,068 $ 652 $ 742
Cost of services......................................... 985 2,437 1,756 439 314
--------- --------- --------- --------- ---------
Gross profit............................................. 943 1,039 312 213 428
Selling, general and administrative...................... 420 537 275 81 92
--------- --------- --------- --------- ---------
Operating income (loss).................................. $ 523 $ 502 $ 37 $ 132 $ 336
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
MULTIMEDIA RESOURCES, LLC--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $90,000, or 14%, from $652,000
for the three months ended March 31, 1998 to $742,000 for the same period in
1999. This increase resulted primarily from an increase in the number of clients
as well as growth in services to MasterCard International. For the three months
ended March 31, 1999, MasterCard International contributed 52% of total revenue.
No other client contributed 10% or more of Multimedia's revenues during the
period.
COST OF SERVICES. Cost of services decreased approximately $125,000, or
28%, from $439,000 for the three months ended March 31, 1998 to $314,000 for the
same period in 1999. The decrease resulted from an increase in the utilization
of employees and the use of fewer outside consultants on client projects. Gross
profit margin increased from 33% for the three months ended March 31, 1998 to
58% for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $11,000, or 14%, from $81,000 for the three
months ended March 31, 1998 to $92,000 for the same period in 1999. The increase
primarily resulted from the addition of marketing and administrative personnel.
MULTIMEDIA RESOURCES, LLC--1997 COMPARED TO 1998
REVENUES. Revenues decreased approximately $1.4 million, or 41%, from $3.5
million for the year ended December 31, 1997 to $2.1 million for the same period
in 1998. This decrease resulted primarily from the temporary loss of a
significant client. For the year ended December 31, 1998, Mastercard
International contributed 34% of total revenues. No other client contributed 10%
or more of Multimedia Resources' revenues during the period.
COST OF SERVICES. Cost of services decreased approximately $681,000, or
28%, from $2.4 million for the year ended December 31, 1997 to $1.8 million for
the same period in 1998. The decrease resulted from lower salary, benefits and
travel expenses directly associated with the temporary loss of a significant
client. Gross profit margin decreased from 30% for the year ended December 31,
1997 to 15% for the same period in 1998.
38
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased by approximately $262,000, or 49%, from $537,000 for the year
ended December 31, 1997 to $275,000 for the same period in 1998. The decrease
primarily resulted from decreases in owner salaries as a result of a decrease in
volume.
MULTIMEDIA RESOURCES, LLC--1996 COMPARED TO 1997
REVENUES. Revenue increased approximately $1.5 million, or 80%, from $1.9
million for the year ended December 31, 1996 to $3.5 million for the same period
in 1997. This increase resulted primarily from key client strategic consulting
revenues from MasterCard International, MSNBC and the Society of European
Satellites ("SES"). For the year ended December 31, 1997, MasterCard
International contributed 63% of total revenues and SES contributed 14% of total
revenues. No other clients contributed 10% or more of Multimedia's revenues
during the period.
COST OF SERVICES. Cost of services increased approximately $1.5 million, or
147%, from $985,000 for the year ended December 31, 1996 to $2.4 million for the
same period in 1997. The increase resulted from investments in personnel and
infrastructure to support the growing business. In addition, Multimedia retained
a large base of contract employees to support Internet development work for
MasterCard International. Gross profit margin decreased from 49% for the year
ended December 31, 1996 to 30% for the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $117,000, or 28%, from $420,000 for the year
ended December 31, 1996 to $537,000 for the same period in 1997.
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC--RESULTS OF OPERATIONS
Potomac Partners Management Consulting, LLC ("Potomac Partners") is located
in Reston, Virginia, has operations in eight states, and has 27 employees. The
following table sets forth certain selected financial data for Potomac Partners
on a historical basis for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------- --------------------
1997(1) 1998 1998 1999
----------- -------------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues............................................. $ 372 $ 4,886 $ 976 $ 2,060
Cost of services..................................... 290 5,086 654 6,231
----- ------- --------- ---------
Gross profit......................................... 82 (200) 322 (4,171)
Selling, general and administrative.................. 86 876 180 489
----- ------- --------- ---------
Operating income (loss).............................. $ (4) $ (1,076) $ 142 $ (4,660)
----- ------- --------- ---------
----- ------- --------- ---------
</TABLE>
- ------------------------
(1) Inception--November 1997
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC--THREE MONTHS ENDED MARCH 31, 1998
COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $1.1 million, or 111%, from
$976,000 for the three months ended March 31, 1998 to $2.1 million for the same
period in 1999. This increase resulted primarily from an increase in the number
of clients and size and scope of engagements. For the three months ended March
31, 1999, United Air Lines contributed 39% of total revenues and Wells Fargo
contributed 39% of total revenues. No other client contributed 10% or more of
Potomac Partners' revenues during the period.
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COST OF SERVICES. Cost of services increased approximately $5.6 million, or
853%, from $654,000 for the three months ended March 31, 1998 to $6.2 million
for the same period in 1999. Approximately $4.9 million, or 88%, of the increase
was due to compensation expense for the value of equity participation rights.
Gross profit margin decreased from 33% for the three months ended March 31, 1998
to a negative 202% for the same period in 1999. However, excluding equity
related compensation expense, the gross profit margin would have been 35% for
1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $309,000, or 172%, from $180,000 for the
three months ended March 31, 1998 to $489,000 for the same period in 1999. The
increase primarily resulted from the addition of marketing and administrative
personnel.
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $4.5 million, or 1,213%, from
$372,000 from inception in November 1997 through December 31, 1997 to $4.9
million for the year ended December 31, 1998. The increase resulted from having
a full year of operations for the year ended December 31, 1998, during which
there was an increase in the number of clients. For the year ended December 31,
1998, Norwest contributed 18% of total revenues, United Airlines contributed 26%
of total revenues, Japan Malls contributed 17% of total revenues and Western
Development contributed 13% of total revenues. No other client contributed 10%
or more of Potomac Partners' revenues during the period.
COST OF SERVICES. Cost of services increased approximately $4.8 million, or
1,654%, from $290,000 for the year ended December 31, 1997 to $5.1 million for
the same period in 1998. Approximately $1.5 million of the increase was due to
compensation expense related to the value of equity participation rights. The
remaining increase resulted from the cost of salary, benefits and travel
expenses associated with the increased number of client engagements. Gross
profit margin decreased from 22% for the year ended December 31, 1997 to a
negative 4% for the same period in 1998. However, excluding equity related
compensation expense, the gross profit margin would have been 27% for 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $790,000, or 919%, from $86,000 for the year
ended December 31, 1997 to $876,000 for the same period in 1998. The increase
primarily resulted from the addition of marketing and administrative personnel.
RSI GROUP, INC. AND SUBSIDIARIES--RESULTS OF OPERATIONS
RSI Group, Inc. ("RSI") is headquartered in Dallas, Texas, and has four
additional offices in Omaha, Nebraska; Poughkeepsie, New York; Herndon, Virginia
and Research Triangle Park, North Carolina. RSI has approximately 140 employees.
The following table sets forth certain selected financial data for RSI on a
historical basis for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues.................................................. $ 16,133 $ 15,724 $ 16,927 $ 4,338 $ 3,253
Cost of services.......................................... 11,663 11,650 12,271 3,150 2,364
--------- --------- --------- --------- ---------
Gross profit.............................................. 4,470 4,074 4,656 1,188 889
Selling, general and administrative....................... 4,105 3,745 4,253 961 1,714
--------- --------- --------- --------- ---------
Operating income (loss)................................... $ 365 $ 329 $ 403 $ 227 $ (825)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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RSI GROUP, INC. AND SUBSIDIARIES--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues decreased approximately $1.1 million, or 25%, from $4.3
million for the three months ended March 31, 1998 to $3.3 million for the same
period in 1999. This decrease resulted primarily from a decrease in staffing.
For the three months ended March 31, 1999, IBM contributed 44% of total revenues
and MCI contributed 11% of total revenues. No other client contributed 10% or
more of RSI's revenues during the period.
COST OF SERVICES. Cost of services decreased approximately $786,000, or
25%, from $3.2 million for the three months ended March 31, 1998 to $2.4 million
for the same period in 1999. The decrease resulted from the cost of salary,
benefits and travel expenses directly associated with client engagements. Gross
profit margin remained unchanged at 27% for the three months ended March 31,
1998 and the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased approximately $753,000, or 78%, from $961,000 for the three
months ended March 31, 1998 to $1.7 million for the same period in 1999. The
increase primarily resulted from an equity based compensation charge in 1999.
RSI GROUP, INC. AND SUBSIDIARIES--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $1.2 million, or 8%, from $15.7
million for the year ended December 31, 1997 to $16.9 million for the same
period in 1998. This increase resulted primarily from an increase in the number
of clients and the size and scope of engagements. For the year ended December
31, 1998, IBM contributed 34% of total revenues and First Data Resource
contributed 13% of total revenues. No other client contributed 10% or more of
RSI's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $621,000, or 5%,
from $11.7 million for the year ended December 31, 1997 to $12.3 million for the
same period in 1998. The increase resulted from the salary, benefits and travel
expenses directly related to client projects. Gross profit margin increased from
26% for the year ended December 31, 1997 to 28% for the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $508,000, or 14%, from $3.7 million for the
year ended December 31, 1997 to $4.3 million for the same period in 1998. The
increase primarily resulted from the addition of marketing and administrative
personnel necessary to support higher volume of business.
RSI GROUP, INC. AND SUBSIDIARIES--1996 COMPARED TO 1997
REVENUES. Revenues decreased approximately $409,000, or 3%, from $16.1
million for the year ended December 31, 1996 to $15.7 million for the same
period in 1997. This decrease resulted primarily from a decline in staffing to
First Data Resource. For the year ended December 31, 1997, IBM contributed 28%
of total revenues, First Data Resource contributed 17% of total revenues and
Computer Associates contributed 10% of total revenues. No other client
contributed 10% or more of RSI's revenues during the period.
COST OF SERVICES. Cost of services decreased approximately $13,000 or less
than 1%, and was approximately $11.7 million for the years ended December 31,
1996 and 1997. Gross profit margin decreased from 28% for the year ended
December 31, 1996 to 26% for the same period in 1997.
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SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased by approximately $360,000, or 9%, from $4.1 million for the
year ended December 31, 1996 to $3.7 million for the same period in 1997. The
decrease was primarily due to a reduction in staffing.
PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES
We will operate our business through assets acquired from Brand Dialogue and
through our seven subsidiaries. Accordingly, our principal sources of liquidity
are the cash flow of our business and subsidiaries, cash available from lines of
credit we may establish and the unallocated net proceeds of this offering. After
the closing of the acquisitions and this offering, we will have approximately
$32.6 million in cash and cash equivalents and approximately $3.5 million of
indebtedness outstanding (on a pro forma basis).
Upon completion of this offering, we intend to consolidate any assumed debt
of our companies into a new credit arrangement. We have initiated preliminary
discussions with a major commercial bank to obtain a senior credit facility
sufficient to provide working capital for all our companies and to finance any
potential acquisitions. It is anticipated that the line of credit will require
us to comply with various loan covenants including maintenance of certain
financial ratios; restrictions on additional indebtedness; and restrictions on
liens, guarantees, advances and dividends. The facility is intended to be used
for working capital and general corporate purposes, including future
acquisitions. We cannot assure you that we will obtain a credit facility on
advantageous terms, if at all.
On a pro forma basis, we made capital expenditures of approximately $2.4
million during the year-ended December 31, 1998 and approximately $676,000
during the three months ended March 31, 1999. These capital expenditures were
primarily for computer equipment, internally used software purchases and
leasehold improvements. We expect to make capital expenditures of approximately
$3.2 million for hardware, software, and leasehold improvements during the next
12 months. No assurance can be made with respect to the actual timing and amount
of such expenditures.
We intend to pursue acquisition opportunities. The timing, size or success
of any acquisition and the associated potential capital expenditures and
commitments are unpredictable. We believe that cash flow from operations,
borrowings under the proposed line of credit and the unallocated net proceeds of
this offering will be sufficient to fund our capital requirements for at least
the next 12 months, excluding potential acquisitions. To the extent that we are
successful in consummating acquisitions, it may be necessary to finance such
acquisitions through the issuance of additional equity securities, incurrence of
indebtedness, or both. In addition, we cannot assure that our working capital
needs will not exceed anticipated levels or working capital generated will be
sufficient to fund our operations. As a result, we may be required to obtain
additional financing from bank borrowings or debt or equity offerings.
YEAR 2000 READINESS DISCLOSURE STATEMENT
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. As a result, date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices or engage in similar business activities. In
connection with the acquisitions of our eight companies, we have received a
representation from the former owners of each company that their company does
not face material unresolved Year 2000 issues. To the extent these
representations are breached and we suffer damages, our operating results and
financial
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condition may be adversely affected. Additionally, many of our companies have
contacted their major clients and vendors to assess their Year 2000 readiness.
We depend on smooth and timely interactions with our vendors, clients and
other third parties. Any unexpected costs or disruption in the operations or
activities of such vendors, clients or other third parties as a result of Year
2000 compliance issues within such entities could materially adversely affect
our business, operating results or financial condition. We intend to take
continuous steps to identify Year 2000 problems related to our clients and
vendors and to formulate a system of working with key third parties to
understand their ability to continue providing services and products through the
change to Year 2000. We intend to work directly with our key vendors, including
financial institutions and utility providers, and partner with them if
necessary, to avoid any business interruptions.
We believe the most likely worst case scenario related to Year 2000 risks is
a material business interruption that leads to client dissatisfaction and the
termination of an engagement or engagements by dissatisfied clients. Such an
interruption in services could occur due to a breakdown in any number of our
computer systems and applications on other systems, or the systems of third
parties. Examples are failures in our application software, computer chips
embedded in equipment, supply of materials from our suppliers, or lack of
adequate telecommunications, power, or other utilities. Any such failure could
prevent us from being able to deliver our services as expected, which could
materially adversely affect our business, operating results and financial
condition.
Based upon current information, we do not anticipate costs associated with
the Year 2000 issue to have a material adverse financial impact on us. There
may, however, be interruptions or other limitations of financial and operating
systems' functionality, and we may incur additional costs to avoid these
interruptions or limitations. Our expectations about future costs associated
with the Year 2000 issue are limited by uncertainties that could cause actual
results to have a greater financial impact than currently anticipated. Factors
that could influence the amount and timing of future costs include:
- our success in identifying systems and programs that contain two-digit
year codes;
- the nature and amount of programming required to upgrade or replace each
of the affected programs;
- the rate and magnitude of related labor and consulting costs; and
- our success in addressing Year 2000 issues with our clients, vendors and
other third parties with which we do business.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires companies to record derivatives on the balance sheet as assets
and liabilities, measured at fair value. Gains or losses resulting from changes
in the value of those derivatives would be accounted for depending on the use of
the derivative and whether it is qualified for hedge accounting. SFAS 133 is
effective for all quarters of fiscal years beginning after June 15, 1999. The
adoption of SFAS 133 is not expected to have a material impact on our financial
position or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 requires companies to capitalize
qualifying computer software costs that are incurred during the application
development stage and amortize them over the software's estimated useful life.
The adoption of SOP 98-1 is not expected to have a material adverse impact on
our financial position or results of operations.
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<PAGE>
BUSINESS
OVERVIEW
We are a leading provider of Internet and electronic commerce professional
services to Fortune 500 companies, Internet-based companies and other
organizations. We focus on enabling traditional businesses to develop and expand
Internet and electronic commerce business models. We also provide services to
primarily Internet-based businesses enabling them to conduct business more
effectively.
For our clients who are creating or improving Internet and electronic
commerce businesses, we provide:
- strategy consulting;
- creative solutions;
- technology solutions; and
- value-added services.
Our services are designed to rapidly improve a client's competitive position
through the development of innovative business strategies and the integration of
emerging and existing technologies. We provide a wide range of services from
assisting our clients to conceive their Internet and electronic commerce
strategies to developing and implementing their Internet and electronic commerce
capabilities. We believe that our approach, which integrates our strategy,
creative and technology disciplines, allows us to deliver reliable,
comprehensive, secure, scalable and expandable Internet and electronic commerce
business solutions in rapid time frames.
We perform services for more than 100 clients, including Ameritrade, AT&T,
Bell Atlantic, IBM, Microsoft, United Air Lines and Wells Fargo Bank. Our
clients are diversified across many industries, including technology, financial,
media and communications. We also work with companies who do business primarily
over the Internet.
As of March 31, 1999, our 570 employees were located throughout the U.S. in
California, Colorado, the District of Columbia, Florida, Georgia, Illinois,
Maryland, Massachusetts, Missouri, Nebraska, New York, North Carolina,
Pennsylvania, Texas, Virginia, Washington and Wisconsin. On a pro forma combined
basis, we had $49.9 million of revenues for the 12 months ended December 31,
1998 and $17.7 million of revenues for the three months ended March 31, 1999.
INDUSTRY BACKGROUND
The Internet is continuing its rapid development from primarily an
information delivery medium to an interactive platform through which companies
market, operate and manage their businesses and conduct transactions. As a
result of its widespread adoption, the Internet has been the catalyst for an
evolution of business to business, business to consumer and employer to employee
relationships and communications. The explosive growth of the Internet and its
potential to create new opportunities and pose fundamental threats to the
competitive positions of traditional businesses presents enormous challenges for
the managers of companies. This is leading to the rapid growth of, and demand
for, professional services relating to the Internet and electronic commerce.
Companies are using the Internet to restructure the way they conduct their
businesses. The Internet provides new ways for companies to market their
products and services, manage their operations and employees, and improve their
financial results. Through the Internet, companies have the ability to improve
their competitive positions, reduce operating, transaction and overhead costs;
shorten product and marketing cycle times; create and strengthen business
alliances; and
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improve and accelerate the flow of information both internally and externally.
Through electronic commerce and the Internet, organizations are identifying,
developing and expanding product and service offerings and creating new
innovative strategies and operating models. This ability has led to the
emergence of new businesses.
The emergence of the Internet and electronic commerce creates significant
challenges for virtually all companies regardless of industry or location. In
many industries traditional barriers to entry, such as physical or capital
assets, are becoming less important, and the traditional competitive advantages
and business models that companies relied on to sustain their profitability are
diminishing. The Internet and other technologies reduce the effect of geographic
barriers, price discrimination and other factors and are changing the way many
businesses have historically competed. Forrester Research, an industry research
firm, estimates the revenues generated from Internet commerce will grow from $55
billion in 1998 to $1.4 trillion in 2003. This represents a compound annual
growth rate of 91%.
In order to successfully develop Internet businesses and conduct electronic
commerce, companies must think of their Internet business strategically,
creatively and technologically. Strategically, companies need to understand how
the Internet will fit in with their overall long and short term business plans,
and how business over the Internet differs from conventional business operations
to be successful. Creatively, Internet locations must be distinctive,
attractive, engaging and easy to use. Technologically, companies need to use the
right tools to successfully implement their strategies and develop workable
architectures.
Generally, companies do not have the internal resources necessary to
establish an electronic commerce presence on the Internet in the rapid time
frames needed to meet their business goals. We believe that companies will focus
on their core competencies and will not make the time or financial commitment
necessary to hire and train the professionals needed to build in-house
capabilities. International Data Corporation, IDC, an industry research firm,
forecasts that the market for Internet and electronic commerce professional
services worldwide will grow from $7.4 billion in 1998 to $43.7 billion by 2002.
These projections represent a compound annual growth rate of more than 55% over
these periods. IDC predicts that the Internet will be one of the fastest-growing
areas within the information technology services industry.
The need for organizations to act quickly and effectively has led to the
demand for coordinated strategic, creative and technology services. Traditional
professional services firms can typically provide services in strategy
consulting, creative solutions or technology solutions but usually not all
three. The need to integrate these disciplines is beyond the capabilities of
most traditional service firms, especially given the rapid time frames for
developing Internet and electronic commerce businesses. As a result, we believe
there is great demand for professional services firms that can effectively
provide services in all three disciplines in the rapid time frame and focus that
the Internet and electronic commerce business environment demands.
THE CLARANT SOLUTION
We are a leading provider of Internet and electronic commerce solutions for
clients in diversified industries located throughout the U.S. and abroad. We are
able to provide the combination of strategy consulting, creative and technology
solutions that clients need to create and expand their Internet and electronic
commerce businesses. We also provide the value-added services needed to manage
and operate our clients' Internet businesses.
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We concentrate on providing a broad range of integrated capabilities which
blend strategy, creative and technology disciplines to help our clients. Our
solution is focused on:
- LEADING INDUSTRY SOLUTIONS. We believe that we provide clients with
leading edge solutions critical to their success. Our strategy consulting
practice helps clients develop and sharpen their strategic vision in order
to capitalize on Internet and electronic commerce opportunities. Our
creative solutions practice then provides creative and marketing services.
Our technology solutions practice designs, builds and implements the
systems, processes and creative requirements necessary to successfully
operate Internet businesses. In addition, our value-added services provide
our clients with services that they require on a continuing, secure and
quality-controlled basis.
- INTEGRATED DELIVERY MODEL. We are able to deliver strategy consulting,
creative and technology solutions in a coordinated manner that addresses
our clients' Internet and electronic commerce-related business challenges
in rapid time frames. We design, build, implement and support high value
solutions using our interactive approach, and expect to increasingly do so
on a basis that fully integrates our three practice areas.
- LONG-TERM CLIENT RELATIONSHIPS. Our extensive understanding of our
clients' needs and strategies allows us to provide structured and
integrated Internet and electronic commerce professional services that add
significant and measurable value to our clients. Our strategy consulting,
creative and technology services and skills are geared to establishing
integrated, multi-year and multi-project relationships with our clients.
- STRONG MANAGEMENT TEAMS. We have a highly experienced group of Internet
and electronic commerce professionals throughout all three of our practice
areas. These professionals combine to form a knowledgeable client
management team with many years of professional experience. These teams
offer seamless client solutions that address a client's strategic vision,
sales and marketing objectives. Our breadth of experience and skills
allows us to provide multifaceted assistance to our clients.
STRATEGY
We intend to strengthen our leading position as a provider of Internet and
electronic commerce professional services to Fortune 500 companies,
Internet-based companies and other clients. Our strategy for achieving this
objective is based on the following key elements:
- LEVERAGE OUR THREE MAIN PRACTICE AREAS. Through our three main practice
areas, strategy consulting, creative solutions and technology solutions,
we are able to develop strong functional expertise. These practice areas
allow us to fully capture our established capabilities and channel those
skills to deliver our value-added solutions in an effective, consistent,
disciplined and integrated manner to our clients. In addition, given the
need for rapid business development in the Internet arena, our ability to
integrate the various disciplines will be an important feature of our
services and a key point of differentiation in the marketplace.
- EXPAND LONG-TERM CLIENT RELATIONSHIPS. We have a number of established
long-term client relationships and we intend to develop and sustain
additional client relationships over time. Our client service teams are
able to integrate strategic, creative and technology solutions at each
stage of our client engagements. We believe that by offering our clients
coordinated strategy consulting, creative and technology services we are
able to create measurable value for the client. Furthermore, we believe
that maintaining a reputation for being an innovative Internet and
electronic commerce professional services firm will increase our ability
to attract new clients, including by referral from our existing clients.
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- OPERATE AS A SINGLE, FULLY INTEGRATED FIRM. We are creating a strong,
dynamic, united platform for our business based on an integrated firm
concept. We intend to leverage our strong executive leadership to project
a unified mission and integrated operating model. All of our businesses
are adopting a single corporate vision, name, identity and brand. Our
management and our employees will be provided incentives that are based on
overall corporate performance. We believe it is critical to establish
strong management systems and processes in order to maintain a high,
consistent level of client service and efficient utilization of the skills
of our people. The key management infrastructure will be centered on
financial and management information, communications, incentives,
recruiting, training and knowledge management.
- MAINTAIN LEADING EDGE PROFESSIONAL CAPABILITIES AND TECHNOLOGY SOLUTIONS.
In order to provide our clients with the industry's leading edge solutions
and our integrated approach to their Internet and electronic commerce
professional services needs, we place a strong focus on attracting,
hiring, developing and retaining outstanding personnel. We focus on
keeping the creative and technology skills of our people in-line with the
industry's most current standards, and on developing management and
leadership skills among a broad cross-section of our people. To facilitate
ongoing professional development and innovation, we focus on several key
skill sets: problem solving, analysis, communications, creativity, team
work and effectiveness with our clients.
- EXPAND OUR BREADTH OF SERVICE AND GEOGRAPHIC SCOPE. As our clients' needs
broaden and expand, we intend to enhance our set of service capabilities,
improve our geographic reach, add to our significant client relationships
and strengthen our management team. We intend to build our capabilities
through organic growth and through selective strategic acquisitions in the
U.S. and internationally.
- PROVIDE VALUE-ADDED SERVICES. As part of our comprehensive, integrated
approach to our long-term client relationships, we provide clients with
ongoing services which enhance a clients' ability to expand their Internet
and electronic commerce businesses. Those services include managing the
content of Internet sites and media placement services. We believe that
these ongoing value-added services are critical to seamlessly providing a
client with the best possible Internet and electronic commerce
professional services and are a principal factor that enables us to
attract and retain our clients.
SERVICES
We offer a wide range of Internet and electronic commerce professional
services to traditional businesses as well as new Internet-based businesses.
These services fall into a number of categories, including strategy consulting,
creative solutions, technology solutions and value-added services, which involve
the following activities:
STRATEGY CONSULTING
Strategy consulting includes services that enable our clients to enhance
competitive advantages, develop and evolve business models and realize operating
efficiencies through intranet, extranet, Internet and electronic commerce
business solutions. Our strategy consulting practice area includes:
- BUSINESS STRATEGY: We analyze industry or business economic structures;
assist our clients to establish financial and non-financial goals;
recommend product and marketing strategies; screen alliance and
acquisition choices; analyze customers and markets; and conduct
competitive and pricing analysis and develop pricing strategies.
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- MARKETING STRATEGY: We provide advice regarding market segmentation and
profiling; promotion and distribution concepts; partnering strategies; and
audience and site traffic development.
- TECHNOLOGY STRATEGY: We provide advice regarding platform architecture,
navigation, tools, interfaces, and technology partners and alliances.
- BRANDING AND IDENTITY: We identify branding goals and analyze market
positioning for our clients; plan for the development, design, creation,
testing and establishment of their brands; coordinate the Internet and
non-Internet company and division branding efforts; and structure
marketing communication plans. We provide creative briefs, graphic design
strategies with initial product look and feel, as well as comprehensive
creative plans. We also help clients optimize graphic content for download
time requirements and maximize impact and market share.
CREATIVE SOLUTIONS
Creative solutions involve developing an intuitive, easy to use and visually
engaging point of interaction for the targeted end-user that is consistent with
a client's branding and identity. Our creative practice area includes:
- INTELLECTUAL PRODUCT DEVELOPMENT: We provide creative development
including designs and graphics, site plans and customer focused platforms.
We also provide content development and execution.
- INTERACTIVE MARKETING: We create interactive marketing programs for our
clients focusing on increasing customers and improving revenues, market
positions and profitability.
- CUSTOMER DEVELOPMENT, MEASUREMENTS AND ANALYSIS: We develop, measure and
analyze the effectiveness and success of the client's Internet enterprise.
We provide design and implementation of processes and technology for the
client's targeting, acquisition and retention of customers; expansion of
customer relationships; sales cycle measurement; lead generation; demand
generation; commerce and electronic customer life cycle management;
pricing analysis and tactics; and sales force efficiency and
effectiveness.
TECHNOLOGY SOLUTIONS
We use our proprietary and leading existing technologies to deliver
solutions that best fulfill our clients' strategic objectives. Our technology
solutions involve integration with our clients' existing systems as well as the
architecture for new systems. Our technology practice area includes:
- ARCHITECTURE AND DESIGN: We design and create our clients' business,
technology and process architectures. We provide the process maps
(business and technology) of all processes, subprocesses and tasks
required to build and maintain the Internet enterprise; the technology
design and implementation plan that includes the systems and applications
for all parts of the Internet enterprise; a detailed design of operations
based on the architectures; and refreshment programs that keep current
technology performance parameters of the architecture.
- INTERNET INTEGRATION: We provide technology to integrate the Internet
enterprise with other areas of the client's business. We provide back
office integration of customer service, pricing, purchasing, shipping,
inventory, order fulfillment and information systems. We also integrate
and implement intranets and extranets and procurement bidding systems.
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- ELECTRONIC COMMERCE MANAGEMENT: We implement standard or custom Internet
and electronic commerce systems to meet our clients' needs. This includes
order management, transaction processing and creating secure environments.
- TECHNOLOGY DEVELOPMENT: We create and employ the technology needed to
achieve our client's marketplace goals. We provide software development
and renewal, and technology interface design that accommodate flexible,
open architecture.
- CONTENT AND PRODUCT DEVELOPMENT MANAGEMENT TOOLS: We build and develop the
technology and content of our clients' Internet and electronic commerce
businesses. We provide a set of production tools, processes and systems to
create and manage the enterprise; content quality control and automatic
refreshment; and database development to support current content and
archives.
- SECURITY: We audit, plan and implement appropriate and necessary security
practices. We provide security policies, procedures and systems to protect
our clients' systems and processes from unauthorized access and intrusion.
VALUE-ADDED SERVICES
Our clients engage us to perform ongoing services, which enables us to
maintain long-term client relationships and to provide our clients with
functions that are critical to their Internet and electronic commerce business
operations. The value-added services that we provide include:
- INTERNET MARKETING AND PROMOTIONS: We provide pre-planned and sequential
campaigns to promote our clients' businesses and build revenue, market
share and profitability.
- CONTENT SERVICES: We create and manage some or all of the content on our
clients' Internet sites, including static or continuously updated content
for entire sites or subsections of sites.
- TRANSACTION MANAGEMENT: We provide services that permit our clients to
manage the volume of transactions and support the necessary tools for
electronic commerce such as archiving, sales and fulfillment cycle
support, financial management and recovery operations.
- RESEARCH SERVICES AND MARKET ANALYSIS: We prepare ongoing studies of the
effectiveness of the Internet site. We provide focus groups, surveys, and
analyses comparing our clients' sites with those of their competitors
using sophisticated research and analysis techniques.
- MEDIA PLACEMENT: We provide online and offline media design, creation,
buying and reporting through hosted services or industry standard
services.
- BUSINESS PROCESSES: We analyze which business processes are important to
the electronic enterprise and how the processes should be performed or
improved. These areas include fulfillment, billing, human resources,
customer order flow, public relations, warehousing and other processes.
49
<PAGE>
CLIENTS
Our companies have provided professional services for a variety of clients
in many industries. The following is a partial list of our clients that we
believe is representative of our overall client base:
<TABLE>
<CAPTION>
MEDIA AND TRAVEL AND
COMMUNICATIONS TECHNOLOGY FINANCIAL TRANSPORTATION
- ----------------------- ----------------------- ---------------------------- ------------------------
<S> <C> <C> <C>
A&E Television International Business First Data Corporation United Air Lines, Inc.
Networks Machines Corporation MasterCard International
AT&T Corp. Microsoft Corporation Incorporated
Bell Atlantic National Association of
Corporation Securities Dealers, Inc.
MCI Worldcom, Inc. Wells Fargo
Sprint Corporation
</TABLE>
<TABLE>
<CAPTION>
INTERACTIVE CONSUMER ENERGY
- ------------------------------ -------------------- --------------------
<S> <C> <C>
Ameritrade Holding Corporation Maybelline, Inc. Chevron Corporation
JuniorNet Corporation M&M/Mars Enron Corp.
Office Depot, Inc. Halliburton Company
</TABLE>
For the 12 months ended December 31, 1998, IBM, our largest client,
accounted for approximately 12.4% of our pro forma combined revenues. No other
client accounted for 10% or more of our pro forma combined revenues for the 12
months ended December 31, 1998 and no client accounted for 10% or more of our
pro forma combined revenues for the three months ended March 31, 1999.
OUR COMPANY
Simultaneously with the closing of this offering we expect to acquire the
following eight companies:
ALIGN SOLUTIONS CORP. is a technology company which joins the strengths of
design and communications experts with the technical expertise of experienced
software developers. Align's services include creating creative new media;
multimedia presentations; designing Websites; delivering complex Web-based
solutions to clients; document services, maintenance of knowledge bases and
workflow automation; and systems integration services. Align has special
expertise in the energy and financial services industries.
BRAND DIALOGUE-NEW YORK is presently the New York branch of a Young &
Rubicam division that offers interactive strategic marketing and electronic
commerce solutions. The services offered by the Brand Dialogue-New York's
business that we intend to acquire include strategic technology and marketing
consulting, web environment development and on-going management, on-line media
strategy and planning, targeted on-line advertising campaigns and web-based
branding application development. Brand Dialogue-New York has provided services
to customers in financial, pharmaceuticals, media and communications industries.
FREE RANGE MEDIA, INC. develops online business solutions. Free Range
provides strategic planning and customized solutions that support corporate
objectives and have clearly defined metrics for measuring success. Free Range
has special expertise in the financial services, health care and
telecommunications industries.
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE is an integrated marketing
and online solutions provider. i.con's services include creative design and
marketing strategies; online brand development; and content maintenance and
refreshment. i.con has special expertise in the entertainment, hospitality,
technology and telecommunications industries.
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INTERACTIVE8, INC. is an interactive strategy consulting, creative and
technology agency. InterActive8's services include strategic planning; creative
development; applications development and database and electronic commerce
integration; account management; site hosting, tracking and analysis; media and
promotions and marketing. InterActive8 has special expertise in the media and
communications and consumer products industries.
MULTIMEDIA RESOURCES, LLC is an interactive consulting and marketing agency.
Multimedia's services include strategic planning, business development, and
marketing and media program development. Multimedia has special expertise in
media, retailing and financial services industries.
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC is an electronic commerce
strategy consulting firm. Professional services include electronic commerce
strategy formulation, program management, strategic partnership formation, and
business process design. Potomac Partners has special industry expertise in the
financial services, retailing, media, entertainment, communications and
transportation industries.
RSI GROUP, INC. AND SUBSIDIARIES is an information technology consulting and
staffing firm. RSI's services include distributing and decentralizing computing
platforms; including electronic commerce and electronic commerce systems
integration services, mission-critical Internet process services; application
development; application development and professional staffing and technology
support. RSI has special expertise in the technology, transportation,
telecommunications, financial and consumer goods industries.
SALES AND MARKETING
Our sales approach is based on developing long-term consultative
relationships with our clients. We intend to integrate the sales and marketing
functions of the companies we acquire to provide for client focused professional
marketing organization targeted toward developing existing client relationships
by expanding the services provided to those clients as well as adding new
clients. In addition to our direct sales force which will market our service
along those lines, our management will actively market to companies with which
they have a relationship. We will employ a team selling approach, whereby our
sales people collaborate with our business unit professionals and management to
identify prospects, conduct sales and manage client relationships, particularly
at core client relationships. We and Young & Rubicam intend to cooperate in
marketing our respective services to each others' clients in order to increase
the range, breadth and depth of services available to such clients.
In addition, we integrate the discipline of strategic, creative and
technical solutions into our clients' sale processes. We assign senior
executives to each account to ensure the multi-disciplinary sales approach. This
process identifies major cross-disciplinary client issues early in the process,
thereby saving the client time and money and allowing us to provide more
effective services to our clients. Most of our senior executives are involved in
the sales process.
COMPETITION
The market for our services is highly fragmented and can be characterized by
intense competition and rapid technological change. We have many competitors
including large and well-established firms, new entrants attracted by low
barriers to entry and prospective clients who have used their internal resources
to develop an Internet presence.
Our current competitors include, and may in the future include, the
following:
- Internet consulting firms and online agencies, such as AGENCY.COM, AppNet,
iXL Enterprises, Modem Media . Poppe Tyson, Organic Online, Proxicom,
Razorfish, Scient, US Interactive, USWeb/CKS and Viant;
51
<PAGE>
- general management consulting firms, such as Bain & Company, Boston
Consulting Group, Booz Allen & Hamilton and McKinsey & Company;
- the professional services groups of computer equipment companies, such as
Compaq, Hewlett-Packard and IBM;
- systems integrators, such as Andersen Consulting, Cambridge Technology
Partners, Sapient, and consulting arms of the "Big Five" accounting firms;
and
- internally developed solutions of current and potential clients.
The principal competitive factors in the Internet professional services
market include Internet expertise and talent, client references, integrated
strategy, technology and creative design services, quality, pricing and speed of
service delivery and vertical industry knowledge. We believe we compete
favorably with respect to these factors and are in a good position to attract
talent with our growth and entrepreneurial culture. We believe we have
established ourselves as a leader in Internet-specific industry and domain
expertise. Through our replicable solution frameworks and our attention to
client satisfaction, we have created a strong track record of customer
successes. We believe the market will continue to offer significant opportunity
for multiple players on the short and medium-term.
INTELLECTUAL PROPERTY
We utilize intellectual property in our business, some of which we consider
proprietary. We generally rely on trade secret law to protect our proprietary
interests. We cannot guarantee that the steps we have taken to protect our
proprietary rights will be adequate to deter misappropriation of our
intellectual property, and we may not be able to detect unauthorized use and
take appropriate steps to enforce our intellectual property rights. If third
parties infringe or misappropriate our trade secrets, copyrights, trademarks or
other proprietary information, our business could be seriously harmed. In
addition, although we believe that our proprietary rights do not infringe on the
intellectual property rights of others, other parties may assert infringement
claims against us or claim that we have violated their intellectual property
rights. Such claims, even if not true, could result in significant legal and
other costs and may be a distraction to management. Protection of intellectual
property in many foreign countries is weaker and less reliable than in the
United States, so if our business expands into foreign countries, risks
associated with protecting our intellectual property will increase.
EMPLOYEES
As of March 31, 1999, we had a total of 570 employees, of which 39 were in
management, 442 in professional services, 35 in sales and marketing and 54 in
administration. Success will depend in part on our ability to attract, retain
and motivate highly qualified technical and management personnel, for whom
competition is intense. None of our employees are represented by labor unions.
We believe our relationship with our employees is good.
To succeed, we must continue to hire, retain and train outstanding
professionals. We believe that our success retaining such individuals will
depend significantly on our ability to provide a rich learning environment, to
provide a one-firm culture and to offer continued professional development as
well as economic incentives.
We believe that developing our one-firm concept with a shared culture is
critical to our ability to attract top management, strategic, technology,
design, sales, marketing and support professionals. Our core values include a
dedication to maintaining an innovative and team-based environment in order to
achieve total client satisfaction and provide our employees with personal and
professional growth opportunities.
52
<PAGE>
FACILITIES
We lease offices located in Atlanta, Georgia; Chicago, Illinois; Dallas,
Texas; Herndon, Virginia; Houston, Texas; Larchmont, New York; New York City,
New York; San Francisco, California; and Seattle, Washington. Our headquarters
are located in Dallas, Texas consisting of approximately 2,000 square feet of
office space under a month to month lease.
LEGAL PROCEEDINGS
We and our companies are not parties to any pending material legal
proceedings.
53
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of May 20, 1999 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- -----------------------------------------------
<S> <C> <C>
Michael H. Jordan (1)(2)(3)......... 62 Chairman and Director
Guillermo G. Marmol (4)............. 46 Chief Executive Officer, President and Director
Derek R. Reisfield.................. 36 Vice Chairman and Executive Vice President
Joseph W. Autem (5)................. 41 Chief Financial Officer and Director
George P. Stamas.................... 48 Director
Randolph Austin (5)................. 35 Director
Michael J. Dolan (5)................ 52 Director
James R. Corey (5).................. 45 Director
Richard M. Scruggs (5).............. 43 Director
</TABLE>
- ------------------------
(1) Mr. Jordan will be elected a director and Chairman effective on the closing
of this offering.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
(4) Mr. Marmol will serve as Chairman until the closing of this offering. Mr.
Marmol will remain as a director following his resignation as Chairman.
(5) Messrs. Autem, Austin, Dolan, Corey and Scruggs will be appointed as
directors effective on the closing of this offering.
MICHAEL H. JORDAN will be our Chairman effective upon the closing of this
offering, having served as an advisor to us since January 1, 1999. Mr. Jordan
retired in December 1998 as Chairman and Chief Executive Officer of CBS
Corporation (formerly Westinghouse Electric Corporation), positions he held
since June 1993. Prior to joining Westinghouse, he was a principal with the
investment firm of Clayton, Dubilier & Rice, Inc. from September 1992 through
June 1993. From 1974 until 1992, Mr. Jordan held various management positions at
PepsiCo, Inc., his last position being Chief Executive Officer of PepsiCo
International. From 1964 to 1974, Mr. Jordan held various positions, including
Partner at McKinsey & Company, Inc., an international management consulting
firm. Mr. Jordan is also a member of the Boards of Directors of Aetna, Inc.,
Dell Computer Corp. and Marketwatch.com. Mr. Jordan is a member of the
President's Export Council; is the Chairman of the U.S.-Japan Business Council;
Chairman of The College Fund/UNCF; and Chairman of the Policy Board of the
Americans for the Arts.
