<PAGE>
Filed pursuant to Rule 424(b)(4)
Registration No. 333-89069
[C-BRIDGE LOGO APPEARS HERE]
4,000,000 Shares
Common Stock
C-bridge Internet Solutions, Inc. is offering 4,000,000 shares of its
common stock. This is our initial public offering, and no public market
currently exists for our shares. Our common stock has been approved for
quotation on the Nasdaq National Market under the symbol "CBIS."
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Investing in our common stock involves risks.
See "Risk Factors" beginning on page 8.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price..................................... $16.00 $64,000,000
Underwriting discounts and commissions.................... $ 1.12 $ 4,480,000
Proceeds to C-bridge...................................... $14.88 $59,520,000
</TABLE>
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have granted the underwriters a 30-day option to purchase up to an
additional 600,000 shares of our common stock to cover over-allotments.
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Robertson Stephens
SG Cowen
SoundView Technology Group
The date of this prospectus is December 17, 1999
<PAGE>
{C-bridge logo appears here]
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Description of the two page graphical foldout:
The background of the inside flap of the gatefold is comprised of a bridge
spanning the bottom of both the inside flap and inside front cover pages. Under
the bridge is water. Over the bridge is blue sky. Above the bridge, but below
the center of the foldout, are four screen shots of client web sites, two per
page.
The top of the left-hand page of the gatefold contains our logo with the text
"Internet...Intranet...Extranet" to the right. The remainder of the page
contains a graphic under the heading "C-bridge's Strategic eBusiness Approach."
The graphic begins with the text "Profit Life Cycle Management." The graphic is
comprised of three topics presented in an oval form. The first topic, presented
to the left top of the oval, contains the text "Enterprise Goals" with the
bullets "Measurements," "Operations," Resource Management," and "Scheduling"
underneath. The second topic, presented to the right center of the oval,
contains the text "Technology" with the bullets "Internet & Processes," "Data
Management" and "Backend Systems Integration" underneath. The third topic,
presented to the middle bottom of the oval, contains the text "Process" with the
bullets "Business Rules & Policies," "Supply & Service Chain" and "Industry
Specific" underneath. The three topics are connected by circular arrows around
the perimeter of the oval.
The top of the inside front cover of the gatefold contains a graphic that begins
with the text "Profit Life Cycle Management." The graphic is comprised of three
topics presented in an oval form. The first topic, presented to the left top of
the oval, contains the text "What to Change?" with the bullets "Strategy" and
"Diagnosis" underneath. The second topic, presented to the right center of the
oval, contains the text "What to Change to?" with the bullets "Rapid Solution,"
"Delivery Process" and "Change Management" underneath. The third topic,
presented to the middle bottom of the oval, contains the text "How to Make the
Change Happen" with the bullets "Implementation & On-going Profit Improvement"
and "Education & Empowerment" underneath. The three topics are connected by
circular arrows around the perimeter of the oval. Under the graphic are three
paragraphs with the headings to the left of each paragraph. The first paragraph
has the heading "Financial:" and contains the text "Profit Life Cycle Management
enables the organization to increase profits and return on resources with
consistent on-time delivery resulting in higher return on investment." The
second paragraph has the heading "Strategic:" and contains the text "Profit Life
Cycle Management provides the competitive edge for increased market share by
creating faster time-to-market throughout the enterprise." The third paragraph
has the heading "Operational:" and contains the text "Profit Life Cycle
Management synchronizes all levels of management, from senior management to
resource managers, by making decisions based on the same criteria and driving
rapid implementation."
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
Until January 11, 2000 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 23
Business................................................................. 31
Management............................................................... 45
Certain Transactions..................................................... 54
Principal Stockholders................................................... 57
Description of Capital Stock............................................. 59
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 62
Legal Matters............................................................ 64
Experts.................................................................. 64
Where You Can Find More Information...................................... 65
Index to Financial Statements............................................ F-1
</TABLE>
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C-BRIDGE is a registered trademark of C-bridge. All other trademarks or
trade names referred to in this prospectus are the property of their respective
owners.
3
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SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It contains a summary of the most significant aspects of the offering that you
should consider before investing in our common stock. This summary may not
contain all of the information that is important to you. You should read the
entire prospectus carefully.
C-bridge Internet Solutions
Our Business
We are a full service provider of Internet-based solutions designed to help
companies conduct business over the Internet, commonly known as eBusiness. We
add value to our clients by incorporating our expertise in business issue
diagnosis and resolution, business and technology strategy development and the
delivery of advanced Internet applications and eBusiness solutions.
Additionally, we offer clients executive education services on topics relevant
to senior executives' efforts to successfully develop and implement Internet
technologies and eBusiness strategies.
Our Services
We help companies interact effectively, both internally with employees and
externally with vendors, suppliers and customers, by employing eBusiness
solutions. We educate senior-level executives from companies on the Business
Week Global 1000 index at executive education seminars around the world,
diagnose new business strategies and systems architectures shortcomings and
then deliver strategic eBusiness solutions that are designed to enhance our
clients' core businesses, operations and communications.
We deliver our services through our proprietary methodology that provides
an integrated framework for each stage of a client engagement. The methodology
is based on a number of underlying principles:
. value driven;
. iterative development and change management;
. design patterns and reusable software; and
. proactive risk management.
Our diagnosis services are structured to improve our clients' understanding
of the power and potential of eBusiness solutions. During the diagnosis phase
we work with clients to help them understand the various ways to incorporate
Internet technologies into their business strategies, enable them to identify
and quantify prominent business opportunities where the Internet can be
leveraged to gain a competitive advantage and realize business value, evaluate
their current Internet capabilities and explore and create a vision of how a
chosen Internet strategy will result in measurable business value.
We use standard design patterns and reusable software components to
assemble our eBusiness solutions, increase reliability and product quality,
reduce costs and keep project teams focused on delivering business
functionality. Application development efforts are based on well-defined
specifications with release schedules that are closely aligned with business
priorities.
Our Market
We believe we are well-positioned to capitalize on the opportunity
presented by the rapid growth of the Internet. According to International Data
Corporation, the amount of commerce conducted over the Internet will exceed
$1.0 trillion by 2003. Faced with growing competition, deregulation and
globalization, companies are increasingly looking to utilize Internet
technologies to help build a competitive advantage. However,
4
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companies frequently require major technology investments in order to realize
the full value of their Internet strategies and often need outside technical
expertise to identify and evaluate viable Internet tools, develop feasible
systems architectures and implement strategies. The market for third-party
Internet professional service providers who perform these services has grown
significantly in recent years. International Data Corporation has forecasted
that the size of this market will grow from $7.8 billion in 1998 to $78.5
billion by 2003.
Our Strategy
Our goal is to become the leading provider of eBusiness services to Global
1000 companies. To achieve this objective, we are actively pursuing the
following strategies:
. continue to enhance our eBusiness framework and design patterns;
. develop and expand client relationships;
. capture and disseminate reusable knowledge and best practices;
. leverage and expand our industry-specific expertise; and
. expand our geographic presence.
Our Clients
We provide our services primarily to Global 1000 companies. Our customers
include Allmerica, Chevron, General Motors, Liz Claiborne, Polo Ralph Lauren
and Toyota. Our eBusiness solutions are designed to increase sales and improve
communications both internally and externally in order to achieve greater
customer satisfaction and enhance business identity.
Examples of a few of our business solutions include:
. creating an Internet-based solution that connects 8,000 Chevron gas
stations and convenience stores in order to recognize greater revenues
and profits by utilizing better economies of scale to assist Chevron
and its franchisees in optimizing their product mix and services;
. improving the Internet-based parts ordering system of Aviall, the
largest independent distributor of original aviation parts, to improve
speed and functionality as well as to provide additional electronic
commerce features;
. working with Aquent, formerly MacTemps, the world's largest placement
agency, to develop an eBusiness solution that addresses the changing
temporary placement market and extends Aquent's traditional placement
capabilities to the Internet; and
. refocusing Central Carolina Bank's eBusiness strategy towards specific
revenue-driven, customer-centric responses to banking patterns in the
industry to enable them to use the Internet to offer value-added
products and services, acquire and retain customers and increase cross-
selling of banking products.
Our Address
C-bridge was organized as a Delaware corporation in October 1996. Our
principal office is located at 219 Vassar Street, Cambridge, Massachusetts
02139 and our telephone number is (617) 497-1707. Our web site can be located
at www.c-bridge.com. Information contained on our web site should not be
considered a part of this prospectus.
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THE OFFERING
<TABLE>
<S> <C>
Common stock offered by C-bridge........ 4,000,000 shares
Common stock to be outstanding after
this offering......................... 17,303,242 shares
Use of proceeds......................... General corporate and working capital
purposes, including possible
acquisitions. See "Use of Proceeds."
Nasdaq National Market symbol........... CBIS
</TABLE>
The number of shares outstanding after this offering is based on our shares
of common stock outstanding as of September 30, 1999, gives effect to our sale
of 1,645,555 shares of series A convertible preferred stock in October 1999 and
the conversion of those shares into 1,645,555 shares of common stock that will
occur upon the completion of this offering, and excludes:
. 6,745,062 shares subject to options outstanding as of September 30,
1999 at a weighted average exercise price of $1.20 per share;
. 1,947,515 additional shares reserved for issuance under our stock
option plans; and
. 784,504 shares subject to warrants outstanding as of September 30, 1999
at a weighted average exercise price of $0.38.
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Except as otherwise noted, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
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Summary Consolidated Financial Data
(in thousands, except per share data)
Set forth below are our summary consolidated statements of operations data
for the period from inception (October 31, 1996) through December 31, 1996, for
the years ended December 31, 1997 and 1998, and for the nine months ended
September 30, 1998 and 1999, and summary balance sheet data as of September 30,
1999, on an actual basis, on a pro forma basis to give effect to our sale of
1,645,555 shares of series A convertible preferred stock in October 1999 for
net proceeds of $9.9 million and the conversion of all of our outstanding
preferred stock into common stock that will occur upon the completion of this
offering, and on a pro forma as adjusted basis to give effect to the sale by us
of 4,000,000 shares of common stock in this offering at an initial public
offering price of $16.00 per share, after deducting underwriting discounts and
commissions and the estimated offering expenses payable by us.
This information should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from
Inception Year Ended Nine Months Ended
(October 31, 1996) December 31, September 30,
through ---------------- ------------------
Statement of Operations December 31, 1996 1997 1998 1998 1999
Data: ------------------ ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Total net revenues...... $ -- $ 3,169 $ 5,047 $ 3,208 $ 13,838
Loss from operations.... (193) (1,218) (3,640) (3,256) (3,118)
Net loss................ (193) (1,215) (3,869) (3,421) (2,931)
Basic and diluted net
loss per share........ $ (0.02) $ (0.12) $ (0.39) $ (0.35) $ (0.27)
Basic and diluted
weighted average
shares outstanding.... 10,000 10,000 9,992 9,912 10,713
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
Balance Sheet Data: ------- --------- -----------
<S> <C> <C> <C>
Working capital deficit.......................... $(1,811) $ 6,622 $65,142
Total assets..................................... 5,858 14,407 72,927
Line of credit................................... 1,449 189 189
Capital lease obligations........................ 317 317 317
Total stockholders' (deficit) equity ............ (671) 9,137 67,657
</TABLE>
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RISK FACTORS
This offering involves a high degree of risk. You should consider carefully
the following risks before you decide to buy our common stock. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially and adversely affected. This could cause the
market price of our common stock to decline, and you could lose all or part of
your investment.
Risks Related to Our Business
Because we have a short operating history, there is a limited amount of
information about us upon which you can evaluate our business and potential for
future success.
We were incorporated in October 1996 and have only a limited operating
history upon which you can evaluate our business and prospects. You must
consider the risks and uncertainties frequently encountered by early stage
companies in new and rapidly evolving markets, such as the market for Internet
professional services. If we are unsuccessful in addressing these risks and
uncertainties, our ability to execute our business plan would be materially and
adversely affected.
We had an accumulated deficit of $8.3 million as of September 30, 1999, and we
expect to continue to incur operating losses for the foreseeable future.
We have had substantial losses since our inception and our operating losses
may continue and even increase in the future. We expect our operating expenses
to increase significantly, especially in the areas of sales, marketing and
recruiting, and, as a result, we will need to generate increased quarterly
revenues to become profitable. Accordingly, we cannot assure you that we will
ever become or remain profitable. If our revenues fail to grow at anticipated
rates or our operating expenses increase without a commensurate increase in our
revenues, our financial condition will be adversely affected. It is unlikely
that the growth rates we have experienced in recent periods will continue at
their current levels. Our inability to become profitable on a quarterly or
annual basis would have a material adverse effect on our business and financial
condition.
Our results of operations may vary from quarter to quarter in future periods,
and, as a result, we may fail to meet the expectations of our investors and
analysts, which could cause our stock price to fluctuate or decline.
Our revenues and results of operations have fluctuated significantly in the
past and could fluctuate significantly in the future due to a variety of
factors, many of which are outside of our control. These factors include:
. demand for our services;
. our ability to attract and retain clients;
. our ability to attract, retain and motivate qualified personnel;
. the number, timing and significance of new services introduced by our
competitors;
. our ability to develop, market and introduce new and enhanced services
on a timely basis;
. the level of service and price competition;
. changes in operating expenses; and
. changes in the mix of services offered.
Our operating expenses are relatively fixed
A substantial portion of our operating expense is related to personnel
costs, marketing programs and overhead, which cannot be adjusted quickly and
are therefore relatively fixed in the short term. Our operating expense levels
are based, in significant part, on our expectations of future revenue. If
actual revenues are below our expectations, our results of operations and
financial condition would be materially and adversely affected.
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Period-to-period comparisons may be unreliable
Due to all of the foregoing factors and the other risks discussed in this
prospectus, you should not rely on period-to-period comparisons of our results
of operations as an indication of future performance. It is possible that in
some future periods our results of operations may be below the expectations of
public market analysts and investors. In this event, the market price of our
common stock is likely to fall.
Our success depends on a limited number of significant clients, and our
revenues could be negatively affected by the loss of a major client or
significant project.
We generate much of our revenues from a limited number of clients. As a
result, if we lose a major client or large project, our revenues could be
materially and adversely affected. In 1998, for example, our three largest
clients, Chevron, Johnstone Supply and Toyota, accounted for approximately 51%
of our total net revenues. During the nine months ended September 30, 1999, our
three largest professional services clients, Allmerica, Chevron and U.S. West,
collectively accounted for approximately 54% of our total net revenues. In
addition, a fourth client, CEE, for whom we perform educational services,
accounted for 18% of our total net revenues for the nine months ended September
30, 1999.
We perform varying amounts of work for specific clients from year to year.
A major client in one year may not use our services in another year. In
addition, we may derive revenues from a major client that constitutes a large
portion of a particular quarter's total revenues. If we lose any major clients
or any of our clients cancel or significantly reduce a large project's scope,
our results of operations and financial condition could be materially and
adversely affected. In addition, we expect the size of these contracts to grow,
resulting in a continued dependence on significant clients. Also, if we fail to
collect a large account receivable, we could be subjected to significant
financial exposure.
Our lack of long-term client contracts reduces the predictability of our
revenues because these contracts may be canceled on short notice and without
penalty.
Our clients generally retain us on a project-by-project basis, rather than
under long-term contracts. As a result, a client may not engage us for further
services once a project is completed. Also, most of our clients can reduce or
cancel their contracts with little or no notice and without penalty. If a
significant client, or a number of clients, terminate, significantly reduce or
modify their contracts with us, our results of operations would be materially
and adversely affected. Consequently, you should not predict or anticipate our
future revenues based on the number of clients we have or the number and size
of our existing projects. When a client postpones, modifies or cancels a
project, we must shift our consultants to other projects to minimize the
adverse impact on our operating results. We cannot assure you that we will be
successful in efficiently shifting our consultants to new projects in the event
of project terminations.
We may lose money on fixed-price contracts.
As part of our strategy, we intend to enter into more fixed-price
contracts, rather than contracts based on payment for time and materials. For
the nine months ended September 30, 1999, fixed-price contracts represented
approximately 12% of our professional services revenues. In addition, the
average size of our contracts has increased in recent periods, which increases
our exposure to the financial risks of fixed-price contracts. We assume greater
financial risk on fixed-price contracts than on time-and-materials engagements,
and we cannot assure you that we will be able to successfully price our larger
contracts. We have only a limited history in estimating our costs for our
engagements, particularly for larger projects. In the past, we have had to
commit unanticipated resources to complete certain projects, resulting in lower
gross margins on these projects. We may experience similar situations in the
future. If we fail to estimate accurately the resources and time required for
an engagement, to manage client expectations effectively or to complete fixed-
price engagements within our budget, on time and to our clients' satisfaction,
we would be exposed to cost overruns, potentially leading to losses on these
engagements.
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We depend on our key personnel, and the loss of any key personnel could disrupt
our operations, adversely affect our business and result in reduced revenues.
Our future success will depend on the continued services and on the
performance of our senior management and other key employees, in particular the
services of:
. Joseph M. Bellini, our President and Chief Executive Officer;
. Richard C. Putz, our Executive Vice President, Worldwide Industries;
. R. Jeffrey Spurrier, our Executive Vice President, Worldwide
Operations;
. Mark A. Cosway, our Executive Vice President, Sales and Marketing;
. Donald W. Amaya, our Executive Vice President, Human Resources; and
. Richard O. Wester, our Vice President, Finance and Administration and
Chief Financial Officer.
The loss of the services of any of these individuals could seriously impair
our ability to execute our business plan, which could reduce our revenues and
have a material adverse effect on our business and results of operations.
Our ability to hire, train and retain qualified employees is crucial to our
ability to compete effectively.
To succeed, we must hire, train, motivate, retain and successfully manage
employees with skills related to the Internet and its rapidly changing
technologies. Because of the recent and rapid growth of the Internet,
professionals who have Internet expertise and can perform the services we offer
are scarce, and competition for these individuals is intense. We might not be
able to hire enough experienced professionals or to train, motivate, retain and
successfully manage the employees we do hire. This could hinder our ability to
complete existing projects and bid for new projects. In addition, because the
competition for qualified professionals in the Internet industry is intense,
hiring, training, motivating and retaining professionals with the strategic,
technical and creative skills we need is both time-consuming and expensive.
While our key employees are subject to non-competition agreements, these
agreements may be difficult to enforce. As a result, our employees may leave us
and work for our competitors or start their own companies in competition with
us. If we fail to attract, train and retain key personnel, our business would
be materially and adversely affected.
We may not be able to successfully manage our growth which could adversely
affect our business.
We have grown rapidly and expect to continue to grow rapidly, both by
hiring new employees and serving new industry and geographic markets. Our
recent growth has placed, and is expected to continue to place, a significant
strain on our management and our operating and financial systems. Our headcount
has grown from 57 as of December 31, 1997 to 183 as of September 30, 1999, and
several members of our senior management team have only recently joined us. We
do not believe our recent growth rate is sustainable for the long term.
Our personnel, systems, procedures and controls may be inadequate to
support our future operations. In order to accommodate the increased number of
projects, clients and the increased size of our operations, we will need to
hire, train and retain appropriate personnel to manage our operations. We will
also need to improve our financial and management controls, reporting systems
and operating systems. We currently plan to redesign several internal systems,
including our recruiting and engagement management systems. We may encounter
difficulties in developing and implementing these new systems.
Historically, we have depended on third-party educational seminars to generate
a substantial majority of our client engagements, and the success of our
business will depend on our ability to develop effective sales and marketing
capabilities.
Historically, we have derived a substantial majority of our client
engagements from sales leads generated by educational seminars produced in
conjunction with CEE and Professor John J. Donovan. In the event that
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either CEE or Professor Donovan is no longer able to perform these services,
our revenues could be adversely affected. While these seminars will continue to
be an important source of sales leads for client engagements, we have begun to
develop our own sales and marketing capabilities as well. However, there is
intense competition for sales personnel in our business, and there can be no
assurance that we will be successful in attracting, integrating, motivating and
retaining new sales personnel. In addition, we have limited experience in
marketing our services with a direct sales force. Unlike our educational
seminars, our direct sales force may be unable to establish client contacts at
senior management levels, which may limit the effectiveness of those contacts
and limit future revenue growth.
Our future success will depend on our ability to keep pace with the Internet's
rapid technological changes, evolving industry standards and changing client
requirements.
The market for Internet professional services is relatively new and
evolving rapidly. Our future success will depend, in part, upon our ability to
provide services that are accepted by our existing and future clients as an
integral part of their business model. Demand and market acceptance for
recently introduced services are subject to a high level of uncertainty. The
level of demand for Internet professional services will depend upon a number of
factors, including the following:
. the growth in consumer access to, and acceptance of, new interactive
technologies such as the Internet;
. the adoption of Internet-based business models; and
. the development of technologies that facilitate two-way communication
between companies and targeted audiences.
Significant issues concerning the commercial use of Internet technologies,
including security, reliability, cost, ease of use and quality of service,
remain unresolved and may inhibit the growth of eBusiness solutions that
utilize these technologies. Our future success will depend, in part, on our
ability to meet these challenges, which must be met in a timely and cost-
effective manner. We cannot assure you that we will succeed in effectively
meeting these challenges, and our failure to do so could materially and
adversely affect our business.
Industry analysts and others have made many predictions concerning the
growth of the Internet as a business medium. Many of these historical
predictions have overstated the growth of the Internet. These predictions
should not be relied upon as conclusive. The market for our services may not
develop, our services may not be adopted and individual personal computer users
in business or at home may not use the Internet or other interactive media for
commerce and communication. If the market for Internet professional services
fails to develop, or develops more slowly than expected, or if our services do
not achieve market acceptance, our business would be materially and adversely
affected.
Future acquisitions or investments could disrupt our ongoing business, distract
our management and employees, increase our expenses and adversely affect our
business.
We anticipate that a portion of any future growth may be accomplished by
acquiring existing businesses. The success of any acquisitions will depend
upon, among other things, our ability to integrate acquired personnel,
operations, products and technologies into our organization effectively, to
retain and motivate key personnel of acquired businesses and to retain
customers of acquired firms. We cannot assure you that we will be able to
identify suitable acquisition opportunities, obtain any necessary financing on
acceptable terms or successfully integrate acquired personnel and operations.
In addition, as a public company, it may be more difficult to acquire
additional companies and the cost of acquiring businesses may increase relative
to the cost of similar acquisitions when we were a private company. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and materially and adversely affect our
results of operations. Any future acquisitions would involve certain other
risks, including the assumption of additional liabilities, potentially dilutive
issuances of equity securities and diversion of management's attention from
other
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business concerns. Furthermore, we may issue equity securities or incur debt
to pay for any future acquisitions. If we issue equity securities, your
percentage ownership of our company would be reduced.
Competition in the Internet professional services market is intense, and
therefore we may lose projects to our competitors or prospective clients'
internal IT departments.
While the market for Internet professional services is relatively new, it
is already highly competitive. In many cases we compete with the in-house
technical staff of our prospective clients. In addition, the market is
characterized by an increasing number of entrants that have introduced or
developed services similar to those offered by us. We believe that competition
will intensify and increase in the future. Our target market is rapidly
evolving and is subject to continuous technological change. As a result, our
competitors may be better positioned to address these developments or may
react more favorably to these changes, which could have a material adverse
effect on our business. We compete on the basis of a number of factors, many
of which are beyond our control. Existing or future competitors may develop or
offer Internet professional services that provide significant technological,
creative, performance, price or other advantages over the services we offer.
There are many competitors in the market for Internet professional services
We currently compete for client assignments and experienced personnel
principally with the following:
. Internet service firms: AGENCY.COM, iXL, Modem Media.Poppe Tyson,
Online Marketing Communications, Organic Online, Proxicom, Razorfish,
Scient, USWeb/CKS and Viant.
. Systems integrators: Andersen Consulting, Cambridge Technology
Partners, Cap Gemini, EDS, Sapient and WM-Data.
. Management consulting firms: Bain, Booz-Allen & Hamilton, Boston
Consulting Group and McKinsey.
. Computer hardware and service vendors: Compaq, DEC, Hewlett-Packard
and IBM.
. Advertising agencies: Bates, DDB Needham, Grey Advertising, McCann-
Erickson and Ogilvy & Mather.
Many of these businesses have longer operating histories and significantly
greater financial, technical, marketing and managerial resources than we do.
There are relatively low barriers to entry into our business. We have no
patented or other proprietary technology that would preclude or inhibit
competitors from entering the Internet professional services market.
Therefore, we must rely on the skill of our personnel and the quality of our
client service. The costs to develop and provide Internet professional
services are low. We expect that we will continue to face additional
competition from new entrants into the market in the future, and we are
subject to the risk that our employees may leave us and may start competing
businesses. Any one or more of these factors could hurt our business.
We may not be able to protect our intellectual property rights, which could
adversely affect our business.
Our future success will depend, in part, upon our intellectual property
rights and our ability to protect these rights. We do not have any patents or
patent applications pending. Existing trade secret and copyright laws afford
us only limited protection. Third parties may attempt to disclose, obtain or
use our solutions or technologies. This is particularly true in foreign
countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States. Others may independently
develop and obtain patents or copyrights for technologies that are similar or
superior to our technologies. If that happens, we may need to license these
technologies and we may not be able to obtain licenses on reasonable terms, if
at all. If we are unsuccessful in any future intellectual property litigation
we may be forced to do one or more of the following:
. cease selling or using technology or services that incorporate the
challenged intellectual property;
12
<PAGE>
. obtain a license, which may not be available on reasonable terms or at
all, to use the relevant technology;
. configure services to avoid infringement; and
. refund license fees or other payments that we have previously
received.
Generally, we develop software applications for specific client
engagements. Issues relating to ownership of and rights to use software
applications and frameworks can be complicated. We may become involved in
disputes that affect our ability to resell or reuse these applications and
frameworks. Also, we may have to pay economic damages in these disputes which
could adversely affect our results of operations and financial condition.
Difficulties in transitioning to new software systems may negatively affect our
business.
We currently use PC and network-based software for our management systems.
Our current financial software is designed for small to medium-sized companies.
Our human resources, recruiting and resource management systems are mainly
database and spreadsheet driven. We have purchased and are currently planning
to implement Oracle's integrated financial, human resources and project
software. We are also evaluating our recruiting and customer relationship
management systems. However, these new systems are expensive, and we may
encounter difficulties in transitioning to them. Difficulties encountered with
developing, implementing or operating such systems could materially and
adversely affect our business.