GUILLERMO G. MARMOL has been our Chief Executive Officer and President since
August 1998 and will become a director effective upon the closing of this
offering. Previously, Mr. Marmol was a Vice President of Perot Systems, Inc.,
Chairman of its Operating Committee and responsible for corporate development
from January 1996 to May 1998. Prior to joining Perot Systems, Mr. Marmol held a
variety of positions during an 18-year career with McKinsey & Company, Inc. He
was elected a director and senior partner in 1991 and most recently held
leadership positions in the firm's senior partner election committee, its
Dallas, Texas office and its global organization practice.
DEREK R. REISFIELD has been our non-director Vice Chairman and Executive
Vice President since April 1999, having served as an advisor since January 1999.
Mr. Reisfield held a variety of positions with CBS Corporation (formerly
Westinghouse Electric Corporation) from May 1996 to January 1999, where he held
the positions of Vice President, Business Development and then President of the
CBS New Media Group. While at CBS, Mr. Reisfield created CBS.Marketwatch.com and
served as the Chairman of the Board of Marketwatch.com, LLC. He was also
responsible for the development of CBS.Sportsline.com, and served on the Board
of Directors of Sportsline USA, Inc. From May 1995 to April 1996, Mr. Reisfield
was a Partner of Mitchell Madison Group, a management consulting company, where
he was a co-founder and co-leader of the firm's Media and
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<PAGE>
Telecommunications Practice. From August 1987 to June 1995, Mr. Reisfield served
in various capacities, including Senior Manager, at McKinsey & Company, Inc. Mr.
Reisfield serves on the board of directors of Pictet & Cie. Global Leisure Fund,
S.A., a Swiss based mutual fund.
JOSEPH W. AUTEM has been our Chief Financial Officer since January 1999 and
will become a director effective upon the closing of this offering. From
September 1998 until December 1998 Mr. Autem was President, CEO and CFO of
American Metrocom, a competitive local exchange carrier in New Orleans,
Louisiana. From July 1998 to August 1998, Mr. Autem served as Senior Vice
President and Chief Financial Officer of CS Wireless, Inc., a privately held
company that provides wireless video and high speed Internet access. Mr. Autem
was a partner of Vision Technology Partners, a private investment company, from
January 1997 to June 1998. Mr. Autem served as the Chief Financial Officer of
Broadcast.com, Inc. from July 1996 to December 1996, and was a member of that
company's original management team. From December 1992 to January 1996, Mr.
Autem served as Vice President of Finance, Secretary, Treasurer and Chief
Financial Officer of OpenConnect Systems, Inc., an Internet software company.
From 1989 to 1992, Mr. Autem served as Chief Financial Officer of Rainwater,
Inc., a private equity investment firm. From 1987 to 1989, Mr. Autem was
employed by PepsiCo in various management capacities. From 1980 to 1987, Mr.
Autem was employed by Arthur Andersen LLP in various capacities, including as a
manager. Mr. Autem is a certified public accountant in the State of Texas. Mr.
Autem serves on the Board of Directors of Broadcast.com and Viewcast.com.
GEORGE P. STAMAS has been a director since May 1999. Mr. Stamas is a partner
with the law firm of Wilmer, Cutler & Pickering and Co-Chairman of that firm's
Corporate Department. Prior to joining Wilmer, Cutler & Pickering as a partner
in April 1996, he was a partner at Piper & Marbury L.L.P. since 1983. Mr. Stamas
is counsel to, and a limited partner of, the Baltimore Orioles baseball team.
Mr. Stamas also serves on the Board of Directors of FTI Consulting, Inc., a
provider of litigation support services.
RANDOLPH AUSTIN will become a director effective upon the closing of this
offering. From January 1999 until present Mr. Austin has been an advisor to
Bertelsmann Ventures. From January 1998 to December 1998, Mr. Austin was
President and Chief Executive Officer of BOL, Bertelsmann Online, Bertelsmann's
global electronic commerce business. From November 1995 to December 1997, Mr.
Austin held various positions with Prodigy, Inc., his last position being Senior
Vice President, Sales & Business Development. From September 1990 to November
1995, Mr. Austin served in various capacities, including Senior Engagement
Manager, at McKinsey & Company, Inc.
MICHAEL J. DOLAN will become a director effective upon the closing of this
offering. Since July 1996, Mr. Dolan has served as Vice Chairman, Chief
Financial Officer and a director of Young & Rubicam Inc., an international
marketing and communications services firm. From August 1991 to July 1996, Mr.
Dolan was President and Chief Executive Officer of the joint venture, Snack
Ventures Europe, between PepsiCo Foods International and General Mills.
JAMES R. COREY will become a director effective upon the closing of this
offering. Mr. Corey has served as Managing Director of Potomac Partners since
September 1997. Prior to joining Potomac Partners, Mr. Corey served as Co-Chief
Operating Officer of AT&T Solutions and Managing Partner of their Consulting
Division from June 1995 until September 1997. From June 1994 to June 1995, Mr.
Corey served as President of the Worldwide Services Organization of Unisys
Corporation. From December 1989 until June 1994 Mr. Corey was a partner in the
Los Angeles office of McKinsey & Company, Inc. Previously, Mr. Corey was a
Partner at Andersen Consulting in Chicago.
RICHARD M. SCRUGGS will become a director effective upon the closing of this
offering. Mr. Scruggs has served as President, Chief Executive Officer and
Chairman of the Board of Align since October 1996. From January 1996 until
October 1996, Mr. Scruggs served as Chief Operating Officer of Rothwell Systems
(which was later purchased by Perot Systems). From May 1990 until
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<PAGE>
January 1996, Mr. Scruggs served in a variety of capacities at BSG Alliance/IT,
including Managing Director of Business Development and Managing Director of the
Houston office.
At the closing of this offering, our Board of Directors will consist of
eight directors, which number may be changed by the Board of Directors. Mr.
Dolan is being appointed to our Board of Directors pursuant to an agreement
between us and Young & Rubicam. If the size of the Board is increased to ten or
more, Young & Rubicam will have the right to nominate an additional director to
our Board. Messrs. Corey and Scruggs are being appointed to our Board of
Directors pursuant to the agreements we have entered into to acquire their
companies.
KEY PRACTICE LEADERS
The following persons held the positions indicated opposite their names in
the companies that we will acquire:
<TABLE>
<CAPTION>
NAME FORMER POSITION IN ACQUIRED COMPANY
- ------------------------ ---------------------------------------------------------
<S> <C>
Lynn J. Branigan........ Managing Partner, Multimedia
Calvin W. Carter........ President and Chief Executive Officer of i.con
James R. Corey.......... Managing Director, Potomac Partners
John B. Dimmer.......... President, Free Range
Bruce D. Grant.......... President, RSI
Henry Heilbrunn......... Managing Partner, Multimedia
William Markel.......... Managing Partner, InterActive8
Andreas Panayi.......... President, Brand Dialogue-New York
Douglas Rice............ President and Chief Executive Officer, InterActive8
Richard M. Scruggs...... President, Chief Executive Officer and Chairman of the
Board, Align
</TABLE>
LYNN J. BRANIGAN has served as Managing Partner of Multimedia since she
co-founded the company with Henry Heilbrunn in 1993. Ms. Branigan specializes in
marketing, media and business development at Multimedia. Prior to forming
Multimedia, Ms. Branigan served as Director, Sales and Marketing for the
commercial unit of Prodigy Services Company, Inc. from February 1985 until
January 1993.
CALVIN W. CARTER has served as the President and Chief Executive Officer of
i.con since he co-founded the company in August 1994. From May 1993 until August
1994, Mr. Carter served as a management consultant for PricewaterhouseCoopers
LLP.
JAMES R. COREY will become a director of Clarant effective upon the closing
of this offering. Mr. Corey has served as Managing Director of Potomac Partners
since September 1997. Prior to joining Potomac Partners, Mr. Corey served as
Co-Chief Operating Officer of AT&T Solutions and Managing Partner of their
Consulting Division from June 1995 until September 1997. From June 1994 to June
1995, Mr. Corey served as President of the Worldwide Services Organization of
Unisys Corporation. From December 1989 until June 1994 Mr. Corey was a partner
in the Los Angeles office of McKinsey & Company, Inc. Previously, Mr. Corey was
a Partner at Andersen Consulting in Chicago.
JOHN B. DIMMER has served as President of Free Range since May 1998. From
June 1995 until May 1998, Mr. Dimmer served as Vice President and Chief
Financial Officer of Free Range. From March 1986 until June 1995, Mr. Dimmer
served as Assistant Secretary and Manager of Commercial Surety at Reliance
Surety Company.
BRUCE D. GRANT has served as President of RSI since January 1999. From
January 1997 until December 1998, Mr. Grant served as President of RSI East, and
from January 1992 until
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<PAGE>
December 1996, Mr. Grant served as Vice President of RSI East. From 1984 until
January 1992, Mr. Grant served in various capacities with RSI and its
affiliates.
HENRY HEILBRUNN has served as Managing Partner of Multimedia since he
co-founded the company with Ms. Branigan in 1993. Mr. Heilbrunn specializes in
business planning and product development at Multimedia Resources. Prior to
forming Multimedia, Mr. Heilbrunn served as Senior Vice President, Product
Management and Retention Marketing at Prodigy Services Company, Inc. from
September 1990 until January 1993, and in various other capacities with Prodigy
from February 1984 until August 1990.
WILLIAM MARKEL has served as Managing Partner of InterActive8 since 1998.
From February 1995 until 1997, Mr. Markel provided business development
consulting for InterActive8, and from 1994 until February 1995 he served as a
sales executive for Harrington Righter and Parsons, a television sales division
of Cox Broadcasting.
ANDREAS PANAYI has served as President of Brand Dialogue-New York, Young &
Rubicam's digital interactive branding unit, since 1998. From 1989 until 1998,
Mr. Panayi worked in various capacities at Poppe Tyson, the global interactive
marketing arm of True North, including most recently as Senior Partner, Director
of International Operations.
DOUGLAS RICE has served as InterActive8's President and Chief Executive
Officer since he founded the company in 1994. From 1994 to 1997, Mr. Rice also
served as the Creative Director for InterActive8.
RICHARD M. SCRUGGS will become a director of Clarant effective upon the
closing of this offering. Mr. Scruggs has served as President, Chief Executive
Officer and Chairman of the Board of Align since October 1996. From January 1996
until October 1996, Mr. Scruggs served as Chief Operating Officer of Rothwell
Systems (which was later purchased by Perot Systems). From May 1990 until
January 1996, Mr. Scruggs served in a variety of capacities at BSG Alliance/IT,
including Managing Director of Business Development and Managing Director of the
Houston office.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors intends to establish an Audit Committee which will be
comprised solely of independent directors. The responsibilities of the Audit
Committee will include: (1) recommending to our board of directors the
independent public accountants to conduct the annual audit of our books and
records; (2) reviewing the proposed scope of the audit; (3) approving the audit
fees to be paid; (4) reviewing accounting and financial controls with the
independent public accountants and our financial and accounting staff; and (5)
reviewing and approving transactions between us and our directors, officers and
affiliates. Mr. Jordan will be a member of the Audit Committee as of the closing
of this offering.
Our Board of Directors intends to establish a Compensation Committee to
consist solely of non-employee directors. The Compensation Committee will (1)
provide a general review of our compensation plans to ensure that they meet
corporate objectives and (2) administer our stock plans. Mr. Jordan will be a
member of the Compensation Committee as of the closing of this offering.
DIRECTOR COMPENSATION Directors who are also our employees will not receive
additional compensation for serving as directors. Each person serving or who has
agreed to serve as a non-employee director as of the closing of this offering
will be automatically granted an option to purchase 15,000 shares of common
stock under our 1999 Long-Term Incentive Plan. In addition, under the 1999
Long-Term Incentive Plan each non-employee director will be granted an annual
option to purchase 10,000 shares at each annual meeting of our stockholders at
which the director is re-elected or remains a director. Each of these options
will have an exercise price equal to the
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<PAGE>
market value per share of common stock on the date of grant. Directors will also
be reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors or committees thereof, in their capacity as directors. Mr.
Jordan will also be granted options to purchase 200,000 shares of common stock
in consideration for services to be rendered exercisable at a price equal to the
initial public offering price per share. The options will become exercisable
one-sixth every six months over 36 months from the date of grant.
EXECUTIVE COMPENSATION We were founded in August 1998, did not conduct any
operations in 1998 and, accordingly, did not pay any compensation to our
executive officers for the year ended December 31, 1998. The following table
sets forth the annual base salary rates and other compensation expected to be
paid in 1999 to our chief executive officer and our three most highly
compensated officers (hereafter referred to as the named officers).
Each named officer is entitled to an annual bonus up to an amount equal to
his base salary based on our performance measured against annual objectives to
be determined by the Compensation Committee of the Board of Directors. See
"--Employment Agreements."
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------------------- ----------------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS/SARS (#) COMPENSATION
- ------------------------------------ ----------- ----------- -------------- ---------------------- --------------
<S> <C> <C> <C> <C> <C>
Guillermo G. Marmol,................ $ 300,000 $ 300,000 $ -- 2,139,767 $ --
Chief Executive Officer
and President
Derek R. Reisfield,................. 250,000 250,000 -- 427,541 --
Vice Chairman and
Executive Vice President
Joseph W. Autem,.................... 200,000 200,000 -- 855,907 --
Chief Financial Officer
</TABLE>
EMPLOYMENT AGREEMENTS
On September 1, 1998, we entered into an employment agreement with Mr.
Marmol as our Chief Executive Officer and President for a term of three years
and four months. The agreement will automatically renew for successive one-year
periods beginning January 1, 2002, unless we or Mr. Marmol provides the other
with written notice that the Agreement will not renew within 90 days of the
expiration date. This agreement provides that Mr. Marmol will devote
substantially all of his time to the operation of our business. The agreement
establishes the initial base salary set forth in the table above and eligibility
for up to an equal annual bonus. We have also agreed to grant options
immediately, before trading begins to purchase 2,139,767 shares of common stock,
at an exercise price equal to the initial public offering price, of which 25%
will be immediately exercisable and the remainder will vest at the rate of 25%
on the first, second and third anniversaries of the date of grant and will
remain exercisable for up to 10 years after the date of grant. We may terminate
the agreement for cause or upon death or disability. Cause means a final
non-appealable conviction for, or plea of no contest to, a charge of commission
of a felony, the good faith determination by the Board of Directors that Mr.
Marmol has committed any act in the course of employment constituting fraud or
dishonesty on 20 days' notice, or a determination by a court of competent
jurisdiction that Mr. Marmol has breached his non-compete agreement; his
confidentiality agreement; or interfered with our relationship with any client,
supplier or other person. In the case of a termination due to disability we will
continue to pay Mr. Marmol his salary and benefits for a period of six months.
Mr. Marmol has the right to terminate his employment with us at any time for any
reason. If we terminate Mr. Marmol's agreement for any reason other than for
cause, or Mr.
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<PAGE>
Marmol terminates his employment for good reason, Mr. Marmol will be entitled to
receive severance pay equal to his base salary and maximum bonus for the period
remaining under the term of the agreement, continuation of benefits for that
period and automatic vesting of all stock options. Good reason includes a change
of control; material breach of the employment agreement by us; relocation of our
principal business office to more than 35 miles outside Dallas; or Mr. Marmol's
duties are diminished or he is not elected Chairman, (unless he consents
otherwise). Mr. Marmol has consented in writing to the election of Michael H.
Jordan as our Chairman and a director, effective concurrently with the closing
of this offering. Mr. Marmol will be subject to covenants intended to bar his
competition and solicitation of clients or employees through one year after his
employment ends for any reason.
We expect to enter into an employment agreement with Mr. Autem as our Chief
Financial Officer, the terms of which are in the process of being finalized.
Until the closing of this offering, Mr. Autem is receiving an annual salary of
$100,000, with a special bonus at the closing equal to $4,167 per month between
January 14, 1999 and the closing of this offering. Beginning with the closing of
this offering, Mr. Autem will have an annual salary of $200,000 and be eligible
for an annual bonus of up to the same amount. We have also agreed to grant
options, immediately before trading begins to purchase 855,907 shares of common
stock, at an exercise price of a penny per share. The options become exercisable
one-sixth every six months over 36 months from the date of grant. Mr. Autem will
receive a $1,500 monthly car allowance.
We expect to enter into an employment agreement with Mr. Reisfield as our
Vice Chairman and Executive Vice President. The following describes that
expected agreement. Until the closing of this offering, Mr. Reisfield is
receiving a monthly salary of $20,000, with a special bonus at the closing equal
to $10,000 per month between February 15, 1999 and closing and reimbursement of
expenses incurred during this period. We have also agreed to grant options,
immediately before trading begins to purchase 427,541 shares of common stock, at
an exercise price equal to the initial public offering price. Mr. Reisfield may
also receive an additional grant of options before trading begins. The options
will be immediately exercisable and will remain exercisable for up to 10 years
after the date of grant. Mr. Reisfield is expected to be subject to covenants
intended to bar his competition and solicitation of clients or employees for
nine months after his employment ends for certain specified reasons.
1999 LONG-TERM INCENTIVE PLAN
We intend to adopt and to submit to our pre-public stockholders the 1999
Long-Term Incentive Plan to promote our long-term growth and profitability,
improve stockholder value, and attract, retain and reward highly motivated and
qualified employees and directors. The Compensation Committee of our Board of
Directors will administer the 1999 Long-Term Incentive Plan unless the Board of
Directors specifies another committee of the Board of Directors or chooses to
act itself as administrator.
Under the 1999 Long-Term Incentive Plan, we can grant options for
approximately 12,838,602 shares of common stock (which number will adjust
automatically to be 30% of our outstanding common stock from time to time). We
can grant all such options to employees in the form of incentive stock options,
but may choose not to do so. Any options we grant which are not incentive stock
options will be nonqualified stock options.
All of our employees, directors, and certain service providers are eligible
to receive options under the 1999 Long-Term Incentive Plan. For tax reasons, the
1999 Long-Term Incentive Plan limits the number of shares covered by options
that an individual can receive in a calendar year to 50% of the total initial
pool. The administrator will determine the prices (which, except with respect to
replacement options, may not be less than the fair market value of the common
stock on the date of
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grant), exercise schedules, expiration dates, and other material conditions
under which optionees other than non-employee directors may exercise their
options. The 1999 Long-Term Incentive Plan also provides for formula option
grants for 15,000 shares to each person serving or who has agreed to serve as a
non-employee director as of the closing of this offering and for 10,000 shares
annually thereafter at each annual meeting of our stockholders at which the
director is re-elected or remains a director.
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CERTAIN TRANSACTIONS WITH RELATED PARTIES
On August 22, 1998, we issued 7,135,424 shares of common stock to
Commonwealth Principals II LLC, a Virginia based merchant banking firm, in
exchange for $1.00. Commonwealth Principals will own approximately 17.44% of
Clarant after this offering, which are beneficially held by its members,
including Messrs. Jordan, Marmol, Reisfield and Autem and their affiliates as
described below. In September 1998, Guillermo G. Marmol, who is our Chief
Executive Officer and President, acquired an interest in Commonwealth Principals
equating to an indirect pecuniary interest in 738,516 shares of Clarant for a
purchase price of $1.00. In December 1998, Michael H. Jordan, who will be our
Chairman and a director at the closing of this offering, acquired a limited
liability company interest in Commonwealth Principals equating to an indirect
pecuniary interest in 313,959 shares of Clarant for a purchase price of
$400,000. In April 1999, Derek R. Reisfield, our Vice Chairman and Executive
Vice President, acquired a limited liability company interest in Commonwealth
Principals equating to an indirect pecuniary interest in 156,979 shares of
Clarant for a purchase price of $200,000. In addition, in May 1999, R4 Venture
Partners I, of which Mr. Reisfield is a general partner and holds a 31.25%
pecuniary interest, acquired a limited liability company interest in
Commonwealth Principals equating to an indirect pecuniary interest in 156,979
shares of Clarant for a purchase price of $200,000. In May 1999, Autem
Technology Partners, L.P., of which Autem LLC, of which Joseph W. Autem, our
Chief Financial Officer, is the Managing Partner, is General Partner, acquired a
limited liability company interest in Commonwealth Principals equating to an
indirect pecuniary interest in 549,428 shares of Clarant for a purchase price of
$500,000.
Commonwealth Principals secured, for our benefit, loans for an aggregate of
$3.0 million. The loans secured by Commonwealth Principals accrue interest at
the prime rate (7.75% at May 20, 1999), are payable on demand and will be repaid
from the proceeds of this offering. At March 31, 1999, Commonwealth Principals
had advanced a total of $50,000. By closing of the offering, Commonwealth
Principals expects to advance approximately $4.5 million.
In September 1998, we entered into a management services agreement with
Commonwealth Principals to provide us with consulting and financial advisory
services. The agreement terminates at the earlier of the closing of our initial
public offering or 24 months after the date of the agreement. For the period
ended December 31, 1998, we paid $49,000 to Commonwealth Principals under that
agreement. No amounts have been paid for the three months ended March 31, 1999.
On September 1, 1998, Mr. Marmol purchased 713,542 shares of common stock
for a purchase price of $200,000 in cash.
Under a stockholders agreement among us, Commonwealth Principals and Mr.
Marmol, Commonwealth Principals and Mr. Marmol have agreed to forfeit up to
398,966 shares of common stock of our common stock if necessary to preserve the
tax-deferred nature of the transactions in which we will acquire our eight
companies. See "Principal Stockholders."
We have entered into or expect to enter into employment agreements with each
of Messrs. Marmol, Reisfield and Autem. For the details of these agreements,
please refer to "Management--Employment Agreements."
James R. Corey will be appointed a director effective on the closing. Mr.
Corey is a Managing Director and owner of Potomac Partners. We will acquire
Potomac Partners simultaneously with the closing of this offering. Mr. Corey
will receive 2,015,367 shares of common stock and $9.372 million in cash, based
on an assumed initial public offering price of $11.00 per share, for his
ownership interest in Potomac Partners.
On February 1, 1998, Potomac Partners loaned $150,000 to Mr. Corey pursuant
to a note that bore interest at the rate of 6% per annum and was payable on
demand. This note was paid in full on December 31, 1998.
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Richard M. Scruggs will be appointed a director effective on the closing.
Mr. Scruggs is President, Chief Executive Officer and Chairman of the Board of
Align. We will acquire Align simultaneously with the closing of this offering.
Mr. Scruggs will receive 1,065,977 shares of common stock and $5.03 million in
cash, based on an initial public offering price of $11.00 per share, for his
ownership interest in Align. In addition, Mr. Scruggs will receive options to
purchase 61,833 shares of our common stock at exercise prices ranging from $0.18
to $2.03 per share in exchange for outstanding options for Align shares.
Mr. Scruggs is the guarantor of $550,000 of indebtedness of Align under its
bank line of credit. The line of credit is due on demand, matures in July 1999
and accrues interest at the rate of prime plus 1% (8.75% at March 31, 1999). Mr.
Scruggs will be released from his guaranty upon the closing.
Mr. Corey and Scruggs are also eligible to receive an indeterminable number
of shares of common stock under the contingent consideration provisions of the
acquisition agreement for their respective company. See "About Clarant Worldwide
Corporation."
YOUNG & RUBICAM
Simultaneously with the closing of this offering, we will acquire assets of
Brand Dialogue-New York from Young & Rubicam for a purchase price of
approximately $50.7 million, which will be paid through the issuance of
4,609,091 shares of common stock. We will also grant to Young & Rubicam an
option immediately exercisable for 1,000,000 shares of our common stock at an
exercise price equal to the initial public offering price. Young & Rubicam will
own approximately 11.27% of Clarant after this offering, or 13.38% assuming the
option is exercised in full. Michael J. Dolan will become a director effective
upon the closing of this offering under an agreement with Young & Rubicam. Mr.
Dolan is Vice Chairman, Chief Financial Officer and a director of Young &
Rubicam.
We have entered into an agreement with Young & Rubicam, Inc. to acquire some
assets of Brand Dialogue-New York, the New York branch of a Young & Rubicam
division. Young & Rubicam has agreed that it will ask certain of its clients to
select us to perform services in connection with certain on-going engagements
and certain future engagements of the type performed by Brand Dialogue-New York
prior to the closing of this offering. Young & Rubicam has the right not to
recommend us or to terminate our involvement in an existing engagement if in its
judgment recommending or retaining us is not in the best interests of its
clients or if we fail to perform our obligations or default under the terms of
any client engagement. A Young & Rubicam client can also cancel the engagement.
We and Young & Rubicam intend to cooperate in marketing our respective services
to each others' clients in order to increase the range, breadth and depth of
services available to such clients.
In addition, upon the closing of this offering we will enter into a
Transition Services Agreement with Young & Rubicam under which Young & Rubicam
will grant us a license to use, for a term not to exceed 12 months, certain
office space used by Brand Dialogue-New York prior to the closing. Young &
Rubicam will also agree to provide us with certain services in connection with
our use of this space. In consideration for providing the space, we will pay to
Young & Rubicam $33,072 per month plus certain expenses. Additional fees will be
paid to Young & Rubicam for the provision of certain services.
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PRINCIPAL STOCKHOLDERS
The following shows the number and percentage of outstanding shares of our
common stock that were owned as of May 20, 1999 and that will be owned following
this offering assuming no exercise by the underwriters of their over-allotment
option by: (1) all persons known by us to own beneficially more than 5% of the
common stock; (2) each director, director nominee and executive officer; and (3)
all directors, director nominees and executive officers as a group.
As of May 20, 1999, there were 7,848,966 shares of common stock outstanding.
Following this offering, we will have outstanding shares of common
stock, assuming the underwriters do not exercise their over-allotment option,
shares assuming the underwriters exercise their over-allotment option in
full, including 20,485,125 shares of common stock we will issue as a portion of
the initial purchase prices for the acquisitions of our companies. At the time
of the closing of this offering we will also have outstanding options to
purchase 8,578,991 shares of common stock, including options to purchase
1,962,483 shares of common stock which will be exercisable immediately following
this offering. No other options, warrants or rights to acquire shares of common
stock will become exercisable within 60 days of this offering.
On August 22, 1998, Commonwealth Principals acquired 7,135,424 shares of our
common stock, which are beneficially held by its members, including Messrs.
Jordan, Marmol, Reisfield and Autem and their affiliates. In the following
table, the beneficial ownership of Commonwealth Principals shown does not
include the shares of Clarant that are held beneficially by those persons as
more specifically described below:
- The number of shares of common stock owned by Mr. Jordan includes 313,959
shares of common stock indirectly owned through his ownership of a limited
liability company interest in Commonwealth Principals.
- The number of shares of common stock owned by Mr. Marmol includes 738,516
shares of common stock indirectly owned through his ownership of a limited
liability company interest in Commonwealth Principals and options to
purchase 534,942 shares that will be exercisable on the closing of this
offering.
- The number of shares of common stock owned by Mr. Reisfield includes
options to purchase 427,541 shares of common stock, that will be
exercisable on the closing of this offering; 156,979 shares indirectly
owned through his ownership of a limited liability company interest in
Commonwealth Principals; and 156,979 shares indirectly owned by R4 Venture
Partners I through its ownership of a limited liability company interest
in Commonwealth Principals. Mr. Reisfield is a general partner of R4
Venture Partners I.
- The number of shares of common stock owned by Mr. Autem includes 549,428
shares held by Autem Technology Partners, L.P. indirectly owned through
its ownership of a limited liability company interest in Commonwealth
Principals. Autem LLC, of which Joseph W. Autem is the Managing Partner,
is the General Partner of Autem Technology Partners, L.P.
The number of shares of common stock owned by Young & Rubicam includes
options for 1,000,000 shares of common stock that will be exercisable on the
closing of this offering.
The number of shares outstanding after the offering may be reduced under the
terms of a stockholders agreement among us, Commonwealth Principals and Mr.
Marmol. If necessary to preserve the tax-deferred nature of the transactions in
which we will acquire our eight companies, Commonwealth Principals and Mr.
Marmol have agreed to forfeit up to 398,966 shares of common stock on a pro rata
basis, so that the total number of shares that were owned by Commonwealth
Principals and Mr. Marmol immediately before this offering will not exceed 20%
of the total number
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of shares of common stock outstanding following this offering. The following
table reflects this reduction with and without giving effect to the
underwriters' over-allotment option.
We originally issued 7,848,966 shares of common stock to our initial
stockholder and an executive officer after giving effect to the 71,354-for-one
stock split.
Following this offering, the former owners of our eight companies may be
entitled to contingent consideration under the terms of the acquisition
agreements that we entered into with them. The number of shares that could be
issued as payment of contingent consideration are not now determinable and no
assumptions regarding those issuances have been included in the pro forma
financial statements included in this prospectus.
The address for our officers and directors is c/o Clarant Worldwide
Corporation, 2665 Villa Creek Drive, Suite 200, Dallas, Texas 75235.
An asterisk indicates ownership of less than 1%.
<TABLE>
<CAPTION>
AFTER OFFERING AFTER OFFERING
(NO EXERCISE OF OVER- ALLOTMENT (FULL EXERCISE OF OVER-
BEFORE OFFERING OPTION) ALLOTMENT OPTION)
------------------------------- ------------------------------- -------------------------------
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OWNED OWNERSHIP OWNED OWNERSHIP OWNED OWNERSHIP
- ------------------------- ------------------ ----------- ------------------ ----------- ------------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Michael H. Jordan........ 313,959 4.00% 298,010 0.73% 313,959 0.73%
Guillermo G. Marmol...... 1,987,000 23.70 1,913,244 4.62 1,987,000 4.59
Derek R. Reisfield....... 741,499 8.96 725,553 1.76 741,499 1.72
Joseph W. Autem.......... 549,428 7.00 521,519 1.27 549,428 1.28
George P. Stamas......... -- -- -- -- -- --
James R. Corey........... -- -- 2,015,367 4.93 2,015,367 4.71
Richard M. Scruggs....... -- -- 1,065,977 2.61 1,065,977 2.49
Randolph Austin.......... -- -- -- -- -- --
Michael J. Dolan......... -- -- -- -- -- --
Young & Rubicam Inc. -- -- 5,609,091 13.38 5,609,091 12.81
285 Madison Avenue
New York, New York
10017...................
Commonwealth Principals 5,219,563 66.50 4,954,157 12.11 5,219,563 12.20
II LLC
1650 Tysons Blvd.
McLean, Va 22102........
All executive officers, 3,591,886 40.76% 6,539,670 15.62% 6,673,230 15.25%
directors and director
nominees as a group
(eight persons).........
</TABLE>
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $0.01 per share, and 10,000,000 shares of preferred stock, par value
$0.01 per share. As of May 20, 1999, there were 7,848,966 shares of our common
stock outstanding, held by two holders of record, and no shares of preferred
stock outstanding.
Following the closing of this offering and the acquisition of our eight
companies, we will have outstanding shares of common stock, including
20,485,125 shares issued as part of the purchase price for our eight companies,
assuming the underwriters do not exercise their over-allotment option and based
upon an assumed initial public offering price of $11.00 per share. In addition,
we may issue additional shares of common stock to the former owners of our
companies as contingent consideration under the terms of the acquisition
agreements that we entered into with them. The number of shares that could be
issued as payment of contingent consideration are not now determinable and no
assumptions regarding those issuances have been included in the pro forma
financial statements included in this prospectus. Following completion of this
offering, no shares of preferred stock will be outstanding.
The following is a description of our capital stock.
COMMON STOCK
We are authorized to issue, without further stockholder approval, up to
100,000,000 shares of common stock. Holders of record of common stock are
entitled to one vote for each share held on all matters properly submitted to a
vote of stockholders. Holders of our common stock do not have cumulative voting
rights. As a result, holders of a plurality 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 ratably to any
dividend declared by the Board of Directors out of funds legally available for
this purpose, subject to any preferential dividend rights of any
then-outstanding preferred stock. Upon our liquidation, dissolution or winding
up, holders of common stock are entitled to receive ratably our remaining net
assets available after payment of or provision for all debts and other
liabilities, subject the prior rights of any then-outstanding preferred stock.
Holders of common stock have no redemption or conversion rights and no
preemptive right to subscribe for or purchase additional shares of any class of
our capital stock. The outstanding shares of common stock are, and the shares of
common stock offered in this offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
common stock may be adversely affected by the rights of the holders of shares of
any series of preferred stock that we may designate and issue in the future. See
"--Preferred Stock."
PREFERRED STOCK
We are authorized to issue, without further stockholder approval, up to
10,000,000 shares of preferred stock in one or more series, which can have
rights senior to those of the common stock. Our Board of Directors may fix or
alter the powers, designation, dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices, liquidation and other preferences, and
other special rights of any wholly unissued series of preferred stock, and the
number of shares constituting any such series.
Our issuance of preferred stock could adversely affect holders of common
stock. These effects could include the following:
- if dividends on the preferred stock have not been made, dividends on the
common stock may be restricted;
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- to the extent the preferred stock has voting rights, the voting rights of
the common stock will be diluted;
- if holders of preferred stock are entitled to preferred dividends or
liquidation preferences, the amount of earnings and assets available for
distribution to holders of common stock may be reduced; and
- the issuance of preferred stock could decrease the market price of the
common stock.
In addition, our issuance of preferred stock may have the effect of delaying or
preventing a change in control. We currently have no plans to issue any shares
of preferred stock.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors will 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
Section 174 of the Delaware General Corporation Law, relating to unlawful
dividends or unlawful stock purchases or redemptions, 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 certificate of incorporation and by-laws provide for the indemnification
of our directors and officers to the fullest extent authorized by the Delaware
General Corporation Law, except that we will indemnify a director or officer in
connection with an action initiated by that person only if the action was
authorized by our Board of Directors. The indemnification provided under our
certificate of incorporation and by-laws includes the right to be paid expenses
in advance of any proceeding for which indemnification may be had, provided that
such advance payment may be made only if the director or officer seeking such
advance payment delivers to us an undertaking to repay all amounts paid in
advance if it is ultimately determined that the director or officer is not
entitled to be indemnified. Under our by-laws, if we do not pay a claim for
indemnification within 60 days after we have received a written claim, the
director or officer may bring an action to recover the unpaid amount of the
claim and, if successful, the director or officer also will be entitled to be
paid the expense of prosecuting the action to recover these unpaid amounts.
Under our by-laws, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, or is or was serving at our request as a director, officer, employee,
partner (limited or general), manager, trustee or agent of another corporation
or of a partnership, joint venture, limited liability company, trust or other
enterprise, against any liability asserted against the person or incurred by the
person in any of these capacities, or arising out of the person's fulfilling one
of these capacities, and related expenses, whether or not we would have the
power to indemnify the person against the claim under the provisions of the
Delaware General Corporation Law. We intend to purchase director and officer
liability insurance on behalf of our directors and officers.
ANTI-TAKEOVER PROVISIONS
Our certificate of incorporation and by-laws contain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of our Board of Directors and in the policies formulated by our
Board of Directors. In addition, provisions of Delaware law may hinder or delay
an attempted takeover of Clarant other than through negotiation with our Board
of Directors. These provisions could have the effect of discouraging attempts to
acquire us or remove
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incumbent management even if some or a majority of our stockholders believe this
action to be in their best interest, including attempts that might result in the
stockholders' receiving a premium over the market price for the shares of common
stock held by stockholders.
REMOVAL AND REPLACEMENT OF DIRECTORS. Under the certificate of
incorporation, directors may only be removed, with or without cause, by the
affirmative vote of two-thirds of the outstanding voting stock. 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, even if those directors do not constitute a quorum or 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. The by-laws establish an advance notice procedure
regarding stockholder proposals and nominations for director. The advance notice
procedure will not apply to proposals by our Board of Directors or management.
Any stockholder that wishes to make a proposal, or nominate a director for
election, at an annual meeting must deliver us notice of the proposal or the
nomination not less than 90 days nor more than 120 days before the first
anniversary of the preceding year's annual meeting. The stockholder must put
information in the notice regarding:
- the stockholder and its holdings;
- the background of any nominee for director;
- 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.
SPECIAL MEETINGS OF STOCKHOLDERS. Our certificate of incorporation and
by-laws permit special meetings of the stockholders to be called only by the
Board of Directors, the Chairman of the Board or the President or holders of at
least 75% of our securities that are outstanding and entitled to vote generally
in an election of directors. This provision may make it more difficult for
stockholders to take actions opposed by the Board of Directors.
PROHIBITION ON STOCKHOLDER ACTION BY WRITTEN CONSENT. Our certificate of
incorporation and by-laws prohibit stockholders from taking action by written
consent. By requiring stockholders to take actions at an annual or special
meeting, rather than by written consent, our certificate of incorporation and
by-laws may discourage stockholder actions that are opposed by our board of
directors.
AUTHORIZED BUT UNISSUED SHARES. Without further stockholder approval, we can
issue shares of common stock and preferred stock up to the number of shares
authorized for issuance in our 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 public 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 Clarant by means of a proxy contest,
tender offer, merger or otherwise.
SECTION 203 OF DELAWARE LAW. In addition to the foregoing provisions of our
certificate of incorporation and by-laws, we will be subject to the provisions
of Section 203 of the Delaware General Corporation Law. Section 203 prohibits
publicly-held Delaware corporations from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset
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sales and other transactions resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years did own, 15% or more
of the corporation's voting stock. These provisions could have the effect of
delaying, deferring or preventing a change in control of Clarant or reducing the
price that investors might be willing to pay in the future for shares of our
common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company.
SHARES AVAILABLE FOR FUTURE SALE
Following this offering, we will have shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option, or
shares, assuming the underwriters' over-allotment option is
exercised in full. All the shares we sell in this offering will be freely
tradable without restriction or further registration under the Securities Act,
except that any shares purchased by our affiliates, as that term is defined in
Rule 144, may generally only be sold in compliance with the limitations of Rule
144 described below.
28,334,091 shares of common stock outstanding following this offering,
including 20,485,125 shares of common stock we issue to former owners of our
companies under the acquisition agreements we entered into with them, will be
restricted securities under the terms of the Securities Act. If the full 398,966
shares are forfeited, shares of our common stock will be outstanding, of
which 27,935,125 shares will be restricted securities. Sales of a portion of the
restricted shares to be outstanding upon completion of this offering will be
limited by lock-up agreements with the underwriters and with us as described
below.
We may also issue an indeterminable number of shares of common stock under
the contingent consideration provisions of the acquisition agreements which
would be "restricted securities," and which may be resold if registered under
applicable registration rights or if an exemption from registration is
available. See "About Clarant Worldwide Corporation."
RULE 144
In general, under Rule 144, a stockholder who owns restricted shares that
have been outstanding for at least one year is entitled to sell, within any
three-month period, a number of these restricted shares that does not exceed the
greater of: (1) one percent of the then outstanding shares of common stock; (2)
approximately shares immediately after this offering; or (3) the
average weekly trading volume in the common stock on the Nasdaq National Market
during the four calendar weeks preceding the sale.
In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement, to
sell shares of common stock which are not restricted securities unless we
register those securities for resale by the affiliate.
Under Rule 144(k), a stockholder who is not currently, and who has not been
for at least three months before the sale, an affiliate of ours and who owns
restricted shares that have been outstanding for at least two years may resell
these restricted shares without compliance with the above requirements. The one-
and two-year holding periods described above do not begin to run until the full
purchase price is paid by the person acquiring the restricted shares from us or
an affiliate of ours.
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REGISTRATION RIGHTS
The former owners of the companies that we acquire at the closing of this
offering will have piggyback registration rights to register the shares of
common stock that they receive pursuant to the acquisition agreements (including
those issued as contingent consideration) whenever we propose to register any
shares of common stock for our own or another's account under the Securities Act
for a public offering, other than (1) any shelf registration of shares of common
stock to be used as consideration for acquisitions of additional businesses, (2)
registrations relating to employee benefit plans, and (3) registrations relating
to rights offerings made to our stockholders.
In addition, Young & Rubicam will have the right, on one occasion that can
be no earlier than 18 months after the closing of this offering, to require that
we register under the Securities Act any or all of the shares of common stock
they receive in connection with their aquisition (including shares issued as
contingent consideration and shares issued upon exercise of options granted to
Young & Rubicam). We have agreed to pay all costs of this registration and to
keep the registration effective for at least 120 days, or such shorter period as
may be required to sell the registered shares.