Our failure to meet client expectations or deliver error-free services could
result in losses and negative publicity.
Our client engagements involve the creation, implementation and maintenance
of eBusiness solutions that are often critical to our clients' businesses. Any
defects or errors in these applications or a failure to meet client
expectations could result in:
. delayed or lost revenues due to adverse client reaction;
. the provision of additional services to a client at no charge;
. negative publicity regarding us and our services, which could
adversely affect our ability to attract or retain clients; and
. claims for substantial damages against us, regardless of our
responsibility for any damages.
Our contracts generally contain provisions intended to limit our liability
for damages that may arise from negligent acts, errors, mistakes or omissions
in rendering services to our clients. However, we cannot assure you that these
contractual provisions will protect us from liability for damages. Furthermore,
our general liability insurance coverage may not continue to be available on
reasonable terms or be sufficient to cover large claims. In addition, the
insurer may disclaim coverage as to any future claim. The successful assertion
of any large claim against us could materially and adversely affect our
financial condition.
Problems relating to the "Year 2000 Issue" could adversely affect our business.
Year 2000 issues may adversely affect our business and our clients'
businesses. 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. As a result, computer systems and software used by many
companies, including us, our clients and our prospective clients, may need to
be upgraded to comply with such "Year 2000" requirements. Any failure on the
part of our principal internal systems, the systems that we create for our
prospective clients and other existing systems of our clients, could seriously
harm our business, financial condition and operating results. For a more
detailed description of our Year 2000 assessment, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Impact of Year
2000."
13
<PAGE>
To remain competitive, we may need additional financing, which may not be
available on terms acceptable to us, if at all.
We expect the net proceeds from this offering, together with current cash
and available borrowings under our credit facilities, will be sufficient for us
to meet our working capital and capital expenditure requirements for at least
the next 12 months. However, we may need additional financing sooner if we:
. decide to expand faster than planned;
. develop new or enhanced services or products ahead of schedule;
. need to respond to competitive pressures; or
. decide to acquire complementary products, businesses or technologies.
If we raise additional funds through the sale of equity or convertible debt
securities, your percentage ownership will be reduced. In addition, these
transactions may dilute the value of our common stock. We may have to issue
securities that have rights, preferences and privileges senior to our common
stock. We cannot assure you that we will be able to raise additional funds on
terms acceptable to us, if at all. If future financing is not available or is
not available on terms acceptable to us, we may not be able to fund our
business plan which would have a material adverse effect on our financial
condition.
Our international expansion plans may not succeed.
A key element of our strategy is to expand our operations into
international markets. We currently have professionals operating in London,
England and Sydney, Australia. We have limited experience in marketing, selling
and delivering our services internationally, and we may have difficulty in
managing our international operations because of distance, as well as language
and cultural differences. We cannot assure you that we will be able to market
and deliver our services successfully in foreign markets.
Other risks related to our international operations include:
. fluctuations in currency exchange rates and the conversion to the euro
by all members of the European Union by year-end 2003;
. difficulties arising from staffing and managing foreign operations;
. longer payment cycles;
. restrictions and the reduced protection of intellectual property;
. restrictions on the import and export of sensitive U.S. technologies,
such as data security and encryption technologies that we may wish to
use in solutions we develop for customers;
. legal and regulatory requirements of different countries, such as
differing tax or labor laws; and
. potential political and economic instability.
If any of these risks materialize, we may have difficulty in managing our
international operations and expansion.
Risks Related to the Internet Professional Services Industry
Our future success will depend on the continued growth and development of the
Internet and its infrastructure.
Our future success will depend on the continued growth and use of the
Internet. We cannot assure you that this growth will continue or that a
sufficient number of consumers will adopt and continue to use the Internet.
Internet usage may be inhibited for a number of reasons, including:
. inadequate Internet infrastructure;
14
<PAGE>
. security concerns;
. inconsistent quality of service; or
. unavailability of cost-effective, high-speed access services.
We cannot assure you that the Internet infrastructure will be able to
support expected growth or that the performance and reliability of the Internet
will not decline as a result of this growth. Recently, many web sites,
including those of our clients, have experienced a variety of interruptions in
their service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays frequently occur in
the future, web usage could grow more slowly than anticipated or decline.
Our future success will depend on the development of the eBusiness market,
which remains uncertain.
Our future success will depend upon the widespread acceptance and use of
the Internet as an effective medium of commerce by businesses and consumers.
Rapid growth in the use of the Internet and commercial online services is a
recent phenomenon. Demand for recently introduced services and products over
the Internet and online services is subject to a high level of uncertainty. The
continued development of the Internet and eBusiness as a viable commercial
marketplace is subject to a number of factors, including the following:
. the willingness of buyers to shift their purchasing habits from
traditional vendors to eBusiness vendors;
. insufficient availability of telecommunications services providing
sufficiently fast response times; and
. adverse publicity and consumer concern about the security of eBusiness
transactions.
Breaches of security and computer viruses on the Internet may adversely affect
our business by slowing the growth of eBusiness.
The need to securely transmit confidential information, such as credit card
and other personal information, over the Internet has been a significant
barrier to eBusiness and Internet communications. Any well-publicized
compromise of security could deter consumers and businesses from using the
Internet to conduct transactions that involve transmitting confidential
information, such as purchases of goods or services. Furthermore, computer
viruses that spread over the Internet could disable or damage the systems we
develop for our clients. Decreased Internet traffic or eBusiness sales as a
result of general security concerns or viruses could cause companies to reduce
their amount of technology spending, which could hurt our results of
operations.
We face risks associated with government regulation of, and legal uncertainties
surrounding, the Internet.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could increase our cost of doing business or
otherwise have a material adverse effect on our business, results of operations
and financial condition. Laws and regulations directly applicable to Internet
communications, commerce and advertising are becoming more prevalent. The laws
governing the Internet, however, remain largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws governing intellectual property, copyright, privacy,
obscenity, libel and taxation apply to the Internet. In addition, the growth
and development of eBusiness may prompt calls for more stringent consumer
protection laws, both in the United States and abroad.
15
<PAGE>
Risks Associated With This Offering
The future sale of substantial amounts of our common stock may negatively
affect our stock price.
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market after this
offering, or the perception that these sales could occur. In addition, we have
a significant number of shares that are subject to outstanding options and
warrants. The exercise of these options and warrants and the subsequent sale of
the underlying common stock could cause a further decline in our stock price.
These sales also might make it difficult for us to sell equity securities in
the future at a time and at a price that we deem appropriate. For a more
detailed description of the number of shares that may be sold following this
offering, see "Shares Eligible for Future Sale" on page 61.
The future issuance of preferred stock may dilute the rights of our common
stockholders.
Following this offering, our board of directors will have the authority to
issue up to 5,000,000 shares of preferred stock and to determine the price,
privileges and other terms of the shares. The board of directors may exercise
this authority without any further approval of the stockholders. The rights of
the holders of common stock may be adversely affected by the rights of the
holders of any preferred stock that may be issued in the future.
We have various mechanisms in place to discourage takeover attempts.
Certain provisions of our certificate of incorporation and bylaws, as well
as Section 203 of the Delaware General Corporation Law, may discourage, delay
or prevent a change in control of our company that you as a stockholder may
consider favorable. These provisions include:
. authorizing the issuance of "blank check" preferred stock that could
be issued by our board of directors to increase the number of
outstanding shares and thwart a hostile takeover attempt;
. prohibiting cumulative voting in the election of directors, which will
allow a majority of stockholders to control the election of all
directors;
. requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
. limitations on who may call special meetings of stockholders;
. prohibiting stockholder action by written consent, which requires all
actions to be taken at a meeting of the stockholders; and
. establishing advance notice requirements for nominations of candidates
for election to the board of directors or for proposing matters that
can be acted upon by stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law and our
stock incentive plans may discourage, delay or prevent a change in control of
our company.
We expect the market price of our common stock to be volatile, and it may drop
unexpectedly.
The initial public offering price has been determined through negotiations
between us and the representatives of the underwriters based on factors that
may not be indicative of future market performance. The initial public offering
price may bear no relationship to the price at which the common stock will
trade upon completion of this offering. An active public market for our common
stock may not develop or be sustained after this offering, and the market price
could fall below the initial public offering price.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources, which could have a material adverse effect on our
business and the market price of our common stock.
16
<PAGE>
Our directors, executive officers and principal stockholders will have
substantial control over our affairs.
Our directors and executive officers will beneficially own approximately
20.9% of our common stock following this offering. In addition, our three
largest stockholders will own approximately 47.1% of our outstanding common
stock. These stockholders acting together will have the ability to exert
substantial influence over all matters requiring approval by our stockholders.
These matters include the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets. In addition,
they may dictate the management of our business and affairs. This concentration
of ownership could have the effect of delaying, deferring or preventing a
change in control or impeding a merger or consolidation, takeover or other
business combination which you, as a stockholder, would otherwise view
favorably.
We do not have a plan for the use of the net proceeds of this offering and will
therefore have discretion as to the use of these proceeds, which we may not use
effectively.
We have no plan with respect to the use of the net proceeds of this
offering and have not committed these proceeds to any particular purpose apart
from expenses of the business and general working capital. Accordingly, our
management will have significant flexibility in applying the net proceeds of
this offering and may use the proceeds in ways with which stockholders
disagree. We may not be able to invest these funds effectively.
You will suffer substantial dilution in the net tangible book value of the
common stock you purchase.
The initial public offering price of our common stock will be substantially
higher than the book value per share of our common stock. Based on an initial
public offering price of $16.00 per share, if you purchase shares of common
stock in this offering, you will suffer immediate and substantial dilution of
$12.62 per share in the net tangible book value of the common stock.
17
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS; MARKET DATA
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing forward-looking statements may be found
in the material set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" as well as in the
prospectus generally. We generally use words such as "believes," "intends,"
"expects," "anticipates," "plans," and similar expressions to identify forward-
looking statements. This prospectus also contains third-party estimates
regarding the size and growth of the Internet professional services market and
Internet usage in general. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in the forward-looking statements for many reasons, including
the risks described above and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, they relate only to events as of the date on which
the statements are made, and we cannot assure you that our future results,
levels of activity, performance or achievements will meet these expectations.
Moreover, neither we nor any other person assumes responsibility for the
accuracy and completeness of the forward-looking statements.
This prospectus contains data related to the eCommerce market and the
Internet professional services industry. These market data have been included
in studies published by the market research firm of International Data
Corporation. These data include projections that are based on a number of
assumptions, including increasing worldwide business use of the Internet, the
growth in the number of web access devices per user, the absence of any failure
of the Internet and the continued improvement of security on the Internet. If
any of these assumptions is incorrect, actual results may differ from the
projections based on those assumptions and these markets may not grow at the
rates projected by these data, or at all. The failure of these markets to grow
at these projected rates may have a material adverse effect on our business and
the market price of our common stock.
18
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of 4,000,000 shares of
common stock offered by us are estimated to be $58.5 million, after deducting
underwriting discounts and commissions and the estimated offering expenses
payable by us. If the underwriters' over-allotment option is exercised in full,
we estimate that the net proceeds will be $67.4 million. We intend to use the
net proceeds from this offering for general corporate and working capital
purposes, including possible acquisitions. As of the date of this prospectus,
we have not identified any specific expenditure plans with respect to the
proceeds of this offering. Accordingly, our management will have broad
discretion and significant flexibility in applying the net proceeds of this
offering. We intend to invest the net proceeds from this offering in short-
term, investment grade, interest-bearing instruments until they are used.
The principal purposes of this offering are:
. to increase our equity capital;
. to facilitate future access by us to public equity markets;
. to provide increased visibility and credibility in a marketplace where
several of our current and prospective competitors are, or may in the
future be, public companies; and
. to enhance our ability to use our common stock as consideration for
acquisitions and as a means of attracting and retaining key employees.
We intend to continue to consider, from time to time, acquisitions that
could provide additional new product or service offerings, additional industry
expertise, a broader client base or an expanded geographic presence, and a
portion of the net proceeds from this offering may be used for such
acquisitions. From time to time, we have engaged in discussions with third
parties concerning potential acquisitions of product lines, technologies and
businesses. There are no pending negotiations or arrangements relating to any
acquisitions. However, there are currently no commitments or agreements with
respect to any acquisition.
DIVIDEND POLICY
We have never paid dividends on our common stock. We currently intend to
retain earnings, if any, to fund the development and growth of our business and
do not anticipate paying cash dividends for the foreseeable future. Payment of
future dividends, if any, will be at the discretion of our board of directors
after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.
The terms of our existing credit agreement also prevent us from paying any
dividend or making any other distribution or payment with respect to our
capital stock.
19
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1999, our
capitalization on an actual basis, on a pro forma basis to give effect to our
sale of 1,645,555 shares of series A convertible preferred stock in October
1999 for net proceeds of $9.9 million and the conversion of all of our
outstanding preferred stock into common stock that will occur upon the
completion of this offering, and on a pro forma as adjusted basis to give
effect to the sale by us of 4,000,000 shares of common stock at an initial
public offering price of $16.00 per share, after deducting underwriting
discounts and commissions and the estimated offering expenses payable by us.
This information should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Line of credit.................................. $ 1,449 $ 189 $ 189
Current portion of capital lease obligation..... 191 191 191
------- ------- -------
Total short-term debt......................... 1,640 380 380
------- ------- -------
Capital lease obligation, less current portion.. 126 126 126
Stockholders' deficit/equity:
Preferred Stock, $0.01 par value, 5,000,000
shares authorized, actual, pro forma and
pro forma as adjusted; none issued and
outstanding, actual, pro forma and pro
forma as adjusted........................... -- -- --
Common stock, $0.01 par value, 30,000,000
shares authorized, 12,167,687 issued and
11,657,687 outstanding, actual; 50,000,000
authorized, 13,813,242 issued and
13,303,242 outstanding, pro forma;
50,000,000 authorized, 17,813,242 issued
and 17,303,242 outstanding, pro forma as
adjusted.................................... 122 138 178
Additional paid-in capital...................... 14,275 24,067 82,547
Notes receivable for issuance of common stock... (84) (84) (84)
Deferred compensation........................... (6,524) (6,524) (6,524)
Accumulated deficit............................. (8,307) (8,307) (8,307)
Treasury stock, at cost--510,000 shares......... (153) (153) (153)
------- ------- -------
Total stockholders' (deficit) equity.......... (671) 9,137 67,657
------- ------- -------
Total capitalization....................... $ (545) $ 9,263 $67,783
======= ======= =======
</TABLE>
20
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999, which gives
effect to our sale of series A convertible preferred stock in October 1999 for
net proceeds of $9.9 million and the conversion of all of our outstanding
preferred stock into 1,645,555 shares of common stock that will occur upon the
completion of this offering, and options to purchase 3,138,668 shares of common
stock held by officers and directors, was $10.5 million, or $0.64 per share of
common stock. Pro forma net tangible book value per share is determined by
dividing our pro forma tangible net worth by the number of shares of common
stock outstanding assuming conversion of all outstanding shares of preferred
stock into 1,645,555 shares of common stock upon the completion of this
offering and the exercise of all options held by officers and directors. Giving
effect to our sale of 4,000,000 shares of common stock, and after deducting
underwriting discounts and commissions and the estimated offering expenses
payable by us, our pro forma net tangible book value as of September 30, 1999
would have been $69.1 million, or $3.38 per share. This represents an immediate
increase in pro forma net tangible book value of $2.74 per share to existing
stockholders and an immediate dilution of $12.62 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $16.00
Pro forma net tangible book value per share as of September 30,
1999............................................................. $0.64
Increase per share attributable to this offering................. 2.74
-----
Pro forma net tangible book value per share after this offering... 3.38
------
Dilution per share to new investors............................... $12.62
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1999, the number of shares of common stock purchased from us, the total cash
consideration paid and the average price paid per share by the existing
stockholders and by new investors purchasing shares in this offering.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 16,441,910 80.4% $13,601,943 17.5% $ 0.83
New investors............. 4,000,000 19.6 64,000,000 82.5 16.00
---------- ----- ----------- -----
Total................... 20,441,910 100.0% $77,601,943 100.0%
========== ===== =========== =====
</TABLE>
The tables and calculations above include options to purchase 3,138,668
shares of common stock held by officers and directors and excludes 3,606,394
shares of common stock issuable pursuant to options outstanding as of September
30, 1999. Of the excluded stock options, options to purchase approximately
893,739 shares were exercisable as of September 30, 1999, at a weighted average
exercise price of $0.66 per share. In addition, as of September 30, 1999, there
were warrants outstanding to purchase a total of 784,504 shares of common stock
with a weighted average exercise price of $0.38 per share. To the extent that
the excluded options and warrants are exercised, there will be further dilution
to new investors.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1997 and 1998
and September 30, 1999 and for the period from inception (October 31, 1996) to
December 31, 1996, for each of the years ended December 31, 1997 and 1998 and
the nine months ended September 30, 1999 are derived from our consolidated
financial statements which have been audited by Arthur Andersen LLP, our
independent public accountants, and are included elsewhere in this prospectus.
The selected consolidated financial data as of December 31, 1996 are derived
from our audited consolidated financial statements which are not included in
this prospectus. The selected consolidated financial data for the nine months
ended September 30, 1998 are derived from unaudited consolidated financial
statements included elsewhere in this prospectus. In the opinion of our
management, the unaudited financial data include all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the data for
such period. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from
Inception
(October 31,
1996) Year Ended Nine Months Ended
through December 31, September 30,
December 31, ---------------- ------------------
1996 1997 1998 1998 1999
------------ ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues:
Professional services...... $ -- $ 3,169 $ 5,047 $ 3,208 $ 11,342
Educational services....... -- -- -- -- 2,496
------- ------- ------- -------- --------
Total net revenues........ -- 3,169 5,047 3,208 13,838
Costs and expenses:
Direct costs of
professional
services(1).............. 50 2,234 4,974 3,528 6,457
Direct costs of educational
services(1).............. -- -- -- -- 1,142
Selling and marketing(1)... 3 328 1,530 1,224 1,884
General and
administrative(1)........ 140 1,797 2,109 1,655 4,721
Compensation expense
related to stock options
and warrants............. -- 28 74 57 2,752
------- ------- ------- -------- --------
Total operating expenses.. 193 4,387 8,687 6,464 16,956
------- ------- ------- -------- --------
Loss from operations........ (193) (1,218) (3,640) (3,256) (3,118)
Interest and other income
(expense), net............ -- 3 (229) (165) 187
------- ------- ------- -------- --------
Net loss.................... $ (193) $(1,215) $(3,869) $ (3,421) $ (2,931)
======= ======= ======= ======== ========
Basic and diluted net loss
per share................. $(0.02) $ (0.12) $ (0.39) $ (0.35) $ (0.27)
======= ======= ======= ======== ========
Basic and diluted weighted
average shares
outstanding............... 10,000 10,000 9,992 9,912 10,713
======= ======= ======= ======== ========
</TABLE>
(1) Exclusive of noncash compensation expense related to stock options and
warrants presented separately.
<TABLE>
<CAPTION>
December 31,
-------------------------- September 30,
1996 1997 1998 1999
-------- ------- ------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital deficit............... $ (192) $ (128) $(3,187) $(1,811)
Total assets.......................... -- 1,797 1,932 5,858
Line of credit........................ -- -- 2,616 1,449
Capital lease obligations............. -- -- 294 317
Total stockholders' deficit........... (192) (1,375) (2,821) (671)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
prospectus.
Overview
We are a full service provider of Internet-based solutions designed to help
companies conduct eBusiness. From our incorporation in October 1996 through
December 31, 1996, our operating activities consisted primarily of recruiting
key technical and management personnel, establishing a business and operations
plan and establishing relationships with prospective clients. In 1997, we
retained our first clients, hired consultants, technical personnel and core
services staff to execute client engagements and began building the sales and
marketing and operational infrastructures to support the projected growth of
our business.
Our revenues are derived primarily from providing Internet professional
services. We expect that our revenues will be driven primarily by the number
and scope of our client engagements and by our professional services headcount.
In 1998, three clients accounted for approximately 51% of our total net
revenues, of which 25% were from Chevron, 16% were from Johnstone Supply and
10% were from Toyota. Revenues from any given client will vary from period to
period; however, we expect that significant customer concentration will
continue for the foreseeable future. To the extent that any significant client
uses less of our services or terminates its relationship with us, our revenues
could decline substantially. As a result, the loss of any significant client
could materially and adversely affect our business and results of operations.
We also generate revenues from providing educational services. In May 1999,
we entered into an outsourcing agreement with our primary sales lead source,
CEE, to provide the operational aspects of their executive education seminars.
Under this contract, we generate revenues of approximately $1.4 million a
quarter. Further discussion of our relationship with CEE can be found in
footnote 10 to our audited consolidated financial statements included elsewhere
in this prospectus.
We market and sell our services through the executive education seminars,
indirectly with our partners, and directly through our sales organization. The
majority of our leads, and our revenues, has come through these executive
education seminars.
Revenues generated pursuant to time and materials contracts are generally
recognized as services are provided. For 1998, approximately 91% of revenues
were derived from time and materials contracts. Revenues generated pursuant to
fixed-fee contracts are generally recognized as services are rendered using the
percentage-of-completion method of accounting. Revenues exclude reimbursable
expenses charged to clients. As we obtain greater experience in estimating the
costs of performing eBusiness services, our strategy is to enter into more
fixed-fee contracts, which we believe are potentially more profitable.
Accordingly, we anticipate that a larger percentage of revenues will be derived
from fixed-fee contracts in the future. In 1998, substantially all clients were
located within North America and all revenues were denominated in U.S. dollars.
Direct costs of professional services consist primarily of the compensation
and benefits of our employees engaged in the delivery of professional services
and non-reimbursable expenses related to client projects. Direct costs of
professional services margins reflect revenues less the professional services
expenses whether or not the employee's time is billed to a client. We expect
that our per capita professional services costs will increase over time due to
wage increases and inflation. In addition, these cash expenses may increase
after this offering because prospective employees that we target after this
offering may perceive that the stock option component of our compensation
package is not as valuable as that component was prior to this offering. Our
professional services margins are affected by trends in hiring and in
consultant utilization, and, as such, will vary in the future. Any significant
decline in consultants' time billed to clients or the loss of a significant
client
23
<PAGE>
would materially adversely affect our professional services margins. Client
engagements currently average three to six months in duration. If a client
engagement ends earlier than we expect, we must re-deploy professional services
personnel. Any resulting non-billable time will adversely affect our
professional services margins.
Direct costs of educational services consist of the salaries, benefits and
direct expenses for personnel related to our educational services. It also
includes the direct expenses of delivering our educational services. We expect
our educational services costs to increase in absolute dollars as we invest in
personnel and incur costs to grow our educational services revenues.
Selling and marketing expenses consist of salaries, commissions, benefits
and related expenses for personnel engaged in sales and marketing activities.
It also includes public relations, trade shows, promotional expenses and other
expenses directly related to sales and marketing. We expect selling and
marketing expenses to increase in absolute dollars as we expand our sales and
marketing efforts and build our brand recognition.
General and administrative expenses consist of compensation, benefits and
related expenses for personnel engaged in executive and general management,
recruiting, human resources, information technology, finance, administrative,
and developing and maintaining our service methodologies. It also includes our
expenses for recruiting, training, leasing and maintaining office space,
professional fees and all other general corporate expenses. We expect general
and administrative expenses to increase in absolute dollars as we continue to
invest in our employees, advance our knowledge management and methodologies,
grow our information technology infrastructure, open new offices, increase our
recruiting efforts and incur additional costs related to the growth of our
business and operations as a public company.
Compensation expense related to stock options and warrants consists of the
non-cash compensation expense related to the granting of stock options and
warrants. We have recorded deferred compensation expense of $8.6 million
related to certain stock option grants through September 30, 1999. This
deferred compensation expense will be recognized based on the vesting of these
stock options. Of the recorded deferred compensation expense, $2.1 million has
been expensed through September 30, 1999. Assuming this offering is completed
in 1999, the balance will be recognized based on vesting of these stock options
at $1.4 million for the quarter ended December 31, 1999, including $1.1 million
related to certain options whose vesting accelerates upon this offering, and
$512,000 per quarter thereafter.
Despite growth in our revenues, we have not been profitable and we expect
to continue to incur net losses. Our net losses may not decrease
proportionately with the increase in our revenues primarily because of
increased expenses related to the hiring of additional employees, expansion of
the number of our offices, increased investment in our knowledge management,
methodologies and operations infrastructure, and our increased marketing and
sales efforts. To the extent that future revenues do not increase significantly
in the same periods in which operating expenses increase, our operating results
would be adversely affected. See "Risk Factors--We had an accumulated deficit
of $8.3 million as of September 30, 1999, and we expect to continue to incur
losses for the foreseeable future."
Our revenues and earnings may fluctuate from quarter to quarter based on
such factors within and outside our control, including the variability in
market demand for the Internet and for Internet professional services, the
length of the sales cycle associated with our service offerings, the number and
scope of our projects, seasonal factors and the efficiency with which we
utilize our employees.
Our number of employees increased from 57 at December 31, 1997 to 183 at
September 30, 1999. We expect the total number of employees to increase further
during the remainder of 1999. Personnel compensation and facilities costs
represent a high percentage of our operating expenses and are relatively fixed
in advance of each quarter. Accordingly, if revenues do not increase at a rate
equal to expenses, our business, financial condition or results of operations
could be materially and adversely affected. In addition, our liquidity may also
be adversely affected if revenues do not increase at a rate equal to these
additional expenses, to the extent we are unable to reduce operating expenses.