COMMON STOCK AND OPTIONS ISSUABLE UNDER OUR EQUITY COMPENSATION PLANS
Before closing this offering, we will issue options to acquire 8,578,991
shares of common stock, of which options to acquire 1,570,776 shares will be
issued to employee participants in Align's option plan on conversion of
outstanding Align options and options to purchase 1,000,000 shares to Young &
Rubicam.
We intend to file one or more registration statements under the Securities
Act after the closing of the initial public offering to register 12,838,602
shares of common stock underlying outstanding stock options or reserved for
issuance under our 1999 Long-Term Incentive Plan. We expect these registration
statements will become effective upon filing, and shares covered by these
registration statements will be eligible for sale in the public market
immediately after the effective dates of these registration statements.
LOCK-UP AGREEMENTS
We have agreed with the underwriters that we will not issue any additional
shares of common stock or securities convertible into, exercisable for or
exchangeable for shares of common stock for 180 days following the date of this
offering, except that we may grant options or warrants to purchase shares of
common stock under the 1999 Long-Term Incentive Plan or in connection with the
acquisitions of companies, and issue shares of common stock upon the exercise of
outstanding options and warrants and in connection with the acquisition of
companies.
Our executive officers, directors and certain large stockholders have agreed
with the underwriters that they will not offer, sell, contract to sell or
otherwise dispose of or enter into any transaction which is designed to or could
be expected to result in the disposition of any common stock for a period of 180
days after the date of this prospectus without the prior written consent of
Deutsche Bank Securities Inc., except that nothing will prevent any of them from
exercising outstanding options or warrants.
69
<PAGE>
UNDERWRITING
The underwriters named below, through their representatives Deutsche Bank
Securities Inc., Hambrecht & Quist LLC and SoundView Technology Group, Inc.,
have severally agreed to purchase from us the following numbers of shares of
common stock at the public offering price less the underwriting discounts and
commissions shown on the cover page of this prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- -----------
<S> <C>
Deutsche Bank Securities Inc.....................................................
Hambrecht & Quist LLC............................................................
SoundView Technology Group, Inc..................................................
-----------
Total..........................................................................
-----------
-----------
</TABLE>
We have entered into an underwriting agreement with the underwriters which
provides that the underwriters are obligated to purchase all of the shares of
common stock we are offering to sell in this offering, other than shares covered
by the over-allotment option described below, if any of the shares are
purchased. We expect to issue these shares on , 1999.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover page of this prospectus and
to dealers at a price that represents a concession not in excess of $
per share under the public offering price. The underwriters may allow, and
dealers may re-allow, a concession not in excess of $ per share to
other dealers. After the initial offering, the offering price and other selling
terms may be changed by the representatives of the underwriters.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to
additional shares of common stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
prospectus. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the common stock in this
offering. To the extent that the underwriters exercise this option, each of the
underwriters will become obligated to purchase approximately the same percentage
of additional shares of common stock as the number of shares of common stock to
be purchased by it in the above table bears to , and we will be obligated
to sell these shares to the underwriters to the extent they exercise the option.
If any additional shares of common stock are purchased, the underwriters will
offer these additional shares on the same terms as those on which the
shares are being offered.
At our request the underwriters have reserved for sale at the initial public
offering price up to shares of common stock for our officers,
directors, employees, clients, friends and related persons who express an
interest in purchasing these shares. The number of shares of our common stock
available for sale to the general public will be reduced to the extent these
persons purchase these reserved shares. The underwriters will offer any reserved
shares not so purchased by these persons to the general public on the same basis
as the other shares in this offering.
We have agreed to indemnify the underwriters against liabilities in
connection with this offering, including liabilities under the Securities Act.
We have agreed with the underwriters that we will not issue any additional
shares of common stock or securities convertible into, exercisable for or
exchangeable for shares of common stock for 180 days following the date of this
offering, except that we may grant options or warrants to purchase shares of
common stock under the 1999 Long-Term Incentive Plan or in connection with the
acquisitions of companies, and issue shares of common stock upon the exercise of
outstanding options and warrants, and in connection with the acquisition of
companies.
70
<PAGE>
Each of our executive officers and directors and certain large stockholders
have agreed with the underwriters that they will not offer, sell, contract to
sell or otherwise dispose of or enter into any transaction which is designed to
or could be expected to result in the disposition of any common stock for a
period of 180 days after the date of this prospectus without the prior written
consent of Deutsche Bank Securities Inc., except that nothing will prevent any
of them from exercising outstanding options or warrants.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
To facilitate the offering of the common stock, the underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the common stock. Specifically, the underwriters may over-allot shares of the
common stock in connection with this offering by creating a short position in
the common stock for their own accounts. Additionally, to cover these
over-allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of common stock in the open
market. Finally, the representatives, on behalf of the underwriters, also may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
PRICING OF THIS OFFERING
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 determined by negotiation between us and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be:
- the history and prospects of our business and the industry in which we
compete;
- an assessment of our management and the present state of our development;
- prevailing market conditions in the U.S. economy and the industry in which
we compete;
- our revenues, operating cash flow and earnings in recent periods;
- the market capitalizations and stages of development of other companies
which the representatives of the underwriters believe to be comparable to
us; and
- estimates of our business potential.
LEGAL MATTERS
The validity of the shares of our common stock offered by this prospectus
will be passed upon for us by Wilmer, Cutler & Pickering, Washington, D.C. The
underwriters have been represented by Piper & Marbury L.L.P., Baltimore,
Maryland.
71
<PAGE>
EXPERTS
The financial statements of Clarant Worldwide Corporation; Align Solutions
Corp.; Free Range Media Inc.; Integrated Consulting Inc.; InterActive8, Inc.;
Multimedia Resources, LLC; Potomac Partners Management Consulting, LLC; and RSI
Group, Inc. and subsidiaries included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The financial statements of Brand Dialogue-New York (a wholly-owned business
of Young & Rubicam Inc.) as of December 31, 1997 and 1998 and for the period
from April 1, 1996 (inception) through December 31, 1996, and for each of the
two years in the period ended December 31, 1998 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
You may rely on the information contained in this prospectus. Neither we nor
the underwriters has authorized anyone to provide information different from
that contained in this prospectus. When you make a decision about whether to
invest in our common stock, you should not rely upon any information other than
the information in this prospectus. Neither the delivery of this prospectus nor
sale of common stock means that information contained in this prospectus is
correct after the date of this prospectus. This prospectus is not an offer to
sell or solicitation of an offer to buy these shares of our common stock in any
circumstances under which the offer or solicitation is unlawful.
We have filed with the SEC a registration statement, which includes
exhibits, schedules and amendments. This prospectus is a part of the
registration statement and includes all of the information which we believe is
material to an investor considering whether to make an investment in our common
stock. We refer you to the registration statement for additional information
about Clarant, our common stock and this offering, including the full texts of
the exhibits, some of which have been summarized in this prospectus. The
registration statement is available for inspection and copying at SEC's
following locations:
1. Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549;
2. New York Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048; and
3. Chicago Regional Officer, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2511
You may obtain copies by mail from the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that
contains the registration statement. The address of the SEC's Internet site is
"http://www.sec.gov."
We intend to furnish our stockholders annual reports containing financial
statements audited by our independent accountants.
72
<PAGE>
CLARANT WORLDWIDE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements.................................... F-3
Unaudited Pro Forma Combined Balance Sheets.......................................................... F-4
Unaudited Pro Forma Combined Statements of Operations................................................ F-5
Unaudited Historical Balance Sheets.................................................................. F-8
Unaudited Historical Statements of Operations........................................................ F-9
Notes to Unaudited Pro Forma Combined Financial Statements........................................... F-12
CLARANT WORLDWIDE CORPORATION............................................................................
Report of Independent Public Accountants............................................................. F-17
Balance Sheets....................................................................................... F-18
Statements of Operations............................................................................. F-19
Statements of Stockholders' Equity................................................................... F-20
Statements of Cash Flows............................................................................. F-21
Notes to Financial Statements........................................................................ F-22
OUR EIGHT COMPANIES
ALIGN SOLUTIONS CORP.
Report of Independent Public Accountants............................................................. F-27
Balance Sheets....................................................................................... F-28
Statements of Operations............................................................................. F-29
Statements of Stockholders' Equity................................................................... F-30
Statements of Cash Flows............................................................................. F-31
Notes to Financial Statements........................................................................ F-32
BRAND DIALOGUE-NEW YORK
Report of Independent Accountants.................................................................... F-39
Balance Sheets....................................................................................... F-40
Statements of Operations............................................................................. F-41
Statements of Cash Flows............................................................................. F-42
Notes to Financial Statements........................................................................ F-43
FREE RANGE MEDIA, INC.
Report of Independent Public Accountants............................................................. F-48
Consolidated Balance Sheets.......................................................................... F-49
Consolidated Statements of Operations................................................................ F-50
Consolidated Statements of Stockholders' Equity...................................................... F-51
Consolidated Statements of Cash Flows................................................................ F-52
Notes to Consolidated Financial Statements........................................................... F-53
INTEGRATED CONSULTING, INC. dba I.CON INTERACTIVE
Report of Independent Public Accountants............................................................. F-61
Balance Sheets....................................................................................... F-62
Statements of Operations............................................................................. F-63
Statements of Stockholders' Equity................................................................... F-64
Statements of Cash Flows............................................................................. F-65
</TABLE>
F-1
<PAGE>
CLARANT WORLDWIDE CORPORATION
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Notes to Financial Statements........................................................................ F-66
INTERACTIVE8, INC.
Report of Independent Public Accountants............................................................. F-72
Balance Sheets....................................................................................... F-73
Statements of Operations............................................................................. F-74
Statements of Stockholders' Equity................................................................... F-75
Statements of Cash Flows............................................................................. F-76
Notes to Financial Statements........................................................................ F-77
MULTIMEDIA RESOURCES, LLC
Report of Independent Public Accountants............................................................. F-84
Balance Sheets....................................................................................... F-85
Statements of Operations............................................................................. F-86
Statements of Members' Equity........................................................................ F-87
Statements of Cash Flows............................................................................. F-88
Notes to Financial Statements........................................................................ F-89
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
Report of Independent Public Accountants............................................................. F-94
Balance Sheets....................................................................................... F-95
Statements of Operations............................................................................. F-96
Statements of Members' Equity........................................................................ F-97
Statements of Cash Flows............................................................................. F-98
Notes to Financial Statements........................................................................ F-99
RSI GROUP, INC. AND SUBSIDIARIES
Report of Independent Public Accountants............................................................. F-107
Consolidated Balance Sheets.......................................................................... F-108
Consolidated Statements of Operations................................................................ F-109
Consolidated Statements of Stockholders' Equity...................................................... F-110
Consolidated Statements of Cash Flows................................................................ F-111
Notes to Consolidated Financial Statements........................................................... F-112
</TABLE>
F-2
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the acquisitions by Clarant Worldwide Corporation ("Clarant") of the
outstanding capital stock of Align Solutions Corp.; Free Range Media, Inc.;
Integrated Consulting, Inc.; InterActive8, Inc; Multimedia Resources, LLC;
Potomac Partners Management Consulting, LLC; and RSI Group, Inc. and the assets
and certain liabilities of Brand Dialogue-New York (a wholly owned subsidiary of
Young and Rubicam Inc.) (the "eight companies"). These acquisitions will occur
simultaneously with the closing of this offering and will be accounted for using
the purchase method of accounting. Align, one of the eight companies we will
acquire, has been identified as the "accounting acquiror."
The unaudited pro forma combined balance sheet gives effect to the
acquisitions and the offering as if they had occurred on March 31, 1999. The
unaudited pro forma combined statements of operations gives effect to these
transactions as if they had occurred on January 1, 1998. Certain
reclassifications to the historical statements of operations for Brand
Dialogue-New York have been made in order to present information that is
consistent with the Clarant statement of operations presentation.
Clarant has preliminarily analyzed the savings or increases that it expects
to realize from changes in salaries and certain benefits to the stockholders and
management of the eight companies. To the extent the stockholders and management
of the eight companies have agreed prospectively to reductions or increases in
salary, bonuses and benefits, these changes have been reflected in the pro forma
combined statements of operations. With respect to other potential cost savings,
Clarant has not and cannot quantify these savings until completion of the
acquisition of the eight companies. It is anticipated that these savings will be
partially offset by the costs of being a publicly held company and the
incremental increase in costs related to Clarant's new management. The
anticipated savings have not been included in the unaudited pro forma combined
financial statements of Clarant.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what
Clarant's financial position or results of operations would actually have been
if such transactions in fact had occurred on those dates and are not necessarily
representative of Clarant's financial position or results of operations for any
future period. Since the eight companies were not under common control or
management, historical combined results may not be comparable to, or indicative
of, future performance. The unaudited pro forma combined financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this prospectus. See "Risk Factors" included
elsewhere in this prospectus.
F-3
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ACQUISITION PRO FORMA OFFERING PRO FORMA
TOTAL ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 2,087 $ -- $ 2,087 $ 30,487 $ 32,574
Accounts receivable, net................................... 11,193 -- 11,193 -- 11,193
Unbilled revenues.......................................... 1,443 -- 1,443 -- 1,443
Employee and other receivables............................. 1,387 (1,138) 249 -- 249
Deferred income taxes...................................... 26 (26) -- -- --
Prepaid expenses and other assets.......................... 484 -- 484 (50) 434
----------- ----------- ----------- ----------- -----------
Total current assets..................................... 16,620 (1,164) 15,456 30,437 45,893
PROPERTY AND EQUIPMENT, net.................................. 3,425 -- 3,425 -- 3,425
OTHER ASSETS:
Goodwill, net.............................................. 9,068 209,035 218,103 -- 218,103
Other Intangible........................................... -- 4,760 4,760 4,760
Other...................................................... 277 -- 277 -- 277
----------- ----------- ----------- ----------- -----------
Total assets............................................. $ 29,390 $ 212,631 $ 242,021 $ 30,437 $ 272,458
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................... $ 3,906 $ -- $ 3,906 $ -- $ 3,906
Payable for eight companies' stock......................... -- 71,202 71,202 (71,202) --
Acquisition-related obligations............................ -- 18,262 18,262 (18,262) --
Customer deposits.......................................... 455 -- 455 -- 455
Accrued liabilities........................................ 12,839 (8,790) 4,049 -- 4,049
Unearned revenues.......................................... 88 -- 88 -- 88
Notes payable.............................................. 6,212 (4,114) 2,098 (50) 2,048
Current maturities of long-term debt....................... 815 -- 815 -- 815
----------- ----------- ----------- ----------- -----------
Total current liabilities................................ 24,315 76,560 100,875 (89,514) 11,361
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities.................. 595 -- 595 -- 595
Deferred income taxes...................................... 9 -- 9 -- 9
----------- ----------- ----------- ----------- -----------
Total liabilities........................................ 24,919 76,560 101,479 (89,514) 11,965
----------- ----------- ----------- ----------- -----------
MINORITY INTEREST............................................ 119 (119) -- -- --
STOCKHOLDERS' EQUITY:
Preferred stock............................................ 3,728 (3,728) -- -- --
Members' equity............................................ (4,674) 4,674 -- -- --
Common stock............................................... 188 95 283 126 409
Additional paid-in capital................................. 18,800 125,717 144,517 119,825 264,342
Young & Rubicam Inc. investment............................ 2,350 (2,350) -- -- --
Subscription receivable from officers...................... (10) 10 -- -- --
Retained earnings (deficit)................................ (15,600) 11,342 (4,258) -- (4,258)
Treasury stock............................................. (430) 430 -- -- --
----------- ----------- ----------- ----------- -----------
Total stockholders' equity............................... 4,352 136,190 140,542 119,951 260,493
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity............... $ 29,390 $ 212,631 $ 242,021 $ 30,437 $ 272,458
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
F-4
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ACQUISITION PRO FORMA
TOTAL ADJUSTMENTS COMBINED
----------- ----------- -------------
<S> <C> <C> <C>
REVENUES................................................................. $ 50,103 $ (219) $ 49,884
COST OF SERVICES......................................................... 34,424 (2,710) 31,714
----------- ----------- -------------
GROSS PROFIT............................................................. 15,679 2,491 18,170
SELLING, GENERAL AND ADMINISTRATIVE...................................... 20,472 3,114 23,586
EQUITY BASED COMPENSATION EXPENSE........................................ -- 6,621 6,621
INTANGIBLES AMORTIZATION................................................. 85 71,265 71,350
OTHER INCOME (EXPENSE):
Interest income........................................................ 37 -- 37
Interest expense....................................................... (401) 182 (219)
Net transactions with affiliate........................................ 430 (430) --
Loss on disposition of assets.......................................... (28) 5 (23)
Other, net............................................................. 28 -- 28
----------- ----------- -------------
LOSS BEFORE INCOME TAXES................................................. (4,812) (78,752) (83,564)
INCOME TAXES............................................................. 481 (481) --
MINORITY INTEREST........................................................ 162 (162) --
----------- ----------- -------------
NET LOSS................................................................. $ (5,455) $ (78,109) $ (83,564)
----------- ----------- -------------
----------- ----------- -------------
NET LOSS PER SHARE....................................................... $ (2.04)
SHARES USED IN COMPUTING PRO FORMA
NET LOSS PER SHARE (see note 5):....................................... 40,909,091
</TABLE>
F-5
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ACQUISITION PRO FORMA
TOTAL ADJUSTMENTS COMBINED
---------- ----------- -------------
<S> <C> <C> <C>
REVENUES................................................................. $ 17,746 $ (41) $ 17,705
COST OF SERVICES......................................................... 17,782 (7,574) 10,208
---------- ----------- -------------
GROSS PROFIT............................................................. (36) 7,533 7,497
SELLING, GENERAL AND ADMINISTRATIVE...................................... 10,065 (2,932) 7,133
EQUITY BASED COMPENSATION EXPENSE........................................ -- 4,851 4,851
INTANGIBLES AMORTIZATION................................................. 416 17,816 18,232
OTHER INCOME (EXPENSE):
Interest income........................................................ 1 -- 1
Interest expense....................................................... (129) 89 (40)
Net transactions with affiliate........................................ -- -- --
Loss on disposition of assets.......................................... -- -- --
Other, net............................................................. (17) -- (17)
---------- ----------- -------------
LOSS BEFORE INCOME TAXES................................................. (10,662) (12,113) (22,775)
INCOME TAXES............................................................. 57 (57) --
MINORITY INTEREST........................................................ (24) 24 --
---------- ----------- -------------
NET LOSS................................................................. $ (10,695) $ (12,080) $ (22,775)
---------- ----------- -------------
---------- ----------- -------------
NET LOSS PER SHARE....................................................... $ (0.56)
SHARES USED IN COMPUTING PRO FORMA
NET LOSS PER SHARE (see note 5):....................................... 40,909,091
</TABLE>
F-6
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ACQUISITION PRO FORMA
TOTAL ADJUSTMENTS COMBINED
----------- ----------- -------------
<S> <C> <C> <C>
REVENUES................................................................. $ 10,207 $ (3) $ 10,204
COST OF SERVICES......................................................... 6,856 (184) 6,672
----------- ----------- -------------
GROSS PROFIT............................................................. 3,351 181 3,532
SELLING, GENERAL AND ADMINISTRATIVE...................................... 4,494 1,414 5,908
EQUITY BASED COMPENSATION EXPENSE........................................ -- 1,655 1,655
INTANGIBLES AMORTIZATION................................................. 13 17,816 17,829
OTHER INCOME (EXPENSE):
Interest income........................................................ 4 -- 4
Interest expense....................................................... (63) 9 (54)
Net transactions with affiliate........................................ -- -- --
Loss on disposition of assets.......................................... -- -- --
Other, net............................................................. 22 -- 22
----------- ----------- -------------
LOSS BEFORE INCOME TAXES................................................. (1,193) (20,695) (21,888)
INCOME TAXES............................................................. 115 (115) --
MINORITY INTEREST........................................................ 33 (33) --
----------- ----------- -------------
NET LOSS................................................................. $ (1,341) $ (20,547) $(21,888)
----------- ----------- -------------
----------- ----------- -------------
NET LOSS PER SHARE....................................................... $ (0.54)
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER SHARE (see note 5):...... 40,909,091
</TABLE>
F-7
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED HISTORICAL BALANCE SHEETS
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BRAND
CLARANT ALIGN DIALOGUE FREE RANGE I.CON INTERACTIVE8 MULTIMEDIA
----------- --------- ----------- ------------- ----- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents............ $ 6 $ 209 $ -- $ 48 $ 16 $ 462 $ 344
Accounts receivable,
net.................... -- 2,397 2,867 1,477 377 532 369
Unbilled revenues........ -- 806 -- 404 -- -- --
Employee and other
receivables............ -- 35 1,138 -- -- 110 --
Deferred income taxes.... -- -- 14 -- 12 -- --
Prepaid expenses and
other assets........... 50 81 -- 76 5 62 14
----- --------- ----------- ------ ----- ------ -----
Total current assets... 56 3,528 4,019 2,005 410 1,166 727
PROPERTY AND EQUIPMENT,
net...................... -- 908 408 768 345 597 55
OTHER ASSETS:
Goodwill, net............ -- 9,040 -- -- -- -- --
Other.................... -- 14 -- -- 17 72 13
----- --------- ----------- ------ ----- ------ -----
Total assets........... $ 56 $ 13,490 $ 4,427 $ 2,773 $ 772 $ 1,835 $ 795
----- --------- ----------- ------ ----- ------ -----
----- --------- ----------- ------ ----- ------ -----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......... $ 76 $ 896 $ 1,274 $ 383 $ 48 $ 274 $ 96
Customer deposits........ 425 30 --
Accrued liabilities...... -- 431 803 909 259 2,763 150
Unearned revenues........ 88
Notes payable............ 50 1,111 -- 4,114 98 50 --
Current maturities of
long-term debt......... -- 112 -- -- 17 617 --
----- --------- ----------- ------ ----- ------ -----
Total current
liabilities............ 126 2,550 2,077 5,831 452 3,704 334
----- --------- ----------- ------ ----- ------ -----
LONG TERM LIABILITIES:
Long-term debt, net of
current maturities..... -- 143 -- -- 107 330 --
Deferred income taxes.... -- -- -- -- 9 -- --
----- --------- ----------- ------ ----- ------ -----
Total liabilities...... 126 2,693 2,077 5,831 568 4,034 334
----- --------- ----------- ------ ----- ------ -----
MINORITY INTEREST.......... -- -- -- -- -- -- --
STOCKHOLDERS' EQUITY:
Preferred stock.......... -- -- -- 3,728 -- -- --
Members' equity.......... -- -- -- -- -- -- 461
Common stock............. 78 64 -- -- 10 1 --
Additional paid-in
capital................ 329 14,514 -- 2,806 14 185 --
Young & Rubicam Inc.
investment............. -- -- 2,350 -- -- -- --
Subscription receivable
from officers.......... -- -- -- -- (10) -- --
Retained earnings
(deficit).............. (477) (3,781) -- (9,369) 190 (2,385) --
Treasury stock........... -- -- -- (223) -- -- --
----- --------- ----------- ------ ----- ------ -----
Total stockholders'
equity................. (70) 10,797 2,350 (3,058) 204 (2,199) 461
----- --------- ----------- ------ ----- ------ -----
Total liabilities and
stockholders' equity... $ 56 $ 13,490 $ 4,427 $ 2,773 $ 772 $ 1,835 $ 795
----- --------- ----------- ------ ----- ------ -----
----- --------- ----------- ------ ----- ------ -----
<CAPTION>
POTOMAC HISTORICAL
PARTNERS RSI TOTAL
----------- --------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents............ $ 971 $ 31 $ 2,087
Accounts receivable,
net.................... 879 2,295 11,193
Unbilled revenues........ 171 62 1,443
Employee and other
receivables............ -- 104 1,387
Deferred income taxes.... -- -- 26
Prepaid expenses and
other assets........... 66 130 484
----------- --------- -----------
Total current assets... 2,087 2,622 16,620
PROPERTY AND EQUIPMENT,
net...................... 46 298 3,425
OTHER ASSETS:
Goodwill, net............ -- 28 9,068
Other.................... -- 161 277
----------- --------- -----------
Total assets........... $ 2,133 $ 3,109 $ 29,390
----------- --------- -----------
----------- --------- -----------
LIABILITIES AND STOCKHOLDER
CURRENT LIABILITIES:
Accounts payable......... $ 322 $ 537 $ 3,906
Customer deposits........ 455
Accrued liabilities...... 6,946 578 12,839
Unearned revenues........ -- -- 88
Notes payable............ -- 789 6,212
Current maturities of
long-term debt......... -- 69 815
----------- --------- -----------
Total current
liabilities............ 7,268 1,973 24,315
----------- --------- -----------
LONG TERM LIABILITIES:
Long-term debt, net of
current maturities..... -- 15 595
Deferred income taxes.... -- -- 9
----------- --------- -----------
Total liabilities...... 7,268 1,988 24,919
----------- --------- -----------
MINORITY INTEREST.......... -- 119 119
STOCKHOLDERS' EQUITY:
Preferred stock.......... -- -- 3,728
Members' equity.......... (5,135) -- (4,674)
Common stock............. -- 35 188
Additional paid-in
capital................ -- 952 18,800
Young & Rubicam Inc.
investment............. -- -- 2,350
Subscription receivable
from officers.......... -- -- (10)
Retained earnings
(deficit).............. -- 222 (15,600)
Treasury stock........... -- (207) (430)
----------- --------- -----------
Total stockholders'
equity................. (5,135) 1,002 4,352
----------- --------- -----------
Total liabilities and
stockholders' equity... $ 2,133 $ 3,109 $ 29,390
----------- --------- -----------
----------- --------- -----------
</TABLE>
F-8
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED HISTORICAL STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BRAND POTOMAC
CLARANT ALIGN DIALOGUE FREE RANGE I.CON INTERACTIVE8 MULTIMEDIA PARTNERS
----------- --------- ----------- ----------- --------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................. $ -- $ 9,226 $ 7,237 $ 3,521 $ 2,140 $ 4,097 $ 2,068 $ 4,887
COST OF SERVICES......... -- 5,128 4,185 3,248 716 2,033 1,756 5,087
--- --------- ----------- ----------- --------- ------ ------ -----------
GROSS PROFIT............. -- 4,098 3,052 273 1,424 2,064 312 (200)
SELLING, GENERAL AND
ADMINISTRATIVE......... 245 4,047 2,087 4,922 1,383 2,419 275 876
INTANGIBLES
AMORTIZATION........... -- 50 -- -- -- -- -- --
OTHER INCOME (EXPENSE):
Interest income........ -- -- -- -- -- -- 6 31
Interest expense....... -- (50) -- (182) -- -- -- --
Net transactions with
affiliate............ -- -- -- 430 -- -- -- --
Loss on disposition of
assets............... -- (28) -- -- -- -- -- --
Other, net............. -- -- -- 28 -- -- -- --
--- --------- ----------- ----------- --------- ------ ------ -----------
INCOME (LOSS) BEFORE
INCOME TAXES........... (245) (77) 965 (4,373) 41 (355) 43 (1,045)
INCOME TAXES............. -- -- 403 -- 6 33 10 --
MINORITY INTEREST........ -- -- -- -- -- -- -- --
--- --------- ----------- ----------- --------- ------ ------ -----------
NET INCOME (LOSS)........ $ (245) $ (77) $ 562 $ (4,373) $ 35 $ (388) $ 33 $ (1,045)
--- --------- ----------- ----------- --------- ------ ------ -----------
--- --------- ----------- ----------- --------- ------ ------ -----------
<CAPTION>
HISTORICAL
RSI TOTAL
----------- -----------
<S> <C> <C>
REVENUES................. $ 16,927 $ 50,103
COST OF SERVICES......... 12,271 34,424
----------- -----------
GROSS PROFIT............. 4,656 15,679
SELLING, GENERAL AND
ADMINISTRATIVE......... 4,218 20,472
INTANGIBLES
AMORTIZATION........... 35 85
OTHER INCOME (EXPENSE):
Interest income........ -- 37
Interest expense....... (169) (401)
Net transactions with
affiliate............ -- 430
Loss on disposition of
assets............... -- (28)
Other, net............. -- 28
----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES........... 234 (4,812)
INCOME TAXES............. 29 481
MINORITY INTEREST........ 162 162
----------- -----------
NET INCOME (LOSS)........ $ 43 $ (5,455)
----------- -----------
----------- -----------
</TABLE>
F-9
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED HISTORICAL STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BRAND
CLARANT ALIGN DIALOGUE FREE RANGE I.CON INTERACTIVE8 MULTIMEDIA
----------- --------- ----------- ------------- ----- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES.................... $ -- $ 4,341 $ 2,701 $ 2,211 $ 825 $ 1,613 $ 742
COST OF SERVICES............ -- 2,367 1,692 1,462 250 3,102 314
----- --------- ----------- ------ ----- ------------- -----
GROSS PROFIT................ -- 1,974 1,009 749 575 (1,489) 428
SELLING, GENERAL AND
ADMINISTRATIVE............ 232 4,884 568 1,176 455 464 92
INTANGIBLES AMORTIZATION.... -- 407 -- -- -- -- --
OTHER INCOME (EXPENSE):
Interest income........... -- -- -- -- -- -- 1
Interest expense.......... -- (13) -- (89) (3) -- --
Net transactions with
affiliate............... -- -- -- -- -- -- --
Loss on disposition of
assets.................. -- -- -- -- -- -- --
Other, net................ -- -- -- (7) -- -- --
----- --------- ----------- ------ ----- ------------- -----
INCOME (LOSS) BEFORE INCOME
TAXES..................... (232) (3,330) 441 (523) 117 (1,953) 337
INCOME TAXES................ -- -- 184 -- 16 -- 135
MINORITY INTEREST........... -- -- -- -- -- -- --
----- --------- ----------- ------ ----- ------------- -----
NET INCOME (LOSS)........... $ (232) $ (3,330) $ 257 $ (523) $ 101 $ (1,953) $ 202
----- --------- ----------- ------ ----- ------------- -----
----- --------- ----------- ------ ----- ------------- -----
<CAPTION>
POTOMAC HISTORICAL
PARTNERS RSI TOTAL
----------- --------- -----------
<S> <C> <C> <C>
REVENUES.................... $ 2,060 $ 3,253 $ 17,746
COST OF SERVICES............ 6,231 2,364 17,782
----------- --------- -----------
GROSS PROFIT................ (4,171) 889 (36)
SELLING, GENERAL AND
ADMINISTRATIVE............ 489 1,705 10,065
INTANGIBLES AMORTIZATION.... -- 9 416
OTHER INCOME (EXPENSE):
Interest income........... -- -- 1
Interest expense.......... -- (24) (129)
Net transactions with
affiliate............... -- -- --
Loss on disposition of
assets.................. -- -- --
Other, net................ (10) -- (17)
----------- --------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES..................... (4,670) (849) (10,662)
INCOME TAXES................ -- (278) 57
MINORITY INTEREST........... -- (24) (24)
----------- --------- -----------
NET INCOME (LOSS)........... $ (4,670) $ (547) $ (10,695)
----------- --------- -----------
----------- --------- -----------
</TABLE>
F-10
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED HISTORICAL STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BRAND FREE
CLARANT ALIGN DIALOGUE RANGE I.CON INTERACTIVE8 MULTIMEDIA
----------- --------- ----------- --------- ----- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................... $ -- $ 1,300 $ 1,410 $ 338 $ 456 $ 737 $ 652
COST OF SERVICES........... -- 757 791 518 113 433 440
--- --------- ----------- --------- ----- ----- -----
GROSS PROFIT............... -- 543 619 (180) 343 304 212
SELLING, GENERAL AND
ADMINISTRATIVE........... -- 681 595 1,090 216 690 81
INTANGIBLES AMORTIZATION... -- 13 -- -- -- -- --
OTHER INCOME (EXPENSE):
Interest income.......... -- -- -- -- -- -- 4
Interest expense......... -- (13) -- (9) -- -- --
Other, net............... -- -- -- 20 -- -- --
--- --------- ----------- --------- ----- ----- -----
INCOME (LOSS) BEFORE INCOME
TAXES.................... -- (164) 24 (1,259) 127 (386) 135
INCOME TAXES............... -- -- 7 -- 16 -- 31
MINORITY INTEREST.......... -- -- -- -- -- -- --
--- --------- ----------- --------- ----- ----- -----
NET INCOME (LOSS).......... $ -- $ (164) $ 17 $ (1,259) $ 111 $ (386) $ 104
--- --------- ----------- --------- ----- ----- -----
--- --------- ----------- --------- ----- ----- -----
<CAPTION>
POTOMAC HISTORICAL
PARTNERS RSI TOTAL
----------- --------- -----------
<S> <C> <C> <C>
REVENUES................... $ 976 $ 4,338 $ 10,207
COST OF SERVICES........... 654 3,150 6,856
----- --------- -----------
GROSS PROFIT............... 322 1,188 3,351
SELLING, GENERAL AND
ADMINISTRATIVE........... 180 961 4,494
INTANGIBLES AMORTIZATION... -- -- 13
OTHER INCOME (EXPENSE):
Interest income.......... -- -- 4
Interest expense......... -- (41) (63)
Other, net............... 2 -- 22
----- --------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES.................... 144 186 (1,193)
INCOME TAXES............... -- 61 115
MINORITY INTEREST.......... -- 33 33
----- --------- -----------
NET INCOME (LOSS).......... $ 144 $ 92 $ (1,341)
----- --------- -----------
----- --------- -----------
</TABLE>
F-11
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
Clarant was established to create a leading single-source Internet service
company that provides electronic commerce professional services to Fortune 1000
companies, Internet based companies and other organizations. Clarant has
conducted no operations to date and will acquire its eight companies
concurrently with and as a condition to the closing of the offering.
The historical financial statements reflect the financial position and
results of operations of Clarant and the eight companies it will acquire on the
consummation of this offering. The audited historical financial statements of
Clarant and the eight companies are included elsewhere in this prospectus.
2. ACQUISITION OF THE EIGHT COMPANIES:
Concurrent with and as a condition to the closing of the offering, Clarant
will acquire eight companies. Seven companies will be acquired by merging each
into newly formed subsidiaries of Clarant. In addition, Clarant will acquire the
assets of Brand Dialogue-New York and will contribute those assets to a newly
formed subsidiary. The acquisitions will be accounted for using the purchase
method of accounting with Align Solutions Corp. the accounting acquiror.
The following table sets forth the consideration to be paid in cash and
shares of common stock to the stockholders of each company. For purposes of
computing the estimated purchase price, the value of shares is determined using
the assumed initial public offering price of $11.00 per share. No amounts have
been included for contingent consideration that may be payable to the
stockholders of each company. The estimated purchase prices for the acquisitions
are based upon preliminary estimates and are subject to certain purchase price
adjustments at and following the closing. Clarant does not anticipate that the
final allocation of purchase price between tangible assets and goodwill will
differ significantly from that presented.
<TABLE>
<CAPTION>
VALUE OF TOTAL ADJUSTED
CASH SHARES CONSIDERATION NET ASSETS GOODWILL LIFE
--------- --------- ------------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Align.......................... $ 33,840 $ 67,560 $ 101,400 $ 10,797 N/A N/A
Brand Dialogue................. -- 50,700 50,700 1,198 $ 49,502 3 years
Free Range..................... 9,310 21,090 30,400 1,056 29,344 3 years
i.con.......................... 4,489 8,911 13,400 192 13,208 3 years
InterActive8................... 10,887 19,513 30,400 126 30,274 3 years
Multimedia..................... 3,150 7,350 10,500 461 10,039 3 years
Potomac Partners............... 22,628 38,172 60,800 1,330 59,470 3 years
RSI............................ 5,160 12,040 17,200 1,002 16,198 3 years
--------- --------- ------------- ----------- -----------
$ 89,464 $ 225,336 $ 314,800 $ 16,162 208,035
--------- --------- ------------- -----------
--------- --------- ------------- -----------
Acquisition-related fees....... 1,000
-----------
$ 209,035
-----------
-----------
</TABLE>
F-12
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
The following table summarizes unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
OFFERING ADJUSTMENTS
ACQUISITION ADJUSTMENTS PRO FORMA POST
------------------------------------------ ACQUISITION -------------------- ACQUISITION
(A) (B) (C) (D) ADJUSTMENTS (E) (F) ADJUSTMENTS
--------- --------- --------- --------- ----------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......... $ -- $ -- $ -- $ -- $ -- $ 119,951 $ (89,464) $ 30,487
Accounts receivable, net.......... -- -- -- -- -- -- -- --
Unbilled revenues................. -- -- -- -- -- -- -- --
Employee and other receivables.... (1,138) -- -- -- (1,138) -- -- --
Deferred income taxes............. (26) -- -- -- (26) -- -- --
Prepaid expenses and other
assets.......................... -- -- -- -- -- (50) -- (50)
--------- --------- --------- --------- ----------- --------- --------- -----------
Total current assets................ (1,164) -- -- -- (1,164) 119,901 (89,464) 30,437
PROPERTY AND EQUIPMENT, net......... -- -- -- -- -- -- -- --
OTHER ASSETS:
Goodwill, net..................... 209,035 -- -- -- 209,035 -- -- --
Other Intangible.................. -- -- -- 4,760 4,760 -- -- --
Other............................. -- -- -- -- -- -- -- --
--------- --------- --------- --------- ----------- --------- --------- -----------
Total assets........................ $ 207,871 $ -- $ -- $ 4,760 $ 212,631 $ 119,901 $ (89,464) $ 30,437
--------- --------- --------- --------- ----------- --------- --------- -----------
--------- --------- --------- --------- ----------- --------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Payable for eight companies'
common stock.................... -- 71,202 -- -- 71,202 -- (71,202) (71,202)
Acquisition-related obligations... -- -- 18,262 -- 18,262 -- -- (18,262)
Customer deposits................. -- -- -- -- -- -- -- --
Accrued liabilities............... -- -- (8,790) -- (8,790) -- (18,262) --
Unearned revenues................. -- -- -- -- -- -- -- --
Notes payable..................... -- -- (4,114) -- (4,114) (50) -- (50)
Current maturities of long-term
debt............................ -- -- -- -- -- -- -- --
--------- --------- --------- --------- ----------- --------- --------- -----------
Total current liabilities........... -- 71,202 5,358 -- 76,560 (50) (89,464) (89,514)
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities...................... -- -- -- -- -- -- -- --
Deferred income taxes............. -- -- -- -- -- -- -- --
--------- --------- --------- --------- ----------- --------- --------- -----------
Total liabilities................... -- 71,202 5,358 -- 76,560 (50) (89,464) (89,514)
--------- --------- --------- --------- ----------- --------- --------- -----------
MINORITY INTEREST................... (119) -- -- -- (119) -- -- --
STOCKHOLDERS' EQUITY:
Preferred stock................... -- -- (3,728) -- (3,728) -- -- --
Members' equity................... 4,674 -- -- -- 4,674 -- -- --
Common stock...................... 95 -- -- -- 95 126 -- 126
Additional paid-in capital........ 193,789 (71,202) (1,630) 4,760 125,717 119,825 -- 119,825
Young & Rubicam Inc. investment... (2,350) -- -- -- (2,350) -- -- --
Subscription receivable from
officers........................ 10 -- -- -- 10 -- -- --
Retained earnings (deficit)....... 11,342 -- -- -- 11,342 -- -- --
Treasury stock.................... 430 -- -- -- 430 -- -- --
--------- --------- --------- --------- ----------- --------- --------- -----------
Total stockholders' equity.......... 207,990 (71,202) (5,358) 4,760 136,190 119,951 -- 119,951
--------- --------- --------- --------- ----------- --------- --------- -----------
Total liabilities and stockholders'
equity............................ $ 207,871 $ -- $ -- $ 4,760 $ 212,631 $ 119,901 $ (89,464) $ 30,437
--------- --------- --------- --------- ----------- --------- --------- -----------
--------- --------- --------- --------- ----------- --------- --------- -----------
</TABLE>
F-13
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------
(A) Reflects the acquisitions of the eight companies and the elimination of
equity balances of the companies. The purchase price in excess of estimated
fair market value of assets acquired has been allocated to goodwill.
(B) Records the liability for the cash portion of the consideration to be paid
for the common stock of the eight companies in connection with the
acquisitions.
(C) Records the cash liability to redeem notes payable and preferred stock of
Free Range and stock options and other equity appreciation rights of Potomac
Partners, Free Range and InterActive8.
(D) Represents the estimated value of stock options granted to Young & Rubicam
Inc.
(E) Records the cash proceeds from the issuance of shares of Clarant common
stock net of estimated offering costs and the repayment of advances from a
stockholder (based on an assumed initial public offering price of $11.00 per
share). Offering costs primarily consist of underwriting discounts and
commissions, accounting fees, legal fees and printing expenses.
(F) Records the cash portion of the acquisition consideration to be paid for the
stock of the eight companies from proceeds of the offering and cash required
to pay off acquisition-related obligations as described in adjustment (C).
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
The following tables summarize unaudited adjustments to the pro forma
combined statements of operations:
For the year ended December 31, 1998:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G) (H)
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................................... $ -- $ -- $ -- $ -- $ -- $ -- $ (219) $ --
COST OF SERVICES........................... (1,099) -- -- (1,533) -- -- (78) --
SELLING, GENERAL AND ADMINISTRATIVE........ (844) -- -- (383) -- -- (924) --
EQUITY BASED COMPENSATION EXPENSE.......... -- -- -- -- -- -- -- --
INTANGIBLES AMORTIZATION................... -- 71,265 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS.............. 1,943 (71,265) -- 1,916 -- -- 783 --
OTHER INCOME (EXPENSE):
Interest expense........................... -- -- -- -- -- -- -- 182
Net transactions with affiliate............ -- -- -- -- (430) -- -- --
Loss on disposition of assets.............. -- -- -- -- -- -- 5 --
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.......... 1,943 (71,265) -- 1,916 (430) -- 788 182
INCOME TAXES............................... -- -- (481) -- -- -- -- --
MINORITY INTEREST.......................... -- -- -- -- -- (162) -- --
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS).......................... $ 1,943 $ (71,265) $ 481 $ 1,916 $ (430) $ 162 $ 788 $ 182
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
PRO FORMA
(I) (J) ADJUSTMENTS
--------- --------- -----------
<S> <C> <C> <C>
REVENUES................................... $ -- $ -- $ (219)
COST OF SERVICES........................... -- -- (2,710)
SELLING, GENERAL AND ADMINISTRATIVE........ 5,472 (207) 3,114
EQUITY BASED COMPENSATION EXPENSE.......... -- 6,621 6,621
INTANGIBLES AMORTIZATION................... -- -- 71,265
--------- --------- -----------
INCOME (LOSS) FROM OPERATIONS.............. (5,472) (6,414) (78,509)
OTHER INCOME (EXPENSE):
Interest expense........................... -- -- 182
Net transactions with affiliate............ -- -- (430)
Loss on disposition of assets.............. -- -- 5
--------- --------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.......... (5,472) (6,414) (78,752)
INCOME TAXES............................... -- -- (481)
MINORITY INTEREST.......................... -- -- (162)
--------- --------- -----------
NET INCOME (LOSS).......................... $ (5,472) $ (6,414) $ (78,109)
--------- --------- -----------
--------- --------- -----------
</TABLE>
- ------------------------------
(A) Reflects the reductions in salaries, bonuses and benefits to the
stockholders and managers of the eight companies to which they have agreed
prospectively.
(B) Reflects the amortization of goodwill and other intangible to be recorded as
a result of these acquisitions over a period of three years. These
amortization periods were determined based on an analysis of the
characteristics of the combined company.
(C) Reflects the reversal of the eight companies' income tax provision. Clarant
has not demonstrated that it will generate future taxable income; therefore,
an asset for the pro forma loss before taxes has not been recorded.
(D) Reflects the reduction in compensation expense related to the non-recurring,
non-cash compensation charges of $248,000, $30,000 and $1,503,000 recorded
by Free Range, InterActive8 and Potomac Partners, respectively, in the
fourth quarter of 1998 related to equity appreciation rights issued to
employees and owners of those entities and the non-recurring, non-cash
charge of $135,000 recorded by InterActive8 related to the below fair market
value issuance of equity. The rights become exercisable upon the
consummation of the acquisitions.
(E) Reflects the reversal of the gain on the sale of one of the eight companies'
subsidiaries.
F-14
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
(CONTINUED)
(F) Reflects elimination of minority interest in one of the eight companies.
(G) Reflects the elimination of revenues and expenses related to a division of
Free Range that will be distributed to Free Range's stockholders concurrent
with the acquisitions. It is estimated that the assets distributed will
equal the liabilities assumed.
(H) Reflects the elimination of interest expense for Free Range's note payable
that is to be redeemed as part of the acquisition.
(I) Includes adjustments to increase expenses related to additional compensation
to corporate management and the estimated incremental costs associated with
being a public entity.
(J) Reflects a compensation charge for options granted and shares sold
subsequent to March 31, 1999 to Clarant management at less than fair market
value and the reclassification of compensation expense related to shares
sold to Clarant management at less than fair market value in 1998.
For the three months ended March 31, 1999:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G) (H)
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................................ $ -- $ -- $ -- $ -- $ -- $ -- $ (41) $ --
COST OF SERVICES........................ (274) -- -- (7,257) (43) -- -- --
SELLING, GENERAL AND ADMINISTRATIVE..... 85 -- -- (863) (3,205) -- (317) --
EQUITY BASED COMPENSATION EXPENSE....... -- -- -- -- 3,248 -- -- --
INTANGIBLES AMORTIZATION................ -- 17,816 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS........... 189 (17,816) -- 8,120 -- -- 276 --
OTHER INCOME (EXPENSE):
Interest expense........................ -- -- -- -- -- -- -- 89
Net transactions with affiliate......... -- -- -- -- -- -- -- --
Loss on disposition of assets........... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES....... 189 (17,816) -- 8,120 -- -- 276 89
INCOME TAXES............................ -- -- (57) -- -- -- -- --
MINORITY INTEREST....................... -- -- -- -- -- 24 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS)....................... $ 189 $ (17,816) $ 57 $ 8,120 $ -- $ (24) $ 276 $ 89
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
PRO FORMA
(I) (J) ADJUSTMENTS
--------- --------- -----------
<S> <C> <C> <C>
REVENUES................................ $ -- $ -- $ (41)
COST OF SERVICES........................ -- -- (7,574)
SELLING, GENERAL AND ADMINISTRATIVE..... 1,368 -- (2,932)
EQUITY BASED COMPENSATION EXPENSE....... -- 1,603 4,851
INTANGIBLES AMORTIZATION................ -- -- 17,816
--------- --------- -----------
INCOME (LOSS) FROM OPERATIONS........... (1,368) (1,603) (12,202)
OTHER INCOME (EXPENSE):
Interest expense........................ -- -- 89
Net transactions with affiliate......... -- -- --
Loss on disposition of assets........... -- -- --
--------- --------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....... (1,368) (1,603) (12,113)
INCOME TAXES............................ -- -- (57)
MINORITY INTEREST....................... -- -- 24
--------- --------- -----------
NET INCOME (LOSS)....................... $ (1,368) $ (1,603) $ (12,080)
--------- --------- -----------
--------- --------- -----------
</TABLE>
- ------------------------------
(A) Reflects the (reductions) and increases in salaries, bonuses and benefits to
the stockholders and managers of the eight companies to which they have
agreed prospectively.
(B) Reflects the amortization of goodwill and other intangible to be recorded as
a result of these acquisitions over a period of three years. These
amortization periods were determined based on an analysis of the
characteristics of the combined company.
(C) Reflects the reversal of the eight companies' income tax provision. Clarant
has not demonstrated that it will generate future taxable income; therefore,
a net deferred tax asset for the pro forma loss before taxes has not been
recognized.
(D) Reflects the reduction in 1999 compensation expense related to the
non-recurring, non-cash charges of $133,000, $2,295,000 and $4,962,000
recorded by Free Range, InterActive8 and Potomac Partners, respectively, in
the first quarter of 1999 related to equity appreciation rights issued to
employees and owners of those entities and the non-recurring, non-cash
compensation charge of $730,000 recorded by RSI in the first quarter of 1999
related to the issuance of additional minority interest. The rights become
exercisable upon the consummation of the acquisitions.
(E) Reflects the reclassification of compensation expense related to stock
options granted at prices below fair market value for the accounting
acquiror Align.
(F) Reflects the elimination of minority interest in one of the eight companies.
(G) Reflects the elimination of revenues and expenses related to a division of
Free Range that will be distributed to Free Range's stockholders concurrent
with the acquisitions. It is estimated that the assets distributed will
equal the liabilities assumed.
(H) Reflects the elimination of interest expense for Free Range's note payable
that is to be redeemed as part of the acquisition.
F-15
<PAGE>
CLARANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
(CONTINUED)
(I) Includes adjustments to increase expenses related to additional compensation
to corporate management and the estimated incremental costs associated with
being a public entity.
(J) Reflects a compensation charge for options granted and shares sold
subsequent to March 31, 1999 to Clarant management at less than fair market
value and the reclassification of compensation expense related to shares
sold to Clarant management at less than fair market value in 1998.
For the three months ended March 31, 1998:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G)
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES........................................... $ -- $ -- $ -- $ -- $ (3) $ -- $ --
COST OF SERVICES................................... (164) -- -- -- (20) -- --
SELLING, GENERAL AND ADMINISTRATIVE................ 204 -- -- -- (158) -- 1,368
EQUITY BASED COMPENSATION EXPENSE.................. -- -- -- -- -- -- --
INTANGIBLES AMORTIZATION........................... -- 17,816 -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS...................... (40) (17,816) -- -- 175 -- (1,368)
OTHER INCOME (EXPENSE):
Interest expense................................... -- -- -- -- -- 9 --
Net transactions with affiliate.................... -- -- -- -- -- -- --
Loss on disposition of assets...................... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.................. (40) (17,816) -- -- 175 9 (1,368)
INCOME TAXES....................................... -- -- (115) -- -- -- --
MINORITY INTEREST.................................. -- -- -- (33) -- -- --
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS).................................. $ (40) $ (17,816) $ 115 $ 33 $ 175 $ 9 $ (1,368)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
PRO FORMA
(H) ADJUSTMENTS
--------- ---------------
<S> <C> <C>
REVENUES........................................... $ -- $ (3)
COST OF SERVICES................................... -- (184)
SELLING, GENERAL AND ADMINISTRATIVE................ -- 1,414
EQUITY BASED COMPENSATION EXPENSE.................. 1,655 1,655
INTANGIBLES AMORTIZATION........................... -- 17,816
--------- ---------------
INCOME (LOSS) FROM OPERATIONS...................... (1,655) (20,704)
OTHER INCOME (EXPENSE):
Interest expense................................... -- 9
Net transactions with affiliate.................... -- --
Loss on disposition of assets...................... -- --
--------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES.................. (1,655) (20,695)
INCOME TAXES....................................... -- (115)
MINORITY INTEREST.................................. -- (33)
--------- ---------------
NET INCOME (LOSS).................................. $ (1,655) $ (20,547)
--------- ---------------
--------- ---------------
</TABLE>
- ------------------------------
(A) Reflects the (reductions) and increases in salaries, bonuses and benefits to
the stockholders and managers of the eight companies to which they have
agreed prospectively.
(B) Reflects the amortization of goodwill and other intangible to be recorded as
a result of these acquisitions over a period of three years. These
amortization periods were determined based on an analysis of the
characteristics of the combined company.
(C) Reflects the reversal of the eight companies' income tax provision. Clarant
has not demonstrated that it will generate future taxable income; therefore,
an asset for the pro forma loss before taxes has not been recorded.
(D) Reflects the elimination of minority interest in one of the eight companies.
(E) Reflects the elimination of revenues and expenses related to a division of
Free Range that will be distributed to Free Range's stockholders concurrent
with the acquisitions. It is estimated that the assets distributed will
equal the liabilities assumed.
(F) Reflects the elimination of interest expense for Free Range's note payable
that is to be redeemed as part of the acquisition.
(G) Includes adjustments to increase expenses related to additional compensation
to corporate management and the estimated incremental costs associated with
being a public entity.
(H) Reflects a compensation charge for options granted and shares sold to
Clarant management at less than fair market value.
5. SHARES USED IN COMPUTING PRO FORMA NET INCOME PER SHARE:
Includes (i) 7,848,966 shares issued to the initial stockholders and
management of Clarant; (ii) 20,485,125 shares issued to the former owners of the
eight companies; and (iii) shares sold in the offering, without regard to
exercise of underwriters' overallotment option and payment of any contingent
consideration.
F-16
<PAGE>
AFTER THE STOCK SPLIT AND INCREASE IN THE NUMBER OF AUTHORIZED COMMON STOCK
DISCUSSED IN NOTE 5 TO THE COMPANY'S FINANCIAL STATEMENTS IS EFFECTED, WE EXPECT
TO BE IN A POSITION TO RENDER THE FOLLOWING AUDIT REPORT.
ARTHUR ANDERSEN LLP
Dallas, Texas,
June , 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Clarant Worldwide Corporation:
We have audited the accompanying balance sheet of Clarant Worldwide
Corporation as of December 31, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the period from inception (August 21,
1998), to December 31, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Clarant Worldwide
Corporation as of December 31, 1998, and the results of its operations and its
cash flows for the period from inception (August 21, 1998), to December 31,
1998, in conformity with generally accepted accounting principles.
F-17
<PAGE>
CLARANT WORLDWIDE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
CASH AND CASH EQUIVALENTS............................................................. $ 111,919 $ 6,261
DEFERRED COSTS........................................................................ 49,729 49,729
------------ -----------
Total assets...................................................................... $ 161,648 $ 55,990
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE...................................................................... $ -- $ 76,250
NOTES PAYABLE......................................................................... -- 50,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value, 100,000,000 shares authorized; 7,848,966 shares issued
and outstanding as of 1998 and 1999 (unaudited)................................... 78,490 78,490
Additional paid-in capital.......................................................... 328,511 328,511
Retained deficit.................................................................... (245,353) (477,261)
------------ -----------
Total stockholders' equity........................................................ 161,648 (70,260)
------------ -----------
Total liabilities and stockholders' equity........................................ $ 161,648 $ 55,990
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
CLARANT WORLDWIDE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
(AUGUST 21,
1998) THREE MONTHS
TO ENDED
DECEMBER 31, MARCH 31,
1998 1999
---------------- -------------
<S> <C> <C>
(UNAUDITED)
REVENUES......................................................................... $ -- $ --
COST OF SERVICES................................................................. -- --
---------------- -------------
GROSS PROFIT..................................................................... -- --
SELLING, GENERAL AND ADMINISTRATIVE.............................................. 245,353 231,908
---------------- -------------
LOSS BEFORE INCOME TAXES......................................................... (245,353) (231,908)
INCOME TAXES..................................................................... -- --
---------------- -------------
NET LOSS......................................................................... $ (245,353) $ (231,908)
---------------- -------------
---------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
CLARANT WORLDWIDE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, August 21, 1998 (inception)............................. -- $ -- $ -- $ --
Issuance of common stock....................................... 7,848,966 78,490 121,511 --
Equity related compensation.................................... -- -- 207,000 --
Net loss....................................................... -- -- -- (245,353)
---------- --------- ---------- -----------
BALANCE, December 31, 1998....................................... 7,848,966 78,490 328,511 (245,353)
Net loss (unaudited)........................................... -- -- -- (231,908)
---------- --------- ---------- -----------
BALANCE, March 31, 1999 (unaudited).............................. 7,848,966 $ 78,490 $ 328,511 $ (477,261)
---------- --------- ---------- -----------
---------- --------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
CLARANT WORLDWIDE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
(AUGUST 21,
1998) THREE MONTHS
TO ENDED
DECEMBER 31, MARCH 31,
1998 1999
---------------- -------------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $ (245,353) $ (231,908)
Equity related compensation.................................................... 207,000 --
Adjustments to reconcile net loss to net cash used in operating activities-
Changes in assets and liabilities-
Deferred costs............................................................. (49,729) --
Accounts payable........................................................... -- 76,250
---------------- -------------
Net cash used in operating activities.................................... (88,082) (155,658)
---------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................................................... -- 50,000
Proceeds from issuance of common stock......................................... 200,001 --
---------------- -------------
Net cash provided by financing activities................................ 200,001 50,000
---------------- -------------
NET INCREASE (DECREASE) IN CASH.................................................. 111,919 (105,658)
CASH AND CASH EQUIVALENTS, beginning of period................................... -- 111,919
---------------- -------------
CASH AND CASH EQUIVALENTS, end of period......................................... $ 111,919 $ 6,261
---------------- -------------
---------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
CLARANT WORLDWIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Clarant Worldwide Corporation, a Delaware corporation (the "Company"), was
founded in August 1998, to provide a new category of professional services
called Internet-centric professional services, enabling businesses centered
primarily or exclusively on the Internet to conduct their business.
The Company's operations to date have consisted primarily of identifying and
negotiating for the acquisition of existing Internet consulting companies. The
Company plans to make an initial public offering and simultaneously exchange
cash and shares of its common stock for the acquisition of eight Internet
consulting companies (the "Companies").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
DEFERRED COSTS
As of December 31, 1998, costs of $49,729 have been incurred in connection
with this offering. Such costs will be recorded as a reduction to equity upon
consummation of this offering.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets is based on
provisions of the enacted tax law. The effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefit that, based on available evidence,
is not expected to be realized. Due to the uncertainty of the ability of the
Company to generate future taxable income, the tax benefit of the Company's loss
has been fully reserved.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to their relative short maturity and/or their variable interest
rates.
F-22
<PAGE>
CLARANT WORLDWIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCOUNTING FOR EQUITY BASED COMPENSATION
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value
based method of accounting for stock-based compensation or continuation under
Accounting Principles Board opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has chosen to account for stock-based
compensation using the intrinsic value based method prescribed in APB 25 and to
provide the pro forma disclosure provision of SFAS 123. Accordingly,
compensation cost for stock options and other equity related transactions is
measured as the excess, if any, of the fair market value of the Company's stock
over the exercise price at the date of the grant.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards of derivative instruments including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement is in effect for all quarters of fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of this standard to have
a material effect on the Company's results of operations, financial position, or
cash flows.
3. DEBT:
The Company has a line of credit with a maximum availability of $3 million,
with its largest stockholder, Commonwealth Principals II LLC ("Commonwealth").
Interest is at prime (7.75% at December 31, 1998), and the line of credit
matures on the closing of this offering. There are no outstanding borrowings as
of December 31, 1998.
4. EQUITY INCENTIVE PLANS:
Under the terms of an employment agreement, as of the effective date of the
Offering, the Company's President will be granted options to purchase up to 5%
of the total outstanding shares of common stock at the initial public offering
price.
As of December 31, 1998, there are no options outstanding.
In January 1999, under the terms of an employment agreement, as of the
effective date of the Offering and subject to consent of the underwriters, the
Company's Chief Financial Officer will be issued options to purchase up to 2% of
the total outstanding shares of common stock at $.01 per share. The options will
become exercisable over three years and have a term of up to ten years. This
will
F-23
<PAGE>
CLARANT WORLDWIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. EQUITY INCENTIVE PLANS: (CONTINUED)
result in compensation expense equal to the difference between the offering
price and option price recognized as the options become exercisable.
In February 1999, under the terms of an employment agreement, as of the
effective date of the offering and subject to consent of the underwriters, the
Company's Executive Vice President, will be issued options to purchase 1% of the
total outstanding shares of common stock at the offering price. The options will
become exercisable upon the Offering and have a term of ten years.
5. EQUITY:
The Company intends to effect a stock split and increase the number of
authorized common stock effective on the day preceding the completion of the
offering. The effects of the common stock split and the increase in the shares
of authorized common stock have been retroactively reflected in the balance
sheet and the accompanying notes.
In connection with the organization of the Company, 7,135,424 shares of
common stock were issued to Commonwealth. Upon signing his employment agreement
in September 1998, 713,542 shares of common stock were issued to the President
of the Company for $200,000. The Board of Directors has determined that these
shares were issued at fair market value. In addition in September 1998,
Commonwealth transferred 738,514 shares to the President resulting in an equity
related compensation expense of approximately $207,000.
6. RELATED-PARTY TRANSACTIONS:
In September 1998, the Company entered into a management services agreement
with Commonwealth to provide consulting and financial advisory services. The
agreement terminates at the earlier of the closing of the offering or September
2000. For the period ended December 31, 1998, approximately $49,000 was paid to
Commonwealth for providing services. These costs are related to the offering and
are included in deferred costs in the accompanying balance sheet. In addition,
Commonwealth has provided the Company with a line of credit as discussed in Note
3.
7. SUBSEQUENT EVENTS:
The Company has signed definitive agreements to acquire all of the common
stock and ownership interests of the Companies to be consummated simultaneously
with the closing of the offering. The companies to be acquired are Align
Solutions Corp., Brand Dialogue New York, Free Range Media, Inc., Integrated
Consulting, Inc. (dba as i.con interactive), Interactive8, Inc., Multimedia
Resources, LLC, Potomac Partners Management Consulting, LLC, and RSI Group, Inc.
Subsequent to December 31, 1998, two officers of the Company purchased
549,438 shares and 313,964 shares of common stock for $500,000 and $400,000. The
Board of Directors has determined that these shares were issued at less than
fair market value. The Company will recognize compensation expense of
approximately $3,400,000 in the second quarter of 1999.
F-24
<PAGE>
CLARANT WORLDWIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SUBSEQUENT EVENTS:
The following pro forma information shows the Company's revenues and net
income as if the transaction referred to above had occurred on January 1, 1998.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
Pro forma revenues (unaudited)............................ $ 49,884 $ 17,705
Pro forma net loss (unaudited)............................ (78,353) (21,524)
</TABLE>
F-25
<PAGE>
CLARANT WORLDWIDE CORP.
NOTES TO THE UNAUDITED MARCH 31, 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
condition as of March 31, 1999, the results of its operations and its cash flows
for the three-month period ended March 31, 1999. These financial statements
should be read in conjunction with the Company's audited 1998 financial
statements, including the notes thereto. Operating results for the three-month
period ended March 31, 1999, are not necessarily indicative of the operating
results that may be expected for the year ending December 31, 1999.
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Align Solutions Corp.:
We have audited the accompanying balance sheets of Align Solutions Corp. (a
Delaware S Corporation) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1998, and for the period from
inception (October 16, 1996), to December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Align Solutions Corp. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1998, and for the
period from inception (October 16, 1996), to December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 4, 1999
F-27
<PAGE>
ALIGN SOLUTIONS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 10,977 $ -- $ 208,700
Accounts receivable, net of allowance for doubtful accounts of
$71,229, $115,068, and $145,068 (unaudited)....................... 880,085 2,161,521 2,396,769
Note receivable..................................................... -- -- 35,000
Unbilled revenues................................................... 43,860 10,520 805,559
Prepaid expenses and other.......................................... 37,778 74,219 81,174
------------ ------------ -------------
Total current assets.............................................. 972,700 2,246,260 3,527,202
PROPERTY AND EQUIPMENT, net........................................... 259,901 776,185 908,405
OTHER ASSETS:
Goodwill, net of amortization of $58,333, $108,333, and $515,186
(unaudited)....................................................... 91,667 41,667 9,040,419
Other............................................................... 3,500 1,673 13,910
------------ ------------ -------------
Total assets...................................................... $ 1,327,768 $ 3,065,785 $ 13,489,936
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including cash overdraft of $0, $105,191, and $0
(unaudited)....................................................... $ 144,994 $ 332,021 $ 895,962
Accrued liabilities................................................. 85,343 713,842 431,263
Notes payable....................................................... 200,000 325,000 1,111,274
Current maturities of long-term debt................................ 64,191 70,870 111,851
------------ ------------ -------------
Total current liabilities......................................... 494,528 1,441,733 2,550,350
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities........................... 232,573 155,791 142,618
------------ ------------ -------------
Total liabilities................................................. 727,101 1,597,524 2,692,968
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock: $.01 par value, 1,000,000 shares authorized, none
issued and outstanding as of 1997, 1998 and 1999.................. -- -- --
Common stock: $.01 par value, 10,000,000 shares authorized,
4,875,000, 5,584,804 and 6,390,540 (unaudited) shares issued and
outstanding as of 1997, 1998, and 1999............................ 48,750 55,848 63,905
Additional paid-in capital.......................................... 926,250 1,863,192 14,514,270
Retained deficit.................................................... (374,333) (450,779) (3,781,207)
------------ ------------ -------------
Total stockholders' equity........................................ 600,667 1,468,261 10,796,968
------------ ------------ -------------
Total liabilities and stockholders' equity........................ $ 1,327,768 $ 3,065,785 $ 13,489,936
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
ALIGN SOLUTIONS CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE
(OCTOBER 16, FOR THE YEAR ENDED THREE MONTHS ENDED
1996) DECEMBER 31, MARCH 31,
TO DECEMBER 31, -------------------------- ----------------------------
1996 1997 1998 1998 1999
----------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES............................ $ 111,858 $ 3,268,071 $ 9,226,127 $ 1,299,492 $ 4,341,077
COST OF SERVICES.................... 79,702 1,783,336 5,128,460 757,071 2,366,986
----------------- ------------ ------------ ------------- -------------
GROSS PROFIT........................ 32,156 1,484,735 4,097,667 542,421 1,974,091
SELLING, GENERAL AND
ADMINISTRATIVE.................... 233,104 1,634,220 4,096,638 693,862 5,291,795
OTHER INCOME (EXPENSE):
Interest expense.................. -- (26,145) (49,825) (12,750) (12,724)
Loss on disposition of assets..... -- -- (27,650) -- --
Other income...................... 399 1,846 -- -- --
----------------- ------------ ------------ ------------- -------------
NET LOSS............................ $ (200,549) $ (173,784) $ (76,446) $ (164,191) $ (3,330,428)
----------------- ------------ ------------ ------------- -------------
----------------- ------------ ------------ ------------- -------------
PRO FORMA INCOME TAX (UNAUDITED).... -- -- -- -- --
----------------- ------------ ------------ ------------- -------------
PRO FORMA NET LOSS (UNAUDITED)...... $ (200,549) $ (173,784) $ (76,446) $ (164,191) $ (3,330,428)
----------------- ------------ ------------ ------------- -------------
----------------- ------------ ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
ALIGN SOLUTIONS CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT
---------- --------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, October 16, 1996 (inception)....................... -- $ -- $ -- $ --
Issuance of common stock.................................. 3,845,200 38,452 730,588 --
Net loss.................................................. -- -- -- (200,549)
---------- --------- ------------- -------------
BALANCE, December 31, 1996.................................. 3,845,200 38,452 730,588 (200,549)
Issuance of common stock.................................. 1,029,800 10,298 195,662 --
Net loss.................................................. -- -- -- (173,784)
---------- --------- ------------- -------------
BALANCE, December 31, 1997.................................. 4,875,000 48,750 926,250 (374,333)
Issuance of common stock.................................. 709,804 7,098 936,942 --
Net loss.................................................. -- -- -- (76,446)
---------- --------- ------------- -------------
BALANCE, December 31, 1998.................................. 5,584,804 55,848 1,863,192 (450,779)
Issuance of common stock (unaudited)...................... 805,736 8,057 9,402,939 --
Equity related compensation (unaudited)................... -- -- 3,248,139 --
Net loss (unaudited)...................................... -- -- -- (3,330,428)
---------- --------- ------------- -------------
BALANCE, March 31, 1999 (unaudited)......................... 6,390,540 $ 63,905 $ 14,514,270 $ (3,781,207)
---------- --------- ------------- -------------
---------- --------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
ALIGN SOLUTIONS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 16, FOR THE
1996) FOR THE YEAR ENDED THREE MONTHS ENDED
TO DECEMBER 31, MARCH 31,
DECEMBER 31, --------------------- ---------------------
1996 1997 1998 1998 1999
----------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $(200,549) $(173,784) $ (76,446) $(164,191) $(3,330,428)
Equity related compensation.................. -- -- -- -- 3,248,139
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization.............. 14,816 129,184 272,588 47,297 505,747
Loss on disposition of assets.............. -- -- 27,650 -- --
Changes in assets and liabilities--
Accounts receivable...................... (60,615) (819,470) (1,281,436) (163,821) 142,450
Unbilled revenues........................ (43,288) (572) 33,340 43,860 (608,871)
Prepaid expenses and other............... (16,051) (21,727) (36,441) (32,802) 9,623
Other assets............................. -- (3,500) 1,827 (1,498) (124,875)
Accounts payable, including cash
overdraft.............................. 17,351 127,643 187,027 (9,713) 332,521
Accrued liabilities...................... 8,862 76,481 628,499 98,842 (408,537)
----------------- --------- ---------- --------- ----------
Net cash used in operating
activities........................... (279,474) (685,745) (243,392) (182,026) (234,231)
----------------- --------- ---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable.............................. -- -- -- -- (35,000)
Capital expenditures......................... (122,072) (158,211) (766,522) (238,841) (173,655)
----------------- --------- ---------- --------- ----------
Net cash used in investing
activities........................... (122,072) (158,211) (766,522) (238,841) (208,655)
----------------- --------- ---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................. 48,602 151,398 125,000 201,294 629,998
Proceeds from long-term debt................. -- 300,000 -- -- 39,619
Payments on long-term debt................... -- (18,521) (70,103) (17,330) (18,031)
Proceeds from issuance of common stock....... 569,040 205,960 944,040 240,000 --
----------------- --------- ---------- --------- ----------
Net cash provided by financing
activities........................... 617,642 638,837 998,937 423,964 651,586
----------------- --------- ---------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 216,096 (205,119) (10,977) 3,097 208,700
CASH AND CASH EQUIVALENTS,
beginning of period.......................... -- 216,096 10,977 10,977 --
----------------- --------- ---------- --------- ----------
CASH AND CASH EQUIVALENTS,
end of period................................ $ 216,096 $ 10,977 $ -- $ 14,074 $ 208,700
----------------- --------- ---------- --------- ----------
----------------- --------- ---------- --------- ----------
SUPPLEMENTAL INFORMATION:
Cash paid for interest......................... $ -- $ 24,931 $ 48,813 $ 12,525 $ 12,724
----------------- --------- ---------- --------- ----------
----------------- --------- ---------- --------- ----------
NON-CASH TRANSACTIONS:
Common stock issued for tangible and intangible
assets....................................... $ 200,000 $ -- $ -- $ -- $ --
----------------- --------- ---------- --------- ----------
----------------- --------- ---------- --------- ----------
Capital expenditures financed with long-term
debt......................................... $ -- $ 15,285 $ -- $ -- $ --
----------------- --------- ---------- --------- ----------
----------------- --------- ---------- --------- ----------
Acquisition of Synapse through issuance of
common stock................................. $ -- $ -- $ -- $ -- $9,402,939
----------------- --------- ---------- --------- ----------
----------------- --------- ---------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Align Solutions Corp. (the "Company") is an interactive services and
information technology consulting firm focused on helping companies achieve
their Internet and e-commerce business objectives through the use of enabling
technologies. The areas of focus include Internet and intranet applications,
document management, system integration, and creative/new media. The Company was
incorporated in the State of Delaware in October 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using a
straight-line method over the estimated useful lives of the assets. The costs
and related accumulated depreciation of property and equipment sold, retired, or
disposed of are removed from the accounts and any gains or losses are reflected
in the statements of operations. Expenditures for major acquisitions and
improvements are capitalized while expenditures for maintenance and repairs are
expensed as incurred.
GOODWILL
Goodwill represents the excess of the aggregate consideration paid by the
Company over the fair value of assets acquired. Goodwill is amortized on a
straight-line basis over three years. Amortization expense totaled $8,667,
$50,000, and $50,000 for the periods ended December 31, 1996, 1997, and 1998,
respectively.
INCOME TAXES
As an S corporation, the Company pays no federal income tax but rather the
stockholders are taxed individually on the Company's taxable income or loss.
Accordingly, no provisions for federal income taxes are reflected in the
accompanying financial statements.
The unaudited pro forma tax information included in the accompanying
statements of operations reflect estimates of the Company's tax provision or
benefit as if it had been a C corporation in fiscal years 1996, 1997, and 1998.
In accordance with SFAS No. 109, "Accounting for Income Taxes," no pro forma tax
benefit was reflected due to the Company's recurring losses and the uncertainty
related to the realization of any tax assets.
REVENUE RECOGNITION
Revenues are recognized for time and materials-based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues and gross profit
are recognized as the work is performed, based on the ratio of costs incurred to
total estimated costs. Unbilled revenues on contracts are comprised of labor
costs incurred, plus earnings on certain contracts which have not been billed.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
F-32
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COST OF SERVICES
Cost of services is comprised primarily of salaries, employee benefits,
incentive compensation of billable employees, and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
ACCOUNTING FOR STOCK BASED COMPENSATION
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value
based method of accounting for stock-based compensation or continuation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has chosen to account for stock-based
compensation using the intrinsic value based method prescribed in APB 25 and
provide the pro forma disclosure provision of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair market value of the Company's stock over the exercise price at the date of
the grant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to their relative short maturity and/or their variable interest
rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME" which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement is in effect for all quarters of fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of this standard to have
a material effect on its results of operations, financial condition, or cash
flows.
F-33
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT CUSTOMERS:
During the year ended December 31, 1997, sales to the Company's two largest
customers accounted for 14% and 12% of revenues. During the year ended December
31, 1998, sales to the Company's two largest customers accounted for 21% and 19%
of revenue.
As of December 31, 1998, accounts receivable from two customers accounted
for 17% and 30% of total accounts receivable.
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
----------- ---------- ------------
<S> <C> <C> <C>
Furniture and fixtures......................................................... 5-7 $ 55,656 $ 140,781
Computers and equipment........................................................ 2-4 289,912 781,505
Leasehold improvements......................................................... 3-4 -- 63,497
Construction-in-progress....................................................... -- -- 75,278
---------- ------------
345,568 1,061,061
Less--Accumulated depreciation................................................. (85,667) (284,876)
---------- ------------
Property and equipment, net.................................................... $ 259,901 $ 776,185
---------- ------------
---------- ------------
</TABLE>
Depreciation expense was $6,483, $79,184 and $222,588 for the periods ended
December 31, 1996, 1997, and 1998, respectively.
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Accrued bonus.............................................................................. $ -- $ 667,870
Accrued salaries........................................................................... 33,775 --
Accrued legal.............................................................................. 4,602 38,822
Accrued property and sales taxes........................................................... 9,610 7,150
Other...................................................................................... 37,356 --
--------- ----------
Accrued liabilities........................................................................ $ 85,343 $ 713,842
--------- ----------
--------- ----------
</TABLE>
6. DEBT:
NOTES PAYABLE
The Company has a bank line of credit with a maximum availability of
$550,000. Interest is at prime plus 1% (8.75% at December 31, 1998), and is
payable monthly. The line of credit is due on demand, matures in July 1999, and
is secured by accounts receivable and the personal guarantees of certain
stockholders. The terms of the line of credit agreement include customary
covenants that limit the Company's ability to incur further debt and require the
Company to maintain certain minimum
F-34
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. DEBT: (CONTINUED)
levels of tangible net worth and liquidity ratios. Subsequent to year-end, the
Company renewed the line of credit with a new maturity date of March 2000.
LONG-TERM DEBT
Long-term debt is comprised of the following as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Note payable to a bank bearing interest at prime plus 1% (8.75% at December 31, 1998),
payable in monthly installments of principal and interest of $7,557, maturing October
2001; secured by accounts receivable, equipment, and the personal guarantees of certain
stockholders............................................................................ $ 284,489 $ 217,982
Equipment financing, non-interest bearing, payable in monthly installments of $384,
maturing February 2001, secured by certain equipment 12,275 8,679
---------- ----------
296,764 226,661
Less--Current portion..................................................................... (64,191) (70,870)
---------- ----------
Long-term debt............................................................................ $ 232,573 $ 155,791
---------- ----------
---------- ----------
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1999.......................................................................... $ 70,870
2000.......................................................................... 84,085
2001.......................................................................... 71,706
----------
$ 226,661
----------
----------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
The Company leases office space in Houston and Dallas, Texas, under
operating lease agreements.
Future minimum annual lease payments under these leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1999.......................................................................... $ 182,739
2000.......................................................................... 181,241
2001.......................................................................... 120,827
2002.......................................................................... --
2003 and thereafter........................................................... --
----------
Total future minimum lease payments........................................... $ 484,807
----------
----------
</TABLE>
Rent expense for the periods ended December 31, 1996, 1997, and 1998 under
these agreements was $7,898, $42,130 and $107,194, respectively.
F-35
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on financial position or results of operations.
8. EQUITY INCENTIVE PLANS:
Effective August 26, 1997, the Company approved the 1997 Stock Option Plan
(the "1997 Plan") authorizing the Board of Directors to grant incentive or
nonqualified options to purchase common stock of the Company. The total number
of shares of common stock that may be issued under the 1997 Plan is 2,500,000.
The 1997 Plan is administered by the Compensation Committee of the Board of
Directors which determines the number of stock options to be granted, the
exercise or purchase price, vesting terms, and expiration date. Nonqualified
stock options may be granted at exercise prices which are greater than or equal
to 80% of the fair market value of the common stock on the grant date.
The exercise price of options qualifying as incentive stock options under
Section 422 of the Internal Revenue Code may not be less than the fair market
value of the common stock on the grant date. Incentive stock options granted to
any 10% stockholder may not be less than 110% of the fair market value of the
common stock on the grant date. Stock options granted under the 1997 Plan are
nontransferable and generally expire ten years after the date of grant, except
in the case of a 10% stockholder whose incentive stock options shall expire five
years from the date of grant. Upon certain events in which all of the
outstanding shares of common stock of the Company are acquired by an unrelated
party, the optionee's schedule shall be accelerated to provide that optionee
with immediate exercisability of the unexercisable options granted. All options
granted become exercisable over a five-year period of continued employment.
Options outstanding at December 31, 1996, 1997, and 1998, and granted,
exercised and cancelled during those years were as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Options outstanding at December 31, 1996............................................ -- $ --
Granted........................................................................... 613,000 .20
Exercised......................................................................... -- --
Canceled.......................................................................... -- --
-----------
Options outstanding at December 31, 1997............................................ 613,000 .20
Granted........................................................................... 393,800 1.19
Exercised......................................................................... -- --
Canceled.......................................................................... (53,200) .25
-----------
Options outstanding at December 31, 1998............................................ 953,600 $ .61
-----------
-----------
</TABLE>
Following is summary information about stock options outstanding at December
31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE
RANGE OF NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF
EXERCISE PRICES SHARES CONTRACT LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------- ----------- ------------------- ----------------- ------------- ---------------
$0.20 to $0.22 622,000 9.00 $ 0.20 -- $ --
$1.33 to $2.50 331,600 9.45 $ 1.37 -- $ --
</TABLE>
F-36
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY INCENTIVE PLANS: (CONTINUED)
Pro forma information regarding net income has been determined as if the
Company has accounted for its stock options under the fair value method of SFAS
123. The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions used for 1997:
an exercisable event occurring in five years; a risk-free interest rate of
6.25%; a dividend yield of 0%; and an expected option life with graded vesting.
The assumptions used to price options granted during 1998 were: an exercisable
event occurring in four years; risk-free interest rates ranging from 4.38% to
5.72%; a dividend yield of 0%; and an expected option life with graded vesting.
The average Black-Scholes fair values at date of grant for options granted
during the years ended December 31, 1997 and 1998, were $0.05 and $0.25 per
option, respectively.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date consistent with the provisions of SFAS
123, the Company's net loss would have been as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
Net loss--as reported................................................ $ (173,784) $ (76,446)
Net loss--pro forma.................................................. (176,734) (90,143)
</TABLE>
9. RELATED-PARTY TRANSACTIONS:
The Company uses a third party to administer the Company's payroll and
related benefits. The Company also provides consulting services to its payroll
and benefits provider. The Company provided services of $1,908,278 to this
entity during the year ended December 31, 1998 (included in revenues for the
year ended December 31, 1998). The Company believes these services are stated at
fair market value.
The Company has an outstanding accounts receivable balance of $375,008 at
December 31, 1998, from its payroll and benefits provider for services provided.
10. SUBSEQUENT EVENTS:
On February 16, 1999, the Company acquired Synapse Group, Inc. ("Synapse")
in a business combination accounted for as a purchase. Synapse engages in
Internet consulting and was purchased by the Company through the issuance of
805,736 shares of the Company's common stock.
On April 30, 1999, the Company signed a letter of intent to acquire Fifth
Gear Media Corporation ("Fifth Gear") for 300,000 shares of common stock. Fifth
Gear engages in Internet consulting. The Company anticipates this transaction
will be completed by May 31, 1999.
On April 28, 1999, the Company signed a letter of intent to acquire inmedia,
inc ("inmedia") for 140,000 shares of common stock and approximately $660,000 in
cash. inmedia is a provider of interactive multimedia training. The Company
anticipates this transaction will be completed by May 31, 1999.