24
<PAGE>
Results of Operations
The following table sets forth the percentage of total net revenues of
certain consolidated financial data for the periods indicated:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
--------------- --------------------
1997 1998 1998 1999
------ ------ --------- --------
<S> <C> <C> <C> <C>
Net revenues:
Professional services................ 100.0% 100.0% 100.0% 82.0%
Educational services................. -- -- -- 18.0
------ ------ --------- --------
Total net revenues.................. 100.0 100.0 100.0 100.0
Costs and expenses:
Direct costs of professional
services........................... 70.5 98.6 110.0 46.7
Direct costs of educational
services........................... -- -- -- 8.3
Selling and marketing................ 10.3 30.3 38.1 13.6
General and administrative........... 56.7 41.8 51.6 34.1
Compensation expense related to stock
options and warrants............... 1.0 1.5 1.8 19.9
------ ------ --------- --------
Total operating expenses............ 138.5 172.2 201.5 122.6
------ ------ --------- --------
Loss from operations.................. (38.5) (72.1) (101.5) (22.6)
Interest and other income (expense),
net................................. 0.1 (4.5) (5.1) 1.4
------ ------ --------- --------
Net loss.............................. (38.4)% (76.6)% (106.6)% (21.2)%
====== ====== ========= ========
</TABLE>
Comparison of Nine Months Ended September 30, 1998 and September 30, 1999
Professional services revenues. Professional services revenues increased
254% from $3.2 million for the nine months ended September 30, 1998 to $11.3
million for the nine months ended September 30, 1999. The increase reflected
growing demand for Internet professional services and increases in both the
size and number of our client engagements. For the nine months ended September
30, 1998, professional services revenues from four clients totaled 56% of total
net revenues, while professional services revenues from three clients totaled
54% of total net revenues for the nine months ended September 30, 1999,
reflecting continuing concentration of revenues from a small number of clients.
Educational services revenues. We began providing educational services in
May 1999. Educational services revenues were $2.5 million for the nine months
ended September 30, 1999. All educational services revenues were earned through
our outsourcing agreement with CEE and represented 18% of total net revenues
for the nine months ended September 30, 1999. Because we began generating
educational services revenues in May 1999, we expect educational services
revenues to increase in absolute dollars in future periods.
Direct costs of professional services. Direct costs of professional
services increased 83% from $3.5 million for the nine months ended September
30, 1998 to $6.5 million for the nine months ended September 30, 1999. The
increase was primarily due to increased hiring of senior-level consultants and
a general increase in wages for professional employees.
Direct costs of educational services. We started providing educational
services in May 1999. Direct costs of educational services were $1.1 million
for the nine months ended September 30, 1999. Because we began incurring direct
costs of educational services in May 1999, we expect direct costs of
educational services to increase in absolute dollars in future periods.
Selling and marketing expenses. Selling and marketing expenses increased
54% from $1.2 million for the nine months ended September 30, 1998 to $1.9
million for the nine months ended September 30, 1999. The increase was due
primarily to an increase in headcount and an increase in marketing
expenditures. Selling and marketing expenses represented 38% of total net
revenues for the nine months ended September 30, 1998 and 14% of total net
revenues for the nine months ended September 30, 1999.
25
<PAGE>
General and administrative expenses. General and administrative expenses
increased 185% from $1.7 million for the nine months ended September 30, 1998
to $4.7 million for the nine months ended September 30, 1999. This increase was
due primarily to an increase in recruiting costs and an increase in headcount
for the nine months ended September 30, 1999. General and administrative
expenses represented 52% of total net revenues for the nine months ended
September 30, 1998 and 34% of total net revenues for the nine months ended
September 30, 1999.
Compensation expense related to stock options and warrants. For the nine
months ended September 30, 1999, we recorded non-cash compensation expense
related to the issuance of stock options of $2.1 million. In addition, we
recorded deferred compensation expense of $6.5 million related to the issuance
of stock options which will be recognized over the vesting period of the
underlying stock options.
Interest and other income (expense), net. Net interest and other income
(expense) changed from an expense of $165,000 for the nine months ended
September 1998 to income of $187,000 for the nine months ended September 30,
1999. This change was primarily due to a one-time gain of $349,000 related to
the termination of a joint-venture agreement with a third party in May 1999.
Comparison of Period from Inception (October 31, 1996) through December 31,
1996, Fiscal Year 1997 and Fiscal Year 1998
Professional services revenues. Professional services revenues increased
59% from $3.2 million for 1997 to $5.0 million for 1998. There were no
professional services revenues for the period from inception (October 31, 1996)
to December 31, 1996. The increase in professional services revenues reflected
growing demand for Internet professional services and increases in both the
size and number of our client engagements. For 1998, three clients accounted
for approximately 51% of total net revenues, consisting of 25% of total net
revenues from Chevron, 16% of total net revenues from Johnstone, and 10% of
total net revenues from Toyota. For 1997, three clients totaled 51% of total
net revenues, consisting of 28% of total net revenues from Toyota, 12% of total
net revenues from Caterpillar and 11% of total net revenues from OnMoney.
Direct costs of professional services. Direct costs of professional
services increased 123% from $2.2 million for 1997 to $5.0 million for 1998.
Direct costs of professional services increased 4,402% from $50,000 for the
period from inception (October 31, 1996) to December 31, 1996 to $2.2 million
for 1997. These increases were primarily due to the hiring of additional
professionals and, to a lesser extent, higher wages.
Selling and marketing expenses. Selling and marketing expenses increased
367% from $328,000 for 1997 to $1.5 million for 1998. Selling and marketing
expenses increased from $3,000 for the period from inception (October 31, 1996)
to December 31, 1996 to $328,000 for 1997. As a percent of total net revenues,
selling and marketing expenses represented 10% for 1997 and 30% for 1998. This
increase was due primarily to an increase in direct sales and marketing
headcount during 1998 and our not investing in our sales and marketing
organization until the fourth quarter of 1997.
General and administrative expenses. General and administrative expenses
increased 17% from $1.8 million for 1997 to $2.1 million for 1998. General and
administrative expenses increased from $140,000 for the period from inception
(October 31, 1996) to December 31, 1996 to $1.8 million in 1997. As a percent
of total net revenues, general and administrative expenses represented 57% for
1997 and 42% for 1998. General and administrative expenses included significant
recruiting costs for both 1997 and 1998. The overall increase in general and
administrative expenses was due primarily to an increase in the number of
employees.
Interest and other income (expense), net. Net interest and other income
(expense) changed from income of $3,000 for 1997 to an expense of $229,000 for
1998. There was no interest and other income (expense), net for the period from
inception (October 31, 1996) to December 31, 1996. This increase in expense was
related to an increase in interest expense related to working capital and
equipment financing during 1998.
26
<PAGE>
Provision for income taxes. At December 31, 1997 and 1998, we had a net
operating loss carryforward of approximately $1.2 million and $2.6 million,
respectively, which we may use to offset future taxable income, if any. This
carryforward is subject to review and possible adjustment by the Internal
Revenue Service. The Internal Revenue Code contains provisions that may limit
our use of the carryforward in the event there are significant changes in our
ownership.
We have not given recognition to any of our potential tax benefits,
consisting primarily of our net operating loss carryforward, as it is more
likely than not that these benefits will not be realizable in our future years'
tax returns.
Quarterly Results of Operations
The following table sets forth certain quarterly consolidated statements of
operations data for each of the seven most recently completed quarters. In
management's opinion, this information has been prepared on the same basis as
the audited financial statements appearing elsewhere in this prospectus, and
includes all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the unaudited quarterly results when read in
conjunction with our consolidated financial statements and related notes
appearing elsewhere in this prospectus. The results of operations for any
quarter are not necessarily indicative of results of operations for any future
period.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- --------- -------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Professional services.. $ 880 $ 973 $1,355 $1,839 $2,441 $3,764 $ 5,137
Educational services... -- -- -- -- -- 1,029 1,467
------- ------- ------ ------ ------ ------ -------
Total net revenues.... 880 973 1,355 1,839 2,441 4,793 6,604
Costs and expenses:
Direct costs of
professional
services(1)........... 1,172 1,034 1,322 1,446 1,527 2,009 2,921
Direct costs of
educational
services(1)........... -- -- -- -- -- 569 573
Selling and
marketing(1).......... 382 625 218 305 413 619 852
General and
administrative(1)..... 969 231 454 455 685 1,583 2,453
Compensation expense
related to stock
options and warrants.. -- 50 7 17 -- 425 2,327
------- ------- ------ ------ ------ ------ -------
Total operating
expenses............. 2,523 1,940 2,001 2,223 2,625 5,205 9,126
------- ------- ------ ------ ------ ------ -------
Loss from operations.... (1,643) (967) (646) (384) (184) (412) (2,522)
Interest and other
income (expense), net.. (9) (50) (106) (64) (71) 291 (33)
------- ------- ------ ------ ------ ------ -------
Net loss................ $(1,652) $(1,017) $ (752) $ (448) $ (255) $ (121) $(2,555)
======= ======= ====== ====== ====== ====== =======
<CAPTION>
Percentage of Total Net Revenues
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Professional services.. 100.0% 100.0% 100.0% 100.0% 100.0% 78.5% 77.8%
Educational services... 0.0 0.0 0.0 0.0 0.0 21.5 22.2
------- ------- ------ ------ ------ ------ -------
Total net revenues.... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Direct costs of
professional
services(1)........... 133.2 106.3 97.6 78.6 62.6 41.9 44.2
Direct costs of
educational
services(1)........... 0.0 0.0 0.0 0.0 0.0 11.9 8.7
Selling and
marketing(1).......... 43.4 64.2 16.1 16.6 16.9 12.9 12.9
General and
administrative(1)..... 110.1 23.7 33.5 24.7 28.1 33.0 37.1
Compensation expense
related to stock
options and warrants.. 0.0 5.1 0.5 0.9 0.0 8.9 35.2
------- ------- ------ ------ ------ ------ -------
Total operating
expenses............. 286.7 199.3 147.7 120.8 107.6 108.6 138.1
------- ------- ------ ------ ------ ------ -------
Loss from operations.... (186.7) (99.4) (47.7) (20.9) (7.6) (8.6) (38.1)
Interest and other
income (expense), net.. (1.0) (5.1) (7.8) (3.5) (2.9) 6.1 (0.5)
------- ------- ------ ------ ------ ------ -------
Net loss................ (187.7)% (104.5)% (55.5)% (24.4)% (10.4)% (2.5)% (38.6)%
======= ======= ====== ====== ====== ====== =======
</TABLE>
(1) Exclusive of noncash compensation expense related to stock options and
warrants presented separately.
27
<PAGE>
We have historically experienced significant quarterly fluctuations in our
revenues and results of operations and expect these fluctuations to continue.
Factors causing these variations include the number, timing, scope and
contractual terms of client projects, delays incurred in the performance of
such projects, accuracy of estimates of resources and time required to complete
ongoing projects, and general economic conditions. In addition, our future
revenues and results of operations may fluctuate as a result of changes in
pricing in response to client demand and competitive pressures, the ratio of
fixed-price contracts versus time-and-materials contracts and the timing of
collection of accounts receivable. A high percentage of our results of
operations, particularly personnel and rent, are relatively fixed in advance of
any particular quarter. As a result, unanticipated variations in the number and
timing of our projects or in consultant utilization rates may cause significant
variations in operating results in any particular quarter, and could result in
losses. Any significant shortfall of revenues in relation to our expectations,
any material reduction in utilization rates for our consultants, an
unanticipated termination of a major project, a client's decision not to pursue
a new project or proceed to succeeding stages of a current project, or the
completion during a quarter of several major client projects could require us
to pay underutilized employees and have a material adverse effect on our
business, results of operations and financial condition.
Our quarterly results of operations are also subject to certain seasonal
fluctuations. We have in the past hired most of our new consultants in the
second and third quarters, and there has been a delay in revenues associated
with these consultants until they become fully billable. Demand for our
services may be lower in the third and fourth quarters due to reduced activity
during the vacation and holiday seasons and fewer working days for those
customers that curtail operations during these periods. These and other
seasonal factors may contribute to fluctuations in our results of operations
from quarter to quarter.
Liquidity and Capital Resources
Since inception, we have funded our operations through the sale of equity
securities, bank borrowings and lease financing arrangements.
Cash used for operating activities was $193,000 for the period from
inception (October 31, 1996) to December 31, 1996, $1.4 million for 1997, $2.7
million for 1998 and $827,000 for the nine months ended September 30, 1999. For
the period from inception (October 31, 1996) through December 31, 1996 we had
no capital expenditures. For 1997, 1998 and the nine months ended September 30,
1999 we had capital expenditures of $584,000, $191,000 and $527,000,
respectively.
We have a committed and revolving line of credit with a bank which
currently provides for borrowings of up to $3.0 million. Of this amount, $2.5
million is committed and guaranteed by our affiliates, as well as secured by
our assets. An additional $500,000 is secured by our assets and is revolving
and subject to a maximum balance of 75% of qualified accounts receivable. The
line of credit agreement also provides for the availability of an additional
revolving amount of $500,000 upon our achieving net profit in two consecutive
quarters. Borrowings under this line of credit, which expires on December 29,
1999, bear interest at the bank's prime rate plus 1.0% (9.25% at September 30,
1999). Under the same bank agreement, we also have an equipment line of credit
which provides for borrowings of up to $200,000, which bears interest at the
bank's prime rate plus 1.5% (9.75% at September 30, 1999). Under the equipment
line, amounts borrowed between January to June 1999 are paid back over a 36-
month period beginning July 5, 1999 and amounts borrowed between July to
December 1999 are paid back over a 36-month period beginning January 5, 2000.
Borrowings under the bank lines of credit may be prepaid in whole or in part
without penalty and are secured by substantially all of our assets. The line of
credit requires compliance with financial covenants including minimum revenues
per quarter and maximum loss/minimum net income per quarter. Outstanding
borrowings under the above credit facilities totaled $1.4 million as of
September 30, 1999.
Our cash and cash equivalents were $4,000 at September 30, 1999. In October
1999, we sold 1,645,555 shares of series A convertible preferred stock to five
investors in a private placement at a price of $6.00 per share. We received net
proceeds of approximately $9.9 million from the private placement, after
deducting our
28
<PAGE>
expenses. Based on our current business plan, we believe that current cash, the
proceeds from the private placement, available borrowings under our credit
facilities and the net proceeds from this offering will be sufficient for us to
meet our working capital and capital expenditure requirements at least through
the year 2000. However, there can be no assurance that we will not require
additional financings within this time frame or that such additional financing,
if needed, will be available on terms acceptable to us, if at all.
Impact of Year 2000
Many currently installed computer systems and software products worldwide
are coded to accept only two-digit entries to identify a year 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 between the year 1900
and the year 2000. Accordingly, many companies, including us and our clients,
potential clients, vendors and strategic partners, may need to upgrade their
systems to comply with applicable Year 2000 requirements.
Because we and our clients are dependent, to a very substantial degree,
upon the proper functioning of computer systems, a failure of these systems to
correctly recognize dates beyond January 1, 2000 would disrupt operations. We
may experience operational difficulties caused by undetected errors or defects
in our internal systems. Purchasing patterns of our clients and potential
clients may be affected by Year 2000 issues as companies expend significant
resources to correct their current systems for Year 2000 compliance and may
therefore defer new initiatives until they do so. We may become involved in
disputes regarding Year 2000 problems occurring in solutions we have developed
or implemented or arising from the interactions of our Internet solutions with
other software applications. Year 2000 problems could require us to incur
delays in providing our services to clients and unanticipated expenses.
To address these issues, we formed a Year 2000 assessment and contingency
planning committee, called the Y2K Committee, to review both our information
technology systems and our non-information technology systems, and where
necessary, to plan for and supervise the remediation of those systems. The Y2K
Committee is headed by our Chief Technologist. We have performed an assessment
of the Year 2000 readiness of our critical hardware and software systems. The
providers of these systems have either confirmed to us that these systems are
Year 2000 compliant or provided the information necessary for us to plan and
implement upgrades to make them Year 2000 compliant.
We have also held and continue to hold discussions with our clients
regarding their Year 2000 remediation plans. Based on discussions to date, we
believe that the Year 2000 problem will not materially or adversely impact the
operations of our significant clients or their plans to purchase our services.
Based on work done to date, we believe that the cost of work and materials
to complete our Year 2000 program will be approximately $60,000, of which
approximately $45,000 has been spent to date. This includes the cost of
material upgrades, software modifications and related consulting fees.
We are developing contingency plans for critical individual information
technology systems and non-information technology systems to address Year 2000
risks not fully resolved by our Year 2000 program. These contingency plans
should be completed by the fourth quarter of 1999. To the extent that our
assessment is finalized without identifying any material noncompliant
information technology systems operated by us or by our vendors, we feel the
most reasonably likely worst case Year 2000 scenario is a temporary
telecommunications failure which would impair communications among our offices.
We currently have contingency plans in place to address such a disruption in
our telecommunications systems and believe that such a disruption would not
have a material or adverse effect on our operations. However, a prolonged
telecommunications failure beyond our control could have a material adverse
effect on our business, results of operations and financial condition.
We believe that the Year 2000 risk will not present significant operational
problems for us. However, there can be no assurance that our Year 2000 program
will prevent any material adverse effect on our operations, financial condition
or customer relations.
29
<PAGE>
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. SFAS No. 133, as amended by
SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS No. 133 is not expected to have a material impact on
our consolidated financial statements.
30
<PAGE>
BUSINESS
Overview
We are a full service provider of Internet-based solutions designed to help
companies conduct eBusiness. We add value to our clients by incorporating our
expertise in business issue diagnosis and resolution, business and technology
strategy development and the delivery of advanced Internet applications and
eBusiness solutions. Additionally, through the C-bridge Institute, we offer
clients executive education services on topics relevant to senior executives'
efforts to successfully develop and implement Internet technologies and
eBusiness strategies.
We have focused the staffing of our senior management team as well as the
appointment of our board of directors around certain core competencies that are
strategic to our eBusiness solutions. These core competencies include business
strategy development, supply chain management, service chain management,
education, creative design, branding and marketing, systems architecture design
and back-end systems integration.
We have gained considerable expertise through our strategic relationships
with major technology product and service providers, including Hewlett-Packard
and Oracle. We have also continued to increase the value of our brand and our
unique lead generation methodology by developing relationships with senior
executives of a significant number of Global 1000 companies who have attended
our executive education seminars. Through the delivery of these seminars
worldwide, we educate over 3,000 business managers and executives each year on
business strategies related to the Internet. We view this as a third sales
channel which complements our own direct sales efforts and sales resulting from
our client-partner model which we run on an account-by-account basis through
our services delivery organization.
For the nine months ended September 30, 1999, three professional services
clients accounted for approximately 54% of our total net revenues, of which 24%
were from Chevron, 18% were from Allmerica and 12% were from USWest, and one
educational services client, CEE, accounted for 18% of our total net revenues.
In 1998, three clients accounted for approximately 51% of our total net
revenues, of which 25% were from Chevron, 16% were from Johnstone Supply and
10% were from Toyota. In 1997, three clients totaled 51% of our total net
revenues, consisting of 28% of total net revenues from Toyota, 12% of total net
revenues from Caterpillar and 11% of total net revenues from OnMoney. We had no
professional services revenues for the period from inception (October 31, 1996)
to December 31, 1996.
Industry Background
Growth of the Internet and eBusiness
The Internet has grown rapidly in recent years, driven by several key
factors, including the development of easy-to-use web browsers, the large and
growing installed base of advanced personal computers, the adoption of faster
and more efficient networks, the emergence of compelling web-based content and
commerce applications, and the growing sophistication of the user base.
According to International Data Corporation, a leading technology research
firm, the number of Internet users was 98 million worldwide at the end of 1998
and is expected to grow to 320 million by the end of 2002.
The initial commercial use of the Internet was as a static informational
and advertising medium. From this origin, the Internet has evolved into a
dynamic platform for conducting business. According to a June 1999 report
published by International Data Corporation, the amount of commerce conducted
over the Internet will exceed $1.0 trillion by 2003. Faced with growing
competition, deregulation and globalization, companies are increasingly looking
to utilize Internet technologies to develop a sustainable competitive
advantage. They have begun to expand their use of efficient and low-cost
Internet technologies to replace or enhance traditional operations, such as
customer relationship management, supply and service chain management, employee
training and communication.
31
<PAGE>
Companies are now moving away from implementing standard applications
toward assembled applications based on Internet standard architectures.
Configuring and customizing large applications was possible when business
strategies could be supported by the functionality of static systems.
Competitive pressures have driven companies to adopt business strategies that
require dynamic, flexible business processes and applicable technical
infrastructure. Today, many companies are using Internet standards when
designing their systems architecture and then use system components that can be
assembled into a flexible solution. With an architectural approach, companies
not only get the system flexibility they are looking for, but they are also
able to assemble the precise functionality required to create a competitive
advantage.
Market for Full Service eBusiness Solution Providers
Given the move toward standard architecture, successful adoption of the
Internet for eBusiness poses significant architectural, creative, strategic and
technical design challenges. The successful alignment of business and Internet
strategies requires an understanding of how the Internet can transform
relationships among companies' various constituencies, including their
employees, customers and business partners. However, companies facing major
technology investment decisions often need outside technical expertise to
identify and evaluate viable Internet tools, develop feasible systems
architectures and implement strategies. Companies must also be able to
integrate new Internet applications with their existing systems. Finally, a
successful solution requires that the Internet-based solution, particularly the
user interface, must be engaging and easy to use. Few companies have the range
of skills necessary to recognize the ways in which Internet technologies can
transform their businesses and implement sophisticated eBusiness solutions.
Even if companies can obtain skills in each of these strategy, technology and
creative disciplines, they often have little experience coordinating them to
fully exploit the Internet and related technologies.
The combination of these factors has created a significant and growing
demand for third-party Internet professional service providers. International
Data Corporation has forecasted that the market for Internet professional
services worldwide will grow from $7.8 billion in 1998 to $78.5 billion by
2003.
Market Opportunities
eBusiness solutions providers can be divided into four major categories:
large systems integrators, specialty systems integrators, strategy consulting
firms and Internet professional services providers. While many competitors in
each category have specific strengths, each tends to focus on only a part of
the overall solution. Few integrate business and marketing strategy with
expertise in Internet-specific technology and architectural design services to
help businesses achieve the full potential that the Internet offers.
As the level of familiarity and sophistication with Internet technologies
continues to grow, so does the need for full eBusiness service providers that
can help formulate a focused, strategic and integrated approach to the
implementation of eBusiness solutions that add measurable value to the client.
This rapidly increasing demand for eBusiness solutions, combined with the
inability of many current eBusiness solution providers to deliver all of the
strategic, creative and technical skills required by clients, has created
significant market opportunities which remain largely unaddressed.
Our Solution
We design and implement sophisticated eBusiness solutions to help our
clients make intelligent business decisions, drive incremental sales volume,
reduce costs and accelerate business transactions both internally with
employees and externally with vendors, suppliers and customers. At the C-bridge
Institute, we educate senior-level executives from Global 1000 companies about
the Internet, diagnose new eBusiness strategies and systems architecture
shortcomings and then deliver strategic eBusiness solutions that are designed
to enhance our clients' core business, operations and communications. Our
solution has five essential elements:
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Provide integrated Internet strategy, technology and systems architecture
design services. We provide a comprehensive set of integrated services designed
to implement sophisticated eBusiness solutions. These services include
strategic consulting, design of systems architectures and end-user interfaces,
and creation and customization of software. We work with our clients to analyze
their business issues, design an appropriate technology and systems
architecture and implement an effective eBusiness solution. Our services assist
our clients to evaluate their strategies and transform their businesses to take
advantage of the Internet.
Offer high value-added eBusiness solutions which can be quickly developed
and deployed. Our goal is to enable our clients to improve their overall
business practices by providing robust eBusiness solutions that can increase
sales, improve operational efficiencies and create or enhance business
identities. We provide application assembly and development and systems
integration services by employing the latest in Internet technologies. Our
clients benefit not only from time and cost savings, but also from robust and
scalable solutions that can be implemented quickly and seamlessly. This
approach also reduces miscommunications and delays that can occur when the
design, customization and implementation are handled by multiple service
providers.
Offer eBusiness education to senior-level Global 1000 executives around the
world. We have a unique channel opportunity structured around the delivery of
executive education. Through an outsourcing agreement, we have partnered with
CEE to deliver content, lectures, and demonstrations for our executive
education programs. These seminars help executives understand how Internet
technologies can benefit their business. Our relationship with CEE gives us
direct high-level access to the corporate executives who attend. CEE's current
major sponsors, Hewlett-Packard and Oracle, are also our alliance partners. At
the seminars, we work with our alliance partners to help business executives
begin to understand their business problems and identify possible eBusiness
solutions. To date, these seminars have been our most significant source of
lead generation.
Combine strategic industry and business domain expertise to create
iSolutions. To date, we have focused the delivery of our services on four
industry groups: retail and distribution; banking, finance and insurance;
manufacturing; and utilities and telecommunications. We have developed valuable
intellectual capital and expertise in these areas. We complement our industry
focus with expertise in cross-industry functional solution areas. This enables
us to understand our clients' particular business processes and competitive
positions and to create what we call iSolutions that are best suited to their
needs. An iSolution is a combination of a business strategy, a workflow
template and a technical architecture. Since each of these continues to move in
time, an iSolution by definition is an environment rather than a traditional
application. As competition dictates moves in strategy, as new ideas emerge
around best in class workflows and as new products and technologies are
introduced, the iSolution needs to be flexible in order to achieve a
competitive advantage. The industry experts in our iSolutions group develop and
deliver the industry vertical solutions for our clients. These iSolutions can
then be used as benchmarks during both diagnosis and delivery, improving both
the speed of delivery and quality of our solutions.
Leverage our intellectual capital to benefit clients. We utilize technology
to accumulate and disseminate information and to ensure the growth and
development of our intellectual capital. This information is tracked and stored
in our corporate intranet, which acts as a centralized intellectual capital
repository. Our intranet is both a solutions library that facilitates the
dissemination of intellectual capital across our business and an internal
project management system that captures detailed information on the resources
required to achieve specific tasks on a project. Our ability to reuse
intellectual capital allows us to predict project completion requirements more
accurately and provide fixed-cost contracts, further reducing risk for our
clients.
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Our Strategy
Our goal is to become the leading provider of eBusiness services to Global
1000 companies. To achieve this objective, we are pursuing the following
strategies:
. Continue to enhance our eBusiness framework and design patterns. We
have developed significant technological capabilities and expertise in
systems architecture and design patterns, which we use to deliver
sophisticated eBusiness solutions. We intend to continue to develop
and invest in our framework and design patterns, which form the
foundation of our client engagements. In particular, we intend to
continuously adapt our framework and design patterns to evolving and
emerging Internet technologies in order to meet the needs of a
worldwide client base.
. Develop and expand client relationships. We establish strong ties with
our clients' senior management by assisting them in addressing their
strategic business issues. We leverage these relationships through the
C-bridge Institute to expand the scope and length of current projects
and to enter into additional projects. Our strategy is to leverage our
industry expertise, technology skills, and scale by expanding the
scope of client relationships into broader engagements, including
additional Internet strategy consulting, design, systems engineering
and application development services.
. Capture and disseminate reusable knowledge and best practices. Our
employees have developed a broad base of knowledge and best practices.
Our strategy is to continue to capture this knowledge and these best
practices for dissemination throughout our business, and to expand
these capabilities where appropriate through acquisitions and external
hiring. We have established a library of reusable software objects,
templates and horizontal business solutions from our client
engagements which continue to grow as projects are completed. The
current set of horizontal business solutions were created as a best
practice within one industry sector but are leverageable across
multiple sectors. We intend to leverage this library to deliver
solutions rapidly and cost-effectively in multiple industries. We
believe this will provide us with a significant competitive advantage,
particularly when providing services under fixed-price contracts.
. Leverage and expand our industry-specific expertise. We have assembled
industry centers of expertise within our practice groups, including
professionals with expertise in the business practices and processes
of several specific industries. We believe that combining industry-
specific knowledge with our best practices and design patterns enables
us to provide effective Internet strategy consulting and services
tailored to the specific needs of our clients. In addition, our
industry expertise reduces the learning curve on new engagements,
improving efficiency of implementation and reducing project delivery
times. Our strategy is to augment our regional industry capability by
recruiting senior professionals from major consulting firms and
companies in relevant industries.
. Expand geographic presence. We have already established a presence in
Australia and England and, in order to obtain broad geographic
coverage, we intend to establish additional offices across the United
States, as well as in Europe and the Pacific Rim. This will allow us
to serve more clients on a local basis, helping to forge strong, long-
term client relationships and to serve the needs of our clients and
their customers and vendors.
Our Methodology and Services
We have developed a fully integrated services methodology, Profit Life
Cycle Management, to assist companies in the ongoing process of expanding and
improving business through technology. This methodology enables businesses to
produce cycles of value from one development phase to another, assisting the
company in becoming a leader in its business and creating a workable business
design that enhances its bottom line. The Profit Life Cycle Management
methodology provides companies with eBusiness solutions and services that
enable the parts of an organization to synchronize around achieving the
greatest benefit for the organization as a whole, to focus on global rather
than local performance, to understand the patterns and frameworks that help
managers succeed and to achieve the goals of the company with the Internet as
the enabler.
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The Profit Life Cycle Management methodology is based on a number of
underlying principles:
. Value driven. We focus on providing measurable value to our clients.
For example, for each engagement we define a deliverable in terms of a
demonstrable improvement in a specific strategic or operational
measure such as market share, revenues, cost, customer service and
cycle time.
. Iterative development and change management. We believe that early
feedback from end-users is integral to the design and implementation
of a successful eBusiness solution. Our engagements are staffed with a
team consisting of our consultants and representatives from our
clients' various businesses or technical functions.
. Design patterns and reusable software. We leverage our growing library
of design patterns and reusable software components to increase our
diagnosis and delivery capabilities. These patterns and components can
be quickly assembled into a preliminary model of an application's core
functions and services.
. Proactive risk management. Risk assessment and control practices are
built into our methodology from the planning stage through the
execution and completion of development projects. We assemble and test
the proposed system architecture early to mitigate potential technical
risks in areas such as connectivity, security and performance.
The following chart illustrates the services and core competencies within
the Profit Life Cycle Management methodology:
[CHART APPEARS HERE]
The graphic is a series of rectangular boxes that, collectively, are presented
in a circular fashion along the outside with smaller boxes and circles in the
inside. The boxes are connected by lines that have an arrow on each end. The
first box, located at the top center, contains the text "Program Management."
Proceeding counter-clockwise, the next box is located to the lower left and
contains the text "Business Innovation." The next box is located directly
below and contains the text "Diagnosis." Directly below this box, prior to the
arrow, and as part of the diagnostic area are three smaller boxes with one
rectangular box underneath. The three boxes, left to right, contain the text
"Internet Strategy Analysis," "Business Value Analysis" and "Internet
Readiness Assessment." Before the arrow, the rectangular box underneath the
three smaller boxes contains the text "Internet Vision Session." The next box
is located directly below and contains the text "Health Checks." The next box
is located at the bottom in the center of the chart and contains the text
"Systems Management." Beginning again at the top of the graphic but now
proceeding clockwise, after the rectangular box containing "Program
Management," the next box is located to the lower right and contains the text
"Education & Customer Mentoring." The next box is located directly below and
contains the text "Delivery." Directly below this box, prior to the arrows,
and as part of the delivery area are four smaller boxes with one larger
rectangular box underneath. The four boxes, left to right, contain the text,
"Define," "Design," "Develop" and "Deploy." The rectangular box underneath the
smaller boxes contains the text, "Internet Systems Integration." The next box
is located directly below and contains the text, "Technology Transfer." From
here the arrow goes to the left, middle and bottom of the graphic, returning
to the box containing the text "Systems Management." In the center of this
circular presentation are four stacked boxes containing the text "iSolution,"
"Profit Patterns," "Process Patterns" and "Design Patterns." At each corner of
the stacked boxes is a circle with an arrow pointing to the center of the
stacked boxes. Proceeding counterclockwise, the circle at the top left
contains the text "Strategic Business Consulting." The circle at the bottom
left contains the text "Web Application Development." The circle at the bottom
right contains the text "Back-end Systems Integration." The circle at the top
right contains the text "Creative Design & Branding."
Program Management
Our Program Management services include a set of planned activities and
associated deliverables that are conducted over the duration of our
engagement. The primary focus of Program Management is on the successful
implementation of the business change resulting in the realization of business
value. Throughout the program we work with a team of key representatives from
the client as well as our alliance partners to ensure a smooth implementation
process. A client engagement team determines the benefits, assesses the
project risks, determines communication and training needs and develops a
rollout approach for the iSolution. These activities are accomplished using a
set of customizable tools tailored to the client's specific situation. Working
with the business organization, we synthesize all of this information into an
integrated Program Management plan. This plan is used throughout the diagnosis
and delivery phases and provides a comprehensive approach toward attaining
business benefits.
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Business Innovation
We work with our clients to better understand their core businesses and
operations in order to focus on an innovative, rather than an incremental,
approach toward designing eBusiness solutions tailored to their needs. We
believe that a truly successful eBusiness solution can only be achieved through
an interactive process where new opportunities are generated by evolving
existing ideas. For example, the banking industry is moving steadily to the
world of eCommerce. However, simply migrating traditional banking services such
as cash management to the Internet will not be enough to maintain market share
in this new competitive environment. Banks, like most other industries, will
need to innovate their existing business to succeed in this new electronic
marketplace.
Education and Customer Mentoring
Through our C-bridge Institute, we offer executive education classes and
workshops to executives, managers and staff of our clients and continue
throughout the life cycle of a client relationship. From executive education
addressing business strategy and technology through management education on
business processes, best practices, technology transfer and employee re-
skilling around the Internet, we offer a broad educational suite. We are
rapidly expanding the course syllabus across all of these areas and will
continue to keep pace with business and technological advancement. Through
these educational services, we empower our client base to drive the
organizational, business process and technological changes required to compete
in a highly competitive marketplace.
Diagnosis
Our diagnosis services are structured to improve the clients' understanding
of the power and potential of eBusiness solutions. Clients can choose their
preferred combination of services based on their particular needs.
Internet strategy analysis. Internet strategy analysis is a two-to-four
week engagement in which we work with our clients to incorporate Internet
technologies into their business strategies. Within Internet strategy analysis
we have four paths of analysis: business to business, business to consumer,
device to device and marketing and branding. The result is a set of strategies,
high-level workflows and a series of metrics to direct the strategy and keep
subsequent application development plans consistent with appropriate goals and
objectives.
Business value analysis. Business value analysis is a two-to-four week
engagement where we help clients identify and quantify prominent business
opportunities where the Internet can be leveraged to gain a competitive
advantage and realize business value. We employ a series of financial models
that are used to convert the current corporate financial structures into a more
workflow-oriented financial analysis. We then compare the client's financial
performance against that of other companies in the sector and in other
industries, and link financial performance to changes in business process
workflows. As a baseline for the business process analysis, our library of
dominant workflows and best practices is directly connected to enabling
business objects that can be assembled into an iSolution.
Internet readiness assessment. The Internet readiness assessment helps our
clients evaluate their current Internet capabilities in a three-to-five week
engagement. Recent developments in technology platforms, new techniques such as
distributed object computing, and end-user demands for features such as multi-
media interfaces, require a robust Internet architecture to enable the
solutions of the future. Business processes, the technology environment and
support systems are first reviewed and catalogued through a series of
interactive workshops. We then perform rapid pattern recognition against a
knowledge base of best practice systems designs that help determine whether the
client's information technology architecture meets the demands of next-
generation applications.
Internet visioning session. Throughout the diagnosis phase, we work with
clients to explore and create a vision of how a chosen Internet strategy will
result in measurable business value. By using Internet-standard
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prototyping tools and methods, we can quickly assemble an Internet vision
application suitable for executive presentation. The Internet vision
application serves as a shared vision of what a client can achieve using
Internet technologies and increases the client's confidence in moving forward.
Delivery
Our delivery services use a proven methodology, standard design patterns
and reusable software components to assemble our solutions, increase
reliability and product quality, reduce costs and keep project teams focused on
delivering business functionality. We deliver processes that support a rigorous
systems integration standard. In most cases, a strategic Internet solution must
be integrated with existing legacy systems. These systems may include a number
of components which are not based on Internet standards. Therefore, a solid
integration approach around applications, data, and messaging and existing
systems is critical. Application development efforts are based on well-defined
specifications and release schedules are aligned with business priorities.
The define phase. The define phase establishes the business case and lays
out the business requirements and processes that are to be supported by the new
application. During this stage, we utilize object-oriented analysis techniques
and intensive workshop sessions to help gather input and ensure effective
interaction with project stakeholders. Incremental culture, organization and
business process changes are accomplished through multiple workshop sessions.
Collectively, the define phase deliverable consists of the initial
specification and scope of work to follow.
The design phase. The goal of the design phase is to lay out the technical
blueprint for the new application in order to avoid costly defects during
programming. The main deliverables from this phase are object models, technical
design specifications, a detailed user interface design, working components
that demonstrate the viability of the new systems infrastructure, a systems
test plan and a refined project plan. Our philosophy is to leverage legacy
systems and commercial off-the-shelf software within a robust application
framework that responds easily to changing business and technological
requirements and enables quick delivery of new applications.
The development phase. The development phase consists principally of the
coding, assembly and testing necessary to create a production-caliber
application. We use established software engineering techniques, team-based
development tools, frequent checkpoints and traditional code reviews to ensure
tight collaboration and high quality. Since the scope and design of the
application were validated and approved in previous phases, the team is well
positioned to deliver a fast, on-target release. Short, incremental code,
assembly and test cycles are used to allow project teams to constantly monitor
the quality of the application.
The deployment phase. After development, we assist in the deployment of the
application in areas such as education, documentation, release management and
systems administration. Planning for deployment frequently begins before
application development even starts. The goal is to provide whatever support is
necessary to allow clients to start realizing tangible business benefit from
the new application quickly and efficiently.
Subsequent releases and enhancements. Project plans are often based on
incremental application releases to allow early return on investment and ease
the burden of change management in our clients' environments. The project team
simply loops through multiple delivery cycles until the overall scope of the
application is achieved.
Health Checks
The objective of a health check is to provide an independent view of a
project's actual progress in terms of schedule, staffing and deliverables, and
to identify those constraints, issues or risks which could threaten a project's
success. Recommendations for issue resolution or risk mitigation are also
documented. Additionally,
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project health checks provide an opportunity to channel input, or escalate
issues, to several of our work groups, such as senior management, development
and account management.
Technology Transfer
Our technology transfer services focus on transferring the requisite
Internet know-how to the client. It typically takes up to one year to educate a
client's internal staff of IT professionals in the latest Internet
technologies, standards, platforms and methods. By combining an actual project
with this service, we typically are able to complete a technology transfer to
the in-house IT organization within six months. As part of this service we
license to the client the applicable design patterns and frameworks.
Systems Management
Once an iSolution has been deployed, in many cases we provide the client
with additional support in managing the new environment as they complete the
technology transfer program. In some instances, the client elects to have us
manage the entire system in order to focus on their core competencies.
Sales
We market our solutions and services through our headquarters in Cambridge,
Massachusetts, with sales professionals also located domestically in Atlanta,
Dallas/Ft. Worth, Detroit, New York, Orange County and San Francisco, and
internationally in London, England and Sydney, Australia. We believe that a
regional sales focus, combined with our local solutions services approach,
allows us to develop a strong market presence and enhanced customer loyalty.
Our sales professionals operate through a coordinated and structured process to
evaluate prospective clients, target qualified prospects and secure new client
engagements.
Our solutions and services are marketed principally to Global 1000
companies, with emphasis on retail and distribution, banking, finance and
insurance, manufacturing, and utilities and telecommunications. In addition, we
focus on two horizontal markets: service chain and supply chain management.
Finally, we have initiated a marketing strategy focusing on mid-tier value-
added resellers of Oracle applications and Hewlett-Packard business solutions.
We create demand for our solutions and services through four sales
channels:
. direct territory development through our domestic and international
sales force;
. through relationships developed at our C-bridge Institute;
. working with mid-tier value-added resellers; and
. through relationships with strategic applications vendors.
Marketing
Our sales efforts are supplemented by marketing and communications
activities which we pursue to further build brand name and recognition in the
marketplace. Our goals include the following:
. to plan and build an integrated program addressing both internal and
external audiences;
. to design and implement media and tactical programs that communicate
most effectively with our target audiences;
. to position us as the standard in providing results-driven eBusiness
solutions; and
. to clearly and consistently communicate our positioning in all
marketing programs.
From a public relations standpoint, we are targeting specific media. For
example, computer and Internet trade media, business and majority media
(newspapers, broadcast and wire services) and industry analyst communities. We
plan to conduct media/analyst tours twice per year in major cities (such as
Boston, New
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York, San Francisco and Washington, D.C.). Also, we are planning editors and
analysts days where we will host target editors and analysts for half-day one-
on-one sessions and customer demonstrations.
Clients
Our clients include the following companies:
. Retail and Distribution: Aviall, Cardinal Health Care, Fabri-Centers
of America, Johnstone Supply, Liz Claiborne, Polo Ralph Lauren and
Trane;
. Banking, Finance and Insurance: Aegon, Allmerica, Central Carolina
Bank and OnMoney (Ameritrade);
. Manufacturing: Buell (Harley Davidson), Caterpillar, Chevron,
Firmenich, General Motors, Quantum, SteelCase and Toyota; and
. Utilities and Telecommunications: UNIFI and US West.
Client Case Studies
Chevron Case Study
Business Opportunity. Chevron has a network of over 8,000 gas stations and
convenience stores, of which over 7,000 are owned and operated by independent
franchisees. Chevron identified an opportunity to assist these stations and
stores in their transformation from traditional gas stations into larger retail
outlets. The goal of the project was to create an alliance program to leverage
the combined buying power of 8,000 stations and stores backward through the
supply chain and forward through coordinated targeted marketing programs.
iSolution. The Chevron/C-bridge project team identified an Internet-based
solution as a critical component in establishing a successful alliance program.
Critical pieces of the alliance program engagement included:
. design of an automated franchise service support structure that
reduced administration costs and enabled personalized sales and
administrative support for franchisees;
. consolidation of purchasing orders to allow for a streamlined supply-
chain solution and leveraged buying power to achieve greater cost
savings and increased margins for both Chevron and its franchisees;
. deployment of an Internet-enabled, electronic commerce system to
support the efficient flow of information among each retail location,
Chevron and its suppliers;
. enhancement of the Chevron brand to differentiate its stores and
stations from the competition, furthering Chevron's recruiting efforts
to sign new franchisees.
Business Value. The increase in business accomplished through the alliance
program will lead to additional revenues and profits for Chevron and its
franchisees. Through increased market and franchisee awareness, Chevron and its
franchisees are now better positioned to offer the mix of products and services
that maximizes return on the limited amount of shelf space and inventory per
store.
Aviall Case Study
Business Opportunity. Aviall, Inc., the world's largest independent
distributor of new aviation parts, identified the need to quickly enhance its
presence in the wholesale and retail channels for aircraft parts and to provide
better communications with its suppliers and internal sales force. The original
"aviall.com" application was developed several years ago and, until recently,
had served most of the on-line ordering needs of Aviall's commercial
distribution network. However, Aviall recognized the need to re-architect its
on-line capabilities to remain competitive and increase sales.
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iSolution. We redesigned an Internet-based parts ordering system to improve
speed and functionality as well as to provide additional electronic commerce
features. The project commenced with a three-week Internet vision and business
value assessment. This helped Aviall create a shared vision of a new
Aviall.com, understand the critical business issues and priorities, define
project expectations and deliverables, document the value impact of creating
the vision, and create the scope of what was to be included in the first
release of the application. Once the key issues were understood and key
decisions were made (such as target audience functionality, prioritized
opportunities and catalog formats) we created a project work plan to define the
applications, including project benefit and risk assessment.
The new iSolution which we created has the following features:
. the ability to create price and quantity quotes in real time;
. the ability to process multi-line orders, search for parts and track
shipments electronically;
. the ability to download, print or view material safety data sheets
online; and
. a new feature called "Supplier Services," a value-added resource that
gives users the ability to create customized sales reports, check
stock status, measure geographic sales penetration and improve
forecasting on a real-time basis.
Business Value. Aviall achieved business value with our iSolution through
increasing sales from new sales channels and increasing revenues from existing
channels. In addition, Aviall was able to reduce the product sales cycle time
through automated sales processes and benefit from efficiencies through direct
links between customers and suppliers. Finally, Aviall was able to decrease
costs of servicing sales and provide additional value-added services to
customers and suppliers.
Aquent Partners Case Study
Business Opportunity. Aquent Partners, formerly MacTemps Inc., is the
world's largest placement agency. With 50 offices in 10 countries, Aquent has
identified the need to use the Internet to match qualified professionals with
appropriate job openings in order to remain competitive.
iSolution. We partnered with Aquent to develop an iSolution that addressed
the rapidly changing temporary placement market and to extend Aquent's
traditional placement capabilities to the Internet. In three months, we
developed AquentDirect found at www.aquentdirect.com, a service specifically
targeted at the accounting field. Job seekers post their profiles on
AquentDirect; employers search the profiles online, choose the candidates whose
resumes and credentials interest them, and then contact the candidates
directly. Unlike other self-service offerings, AquentDirect offers the added
value provided by full-service temp agencies. Aquent screens the candidates
through interviews, tests and reference checks and keeps a record of employer
feedback so companies can be sure they are choosing a candidate that best suits
their needs.
Business Value. The business value created for Aquent Partners from this
application includes minimizing dependency on particular application vendors,
leveraging existing infrastructure to establish the first online matching
service and unifying all Aquent web sites.
Central Carolina Bank Case Study
Business Opportunity. CCB Financial Corporation is a bank holding company
whose principal subsidiaries are Central Carolina Bank and Trust Company of
Durham, North Carolina and American Federal Bank, FSB of Greenville, South
Carolina. CCB is one of the Southeast's largest and fastest-growing financial
institutions.
The anticipated melding of insurance, brokerage and banking has created
greater competition for customers in the financial services marketplace. CCB
recognized the need to develop a strategy to retain current customers and gain
new customers by leveraging the potential of consumer banking over the
Internet.
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iSolution. We began this project by conducting a five-week assessment of
CCB's strategy, business value and organizational and technical readiness. The
main focus of this process was to refine CCB's existing eBusiness strategy to
specific revenue-driven customer-centric responses to banking patterns in the
industry. These responses were then prioritized based on potential value.
Once the diagnostic process was completed, we designed and deployed an
Internet financial services portal targeted at retaining and gaining customers.
Through targeted data-gathering and one-to-one marketing techniques, CCB is now
able to cross-sell a multitude of products to its customers.
Business Value. Our iSolution has allowed CCB to offer new value-added
products and services, enter new markets, acquire and retain customers and
increase cross-selling of financial products to online customers.
Strategic Alliances
Our strategic alliances focus on large companies with proven success in our
principal line of focus. These organizations typically have large field
operations and are in a position to recommend and/or sub-contract our education
and consulting services. Our current alliances include:
Oracle
We have developed a strategic relationship with Oracle at multiple levels
throughout its organization including the eBusiness Group, U.S. Sales, and
Consulting Services. We and Oracle have entered into an agreement to deliver
joint business solutions based on our Profit Life Cycle Management methodology.
The foundation of the alliance is based on leveraging our unique abilities in
executive education, Internet visioning and rapid application development with
Oracle's consulting expertise and vast resources.
We and Oracle jointly engage in co-marketing and branding activities to
support the business development efforts in this partnership. Included in this
effort is the development of a custom lead tracking/sales force automation
application designed to track leads generated through the executive seminars.
Business development activities initially focused on generating business
through the seminar series but has expanded beyond the seminars and into our
respective field operations. We and Oracle often work together on same
engagement teams but under separate contracts with the client.
Mr. Raymond J. Lane, the president and chief operating officer of Oracle,
joined our board of directors in October 1999.
Hewlett-Packard
We have developed a working relationship with Hewlett-Packard at multiple
levels within our respective organizations, including the personal systems
group, local products organization and the professional services organization.
Our marketing alliances include the retail marketing group, Internet imaging
marketing and other groups. We and Hewlett-Packard regularly engage in co-
marketing and branding activities to support our respective business
development efforts.
Cambridge Executive Enterprises
We have entered into a five-year outsourcing agreement pursuant to which we
and Cambridge Executive Enterprises jointly provide executive education
programs, delivered under the sponsorship of major technology product and
service providers such as Hewlett-Packard, Informix and Oracle. In 1998, there
were 42 such programs. Typically, the programs annually draw more than 3,000
participants throughout the world, including many senior executives and
managers from Global 1000 companies, who seek to learn how to merge their IT
strategies with their continually evolving business objectives.
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Recruiting and Career Development
To succeed, we must continue to identify, recruit, hire, professionally
develop and retain outstanding professionals. We believe that our success in
recruiting and retaining such individuals will depend significantly on our
ability to provide continued professional development and competitive
benefits, as well as financial rewards and incentives through compensation and
equity incentives.
We dedicate significant resources to our recruiting efforts and manage it
similarly to a sales function. As of September 30, 1999, we employed five
professionals who focused full-time on recruiting. Our recruiting efforts are
targeted at three levels: college recruiting, technical and management. In
addition to the efforts of our in-house recruiting group, we seek to meet our
hiring needs through referrals and through technical and executive search
firms. While recruiting personnel are responsible for screening candidates,
business, functional or administrative managers make hiring decisions for
their own groups in order to help ensure high-quality hires.
We believe that our continuous focus on career development will help us
retain our highly skilled personnel. Upon joining our company, each new
employee participates in a multi-day training program that covers a broad
range of topics, including technology, consulting and our proprietary
methodology. During their first year with us, recent college graduates receive
approximately three to four weeks of training and experienced hires receive
approximately two weeks of training. We have also created a sponsorship
program where experienced employees provide ongoing career development,
mentorship and training to less-experienced employees. Our existing employees
attend professional development and training programs and keep apprised of
technological advances and developments through on-the-job exposure to
relevant technology.
Competition
While the market for Internet professional services is relatively new, it
is already highly competitive. In many cases we compete with the in-house
technical staff of our prospective clients. In addition, the market is
characterized by an increasing number of entrants that have introduced or
developed products and services similar to those offered by us. We believe
that competition will intensify and increase in the future. Our target market
is rapidly evolving and is subject to continuous technological change. As a
result, our competitors may be better positioned to address these developments
or may react more favorably to these changes, which could have a material
adverse effect on our business, results of operations and financial condition.
We compete on the basis of a number of factors, including the following:
. integrated strategy, technology and architectural design services;
. architectural design and systems engineering expertise;
. technological innovation;
. quality, pricing and speed of service delivery;
. understanding clients' strategies and needs;
. client references; and
. vertical industry knowledge.
Many of these factors are beyond our control. Existing or future
competitors may develop or offer strategic Internet services that provide
significant technological, creative, performance, price or other advantages
over the services offered by us.
We currently compete for client assignments and experienced personnel
principally with the following:
. Internet service firms: AGENCY.COM, iXL, Modem Media.Poppe Tyson,
Online Marketing Communications, Organic Online, Proxicom, Razorfish,
Scient, USWeb/CKS and Viant.
. Systems integrators: Andersen Consulting, Cambridge Technology
Partners, Cap Gemini, EDS, Sapient and WM-Data.
. Management consulting firms: Bain, Booz-Allen & Hamilton, Boston
Consulting Group and McKinsey.
42
<PAGE>
. Computer hardware and service vendors: Compaq, DEC, Hewlett-Packard
and IBM.
. Advertising agencies: Bates, DDB Needham, Grey Advertising, McCann-
Erickson and Ogilvy & Mather.
Many of these businesses have longer operating histories and significantly
greater financial, technical, marketing and managerial resources than we have.
Many of these businesses also generate significantly higher revenues, are
better known than we are and offer a greater breadth of management consulting
services. There are relatively low barriers to entry into our business. We have
no patented or other proprietary technology that would preclude or inhibit
competitors from entering the Internet professional services market. Therefore,
we must rely on the skill of our personnel and the quality of our client
service. The costs to develop and provide Internet services are low. Therefore,
we expect that we will continually face additional competition from new
entrants into the market in the future, and we are subject to the risk that our
employees may leave us and start competing businesses. Any one of the foregoing
factors could have a material and adverse effect on our business.
Proprietary and Intellectual Property Rights
We have developed detailed tools, processes and methodologies underlying
the software code, scripts, libraries and other technology used internally and
in our client engagements. We regard our copyrights, trade secrets and other
intellectual property as critical to our success. Unauthorized use of our
intellectual property by third parties may damage our brand and our reputation.
We rely on trademark and copyright law, trade secret protection and
confidentiality, non-disclosure, license and other agreements with our
employees, customers, partners and others to protect our intellectual property
rights. Despite our precautions, it may be possible for third parties to obtain
and use our intellectual property without our authorization. Furthermore, the
validity, enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries do not protect intellectual property to the same extent as do
the laws of the United States.