The Company has entered into an agreement to be acquired by Clarant. This
acquisition is subject to successful completion of an initial public offering of
the common stock of Clarant.
F-37
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS:
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to and Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
condition as of March 31, 1999, the results of its operations and its cash flows
for the three-month periods ended March 31, 1998 and 1999. These financial
statements should be read in conjunction with the Company's audited 1998
financial statements, including the notes thereto. Operating results for the
three-month period ended March 31, 1999, are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 1999.
B. BUSINESS COMBINATION:
On February 16, 1999, the Company acquired Synapse in a business combination
accounted for as a purchase. Synapse engages in Internet consulting and was
purchased by the Company through the issuance of 805,736 shares of the Company's
common stock. The estimated fair market value of the shares of common stock used
to purchase Synapse was $11.68. Goodwill of $9,146,805 was recorded in
connection with this transaction, and is being amortized on a straight-line
basis with a useful life of three years.
C. NOTE RECEIVABLE:
The Company advanced $35,000 to inmedia, inc. during the period ended March
31, 1999. The note is due on February 18, 2000. Interest is payable on September
1, 1999 and at maturity at a rate of 8%.
D. DEBT:
The Company renewed its bank line of credit during the first quarter. The
bank line of credit has a maximum availability of $1,200,000, is due on demand,
and matures in March 2000. Interest is at prime plus 1% (8.75% at March 31,
1999) and is payable monthly.
E. EQUITY INCENTIVE PLANS:
During the three months ended March 31, 1999 options were granted with an
exercise price less than the estimated fair market value on the date of grant.
The Company recognized $3,243,968 of compensation expense in connection with
these stock option grants in 1999.
F-38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Young & Rubicam Inc.
In our opinion, the accompanying balance sheets and related statements of
operations and of cash flows present fairly, in all material respects, the
financial position of Brand Dialogue - New York (a wholly owned business of
Young & Rubicam Inc.), at December 31, 1997 and 1998 and the results of its
operations and its cash flows for the period April 1, 1996 (inception) through
December 31, 1996, and for the years ended December 31, 1997 and 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Brand Dialogue - New York's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Brand Dialogue - New York is a wholly owned business of Young & Rubicam Inc.,
and as further described in the notes to the financial statements, has extensive
transactions with Young & Rubicam Inc., its subsidiaries, affiliates, and
clients. Because of these relationships, it is possible that the terms of these
transactions are not the same as those that would result from transactions among
unrelated parties.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
May 24, 1999, except for Note 8 which
is as of June 3, 1999
F-39
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Accounts receivable.............................................................. $ 645 $ 683 $ 2,867
Costs billable to clients........................................................ 21 17
Due from related parties, net.................................................... 546 973 1,138
--------- --------- -----------
TOTAL CURRENT ASSETS......................................................... 1,212 1,673 4,005
--------- --------- -----------
Computer equipment, net of accumulated depreciation of $109, $288, and $350,
respectively................................................................... 233 442 408
Deferred income taxes............................................................ 4 12 14
--------- --------- -----------
TOTAL ASSETS................................................................. $ 1,449 $ 2,127 $ 4,427
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND INVESTMENT
Accounts payable................................................................. $ 206 $ 820 $ 1,274
Accrued expenses................................................................. 410 249 803
--------- --------- -----------
TOTAL CURRENT LIABILITIES.................................................... 616 1,069 2,077
--------- --------- -----------
Young & Rubicam Inc. Investment.................................................. 833 1,058 2,350
--------- --------- -----------
TOTAL LIABILITIES AND YOUNG & RUBICAM INC. INVESTMENT........................ $ 1,449 $ 2,127 $ 4,427
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
BRAND DIALOGUE-NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS
PERIOD FROM ENDED
APRIL 1, 1996 DECEMBER 31, MARCH 31,
(INCEPTION) THROUGH -------------------- --------------------
DECEMBER 31, 1996 1997 1998 1998 1999
------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues............................................... $ 1,922 $ 4,011 $ 7,237 $ 1,410 $ 2,701
Compensation expense, including employee benefits...... 943 1,842 4,596 1,005 1,560
General and administrative expenses.................... 402 998 1,677 381 700
------ --------- --------- --------- ---------
OPERATING EXPENSES..................................... 1,345 2,840 6,273 1,386 2,260
------ --------- --------- --------- ---------
Income before income taxes............................. 577 1,171 964 24 441
Income tax provision................................... 243 492 403 7 184
------ --------- --------- --------- ---------
NET INCOME............................................. $ 334 $ 679 $ 561 $ 17 $ 257
------ --------- --------- --------- ---------
------ --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
PERIOD FROM FOR THE YEAR ENDED ENDED
APRIL 1, 1996 DECEMBER 31, MARCH 31,
(INCEPTION) THROUGH -------------------- --------------------
DECEMBER 31, 1996 1997 1998 1998 1999
------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income....................................... $ 334 $ 679 $ 561 $ 17 $ 257
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense........................... 26 83 179 22 62
Change in assets and liabilities:
Accounts receivable............................ (548) (97) (38) (627) (2,184)
Costs billable to clients...................... (132) 111 4 21 17
Due from related parties, net.................. (327) (219) (427) 21 (165)
Accounts payable and accrued expenses.......... 695 (79) 453 710 1,008
Deferred income taxes.......................... (1) (3) (8) (3) (2)
------ --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................. 47 475 724 161 (1,007)
------ --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of computer equipment................ (156) (186) (388) -- (28)
------ --------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES........ (156) (186) (388) -- (28)
------ --------- --------- --------- ---------
Cash flows from financing activities:
Cash receipts and cash disbursements, net........ (165) (808) (1,232) (341) 627
Amounts paid by Young & Rubicam Inc.............. 274 519 896 180 408
------ --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................. 109 (289) (336) (161) 1,035
------ --------- --------- --------- ---------
Net change in cash................................. -- -- -- -- --
Cash at beginning of year.......................... -- -- -- -- --
------ --------- --------- --------- ---------
Cash at end of year................................ $ -- $ -- $ -- $ -- $ --
------ --------- --------- --------- ---------
------ --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-42
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Brand Dialogue - New York (a wholly owned business of Young & Rubicam Inc.)
(the "Company") was organized on April 1, 1996 and provides digital interactive
branding services and digital commerce solutions to its clients. The Company's
primary offerings consist of:
- Web advertising, including the design, creation and production of
websites, banners, home pages and comprehensive interactive campaigns;
- Digital commerce applications;
- The development of corporate intranets to improve communications and
productivity within and among a defined set of users; and
- Interactive marketing consulting services.
The accompanying financial statements include the accounts of Brand Dialogue
- - New York and reflect the historical results of operations, financial position
and cash flows of Brand Dialogue - New York. These financial statements,
however, may not be indicative of the results that would have occurred if Brand
Dialogue - New York operated as a stand-alone entity during the periods
presented, the future results of Brand Dialogue - New York or the costs which
may be incurred by an unaffiliated entity to achieve similar results.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues earned and expenses incurred
during the reporting period. While actual results could differ from these
estimates, management believes that the estimates are reasonable. The
significant estimates that affect the financial statements include, but are not
limited to, revenues earned pursuant to Young & Rubicam Inc. multi-disciplinary
global client contracts and corporate overhead allocations.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
In the opinion of management, the March 31, 1998 and 1999 unaudited interim
financial statements include all adjustments, consistency of normal recurring
adjustments, necessary for a fair presentation of such financial statements. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
REVENUE RECOGNITION
Revenues from interactive branding and digital commerce solutions are
derived from billings to clients for media and production activities, generally
on the basis of negotiated fees. Revenues are recognized in the period when the
underlying services are rendered.
F-43
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Depreciation is computed using the straight-line method over the estimated
useful life of three years. During the period from April 1, 1996 (inception)
through December 31, 1996, and for the years ended December 31, 1997 and 1998,
depreciation expense amounted to $26, $83, and $179, respectively.
FINANCIAL INSTRUMENTS
The fair values of accounts receivable, trade accounts payable and accrued
expenses are equal to their carrying amounts as reported at December 31, 1996,
1997, and 1998.
CONCENTRATION OF CREDIT RISK
The Company's clients are engaged in various businesses and the Company
performs ongoing credit evaluations of its clients. Additionally, consistent
with the Young & Rubicam Inc. strategy, the Company is dependent upon a
relatively small number of clients who purchase services under short-term
contracts and contribute a significant percentage of revenues. Significant
client revenues as a percentage of total Company revenues are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
PERIOD FROM
APRIL 1, 1996 DECEMBER 31,
(INCEPTION) THROUGH --------------------
DECEMBER 31, 1996 1997 1998
--------------------- --------- ---------
<S> <C> <C> <C>
Client A........................................... 33% 23% 29%
Client B........................................... 0% 0% 13%
Client C........................................... 0% 5% 12%
Client D........................................... 0% 5% 11%
Client E........................................... 28% 15% 6%
Client F........................................... 16% 10% 5%
Client G........................................... 0% 11% 0%
--- --- ---
77% 69% 76%
--- --- ---
--- --- ---
</TABLE>
SEGMENT REPORTING
The Company is centrally managed and operates in one business segment:
digital interactive branding services and digital commerce solutions.
3. CORPORATE OVERHEAD ALLOCATIONS
Young & Rubicam Inc. and its subsidiaries and affiliates provide certain
administrative and corporate services which have been charged to Brand Dialogue
- - New York and are included in the results of operations for the periods
presented. Such services include executive management, information technology,
facilities and key client account management. Costs are allocated on a
proportionate basis as a function of revenues or headcount. These corporate
overhead allocations do
F-44
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. CORPORATE OVERHEAD ALLOCATIONS (CONTINUED)
not necessarily reflect the amount of expenses that would have been incurred by
Brand Dialogue - New York on a stand-alone basis. The costs of certain financing
activities, administrative, and other corporate functions, which did not benefit
Brand Dialogue - New York, were absorbed by Young & Rubicam Inc.
Management believes that the methodologies used to allocate charges for the
services described above from Young & Rubicam Inc. are reasonable.
Charges allocated to Brand Dialogue - New York are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
PERIOD FROM
APRIL 1, 1996 DECEMBER 31,
(INCEPTION) THROUGH --------------------
DECEMBER 31, 1996 1997 1998
--------------------- --------- ---------
<S> <C> <C> <C>
Compensation, including employee benefits................ $ 64 $ 133 $ 269
General and administrative............................... 210 386 627
----- --------- ---------
$ 274 $ 519 $ 896
----- --------- ---------
----- --------- ---------
</TABLE>
4. YOUNG & RUBICAM INC. INVESTMENT
Brand Dialogue - New York participates in Young & Rubicam Inc.'s centralized
treasury and cash management system. Cash generated from operations is
transferred to Young & Rubicam Inc. on a daily basis. Cash disbursements for
operations are funded as needed from Young & Rubicam Inc. No interest was
charged or earned on the Company's outstanding balance with Young & Rubicam Inc.
An analysis of the Young & Rubicam Inc. investment activity is as follows:
<TABLE>
<CAPTION>
PERIOD FROM FOR THE YEARS ENDED
APRIL 1, 1996 DECEMBER 31,
(INCEPTION) THROUGH --------------------
DECEMBER 31, 1996 1997 1998
------------------- --------- ---------
<S> <C> <C> <C>
Balance at the beginning of the period............... $ -- $ 443 $ 833
Net income........................................... 334 679 561
Corporate overhead allocations....................... 274 519 896
Cash receipts and cash disbursements, net............ (165) (808) (1,232)
----- --------- ---------
Balance at the end of the period..................... $ 443 $ 833 $ 1,058
----- --------- ---------
----- --------- ---------
</TABLE>
5. EMPLOYEE BENEFITS
Substantially all employees of Brand Dialogue - New York are eligible to
participate in the Young & Rubicam Inc. Career Cash Balance Plan (the "Plan").
The benefits under the Plan are based on, among other things, age at retirement,
years of service and salary levels. Upon retirement, these benefits will be
based upon the benefit formula of the Plan. Benefits are generally paid from
funds previously provided to trustees. Funds are contributed to a trustee as
necessary to provide for current service and for any unfunded projected benefit
obligation. To the extent that these requirements are
F-45
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. EMPLOYEE BENEFITS (CONTINUED)
fully covered by assets on hand, a contribution may not be made in a particular
year. At December 31, 1996, 1997 and 1998, assets were held in equity securities
and fixed income-type securities.
The Plan's net periodic pension cost and the Plan's funded status and
related amounts recognized are determined on a consolidated basis by Young &
Rubicam Inc. and allocated to its subsidiaries and affiliates based on the
number of participants as determined by an actuary. As a result, the components
of the Plan's net periodic pension cost and the actuarial present value of
benefit obligations are not determinable on a subsidiary or affiliate basis and,
therefore, not disclosed separately. The difference between the fair value of
the Plan assets and the projected benefit obligation was ($446), ($615), and
$784 at December 31, 1996, 1997 and 1998, respectively. The Plan's net periodic
pension cost was $5,920, $2,779, and 4,127 for the years ended December 31,
1996, 1997 and 1998, respectively.
The Company provides healthcare benefits to certain active employees. The
cost of providing these benefits, compiled by Young & Rubicam Inc. on an
aggregate basis, is recognized when incurred and has been allocated to Brand
Dialogue - New York as a function of headcount.
Employees of Brand Dialogue - New York participate in an employee savings
plan, sponsored by Young & Rubicam Inc., that qualifies as a defined
contribution plan under section 401(k) of the Internal Revenue Code. Under the
plan, participating employees may defer a portion of their pre-tax earnings up
to the Internal Revenue Service annual contribution limits. The Company matches
100% of each employee's contribution up to a maximum of 5% of the employee's
earnings up to $150.
Certain employees of Brand Dialogue - New York participate in various stock
compensation programs sponsored by Young & Rubicam Inc. Young & Rubicam Inc.
measures compensation cost using the method prescribed by Accounting Principles
Board Opinion No 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock plans as the exercise price on the date of
grant approximated the fair value of the common stock. Charges associated with
employee benefits, which are included as a component of compensation expense,
are summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM FOR THE YEARS ENDED
APRIL 1, 1996 DECEMBER 31,
(INCEPTION) THROUGH --------------------
DECEMBER 31, 1996 1997 1998
--------------------- --------- ---------
<S> <C> <C> <C>
Medical and dental.................................. $ 29 $ 58 $ 153
Employee savings plan............................... 29 58 118
Career cash balance plan............................ 9 17 53
----- --------- ---------
Other............................................... 25 49 86
----- --------- ---------
$ 92 $ 182 $ 410
----- --------- ---------
----- --------- ---------
</TABLE>
F-46
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. INCOME TAXES
Brand Dialogue--New York has been included in the consolidated federal
income tax returns and certain state and local income tax returns filed by Young
& Rubicam Inc. or its subsidiaries.
Income taxes have been provided on a separate return basis for all periods
presented. Income taxes payable of $243, $653, and $1,186 as of December 31,
1996, 1997, and 1998, respectively, are included in due from related parties,
net.
The reconciliation of the United States statutory rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
PERIOD FROM FOR THE YEARS ENDED
APRIL 1, 1996 DECEMBER 31,
(INCEPTION) THROUGH --------------------
DECEMBER 31, 1996 1997 1998
------------------- --------- ---------
<S> <C> <C> <C>
Percent of Income
Before Income Taxes
United States statutory rate................. 35.0% 35.0% 35.0%
State and local income taxes................. 7.0 7.0 7.0
Travel, entertainment and other
non-deductible expenses.................... 0.3 0.4 0.5
Excess of book over tax
depreciation expense....................... (0.2) (0.4) (0.6)
------ --------- ---------
Effective tax rate............................... 42.1% 42.0% 41.9%
------ --------- ---------
</TABLE>
Brand Dialogue - New York's deferred income tax asset arises from temporary
differences which represent the cumulative deductible or taxable amounts
recorded in the financial statements in different years than recognized in the
tax returns and relate to the excess book over tax depreciation of computer
equipment.
7. ACCRUED EXPENSES
The components of accrued expenses are as follows:
<TABLE>
<CAPTION>
PERIOD FROM FOR THE YEARS ENDED
APRIL 1, 1996 DECEMBER 31,
(INCEPTION) THROUGH --------------------
DECEMBER 31, 1996 1997 1998
--------------------- --------- ---------
<S> <C> <C> <C>
Compensation, including benefits................. $ 21 $ 131 $ 165
Information technology services.................. -- 35 --
Professional services............................ -- 118 --
Travel expenses.................................. 40 100 --
Deferred income.................................. 136 -- --
Other............................................ -- 106 84
----- --------- ---------
$ 197 $ 490 $ 249
----- --------- ---------
----- --------- ---------
</TABLE>
8. SUBSEQUENT EVENT
The Company has agreed upon the terms of a transaction whereby Young &
Rubicam Inc. will sell certain net assets, as defined, to Clarant Worldwide
Corporation. This transaction is subject to the successful completion of an
initial public offering of the common stock of Clarant.
F-47
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Free Range Media, Inc.:
We have audited the accompanying consolidated balance sheets of Free Range
Media, Inc. (a Washington corporation) and subsidiary as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Free Range Media, Inc. and
subsidiary as of December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 7, 1999
F-48
<PAGE>
FREE RANGE MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 5,963 $ 30,397 $ 47,893
Accounts receivable, net of allowance for doubtful accounts of
$47,008, $0, and $60,360 (unaudited)............................. 294,232 734,416 1,477,129
Unbilled revenues.................................................. 31,713 96,753 403,785
Prepaid expenses and other......................................... 121,541 36,479 76,046
------------- ------------- -------------
Total current assets............................................. 453,449 898,045 2,004,853
PROPERTY AND EQUIPMENT, net.......................................... 446,389 798,234 767,599
------------- ------------- -------------
Total assets..................................................... $ 899,838 $ 1,696,279 $ 2,772,452
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 207,627 $ 118,682 $ 383,300
Customer deposits.................................................. 76,061 335,038 424,933
Accrued liabilities................................................ 38,777 613,159 908,737
Notes payable...................................................... -- 3,212,273 4,114,464
------------- ------------- -------------
Total liabilities................................................ 322,465 4,279,152 5,831,434
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock: $2.75 par value, 2,400,000 shares authorized,
908,923, 1,359,460, and 1,359,460 (unaudited) shares issued and
outstanding as of 1997, 1998, and 1999........................... 2,488,538 3,727,514 3,727,514
Common stock, voting: no par value, 6,400,000 shares authorized,
6,400,000 shares issued as of 1997 and 1998 and 6,243,408,
6,238,808, and 6,238,808 (unaudited) shares outstanding as of
1997, 1998, and 1999............................................. 2,424,760 2,672,536 2,805,872
Retained deficit................................................... (4,116,186) (8,759,879) (9,369,324)
Less--Treasury stock at cost, 152,192, 156,792 and 156,792
(unaudited) shares as of 1997, 1998 and 1999..................... (219,739) (223,044) (223,044)
------------- ------------- -------------
Total stockholders' equity....................................... 577,373 (2,582,873) (3,058,982)
------------- ------------- -------------
Total liabilities and stockholders' equity....................... $ 899,838 $ 1,696,279 $ 2,772,452
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
<PAGE>
FREE RANGE MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ---------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES............................... $ 2,939,746 $ 1,982,288 $ 3,520,514 $ 337,684 $ 2,210,752
COST OF SERVICES....................... 2,016,218 1,641,493 3,248,161 517,653 1,462,020
------------- ------------- ------------- ------------- ------------
GROSS PROFIT........................... 923,528 340,795 272,353 (179,969) 748,732
SELLING, GENERAL AND ADMINISTRATIVE.... 2,005,332 2,984,957 4,922,329 1,090,388 1,175,341
OTHER INCOME (EXPENSE):
Interest expense..................... (45,196) (107,475) (181,673) (8,928) (89,233)
Net transactions with affiliate...... -- -- 429,996 -- --
Other (expense) income............... (48,792) (34,581) 28,422 19,732 (7,196)
------------- ------------- ------------- ------------- ------------
LOSS BEFORE INCOME TAXES............... (1,175,792) (2,786,218) (4,373,231) (1,259,553) (523,038)
INCOME TAXES........................... -- -- -- -- --
------------- ------------- ------------- ------------- ------------
NET LOSS............................... $ (1,175,792) $ (2,786,218) $ (4,373,231) $ (1,259,553) $ (523,038)
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<PAGE>
FREE RANGE MEDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------ ------------------------ RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT DEFICIT STOCK
---------- ------------ ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995............. -- $ -- 3,700,000 $ 240,000 $ (154,176) $ (2,487,149)
Issuance of common stock............. -- -- 3,073,940 2,079,759 -- 3,126,357
Exercise of stock options............ -- -- 4,800 (5,506) -- 9,570
Purchase of treasury stock........... -- -- (533,332) -- -- (850,665)
Equity related compensation.......... -- -- -- 10,797 -- --
Net loss............................. -- -- -- -- (1,175,792) --
---------- ------------ ---------- ------------ ------------- -------------
BALANCE, December 31, 1996............. -- -- 6,245,408 2,325,050 (1,329,968) (201,887)
Issuance of preferred stock.......... 908,923 2,488,538 -- -- -- --
Exercise of stock options............ -- -- 2,400 (6,674) -- 8,932
Purchase of treasury stock........... -- -- (4,400) -- -- (26,784)
Equity related compensation.......... -- -- -- 106,384 -- --
Net loss............................. -- -- -- -- (2,786,218) --
---------- ------------ ---------- ------------ ------------- -------------
BALANCE, December 31, 1997............. 908,923 2,488,538 6,243,408 2,424,760 (4,116,186) (219,739)
Issuance of preferred stock.......... 450,537 1,238,976 -- -- -- --
Purchase of treasury stock........... -- -- (4,600) -- -- (3,305)
Equity related compensation.......... -- -- -- 247,776 -- --
Dividends............................ -- -- -- -- (270,462) --
Net loss............................. -- -- -- -- (4,373,231) --
---------- ------------ ---------- ------------ ------------- -------------
BALANCE, December 31, 1998............. 1,359,460 3,727,514 6,238,808 2,672,536 (8,759,879) (223,044)
Equity related compensation
(unaudited)........................ -- -- -- 133,336 -- --
Dividends (unaudited)................ -- -- -- -- (86,407) --
Net loss (unaudited)................. -- -- -- -- (523,038) --
---------- ------------ ---------- ------------ ------------- -------------
BALANCE, March 31, 1999 (unaudited).... 1,359,460 $ 3,727,514 6,238,808 $ 2,805,872 $ (9,369,324) $ (223,044)
---------- ------------ ---------- ------------ ------------- -------------
---------- ------------ ---------- ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<PAGE>
FREE RANGE MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ---------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(1,175,792) $(2,786,218) $(4,373,231) $(1,259,553) $(523,038)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation.................................... 119,271 210,064 324,982 63,623 99,952
Equity related compensation..................... 10,797 106,384 247,776 61,944 133,336
Net transactions with affiliate................. -- -- (429,996) -- --
Changes in assets and liabilities-
Accounts receivable........................... (61,879) 176,562 (440,184) 65,299 (742,713)
Unbilled revenues............................. 73,519 3,835 (65,040) 15,214 (307,032)
Prepaid expenses and other.................... 5,990 235,604 85,061 106,948 (39,567)
Accounts payable.............................. (13,120) 76,342 (88,944) 101,981 264,618
Customer deposits............................. 6,268 (108,186) 258,977 71,342 89,895
Accrued liabilities........................... (597,289) (23,111) 574,382 66,048 295,578
---------- ---------- ---------- ---------- ---------
Net cash used in operating activities......... (1,632,235) (2,108,724) (3,906,217) (707,154) (728,971)
---------- ---------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (187,003) (282,085) (676,827) (175,436) (69,317)
Investment in affiliate (disposed of in 1998)..... -- -- (250,000) -- --
Proceeds from disposition of affiliate............ -- -- 679,996 -- --
---------- ---------- ---------- ---------- ---------
Net cash used in investing activities......... (187,003) (282,085) (246,831) (175,436) (69,317)
---------- ---------- ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments on) proceeds from notes payable....... (2,534,413) (73,104) 3,212,273 934,174 902,191
Proceeds from issuance of preferred stock......... -- 2,488,538 1,238,976 -- --
Proceeds from issuance of common stock............ 2,074,253 -- -- -- --
Proceeds from issuance of treasury stock.......... 3,135,927 2,258 -- -- --
Purchases of treasury stock....................... (850,665) (26,784) (3,305) -- --
Dividends declared................................ -- -- (270,462) (57,547) (86,407)
---------- ---------- ---------- ---------- ---------
Net cash provided by financing activities..... 1,825,102 2,390,908 4,177,482 876,627 815,784
---------- ---------- ---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... 5,864 99 24,434 (5,963) 17,496
CASH AND CASH EQUIVALENTS, beginning of period...... -- 5,864 5,963 5,963 30,397
---------- ---------- ---------- ---------- ---------
CASH AND CASH EQUIVALENTS, end of period............ $ 5,864 $ 5,963 $ 30,397 $ -- $ 47,893
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
SUPPLEMENTAL INFORMATION:
Cash paid for interest............................ $ 935 $ 101,667 $ 179,032 $ -- $ --
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-52
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Free Range Media, Inc. and its subsidiary (the "Company") specializes in the
design of World Wide Web pages on the Internet. The Company is a full service
developer of Internet and intranet sites, offering services in four areas:
website design and implementation, hosting, consulting, and maintenance. The
Company's wholly owned subsidiary is Lariat, Inc. The Company was incorporated
in the State of Washington in March 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using a
straight-line method over the estimated useful lives of the assets. The costs
and related accumulated depreciation of property and equipment sold, retired, or
disposed of are removed from the accounts and any gains or losses reflected in
the consolidated statements of operations. Expenditures for major acquisitions
and improvements are capitalized while expenditures for maintenance and repair
costs are expensed as incurred.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets is based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
is not expected to be realized.
REVENUE RECOGNITION
Revenues are recognized for time and materials-based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues and gross profit
are recognized as the work is performed, based on the ratio of costs incurred to
total estimated costs. Unbilled revenues on contracts are comprised of labor
costs incurred, plus earnings on certain contracts which have not been billed.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Customer deposits represent the amount of
customer payments received in advance of services being performed.
COST OF SERVICES
Cost of services is comprised primarily of salaries, employee benefits, and
incentive compensation of billable employees and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
F-53
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
TRANSACTIONS WITH AFFILIATE
On September 17, 1998, the Company sold their ownership interest in Free
Zone, LLC ("Free Zone") for $679,996 and recognized a gain of $429,996. This
investment was previously accounted for using the equity method.
ACCOUNTING FOR STOCK BASED COMPENSATION
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value
based method of accounting for stock-based compensation or continuation under
Accounting Principles Board Option No. 25, "Accounting for Stock Issued to
Employees ("APB 25")." The Company has chosen to account for stock-based
compensation using the intrinsic value based method prescribed in APB 25 and
provides the pro forma disclosure provision of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair market value of the Company's stock over the exercise price at the date of
the grant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to their relatively short maturity and/or their variable interest
rates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. An investment in a company that is
50% owned is accounted for using the equity method. All significant intercompany
transactions and balances have been eliminated.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards of derivative
F-54
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This statement is in effect for all
quarters of fiscal years beginning after June 15, 1999. The Company does not
expect the adoption of this standard to have a material effect on its results of
consolidated operations, financial condition, or cash flows.
3. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
------ ----------- ------------
<S> <C> <C> <C>
Computers and equipment................................... 3 $ 646,966 $ 1,253,290
Furniture and fixtures.................................... 5 195,678 256,777
Leasehold improvements.................................... 5 20,108 29,512
----------- ------------
862,752 1,539,579
Less- Accumulated depreciation............................ (416,363) (741,345)
----------- ------------
Property and equipment, net........................ $ 446,389 $ 798,234
----------- ------------
----------- ------------
</TABLE>
Depreciation expense was $119,271, $210,064, and $324,982 for the periods
ended December 31, 1996, 1997, and 1998, respectively.
4. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Accrued compensation................................................... $ 36,587 $ 141,385
Accrued dividends...................................................... -- 270,462
Accrued interest....................................................... -- 179,844
Other.................................................................. 2,190 21,468
--------- ----------
Accrued liabilities.................................................... $ 38,777 $ 613,159
--------- ----------
--------- ----------
</TABLE>
5. DEBT:
The Company has two notes payable of $3,212,273 as of December 31, 1998,
with related parties with interest at 9.25% and prime plus 1% (8.75% at December
31, 1998). The notes payable are due on demand, have an "open ended" maturity,
and are general obligations of the Company.
F-55
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES:
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to the effective income tax
rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Tax at U.S. statutory rates........................................ (35)% (35 )% (35 )%
Meals and entertainment............................................ 1% 1% 1%
Net operating loss carryforward.................................... 34% 34% 34%
-- -- --
Effective income tax rate.......................................... --% --% --%
-- -- --
-- -- --
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1997 and 1998, are shown below.
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Deferred tax assets-
Book depreciation in excess of tax depreciation............... $ 12,293 $ 40,883
Accruals...................................................... 26,268 26,268
Net operating loss carryforward............................... 1,332,143 2,832,630
------------- -------------
Total deferred tax assets....................................... 1,370,704 2,899,781
Deferred tax liabilities-
Other......................................................... (9,293) (9,293)
------------- -------------
Net deferred tax assets......................................... 1,361,411 2,890,488
Valuation allowance............................................. (1,361,411) (2,890,488)
------------- -------------
Net deferred tax assets......................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The Company's net operating loss carryforwards expire in years 2009 through
2013.
Management periodically reviews the expected realization of the Company's
deferred tax assets and records a valuation allowance, as appropriate, when
existing conditions impact the probability of ultimate realization of the
deferred tax asset. Due to the Company's recurring losses before income taxes,
management believes it is more likely than not that the Company will not realize
the net deferred tax asset. Accordingly, the Company has recorded a valuation
allowance to reflect uncertainties associated with the ultimate realization of
certain deferred tax assets.
7. COMMITMENTS AND CONTINGENCIES:
The Company sponsors 401(k) cash or deferred retirement plans that cover
substantially all of its ongoing employees. The Company has not made matching
contributions.
The Company leases its office facilities under noncancelable operating
leases that expire in January 2005. The leases require the payment of property
taxes, insurance, and maintenance. The Company also has operating lease
agreements related to certain equipment which expire at various dates.
F-56
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
------------
<S> <C>
1999............................................................................ $ 263,994
2000............................................................................ 274,860
2001............................................................................ 288,512
2002............................................................................ 294,216
2003............................................................................ 297,570
Thereafter...................................................................... 338,834
------------
Total future minimum lease payments............................................. $ 1,757,986
------------
------------
</TABLE>
Rent expense for the years ended December 1996, 1997, and 1998 totaled
$146,212, $255,285, and $279,510, respectively.
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on the Company's financial condition or results of operations.
8. EQUITY INCENTIVE PLANS:
Effective November 1, 1995, the Company approved the 1995 Stock Option Plan
(the "Plan") authorizing the Board of Directors to grant incentive or
nonqualified options to purchase common stock of the Company. Effective April 1,
1998, the Plan was converted into a nonqualified option plan. The Board of
Directors has authorized shares to be issued under the Plan. The Plan is
administered by the Board of Directors, which determines the number of stock
options to be granted, the exercise or purchase price, exercise schedule, and
expiration date of such options.
The exercise price of options qualifying as incentive stock options under
Section 422 of the Internal Revenue Code may not be less than the grant date
fair market value of the common stock. Incentive stock options granted to any
10% stockholder may not be less than 110% of the fair market value of the common
stock on the grant date. Stock options granted under the Plan are
nontransferable and generally expire ten years after the date of grant. Upon the
event that all of the outstanding shares of common stock of the Company are
acquired by an unrelated party, the optionee's exercise schedule shall be
accelerated to provide that optionee with immediate exercisability of fifty
percent of the options granted. All options granted become exercisable over a
five-year period of continued employment.
F-57
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY INCENTIVE PLANS: (CONTINUED)
Options outstanding at December 31, 1996, 1997, and 1998, were as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- -------------------
<S> <C> <C>
Options outstanding at December 31, 1995........................ 135,550 $ .25
Granted....................................................... 181,750 .25
Exercised..................................................... (4,800) .25
Canceled...................................................... (49,250) .25
----------- ---
Options outstanding at December 31, 1996........................ 263,250 .25
Granted....................................................... 336,250 .25
Exercised..................................................... (2,400) .25
Canceled...................................................... (205,750) .25
----------- ---
Options outstanding at December 31, 1997........................ 391,350 .25
Granted....................................................... 465,250 .25
Exercised..................................................... -- --
Canceled...................................................... (279,450) .25
----------- ---
Options outstanding at December 31, 1998........................ 577,150 $ .25
----------- ---
----------- ---
</TABLE>
The following is summary information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE
NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF
EXERCISE PRICES SHARES CONTRACT LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ----------------- ----------- ----------------------- ------------------- ----------- -----------------
$ .25 577,150 5 $ .25 4,890 $ .25
</TABLE>
Additionally, the Company had 680 and 1,260 options exercisable at December
31, 1996 and 1997. Included in the above options granted during the three years
ended December 31, 1998, were options granted with an exercise price less than
fair market value on the grant date. The Company recognized $10,797, $106,384,
and $247,776 in connection with these stock option grants in compensation
expense for 1996, 1997, and 1998, respectively.
Pro forma information regarding net income has been determined as if the
Company accounted for its stock options under the fair value method of SFAS 123.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following assumptions used for 1996:
an exercisable event occurring in five years; risk-free interest rates ranging
from 5.42% to 6.71%; a dividend yield of 0%; a volatility factor of zero; a
weighted-average expected life of five years; and an average Black-Scholes fair
value at the date of grant of $2.44 per option. The assumptions used to price
options granted during 1997 were: an exercisable event occurring in five years;
risk-free interest rates ranging from 5.42% to 5.83%; dividend yield of 0%; a
volatility factor of zero; a weighted-average expected life of five years; and
average Black-Scholes fair value at the date of grant of $2.56 per option. The
assumptions used to price options granted during 1998 were: an exercisable event
occurring in five years; risk-free interest rates ranging from 4.68% to 5.63%; a
dividend yield of 0%; a volatility factor of zero; a weighted-average expected
life of five years; and an average Black-Scholes fair value at the date of grant
of $2.56 per option.
F-58
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY INCENTIVE PLANS: (CONTINUED)
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the date of grant consistent with SFAS 123, the
Company's net loss would have been as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net loss--As reported............................ $ (1,175,792) $ (2,786,218) $ (4,373,231)
Net loss--Pro forma.............................. (1,237,468) (2,819,098) (4,417,297)
</TABLE>
9. EQUITY:
PREFERRED STOCK
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 2,400,000 shares of convertible Class A Preferred Stock ("Preferred
Stock"). In the event of liquidation, each holder of Preferred Stock will be
entitled to receive, as a preferential distribution, $2.75 for each outstanding
share and an amount equal to the accumulated but unpaid dividends, if any, on
such share. If the assets of the Company are insufficient to permit the payment
of full preferential amounts previously described, then all assets of the
Company legally available for distribution to its stockholders will be
distributed ratably among the holders of Preferred Stock.
The holders of Preferred Stock will be entitled to receive, when declared by
the Board of Directors, cumulative preferred dividends in the amount of a
percentage which is equal to the prime lending rate for Key Bank of Washington
multiplied by the par value per year on each share.
Each share of Preferred Stock is convertible into the number of shares of
Common Stock which is equal to $2.75 divided by the conversion price in effect
at the time of the conversion.
The Company has recognized cumulative dividends for the Preferred Stock in
the amount of $270,462.
COMMON STOCK
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 6,400,000 shares of Common Stock having no par value.
10. RELATED-PARTY TRANSACTIONS:
At December 31, 1998, the Company had notes payable to two stockholders
totaling $3,212,273 at December 31, 1998. The notes payable are "open-ended"
loans without set maturity dates.
11. AGREEMENT TO MERGE WITH CLARANT:
The Company intends to enter into an agreement to be acquired by Clarant.
This acquisition is subject to successful completion of an initial public
offering of the common stock of Clarant.
F-59
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Rule 10-01 of Regulation S-X. Accordingly,
they do not contain all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, the accompanying unaudited financial statements reflect all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation of the Company's financial condition as of
March 31, 1999, the results of its operations and its cash flows for the three-
month periods ended March 31, 1998 and 1999. These financial statements should
be read in conjunction with the Company's audited 1998 financial statements,
including the notes thereto. Operating results for the three-month period ended
March 31, 1999, are not necessarily indicative of the operating results that may
be expected for the year ending December 31, 1999.
B. DEBT:
The Company has notes payable amounting to $4,114,464 as of March 31, 1999,
with related parties, with interest at 9.25% and prime plus 1% (8.75% at March
31, 1999). The notes payable are due on demand, have an "open-ended" maturity,
and are general obligations of the Company.
C. RELATED-PARTY TRANSACTIONS:
In the three months ended March 31, 1999, approximately 25% of the Company's
revenues were with a customer of which the Company's Chairman of the Board is a
director.
F-60
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Integrated Consulting, Inc.:
We have audited the accompanying balance sheets of Integrated Consulting,
Inc., dba i.con interactive (a Texas corporation) as of December 31, 1997 and
1998, and the related statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integrated Consulting, Inc.
as of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 7, 1999
F-61
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 42,566 $ 8,968 $ 15,717
Accounts receivable, net of allowance for doubtful accounts of $0, $9,000,
and $17,000 (unaudited)................................................. 39,842 209,198 376,972
Deferred income taxes..................................................... 11,609 11,886 11,886
Prepaid expenses and other................................................ 10,677 10,992 5,043
---------- ---------- -----------
Total current assets.................................................... 104,694 241,044 409,618
PROPERTY AND EQUIPMENT, net................................................. 135,453 239,382 344,662
OTHER ASSETS................................................................ 7,622 17,367 17,367
---------- ---------- -----------
Total assets............................................................ $ 247,769 $ 497,793 $ 771,647
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including cash overdraft of $0, $74,810, and $0
(unaudited)............................................................. $ 10,762 $ 145,979 $ 47,543
Customer deposits......................................................... 83,164 57,946 29,900
Accrued liabilities....................................................... 86,240 119,872 259,319
Notes payable............................................................. -- -- 97,889
Current maturities of long-term debt...................................... -- 7,568 16,579
---------- ---------- -----------
Total current liabilities............................................... 180,166 331,365 451,230
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities................................. -- 56,453 107,459
Deferred income taxes..................................................... 4,970 7,034 8,524
---------- ---------- -----------
Total liabilities....................................................... 185,136 394,852 567,213
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, Class A, voting: $.01 par value, 10,000,000 shares
authorized, 900,000, 1,000,000, and 1,000,000 (unaudited) issued and
outstanding as of 1997, 1998 and 1999................................... 9,000 10,000 10,000
Common stock, Class B, nonvoting: $.01 par value, 10,000,000 and 0 shares
authorized, no shares issued and outstanding as of 1997, 1998 and
1999.................................................................... -- -- --
Additional paid-in capital................................................ -- 14,000 14,000
Subscription receivable from officers..................................... -- (10,000) (10,000)
Retained earnings......................................................... 53,633 88,941 190,434
---------- ---------- -----------
Total stockholders' equity.............................................. 62,633 102,941 204,434
---------- ---------- -----------
Total liabilities and stockholders' equity.............................. $ 247,769 $ 497,793 $ 771,647
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1996 1997 1998 1998 1999
---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Trade revenues................................... $ 442,924 $ 848,584 $ 1,715,591 $ 400,665 $ 678,660
Barter revenues.................................. -- -- 424,900 55,000 146,713
---------- ---------- ------------ ---------- ----------
Total revenues................................. 442,924 848,584 2,140,491 455,665 825,373
COST OF SERVICES................................... 132,172 266,774 716,209 112,711 250,301
---------- ---------- ------------ ---------- ----------
GROSS PROFIT....................................... 310,752 581,810 1,424,282 342,954 575,072
SELLING, GENERAL AND ADMINISTRATIVE................ 314,829 550,312 1,382,744 215,860 454,898
OTHER INCOME (EXPENSE):
Interest expense................................. -- -- -- -- (3,025)
Other income..................................... -- 8,563 -- -- --
---------- ---------- ------------ ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................. (4,077) 40,061 41,538 127,094 117,149
INCOME TAXES....................................... (612) 6,009 6,230 16,242 15,656
---------- ---------- ------------ ---------- ----------
NET INCOME (LOSS).................................. $ (3,465) $ 34,052 $ 35,308 $ 110,852 $ 101,493
---------- ---------- ------------ ---------- ----------
---------- ---------- ------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK SUBSCRIPTION
--------------------- ADDITIONAL RECEIVABLE
NUMBER OF PAR PAID-IN FROM RETAINED
SHARES VALUE CAPITAL OFFICERS EARNINGS
---------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995......................... 900,000 $ 9,000 $ -- $ -- $ 23,046
Net loss......................................... -- -- -- -- (3,465)
---------- --------- ----------- ------------ ----------
BALANCE, December 31, 1996......................... 900,000 9,000 -- -- 19,581
Net income....................................... -- -- -- -- 34,052
---------- --------- ----------- ------------ ----------
BALANCE, December 31, 1997......................... 900,000 9,000 -- -- 53,633
Issuance of common stock......................... 100,000 1,000 14,000 (10,000) --
Net income....................................... -- -- -- -- 35,308
---------- --------- ----------- ------------ ----------
BALANCE, December 31, 1998......................... 1,000,000 10,000 14,000 (10,000) 88,941
Net income (unaudited)........................... -- -- -- -- 101,493
---------- --------- ----------- ------------ ----------
BALANCE, March 31, 1999 (unaudited)................ 1,000,000 $ 10,000 $ 14,000 $ (10,000) $ 190,434
---------- --------- ----------- ------------ ----------
---------- --------- ----------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- ---------- ----------- ---------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ (3,465) $ 34,052 $ 35,308 $ 110,852 $ 101,493
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization................... 14,890 28,696 43,547 10,886 16,833
Equity related compensation..................... -- -- 5,000 5,000 --
Deferred income taxes........................... (7,605) 966 1,787 523 1,490
Changes in assets and liabilities-
Accounts receivable........................... 9,597 (38,173) (169,356) (68,561) (167,774)
Prepaid expenses and other.................... (1,093) (1,119) (315) (431) 5,949
Other assets.................................. (6,222) -- (9,745) -- --
Accounts payable, including cash overdraft.... 9,309 (2,464) 135,217 (4,114) (98,436)
Customer deposits............................. 63,711 19,453 (25,218) (55,041) (28,046)
Accrued liabilities........................... 18,454 62,111 33,632 17,999 139,447
--------- ---------- ----------- ---------- -----------
Net cash provided by (used in) operating
activities................................ 97,576 103,522 49,857 17,113 (29,044)
--------- ---------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (69,569) (81,745) (147,476) (10,519) (122,113)
--------- ---------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments on) notes payable....... -- -- -- -- 97,889
Proceeds from long-term debt...................... -- -- 64,021 -- 64,137
Payments on long-term debt........................ -- -- -- -- (4,120)
--------- ---------- ----------- ---------- -----------
Net cash provided by financing activities... -- -- 64,021 -- 157,906
--------- ---------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... 28,007 21,777 (33,598) 6,594 6,749
CASH AND CASH EQUIVALENTS, beginning of period...... (7,218) 20,789 42,566 42,566 8,968
--------- ---------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of period............ $ 20,789 $ 42,566 $ 8,968 $ 49,160 $ 15,717
--------- ---------- ----------- ---------- -----------
--------- ---------- ----------- ---------- -----------
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes........................ $ 7,500 $ 6,500 $ 3,800 $ -- $ --
--------- ---------- ----------- ---------- -----------
--------- ---------- ----------- ---------- -----------
Cash paid for interest............................ $ -- $ -- $ -- $ -- $ 3,025
--------- ---------- ----------- ---------- -----------
--------- ---------- ----------- ---------- -----------
NON-CASH TRANSACTIONS:
Issuance of stock for notes receivable............ $ -- $ -- $ 10,000 $ 10,000 $ --
--------- ---------- ----------- ---------- -----------
--------- ---------- ----------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Integrated Consulting, Inc. ("i.con") specializes in electronic marketing on
the Internet under the trade name "i.con interactive." i.con is a full service
Internet and multimedia development firm focusing on the corporate market
specializing in Internet, extranet, and intranet solutions, corporate
communications, marketing and sales tools, computer-based training, and on-line
marketing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
i.con considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The
costs and related accumulated depreciation of property and equipment sold,
retired, or disposed of are removed from the accounts and any gains or losses
reflected in the statements of operations. Expenditures for major acquisitions
and improvements are capitalized while expenditures for maintenance and repairs
are expensed as incurred.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in i.con's financial statements or tax returns. The
measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law. The effects of future changes in tax laws or
rates are not anticipated.
REVENUE RECOGNITION
Revenues are recognized for time and materials-based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues are recognized as
the work is performed, based on the ratio of costs incurred to total estimated
costs. Customer deposits represent the amount of customer payments received in
advance of services being performed.
Revenues associated with hosting services are recognized when the services
are performed.
The Company earned a portion of its 1998 revenue under barter arrangements
with certain customers for website development and maintenance services in
exchange for advertising. The barter transactions are valued at the normal rates
per hour including a minimal discount provision in some instances and with
consideration of the costs of advertising and promotion that would have been
paid to the customers in an ordinary cash transaction. Advertising expense equal
to the amount of barter revenue is recorded in selling, general and
administrative expense.
F-66
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COST OF SERVICES
Cost of services are comprised primarily of salaries, employee benefits, and
incentive compensation of billable employees, and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
i.con's financial instruments have carrying amounts which approximate fair
value due to the relatively short maturity of these instruments.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement is in effect for all quarters of fiscal years beginning after
June 15, 1999. i.con does not expect the adoption of this standard to have a
material effect on its results of operations, financial condition, or cash
flows.
3. SIGNIFICANT CUSTOMERS:
During the year ended December 31, 1996, sales to five customers accounted
for approximately 19%, 19%, 16%, 14%, and 14% of revenues. During the year ended
December 31, 1997, sales to two customers accounted for approximately 13% and
10% of revenues. During the year ended December 31, 1998, sales to one customer
accounted for approximately 12% of revenues.
As of December 31, 1997, accounts receivable from four customers accounted
for approximately 52%, 18%, 13%, and 12% of accounts receivable. As of December
31, 1998, accounts receivable from three customers accounted for approximately
12%, 10%, and 10% of accounts receivable.
F-67
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
Computers and equipment...................................... 3-5 $ 145,520 $ 191,149
Furniture and fixtures....................................... 7 28,040 54,248
Autos........................................................ 5 -- 64,021
Leasehold improvements....................................... 7 -- 9,000
Other equipment.............................................. 5-7 10,768 13,386
---------- ----------
184,328 331,804
Less--Accumulated depreciation............................... (48,875) (92,422)
---------- ----------
Property and equipment, net................................ $ 135,453 $ 239,382
---------- ----------
---------- ----------
</TABLE>
Depreciation expense was $14,890, $28,696, and $43,547 for the periods ended
December 31, 1996, 1997, and 1998, respectively.
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Sales tax payable...................................................... $ 15,134 $ 59,374
Franchise tax payable.................................................. -- 1,097
Accrued compensation................................................... -- 57,062
Other.................................................................. 71,106 2,339
--------- ----------
Total accrued liabilities............................................ $ 86,240 $ 119,872
--------- ----------
--------- ----------
</TABLE>
6. DEBT:
Long-term debt is comprised of the following as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Note payable bearing interest at 10.05%, payable in monthly installments of
principal and interest of $1,138 with a balloon payment of $40,007,
maturing December 2001................................................... $ -- $ 64,021
Less--Current maturities................................................... -- (7,568)
--------- ---------
Long-term debt............................................................. $ -- $ 56,453
--------- ---------
--------- ---------
</TABLE>
F-68
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. DEBT: (CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1999............................................................................... $ 7,568
2000............................................................................... 8,357
2001............................................................................... 48,096
---------
$ 64,021
---------
---------
</TABLE>
7. INCOME TAXES:
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Current.......................................................... $ 6,993 $ 5,043 $ 4,443
Deferred......................................................... (7,605) 966 1,787
--------- --------- ---------
Total current and deferred....................................... $ (612) $ 6,009 $ 6,230
--------- --------- ---------
--------- --------- ---------
</TABLE>
i.con's effective tax rate is equivalent to the statutory tax rate.
Significant components of i.con's deferred tax liabilities and assets as of
December 31, 1997 and 1998, are shown below:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets--
Accruals and reserves..................................................................... $ 11,609 $ 11,886
--------- ---------
Deferred tax liabilities--
Tax depreciation in excess of book value.................................................. 4,970 7,034
--------- ---------
Net deferred tax assets..................................................................... $ 6,639 $ 4,852
--------- ---------
--------- ---------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
i.con sponsors a 401(k) profit sharing plan that covers eligible employees.
Company discretionary contributions to the plan were $22,575, $31,747, and
$39,732 during 1996, 1997, and 1998, respectively.
On January 1, 1999, i.con amended the plan to provide for Company matching
of employee 401(k) contributions in the amount of 50% of employee contributions
up to 6% of an employee's salary. In addition, employees now participate in the
plan after six months of service and vest over a period of four years.
i.con leases its office facility under a noncancelable operating lease which
expires in January 2003. The lease requires the payment of property taxes,
insurance, and maintenance. i.con also has operating lease agreements related to
certain equipment which expire at various dates.
F-69
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1999.............................................................................. $ 180,180
2000.............................................................................. 180,000
2001.............................................................................. 186,000
2002.............................................................................. 186,000
2003.............................................................................. 7,000
Thereafter........................................................................ --
----------
Total future minimum lease payments............................................... $ 739,180
----------
----------
</TABLE>
Rent expense for the years ended December 1996, 1997, and 1998 totaled
$18,213, $87,234, and $121,669, respectively.
In the ordinary course of business, i.con may be subject to legal actions
and claims. Management does not believe litigation or claims will have a
material effect on financial position or results of operations.
9. EQUITY INCENTIVE PLAN:
In March 1998, an officer of i.con purchased 100,000 shares of common stock
for $10,000 cash or $.10 per share. At the time of the purchase, i.con
determined the fair market value of the stock to be $.15 per share. A
compensation charge of $5,000 was recorded in conjunction with the purchase of
the common stock.
10. RELATED-PARTY TRANSACTIONS:
At December 31, 1998, i.con had a $5,000 receivable included in prepaid
expenses and other, from one of its stockholders. This receivable bears no
interest and has no stated maturity.
11. AGREEMENT TO MERGE WITH CLARANT WORLDWIDE CORPORATION:
i.con intends to enter into an agreement to be acquired by Clarant Worldwide
Corporation. This acquisition is subject to successful completion of an initial
public offering of the common stock of Clarant Worldwide Corporation.
F-70
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Rule10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of i.con's financial condition as
of March 31, 1999, the results of its operations, and its cash flows for the
three-month periods ended March 31, 1998 and 1999. These financial statements
should be read in conjunction with i.con's audited 1998 financial statements,
including the notes thereto. Operating results for the three-month period ended
March 31, 1999, are not necessarily indicative of the operating results that may
be expected for the year ending December 31, 1999.
B. DEBT:
NOTES PAYABLE
i.con has a bank line of credit with a maximum availability of $100,000,
upon which $97,889 was outstanding at March 31, 1999. Interest is at prime plus
1.75% (9.5% at March 31, 1999), and is payable monthly. The line of credit is
automatically renewable annually and is not restricted by any covenants, but is
guaranteed by certain stockholders.
LONG-TERM DEBT
Long-term debt is comprised of the following as of March 31, 1999:
<TABLE>
<CAPTION>
MARCH 31,
1999
----------
<S> <C>
Note payable bearing interest at 10.05%, payable in monthly installments of
principal and interest of $1,138 with a balloon payment of $40,007, maturing
December 2001................................................................... $ 62,194
Note payable bearing interest at 8.80%, payable in monthly installments of
principal and interest of $1,227 with a balloon payment of $34,322, maturing
January 2002.................................................................... 61,844
----------
124,038
Less--Current portion............................................................. (16,579)
----------
Long-term debt.................................................................... $ 107,459
----------
----------
</TABLE>
F-71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InterActive8, Inc.:
We have audited the accompanying balance sheets of InterActive8, Inc. (a New
York S corporation) as of December 31, 1997 and 1998, and the related statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InterActive8, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 14, 1999
F-72
<PAGE>
INTERACTIVE8, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
---------- ------------ --------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 90,321 $ 129,573 $ 461,836
Accounts receivable, net of allowance for doubtful accounts of
$30,000, $80,000, and $80,000 (unaudited).......................... 403,949 724,963 531,974
State and local tax receivables...................................... 23,000 110,300 110,300
Prepaid expenses and other........................................... 15,296 88,315 62,153
---------- ------------ --------------
Total current assets............................................... 532,566 1,053,151 1,166,263
PROPERTY AND EQUIPMENT, net............................................ 252,710 314,533 596,600
OTHER ASSETS:
Deposits and other................................................... 8,072 71,806 71,851
---------- ------------ --------------
Total assets....................................................... $ 793,348 $ 1,439,490 $ 1,834,714
---------- ------------ --------------
---------- ------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 91,122 $ 183,698 $ 274,005
Accrued liabilities.................................................. 567,011 500,970 2,763,218
Customer deposits.................................................... -- 45,130 --
Notes payable........................................................ -- 232,505 49,739
Current maturities of long-term debt................................. 164,080 700,709 616,439
---------- ------------ --------------
Total current liabilities.......................................... 822,213 1,663,012 3,703,401
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities............................ 13,968 22,599 330,371
---------- ------------ --------------
Total liabilities.................................................. 836,181 1,685,611 4,033,772
---------- ------------ --------------
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, voting: $0.001 par value, 2,000,000 shares authorized,
641,567, 962,350 and 962,350 (unaudited) shares issued and
outstanding as of 1997, 1998 and 1999.............................. 642 962 962
Additional paid-in capital........................................... 358 185,038 185,038
Retained deficit..................................................... (43,833) (432,121) (2,385,058)
---------- ------------ --------------
Total stockholders' equity......................................... (42,833) (246,121) (2,199,058)
---------- ------------ --------------
Total liabilities and stockholders' equity......................... $ 793,348 $ 1,439,490 $ 1,834,714
---------- ------------ --------------
---------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
INTERACTIVE8, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ---------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES.................................. $ 1,713,303 $ 2,817,894 $ 4,097,448 $ 736,854 $ 1,613,124
COST OF SERVICES.......................... 1,056,158 1,633,538 2,033,451 433,256 3,102,053
------------ ------------ ------------ ------------ -------------
GROSS PROFIT.............................. 657,145 1,184,356 2,063,997 303,598 (1,488,929)
SELLING, GENERAL AND ADMINISTRATIVE....... 460,300 1,381,853 2,418,844 690,044 464,008
------------ ------------ ------------ ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES......... 196,845 (197,497) (354,847) (386,446) (1,952,937)
STATE AND LOCAL INCOME TAXES.............. 18,063 43,900 33,441 -- --
------------ ------------ ------------ ------------ -------------
NET INCOME (LOSS)......................... $ 178,782 $ (241,397) $ (388,288) $ (386,446) $ (1,952,937)
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
PRO FORMA INCOME TAXES (UNAUDITED)........ 52,975 (52,975) -- -- --
------------ ------------ ------------ ------------ -------------
PRO FORMA NET INCOME (LOSS) (UNAUDITED)... $ 125,807 $ (188,422) $ (388,288) $ (386,446) $ (1,952,937)
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
INTERACTIVE8, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
---------------------- PAID-IN EARNINGS
NUMBER AMOUNT CAPITAL (DEFICIT)
--------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995....................................... 641,567 $ 642 $ 358 $ 18,782
Net income..................................................... -- -- -- 178,782
--------- ----- ---------- --------------
BALANCE, December 31, 1996....................................... 641,567 642 358 197,564
Net loss....................................................... -- -- -- (241,397)
--------- ----- ---------- --------------
BALANCE, December 31, 1997....................................... 641,567 642 358 (43,833)
Net loss....................................................... -- -- -- (388,288)
Issuance of Common Stock....................................... 320,783 320 184,680 --
--------- ----- ---------- --------------
BALANCE, December 31, 1998....................................... 962,350 962 185,038 (432,121)
Net loss (unaudited)........................................... -- -- -- (1,952,937)
--------- ----- ---------- --------------
BALANCE, March 31, 1999 (unaudited).............................. 962,350 $ 962 $ 185,038 $ (2,385,058)
--------- ----- ---------- --------------
--------- ----- ---------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
INTERACTIVE8, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ 178,782 $ (241,397) $ (388,288) $ (386,446) $ (1,952,937)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization.................... 59,598 125,765 178,001 39,278 74,705
Equity related compensation...................... -- -- 135,000 135,000 2,205,000
Changes in assets and liabilities-
Accounts receivable............................ 12,998 (293,714) (321,014) (40,860) 192,989
State and local tax receivable................. (23,000) -- (87,300) -- --
Prepaid expenses and other..................... (47,025) 31,729 (73,019) (1,803) 26,162
Deposits and other............................. (9,413) 1,341 (63,734) -- (45)
Accounts payable............................... (1,846) 24,625 92,576 (45,216) 90,307
Accrued liabilities............................ (35,581) 551,979 (66,041) 8,834 57,248
Customer deposits.............................. -- -- 45,130 -- (45,130)
----------- ----------- ----------- ----------- -------------
Net cash provided by (used in) operating
activities................................... 134,513 200,328 (548,689) (291,213) 648,299
----------- ----------- ----------- ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (233,722) (70,620) (150,875) (6,388) (278,079)
----------- ----------- ----------- ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable........................ -- -- 232,505 -- 95,126
Proceeds from long-term debt....................... 64,392 (37,246) 514,471 243,064 --
Payments on long-term debt......................... (16,570) (32,176) (58,160) (10,306) (133,083)
Proceeds from issuance of common stock............. -- -- 50,000 50,000 --
----------- ----------- ----------- ----------- -------------
Net cash provided by (used in) financing
activities................................... 47,822 (69,422) 738,816 282,758 (37,957)
----------- ----------- ----------- ----------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ (51,387) 60,286 39,252 (14,843) 332,263
CASH AND CASH EQUIVALENTS,
beginning of period................................ 81,422 30,035 90,321 90,321 129,573
----------- ----------- ----------- ----------- -------------
CASH AND CASH EQUIVALENTS,
end of period...................................... $ 30,035 $ 90,321 $ 129,573 75,478 461,836
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
SUPPLEMENTAL INFORMATION:
Cash paid for state and local income taxes......... $ 40,796 $ 44,225 $ 120,741 $ -- $ --
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
Cash paid for interest............................. $ 2,392 $ 4,112 $ 7,457 $ -- $ 2,815
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
NONCASH TRANSACTIONS:
Capital expenditures financed with long-term
debt............................................. $ 39,768 $ 63,838 $ 88,949 $ -- $ 78,693
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
Noncash ownership donation......................... $ -- $ -- $ 135,000 $ -- $ --
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
INTERACTIVE8, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
InterActive8, Inc. (the "Company") was formed in 1994 for the purpose of
developing and maintaining Internet websites. The Company is a full-service
interactive marketing agency providing strategy, creative, technical, and media
services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The
costs and related accumulated depreciation of property and equipment sold,
retired or disposed of are removed from the accounts and any gains or losses
reflected in the statements of operations. Expenditures for major acquisitions
and improvements are capitalized while expenditures for maintenance and repairs
are expensed as incurred.
INCOME TAXES
As a S corporation, the Company pays no federal income tax, but rather the
stockholders are taxed individually on the Company's taxable income or loss.
Accordingly, no provisions for federal income taxes are reflected in the
accompanying financial statements. Provision has been made for state and local
income taxes.
The unaudited pro forma tax information included in the accompanying
statements of operations reflect estimates of the Company's tax provision or
benefit as if it had been a C corporation in fiscal years 1996, 1997, and 1998.
In accordance with SFAS No. 109, "Accounting for Income Taxes," no pro forma
benefit was reflected in 1998 due to the Company's losses and the uncertainty
related to the realization of any tax assets.
REVENUE RECOGNITION
Revenues are recognized for time and materials-based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues and gross profit
are recognized as the work is performed, based on the ratio of costs incurred to
total estimated costs. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Customer deposits
represent the amount of customer payments received in advance of services being
performed.
COST OF SERVICES
Cost of services is comprised primarily of salaries, employee benefits and
incentive compensation of billable employees and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements
F-77
<PAGE>
INTERACTIVE8, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to their relative short maturity and/or their variable interest
rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement is in effect for all quarters of fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of this standard to have
a material effect on its results of operations, financial condition or cash
flows.
3. SIGNIFICANT CUSTOMERS:
During the year ended December 31, 1996, sales to three customers accounted
for 26%, 16%, and 12% of revenue. During the year ended December 31, 1997, sales
to three customers accounted for 31%, 21%, and 14% of revenue. During the year
ended December 31, 1998, sales to two customers accounted for 35% and 10% of
revenue. At December 31, 1998, four customers accounted for 43%, 11%, 11%, and
11% of accounts receivable.
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
Computers and equipment...................................... 3-7 $ 326,930 $ 494,049
Leasehold improvements....................................... 10 140,455 213,160
---------- ----------
467,385 707,209
Less--Accumulated depreciation............................... (214,675) (392,676)
---------- ----------
Property and equipment, net................................ $ 252,710 $ 314,533
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense was $59,599, $135,499, and $178,001
for the years ended December 31, 1996, 1997, and 1998, respectively.
F-78
<PAGE>
INTERACTIVE8, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Accrued payroll....................................................... $ 37,679 $ --
Accrued payroll taxes................................................. 15,658 1,414
Consulting agreement.................................................. 478,442 414,650
Accrued bonuses....................................................... 2,025 --
Accrued vacation...................................................... 15,825 29,906
Accrued professional fees............................................. 15,751 --
Accrued interest...................................................... -- 55,000
Other................................................................. 1,631 --
---------- ----------
Accrued liabilities................................................. $ 567,011 $ 500,970
---------- ----------
---------- ----------
</TABLE>
6. DEBT:
NOTES PAYABLE
As of December 31, 1998, the Company has available a $250,000 revolving line
of credit (of which $232,505 has been drawn) with a bank. The agreement provides
for interest at a rate of prime plus 1% (8.75% at December 31, 1998). The line
of credit is secured by certain defined assets of the stockholders, including
all personal property and fixtures, and matures during November 1999. In the
event that the line of credit is not renewed, it converts at maturity into an
installment note with a two-year maturity.
At December 31, 1998, the Company negotiated for a term loan of $300,000 to
help finance construction. The term loan has a fixed rate of 8% per annum. There
were no borrowings against this loan as of December 31, 1998. The term loan will
be repayable in 48 monthly installments commencing January 30, 2000. The term
loan is secured by certain defined assets of the stockholders, including all
personal property and fixtures.
LOANS PAYABLE TO STOCKHOLDERS
Loans payable to stockholders are demand obligations and bear interest at 8%
per annum.
Long-term debt is comprised of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Loans payable to stockholders......................................... $ 123,188 $ 637,659
Equipment financing, non-interest bearing payable in monthly
installments ranging from $175 to $1,695, maturing March 1999
through March 2001, secured by certain equipment.................... 54,860 85,649
---------- ----------
178,048 723,308
Less--Current maturities.............................................. (164,080) (700,709)
---------- ----------
$ 13,968 $ 22,599
---------- ----------
---------- ----------
</TABLE>
F-79
<PAGE>
INTERACTIVE8, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. DEBT: (CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<S> <C> <C>
1999.................................................... $ 700,709
2000.................................................... 22,599
---------
$ 723,308
---------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
The Company adopted a 401(k) plan during 1997. The Company matches employees
contributions up to 2%. During 1998, the Company contributed $23,287. No
contributions were made during 1997.
At December 31, 1998, the Company had entered into a noncancelable operating
lease, expiring October 2008, to lease new office facilities. The leases require
the payment of property taxes, insurance, and maintenance.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
------------
<S> <C>
1999............................................................................ $ 184,000
2000............................................................................ 252,000
2001............................................................................ 231,000
2002............................................................................ 252,000
2003............................................................................ 232,500
Thereafter...................................................................... 1,428,750
------------
Total future minimum lease payments......................................... $ 2,580,250
------------
------------
</TABLE>
Rent expense for the years ended December 1996, 1997, and 1998 totaled
$47,274, $39,132, and $49,007, respectively.
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on its financial condition or results of operations.
8. EQUITY INCENTIVE PLANS:
Effective July 1, 1998, the Company approved the 1998 Nonqualified Stock
Option Plan (the "1998 Plan"), authorizing the Board of Directors to grant
nonqualified options to purchase common stock of the Company. The total number
of shares of common stock which may be issued under the 1998 Plan is 237,650.
Under the terms of the 1998 Plan, the Company can offer certain
non-stockholder employees the right to share in the Company's value in the event
the Company goes public or is sold to a third party. These are effectively,
appreciation rights (the "Rights") that do not represent ownership or voting
interests in the Company. Employees, officers, and directors become eligible to
receive Rights six months after the commencement of their employment with the
Company. Rights vest 50% after six months from the grant date and a further 50%
after twelve months from the grant date. Upon a defined event, such as an
initial public offering of stock or a sale of the Company, Rights will be
converted into a new combination of cash and/or stock dependent upon the
structure of the defined
F-80
<PAGE>
INTERACTIVE8, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY INCENTIVE PLANS: (CONTINUED)
event. Prior to such an event, the Rights have no value. The Rights are
nontransferable, and will be forfeited immediately upon an employee's departure
from the Company prior to any defined event.
No Rights were issued prior to 1998. Rights outstanding during 1998, were as
follows:
<TABLE>
<CAPTION>
GRANT NUMBER OF
PRICE RIGHTS
--------- -----------
<S> <C> <C>
Rights outstanding at December 31, 1997.................................. --
Granted................................................................ $ 2.50 94,500
Exercised.............................................................. --
Canceled............................................................... --
-----------
Rights outstanding at December 31, 1998.................................. 94,500
-----------
-----------
</TABLE>
The Rights are considered compensatory equity instruments. The Rights will
be exercisable only upon the occurrence of a defined event. The date the event
is first considered likely to occur, a compensation charge for the cumulative
appreciation in the Rights should be recognized. The Company believes that the
condition for recognition has been met and has recognized a $30,000 cost of
services charge during 1998 for the cumulative appreciation in the Rights.
Compensation expense recognized during 1998 is equal to the difference between
the estimated fair market value of the Company stock at year-end and the grant
price.
In February 1998, the Company issued 320,783 shares of common stock to a new
stockholder, for cash consideration of $50,000. The Company estimated the fair
value of this stock at the date of the transaction and recorded compensation
expense of $135,000 for the excess of the fair value over the consideration
received, with a corresponding increase to additional paid-in capital.
9. RELATED-PARTY TRANSACTIONS:
The Company has a consulting agreement with a former stockholder that
provides for monthly payments of $7,000 commencing July 1, 1997, and ending June
30, 2005.
10. AGREEMENT TO MERGE WITH CLARANT:
The Company intends to enter into an agreement to be acquired by Clarant.
This acquisition is subject to successful completion of an initial public
offering of the common stock of Clarant.
F-81
<PAGE>
INTERACTIVE8, INC.
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Rule 10-01 of Regulation S-X. Accordingly,
they do not contain all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, the accompanying unaudited financial statements reflect all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation of the Company's financial condition as of
March 31, 1999, the results of its operations and its cash flows for the three
month periods ended March 31, 1998 and 1999. These financial statements should
be read in conjunction with the Company's audited 1998 financial statements,
including the notes thereto. Operating results for the three month period ended
March 31, 1999 are not necessarily indicative of the operating results that may
be expected for the year ending December 31, 1999. The following discussions may
contain forward-looking statements, which are subject to the risk factors set
forth in "Risk Factors" contained in Item 2.
B. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of March 31, 1999:
<TABLE>
<CAPTION>
MARCH 31,
1999
------------
<S> <C>
Accrued payroll................................................................. $ 41,755
Accrued payroll taxes........................................................... 5,256
Consulting agreement............................................................ 398,702
Accrued participation rights.................................................... 2,205,000
Accrued vacation................................................................ 42,089
Accrued interest................................................................ 68,750
Other........................................................................... 1,666
------------
Accrued liabilities........................................................... $ 2,763,218
------------
------------
</TABLE>
C. DEBT:
The Company has a term loan of $300,000 which bears interest at a fixed rate
of 8% per annum payable monthly. Borrowing against this loan was $277,892 at
March 31, 1999. The loan will be repayable in 48 monthly installments commencing
January 2000. The loan is secured by certain defined assets of the stockholders,
including all personal property and fixtures.
D. EQUITY INCENTIVE PLANS:
Effective July 1, 1998, the Company approved the 1998 Nonqualified Stock
Option Plan (the "1998 Plan"), authorizing the Board of Directors to grant
nonqualified options to purchase common stock of the Company. The total number
of shares of common stock that may be issued under the 1998 Plan is 237,650.
Under the terms of the 1998 Plan, the Company can offer certain
non-stockholder employees the right to share in the Company's value in the event
the Company goes public or is sold to a third party. These are effectively,
appreciation rights (the "Rights") that do not represent ownership or voting
F-82
<PAGE>
INTERACTIVE8, INC.
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS (CONTINUED)
D. EQUITY INCENTIVE PLANS: (CONTINUED)
interests in the Company. Employees, officers, and directors become eligible to
receive Rights grants six months after the commencement of their employment with
the Company. Rights vest 50% after six months from the grant date and a further
50% after twelve months from the grant date. Upon a defined event, such as an
initial public offering of stock or a sale of the Company, these rights will be
converted into a new combination of cash and/or stock dependent upon the
structure of the defined event. Prior to such an event, the Rights have no
value. The Rights are nontransferable, and will be forfeited immediately upon an
employee's departure from the Company prior to any defined event.
Rights outstanding at March 31, 1999, were as follows:
<TABLE>
<CAPTION>
GRANT NUMBER OF
PRICE RIGHTS
--------- -----------
<S> <C> <C>
Rights outstanding at December 31, 1998.................................. 94,500
Granted................................................................ $ 7.00 6,550
Exercised.............................................................. --
Canceled............................................................... --
-----------
Rights outstanding at March 31, 1999..................................... 101,050
-----------
-----------
</TABLE>
The Rights are considered compensatory equity instruments. The Rights will
be exercisable only upon the occurrence of a defined event. The date the event
is first considered likely to occur, a compensation charge for the cumulative
appreciation in the Rights should be recognized. The Company believes that the
condition for recognition has been met and has recognized a $2,205,000 cost of
services charge during the three months ended March 31, 1999, for the cumulative
appreciation in the Rights. Compensation expense recognized during the three
months ended March 31, 1999, is equal to the difference between the estimated
fair market value of the Company stock at March 31, 1999, and the exercise
price.
F-83
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Multimedia Resources, LLC:
We have audited the accompanying balance sheets of Multimedia Resources, LLC
(a New York limited liability company) as of December 31, 1997 and 1998, and the
related statements of operations, members' equity, and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Multimedia Resources, LLC as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 30, 1999
F-84
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 100,824 $ 120,903 $ 343,926
Accounts receivable....................................................... 581,346 125,998 369,434
Unbilled revenues......................................................... 21,450 22,502 --
Prepaid expenses and other................................................ 16,293 5,044 13,710
---------- ---------- -----------
Total current assets.................................................... 719,913 274,447 727,070
PROPERTY AND EQUIPMENT, net................................................. 72,206 58,886 54,512
OTHER ASSETS................................................................ 12,315 13,045 13,045
---------- ---------- -----------
Total assets............................................................ $ 804,434 $ 346,378 $ 794,627
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................................... $ 118,652 $ 17,136 $ 96,127
Accrued liabilities....................................................... 231,021 155,202 150,344
Customer deposits......................................................... -- -- 87,500
---------- ---------- -----------
Total liabilities........................................................... 349,673 172,338 333,971
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY............................................................. 454,761 174,040 460,656
---------- ---------- -----------
Total liabilities and members' equity................................... $ 804,434 $ 346,378 $ 794,627
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ----------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES....................................... $ 1,928,189 $ 3,476,221 $ 2,068,255 $ 652,099 $ 742,253
COST OF SERVICES............................... 985,282 2,437,132 1,755,896 439,372 314,397
------------ ------------ ------------ ---------- ----------
GROSS PROFIT................................... 942,907 1,039,089 312,359 212,727 427,856
SELLING, GENERAL AND ADMINISTRATIVE............ 420,406 536,503 275,199 81,386 91,950
INTEREST INCOME................................ 737 4,576 6,319 3,888 810
------------ ------------ ------------ ---------- ----------
NET INCOME..................................... $ 523,238 $ 507,162 $ 43,479 $ 135,229 $ 336,716
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
PRO FORMA INCOME TAX (UNAUDITED)............... 209,295 202,865 9,847 30,629 134,686
------------ ------------ ------------ ---------- ----------
PRO FORMA NET INCOME (UNAUDITED)............... $ 313,943 $ 304,297 $ 33,632 $ 104,600 $ 202,030
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1995........................................................ $ 125,626
Distributions to members........................................................ (201,265)
Net income...................................................................... 523,238
---------
BALANCE, December 31, 1996........................................................ 447,599
Distributions to members........................................................ (500,000)
Net income...................................................................... 507,162
---------
BALANCE, December 31, 1997........................................................ 454,761
Distributions to members........................................................ (324,200)
Net income...................................................................... 43,479
---------
BALANCE, December 31, 1998........................................................ 174,040
Distributions to members (unaudited)............................................ (50,100)
Net income (unaudited).......................................................... 336,716
---------
BALANCE, March 31, 1999 (unaudited)............................................... $ 460,656
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 523,238 $ 507,162 $ 43,479 $ 135,229 $ 336,716
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation................................... 4,939 10,521 17,496 4,256 4,374
Changes in assets and liabilities-
Accounts receivable.......................... (516,353) (11,784) 455,348 330,158 (243,436)
Unbilled revenues............................ -- 2,118 (1,052) 21,450 22,502
Prepaid expenses and other................... (2,720) (13,573) 11,249 13,583 (8,666)
Other assets................................. (5,045) (6,875) (730) -- --
Accounts payable............................. 131,311 (12,659) (101,516) 3,520 78,991
Accrued liabilities.......................... 62,882 167,477 (75,819) (104,399) (4,858)
Customer deposits............................ -- -- -- -- 87,500
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities.... 198,252 642,387 348,455 403,797 273,123
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (13,212) (68,732) (4,176) -- --
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to members........................... (201,265) (500,000) (324,200) (30,000) (50,100)
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ (16,225) 73,655 20,079 373,797 223,023
CASH AND CASH EQUIVALENTS,
beginning of period................................ 43,394 27,169 100,824 100,824 120,903
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period............. $ 27,169 $ 100,824 $ 120,903 $ 474,621 $ 343,926
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Multimedia Resources, LLC (the "Company"), a New York limited liability
company, was organized effective March 31, 1995. Using the Internet as its
primary platform, the company specializes in business development, relationship
building, development and implementation of marketing and media programs, and
technology innovation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using a
straight-line method over the estimated useful lives of the assets. The costs
and related accumulated depreciation of property and equipment sold, retired, or
disposed of are removed from the accounts and any gains or losses reflected in
the statements of operations. Expenditures for major acquisitions and
improvements are capitalized while expenditures for maintenance and repairs are
expensed as incurred.
INCOME TAXES
As a limited liability company, the Company pays no federal income tax, but
rather its members are taxed individually on the Company's taxable income or
loss. Accordingly, no provisions for federal income taxes are reflected in the
accompanying financial statements.
The unaudited pro forma tax information included in the accompanying
statements of operations reflect estimates of the Company's tax provision or
benefit as if it had been a C corporation in fiscal years 1996, 1997, and 1998.
REVENUE RECOGNITION
Revenues are recognized for time and materials-based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues and gross profit
are recognized as the work is performed, based on the ratio of costs incurred to
total estimated costs. Unbilled revenues on contracts are comprised of labor
costs incurred, plus earnings on certain contracts which have not been billed.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
COST OF SERVICES
Cost of services is comprised primarily of salaries, employee benefits, and
incentive compensation of billable employees and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
F-89
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts that approximate
fair value due to their relative short maturity and/or their variable interest
rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement is in effect for all quarters of fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of this standard to have
a material effect on its results of operations, financial condition or cash
flows.
3. SIGNIFICANT CUSTOMERS:
During the year ended December 31, 1996, sales to one customer accounted for
52% of revenue. During the year ended December 31, 1997, sales to two customers
accounted for 77% of revenue. During the year ended December 31, 1998, sales to
one customer accounted for 34% of revenue.
F-90
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Computers and equipment......................................................... 3-5 $ 47,930 $ 52,106
Furniture and fixtures.......................................................... 5-7 41,301 41,301
---------- ----------
89,231 93,407
Less--Accumulated depreciation.................................................. (17,025) (34,521)
---------- ----------
Property and equipment, net................................................... $ 72,206 $ 58,886
---------- ----------
---------- ----------
</TABLE>
Depreciation expense was $4,939, $10,521, and $17,496 for the years ended
December 31, 1996, 1997, and 1998, respectively.
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Profit sharing plan contribution.......................................................... $ 116,010 $ 150,344
Accrued bonuses........................................................................... 104,400 --
Other..................................................................................... 10,611 4,858
---------- ----------
Accrued liabilities..................................................................... $ 231,021 $ 155,202
---------- ----------
---------- ----------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
The Company sponsors a profit sharing and money purchase plan that covers
employees who are at least 21 years old and have at least one year of service
with the Company. Contributions to the profit sharing plan are at the discretion
of the Company. The Company contributes 4.8% of employees' compensation to the
money purchase plan. Contributions to the plans were $63,744, $116,010, and
$150,344 during 1996, 1997, and 1998, respectively.
The Company leases its office facilities under noncancelable operating
leases which expire in January 2002. The leases require the payment of property
taxes, insurance, and maintenance. The Company also has operating lease
agreements related to certain equipment which expire at various
F-91
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
dates. Rent expense for the years ended December 1996, 1997, and 1998, totaled
$2,945, $54,939, and $77,468, respectively. Future minimum lease payments are as
follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1999.............................................................................. $ 78,401
2000.............................................................................. 82,242
2001.............................................................................. 85,538
2002.............................................................................. 7,203
2003.............................................................................. --
Thereafter........................................................................ --
----------
Total future minimum lease payments............................................... $ 253,384
----------
----------
</TABLE>
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on its financial condition or results of operations.
7. AGREEMENT TO MERGE WITH CLARANT:
The Company intends to enter into an agreement to be acquired by Clarant.
This acquisition is subject to successful completion of an initial public
offering of the common stock of Clarant.
F-92
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to and Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
condition as of March 31, 1999, the results of its operations and its cash flows
for the three-month periods ended March 31, 1998 and 1999. These financial
statements should be read in conjunction with the Company's audited 1998
financial statements, including the notes thereto. Operating results for the
three-month period ended March 31, 1999, are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 1999.