We pursue the registration of our trademarks in the United States. We may
not be able to secure adequate protection of our trademarks in the United
States and other countries. We have received a trademark registration in the
United States for the C-BRIDGE mark. If we are unable to protect trademark
registrations for one or both of these trademarks, we would be unable to fully
enforce our statutory trademark rights against third parties for these
trademarks, and/or we may decide to replace these trademarks with new
trademarks. This could have a material adverse effect on our business,
financial condition and results of operations. Effective trademark protection
may not be available in all the countries in which we conduct business.
Policing unauthorized use of our trademarks is also difficult and expensive. In
addition, it is possible that our competitors have adopted or will adopt
product or service names similar to ours, thereby impeding our ability to build
brand identity and possibly leading to customer confusion.
We cannot be certain that our services and the finished products that we
deliver do not or will not infringe valid patents, copyrights, trademarks or
other intellectual property rights held by third parties. We may be subject to
legal proceedings and claims from time to time relating to the intellectual
property of others in the ordinary course of our business. We may incur
substantial expenses in defending against these third-party infringement
claims, regardless of their merit. Successful infringement claims against us
may result in substantial monetary liability or may materially disrupt the
conduct of our business. We cannot assure you 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.
Employees
At September 30, 1999, we had a total of 183 employees, of which 114 were
assigned to professional services, 15 were assigned to executive education
services, 16 were assigned to sales and marketing and 38 were assigned to
general and administration. None of our employees are represented by a labor
union. We have never experienced any work stoppages and consider our relations
with our employees to be good.
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<PAGE>
Facilities
We currently lease approximately 28,000 square feet of space at our
headquarters in Cambridge, Massachusetts under a lease that expires on May 1,
2004. We also maintain offices in Detroit, New York and San Francisco. We
believe we will be able to obtain additional space on an as-needed basis at
commercially reasonable rates.
Legal Proceedings
From time to time, we are involved in litigation incidental to the conduct
of our business. We are not a party to any lawsuit or proceeding that, in the
opinion of our management, is likely to have a material adverse effect on our
business.
44
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
Our executive officers, directors and key employees, and their respective
ages as of September 30, 1999, are as follows:
<TABLE>
<CAPTION>
Age Position(s)
Executive Officers and Directors: --- -----------
<S> <C> <C>
Joseph M. Bellini......... 39 President and Chief Executive Officer and
Director
Richard C. Putz........... 50 Executive Vice President, Worldwide Industries
and Chief Strategy Officer
R. Jeffrey Spurrier....... 43 Executive Vice President, Worldwide Operations
Mark A. Cosway............ 41 Executive Vice President, Sales and Marketing
Donald W. Amaya........... 53 Executive Vice President, Human Resources
Richard O. Wester......... 41 Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
Other Directors:
Joseph L. Badaracco, Jr... 51 Director
Paul R. Charron........... 57 Director
Raymond J. Lane........... 52 Director
Ramanan Raghavendran...... 31 Director
Gerard F. King, II........ 42 Vice President, Consulting Services and Director
Key Employees:
Kerry L. Bush............. 41 Managing Director, Network Computing
Anthony W. Elkins......... 42 Managing Director, Central Operations
David G. Panitz........... 31 Managing Director, Eastern Operations
James M. D'Augustine...... 38 Managing Director, Architecture
Clifford B. Thompson...... 38 Managing Director, Compliance
Ronald J. Bodkin.......... 29 Chief Technologist
Andrew J. MacDonald....... 38 Managing Director, Western Operations
Satish S. Bhat............ 33 Managing Director, Industries
</TABLE>
Joseph M. Bellini joined C-bridge in February 1999 as President and Chief
Operating Officer and was named Chief Executive Officer in May 1999. Mr.
Bellini has also served as a director of C-bridge since September 1998. Prior
to joining C-bridge, Mr. Bellini served in various capacities at i2
Technologies, Inc. from June 1995 to February 1999, most recently as Executive
Vice President, Worldwide Automotive and Industrial Business Unit. From April
1993 to June 1995, Mr. Bellini served as Senior Practice Director at Oracle
Corporation. Mr. Bellini received a B.S. in both Mechanical Engineering and
Applied Mathematics and Statistics from the University of Massachusetts at
Amherst and is an alumnus of Harvard Business School.
Richard C. Putz joined C-bridge in July 1999 as Executive Vice President,
Worldwide Industries and Chief Strategy Officer and Executive Vice President of
Industries and Diagnostics. Prior to joining C-bridge, Mr. Putz served as
Senior Director, and then Regional Vice President, of the Industrial Practice
at Oracle Corporation from August 1998 to July 1999. From October 1995 to July
1998, Mr. Putz was the President and Chief Executive Officer of Security
Federal Bank. From July 1994 to October 1995, Mr. Putz was a Senior Practice
Director for Oracle Corporation. Mr. Putz received a B.A. from St. Meinrad
College and is a Masters candidate at the St. Meinrad School of Theology at the
University of Notre Dame.
R. Jeffrey Spurrier joined C-bridge in October 1998 as Executive Vice
President, Worldwide Operations. Prior to joining C-bridge, Mr. Spurrier served
as Senior Director, Oracle Services at Oracle Corporation where he was employed
since July 1993. Mr. Spurrier received a B.S. in Mathematics and Physics from
University of Florida, a M.S. in Electrical Engineering from Rice University
and a M.B.A. from Stanford University.
45
<PAGE>
Mark A. Cosway joined C-bridge in April 1999 as Executive Vice President,
Sales and Marketing. Prior to joining C-bridge, Mr. Cosway was Director, Global
Accounts for i2 Technologies, Inc. from July 1994 to April 1999. From January
1989 to April 1994, Mr. Cosway served as Regional Sales Manager at Enterprise
Planning Systems. Mr. Cosway received an Honors Bachelor of Commerce in
Marketing and Information Systems from Carleton University, Ottawa, Canada.
Donald W. Amaya joined C-bridge in November 1999 as Executive Vice
President, Human Resources. Prior to joining C-bridge, Mr. Amaya was Vice
President, Staffing and Education, for EMC Corporation from September 1997
through October 1999. From January 1996 to September 1997, Mr. Amaya was a
consultant providing human resources services to a number of mid-size IT
professional services and software companies. From May 1984 through December
1995, Mr. Amaya was the Vice President, Human Resources at Keane, Inc. Mr.
Amaya received a B.A. from Wheaton College, Wheaton, Illinois.
Richard O. Wester joined C-bridge in July 1998 as Vice President, Finance
and Administration, Chief Financial Officer and Treasurer. Prior to joining C-
bridge, Mr. Wester consulted as a chief financial officer to several start-up
entities from October 1997 to August 1998. From September 1995 to October 1997,
Mr. Wester served in various capacities at Integrated Computer Engines, Inc.,
most recently as Vice President, Finance and Administration, Chief Financial
Officer and Treasurer. Mr. Wester also was a co-founder of ICE and served as a
director of ICE from September 1994 until June 1998. From September 1994 to
September 1995, Mr. Wester served as the Director of Finance and
Administration, Chief Financial Officer and Treasurer at International
Integration Incorporated Inc., known as i-Cube. Mr. Wester received a BSBA in
Accounting from Salem State College. Mr. Wester is also a Certified Public
Accountant.
Joseph L. Badaracco, Jr. joined C-bridge as a director on October 1, 1999.
Professor Badaracco is currently the John Shad Professor of Business Ethics at
Harvard Business School, where he has taught since February 1981. He is a
graduate of St. Louis University, Oxford University, where he was a Rhodes
Scholar, and Harvard Business School.
Paul R. Charron joined C-bridge as a director on October 1, 1999. Mr.
Charron has been with Liz Claiborne Inc. since May 1994 and is currently
Chairman of the Board and Chief Executive Officer. Mr. Charron received a B.A.
from Notre Dame University and has a MBA from Harvard Business School.
Raymond J. Lane joined C-bridge as a director on October 1, 1999. Mr. Lane
has been President and Chief Operating Officer of Oracle Corporation since
January 1997. Since June 1992, Mr. Lane has served in various capacities at
Oracle Corporation, including executive vice president and president of
worldwide operations. Before joining Oracle, Mr. Lane was a senior vice
president of Booz-Allen & Hamilton, where he led their worldwide consulting
practice targeted to information technology investments from July 1986 to May
1992. Mr. Lane also serves on the board of directors of Oracle Corporation and
Marimba Inc. and is a member of the board of trustees of Carnegie Mellon
University. Mr. Lane received a B.S. in Mathematics from West Virginia
University.
Ramanan Raghavendran joined C-bridge as a Director in October, 1999. Mr.
Raghavendran has been a general partner of InSight Capital Partners and its
affiliated entities since January 1997. From August 1992 to December 1996, Mr.
Raghavendran was a senior associate with General Atlantic Partners, a private
equity investment firm. Mr. Raghavendran also serves on the board of directors
of Exchange Applications Inc. and several privately held companies. Mr.
Raghavendran received a B.S. from the University of Pennsylvania.
Gerard F. King, II joined C-bridge in July 1997 as Vice President,
Consulting Services and has served as a director since May 1998. Prior to
joining C-bridge, Mr. King was a Director of Professional Services at Sybase,
Inc. from April 1994 to June 1997. Mr. King received a B.A. in History and
German from Tufts University and a M.S. in Computer Information Systems from
Bentley College.
46
<PAGE>
Kerry L. Bush joined C-bridge in May 1999 as Managing Director, Network
Computing. Prior to joining C-bridge, Mr. Bush was employed by Oracle
Corporation for a period of over 15 years where he held positions in sales,
support, education and consulting. Mr. Bush most recently served as Senior
Practice Director for the Oracle Performance Architecture Group. Mr. Bush
received a B.S. in Computer and Communications Sciences from the University of
Michigan, Ann Arbor.
Anthony W. Elkins joined C-bridge in March 1999 as Managing Director,
Central Operations. From April 1996 to March 1999, Mr. Elkins served as Senior
Strategy Manager with Andersen Consulting's Information and Technology Strategy
practice. From September 1988 to April 1996, Mr. Elkins served as Senior
Account Manager at Electronic Data Systems. Mr. Elkins received a B.S. in
Mathematics from the University of Kentucky, a M.S. in Operations Research and
a M.B.A. from the University of Dayton.
David G. Panitz joined C-bridge in February 1999 as Managing Director,
Eastern Operations. Prior to joining C-bridge, Mr. Panitz worked for Polo Ralph
Lauren Corporation from May 1994 to February 1999, where he served in various
capacities, including most recently as Director of Retail Analysis and
Planning. Mr. Panitz received a B.S. from Cornell University and a M.B.A. from
New York University.
James M. D'Augustine joined C-bridge in October 1997 as a principal
consultant. In January 1998, he was promoted to Managing Director,
Architecture. Prior to joining C-bridge, Mr. D'Augustine was a system architect
at Cambridge Technology Partners from July 1993 to October 1997. Mr.
D'Augustine received a B.S. in Computer Science from Boston University.
Clifford B. Thompson joined C-bridge in May 1999 as Managing Director,
Compliance. Prior to joining C-bridge, Mr. Thompson served as a Senior
Technology Negotiator at BankBoston from October 1998 to May 1999. From May
1996 to July 1998, Mr. Thompson served as Director of Licensing at Avicenna
Systems, Corp. From August 1993 to May 1996, Mr. Thompson served as Manager of
Information Content Supplies at Individual, Inc. Mr. Thompson received a B.A.
in Psychology from the University of Massachusetts at Amherst and a J.D. from
the University of Houston Law School.
Ronald J. Bodkin joined C-bridge in September 1996 and has served as Chief
Technologist since that time. Prior to joining C-bridge, Mr. Bodkin was a
researcher at the Massachusetts Institute of Technology Laboratory for Computer
Science from September 1995 to August 1996. From October 1994 to September
1995, Mr. Bodkin served as Vice President, Technology at Exsellarated Software.
Mr. Bodkin received a B.S. in Mathematics and Computer Science from McGill
University and a M.S. in Computer Science from Massachusetts Institute of
Technology.
Andrew J. MacDonald joined C-bridge in May 1999 as Managing Director,
Western Operations. Prior to joining C-bridge, Mr. MacDonald served in various
capacities at Oracle Corporation from September 1993 to May 1999, including
most recently as Program Director, Applications Global Service Line. Mr.
MacDonald graduated with a degree in Mathematics from the University of
Waterloo and earned a M.B.A. from Queen's University.
Satish S. Bhat joined C-bridge in April 1999 as Managing Director,
Industries. Prior to joining C-bridge, Mr. Bhat served as Director of Business
Solutions in the Automotive Industry Business Unit at i2 Technologies from
March 1997 to April 1999. From August 1996 to January 1997, Mr. Bhat worked as
a management consultant at Bain & Company. From September 1994 to July 1996,
Mr. Bhat pursued his Masters degree. From May 1991 to August 1994, Mr. Bhat
worked as a senior consultant at SABRE Design Technologies. Mr. Bhat received a
B.S. in Mechanical Engineering from Anna University in Madras, India, a M.S. in
Industrial Engineering from Louisiana State University, and a M.B.A. in Finance
and Marketing from the University of Chicago.
Pursuant to a stockholders voting agreement that we entered into in
connection with our sale of our series A convertible preferred stock in October
1999, Ramanan Raghavendran was elected to our board of directors. This
agreement will terminate by its terms upon completion of this offering.
47
<PAGE>
Committees of the Board of Directors
The board of directors has a compensation committee composed of Messrs.
Charron, Lane and Raghavendran, which makes recommendations concerning salaries
and incentive compensation for our employees and administers and grants stock
options under our stock option plans. The board of directors also has an audit
committee composed of Messrs. Badaracco, Charron and Raghavendran, which
reviews the results and scope of the audit and other services provided by our
independent public auditors.
Director Compensation
All of the directors are reimbursed for expenses incurred to attend board
of directors and committee meetings.
Executive Compensation
The following table sets forth the total compensation paid or accrued for
the fiscal year ended December 31, 1998 for each person who was serving as an
executive officer of C-bridge on December 31, 1998 except as otherwise
indicated below:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Securities
-------------------- Underlying
Name and Principal Position Salary Bonus Options
- --------------------------- ---------- --------- ------------
<S> <C> <C> <C>
Sundar Subramaniam(1)........................ -- -- --
President and Chief Executive Officer
R. Jeffrey Spurrier(2)....................... $ 31,250 $ 28,125 419,727
Executive Vice President, Worldwide
Operations
Marco M. Farsheed(3)......................... 58,333 25,727 300,000
Executive Vice President, Sales and
Marketing
Gerard F. King, II(4)........................ 150,000 25,000 577,850
Executive Vice President, Consulting
Services
Richard O. Wester(5)......................... 44,410 -- 300,000
Chief Financial Officer and Treasurer
</TABLE>
- --------
(1) Mr. Subramaniam served without compensation in 1998. He resigned as
President in February 1999 and Chief Executive Officer in May 1999.
(2) Mr. Spurrier joined C-bridge in October 1998. His current salary is
$150,000 per year.
(3) Mr. Farsheed joined C-bridge in June 1998. His current salary is $100,000
per year.
(4) Mr. King joined C-bridge in July 1997. His current salary is $150,000 per
year.
(5) Mr. Wester joined C-bridge in July 1998. His current salary is $110,000 per
year.
Joseph M. Bellini, who joined us in February 1999 as our president and
chief operating officer, has a current salary of $250,000 per year. Mr. Bellini
was named chief executive officer in May 1999. Mark A. Cosway, who joined us in
April 1999 as our executive vice president of sales and marketing, has a
current salary of $125,000 per year.
48
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth grants of stock options for the year ended
December 31, 1998 to each of our most highly compensated executive officers
whose salary and bonus for such fiscal year exceeded $100,000. We have never
granted any stock appreciation rights. The potential realizable value is
calculated based on the term of the option at its time of grant. It is
calculated assuming that the fair market value of common stock on the date of
grant appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the last
day of its term for the appreciated stock price. These numbers are calculated
based on the requirements of the Securities and Exchange Commission and do not
reflect our estimate of future stock price growth. Actual gains, if any, on
stock option exercises are dependent on the future performance of the common
stock and overall stock market conditions. The amounts reflected in the table
may not necessarily be achieved. The percentage of total options granted to
employees in the last fiscal year is based on options to purchase an aggregate
of 3,108,128 shares of common stock granted under our option plans. There was
no public market for our common stock as of December 31, 1998. Accordingly, the
fair market value on December 31, 1998 is based on the initial public offering
price of $16.00 per share.
<TABLE>
<CAPTION>
Individual Grants (1)
-----------------------------------------------
Potential Realizable
Value
at Assumed Annual
Number of Percent of Rates of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees in Price Per Expiration ---------------------
Name Granted 1998 Share Date 5% 10%
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sundar Subramaniam...... -- -- -- -- -- --
R. Jeffrey Spurrier..... 279,818 9.0% $0.30 10/31/08 $2,762,824 $7,001,538
139,909(2) 4.5 0.30 10/31/08 1,381,412 3,500,769
Marco M. Farsheed....... 300,000(2) 9.7 0.30 05/20/08 2,962,094 7,506,527
Gerard F. King, II...... 100,000 3.2 0.30 02/06/08 987,365 2,502,176
27,850 0.9 0.30 03/25/08 274,981 696,856
200,000(2) 6.4 0.30 09/30/08 1,974,729 5,004,351
Richard O. Wester....... 300,000 9.7 0.30 09/30/08 2,962,094 7,506,527
</TABLE>
- --------
(1) Each option represents the right to purchase one share of common stock. The
options shown in this column were all granted pursuant to our 1997 Stock
Incentive Plan. The options shown in this table, except as otherwise
indicated below, become exercisable at a rate of 25% annually over four
years from the date of grant.
(2) Option contains accelerated vesting based upon our obtaining certain
revenue goals.
49
<PAGE>
Aggregate Stock Option Exercises in Fiscal 1998 and
Fiscal Year-End Option Values
The following table sets forth certain information concerning the number
and value of unexercised options held by each of our executive officers on
December 31, 1998. None of our executive officers exercised stock options in
the fiscal year ended December 31, 1998. There was no public market for our
common stock as of December 31, 1998. Accordingly, the fair market value on
December 31, 1998 is based on the initial public offering price of $16.00 per
share.
<TABLE>
<CAPTION>
Number of Shares
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 1998 December 31, 1998
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Sundar Subramaniam.......... -- -- -- --
R. Jeffrey Spurrier......... 34,977 384,750 $ 549,139 $6,040,575
Marco M. Farsheed........... 43,750 256,250 686,875 4,023,125
Gerald F. King, II.......... 164,595 413,255 2,584,142 6,488,104
Richard O. Wester........... -- 300,000 -- 4,710,000
</TABLE>
Stock Plans
1997 Stock Incentive Plan
Our 1997 Stock Incentive Plan was adopted by our board of directors and
approved by our stockholders in April 1997. In March 1998, the board of
directors increased the number of authorized shares under the plan to 4,000,000
shares of common stock. As of September 30, 1999, an aggregate of 2,528,562
shares of common stock at a weighted average exercise price of $0.29 per share
were outstanding under the 1997 plan, an aggregate of 164,265 shares of common
stock were reserved for issuance for future option grants and an aggregate of
1,307,173 shares were issued upon exercise of options previously granted under
the 1997 plan.
The 1997 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, non-statutory stock
options, restricted stock awards and other stock-based awards.
All officers, employees, directors, consultants and advisors of C-bridge
and our subsidiaries are eligible to receive awards under the 1997 plan. Under
present law, however, incentive stock options may only be granted to employees.
No participant may receive an award for more than 500,000 shares in any
calendar year.
We may grant options at an exercise price less than, equal to or greater
than the fair market value of the common stock on the date of grant. Under
present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue
Code may not be granted at an exercise price less than the fair market value of
the common stock on the date of grant or less than 110% of the fair market
value in the case of incentive stock options granted to optionees holding more
than 10% of the voting power of our company. The 1997 plan permits the board of
directors to determine how optionees may pay the exercise price of their
options, including by cash, check or in connection with a "cashless exercise"
through a broker, by surrender of shares of common stock, by delivery to us of
a promissory note, or by any combination of the permitted forms of payment.
Our board of directors administers the 1997 plan. The board of directors
has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the plan and to interpret its provisions.
It may delegate authority under the plan to one or more committees of the board
of directors and, subject to certain limitations, to one or more of our
executive officers. The board of directors has authorized the compensation
committee to administer the 1997 plan, including the granting of options to
executive officers. Subject to any applicable limitations contained in the 1997
plan, the board of directors, the compensation
50
<PAGE>
committee or any other committee or executive officer to whom the board of
directors delegates authority, as the case may be, selects the recipients of
awards and determines:
. the number of shares of common stock covered by options and the dates
upon which such options become exercisable;
. the exercise price of options;
. the duration of options; and
. the number of shares of common stock subject to any restricted stock
or other stock-based awards and the terms and conditions of such
awards, including the conditions for repurchase, issue price and
repurchase price.
In the event of a merger, liquidation or other acquisition event, our board
of directors is authorized to provide for outstanding options or other stock-
based awards to be assumed or substituted for by the acquiror and to accelerate
the vesting schedule of awards.
No award may be granted under the 1997 plan after April 3, 2007, but the
vesting and effectiveness of awards previously granted may extend beyond that
date. The board of directors may at any time amend, suspend or terminate the
1997 plan, except that no award granted after an amendment of the 1997 plan and
designated as subject to Section 162(m) of the Internal Revenue Code by the
board of directors shall become exercisable, realizable or vested, to the
extent the amendment was required to grant the award, unless and until the
amendment is approved by our stockholders.
1999 Stock Incentive Plan
Our 1999 Stock Incentive Plan was adopted by our board of directors in
January 1999. Subject to the approval of our stockholders, the 1999 plan
authorizes the issuance of an aggregate of 6,000,000 shares of common stock.
The number of shares authorized for issuance shall automatically increase by
500,000 shares effective on the first day of every calendar year for the next
ten years. As of September 30, 1999, an aggregate of 4,216,500 shares of common
stock at a weighted average exercise price of $1.75 per share were outstanding
under the 1999 Plan, an aggregate of 1,783,250 shares of common stock were
reserved for issuance for future option grants and an aggregate of 250 shares
were issued upon exercise of options previously granted under the 1999 plan.
The 1999 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, non-statutory stock
options, restricted stock awards and other stock-based awards.
All of our officers, employees, directors, consultants and advisors and our
subsidiaries are eligible to receive awards under the 1999 plan. Under present
law, however, incentive stock options may only be granted to employees.
We may grant options at an exercise price less than, equal to or greater
than the fair market value of the common stock on the date of grant. Under
present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue
Code may not be granted at an exercise price less than the fair market value of
the common stock on the date of grant or less than 110% of the fair market
value in the case of incentive stock options granted to optionees holding more
than 10% of the voting power of our company. The 1999 plan permits the board of
directors to determine how optionees may pay the exercise price of their
options, including by cash, check or in connection with a "cashless exercise"
through a broker, by surrender of shares of common stock, by delivery to us of
a promissory note, or by any combination of the permitted forms of payment.
Our board of directors administers the 1999 plan. The board of directors
has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the plan and to interpret its provisions.
It may delegate authority under the plan to one or more committees of the board
of directors and, subject to certain limitations, to one or more of our
executive officers. The board of directors has authorized the
51
<PAGE>
compensation committee to administer the 1999 plan, including the granting of
options to executive officers. Subject to any applicable limitations contained
in the 1999 plan, the board of directors, the compensation committee or any
other committee or executive officer to whom the board of directors delegates
authority, as the case may be, selects the recipients of awards and determines:
. the number of shares of common stock covered by options and the dates
upon which such options become exercisable;
. the exercise price of options;
. the duration of options; and
. the number of shares of common stock subject to any restricted stock
or other stock-based awards and the terms and conditions of such
awards, including the conditions for repurchase, issue price and
repurchase price.
In the event of a merger, liquidation or other acquisition event, our board
of directors is authorized to provide for outstanding options or other stock-
based awards to be assumed or substituted for by the acquiror and to accelerate
the vesting schedule of awards.
No award may be granted under the 1999 plan after January 29, 2009, but the
vesting and effectiveness of awards previously granted may extend beyond that
date. The board of directors may at any time amend, suspend or terminate the
1999 plan, except that no award granted after an amendment of the 1999 plan and
designated as subject to Section 162(m) of the Internal Revenue Code by the
board of directors shall become exercisable, realizable or vested, to the
extent the amendment was required to grant the award, unless and until the
amendment is approved by our stockholders.
1999 Director Stock Option Plan
Our 1999 Director Stock Option Plan was adopted by our board of directors
on November 9, 1999, subject to the approval of our stockholders. Under the
director stock option plan, directors who are not our employees will be
eligible to receive non-statutory options to purchase shares of our common
stock. A total of 200,000 shares of our common stock may be issued upon the
exercise of options granted under the director stock option plan.
Under the terms of the director stock option plan, each person who becomes
a non-employee director after the closing of this offering will be granted an
option to purchase 30,000 shares of our common stock on the date of his or her
initial election to the board of directors. These options vest in three equal
annual installments beginning on the first anniversary of the option grant
date. In addition, each non-employee director will receive an option to
purchase 15,000 shares of our common stock on the date of each annual meeting
of our stockholders commencing with the 2000 annual meeting of stockholders,
other than a director who was initially elected to the board of directors at
any such annual meeting or, if previously, at any time after the prior year's
annual meeting. These options vest immediately in full upon the option grant
date. The exercise price per share of all options will equal the fair market
value per share of our common stock on the option grant date. Each grant under
the director stock option plan will have a maximum term of ten years, subject
to earlier termination following the optionee's cessation of service.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan was adopted by our board of directors
on November 9, 1999, subject to the approval of our stockholders. The purchase
plan will become effective upon the completion of this offering and authorizes
the issuance of up to a total of 750,000 shares of our common stock to
participating employees.
All of our employees, including our directors who are employees and all
employees of any participating subsidiaries, whose customary employment is more
than 20 hours per week for more than five months in any
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calendar year, are eligible to participate in the purchase plan. Employees who
would immediately after an option grant own 5% or more of the total combined
voting power or value of our stock or any subsidiary are not eligible to
participate in the purchase plan.