F-93
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Potomac Partners Management Consulting, LLC:
We have audited the accompanying balance sheets of Potomac Partners
Management Consulting, LLC (a Delaware limited liability company) as of December
31, 1997 and 1998, and the related statements of operations, members' equity,
and cash flows for the period from inception (November 10, 1997), to December
31, 1997, and for the year ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Potomac Partners Management
Consulting, LLC as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for the period from inception (November 10, 1997),
to December 31, 1997, and for the year ended December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 5, 1999
F-94
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 164,503 $ 892,336 $ 970,794
Accounts receivable, net of allowance for doubtful accounts of $37,400,
$132,400, and $225,880 (unaudited).................................... 51,437 683,797 878,979
Unbilled revenues....................................................... 185,300 420,353 170,777
Prepaid expenses and other.............................................. 934 24,015 66,530
---------- ------------ ------------
Total current assets.................................................. 402,174 2,020,501 2,087,080
PROPERTY AND EQUIPMENT, net............................................... 24,523 51,288 45,928
---------- ------------ ------------
Total assets.......................................................... $ 426,697 $ 2,071,789 $ 2,133,008
---------- ------------ ------------
---------- ------------ ------------
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ -- $ 175,170 $ 322,794
Accrued liabilities..................................................... 129,699 2,142,854 6,945,587
---------- ------------ ------------
Total liabilities..................................................... 129,699 2,318,024 7,268,381
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY........................................................... 296,998 (246,235) (5,135,373)
---------- ------------ ------------
Total liabilities and members' equity................................. $ 426,697 $ 2,071,789 $ 2,133,008
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE
(NOVEMBER 10, 1997) FOR THE THREE MONTHS ENDED
TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1997 1998 1998 1999
------------------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
REVENUES........................................... $ 372,600 $ 4,886,543 $ 975,950 $ 2,059,514
COST OF SERVICES................................... 290,360 5,086,176 653,628 6,230,720
-------- ------------- ---------- -------------
GROSS PROFIT....................................... 82,240 (199,633) 322,322 (4,171,206)
SELLING, GENERAL AND ADMINISTRATIVE................ 86,239 876,226 180,086 489,038
OTHER INCOME (EXPENSE)............................. 997 30,618 1,743 (10,033)
-------- ------------- ---------- -------------
NET INCOME (LOSS).................................. $ (3,002) $ (1,045,241) $ 143,979 $ (4,670,277)
-------- ------------- ---------- -------------
-------- ------------- ---------- -------------
PRO FORMA INCOME TAX (UNAUDITED)................... -- -- -- --
-------- ------------- ---------- -------------
PRO FORMA NET INCOME (LOSS) (UNAUDITED)............ $ (3,002) $ (1,045,241) $ 143,979 $ (4,670,277)
-------- ------------- ---------- -------------
-------- ------------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<S> <C>
BALANCE, November 10, 1997 (inception).......................................... $ --
Capital contributions-
Issuance of member units at stated value.................................... 600,000
Members' notes in lieu of cash contributions................................ (300,000)
----------
Net capital contributions................................................. 300,000
Net loss...................................................................... (3,002)
----------
BALANCE, December 31, 1997...................................................... 296,998
Capital contributions-
Issuance of member units at stated value.................................... 337,500
Members' notes in lieu of cash contributions................................ (100,000)
Payments on notes from members.............................................. 300,000
----------
Net capital contributions................................................. 537,500
Redemption of member units.................................................... (35,492)
Net loss...................................................................... (1,045,241)
----------
BALANCE, December 31, 1998...................................................... (246,235)
Capital contributions-
Issuance of member units at stated value (unaudited)........................ 375,500
Members' notes in lieu of cash contributions (unaudited).................... (86,249)
Payments on notes from members (unaudited).................................. 100,000
----------
Net capital contributions (unaudited)..................................... 389,251
Redemption of member units (unaudited)........................................ (608,112)
Net loss (unaudited).......................................................... (4,670,277)
----------
BALANCE, March 31, 1999 (unaudited)............................................. $(5,135,373)
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE
(NOVEMBER 10, 1997) FOR THE THREE MONTHS ENDED
TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1997 1998 1998 1999
------------------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ (3,002) $ (1,045,241) $ 143,979 $ (4,670,277)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities-
Depreciation and amortization.................. 205 25,528 5,885 4,031
Equity related compensation.................... -- 1,503,000 -- 4,962,103
Changes in assets and liabilities-
Accounts receivable.......................... (51,437) (632,360) (415,112) (195,182)
Unbilled revenues............................ (185,300) (235,053) (38,800) 249,576
Prepaid expenses and other................... (934) (23,082) (26,976) (42,515)
Disposal of equipment........................ -- -- -- 1,329
Accounts payable............................. -- 175,170 -- 147,624
Accrued liabilities.......................... 129,699 510,155 218,936 (159,370)
---------- ------------- ---------- -------------
Net cash provided by (used in) operating
activities............................... (110,769) 278,117 (112,088) 297,319
---------- ------------- ---------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................. (24,728) (52,292) (26,106) --
---------- ------------- ---------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions............................ 300,000 537,500 138,562 389,251
Redemption of member units....................... -- (35,492) -- (608,112)
---------- ------------- ---------- -------------
Net cash provided by (used in) financing
activities............................... 300,000 502,008 138,562 (218,861)
---------- ------------- ---------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......... 164,503 727,833 368 78,458
CASH AND CASH EQUIVALENTS, beginning of period..... -- 164,503 164,503 892,336
---------- ------------- ---------- -------------
CASH AND CASH EQUIVALENTS, end of period........... $ 164,503 $ 892,336 $ 164,871 $ 970,794
---------- ------------- ---------- -------------
---------- ------------- ---------- -------------
SUPPLEMENTAL INFORMATION:
Issuance of member units for notes receivable...... $ 300,000 $ 100,000 $ -- $ 86,249
---------- ------------- ---------- -------------
---------- ------------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Potomac Partners Management Consulting, LLC (the "Company") specializes in
electronic commerce and Internet related consulting services. The Company offers
consulting services in three primary areas: business and strategy, program
management, and application design. The Company was formed in the State of
Delaware on November 10, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using a
straight-line method over the estimated useful lives of the assets. The costs
and related accumulated depreciation of property and equipment sold, retired, or
disposed of are removed from the accounts and any gains or losses are reflected
in the statement of operations. Expenditures for major acquisitions and
improvements are capitalized while expenditures for maintenance and repairs are
expensed as incurred.
INCOME TAXES
As a limited liability company, the Company pays no federal income tax, but
rather the members are taxed individually on the Company's taxable income.
Accordingly, no provisions for federal income taxes are reflected in the
accompanying financial statements.
The unaudited pro forma tax information included in the accompanying
statements of operations reflect estimates of the Company's tax provision or
benefit as if it had been a C corporation in fiscal years 1997 and 1998. In
accordance with SFAS No. 109, "Accounting for Income Taxes," no pro forma tax
benefit was reflected due to the Company's recurring losses and the uncertainty
related to the realization of any tax assets.
REVENUE RECOGNITION
Revenues are recognized on the percentage-of-completion method. Under this
approach, revenues and gross profit are recognized as the work is performed,
based on the ratio of costs incurred to total estimated costs. Unbilled revenues
on contracts are comprised of labor costs incurred, plus earnings on certain
contracts which have not been billed. Provisions for losses are recorded in the
period such items are identified.
COST OF SERVICES
Cost of services are comprised primarily of salaries, employee benefits, and
incentive compensation of billable employees and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
F-99
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCOUNTING FOR PARTICIPATION APPRECIATION RIGHTS AND MEMBER APPRECIATION RIGHTS
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value
based method of accounting for stock-based compensation or continuation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has chosen to account for stock-based
compensation using the intrinsic value based method prescribed in APB 25 and to
provide the pro forma disclosure provision of SFAS 123.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to the relatively short maturity of these instruments.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement is in effect for all quarters of fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of this standard to have
a material effect on its results of operations, financial condition or cash
flows.
3. SIGNIFICANT CUSTOMERS:
During the period from inception (November 10, 1997) through December 31,
1997, sales to two customers accounted for 48% and 46% of revenue. During the
year ended December 31, 1998, sales to the Company's four largest customers
accounted for 26%, 18%, 17%, and 13% of revenue.
F-100
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT CUSTOMERS: (CONTINUED)
As of December 31, 1998, accounts receivable from the Company's four largest
customers accounted for 26%, 24%, 17%, and 15% of total accounts receivable.
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
----------- --------- ---------
<S> <C> <C> <C>
Computers and equipment............................................................. 1-3 $ 24,728 $ 76,342
Furniture and fixtures.............................................................. 3 -- 679
--------- ---------
24,728 77,021
Less- Accumulated depreciation...................................................... (205) (25,733)
--------- ---------
Property and equipment, net.................................................. $ 24,523 $ 51,288
--------- ---------
--------- ---------
</TABLE>
Depreciation expense was $205 and $25,528 for the periods ended December 31,
1997 and 1998.
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- ------------
<S> <C> <C>
Member bonus payable................................................ $ 72,300 $ 485,332
Employee bonus payable.............................................. 3,100 100,000
Participation appreciation rights................................... -- 1,503,000
Other............................................................... 54,299 54,522
---------- ------------
Accrued liabilities............................................. $ 129,699 $ 2,142,854
---------- ------------
---------- ------------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
The Company sponsors a profit sharing plan (the "Plan") that covers
employees who are at least 21 years old and have at least one hour of service
with the Company. Contributions to the Plan are at the discretion of the
Company. There were no contributions to the Plan during 1997 and 1998.
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on financial position or results of operations.
7. EQUITY INCENTIVE PLANS:
PARTICIPATION APPRECIATION RIGHTS
The Company offers all non-member professionals the right to share in the
Company's value in the event the Company consummates an initial public offering
or is sold to a third party. These
F-101
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EQUITY INCENTIVE PLANS: (CONTINUED)
appreciation rights (the "Non-Member Rights") do not represent ownership or
voting interests or membership in the Company. The Non-Member Rights are awarded
at the time an employee signs an employment offer letter from the Company and at
various points during employment based on performance. Upon a defined event,
such as an initial public offering of stock or a sale of the Company, these
rights will be converted into a new combination of cash and/or securities
(options, stock, restricted stock) dependent upon the structure of the defined
event. Prior to such an event, these rights have no value. The Non-Member Rights
are nontransferable, and will be forfeited immediately upon an employee's
departure from the Company prior to any defined event.
<TABLE>
<CAPTION>
RANGE OF NUMBER OF
GRANT PRICES RIGHTS
-------------- -----------
<S> <C> <C>
Rights outstanding at inception (November 10, 1997).................................. --
Granted............................................................................ $0.33 90,000
Exercised.......................................................................... --
Canceled........................................................................... --
-----------
Rights outstanding at December 31, 1997.............................................. 90,000
Granted............................................................................ $1.00-$4.05 223,500
Exercised.......................................................................... --
Canceled........................................................................... --
-----------
Rights outstanding at December 31, 1998.............................................. 313,500
-----------
-----------
</TABLE>
The Non-Member Rights are considered compensatory equity instruments. The
Non-Member Rights will be exercisable only upon the occurrence of a defined
event. The date the event is first considered likely to occur, a compensation
charge for the cumulative appreciation in the Non-Member Rights should be
recognized. The Company believes that the condition for recognition has been met
and has recognized a $1,503,000 cost of services charge during 1998 for the
cumulative appreciation in the Non-Member Rights.
Compensation expense recognized during 1998 is equal to the increase in the
estimated fair market value of the Company's units since date of grant
multiplied by the total number of rights outstanding.
MEMBER APPRECIATION RIGHTS
The Company grants member appreciation rights ("Member Rights") to its
members upon the acquisition of a membership interest in the Company and during
the year based on performance. The Member Rights vest ratably over a three-year
period. The grant price of each Member Right is equal to the estimated fair
market value of each member unit on the date of grant. Upon a defined event,
such as an initial public offering of stock or a sale of the Company, these
Member Rights will be converted into a new combination of cash and/or securities
(options, stock, restricted stock) dependent upon the structure of the defined
event. Prior to such an event, these rights have no value. The Member Rights are
nontransferable, and will be forfeited upon a member's departure from the
Company prior to any defined event.
F-102
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EQUITY INCENTIVE PLANS: (CONTINUED)
Member Rights outstanding during 1997 and 1998, were as follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF
GRANT PRICES RIGHTS
------------- -----------
<S> <C> <C>
Rights outstanding at inception (November 10, 1997)................. --
Granted........................................................... --
Exercised......................................................... --
Canceled.......................................................... --
-----------
Rights outstanding at December 31, 1997............................. --
Granted........................................................... $ 6.50 33,716
Exercised......................................................... --
Canceled.......................................................... --
-----------
Rights outstanding at December 31, 1998............................. 33,716
-----------
-----------
</TABLE>
The Member Rights are considered compensatory equity instruments. The vested
Member Rights will be exercisable only upon the occurrence of a defined event.
The date the event is first considered likely to occur, a compensation charge
for the cumulative appreciation in the Member Rights should be recognized. The
Company recognized no charge during 1998 as these Member Rights were granted in
December 1998.
8. RELATED-PARTY TRANSACTIONS:
At December 31, 1997, the Company had interest-bearing notes receivable from
two of its members totaling $150,000 each. At December 31, 1998, the Company had
a $100,000 interest-bearing note receivable from one of its members. All notes
bear interest at 6% annually and have a term of twelve months. All notes were
related to members' capital contributions and have been recorded as an offset to
members' equity. The Company recognized interest income of $18,000 during 1998.
At December 31, 1997 and 1998, the Company's accrued expenses included
employee expenses of $53,236 and $4,646, respectively.
9. SUBSEQUENT EVENTS:
Effective January 1, 1999, certain of the Company's Members (the "Exiting
Members") dissolved their interest in the Company to form a new Limited
Liability Company called Potomac Ventures, LLC. Their interest was dissolved by
the transfer of 45% of the aggregate net assets of the Company to the Exiting
Members in exchange for the Exiting Member's units in the Company. There is no
co-ownership between the companies; however, they share the same Advisory Board
(as defined).
The Company and Potomac Ventures, LLC, entered into a cross services
agreement during 1999, whereby the two companies agree to share certain
administrative services.
10. AGREEMENT TO MERGE WITH CLARANT:
The Company intends to enter into an agreement to be acquired by Clarant.
This acquisition is subject to the successful completion of an initial public
offering of the common stock of Clarant.
F-103
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to and Rule10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
condition as of March 31, 1999, the results of its operations and its cash flows
for the three-month periods ended March 31, 1998 and 1999. These financial
statements should be read in conjunction with the Company's audited 1998
financial statements, including the notes thereto. Operating results for the
three-month period ended March 31, 1999 are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 1999.
B. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of March 31, 1999:
<TABLE>
<CAPTION>
MARCH 31,
1999
------------
<S> <C>
Member bonus payable............................................................ $ 263,665
Employee bonus payable.......................................................... 134,265
Participation appreciation rights............................................... 6,465,103
Other........................................................................... 82,554
------------
Accrued liabilities......................................................... $ 6,945,587
------------
------------
</TABLE>
C. EQUITY INCENTIVE PLANS:
PARTICIPATION APPRECIATION RIGHTS
The Company offers all non-member professionals the right to share in the
Company's value in the event the Company consummates an initial public offering
or is sold to a third party. These appreciation rights (the "Non-Member Rights")
do not represent ownership or voting interests or membership in the Company. The
Non-Member Rights are awarded at the time an employee signs an employment offer
letter from the Company and at various points during employment based on
performance. Upon a defined event, such as an initial public offering of stock
or a sale of the Company, these rights will be converted into a new combination
of cash and/or securities (options, stock, restricted stock) dependent upon the
structure of the defined event. Prior to such an event, these
F-104
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
C. EQUITY INCENTIVE PLANS: (CONTINUED)
rights have no value. The Non-Member Rights are nontransferable, and will be
forfeited immediately upon an employee's departure from the Company prior to any
defined event.
<TABLE>
<CAPTION>
RANGE OF NUMBER OF
GRANT PRICES RIGHTS
------------- -----------
<S> <C> <C>
Rights outstanding at December 31, 1998............................ 313,500
Granted.......................................................... $ 6.84-$7.58 8,950
Exercised........................................................ --
Canceled......................................................... $ 1.00-$2.85 (144,000)
------------- -----------
Rights outstanding at March 31, 1999............................... 178,450
-----------
-----------
</TABLE>
The Non-Member Rights are considered compensatory equity instruments. The
Non-Member Rights will be exercisable only upon the occurrence of a defined
event. The date the event is first considered likely to occur, a compensation
charge for the cumulative appreciation in the Non-Member Rights should be
recognized. The Company believes that the condition for recognition has been met
and has recognized $4,369,335 as a cost of services charge during 1999 for the
cumulative appreciation in the Non-Member Rights.
Compensation expense recognized during 1999 is equal to the increase in the
estimated fair market value of the Company's units since date of grant
multiplied by the total number of rights outstanding.
MEMBER APPRECIATION RIGHTS
The Company grants member appreciation rights ("Member Rights") to its
members on admission into the Company ownership and during the year based on
performance. The Member Rights vest ratably over a three-year period. The grant
price of each Member Right is equal to the estimated fair market value of each
member unit on the date of grant. Upon a defined event, such as an initial
public offering of stock or a sale of the Company, these Member Rights will be
converted into a new combination of cash and/or securities (options, stock,
restricted stock) dependent upon the structure of the defined event.
Prior to such an event, these rights have no value. The Member Rights are
nontransferable, and will be forfeited immediately upon a member's departure
from the Company prior to any defined event.
<TABLE>
<CAPTION>
RANGE OF NUMBER OF
GRANT PRICES RIGHTS
------------- -----------
<S> <C> <C>
Rights outstanding at December 31, 1998................................................ 33,716
Granted.............................................................................. $ 6.50-$7.58 171,422
Exercised............................................................................ --
Canceled............................................................................. --
-----------
Rights outstanding at March 31, 1999................................................... 205,138
-----------
-----------
</TABLE>
The Member Rights are considered compensatory equity instruments. The vested
Member Rights will be exercisable only upon the occurrence of a defined event.
The date the event is first considered
F-105
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
C. EQUITY INCENTIVE PLANS: (CONTINUED)
likely to occur, a compensation charge for the cumulative appreciation in the
Member Rights should be recognized. The Company believes that the condition for
recognition has been met and has recognized $592,768 cost of service charge
during 1999 for the cumulative appreciation in Member Rights.
D. EQUITY:
Effective January 1, 1999, certain of the Company's members (the "Exiting
Members") dissolved their interest in the Company to form a new Limited
Liability Company called Potomac Venturers LLC. Their interest was dissolved by
the transfer of 45% of the aggregate net assets of the Company (approximately
$600,000) to the Exiting Members in exchange for the Exiting Members' units in
the Company. There is no co-ownership between the companies; however, they share
the same Advisory Board (as defined).
The Company and Potomac Ventures, LLC entered into a cross services
agreement during 1999, whereby the two companies agree to share certain
administrative services.
E. RELATED-PARTY TRANSACTIONS:
At March 31, 1999, the Company had a $86,249 interest-bearing note
receivable from one of its members. The note bears interest at 6% annually and
has a term of twelve months. The note relates to members' capital contributions
and has been recorded as an offset to members' equity.
F-106
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RSI Group, Inc.:
We have audited the accompanying consolidated balance sheets of RSI Group,
Inc. (a Texas S corporation) and subsidiaries as of December 31, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RSI Group, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 8, 1999
F-107
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 13,726 $ 30,495 $ 31,117
Accounts receivable, net of allowance for doubtful accounts of
$129,978, $199,065, and $191,460 (unaudited)........................ 2,880,383 3,147,714 2,294,438
Unbilled revenues..................................................... 40,868 76,542 62,299
Employee and other receivables........................................ 83,860 58,047 104,253
Prepaid expenses and other............................................ 99,773 112,739 129,764
------------ ------------ ------------
Total current assets................................................ 3,118,610 3,425,537 2,621,871
PROPERTY AND EQUIPMENT, net............................................. 248,942 325,377 298,380
OTHER ASSETS:
Goodwill, net of accumulated amortization of $2,950, $38,250 and
$47,100 (unaudited)................................................. 67,671 36,967 28,117
Other................................................................. 97,549 148,280 160,744
------------ ------------ ------------
Total assets........................................................ $ 3,532,772 $ 3,936,161 $ 3,109,112
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including cash overdraft of $299,751, $429,461, and
$270,960 (unaudited)................................................ $ 492,088 $ 540,866 $ 536,847
Accrued liabilities................................................... 254,403 279,997 577,946
Notes payable......................................................... 1,530,990 1,750,712 788,715
Current maturities of long-term debt.................................. 82,512 62,184 68,878
------------ ------------ ------------
Total current liabilities........................................... 2,359,993 2,633,759 1,972,386
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities............................. 6,693 36,259 15,546
------------ ------------ ------------
Total liabilities................................................... 2,366,686 2,670,018 1,987,932
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST....................................................... 90,183 168,310 118,832
STOCKHOLDERS' EQUITY:
Common stock, voting: $.20 par value, 175,000 shares authorized and
issued, 162,351 shares outstanding as of 1997, 1998 and 1999
(unaudited)......................................................... 35,000 35,000 35,000
Additional paid-in capital............................................ 222,268 222,268 952,268
Retained earnings..................................................... 1,026,028 1,047,958 222,473
Less--Treasury stock; at cost, 12,649 shares at 1997, 1998 and 1999
(unaudited)......................................................... (207,393) (207,393) (207,393)
------------ ------------ ------------
Total stockholders' equity.......................................... 1,075,903 1,097,833 1,002,348
------------ ------------ ------------
Total liabilities and stockholders' equity.......................... $ 3,532,772 $ 3,936,161 $ 3,109,112
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-108
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................... $ 16,133,004 $ 15,723,685 $ 16,926,779 $ 4,337,584 $ 3,252,823
COST OF SERVICES....................... 11,663,140 11,649,968 12,271,093 3,149,641 2,364,442
------------- ------------- ------------- ------------ ------------
GROSS PROFIT........................... 4,469,864 4,073,717 4,655,686 1,187,943 888,381
SELLING, GENERAL AND ADMINISTRATIVE.... 4,104,567 3,744,606 4,252,682 961,249 1,713,755
INTEREST EXPENSE....................... 122,043 142,773 169,178 41,114 24,248
MINORITY INTEREST...................... -- 108,767 161,896 33,181 (24,137)
------------- ------------- ------------- ------------ ------------
NET INCOME (LOSS)...................... $ 243,254 $ 77,571 $ 71,930 $ 152,399 $ (825,485)
------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------ ------------
PRO FORMA INCOME TAXES (BENEFIT)
(UNAUDITED).......................... 87,109 27,716 28,477 60,335 (278,106)
------------- ------------- ------------- ------------ ------------
PRO FORMA NET INCOME (UNAUDITED)....... $ 156,145 $ 49,855 $ 43,453 $ 92,064 $ (547,379)
------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-109
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
--------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995..................................... $ 35,000 $ 50,083 $ 1,015,203 $ (196,370)
Purchase of treasury stock................................... -- -- -- (11,023)
Equity related compensation.................................. -- 172,185 -- --
Dividends.................................................... -- -- (90,000) --
Net income................................................... -- -- 243,254 --
--------- ---------- ------------ -----------
BALANCE, December 31, 1996..................................... 35,000 222,268 1,168,457 (207,393)
Dividends.................................................... -- -- (220,000) --
Net income................................................... -- -- 77,571 --
--------- ---------- ------------ -----------
BALANCE, December 31, 1997..................................... 35,000 222,268 1,026,028 (207,393)
Dividends.................................................... -- -- (50,000) --
Net income................................................... -- -- 71,930 --
--------- ---------- ------------ -----------
BALANCE, December 31, 1998..................................... 35,000 222,268 1,047,958 (207,393)
Equity related compensation (unaudited)...................... -- 730,000 -- --
Net loss (unaudited)......................................... -- -- (825,485) --
--------- ---------- ------------ -----------
BALANCE, March 31, 1999 (unaudited)............................ $ 35,000 $ 952,268 $ 222,473 $ (207,393)
--------- ---------- ------------ -----------
--------- ---------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-110
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 243,254 $ 77,571 $ 71,930 $ 152,399 $ (825,485)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities-
Depreciation and amortization............... 56,754 84,884 158,148 39,538 40,689
Minority interest, net of payments made..... -- 108,767 78,127 (26,784) (49,478)
Equity related compensation................. 172,185 -- -- -- 730,000
Changes in assets and liabilities-
Accounts receivable....................... (270,359) (137,137) (267,331) (279,867) 853,276
Unbilled revenues......................... 13,364 (11,085) (35,674) 1,554 14,243
Employee and other receivables............ 8,969 (37,701) 25,813 12,320 (46,206)
Prepaid expenses and other................ (48,644) 30,276 (12,966) (8,981) (17,025)
Other assets.............................. (27,481) (47,186) (55,327) (12,362) (12,464)
Accounts payable, including cash
overdraft............................... 174,865 96,991 48,778 44,138 (4,019)
Accrued liabilities....................... 10,473 81,795 25,594 44,613 297,949
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities............................ 333,380 247,175 37,092 (121,708) 981,480
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (66,472) (178,754) (199,283) (68,767) (4,842)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) from notes payable,
net......................................... (59,548) 176,857 219,722 132,931 (961,997)
Proceeds from long-term debt.................. -- -- 124,403 81,543 --
Payments on long-term debt.................... (64,260) (53,629) (115,165) (22,301) (14,019)
Purchases of treasury stock................... (11,023) -- -- -- --
Dividends..................................... (90,000) (220,000) (50,000) -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities............................ (224,831) (96,772) 178,960 192,173 (976,016)
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 42,077 (28,351) 16,769 1,698 622
CASH AND CASH EQUIVALENTS, beginning of
period........................................ -- 42,077 13,726 13,726 30,495
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period........ $ 42,077 $ 13,726 $ 30,495 $ 15,424 $ 31,117
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL INFORMATION:
Cash paid for interest........................ $ 122,043 $ 130,773 $ 170,229 $ 12,958 $ 35,197
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-111
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
RSI Group, Inc. (the "Company") is a professional data processing services
company incorporated in the State of Texas on October 26, 1984. The primary
activity of the Company is to provide data processing personnel to other
companies on a consulting and contract staffing basis. The Company is an S
corporation for federal income tax purposes and, accordingly, acts as a
flow-through entity for the Company's stockholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. At December 31, 1998, the Company owns 80% of
a Texas limited liability company, Resource Solutions International ("RSI")
East, LLC, and has three other wholly owned subsidiaries.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the assets' estimated useful lives. The costs and
related accumulated depreciation of property and equipment sold, retired, or
disposed of are removed from the accounts and any gains or losses reflected in
the consolidated statements of operations. Repair and maintenance costs that do
not extend the useful life of the asset are charged to expense as incurred.
GOODWILL
Goodwill represents the excess of the aggregate consideration paid by the
Company in excess of the carrying value of the minority interests acquired.
Goodwill is amortized on a straight-line basis over two years. Amortization
expense totaled $2,950 and $35,300 in 1997 and 1998, respectively.
INCOME TAXES
As an S corporation, the Company pays no federal income tax, but rather the
stockholders are taxed individually on the Company's taxable income or loss.
Accordingly, no provision for federal income tax is reflected in the
accompanying consolidated financial statements.
The unaudited pro forma federal income tax information included in the
accompanying consolidated statements of operations reflect estimates of the
Company's tax provision as if it had been a C corporation in fiscal years 1996,
1997, and 1998.
MINORITY INTEREST
Minority interest represents the accumulated undistributed earnings
attributable to the minority owners of consolidated subsidiaries.
F-112
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
Revenue for professional services is recognized at the time such services
are rendered.
COST OF SERVICES
Cost of services are comprised primarily of salaries, employee benefits, and
incentive compensation of billable employees.
ACCOUNTING FOR EQUITY BASED COMPENSATION
The Company has granted minority interests in its consolidated subsidiaries
to certain management personnel. At the time of grant, the Company recorded
compensation expense for the fair value of the minority interest with
corresponding credits to additional paid-in capital. In addition, in 1996 the
Company had an equity participation plan, which has been replaced with the
minority interest participation discussed above. Compensation expense was
recorded in 1996 for the appreciation in equity value under this plan.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to their relative short maturity and/or their variable interest
rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement is in effect for all quarters of fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of this standard to have
a material effect on its consolidated results of operations, financial
condition, or cash flows.
F-113
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT CUSTOMERS:
During 1996, sales to two customers accounted for 21% and 18% of revenues.
During 1997, sales to three customers accounted for 28%, 17%, and 10% of
revenues. During 1998, sales to two customers accounted for 34% and 13% of
revenues.
As of December 31, 1998, two customers accounted for approximately 39% and
11% of trade accounts receivable.
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
------ ----------- -----------
<S> <C> <C> <C>
Computers and equipment........................................................ 3 $ 366,261 $ 544,743
Furniture and fixtures......................................................... 5 356,511 377,312
----------- -----------
722,772 922,055
Less- Accumulated depreciation................................................. (473,830) (596,678)
----------- -----------
Property and equipment, net............................................. $ 248,942 $ 325,377
----------- -----------
----------- -----------
</TABLE>
Depreciation expense during 1996, 1997, and 1998 was $56,754, $81,934, and
$122,848, respectively.
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Accrued vacation...................................................... $ 153,851 $ 184,076
Other................................................................. 100,552 95,921
---------- ----------
Accrued liabilities............................................. $ 254,403 $ 279,997
---------- ----------
---------- ----------
</TABLE>
6. DEBT:
The Company's note payable consists of a bank line of credit, in the amount
of $2,400,000, upon which $1,530,990 and $1,750,712 was drawn at December 31,
1997 and 1998. The line of credit is renewable annually on June 15, and contains
several restrictive covenants, the most restrictive of which requires the
Company to maintain certain financial ratios related to total debt, tangible net
worth, and working capital. At December 31, 1998, the Company was in compliance
with or had obtained waivers for all debt covenants. Management believes that
the Company will be able to refinance the line of credit under similar terms.
Advances on the line of credit are limited to 75% of the accounts receivable
that are less than 90 days past the invoice date, and are secured by accounts
receivable and other assets of the Company. Certain stockholders have guaranteed
the line of credit. Interest is payable monthly at 1.25% above prime, or 9.0% at
December 31, 1998. Commitment fees of one-half of one percent (.5%) per annum of
the average unused line of credit for the preceding quarter are paid quarterly.
The Company's long-term debt consists of a term loan from a bank and debt
payable to former minority interest holder. The term loan was obtained on July
8, 1998, to finance certain equipment and
F-114
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT: (CONTINUED)
furniture purchases. The note is secured by all equipment and furniture owned by
the Company and is guaranteed by certain stockholders. Principle and interest is
payable monthly with the final payment due on July 8, 2000. Interest is at 1.25%
above prime, or 9.0% at December 31, 1998.
Debt related to the former minority interest holder originated on November
30, 1997, in connection with the repurchase of a minority interest in a
subsidiary by the Company. The debt was non-interest bearing and was paid in
1998.
Debt at December 31, 1997 and 1998, are comprised of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Term loan................................................................ $ -- $ 98,443
Loan from former minority interest holder................................ 89,205 --
--------- ---------
Total debt......................................................... 89,205 98,443
Less- Current maturities................................................. (82,512) (62,184)
--------- ---------
Long-term debt..................................................... $ 6,693 $ 36,259
--------- ---------
--------- ---------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
The Company maintains a defined contribution retirement plan for employees
who have at least one year of continuous service. The Plan entitles employees to
make pre-tax contributions to the Plan and the Company to make contributions at
the discretion of the Board of Directors. No Company contributions were made in
1996, 1997, or 1998.
The Company leases office space and equipment under several different
operating lease arrangements for terms ranging from one to five years. At
December 31, 1998, the Company was committed under noncancelable operating
leases which extend beyond 1998 as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 230,298
2000.............................................................. 173,088
2001.............................................................. 69,345
2002.............................................................. 40,337
2003.............................................................. 25,496
Thereafter........................................................ --
---------
Total future minimum lease payments............................... $ 538,564
---------
---------
</TABLE>
Rental expense related to operating leases was $192,238, $272,567, and
$295,351 in 1996, 1997, and 1998, respectively.
In the ordinary course of business the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on the financial position or results of operations.
F-115
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY INCENTIVE PLANS:
During 1996, certain management personnel participated in the Company's
Equity Sharing Unit Plan (the "Equity Plan"). Under the Equity Plan employees
were given the opportunity to participate in the earnings and appreciation of
the Company through periodic cash distributions and increases in the value of
their equity units. In 1996, the Company recorded expense related to the plan of
$273,435. The non-cash portion of this expense related to the appreciation of
the equity units was recorded as a credit to additional paid-in capital. The
Equity Plan was terminated on December 31, 1996, and the participants exchanged
their units in the Equity Plan for minority interests in the Company's
subsidiaries.
In 1997, the Company reacquired certain minority interests in exchange for a
loan payable in the amount of $89,205. In 1998, the Company reacquired certain
minority interests for $7,400.
9. SUBSEQUENT EVENT:
In January 1999, the Company merged all of its subsidiaries into a single
legal entity and provided a minority shareholder and employee with a 20%
interest in the resulting subsidiary. The Company recorded compensation expense
of approximately $730,000 related to this event in 1999. Concurrent with the
minority interest grant, the buyout provisions of the minority interest
agreement were amended such that upon a sale of the Company, the minority owner
will exchange his minority interest for 20% of the sale proceeds.
10. AGREEMENT TO MERGE WITH CLARANT:
The Company intends to enter into an agreement to be acquired by Clarant.
This acquisition is subject to the successful completion of an initial public
offering of the common stock of Clarant.
F-116
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to and Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
condition as of March 31, 1999, the results of its operations and its cash flows
for the three-month periods ended March 31, 1998 and 1999. These financial
statements should be read in conjunction with the Company's audited 1998
financial statements, including the notes thereto. Operating results for the
three-month period ended March 31, 1999, are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 1999.
B. DEBT:
The Company's note payable consists of a bank line of credit, in the amount
of $2,400,000, upon which $788,715 was drawn at March 31, 1999. The line of
credit is renewable annually on June 15, and contains several restrictive
covenants, the most restrictive of which requires the Company to maintain
certain financial ratios related to total debt, tangible net worth, and working
capital. At March 31, 1999, the Company was in compliance with or had obtained
waivers for all debt covenants. Management believes that the Company will be
able to refinance the line of credit under similar terms. Advances on the line
of credit are limited to 75% of the accounts receivable that are less than 90
days past the invoice date, and are secured by accounts receivable and other
assets of the Company. Certain stockholders have guaranteed the line of credit.
Interest is payable monthly at 1.25% above prime, or 9.0% at March 31, 1999.
Commitment fees of one-half of one percent (.5%) per annum of the average unused
line of credit for the preceding quarter are paid quarterly.
C. EQUITY INCENTIVE PLANS:
In January 1999, the Company merged all of its subsidiaries into a single
legal entity and provided a minority shareholder and employee with a 20%
interest in the resulting subsidiary. The Company recorded compensation expense
of approximately $730,000 related to this event in 1999. Concurrent with the
minority interest grant, the buyout provisions of the minority interest
agreement were amended such that upon a sale of the Company, the minority owner
will exchange his minority interest for 20% of the sale proceeds.
F-117
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You may rely on the information contained in this prospectus. Neither we nor any
of the underwriters have authorized anyone to provide information different from
that contained in this prospectus. When you make a decision about whether to
invest in our common stock, you should not rely upon any information other than
the information in this prospectus. Neither the delivery of this prospectus nor
sale of common stock means that information contained in this prospectus is
correct after the date of this prospectus. This prospectus is not an offer to
sell or solicitation of an offer to buy these shares of common stock in any
circumstances under which the offer or solicitation is unlawful.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary.........................................
Risk Factors....................................
About Clarant Worldwide Corporation.............
Use of Proceeds.................................
Dividend Policy.................................
Capitalization..................................
Dilution........................................
Selected Unaudited Pro Forma Combined Financial
Data..........................................
Selected Historical Financial Data..............
Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................
Business........................................
Management......................................
Certain Transactions With Related Parties.......
Principal Stockholders..........................
Description of Capital Stock....................
Shares Available for Future Sale................
Underwriting....................................
Legal Matters...................................
Experts.........................................
Where You Can Find Additional Information.......
Index to Financial Statements...................
</TABLE>
--------------------------
Dealer Prospectus Delivery Obligations:
Until , 1999 (25 days after the commencement of this offering), all
dealers that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligations to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
Shares
[LOGO]
CLARANT WORLDWIDE
CORPORATION
Common Stock
-----------
PROSPECTUS
---------------
DEUTSCHE BANC ALEX. BROWN
HAMBRECHT & QUIST
SOUNDVIEW TECHNOLOGY GROUP
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all fees and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the common stock being registered. All amounts shown are
estimates, except for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 48,650
NASD filing fee................................................ 18,000
Nasdaq National Market listing fee............................. 90,000
Accounting fees and expenses................................... 3,000,000
Legal fees and expenses........................................ 2,000,000
Printing and engraving expenses................................ 350,000
Transfer agent and registrar fees.............................. 50,000
Miscellaneous expenses......................................... 443,350
----------
Total........................................................ $6,000,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and By-laws of the Registrant provide for
the indemnification of the Registrant's directors and officers to the fullest
extent authorized by, and subject to the conditions set forth in the General
Corporation Law of the State of Delaware (the "DGCL"), except that the
Registrant will indemnify a director or officer in connection with a proceeding
(or part thereof) initiated by the person only if the proceeding (or part
thereof) was authorized by the Registrant's Board of Directors. The
indemnification provided under the Certificate of Incorporation and By-laws
includes the right to be paid by the Registrant the expenses (including
attorneys' fees) in advance of any proceeding for which indemnification may be
had in advance of its final disposition, provided that the payment of such
expenses (including attorneys' fees) incurred by a director or officer in
advance of the final disposition of a proceeding may be made only upon delivery
to the Registrant of an undertaking by or on behalf of the director or officer
to repay all amounts so paid in advance if it is ultimately determined that the
director or officer is not entitled to be indemnified.
As permitted by the DGCL, the Registrant's Certificate of Incorporation, as
amended, restated and supplemented, provides that directors of the Registrant
shall not be liable to the Registrant or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Registrant 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 or unlawful stock purchase or
redemption or (iv) for any transaction from which the director derived an
improper personal benefit. As a result of this provision, the Registrant and its
stockholders may be unable to obtain monetary damages from a director for breach
of his or her duty of care.
Under the By-laws, the Registrant has the power 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 the
person or incurred by the person in any
II-1
<PAGE>
such capacity, or arising out of the person's status as such, and related
expenses, whether or not the Registrant would have the power to indemnify the
person against such liability under the provisions of the DGCL. The Registrant
intends to purchase director and officer liability insurance on behalf of its
directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth certain information as to all securities sold by us
within the last three years that were not registered under the Securities Act of
1933, as amended (the "Securities Act").
On August 22, 1998, Commonwealth Principals II LLC purchased 7,135,424
shares of common stock for an aggregate purchase price of $1.00. An exemption is
claimed under Section 4(2) of the Securities Act.
On September 1, 1998, we sold 713,542 shares to Guillermo G. Marmol, our
Chief Executive Officer and President, for an aggregate purchase price of
$200,000. An exemption is claimed under Section 4(2) of the Securities Act.
Simultaneously with the completion of the offering, we will issue 6,141,818
shares of common stock to certain former owners of Align Solutions Corp. for
their respective interests in that company. An indeterminate number of shares of
common stock may be issued in payment of contingent consideration, if earned. An
exemption is claimed under Rule 506 of Regulation D promulgated under the
Securities Act.
Simultaneously with the completion of the offering, we will issue 4,609,091
shares of common stock to the former owner of Brand Dialogue-New York for
certain assets of Brand Dialogue. An indeterminate number of shares of common
stock may be issued in payment of contingent consideration, if earned. An
exemption is claimed under Rule 506 of Regulation D promulgated under the
Securities Act.
Simultaneously with the completion of the offering, we will issue 1,917,273
shares of common stock to certain former owners of Free Range Media, Inc. for
their respective interests in that company. An indeterminate number of shares of
common stock may be issued in payment of contingent consideration, if earned. An
exemption is claimed under Rule 506 of Regulation D promulgated under the
Securities Act.
Simultaneously with the completion of the offering, we will issue 810,091
shares of common stock to certain former owners of Integrated Consulting, Inc.,
dba i.con interactive, for their respective interests in that company. An
indeterminate number of shares of common stock may be issued in payment of
contingent consideration, if earned. An exemption is claimed under Rule 506 of
Regulation D promulgated under the Securities Act.
Simultaneously with the completion of the offering, we will issue 1,773,909
shares of common stock to certain former owners of InterActive8, Inc. for their
respective interests in that company. An indeterminate number of shares of
common stock may be issued in payment of contingent consideration, if earned. An
exemption is claimed under Rule 506 of Regulation D promulgated under the
Securities Act.
Simultaneously with the completion of the offering, we will issue 668,182
shares of common stock to certain former owners of Multimedia Resources, LLC for
their respective interests in that company. An indeterminate number of shares of
common stock may be issued in payment of contingent consideration, if earned. An
exemption is claimed under Rule 506 of Regulation D promulgated under the
Securities Act.
Simultaneously with the completion of the offering, we will issue 3,470,182
shares of common stock to certain former owners of Potomac Partners Management
Consulting, LLC for their
II-2
<PAGE>
respective interests in that company. An indeterminate number of shares of
common stock may be issued in payment of contingent consideration, if earned. An
exemption is claimed under Rule 506 of Regulation D promulgated under the
Securities Act.
Simultaneously with the completion of the offering, we will issue 1,094,545
shares of common stock to certain former owners of RSI Group, Inc. for their
respective interests in that company. An indeterminate number of shares of
common stock may be issued in payment of contingent consideration, if earned. An
exemption is claimed under Rule 506 of Regulation D promulgated under the
Securities Act.
We will grant options exercisable for a total of 1,570,776 shares of common
stock to former option holders of Align Solutions Corp in exchange for
outstanding options of Align. We have relied on no sale to grant those options.
Before completion of the offering, we will grant options exercisable for a
total of 3,803,627 shares of common stock under our 1999 Long-Term Incentive
Plan to our executive officers, directors and employees. An exemption is claimed
under Section 4(2) of the Securities Act.
Before completion of the offering we will grant options exercisable for a
total of 1,000,000 shares of common stock to Young & Rubicam outside of the 1999
Long-Term Incentive Plan. An exemption is claimed under Section 4(2) of the
Securities Act.
Before completion of the offering we will grant options exercisable for a
total of 2,205,000 shares of common stock to persons who will become our
employees upon the closing of the offering. We have relied on no-sale to grant
those options.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant
3.2 Amendment to Certificate of Incorporation of Registrant
3.3 Second Amendment to Certificate of Incorporation of Registrant
3.4 Third Amendment to Certificate of Incorporation of Registrant
3.5* Amended and Restated Certificate of Incorporation of the Registrant
3.6 By-Laws of Registrant
3.7* Amended and Restated By-Laws of the Registrant
4.1* Form of Common Stock Certificate
5.1* Opinion of Wilmer, Cutler & Pickering
10.1* 1999 Long-Term Incentive Plan
10.2* Employment Agreement of Guillermo G. Marmol
10.3* Stockholders Agreement by and among Clarant Worldwide Corporation, Commonwealth
Principals II LLC and Guillermo G. Marmol
21.1* Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3* Consent of Wilmer, Cutler & Pickering (included in Exhibit 5.1)
23.4 Consent of Michael H. Jordan to be named in Registration Statement.
23.5 Consent of Randolph Austin to be named in Registration Statement.
23.6 Consent of Michael Dolan to be named in Registration Statement.
23.7 Consent of Lynn J. Branigan to be named in Registration Statement.
23.8 Consent of Calvin W. Carter to be named in Registration Statement.
23.9 Consent of James R. Corey to be named in Registration Statement.
23.10 Consent of John B. Dimmer to be named in Registration Statement.
23.11 Consent of Bruce D. Grant to be named in Registration Statement.
23.12 Consent of Henry Heilbrunn to be named in Registration Statement.
23.13 Consent of Morris W. Markel to be named in Registration Statement.
23.14 Consent of Andreas Panayi to be named in Registration Statement.
23.15 Consent of Douglas Rice to be named in Registration Statement.
23.16 Consent of Richard M. Scruggs to be named in Registration Statement.
24.1 Power of Attorney (included on signature page to this Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
II-4
<PAGE>
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as may be required by the underwriter
to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 of this
Registration Statement, 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. If 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the 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,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the District of Columbia, on the 7th
day of June 1999.
CLARANT WORLDWIDE CORPORATION
By: /s/ GUILLERMO G. MARMOL
-----------------------------------------
Guillermo G. Marmol
CHIEF EXECUTIVE OFFICER AND PRESIDENT
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Guillermo G. Marmol, his or her true and
lawful attorneys-in-fact and agents with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, and to sign any registration statement for the same
offering covered by this Registration Statement that is to be effective on
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and
all post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or his
or her or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
/s/ GUILLERMO G. MARMOL Chief Executive Officer,
- ------------------------------ President and director June 7, 1999
Guillermo G. Marmol (chief executive officer)
/s/ DEREK R. REISFIELD
- ------------------------------ Vice Chairman and Executive June 7, 1999
Derek R. Reisfield Vice President
/s/ JOSEPH W. AUTEM Chief Financial Officer
- ------------------------------ (chief financial and June 7, 1999
Joseph W. Autem accounting officer)
/s/ GEORGE P. STAMAS
- ------------------------------ Director June 7, 1999
George P. Stamas
</TABLE>
II-6
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
WEBONE
FIRST: The name of the corporation is WEBONE, INC. (the "Corporation")
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, Delaware 19801 in the
county of New Castle. The name of the Corporation's registered
agent is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware
(the "GCL").
FOURTH: The total number of shares of capital stock which the Corporation
shall have authority to issue is 200 shares of common stock, par
value of $.01 per share.
FIFTH: The name and mailing address of the Corporation's incorporator is:
Name Mailing Address
---- ---------------
Forrest Walpole 2323 45th Avenue
Greeley, CO 80634
SIXTH: The Board of Directors of the Corporation is expressly authorized
to adopt amend or repeal the by-laws of the Corporation (the
"By-Laws").
SEVENTH: Elections of directors need not be by written ballot unless
otherwise provided in the By-Laws.
EIGHTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between
the Corporation and its stockholders or any class of them, any
court of equitable jurisdiction within the State of Delaware may,
on the application in a summary way of the Corporation or on the
application of any receiver or receivers appointed for this
Corporation under the provisions of Section 291 of Title 8 of the
GCL or on the application of trustees in dissolution or of any
receiver or receivers appointed for the Corporation under the
provisions of Section 279 of Title 8 of the GCL order a meeting of
the creditors or class of creditors, and/or of the stockholders or
class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or
class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization
of the Corporation as a consequence of such compromise or
<PAGE>
if sanctioned by the court to which the said application has been
made, be binding on all the creditors or class of creditors, and/or
on all the stockholders or class of stockholders, of the
Corporation, as the case may be, and also on this Corporation.
NINTH: The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by the GCL.
TENTH: The Corporation shall:
(a) indemnify, to the fullest extent permitted by the GCL, any
person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Corporation) by reason of the
fact that such person is or was a director of the Corporation, or is
or was serving at the request of the Corporation as a director of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees ),
judgements, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe
such person's conduct was unlawful. The termination of any action,
suit or proceeding by judgement order, settlement conviction, or
upon a plea of nolo contendere or its equivalent shall not of
itself, create a presumption that the person did not act in good
faith and in a manner which such person reasonably believed to be in
or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had reasonable cause
to believe that such person's conduct was unlawful; and
(b) Indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that such person is or was a director
of the Corporation, or is or was serving at the request of the
Corporation as a director of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of
the Corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the Corporation unless and only
to the extent that the Court of Chancery or the court in which such
action or suit was brought shall determine upon application that
despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper; and
2
<PAGE>
(c) indemnify any director against expenses (including attorneys'
fees) actually and reasonably incurred by such person in
connection therewith, to the extent that a director of the
Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred in Article
TENTH (a) and (b), or in defense of any claim, issue or matter
therein; and
(d) make any indemnification under Article TENTH (a) and (b)
(unless ordered by a court) only as authorized in the specific
case upon a determination that indemnification of the director is
proper in the circumstances because such director has met the
applicable standard of conduct set forth in Article TENTH (a) and
(b). Such determination shall be made (1) by the board of
directors by a majority vote of a quorum consisting of directors
who were not parties to such action, suit or proceeding, or (2)
if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders of
the Corporation; and
(e) pay expenses incurred by a director in defending a civil or
criminal action, suit or proceeding in advance of the final
disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director to repay such amount
if it shall ultimately be determined that such director is not
entitled to be indemnified by the Corporation as authorized in
this Article TENTH; and
(f) not deem the indemnification and advancement of expenses
provided by, or granted pursuant to, the other subsections of
this Article TENTH exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be
entitled under any by-law, agreement vote of stockholders or
disinterested directors or otherwise, both as to action in a
director's official capacity and as to action in another capacity
while holding such office; and
(g) have power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person and
incurred by such person in any such capacity, or arising out of
such persons's status as such, whether or not the Corporation
would have the power to indemnify such person against such
liability under the provisions of this Article TENTH; and
(h) deem the provisions of this Article TENTH to be a contract
between the Corporation and each director who serves in such
capacity at any time while this Article TENTH is in effect and
any repeal or modification of this Article TENTH shall not affect
any rights or obligations then existing with respect to any state
of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought or threatened based
in whole or in part upon such state of facts. The provisions of
this Article TENTH shall not be deemed to be a contract between
the Corporation and the directors of any other Corporation (the
"Second
3
<PAGE>
Corporation") which shall merge into or consolidate with this
Corporation when this Corporation shall be the surviving or
resulting Corporation, and any such directors of the Second
Corporation shall be indemnified to the extent required under the
GCL only at the discretion of the board of directors of this
Corporation; and
(i) continue the indemnification and advancement of expenses
provided by, or granted pursuant to, this Article TENTH unless
otherwise provided when authorized or ratified, as to a person
who has ceased to be a director of the Corporation and shall
inure to the benefit of the heirs, executors and administrators
of such a person.
The undersigned incorporator hereby acknowledges that the foregoing
certificate of incorporation is such incorporator's act and deed and that the
facts stated therein are true.
Dated: August 21, 1998
/s/ Forrest Walpole
----------------------------
Forrest Walpole
2323 45th Avenue
Greeley, CO 80634
4
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
- --------------------------------------------------------------------------------
WEBONE, INC., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That a meeting of the Board of Directors of WEBONE, INC. resolutions
were adopted setting forth a proposed amendment of the Certificate of
Incorporation of said corporation, declaring said amendment to be advisable and
calling a meeting of the stockholders of said corporation for consideration
thereof. The resolutions setting forth the proposed amendment are as follows:
RESOLVED, that the Certificate of Incorporation of this Corporation be
amended by changing the Article thereof numbered "First" so that, as amended,
said Article shall be and read as follows:
FIRST: The name of the corporation is Integrated Interactive, Inc. (the
"Corporation").
SECOND: That thereafter, pursuant to a resolution of its Board of Directors,
a special meeting of the stockholders of said corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware at which meeting the necessary number of shares are
required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with Section 242
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said WEBONE, INC. has caused this certificate to be
signed by J. Marshall Coleman, its authorized officer, this 11th day of
November, 1998.
/s/ J. Marshall Coleman
------------------------------------
J. Marshall Coleman
Title: Chairman of the Board
<PAGE>
EXHIBIT 3.3
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 05/26/1999
991210232 - 2936EIO
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
INTEGRATED INTERACTIVE, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "corporation") is
Integrated Interactive, Inc.
2. The certificate of incorporation of the corporation is hereby amended
by striking out the First Article thereof and by substituting in lieu of said
Article the following new Article:
"FIRST: The name of the corporation is Clarant, Inc. (the
"Corporation").
3. The amendment of the certificate of incorporation herein certified
has been duly adopted in accordance with the provisions of Sections 228 and
242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Integrated Interactive, Inc. has caused this
certificate to be signed by J. Marshall Colman, its authrozied officer, this
25 day of May, 1999.
/s/ J. Marshall Coleman
- ----------------------------
J. Marshall Coleman
Title: Chairman of the Board
<PAGE>
EXHIBIT 3.4
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
CLARANT, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "corporation")
is: Clarant, Inc.
2. The certificate of incorporation of the corporation is hereby amended
by striking out the First Article thereof and by substituting in lieu of said
Article the following new Article:
"FIRST: The name of the corporation is Clarant Worldwide Corporation
(the "Corporation")".
3. The amendment of the certificate of incorporation herein certified
has been duly adopted in accordance with the provisions of Sections 228(a)
and 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Clarant, Inc. has caused this certificate to be
signed by Guillermo G. Marmol, its authorized officer, this 4th day of June,
1999.
/s/ Guillermo G. Marmol
--------------------------------------------
Guillermo G. Marmol
Title: President and Chief Executive Officer
<PAGE>
EXHIBIT 3.6
BY-LAWS
OF
WEBONE, INC.
ARTICLE I
IDENTIFICATION: OFFICES
SECTION 1.1. NAME. The name of the corporation is Webone, Inc. (the
"Corporation").
SECTION 1.2. REGISTERED OFFICES: OTHER OFFICES. The registered office of the
Corporation in the State of Delaware shall be in the City of Wilmington and
County of New Castle. The Corporation may have such other offices, either within
or outside of the State of Delaware, as the business of the Corporation may
require from time to time.
ARTICLE II
STOCKHOLDERS
SECTION 2.1. ANNUAL MEETING. An annual meeting of the stockholders shall be
held on the fourth Tuesday of April of each year, or on such other date as may
be determined by resolution of the Board of Directors; provided, however, that
if in any year such date is a legal holiday, such meeting shall be held on the
next succeeding business day. At each annual meeting, the stockholders shall
elect directors to hold office for the term provided in Section 3.1 of these
By-laws.
SECTION 2.2. SPECIAL MEETING. A special meeting of the stockholders may be
called by the President of the Corporation, the Board of Directors, or by such
other officers or persons as the Board of Directors may designate.
SECTIONS 2.3. PLACE OF STOCKHOLDER MEETINGS. The Board of Directors may
designate any place, either within or without the State of Delaware, as the
place of meeting for any annual meeting or for any special meeting. If no such
place is designated by the Board of Directors, the place of meeting will be the
principal business office of the Corporation.
SECTION 2.4. NOTICE OF MEETINGS. Unless waived as herein provided, whenever
stockholders are required or permitted to take any action at a meeting, written
notice of the meeting shall be given stating the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. Such written notice shall be given not less than
ten (10) days nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at the meeting or in the event of a merger,
consolidation, share exchange, dissolution or sale, lease or exchange of all or
substantially all of
<PAGE>
the Corporation's property, business or assets not less than twenty (20)
days before the date of the meeting. If mailed, notice is given when deposited
in the United States mail, postage prepaid, directed to the stockholder at the
stockholders address as it appears on the records of the Corporation.
When a meeting is adjourned to another time or place in accordance with
Section 2.5 of these By-laws, notice need not be given of the adjourned meeting
if the time and place thereof are announced at the meeting in which the
Adjournment is taken. At the adjourned meeting the Corporation may conduct any
business which might have been transacted at the original meeting. If the
adjournment is for more than thirty days, or if after the Adjournment a new
record date is fixed for the adjournment meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
SECTION 2.5. QUORUM AND ADJOURNED MEETINGS. Unless otherwise provided by law
or the Corporation's Certificate of Incorporation, a majority of the shares
entitled to vote, present in person or represented by proxy, shall constitute a
quorum at a meeting of stockholders. If less than a majority of the shares
entitled to vote at a meeting of stockholders is present in person or
represented by proxy at such meeting, a majority of the shares so represented
may adjourn the meeting from time to time without further notice. At any
adjourned meeting at which a quorum is present any business may be transacted
which might have been transacted at the original meeting. The stockholders
present at a meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of such number of stockholders as may leave less
than a quorum.
SECTION 2.6. FIXING OF RECORD DATE.
(a) For the purpose of determining stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, the
Board of Directors may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and which record date shall not be more than sixty nor
less than ten days before the date of such meeting. If no record date is fixed
by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding
the day on which the meeting is held. A determination of stockholders of
record entitled to notice of or to vote-at a meeting of stockholders shall
apply to any adjournment of the meeting provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
(b) For the purpose of determining stockholders entitled to consent to
corporate action in writing without a meeting, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is established by the Board of Directors, and
which date shall not be more than ten (10) days after the date on which the
resolution fixing the record date is adopted by the Board of Directors, if no
record date has been fixed by the Board of Directors, the record date for
determining stockholders entitled to consent to corporate action in writing
without a
2
<PAGE>
meeting, when no prior action by the Board of Directors is required by law,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the Corporation by
delivery to its registered office in the State of Delaware, its principal
office, or an officer or agent of the Corporation having custody of the
book in which the proceedings of meetings of stockholders are recorded.
Delivery to the Corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by law, the record date for determining stockholders'
consent to corporate action in writing without a meeting shall be the close
of business on the day on which the Board of Directors adopts the
resolution taking such prior action.
(c) For the purpose of determining the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect to
any change, conversion or exchange of stock, or for the purpose of any
other lawful action, the Board of Directors may fix the record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty
(60) days prior to such action. If no record date is fixed, the record date
for determining the stockholders for any such purpose shall be the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto.
SECTION 2.7. VOTING LIST. The officer who has charge of the stock ledger of
the Corporation shall prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) day prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present.
SECTION 2.8. VOTING. Unless otherwise provided by the Certificate of
Incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by each stockholder. In all matters other than the election
or directors, the affirmative vote of the majority of shares present in person
or represented by proxy at the meeting and entitled to vote on the subject
matter shall be the act of the stockholders. Directors shall be elected by
plurality of the votes of the shares present in person or represented by a proxy
at the meeting entitled to vote on the election of directors.
SECTION 2.9. PROXIES. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period. A duly executed proxy shall
be irrevocable if it states that it is irrevocable and if, and only as long as,
it is coupled
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with an interest sufficient in law to support an irrevocable power. A proxy may
remain irrevocable regardless of whether the interest with which it is coupled
is an interest in the stock itself or an interest in the Corporation generally.
SECTION 2.10. RATIFICATION OF ACTS OF DIRECTORS AND OFFICERS. Except as
otherwise provided by law or by the Certificate of incorporation of the
Corporation, any transaction or contract or act of the Corporation or of the
directors or the officers of the Corporation may be ratified by the affirmative
vote of the holders of the number of shares which would have been necessary to
approve such transaction, contract or act at a meeting of stockholders, or by
the written consent of stockholders in lieu of a meeting.
SECTION 2.11. INFORMAL ACTION OF STOCKHOLDERS. Any action required to be
taken at any annual or special meeting of stockholders of the Corporation, or
any action which may be taken at any annual or special meeting of such
stockholders, may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be give to those stockholders who have
not consented in writing. In the event that the action which is consented to is
such as would have required the filing of a certificate with any governmental
body, if such action had been voted on by the stockholders at a meeting thereof,
the certificate filed shall state, in lieu of any statement required by law
concerning any vote of stockholders, that written consent had been given in
accordance with the provisions of Section 228 of the Delaware General
Corporation Law, and that written notice has been given as provided in such
section.
SECTION 2.12. ORGANIZATION. Such person as the Board of Directors may
designate or, in the absence of such a designation, the president of the
Corporation or, in his or her absence, such person as may be chosen by the
holders of a majority of the shares entitled to vote who are present in person
or by proxy, shall call to order any meeting of the stockholders and act as
chairman of such meeting. In the absence of the secretary of the Corporation,
the chairman of the meeting shall appoint a person to serve as secretary at the
meeting.
ARTICLE III
DIRECTORS
SECTION 3.1. NUMBER. The number of directors which shall constitute the
whole Board shall be fixed from time to time by vote of a majority of the whole
Board; provided, however, that the number of directors shall not be less than
one (1) nor more than fifteen (15). Hereafter, one director will constitute
the whole Board until otherwise fixed by the whole Board in accordance with the
preceding sentences.
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SECTION 3.2. ELECTION OF DIRECTORS. Directors shall be elected at the
annual meeting of stockholders. In all elections for directors, every
stockholder shall have the right to vote the number of shares owned by such
stockholder for each director to be elected.
SECTION 3.3. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, the
President or at least one-third of the number of directors constituting the
whole board. The person or persons authorized to call special meetings of the
Board of Directors may fix any place, either within or without the State of
Delaware, as the place for holding any special meeting of the Board of
Directors called by them.
3.4. NOTICE OF SPECIAL MEETINGS OF THE BOARD OF DIRECTORS. Notice of any
special meeting of the Board of Directors shall be given at least three (3)
days previous thereto by written notice to each director at his or her
address. If mailed, such notice shall be deemed to be delivered when
deposited in the United States Mail so addressed, with first class postage
thereon prepaid. If sent by any other means (including facsimile, courier, or
express mail, etc.), such notice shall be deemed to be delivered when
actually delivered to the home or business address of the director.
SECTION 3.5. QUORUM. A majority of the total number of directors fixed by
these By-laws, or in the absence of a By-Law which fixes the number of
directors, the number stated in the Certificate of Incorporation or named by
the incorporators, shall constitute a quorum for the transaction of business.
If less than a majority of the directors are present at a meeting of the
Board of Directors, a majority of the directors present may adjourn the
meeting from time to time without prior notice.
SECTION 3.6. VOTING. The vote of the majority of the directors present at
a meeting at which a quorum is present shall be the act of the Board of
Directors, unless the Delaware General Corporation Law or the Certificate of
Incorporation requires a vote of a greater number.
SECTION 3.7. VACANCIES. Vacancies in the Board of Directors may be filled
by a majority vote of the Board of Directors or by an election either at an
annual meeting or at a special meeting of the stockholders called for that
purpose. Any directors elected by the stockholders to fill a vacancy shall
hold office for the balance of the term for which he or she was elected. A
director appointed by the Board of Directors to fill a vacancy shall serve
until the next meeting of stockholders at which directors are elected.
SECTION 3.8. REMOVAL OF DIRECTORS. A director, or the entire Board of
Directors, may be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors,
provided, however, that if cumulative voting obtains and less than the entire
Board of Directors is to be removed, no director may be removed without cause
if the votes cast against such director's removal would be sufficient to
elect him if then cumulatively voted at an election of the entire Board of
Directors.
SECTION 3.9. INFORMAL ACTION OF DIRECTORS. Unless otherwise restricted by
the Certificate of incorporation or these By-laws, any action required or
permitted to be taken at any
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meeting of the Board of Directors, or of any committee thereof, may be taken
without a meeting if all members of the Board of Directors or committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors or committee.
SECTION 3.10. PARTICIPATION BY CONFERENCE TELEPHONE. Members of the
Board of Directors, or any committee designated by such board, may
participate in a meeting of the Board of Directors, or committee thereof, by
means of conference telephone or similar communications equipment as long as
all persons participating in the meeting can speak with and hear each other,
and participation by a director pursuant to this Section 3.10 shall
constitute presence in person at such meeting.
ARTICLE IV
WAIVER OF NOTICE
SECTION 4.1. WRITTEN WAIVER OF NOTICE. A written waiver of any required
notice, signed by the person entitled to notice, whether before or after the
date stated therein, shall be deemed equivalent to notice. Neither the
business to be transacted at nor the purpose of, any regular or special
meeting of stockholders, directors or members of a committee of directors
need be specified in any written waiver of notice.
SECTION 4.2. ATTENDANCE AS WAIVER OF NOTICE. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting, and objects
at the beginning of the meeting, to the transaction of any business because
the meeting is not lawfully called or convened.
ARTICLE V
COMMITTEES
SECTION 5. GENERAL PROVISIONS. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate an Executive Committee, an
Audit Committee, a Nominating Committee, and a Compensation Committee. In the
absence or disqualification of a member at any meeting of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of
Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to
all papers which may require it; but no such committee shall have the power
or authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease, or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of
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a dissolution, or amending the Bylaws of the Corporation; and, unless the
resolution so provides, no such committee shall have the power or authority
to declare a dividend, to authorize the issuance of stock, or to adopt a
certificate of ownership and merger, pursuant to Section 253 of the Delaware
General Corporation Law.
ARTICLE VI
OFFICERS
SECTION 6.1. GENERAL PROVISIONS. The Board of Directors shall elect a
President and a Secretary of the Corporation. The Board of Directors may also
elect a Chairman of the Board, one or more Vice Chairmen of the Board, one or
more Vice Presidents, a Treasurer, one or more Assistant Secretaries and
Assistant Treasurers and such additional officers as the Board of Directors
may deem necessary or appropriate from time to time. Any two or more offices
may be held by the same person. The officers elected by the Board of
Directors shall have such duties as are hereafter described and such
additional duties as the Board of Directors may from time to time prescribe.
SECTION 6.2. ELECTION AND TERM IN OFFICE. The officers of the
Corporation shall be elected annually by the Board of Directors at the
regular meeting of the Board of Directors held after each annual meeting of
the stockholders. If the election of officers is not held at such meeting,
such election shall be held as soon thereafter as may be convenient. New
offices of the Corporation may be created and filled and vacancies in offices
may be filled at any time, at a meeting or by written consent of the Board
of Directors. Unless removed pursuant to Section 6.3 of these By-laws, each
officer shall hold office until his successor has been duly elected and
qualified, or until his earlier death or resignation. Election or appointment
of an officer or agent shall not of itself create contract rights.
SECTION 6.3. REMOVAL OF OFFICERS. Any officer or agent elected or
appointed by the Board of Directors may be removed by the Board of Directors
whenever, in its judgement the best interests of the Corporation would be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person(s) so removed.
SECTION 6.4. THE CHIEF EXECUTIVE OFFICER. The Board of Directors shall
designate whether the Chairman of the Board, if one shall have been chosen,
or the President shall be the Chief Executive Officer of the Corporation. If
a Chairman of the Board has not been chosen, or if one has been chosen but
not designated Chief Executive Officer, then the President shall be the Chief
Executive Officer of the Corporation. The Chief Executive Officer shall be
the principal executive officer of the Corporation and shall in general
supervise and control all of the business and affairs of the Corporation,
unless otherwise provided by the Board of Directors. The Chief Executive
Officer shall preside at all meetings of the stockholders and of the Board of
Directors and shall see that orders and resolutions of the Board of Directors
are carried into effect. The Chief Executive Officer may sign bonds,
mortgages, certificates for shares and all other contracts and documents
whether or not under the seal of the Corporation except in cases where the
signing and execution thereof shall be expressly delegated by law, by the
Board of Directors or
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by these By-laws to some other officer of agent of the Corporation. The Chief
Executive Officer shall have general powers of supervision and shall be the
final arbiter of all differences between officers of the Corporation and his
decision as to any matter affecting the Corporation shall be final and binding
as between the officers of the Corporation subject only to the Board of
Directors.
SECTION 6.5. THE PRESIDENT. In the absence of the Chief Executive Officer
or in the event of his inability or refusal to act if the Chairman of the
Board has been designated Chief Executive Officer, the President shall
perform the duties of the Chief Executive Officer, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the Chief
Executive Officer. At all other times the President shall have the active
management of the business of the Corporation under the general supervision
of the Chief Executive Officer. The President shall have concurrent power
with the Chief Executive Officer to sign bonds, mortgages, certificates for
shares and other contracts and documents, whether or not under the seal of
the Corporation except in cases where the signing and execution thereof shall
be expressly delegated by law, by the Board of Directors, or by these By-laws
to some other officer or agent of the Corporation. In general, the President
shall perform all duties incident to the office of president and such other
duties as the Chief Executive Officer or the Board of Directors may from time
to time prescribe.
SECTION 6.6. THE CHAIRMAN OF THE BOARD. The Chairman of the Board, if
one is chosen, shall be chosen from among the members of the board. If the
Chairman of the Board has not been designated Chief Executive Officer, the
Chairman of the Board shall perform such duties as may be assigned to the
Chairman of the Board by the Chief Executive Officer or by the Board of
Directors.
SECTION 6.7. VICE CHAIRMAN OF THE BOARD. In the absence of the Chief
Executive Officer or in the event of his inability or refusal to act if the
Chairman of the Board has been designated Chief Executive Officer, the Vice
Chairman, or if there be more than one, the Vice Chairmen, in the order
determined by the Board of Directors, shall perform the duties of the Chief
Executive Officer, and when so acting shall have all the powers of and be
subject to all the restrictions upon the Chief Executive Officer. At all
other times, the Vice Chairman or Vice Chairmen shall perform such duties and
have such powers as the Chief Executive Officer or the Board of Directors may
from time to time prescribe.
SECTION 6.8. The Vice President. In the absence of the President or in
the event of his inability or refusal to act the Vice President (or in the
event there be more than one Vice President the Executive Vice President and
then the other Vice President or Vice Presidents in the order designated, or
in the absence of any designation, then in the order of their election) shall
perform the duties of the President and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President. The Vice
Presidents shall perform such other duties and have such other powers as the
Chief Executive Officer or the Board of Directors may from time to time
prescribe.
SECTION 6.9. THE SECRETARY. The Secretary shall attend all meetings of
the Board of Directors and all meetings of the stockholders and record all
the proceedings of the meetings of
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the Corporation and of the Board of Directors in a book to be kept for that
purpose and shall perform like duties for the standing committees when required.
The Secretary shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or the Chief
Executive Officer, under whose supervision he shall be. The Secretary shall
have custody of the corporate seal of the Corporation and the Secretary, or an
Assistant Secretary, shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by his signature or by the
signature of such Assistant Secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by his signature.
SECTION 6.10. THE ASSISTANT SECRETARY. The Assistant Secretary, or if there
be more than one, the Assistant Secretaries in the order determined by the Board
of Directors (or if there be no such determination, then in the order of their
election), shall, in the absence of the Secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Chief Executive Officer or the Board of Directors may from time to time
prescribe.
SECTION 6.11. THE TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit
of the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board of Directors making proper vouchers for such
disbursements, and shall render to the President and the Board of Directors,
at its regular meetings, or when the Board of Directors so requires, an
account of all his transactions as Treasurer and of the financial condition
of the Corporation. If required by the Board of Directors, the Treasurer
shall give the Corporation a bond (which shall be renewed every six (6)
years) in such sum and with such surety or sureties as shall be satisfactory
to the Board of Directors for the faithful performance of the duties of his
office and for the restoration to the Corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or
under his control belonging to the Corporation.
SECTION 6.12. THE ASSISTANT TREASURER. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
Board of Directors (or if there be no such determination, then in the order of
their elect-ion), shall, in the absence of the Treasurer or in the event of his
inability or refusal to act perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Chief Executive Officer or the Board of Directors may from time to time
prescribe.
SECTION 6.13. DUTIES OF OFFICERS MAY BE DELEGATED. In the absence of any
officer of the Corporation, or for any other reason the Board of Directors may
deem sufficient the Board of Directors may delegate the powers or duties, or any
of such powers or duties, of any officers or officer to any other officer or to
any director.
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SECTION 6.14. COMPENSATION. The Board of Directors shall have the authority
to establish reasonable compensation of all officers for services to the
Corporation.
ARTICLE VII
CERTIFICATES FOR SHARES
SECTION 7.1. CERTIFICATES OF SHARES. The shares of the Corporation shall be
represented by certificates, provided that the Board of Directors of the
Corporation may provide by resolution or resolutions that some or all of any or
all classes or series of its stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until such
certificate is surrendered to the Corporation. Notwithstanding the adoption of
such a resolution by the Board of Directors, every holder of stock represented
by certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by or in the name of the Corporation by
the Chairman or Vice Chairman of the Board of Directors, Chief Executive
Officer, or the President or Vice President and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the Corporation
representing the number of shares registered in certificate form. Any or all the
signatures on the certificate may be a facsimile.
SECTION 7.2. SIGNATURES OF FORMER OFFICER, TRANSFER AGENT OR REGISTRAR. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if such person or entity
were such officer, transfer agent or registrar at the date of issue.
SECTION 7.3. TRANSFER OF SHARES. Transfers of shares of the Corporation
shall be made only on the books of the Corporation by the holder of record
thereof or by his legal representative, who shall furnish proper evidence of
authority to transfer, or by his or her attorney hereunto authorized by power of
attorney duly executed and filed with the Secretary of the Corporation, and on
surrender for cancellation of certificate for such shares. Prior to due
presentment of a certificate for shares for registration of transfer, the
Corporation may treat a registered owner of such shares as the person
exclusively entitled to vote, to receive notifications and otherwise have and
exercise all of the right and powers of an owner of shares.
SECTION 7.4. LOST, DESTROYED OR STOLEN CERTIFICATES. Whenever a certificate
representing shares of the Corporation has been lost, destroyed or stolen, the
holder thereof may file in the office of the Corporation an affidavit setting
forth, to the best of his knowledge and belief, the time, place and circumstance
of such loss, destruction or theft together with a statement of indemnity
sufficient in the opinion of the Board of Directors to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss of
any such certificate. Thereupon the Board may cause to be issued to such person
or such person's legal representative a new certificate or a duplicate of the
certificate alleged to have been lost destroyed or stolen. In the exercise of
its discretion, the Board of Directors may waive the indemnification
requirements provided herein.
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ARTICLE VIII
DIVIDENDS
SECTION 8. DIVIDENDS. The Board of Directors of the Corporation may declare
and pay dividends upon the shares of the Corporations capital stock in any form
determined by the Board of Directors, in the manner and upon the terms and
conditions provided by law.
ARTICLE IX
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 9.1. CONTRACTS. The Board of Directors may authorize any officer
or officers, agents officers, agent or agents, to enter into any contract or
execute and deliver any instrument in the name of and on behalf of the
Corporation, and such authority may be general or confined to specific
instances.
SECTION 9.2. LOANS. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors. Such authority may be
general or confined to specific instances.
SECTION 9.3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers or agents of
the Corporation and in such manner as shall from time to time be determined
by resolution of the Board of Directors.
SECTION 9.4. DEPOSITS. The funds of the Corporation may be deposited or
invested in such bank account in such investments or with such other
depositories as determined by the Board of Directors.
ARTICLE X
AMENDMENTS
SECTION 10. AMENDMENTS. These By-laws may be adopted, amended or repealed by
either the Corporation's Board of Directors or its stockholders.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
this registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
June 4, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 24, 1999, except for
Note 8 which is as of June 3, 1999, relating to the financial statements of
Brand Dialogue - New York, which appears in such Prospectus. We also consent
to the reference to us under the heading "Experts" in such Prospectus.
PricewaterhouseCoopers LLP
New York, New York
June 4, 1999
<PAGE>
EXHIBIT 23.4
Consent of Director Nominee
Integrated Interactive, Inc.
I hereby consent to be named in the Registration Statement on Form S-1 of
Integrated Interactive, Inc., relating to the proposed initial public
offering of shares of common stock, par value $.01 per share, and in any
amendment or supplement to any prospectus included in such Registration
Statement, any amendment to such Registration Statement or any subsequent
Registration Statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, as amended.
By: /s/ Michael H. Jordan
----------------------------
Michael H. Jordan
Michael H. Jordan
New York, New York
Date: May 20, 1999
<PAGE>
Exhibit 23.5
CONSENT TO BE NAMED AS A DIRECTOR
I hereby consent to be named as a person who will become a
director of Clarant, Inc. (the "Company") in the registration statement on
Form S-1 to be filed by the Company with the Securities and Exchange
Commission relating to the initial public offering by the Company of shares
of common stock, par value $.01, of the Company.
Dated: May 24, 1999 By: /s/ Randolph Lee Austin, Jr.
-------------------------------
Name: Randolph Lee Austin, Jr.
-----------------------------
Chip Austin
<PAGE>
Exhibit 23.6
Consent of Director Nominee
Clarant Worldwide Corporation
I hereby consent to be named in the Registration Statement on
Form S-1 of Clarant Worldwide Corporation, relating to the proposed initial
public offering of shares of common stock, par value $.01 per share, and in
any amendment or supplement to any prospectus included in such Registration
Statement, any amendment to such Registration Statement or any subsequent
Registration Statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, as amended.
By: /s/ Michael J. Dolan
-----------------------------------
Michael J. Dolan
Michael J. Dolan
New York City
Date: June 7, 1999
<PAGE>
Exhibit 23.7
CONSENT TO BE NAMED AS A KEY PRACTICE LEADER
I hereby consent to be named as a person who will become a key
practice leader of Clarant, Inc. (the "Company") in the registration
statement on Form S-1 to be filed by the Company with the Securities and
Exchange Commission relating to the initial public offering by the Company of
shares of common stock, par value $.01, of the Company.
Dated: May 20, 1999 By: /s/ Lynn J. Branigan
-----------------------------------------
Name: [print] Lynn J. Branigan
----------------------------
<PAGE>
Exhibit 23.8
CONSENT TO BE NAMED AS A KEY PRACTICE LEADER
I hereby consent to be named as a person who will become a key practice
leader of Clarant, Inc. (the "Company") in the registration statement on
Form S-1 to be filed by the Company with the Securities and Exchange Commission
relating to the initial public offering by the Company of shares of common
stock, par value $.01, of the Company.
Dated: May 24, 1999 /s/ Calvin W. Carter
--------------------------
Name [print] Calvin W. Carter
<PAGE>
Exhibit 23.9
CONSENT OF DIRECTOR NOMINEE
CLARANT WORLDWIDE CORPORATION
I hereby consent to be named in the Registration Statement on Form
S-1 of Clarant Worldwide Corporation, relating to the proposed initial public
offering of shares of common stock, par value $.01 per share, and in any
amendment or supplement to any prospectus included in such Registration
Statement, any amendment to such Registration Statement or any subsequent
Registration Statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, as amended.
By: /s/ James R. Corey
-----------------------------------------
James R. Corey
James R. Corey
District of Columbia
Date: 6/3/99
---------------
<PAGE>
Exhibit 23.10
CONSENT TO BE NAMED AS A KEY PRACTICE LEADER
I hereby consent to be named as a person who will become a key
practice leader of Clarant, Inc. (the "Company") in the registration
statement on Form S-1 to be filed by the Company with the Securities and
Exchange Commission relating to the initial public offering by the Company of
shares of common stock, par value $.01, of the Company.
Dated: May 20, 1999 By: /s/ John B. Dimmer
-----------------------------------------
Name: [print] John B. Dimmer
----------------------------
<PAGE>
Exhibit 23.11
CONSENT TO BE NAMED AS A KEY PRACTICE LEADER
I hereby consent to be named as a person who will become a key
practice leader of Clarant, Inc. (the "Company") in the registration
statement on Form S-1 to be filed by the Company with the Securities and
Exchange Commission relating to the initial public offering by the Company of
shares of common stock, par value $.01, of the Company.
Dated: May 27, 1999 By: /s/ Bruce D. Grant
-----------------------------------------
Name: [print] Bruce D. Grant
----------------------------
<PAGE>
Exhibit 23.12
CONSENT TO BE NAMED AS A KEY PRACTICE LEADER
I hereby consent to be named as a person who will become a key
practice leader of Clarant, Inc. (the "Company") in the registration
statement on Form S-1 to be filed by the Company with the Securities and
Exchange Commission relating to the initial public offering by the Company of
shares of common stock, par value $.01, of the Company.
Dated: May 20, 1999 By: /s/ Henry Heilbrunn
-----------------------------------------
Name: [print] Henry Heilbrunn
----------------------------
<PAGE>
Exhibit 23.13
CONSENT TO BE NAMED AS A KEY PRACTICE LEADER
I hereby consent to be named as a person who will become a key practice
leader of Clarant, Inc. (the "Company") in the registration statement on
Form S-1 to be filed by the Company with the Securities and Exchange Commission
relating to the initial public offering by the Company of shares of common
stock, par value $.01, of the Company.
Dated: May 24, 1999 /s/ Morris W. Markel
--------------------------
Name [print] Morris W. Markel
<PAGE>
Exhibit 23.14
CONSENT TO BE NAMED AS A KEY PRACTICE LEADER
I hereby consent to be named as a person who will become a key
practice leader of Clarant Worldwide Corporation (the "Company") in the
registration statement on Form S-1 to be filed by the Company with the
Securities and Exchange Commission relating to the initial public offering by
the Company of shares of common stock, par value $.01, of the Company.
Dated: June 7, 1999 By: /s/ Andreas Panayi
-----------------------------------------
Name: [print] Andreas Panayi
----------------------------
<PAGE>
Exhibit 23.15
CONSENT TO BE NAMED AS A KEY PRACTICE LEADER
I hereby consent to be named as a person who will become a key practice
leader of Clarant, Inc. (the "Company") in the registration statement on
Form S-1 to be filed by the Company with the Securities and Exchange Commission
relating to the initial public offering by the Company of shares of common
stock, par value $.01, of the Company.
Dated: May 24, 1999 /s/ Douglas M. Rice
--------------------------
Name [print] Douglas M. Rice
<PAGE>
Exhibit 23.16
Consent of Director Nominee
Clarant Worldwide Corporation
I hereby consent to be named in the Registration Statement on
Form S-1 of Clarant Worldwide Corporation, relating to the proposed initial
public offering of shares of common stock, par value $.01 per share, and in
any amendment or supplement to any prospectus included in such Registration
Statement, any amendment to such Registration Statement or any subsequent
Registration Statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, as amended.
By: /s/ Richard M. Scruggs
-----------------------------------
Richard M. Scruggs
Richard M. Scruggs
Dallas, Texas
Date: June 3, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF CLARANT WORLDWIDE CORPORATION AS OF
MARCH 31, 1999 AND THE YEAR ENDED DECEMBER 31, 1998 AND THE THREE MONTHS ENDED
MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 0 32,574
<SECURITIES> 0 0
<RECEIVABLES> 0 11,913
<ALLOWANCES> 0 720
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 45,893
<PP&E> 0 6,273
<DEPRECIATION> 0 2,848
<TOTAL-ASSETS> 0 272,458
<CURRENT-LIABILITIES> 0 11,361
<BONDS> 0 595
0 0
0 0
<COMMON> 0 409
<OTHER-SE> 0 260,084
<TOTAL-LIABILITY-AND-EQUITY> 0 272,458
<SALES> 0 0
<TOTAL-REVENUES> 49,884 17,705
<CGS> (31,714) (10,208)
<TOTAL-COSTS> (133,271) (40,424)
<OTHER-EXPENSES> 42 (16)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (219) (40)
<INCOME-PRETAX> (83,564) (22,775)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (83,564) (22,775)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (83,564) (22,775)
<EPS-BASIC> (2.04) (0.56)
<EPS-DILUTED> (2.04) (0.56)
</TABLE>