We will make one or more offerings to our employees to purchase stock under
the purchase plan. Offerings will begin on dates established by our board of
directors, provided that our first offering commencement date will be the date
on which trading of our common stock commences on the Nasdaq National Market in
connection with this offering. Each offering commencement date will begin a
six-month period during which payroll deductions will be made and held for the
purchase of our common stock at the end of the purchase plan period.
On the first day of a designated payroll deduction period, or offering
period, we will grant to each eligible employee who has elected to participate
in the purchase plan an option to purchase shares of our common stock as
follows: the employee may authorize between 1% to 10% of his or her base pay to
be deducted by us during the offering period. On the last day of the offering
period, the employee is deemed to have exercised the option, at the option
exercise price, to the extent of accumulated payroll deductions. Under the
terms of the purchase plan, the option price is an amount equal to 85% of the
closing price (as defined) per share of our common stock on either the first
day or the last day of the offering period, whichever is lower. In no event may
an employee purchase in any one offering period a number of shares which
exceeds the number of shares determined by dividing (a) the product of $2,083
and the number or fraction of months in the offering period by (b) the closing
price of a share of our common stock on the commencement date of the offering
period. Our board of directors may, in its discretion, choose an offering
period of 12 months or less for each offering and may choose a different
offering period for each offering.
An employee who is not a participant on the last day of the offering period
is not entitled to exercise any option, and the employee's accumulated payroll
deductions will be refunded. An employee's rights under the purchase plan
terminate upon voluntary withdrawal from the purchase plan at any time, or when
the employee ceases employment for any reason, except that upon termination of
employment because of death, the employee's beneficiary has certain rights to
elect to exercise the option to purchase the shares that the accumulated
payroll deductions in the employee's account would purchase at the date of
death.
Because participation in the purchase plan is voluntary, we cannot now
determine the number of shares of our common stock to be purchased by any
particular current executive officer, by all current executive officers as a
group or by non-executive employees as a group.
401(k) Plan
We have a 401(k) plan covering all of our employees who meet certain
defined requirements. Under the terms of the 401(k) plan, the employees may
elect to make tax-deferred contributions, and we may match 25% of the first 6%
of employee contributions as determined by the board of directors and may make
other discretionary contributions to the 401(k) plan. During 1998 and the nine
months ended September 30, 1999, we contributed approximately $46,400 and
$56,900, respectively, to the 401(k) plan. We made no contributions during 1996
or 1997.
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CERTAIN TRANSACTIONS
Sale of Series A Convertible Preferred Stock.
In October 1999, we sold 1,645,555 shares of series A convertible preferred
stock to five accredited investors for $6.00 per share, for an aggregate
purchase price of approximately $9.9 million. InSight Capital Partners III,
L.P. purchased 954,129 shares, InSight Capital Partners (Cayman) III, L.P.
purchased 236,355 shares, InSight Capital Partners III-Co-Investors, L.P.
purchased 142,849 shares, Oracle Corporation purchased 305,555 shares and H&D
Investments 97 purchased 6,667 shares. Mr. Raymond J. Lane, a member of our
board of directors, is President and Chief Operating Officer of Oracle
Corporation. H&D Investments 97 is an investment fund of our counsel, Hale and
Dorr LLP. Upon completion of this offering, each share of series A convertible
preferred stock will automatically convert into one share of common stock.
Concurrent with our offering of series A convertible preferred stock, the
Willingdon Trust, one of our significant stockholders, sold 719,445 shares of
our common stock to four of the series A investors for $6.00 per share, for an
aggregate purchase price of approximately $4.3 million. InSight Capital
Partners III, L.P. purchased 477,065 shares, InSight Capital Partners (Cayman)
III, L.P. purchased 118,177 shares, InSight Capital Partners III-Co-Investors,
L.P. purchased 71,425 shares and Oracle Corporation purchased 52,778 shares.
Also concurrent with our offering of series A convertible preferred stock, one
of our stockholders sold 100,000 shares of our common stock to Oracle
Corporation for $6.00 per share, for an aggregate purchase price of $600,000.
See "Principal Stockholders."
Sale of Common Stock to Mr. Raymond J. Lane.
In June 1999, we sold 333,333 shares of our common stock to Mr. Raymond J.
Lane, the President and Chief Operating Officer of Oracle Corporation, for an
aggregate purchase price of $2.0 million, or $6.00 per share. On October 1,
1999, Mr. Lane became a member of our board of directors. See "Management."
We have developed a strategic relationship with Oracle as further described in
"Business--Strategic Alliances."
Lease Agreement with Property Management Partners.
On May 1, 1999, we entered into a five-year operating lease agreement for
28,000 square feet in Cambridge, Massachusetts, which encompasses our executive
offices, from Property Management Partners, a corporation controlled by a
former employee of Cambridge Technology Group, Steven Jaworski. In addition to
a monthly rent of $47,000, subject to set annual increases, and a monthly
property management fee of $23,000, we are obligated to make a one-time capital
improvements payment of approximately $1.4 million on January 3, 2000. We
believe that the terms of this lease in the aggregate are at least as favorable
as those we would have obtained from a non-related party in an arms-length
transaction.
Agreements with CEE, Inc. and Cambridge Executive Enterprises.
On April 30, 1999, we entered into a five-year contract with CEE, Inc.,
pursuant to which CEE outsourced the management and performance of executive
education seminars to us in return for a monthly fee of approximately $479,000
per month. An affiliate of CEE, Cambridge Executive Enterprises, Inc., had
previously provided these services. The sole stockholder of CEE and Cambridge
Executive Enterprises is James Nondorf. Simultaneously with the execution of
this outsourcing agreement with CEE, we hired substantially all of the
employees of Cambridge Executive Enterprises and acquired substantially all of
its tangible assets in exchange for a promissory note in the amount of
$234,000. We repaid this note in full on October 27, 1999. In connection with
the outsourcing agreement, we have agreed to issue options to purchase 190,000
shares of our common stock to designees of CEE and have committed to issue
options to purchase an additional 50,000 shares of our common stock to CEE's
designees for each year that the outsourcing agreement remains in place. Eighty
persons have received options from this pool at exercise prices ranging from
$1.00 to $8.50 and the largest single grant was for 35,000 shares (at an
exercise price of $1.00). These options expire ten years from the date of grant
and vest over the period of four years. A majority of the grants were to our
current employees. The additional options will be granted to individuals who
have not yet been identified and the exercise prices of these options will be
based on the fair market value of our common stock at the time of grant.
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Non-Competition Agreement with Professor Donovan.
On September 27, 1999, Cambridge Executive Enterprises and CEE entered into
a non-competition agreement with Professor John J. Donovan, which provides that
Professor Donovan shall not compete with Cambridge Executive Enterprises in
developing and performing executive education seminars before September 27,
2000. We are named as a third-party beneficiary in the agreement, and the
provisions of the agreement may not be waived or amended without our written
consent.
Historical Relationship with Cambridge Technology Group.
We, CEE and Cambridge Executive Enterprises have an historical relationship
with Cambridge Technology Group. For more than ten years prior to September
1998, Cambridge Technology Group conducted an executive education seminar
business. Professor John J. Donovan, the former sole stockholder, director and
executive officer of Cambridge Technology Group, is currently an employee of
CEE. Affiliates of Professor Donovan are beneficiaries of a trust and a holding
company which have invested in our company and are significant stockholders as
a result. See "Principal Stockholders."
Advances from Affiliates.
During 1997 and 1998, we were financed primarily by advances from Cambridge
Technology Group, the Willingdon Trust, the Winsor Trust and Harrington Trust
Limited, as Trustee of the Appleby Trust, the beneficiaries of which include
various relatives of Professor Donovan. The Willingdon Trust and the Winsor
Trust are two of our significant stockholders. Amounts advanced by Cambridge
Technology Group, which consisted primarily of working capital advances,
general and administrative allocations and operating expenses, were
approximately $1.0 million in 1997 and $1.1 million in 1998. Amounts advanced
by each of the Willingdon Trust and the Winsor Trust were approximately
$325,000 in 1997. Amounts advanced by the third trust were approximately
$450,000 in 1997. During March and May of 1998, we entered into agreements with
these affiliated parties to forgive $2.3 million of the amounts due. We
recorded the forgiveness as a capital contribution, and the remaining
indebtedness of approximately $988,000 was repaid in 1998.
Line of Credit Guarantee.
During 1998, we entered into a revolving line of credit with a bank secured
by substantially all of our assets and guaranteed in part by Mr. Subramaniam,
our former chief executive officer and a beneficiary of the Willingdon Trust,
and a trust, the beneficiaries of which include an affiliate of Professor
Donovan. Under the line of credit, $1.0 million is collateralized by our assets
and $2.5 million is subject to this guarantee. On April 7, 1999, we entered
into a loan modification of our line of credit in order to draw upon a
committed equipment line of credit of up to $200,000. The modification of the
line of credit is subject to the same guarantee. Upon completion of this
offering, we expect the guarantee to be released.
1998 Bridge Financing.
In May 1998, in connection with a bridge financing, a limited liability
company, in which Mr. Subramaniam is an investor, loaned us approximately
$148,000 in return for a promissory note and warrants to purchase 200,000
shares of common stock at an exercise price of $0.30 per share. The note was
due in 90 days and bore interest at the prime rate, which was 7.75% at December
31, 1998, plus 1%. In August 1998, in connection with the extension of the
note, we issued the limited liability company warrants to purchase 66,666
shares of common stock at an exercise price of $0.30 per share. Each share of
common stock purchased upon exercise of the warrants may be exchanged for
approximately .25 of a share of our series A convertible preferred stock. In
September 1998, we repaid $87,000 of the amount due to the limited liability
company, and the balance of $61,000 and the accrued interest was converted into
202,000 shares of common stock at a price of $0.30 per share.
Prior Lease Agreements with Cambridge Technology Group.
During 1997 and 1998, we leased certain office space and equipment from
Cambridge Technology Group under month-to-month operating lease agreements.
Pursuant to these agreements, we incurred rental expenses
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of $93,000 and $251,000 for 1997 and 1998, respectively. We believe that the
terms of these lease agreements were in the aggregate at least as favorable as
those we would have obtained from a non-related party in an arms-length
transaction.
Agreement with Invenio Technologies Corporation.
During 1998, we performed professional consulting and technical development
services for an unrelated company in which Mr. Subramaniam holds a minority
equity interest. Transactions with Invenio were treated as arms-length
transactions. The total amount of the services was $64,000, of which $48,000
remained unpaid as of September 30, 1999. Invenio makes payments from time to
time, and we expect that the amount will be paid in full in the foreseeable
future.
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PRINCIPAL STOCKHOLDERS
Principal Stockholders
The following table sets forth certain information known to us regarding
the beneficial ownership of our common stock as of October 30, 1999 and as
adjusted to reflect the sale of the shares of our common stock in this offering
for:
. each of our executive officers named in the Summary Compensation
Table;
. each of our directors;
. each person known by us to beneficially own more than 5% of our common
stock; and
. all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The information is not necessarily
indicative of beneficial ownership for any other purpose. Except as indicated
by the footnotes below, none of these persons or entities has a relationship
with us or, to our knowledge, any of the underwriters or their respective
affiliates. Unless otherwise indicated, each person or entity named in the
table below has sole voting and investment power (or shares such power with his
or her spouse) with respect to all shares of common stock shown as beneficially
owned by them, subject to applicable community property laws. Percentage of
beneficial ownership is based on 13,429,907 shares of common stock outstanding
as of October 30, 1999, which assumes the conversion of the outstanding shares
of series A convertible preferred stock as of October 30, 1999 into shares of
common stock. In computing the number of shares of common stock beneficially
owned by a person and the percentage ownership of that person, shares of common
stock subject to options held by that person that are currently exercisable or
exercisable within 60 days of October 30, 1999 are deemed outstanding. These
shares, however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person. Unless otherwise indicated, the
address of each beneficial owner listed below is c/o C-bridge Internet
Solutions, Inc., 219 Vassar Street, Cambridge, Massachusetts 02139. The number
of shares of common stock deemed outstanding after this offering includes the
4,000,000 shares of common stock being offered for sale in this offering but
assumes no exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
Percentage of
Common Stock
Beneficially
Owned
-----------------
Shares Beneficially Prior To After
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ------------------- -------- --------
<S> <C> <C> <C>
Joseph M. Bellini....................... 782,500 5.5% 4.3%
R. Jeffrey Spurrier..................... 209,863 1.6 1.2
Richard O. Wester....................... 75,000 * *
Sundar Subramaniam(1)................... 4,049,055 30.1 23.2
Marco M. Farsheed....................... 300,000 2.1 1.7
Joseph L. Badaracco, Jr.(2)............. 125 * *
Paul R. Charron(3)...................... -- * *
Gerald F. King, II...................... 275,725 2.0 1.6
Raymond J. Lane(4)...................... 791,666 5.9 4.4
Ramanan Raghavendran(5)................. 2,000,000 14.9 11.5
Entities affiliated with InSight Capital
Partners(6)........................... 2,000,000 14.9 11.5
Hamilton Trust Company Limited, as
Trustee of the Willingdon Trust(7).... 4,049,055 30.1 23.2
Butterfield Trust (Bermuda) Limited, as
Trustee of the Winsor Trust(8)........ 2,290,750 17.1 13.1
Internet Business Capital Corporation
Limited(9)............................ 2,290,750 17.1 13.1
Oracle Corporation(10).................. 458,333 3.4 2.6
All directors and executive officers as
a group
(10 persons).......................... 3,918,550 26.6 20.9
</TABLE>
- --------
* Represents beneficial ownership of less than one percent of our common stock.
(footnotes follow on next page)
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--------
(1) Consists of 4,049,055 shares owned by the Willingdon Trust, of which Mr.
Subramaniam, his sister, Subitha Subramaniam, and their respective issue
are the sole beneficiaries. Mr. Subramaniam disclaims beneficial
ownership of the shares held by the Willingdon Trust except as to the
extent of his pecuniary interest, and neither he nor his sister exercise
sole or shared investment power with respect to the shares listed. The
address of the Willingdon Trust is Hamilton Trust Company Limited, as
Trustee of the Willingdon Trust, Vallis Building, P.O. Box HM247,
Hamilton HM AX, Bermuda.
(2) The address of Professor Badaracco is c/o Harvard Business School,
Soldier's Field Road, Morgan 475, Boston, Massachusetts 02163.
(3) The address of Mr. Charron is c/o Liz Claiborne, Inc., 1441 Broadway, New
York, New York 10018.
(4) Includes 305,555 shares of series A convertible preferred stock and
152,778 shares of common stock held by Oracle Corporation. Mr. Lane is
President and Chief Operating Officer of Oracle Corporation. Mr. Lane
disclaims beneficial ownership of the shares held by Oracle Corporation
except as to the extent of his pecuniary interest, if any. The address of
Mr. Lane is c/o Oracle Corporation, 500 Oracle Parkway, Redwood Shores,
California 94065.
(5) The address of Mr. Raghavendran is c/o InSight Capital Partners, 527
Madison Avenue, 10th Floor, New York, New York 10022. Mr. Raghavendran is
a partner of InSight Capital Partners, and Mr. Raghavendran disclaims
beneficial ownership of the shares held by InSight Capital Partners
except as to the extent of his pecuniary interest.
(6) Consists of 954,129 shares of series A convertible preferred stock and
477,065 shares of common stock held by InSight Capital Partners III,
L.P., 236,355 shares of series A convertible preferred stock and 118,177
shares of common stock held by InSight Capital Partners (Cayman) III,
L.P., and 142,849 shares of series A convertible preferred stock and
71,425 shares of common stock held by InSight Capital Partners III-Co-
Investors, L.P. The address of InSight Capital Partners III, L.P. and
InSight Capital Partners III-Co-Investors, L.P. is 527 Madison Avenue,
10th Floor, New York, New York 10022. The address of InSight Capital
Partners (Cayman) III, L.P. is c/o W.S. Walker & Company, Walker House,
P.O. Box 265GT, Mary Street, George Town, Grand Cayman, Cayman Islands.
(7) Consists of 4,049,055 shares held by the Willingdon Trust, the
beneficiaries of which are Sundar Subramaniam, his sister, Subitha
Subramaniam, and their respective issue. The address of the Willingdon
Trust is Hamilton Trust Company Limited, as Trustee of the Willingdon
Trust, Vallis Building, P.O. Box HM247, Hamilton HM AX, Bermuda.
(8) Consists of 2,290,750 shares held by the Winsor Trust, the beneficiaries
of which include a child of Professor John J. Donovan, and his respective
issue. The address of the Winsor Trust is Butterfield Trust (Bermuda)
Limited, 65 Front Street, Hamilton HM AX, Bermuda.
(9) Consists of 2,290,750 shares held by Internet Business Capital
Corporation Limited, the stockholders of which include trusts for the
benefit of the children of Professor John J. Donovan, and their
respective issue. The address of Internet Business Capital Corporation
Limited is c/o ASK Services Ltd., Cedar House, 41 Cedar Avenue, Hamilton
HM EX, Bermuda.
(10) Consists of 305,555 shares of series A convertible preferred stock and
152,778 shares of common stock. The address of Oracle Corporation is 500
Oracle Parkway, Redwood Shores, California 94065.
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DESCRIPTION OF CAPITAL STOCK
After this offering, our authorized capital stock will consist of
50,000,000 shares of common stock, $0.01 par value per share, and 5,000,000
shares of preferred stock, $0.01 par value per share. As of September 30, 1999,
there were outstanding 11,657,687 shares of common stock held by 83
stockholders of record. In addition, there were outstanding options to purchase
an aggregate of 6,745,062 shares of common stock.
Common Stock
Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any such dividends declared by the board of directors, subject
to any preferential dividend rights of outstanding preferred stock. Upon our
liquidation, dissolution or winding up, the holders of our common stock are
entitled to receive ratably our net assets available after the payment of all
debts and other liabilities and subject to the prior rights of any outstanding
preferred stock. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of common stock are,
and the shares offered by us in this offering will be, when issued and paid
for, fully paid and nonassessable. The rights, preferences and privileges of
holders of our common stock are subject to the rights of the holders of shares
of any series of preferred stock which we may designate and issue in the
future. Some holders of common stock have the right to require us to register
their shares of common stock under the Securities Act in specified
circumstances.
Preferred Stock
Under the terms of the charter, our board of directors will be authorized
to issue such shares of preferred stock in one or more series without
stockholder approval. The board has discretion to determine the rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences of
each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could make it more difficult for a third party to
acquire, or could discourage a third party from acquiring, a majority of our
outstanding voting stock.
Warrants
At September 30, 1999 we had warrants outstanding to purchase an aggregate
of 784,504 shares of our common stock at a weighted average exercise price of
$0.38 per share. Certain holders of warrants are entitled to registration
rights with respect to the shares of common stock issuable upon exercise of the
warrants. See "Shares Eligible for Future Sale--Registration Rights."
Delaware Law and Our Charter and By-law Provisions; Anti-Takeover Effects
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law statute. Section 203 prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the person becomes an interested
stockholder, unless the business combination is approved in a prescribed
manner. A business combination includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an interested stockholder is a person who,
together with affiliates and associates, owns, or within three years did own,
15% or more of the corporation's voting stock.
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Under the by-laws, any vacancy on our board of directors, including a
vacancy resulting from an enlargement of our board of directors, may only be
filled by vote of a majority of the directors then in office, making it more
difficult for a third party to acquire, or discourage a third party from
acquiring, control of our company.
Our by-laws also provide that after this offering, stockholders can only
take action at an annual meeting or special meeting, and not by written action
in lieu of a meeting. Our by-laws further provide that only our chairman of the
board, our president, our board of directors or, on or before October 7, 2000,
stockholders holding a majority of our capital stock issued and outstanding and
entitled to vote, may call a special meeting of stockholders.
Our stockholders must comply with advance notice and information disclosure
requirements in order for any matter to be considered "properly brought" before
a meeting. Stockholders must deliver written notice to us between 60 and 90
days prior to the meeting. If we give less than 70 days' notice or prior public
disclosure of the meeting date, stockholders must deliver written notice to us
within ten days following the date upon which the notice of the meeting was
mailed or such public disclosure was made, whichever occurs first. If the
matter relates to the election of directors, the notice must set forth specific
information regarding each nominee and the nominating stockholder. For any
other matter, the notice must set forth a brief description of the proposed
matter and certain information regarding the proponent stockholder. These
provisions could delay until the next stockholders' meeting proposed actions
which are favored by the holders of a majority of our outstanding voting
securities. These provisions could also discourage a third party from making a
tender offer for our common stock, because even if it acquired a majority of
the outstanding voting securities, the third party would be able to take action
as a stockholder only at a duly called stockholders' meeting, and not by
written consent.
The Delaware General Corporation Law statute provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our by-laws require the affirmative vote of
holders of at least 75% of the votes which all the stockholders would be
entitled to cast in any annual election of directors or class of directors to
amend or repeal any of the provisions described in the prior two paragraphs.
Our certificate of incorporation contains certain provisions permitted
under the Delaware General Corporation Law statute relating to the limitation
of liability of directors. These provisions eliminate a director's liability
for monetary damages for a breach of fiduciary duty, except in certain
circumstances involving wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of law. Further, the certificate of incorporation contains
provisions to indemnify our directors and officers to the fullest extent
permitted by the Delaware General Corporation Law statute. We believe that
these provisions will assist us in attracting and retaining qualified
individuals to serve as our directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Equiserve.
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our securities.
After completion of this offering there will be 18,324,823 shares of common
stock outstanding. Of these shares, the 4,000,000 shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act of 1933, except that any shares purchased by our "affiliates,"
as that term is defined in Rule 144 under the Securities Act, may generally
only be sold in compliance with the limitations of Rule 144 described below.
Sales of Restricted Shares
All of the shares offered under this prospectus will be freely tradable in
the open market. The remaining 14,324,823 shares of common stock that will be
outstanding after this offering will be considered "restricted securities"
under Rule 144 of the Securities Act. Generally, restricted securities that
have been owned for a period of at least two years may be sold immediately
after the completion of this offering, and restricted securities that have been
owned for at least one year may be sold 90 days after the completion of this
offering. Certain of the restricted securities are subject to lock-up
agreements with the underwriters. Persons subject to lock-up agreements have
agreed not to sell shares of our common stock without the prior permission of
FleetBoston Robertson Stephens Inc. for a period of 180 days after the
completion of this offering. The table below sets forth information regarding
potential sales of restricted securities.
. 158,479 shares which are not subject to the 180-day lock-up period may
be sold beginning 90 days after completion of this offering;
. 5,535,789 additional shares may be sold at various times following
expiration of the 180-day lock-up period;
. 4,315,278 additional shares may be sold upon expiration of the one-
year lock-up period described in "Underwriting" for three of our
principal stockholders;
. 2,157,639 additional shares may be sold upon expiration of the two-
year lock-up period described in "Underwriting" for three of our
principal stockholders; and
. 2,157,638 additional shares may be sold upon expiration of the three-
year lock-up period described in "Underwriting" for three of our
principal stockholders.
Options
Shares of common stock may also be issued and sold upon the exercise of
options. After this offering, we intend to register an aggregate of
approximately 11,000,000 shares of common stock, which may be issued under our
1997 Stock Incentive Plan, 1999 Stock Incentive Plan, 1999 Director Stock
Option Plan and 1999 Employee Stock Purchase Plan. Shares issued upon the
exercise of stock options after the effective date of the registration
statements on Form S-8 will be eligible for resale in the public market without
restriction, subject to Rule 144 limitations applicable to affiliates and the
lock-up agreements noted above, if applicable. Upon the expiration of the lock-
up agreements, an additional 2,525,313 shares may be sold as a result of the
exercise of options.
Registration Rights
Upon completion of this offering, holders of approximately 8,700,000 shares
of our common stock and warrants to acquire an aggregate of 784,504 shares of
our common stock have the right to demand that we include the shares of common
stock they hold or acquire upon the exercise of the warrants in any
registration statements we file with the Securities and Exchange Commission,
other than registration statements filed with respect to employee benefit plans
or in connection with an acquisition.
Effect of Sales of Shares
Prior to this offering, there has been no public market for our common
stock, and we cannot advise you as to the effect, if any, that sales in the
public market of shares of our common stock, or the availability of shares for
sale, will have on the market price of our common stock prevailing from time to
time. Nevertheless, sales of significant numbers of shares of our common stock
in the public market could adversely affect the market price of our common
stock and could impair our ability to raise capital.
61
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., SG Cowen Securities Corporation and
SoundView Technology Group, Inc., have severally agreed with us, subject to the
terms and conditions of the underwriting agreement, to purchase from us the
number of shares of common stock set forth opposite their names below. The
underwriters are committed to purchase and pay for all of the shares if any are
purchased.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc. ........................... 2,000,000
SG Cowen Securities Corporation................................ 1,200,000
SoundView Technology Group, Inc. .............................. 800,000
---------
Total........................................................ 4,000,000
=========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
our common stock to the public at the public offering price located on the
cover page of this prospectus and to dealers at that price less a concession of
not in excess of $.67 per share, of which $.10 may be reallowed to other
dealers. After the initial public offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
reduction in this price will change the amount of proceeds to be received by us
as indicated on the cover page of this prospectus.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 600,000 additional shares of common stock to cover over-
allotments, if any, at the same price per share as we will receive for the
4,000,000 shares that the underwriters have agreed to purchase. To the extent
that the underwriters exercise this option, each of the underwriters will have
a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares of common stock to be purchased by
it shown in the above table represents as a percentage of the 4,000,000 shares
offered by this prospectus. If purchased, the additional shares will be sold by
the underwriters on the same terms as those on which the 4,000,000 shares are
being sold. We will be obligated, under this option, to sell shares to the
extent the option is exercised. The underwriters may exercise the option only
to cover over-allotments made in connection with the sale of the 4,000,000
shares of our common stock offered by this prospectus.
The following table shows the per share and total underwriting discounts
and commissions to be paid by us to the underwriters. This information is
presented assuming either no exercise or full exercise by the underwriters of
their over-allotment option.
<TABLE>
<CAPTION>
Without With
Over-allotment Over-allotment
Per Share Option Option
--------- -------------- --------------
<S> <C> <C> <C>
Public offering price.............. $16.00 $64,000,000 $73,600,000
Underwriting discounts and
commissions...................... 1.12 4,480,000 5,152,000
Proceeds, before expenses, to us... 14.88 59,520,000 68,448,000
</TABLE>
The expenses of the offering, other than underwriting discounts and
commissions, payable by us are estimated at $1,000,000. FleetBoston Robertson
Stephens Inc. expects to deliver the shares of common stock to purchasers on
December 22, 1999.
62
<PAGE>
Directed Share Program. The underwriters have reserved approximately
225,000 shares of the common stock to be issued by us and offered for sale in
this offering, at the initial public offering price, to directors, officers,
employees, business associates and persons otherwise connected to C-bridge. The
number of shares of common stock available for sale to the general public will
be reduced to the extent these individuals purchase reserved shares. Any
reserved shares which are not purchased will be offered by the underwriters to
the general public on the same basis as the other shares offered in this
offering.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including
liabilities under the Securities Act, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Agreements Not to Sell Shares. Three of our principal stockholders, which
hold, in the aggregate, 8,630,555 shares of common stock, have agreed, subject
to limited exceptions, not to offer to sell, contract to sell, or otherwise
sell, dispose of, loan, pledge or grant any rights with respect to any shares
of common stock or any options or warrants to purchase any shares of common
stock, or any securities convertible into or exchangeable for shares of common
stock owned as of the date of this prospectus or later acquired directly by
such holders or with respect to which they have the power of disposition,
without the prior written consent of FleetBoston Robertson Stephens Inc., for a
period of one year from the date of this prospectus with respect to 100% of
their shares of common stock, for a period of two years from the date of this
prospectus with respect to 50% of their shares of common stock, and for a
period of three years from the date of this prospectus with respect to 25% of
their shares of common stock. The holders of a total of 14,166,344 shares of
common stock, including our executive officers and directors, the principal
stockholders described above and other stockholders, have agreed, during the
period ending 180 days after the date of this prospectus, subject to limited
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of common stock
or any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock owned as
of the date of this prospectus or later acquired directly by such holders or
with respect to which they have the power of disposition, without the prior
written consent of FleetBoston Robertson Stephens Inc. However, FleetBoston
Robertson Stephens Inc. may, in its sole discretion and at any time without
notice, release all or any portion of securities subject to these agreements
not to sell shares. There are no existing agreements between the
representatives of the underwriters and any of our stockholders providing
consent to the sale of shares prior to the expiration of the respective
periods.
Future Sales by Us. In addition, we have agreed that during the 180 days
after the date of this prospectus, we will not, without the prior written
consent of FleetBoston Robertson Stephens Inc., subject to certain exceptions,
(a) consent to the disposition of any shares held by stockholders subject to
agreements not to sell shares prior to the expiration of the respective periods
or (b) issue, sell, contract to sell, or otherwise dispose of, any shares of
common stock, any options to purchase any shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares of
common stock other than our sale of shares in this offering, the issuance of
common stock upon the exercise of outstanding options, and the issuance of
options under existing stock option and incentive plans, provided such options
do not vest prior to the expiration of the 180-day period. See "Shares Eligible
for Future Sale."
Internet Distribution. E*TRADE will make the preliminary prospectus
available on its web site when it becomes available. E*TRADE will not solicit
conditional offers until two business days before the expected effective date
of an offering. If the effective date of the offering is delayed beyond two
business days, E*TRADE would allow, consistent with the Wit Capital no-action
letter, that any conditional offer received from a customer remain valid for
five business days from the date it was submitted.
E*TRADE will provide customers a period after effectiveness and pricing
during which they will continue to have the right to cancel their conditional
offers. This period will be until 8 p.m. e.s.t. (but in no event less than two
hours after E*TRADE notifies its customers of effectiveness and pricing) in the
usual situation where the offering becomes effective and prices after the close
of trading. If the offering becomes effective and prices prior to or during the
trading day, the period will be one hour after E*TRADE notifies its customers
of effectiveness and pricing.
63
<PAGE>
If an offering prices outside the expected price range indicated in the
preliminary prospectus or the price range for an offering changes, E*TRADE will
either (i) cancel its existing book of conditional offers and re-solicit new
conditional offers or (ii) require customers to reconfirm their existing
conditional offers as a condition to participating in the offering.
Listing. Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol "CBIS."
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock offered by this prospectus has been determined through
negotiations among us and the representatives. Among the factors considered in
these negotiations were prevailing market conditions, our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.
Stabilization. The representatives have advised us that, under Regulation M
under the Securities and Exchange Act of 1934, some participants in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of our common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for or the purchase
of the common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with this offering. A "penalty bid"
is an arrangement permitting the representatives to reclaim the selling
concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the common stock originally sold by the
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised us that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. An investment fund for
the benefit of partners at Hale and Dorr holds in the aggregate 6,667 shares of
series A convertible preferred stock, which will automatically convert into
6,667 shares of common stock upon the completion of this offering. Legal
matters in connection with this offering will be passed upon for the
underwriters by Foley, Hoag & Eliot LLP, Boston, Massachusetts.
EXPERTS
The audited consolidated financial statements and schedules 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.
64
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 (including its exhibits
and schedules) with the Securities and Exchange Commission under the Securities
Act with respect to our common stock to be sold in this offering. This
prospectus, which is a part of the registration statement, contains all of the
material information relating to this offering. With respect to references made
in this prospectus to any contract, agreement or other document of C-bridge,
such references are not necessarily complete and you should refer to the
exhibits attached to the registration statement for copies of the actual
contract, agreement or other document. You may review a copy of the
registration statement, including exhibits, at the Securities and Exchange
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC
located at Seven World Trade Center, 13th Floor, New York, New York 10048 or at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Please call 1-800-SEC-0330 for further information about the operation of the
public reference rooms. The registration statement and our other Securities and
Exchange Commission filings can also be reviewed by accessing the Securities
and Exchange Commission's Internet site at http://www.sec.gov, which contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission.
After we have filed this registration statement, we will file annual,
quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any reports,
statements or other information on file at the public reference rooms. You can
also request copies of these documents, for a copying fee, by writing to the
Securities and Exchange Commission.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.
65
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and September
30, 1999................................................................ F-3
Consolidated Statements of Operations for the Period from Inception
(October 31, 1996) to December 31, 1996, for the Years Ended December
31, 1997 and 1998 and for the Nine Months Ended September 30, 1998 and
1999.................................................................... F-4
Consolidated Statements of Stockholders' Deficit for the Period from
Inception (October 31, 1996) through September 30, 1999................. F-5
Consolidated Statements of Cash Flows for the Period from Inception
(October 31, 1996) to December 31, 1996, for the Years Ended December
31, 1997 and 1998 and for the Nine Months Ended September 30, 1998 and
1999.................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To C-bridge Internet Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of C-bridge
Internet Solutions, Inc. (a Delaware corporation) and subsidiary as of December
31, 1997 and 1998 and September 30, 1999, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the period
from inception (October 31, 1996) to December 31, 1996, for the years ended
December 31, 1997 and 1998 and for the nine months ended September 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of C-bridge Internet Solutions, Inc. and subsidiary as of December 31, 1997 and
1998 and September 30, 1999, and the results of its operations and its cash
flows for the period from inception (October 31, 1996) to December 31, 1996,
for the years ended December 31, 1997 and 1998 and for the nine months ended
September 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
-------------------------------------
Boston, Massachusetts
October 28, 1999 (except for the matters discussed in Note 13, as to which the
date is November 9, 1999)
F-2
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
1997 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................. $ 30,699 $ 190,409 $ 3,892
Accounts receivable, net of allowance
of $16,726, $30,502 and $63,844 at
December 31, 1997 and 1998 and
September 30, 1999, respectively... 871,832 732,765 2,842,402
Unbilled receivables................. 217,509 451,586 1,674,587
Other current assets................. 168,235 13,733 70,831
----------- ----------- -----------
Total current assets................... 1,288,275 1,388,493 4,591,712
----------- ----------- -----------
Property and equipment, at cost:
Computer equipment................... 578,491 714,463 1,262,489
Furniture and fixtures............... 5,644 14,044 200,034
Computer software.................... -- 40,779 126,378
Leasehold improvements............... -- -- 40,182
----------- ----------- -----------
584,135 769,286 1,629,083
Less--Accumulated depreciation....... 75,871 226,018 507,586
----------- ----------- -----------
508,264 543,268 1,121,497
----------- ----------- -----------
Deferred financing costs............... -- -- 145,000
----------- ----------- -----------
Total assets........................... $ 1,796,539 $ 1,931,761 $ 5,858,209
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Lines of credit...................... $ -- $ 2,615,539 $ 1,448,889
Current portion of capital lease
obligations........................ -- 117,716 191,485
Accounts payable..................... 467,270 365,473 546,807
Accrued liabilities.................. 306,039 979,337 2,382,520
Deferred revenue..................... 192,959 377,107 1,600,031
Current portion of due to
affiliates......................... 450,000 120,610 233,397
----------- ----------- -----------
Total current liabilities.............. 1,416,268 4,575,782 6,403,129
----------- ----------- -----------
Long-term liabilities:
Capital lease obligations, less
current portion.................... -- 176,575 125,816
Due to affiliates, less current
portion............................ 1,755,390 -- --
----------- ----------- -----------
Total liabilities...................... 3,171,658 4,752,357 6,528,945
----------- ----------- -----------
Commitments and contingencies (Note 5)
Stockholders' deficit:
Preferred stock, $0.01 par value--
Authorized--5,000,000 shares
Issued and outstanding--None........ -- -- --
Common stock, $0.01 par value--
Authorized--30,000,000 shares
Issued--10,000,000, 10,719,969 and
12,167,687 shares at December 31,
1997 and 1998 and September 30,
1999, respectively.................. 100,000 107,200 121,677
Additional paid-in capital........... 32,054 2,685,333 14,274,967
Notes receivable for issuance of
common stock....................... -- (84,000) (84,000)
Deferred compensation................ -- -- (6,523,543)
Accumulated deficit.................. (1,507,173) (5,376,129) (8,306,837)
Treasury stock, at cost--510,000
shares............................. -- (153,000) (153,000)
----------- ----------- -----------
Total stockholders' deficit............ (1,375,119) (2,820,596) (670,736)
----------- ----------- -----------
$ 1,796,539 $ 1,931,761 $ 5,858,209
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
From
Inception For the Nine Months
(October 31, For the Years Ended Ended
1996) to December 31, September 30,
December 31, ------------------------ ------------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues:
Professional
services............ $ -- $ 3,169,183 $ 5,047,474 $ 3,208,416 $11,342,538
Educational
services............ -- -- -- -- 2,495,627
---------- ----------- ----------- ----------- -----------
Total net
revenues......... -- 3,169,183 5,047,474 3,208,416 13,838,165
---------- ----------- ----------- ----------- -----------
Costs and expenses:
Direct costs of
professional
services (exclusive
of noncash
compensation
expense presented
below).............. 49,641 2,234,598 4,974,586 3,528,074 6,456,562
Direct costs of
educational
services (exclusive
of noncash
compensation
expense presented
below).............. -- -- -- -- 1,142,283
Selling and marketing
(exclusive of
noncash
compensation
expense presented
below).............. 3,414 327,553 1,530,140 1,224,854 1,884,550
General and
administrative
(exclusive of
noncash
compensation
expense presented
below).............. 140,439 1,797,185 2,108,663 1,654,625 4,720,717
Compensation expense
related to stock
options and
warrants............ -- 27,984 74,068 57,014 2,752,079
---------- ----------- ----------- ----------- -----------
Total operating
expenses......... 193,494 4,387,320 8,687,457 6,464,567 16,956,191
---------- ----------- ----------- ----------- -----------
Loss from
operations....... (193,494) (1,218,137) (3,639,983) (3,256,151) (3,118,026)
Interest expense........ -- (5,440) (244,370) (171,635) (165,367)
Interest income......... -- 8,221 2,433 2,433 --
Other income (expense).. -- 677 12,964 4,027 352,685
---------- ----------- ----------- ----------- -----------
Net loss................ $ (193,494) $(1,214,679) $(3,868,956) $(3,421,326) $(2,930,708)
========== =========== =========== =========== ===========
Basic and diluted net
loss per share (Note
2(g))................. $ (0.02) $ (0.12) $ (0.39) $ (0.35) $ (0.27)
========== =========== =========== =========== ===========
Basic and diluted
weighted average
shares outstanding.... 10,000,000 10,000,000 9,991,529 9,911,660 10,713,089
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Notes
Common Stock Receivable Treasury Stock
------------------- Additional for Issuance ------------------- Total
Number of $.01 Par Paid-in of Common Deferred Accumulated Number Stockholders'
Shares Value Capital Stock Compensation Deficit of Shares Amount Deficit
---------- -------- ----------- ------------ ------------ ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial issuance
of common
stock........... 10,000,000 $100,000 $ -- $ -- $ -- $ (99,000) -- $ -- $ 1,000
Net loss........ -- -- -- -- -- (193,494) -- -- (193,494)
---------- -------- ----------- -------- ----------- ----------- ------- --------- -----------
Balance, December
31, 1996........ 10,000,000 100,000 -- -- -- (292,494) -- -- (192,494)
Issuance of
warrants for
financing...... -- -- 4,070 -- -- -- -- -- 4,070
Issuance of
stock options
to
nonemployees... -- -- 27,984 -- -- -- -- -- 27,984
Net loss........ -- -- -- -- -- (1,214,679) -- -- (1,214,679)
---------- -------- ----------- -------- ----------- ----------- ------- --------- -----------
Balance, December
31, 1997........ 10,000,000 100,000 32,054 -- -- (1,507,173) -- -- (1,375,119)
Issuance of
common stock
for notes
receivable..... 280,000 2,800 81,200 (84,000) -- -- -- -- --
Compensation
expense
associated with
issuance of
common stock
for notes
receivable..... -- -- 43,098 -- -- -- -- -- 43,098
Issuance of
common stock
for services
rendered....... 45,000 450 13,050 -- -- -- -- -- 13,500
Exercise of
stock options.. 193,038 1,931 6,814 -- -- -- -- -- 8,745
Purchase of
treasury
stock.......... -- -- -- -- -- -- 510,000 (153,000) (153,000)
Issuance of
common stock on
conversion of
bridge
financing...... 201,931 2,019 58,560 -- -- -- -- -- 60,579
Issuance of
warrants for
financing...... -- -- 99,018 -- -- -- -- -- 99,018
Issuance of a
warrant in
connection with
joint venture.. -- -- 22,703 -- -- -- -- -- 22,703
Issuance of
stock options
to
nonemployees... -- -- 17,470 -- -- -- -- -- 17,470
Forgiveness of
debt to
affiliates..... -- -- 2,311,366 -- -- -- -- -- 2,311,366
Net loss........ -- -- -- -- -- (3,868,956) -- -- (3,868,956)
---------- -------- ----------- -------- ----------- ----------- ------- --------- -----------
Balance, December
31, 1998........ 10,719,969 107,200 2,685,333 (84,000) -- (5,376,129) 510,000 (153,000) (2,820,596)
Sale of common
stock ......... 333,333 3,333 1,996,667 -- -- -- -- -- 2,000,000
Exercise of
stock options
............... 1,114,385 11,144 317,345 -- -- -- -- -- 328,489
Compensation
expense
associated with
warrants....... -- -- 660,000 -- -- -- -- -- 660,000
Deferred
compensation
related to the
issuance
of stock
options to
employees and
nonemployees... -- -- 8,615,622 -- (8,615,622) -- -- -- --
Amortization of
deferred
compensation... -- -- -- -- 2,092,079 -- -- -- 2,092,079
Net loss ....... -- -- -- -- -- (2,930,708) -- -- (2,930,708)
---------- -------- ----------- -------- ----------- ----------- ------- --------- -----------
Balance,
September 30,
1999 ........... 12,167,687 $121,677 $14,274,967 $(84,000) $(6,523,543) $(8,306,837) 510,000 $(153,000) $ (670,736)
========== ======== =========== ======== =========== =========== ======= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
(October 31, For the Years Ended For the Nine Months
1996) to December 31, Ended September 30,
December 31, ------------------------ ------------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating
activities:
Net loss............. $(193,494) $(1,214,679) $(3,868,956) $(3,421,326) $(2,930,708)
Adjustments to
reconcile net loss
to net cash used in
operating
activities--
Depreciation and
amortization...... -- 75,871 249,738 65,832 281,568
Noncash stock based
compensation...... -- 27,984 74,068 57,014 2,752,079
Noncash interest
expense related to
warrants.......... -- 4,070 121,721 121,721 --
Repayment of debt by
third party....... -- -- -- (348,000)
Changes in current
assets and
liabilities--
Accounts
receivable....... -- (871,832) 139,067 (247,784) (2,109,637)
Unbilled
receivables...... -- (217,509) (234,077) (264,995) (1,223,001)
Other current
assets........... -- (168,235) 154,502 (26,915) (57,098)
Accounts payable... -- 467,270 (101,797) 125,498 181,334
Accrued
liabilities...... -- 306,039 598,649 579,948 1,403,183
Deferred revenue... -- 192,959 184,148 249,262 1,222,924
--------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities..... (193,494) (1,398,062) (2,682,937) (2,761,745) (827,356)
--------- ----------- ----------- ----------- -----------
Cash flows from
investing
activities:
Purchases of property
and equipment...... -- (584,135) (191,400) (160,383) (526,951)
--------- ----------- ----------- ----------- -----------
Cash flows from
financing
activities:
Net proceeds
(repayments) on
line of credit
loans.............. -- -- 2,615,539 2,398,539 (927,650)
Proceeds from
issuance of bridge
loans.............. -- -- 248,600 248,600 --
Payments on bridge
loans.............. -- -- (193,750) (162,500) --
Loans from
affiliates......... 192,494 2,012,896 1,214,586 1,160,507 --
Repayment of loans
from affiliates.... -- -- (988,000) (988,000) (11,610)
Proceeds from sale
lease back
transaction........ -- -- 337,036 337,036 --
Payments on capital
lease obligation... -- -- (55,709) (33,124) (76,439)
Loan to employee..... -- -- (153,000) -- --
Proceeds from
issuance of common
stock.............. 1,000 -- -- -- 2,000,000
Proceeds from
exercise of stock
options............ -- -- 8,745 2,876 328,489
Deferred financing
costs.............. -- -- -- -- (145,000)
--------- ----------- ----------- ----------- -----------
Net cash provided
by financing
activities..... 193,494 2,012,896 3,034,047 2,963,934 1,167,790
--------- ----------- ----------- ----------- -----------
Net increase
(decrease) in cash.. -- 30,699 159,710 41,806 (186,517)
Cash, beginning of
period.............. -- -- 30,699 30,699 190,409
--------- ----------- ----------- ----------- -----------
Cash, end of period... $ -- $ 30,699 $ 190,409 $ 72,505 $ 3,892
========= =========== =========== =========== ===========
Supplemental
disclosure of
noncash financing
activities:
Issuance of common
stock for notes
receivable......... $ -- $ -- $ 84,000 $ 84,000 $ --
========= =========== =========== =========== ===========
Assets acquired under
capital lease...... $ -- $ -- $ -- $ -- $ 99,449
========= =========== =========== =========== ===========
Assets acquired in
connection with
outsourcing
agreement.......... $ -- $ -- $ -- $ -- $ 233,397
========= =========== =========== =========== ===========
Purchase of treasury
stock by forgiving
loan to employee... $ -- $ -- $ 153,000 $ 153,000 $ --
========= =========== =========== ===========
Conversion of bridge
financing and
related interest to
common stock....... $ -- $ -- $ 60,579 $ 60,579 $ --
========= =========== =========== =========== ===========
Forgiveness of debt
due to affiliates.. $ -- $ -- $ 2,311,366 $ 2,311,366 $ --
========= =========== =========== =========== ===========
Supplemental
disclosure of cash
flow information:
Cash paid during the
period for
interest........... $ -- $ -- $ 93,095 $ 58,846 $ 145,169
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(including data applicable to unaudited period)
(1) Operations
C-bridge Internet Solutions, Inc. and Subsidiary (the Company) is a full
service provider of eBusiness solutions that help companies create strategic
business solutions through the use of Internet technologies. In May 1999, the
Company began offering eBusiness educational services. The Company was
incorporated in Delaware on October 31, 1996.
The Company is subject to risks common to rapidly growing technology-based
companies, including a limited operating history, dependence on key personnel,
the need to raise capital, rapid technological change, competition from larger
service providers, and the need for successful development and marketing of
services.
(2) Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the application
of the following significant accounting policies, as discussed below and
elsewhere in the notes to the consolidated financial statements.
(a) Management's 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.
(b) Principles of Consolidation
In August 1998, the Company formed a wholly owned subsidiary, C-bridge
Packaged Solutions, Inc. (the Subsidiary). These consolidated financial
statements include the accounts of the Company and the subsidiary. All
significant intercompany transactions have been eliminated in consolidation.
(c) Revenue Recognition
The Company generates revenue from eBusiness consulting and education
services. Revenues from consulting contracts are recognized on a time and
material or percentage-of-completion basis depending upon the contract with the
customer. Revenues related to time and material consulting contracts are
recognized when the services are performed. Revenues related to fixed price
consulting contracts are recognized based on the percent of the cost incurred
compared to the total estimated cost to complete the project. The cumulative
impact of any revisions in estimates are reflected in the period in which they
become known. If a consulting contract is estimated to result in a loss, the
loss is recorded immediately. Net revenues exclude reimbursable expenses
charged to customers.
Revenues from educational services are recognized based upon the management
and performance of educational services. The Company recognizes revenue based
upon the performance of services under a five-year outsourcing agreement with a
third party. In accordance with the outsourcing agreement, the Company manages
and performs executive education in exchange for a monthly fee of approximately
$479,000 per month. The Company records such fee as revenue ratably over the
contract term. Costs incurred in performing such services are expensed as
incurred. See Note 10 for further discussion of the outsourcing agreement.
Unbilled receivables represents services that have been performed but have
not yet been billed. Unbilled receivables also includes reimbursable expenses.
Deferred revenues represent amounts billed or paid in advance of revenues
recognized.
F-7
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
(d) Depreciation and Amortization
The Company provides for depreciation and amortization using the straight-
line method, by charges to operations in amounts estimated to allocate the cost
of property and equipment over their estimated useful lives, as follows:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
- -------------------- -------------
<S> <C>
Computer equipment............................................... 3 years
Furniture and fixtures........................................... 3 years
Computer software................................................ 3 years
Leasehold improvements........................................... Life of lease
</TABLE>
The Company has assets under capital leases of $350,000 and $421,626 as of
December 31, 1998 and September 30, 1999, respectively. There were no assets
under capital leases as of December 31, 1997. Accumulated depreciation related
to these assets is $48,611 and $136,111 as of December 31, 1998 and September
30, 1999, respectively.
(e) Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk consist of
cash and accounts receivable. The Company maintains the majority of its cash
balances with financial institutions. Concentrations of credit risk with
respect to accounts receivable is limited to certain customers to whom the
Company makes substantial sales. To reduce risk, the Company routinely assesses
the financial strength of its customers and, as a consequence, believes that
its accounts receivable credit risk exposure is limited. The Company operates
in two industry segments and derives substantially all of its revenues from
U.S. customers.
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenues and accounts receivable for the
periods presented:
<TABLE>
<CAPTION>
Years Ended
December Nine Months
31, Ended
------------- September 30,
1997 1998 1999
----- ----- -------------
<S> <C> <C> <C>
Revenue--
Customer A..................................... 28% 10% *
Customer B..................................... 12% * *
Customer C..................................... 11% * *
Customer D..................................... * 25% 24%
Customer E..................................... * 16% *
Customer F..................................... * * 18%
Customer G..................................... * * 12%
Customer I..................................... * * 18%
</TABLE>
F-8
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
<TABLE>
<CAPTION>
December
31,
---------- September 30,
1997 1998 1999
---- ---- -------------
<S> <C> <C> <C>
Accounts Receivable--
Customer A........................................... 32% * *
Customer D........................................... * * 18%
Customer E........................................... * 29% *
Customer F........................................... * 16% 19%
Customer H........................................... * 33% *
Customer I........................................... 19% * *
Customer J........................................... 10% * *
</TABLE>
- --------
* Less than 10%
(f) Interim Financial Statements
The accompanying consolidated statements of operations and cash flows for
the nine months ended September 30, 1998 are unaudited, but, in the opinion of
management, include all adjustments (consisting only of normal, recurring
adjustments) necessary for a fair presentation of results for this interim
period.
(g) Net Loss Per Share
Basic net loss per common share is computed using the weighted average
number of shares of common stock outstanding during the period. Diluted net
loss per common share is the same as basic net loss per common share, since the
effects of the Company's potentially dilutive securities are antidilutive. In
accordance with Staff Accounting Bulletin No. 98, the Company has determined
that there was no nominal issuance of common stock or potential common stock in
the period prior to the Company's planned IPO. Antidilutive securities, which
consist of options and warrants to purchase common stock that are not included
in diluted net loss per share, were 1,653,010, 8,308,138, 7,831,192 and
7,529,566 as of December 31, 1997 and 1998 and September 30, 1998 and 1999,
respectively. There were no antidilutive securities as of December 31, 1996.
(h) Stock-Based Compensation for Employees
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 defines a fair-
value-based method of accounting for employee stock options and other stock-
based compensation. Compensation expense related to employee stock based
compensation arising from this method of accounting can be reflected in the
financial statements or, alternatively, the pro forma net loss and loss per
share effect of the fair-value-based accounting can be disclosed in the
financial footnotes. The Company has adopted the disclosure-only alternative
(see Note 7(e)).
(i) Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income, which is effective for the Company's
fiscal year ended December 31, 1998. Under SFAS No. 130, companies are required
to report comprehensive income as a measure of overall performance.
Comprehensive income includes all changes in equity during a period, except
those resulting from investments by owners and distributions to owners. For the
periods ended December 31, 1996, 1997 and 1998 and for the nine months ended
September 30, 1998 and 1999, the Company's comprehensive loss is the same as
its reported net loss.
F-9
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
(j) Fair Value of Financial Instruments
Financial instruments consist principally of cash, accounts receivable,
accounts payable and debt. The estimated fair value of these instruments
approximates their carrying value.
(k) New Accounting Standard
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to
have a material impact on the Company's consolidated financial statements.
(3) Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Accrued payroll and other related employee
benefits.................................... $145,968 $204,416 $1,281,121
Other accrued liabilities..................... 160,071 774,921 1,101,399
-------- -------- ----------
$306,039 $979,337 $2,382,520
======== ======== ==========
</TABLE>
(4) Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with the provisions of SFAS No. 109, Accounting for Income Taxes,
whereby a deferred tax asset or liability is measured by enacted tax rates that
will be in effect when any differences between the financial statement and tax
bases of assets and liabilities reverse.
The approximate tax effect of each type of temporary difference and
carryforward as of December 31, 1997 and 1998 and September 30, 1999,
respectively, is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1997 1998 1999
--------- ----------- -------------
<S> <C> <C> <C>
Net operating loss carryforwards.......... $ 486,019 $ 1,036,697 $ 1,059,372
Depreciation.............................. (16,363) (6,119) 46,389
Other..................................... 62,805 59,080 56,617
--------- ----------- -----------
532,461 1,089,658 1,162,378
Less--Valuation allowance................. (532,461) (1,089,658) (1,162,378)
--------- ----------- -----------
$ -- $ -- $ --
========= =========== ===========
</TABLE>
The Company has not given recognition to any of its potential tax benefits,
consisting primarily of its net operating loss carryforward, in the
accompanying consolidated financial statements as it is more likely than not
that these benefits will not be realizable in future years' tax returns.
F-10
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
At December 31, 1997 and 1998, and September 30, 1999, the Company had
available a net operating loss carryforward of approximately $1,207,000,
$2,574,000 and $2,631,000, respectively, which expires through 2019. This
carryforward is subject to review and possible adjustment by the Internal
Revenue Service. The Internal Revenue Code (IRC) contains provisions that may
limit the Company's use of the carryforward in the event there are significant
changes in the ownership, as defined in Section 382 of the IRC.
(5) Commitments and Contingencies
(a) Capital Leases
In July 1998, the Company entered into a sale/leaseback transaction,
whereby the Company sold existing fixed assets (primarily computer equipment)
with a net book value of approximately $250,000 to a leasing company for
$350,000. The Company then leased the fixed assets from the leasing company
under a three-year capital lease arrangement. The gain of approximately
$100,000 was deferred and is being amortized to income over the term of the
lease.
As of September 30, 1999, payments due pursuant to capital lease
obligations are approximately as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
- ------------------------ --------
<S> <C>
1999 (October 1, 1999-December 31, 1999 only)....................... $ 42,562
2000................................................................ 170,246
2001................................................................ 151,108
--------
363,916
Less--Amount representing interest.................................... 46,615
--------
Present value of net minimum lease payments........................ 317,301
Less--Current portion................................................. 191,485
--------
Long-term portion.................................................. $125,816
========
</TABLE>
(b) Operating Leases
From October 1996 to April 1999, the Company leased certain office space
and equipment from a related party, Cambridge Technology Group, under month-to-
month operating lease agreements. Included in the accompanying consolidated
statements of operations for the years ended December 31, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 is rent expense of
approximately $93,000, $251,000, $187,000 and $156,000, respectively, related
to this lease. There was no rent expense for the period from inception (October
31, 1996) to December 31, 1996.
On May 1, 1999, the Company entered into a five-year operating lease
agreement for its principal office space from Property Management Partners,
Inc. (PMP), a corporation controlled by a former employee of Cambridge
Technology Group. Aside from the monthly base rent, a one-time sum of
$1,375,000 is to be paid to the lessor on January 3, 2000. This amount is to be
used for certain capital improvements or material repairs as needed. The
Company is amortizing this one-time charge to operations over the term.
Concurrent with the operating lease, the Company entered into a five-year
facilities management agreement with PMP. Monthly payments of $23,333 are to be
paid for the management, operations and maintenance of the leased facilities.
The Company believes these transactions are at arms-length.
F-11
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
The approximate future minimum annual rent and management fees due under
the operating lease agreement as of September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Total
- ------------------------ ----------
<S> <C>
1999 (October 1, 1999-December 31, 1999 only)..................... $ 248,000
2000.............................................................. 898,000
2001.............................................................. 878,000
2002.............................................................. 888,000
2003.............................................................. 895,000
Thereafter........................................................ 300,000
----------
$4,107,000
==========
</TABLE>
(c) Litigation
In the ordinary course of business, the Company is party to various types
of litigation. The Company believes it has meritorious defenses to all claims
and, in its opinion, all litigation currently pending or threatening will not
have a material adverse effect on the Company's consolidated financial position
or consolidated results of operations.
(6) Debt Obligations
(a) Due to Affiliates
During 1997 and 1998, the Company was financed by advances from parties
affiliated with the Company. These affiliates consist of Cambridge Technology
Group and trusts which are significant stockholders of the Company. Amounts due
to these affiliates, which consisted primarily of working capital advances,
general and administrative allocations, and operating expenses, were
approximately $2,205,000 in 1997 and $1,094,000 in 1998. During March and May
of 1998, the Company entered into agreements with the affiliated parties to
formally forgive $2,311,366 of the amounts due. The Company recorded the
forgiveness as a capital contribution, as reflected in the accompanying
consolidated financial statements. The remaining $988,000 was repaid in 1998.
The amount due to affiliate as of September 30, 1999 relates to the
outsourcing agreement described in Note 10.
(b) Line of Credit
During 1998, the Company entered into a $1,500,000 revolving line of credit
with a bank secured by substantially all business assets and guaranteed by
major stockholders of the Company. Interest was at the bank's prime rate (8.25%
at September 30, 1999) plus 1%. In July 1998, the Company extended the existing
line of credit from $1,500,000 to $2,000,000, also guaranteed by the same major
stockholders of the Company. In September 1998, the Company secured a line of
credit with a different bank, paying down and terminating the original bank
debt.
Under the new line of credit, the Company may draw up to $3,500,000 based
on certain terms and conditions. Of the total amount available under the line
of credit, $1,000,000 is collateralized by assets of the Company and $2,500,000
is guaranteed by a major stockholder of the Company and a trust for the benefit
of a major stockholder of the Company. A warrant to purchase 65,000 shares of
common stock was issued to the bank in connection with the new line of credit
(see Note 7(f)). Borrowings under the line of credit bear interest
F-12
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
at prime (8.25% at September 30, 1999) plus 1%. At December 31, 1998 and
September 30, 1999, loans of $2,200,000 and $1,260,000, respectively, were
outstanding under the line and $300,000 and $1,240,000, respectively, was
available under the line based on the terms and conditions of the borrowing
base. The line expires in December 1999. The Company and the guarantors are
subject to certain restrictive covenants in connection with the line of credit.
The Company and the guarantors were in compliance with these covenants at
December 31, 1998 and September 30, 1999.
On April 7, 1999, the Company entered into a loan modification of its
$3,500,000 line of credit in order that the Company would be able to draw upon
a committed equipment line of credit (Equipment Line) up to $200,000. The
Equipment Line is to be used to purchase or refinance certain operating
equipment, as defined. The Equipment Line bears interest at the bank's prime
rate (8.25% at September 30, 1999) plus 1.5% and is secured by the same
guarantees as the original line of credit. Under the Equipment Line, amounts
borrowed between January and June 1999 are to be paid back over a 36-month
period beginning July 5, 1999 and amounts borrowed between July and December
1999 are to be paid back over a 36-month period beginning January 5, 2000.
Borrowings under the Equipment Line need to be in compliance with certain
financial covenants. At September 30, 1999, $188,889 was outstanding under the
Equipment Line.
In September 1998, the Subsidiary obtained a $2,000,000 line of credit with
a bank collateralized by a letter of credit issued by a third-party joint
venture partner (see Note 8). A warrant, recorded at fair value, was issued to
this third party in connection with the letter of credit (see Note 7(f)).
Borrowings under this line of credit bear interest at prime (8.25% at September
30, 1999). At December 31, 1998, and September 30, 1999, $415,539 and $0,
respectively, was outstanding under this line. As discussed in Note 8, the
joint venture was dissolved, the Subsidiary's line of credit was paid down and
the line of credit and warrant were terminated.
(c) Bridge Loans Payable
In May 1998, the Company entered into short-term financing agreements with
three investors totaling approximately $248,000. Interest on the notes was at
prime (7.75% at December 31, 1998) plus 1%. The terms were for 90 days and
included issuance of warrants, which were recorded at fair value (see Note
7(f)). One party, representing approximately $148,000 of this amount, is a
related party. On August 3, 1998, the due date of the bridge loans was extended
from July 29, 1998 to September 21, 1998. Additional warrants were issued in
connection with the extension (see Note 7 (f)). In late September 1998,
approximately $194,000 of the total amount was paid in full and the remaining
amount due, $54,000 along with related accrued interest, was converted into
approximately 202,000 shares of common stock at $.30 per share.
(7) Stockholders' Deficit
(a) Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock with a $.01
par value. No shares have been issued as of December 31, 1998 or September 30,
1999, and no terms for voting, conversion, dividends, liquidation preference or
redemption have been set by the Board of Directors.
(b) Reserved Common Stock
The Company has reserved 8,308,138 and 7,529,566 shares of common stock to
be issued upon exercise of stock options and warrants as of December 31, 1998
and September 30, 1999, respectively.
(c) Stock Split
On April 3, 1997, the Company's Board of Directors approved a ten thousand-
for-one stock split of its common stock. All share and per share amounts of
common stock for all periods presented reflect the stock split.
F-13
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
(d) Notes Receivable for Issuance of Common Stock
In May 1998, in connection with the employment of an employee, the Company
issued 280,000 shares of common stock to a party related to the employee in
exchange for a note receivable in the amount of $84,000. The Company accounted
for this transaction as a variable stock award and recorded a compensation
charge of $43,098 in the accompanying consolidated statement of operations for
the year ended December 31, 1998. On January 1, 1999, the Company received full
recourse rights for this note receivable thereby fixing the measurement date.
No additional compensation was required to be recorded. This note is due on May
20, 2002 and bears interest at 5.7%. In addition to full recourse rights, the
loan is collateralized by the 280,000 shares of common stock.
(e) Stock Option Plans
1997 Stock Incentive Plan
In 1997, the Company implemented a Stock Incentive Plan (the 1997 Plan),
pursuant to which 4,000,000 shares of common stock have been reserved for stock
options, stock grants and other stock-based awards. Issuances under the 1997
Plan generally expire ten years from issue date. Under the 1997 Plan, the
Company may grant both incentive stock options and nonstatutory options, as
well as award or sell shares of common stock to employees, directors or
consultants of the Company. All option grants, prices and vesting periods are
determined by the Board of Directors. All options issued prior to March 1998
generally vest monthly. All options issued after March 1998 generally vest
semiannually. However, certain option grants contain provisions to accelerate
vesting upon defined events. Full vesting of all options occurs four years
after date of issuance. As of September 30, 1999, there are 164,265 shares
available for future grants under the 1997 plan.
1999 Stock Incentive Plan
In February 1999, the Board of Directors approved the 1999 Stock Incentive
Plan (the 1999 Plan), pursuant to which 6,000,000 shares of common stock have
been reserved for stock options, stock grants and other stock-based awards. The
number of shares of common stock made available and reserved shall
automatically increase by 500,000 shares effective on the first day of every
calendar year for the next 10 years. Issuances under the 1999 Plan generally
expire ten years from issue date. Under the 1999 Plan, the Company may grant
both incentive stock options and nonstatutory options, as well as award or sell
shares of common stock to employees, directors or consultants of the Company.
All option grants, prices and vesting are determined by the Board of Directors.
All options generally vest semiannually from date of grant. However, certain
option grants contain provisions to accelerate vesting upon defined events.
Full vesting of all options occurs four years after date of issuance. As of
September 30, 1999, there are 1,783,250 shares available for future grants
under the 1999 Plan.
F-14
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
Stock option activity under both the 1997 and 1999 plans is summarized as
follows:
<TABLE>
<CAPTION>
Weighted
Exercise Average
Number Price Exercise Price
of Shares per Share per Share
---------- ---------- --------------
<S> <C> <C> <C>
Outstanding, December 31, 1996........... -- $ -- $ --
Granted................................ 1,611,000 0.01-0.30 0.20
Canceled............................... (2,990) 0.25-0.30 0.29
----------
Outstanding, December 31, 1997........... 1,608,010 0.01-0.30 0.20
Granted................................ 3,212,128 0.30 0.30
Exercised.............................. (193,038) 0.01-0.30 0.05
Canceled............................... (1,101,739) 0.01-0.30 0.27
----------
Outstanding, December 31, 1998........... 3,525,361 0.01-0.30 0.28
Granted................................ 4,558,850 0.30-6.00 1.64
Exercised.............................. (1,114,385) 0.01-1.00 0.28
Canceled............................... (224,764) 0.01-0.30 0.26
---------- ---------- -----
Outstanding, September 30, 1999.......... 6,745,062 $0.01-6.00 $1.20
========== ========== =====
Exercisable, September 30, 1999.......... 1,330,407 $0.01-1.00 $0.54
========== ========== =====
Exercisable, December 31, 1998........... 671,842 $0.01-0.30 $0.25
========== ========== =====
Exercisable, December 31, 1997........... 262,771 $0.01-0.30 $0.06
========== ========== =====
</TABLE>
The following table summarizes information relating to currently
outstanding and exercisable options as of September 30, 1999.
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------------- -----------
Weighted
Average
Remaining
Exercise Number of Contractual Number of
Prices Shares Life (Years) Shares
-------- --------- ------------ -----------
<S> <C> <C> <C>
$.01 87,462 7.54 37,630
.25 424,297 7.91 173,087
.30 3,841,803 9.14 646,915
1.00 1,501,250 9.64 472,775
6.00 890,250 9.92 --
--------- ---------
6,745,062 1,330,407
========= =========
</TABLE>
During 1997 and 1998 and the first nine months of 1999, the Company issued
options to purchase 239,000, 104,000 and 345,767 shares, respectively, of
common stock to nonemployees in exchange for services. The Company recorded
these transactions at fair value, which was $27,984, $17,470 and $704,859 for
the years ended December 31, 1997 and 1998 and the nine months ended September
30, 1999, respectively. Certain options to purchase common stock to
nonemployees have been issued with various vesting periods ranging from
immediate vesting to a four-year vesting period. The compensation expense
related to these stock options is recorded over the related vesting period.
F-15
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
During the nine months ended September 30, 1999, the Company issued options
to purchase approximately 1,577,000 shares of common stock to employees at an
exercise price deemed to be below market value. In accordance with Accounting
Principles Board Opinion 25, Accounting for Stock Issued to Employees (APB 25),
the Company has recorded the difference between the exercise price and fair
value as deferred compensation and is amortizing such deferred compensation to
operations over the vesting periods of the options.
The Company has computed the pro forma disclosures required under SFAS No.
123 for options granted using the Black-Scholes option pricing model prescribed
by SFAS No. 123. The assumptions used and the weighted average information for
the years ended December 31, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
--------------------- ----------------------
1997 1998 1998 1999
---------- ---------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Risk-free interest rates......... 5.83-6.57% 4.39-5.59% 5.41% 5.77%
Expected dividend yield.......... -- -- -- --
Expected life.................... 5 years 5 years 5 years 5 years
Expected volatility.............. 60% 60% 60% 60%
Weighted average fair value per
share of options granted....... $.05 $.07 $.14 $2.72
Weighted-average remaining
contractual life of options
outstanding.................... 9.65 years 9.39 years 7.36 years 9.26 years
</TABLE>
Had compensation expense from the Company's stock option plan been
determined consistent with SFAS No. 123, net loss and net loss per share would
have been approximately as follows:
<TABLE>
<CAPTION>
Years Ended December Nine Months
31, Ended September 30,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net loss--
As reported.............. $(1,214,679) $(3,868,956) $(3,421,326) $(2,930,708)
Pro forma................ (1,227,071) (3,990,032) (3,505,213) (3,441,222)
Basic and diluted net loss
per share--
As reported.............. $ (0.12) $ (0.39) $ (0.35) $ (0.27)
Pro forma................ (0.12) (0.40) (0.35) (0.32)
</TABLE>
(f) Warrants
In September 1997, the Company issued a warrant to purchase common stock to
a bank in connection with borrowings of a related party, Cambridge Technology
Group, that were used to fund the Company's operations.
In connection with a bridge financing in May 1998 (see Note 6(c)), the
Company issued warrants to purchase 333,334 shares of common stock at an
exercise price of $.30 per share. Each share of common stock purchased by the
exercise of the warrants may be exchanged for a proportional amount of the
Company's preferred stock, if any is issued, based upon the number of common
stock shares multiplied by $.30 per share divided by $1.19 for each share of
preferred stock.
F-16
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
In May 1998, the Company issued a warrant to a customer to purchase 110,000
shares of common stock at an exercise price of $1.00 based upon achievement of
certain revenue related milestones by May 2000; accordingly, the accounting
measurement date was unknown. In September 1999, the Company amended the
warrant agreement to fully vest the warrant. In conjunction with the amendment,
the Company recorded the value of this warrant as a charge to operations in the
nine months ended September 30, 1999.
In June 1998, the Company issued a warrant to purchase 25,000 shares of
common stock in connection with a line of credit entered into with a bank.
In connection with entering into a capital lease in July 1998 (see Note
5(a)), the Company issued a warrant to the lessor to purchase 93,333 shares of
common stock at an exercise price of $.30 per share. The warrant expires on the
earlier of three years from an initial public offering, as defined, or five
years.
In August 1998, in connection with the guarantee of a line of credit for
the joint venture discussed in Note 8, a warrant was issued to the third-party
partner in the joint venture to purchase 4,000,000 shares of the Subsidiary's
common stock at an exercise price of $0.01 per share. The Company recorded the
issuance of this warrant at fair value, which totaled $22,703, as interest
expense. As discussed in Note 8, the joint venture was terminated and the
warrant was canceled.
In August 1998, the May 1998 bridge financing was extended and additional
warrants to purchase 111,110 shares of common stock at an exercise price of
$.30 per share were issued to the investors. Each share of common stock
purchased by the exercise of the warrants may be exchanged for a proportional
amount of the Company's preferred stock, if any is issued, based upon a similar
determination as the original warrants.
In September 1998, the Company issued a warrant to a bank in connection
with a line of credit.
The following table summarizes warrants outstanding as of September 30,
1999.
<TABLE>
<CAPTION>
Value
Ascribed to Period
Grant Date Shares Exercise Price Expiration Warrant Recorded
- -------------- ------- --------------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
September 1997 46,727 $1.00 per share September 2004 $ 4,070 1997
May 1998 333,334 $.30 per share May 2003 56,684 1998
May 1998 110,000 $1.00 May 2000 660,000 1999
June 1998 25,000 $1.00 per share June 2005 2,519 1998
July 1998 93,333 $.30 per share July 2003 15,850 1998
August 1998 111,110 $.30 per share August 2003 18,806 1998
September 1998 65,000 $1.00 per share September 2003 5,159 1998
------- --------
784,504 $763,088
======= ========
</TABLE>
At September 30, 1999, all outstanding warrants are exercisable. An equal
number of shares of common stock have been reserved for the exercise of all
outstanding warrants. The Company recorded the issuance of these warrants at
fair value. The value ascribed to warrants issued in connection with debt
financing has been charged to interest expense. The value ascribed to warrants
issued in connection with services has been charged to operations.
(g) Treasury Stock
In April 1998, the Company reacquired 510,000 shares of its common stock in
satisfaction of a loan previously made to a former officer in the amount of
$153,000 in connection with his severance agreement. Severance in the amount of
approximately $56,000 was also owed to the former officer, as per the severance
agreement, and was paid in full during 1998.
F-17
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
(8) Subsidiary and Joint Venture
In connection with the formation of the Subsidiary, the Company and the
Subsidiary entered into a joint venture with a third-party provider of packaged
solution software. The joint venture engaged the Subsidiary as the vehicle to
develop and implement Web-based solutions and services. Under the agreement of
the joint venture, the Subsidiary issued a warrant (see Note 7(f)) to the
third-party provider to purchase up to 40% of the Subsidiary on a fully diluted
basis in exchange for a letter of credit guarantee on the Subsidiary's line of
credit.
In May 1999, the Company, the Subsidiary and third party that formed the
joint venture terminated the arrangement and dissolved the joint venture. In
connection with the dissolution of the joint venture, the third party and the
Company paid down approximately $239,000 and $310,000, respectively, of the
outstanding line of credit and terminated the line of credit arrangement. The
warrants issued to the third party were also canceled. Additionally,
approximately $70,000 owed by the Subsidiary to the third party was forgiven.
The Company has recorded the debt forgiveness by the third party as other
income in the accompanying consolidated statement of operations during the nine
months ended September 30, 1999.
(9) Employee Benefit Plan
The Company has a 401(k) plan (the 401(k) Plan) covering all employees of
the Company who meet certain defined requirements. Under the terms of the
401(k) Plan, the employees may elect to make tax-deferred contributions and the
Company may match 25% of the first 6% of employee contributions as determined
by the Board of Directors and may make other discretionary contributions to the
401(k) Plan. During 1998 and the nine months ended September 30, 1999, the
Company contributed approximately $46,400 and $56,900, respectively to the
401(k) Plan. The Company made no contributions during 1996 or 1997.
(10) Related Party Transactions
On April 30, 1999, the Company entered into a five-year contract with a
third party, CEE, Inc. (CEE), whereby CEE outsourced the management and
performance of executive education seminars to the Company in exchange for a
monthly fee of approximately $479,000 per month. In accordance with the
outsourcing agreement, the Company agreed to issue options to purchase 190,000
shares of the Company's common stock to designees of CEE and is committed to
issue options to purchase an additional 50,000 shares of the Company's common
stock to CEE's designees each year that the outsourcing agreement is in place.
A sister company of CEE named Cambridge Executive Enterprises, Inc.
(Enterprises) previously provided these services. Simultaneous with signing the
outsourcing arrangement, the Company hired substantially all of Enterprises'
employees, assumed Enterprises' real estate lease and acquired all of
Enterprises' tangible assets (primarily furniture, computers and leasehold
improvements), in exchange for a note payable to Enterprises for approximately
$234,000. The amount due to Enterprises is included in the accompanying
consolidated balance sheet as amount due to affiliate at September 30, 1999.
On May 1, 1999, the Company granted to designees of CEE, options to
purchase 189,500 shares of common stock at an exercise price of $1.00 per
share, 71,500 of which were granted to employees of CEE that remained in the
employ of CEE. In accordance with SFAS No. 123 and Emerging Issues Task Force
Issue 96-18, the Company recorded a charge to operations of $199,000 related to
this grant. As a result of the outsourcing agreement, certain employees of CEE
became employees of C-bridge on May 1, 1999. These employees represent the
remaining CEE designees. The Company granted these employees options to
purchase 118,000 shares of common stock at an exercise price of $1.00 per
share, which was deemed to be less than fair market value on the date of grant.
In accordance with APB 25, the Company recorded deferred compensation of
$590,000 which is being amortized to operations over the vesting period of the
employees' options.
F-18
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
The Company, CEE and Enterprises have a historical business relationship
through Cambridge Technology Group (CTG). For more than 10 years prior to
September 1998, CTG conducted an executive seminar business. In September 1998,
CTG made an assignment for the benefit of creditors. The sole stockholder,
director and officer of CTG is an employee of CEE, and members of his family
are beneficiaries of a trust and a holding company which are significant
stockholders of the Company.
Certain lease, debt and equity transactions involving related parties have
been discussed in Notes 5, 6 and 7.
During 1998, the Company performed professional services for a company in
which a major stockholder of the Company is also an investor. The total amount
of the services was $64,000, of which $64,000 and $48,000 is included in
accounts receivable in the accompanying consolidated balance sheets as of
December 31, 1998 and September 30, 1999. Transactions with this related
company have been treated at arm's-length, as if conducted with an unrelated
party. Revenue on these transactions has been recognized in accordance with the
Company's revenue recognition policy.
During 1998 and the nine months ended September 30, 1999, the Company
subcontracted certain consulting work to a related party in which a key
employee/stockholder of the Company is an investor. The total amount of these
services is approximately $22,000 and $50,000 for the year ended December 31,
1998 and the nine months ended September 30, 1999, respectively.
(11) Segment and Geographic Information
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS No. 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making group, in
making decisions how to allocate resources and assess performance. The
Company's chief decision-maker, as defined under SFAS No. 131, is the Chief
Executive Officer.
The Company views its operations and manages its business as two segments,
strategic and technology consulting services and educational services. The
Company's reportable segments are strategic business units that provided
distinct services to the end customer. They are managed separately because each
business requires different marketing and management strategies. The Company's
approach is based on the way that management organizes the segments within the
Company for making operating decisions and assessing performance.
The accounting policies of the segment are the same as those described in
the summary of significant accounting policies. The Company does not allocate
operating expenses between its two reportable segments. Accordingly, the
Company's measure of performance for each reportable segment is based on total
net revenues and direct costs of services, which are reported separately in the
accompanying consolidated statements of operations. Accordingly, no additional
disclosure is required. The Company does not identify assets and liabilities by
segment. Accordingly, identifiable assets, capital expenditures and
depreciation and amortization are not reported by segment.
F-19
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
(12) Series A Preferred Stock Financing
In October 1999, the Company sold 1,645,555 shares of Series A redeemable
convertible preferred stock (Series A Preferred Stock) at a purchase price of
$6.00 per share resulting in net proceeds to the Company of approximately $9.9
million. Concurrent with the sale of the Series A Preferred Stock, two
significant stockholders of the Company sold an aggregate of 819,445 shares of
common stock to certain of the Series A Preferred Stock investors at a purchase
price per share of $6.00 resulting in gross proceeds to the stockholders of
approximately $4.9 million. In conjunction with the sale of the Series A
Preferred Stock, the Company amended its Articles of Incorporation to change
the par value of the Company's common stock to $.01 per share. The Company's
par value of common stock has been retroactively adjusted for this amendment.
The rights, preferences and privileges of the Series A Preferred Stock are
listed below.
Dividends
The holders of the Series A Preferred Stock are entitled to receive
noncumulative dividends of 8% per annum, payable only when, as and if declared
by the Board of Directors. The Company shall not declare or pay any dividends
on shares of common stock until the holders of the Series A Preferred Stock
then outstanding first receive an amount equal to 8% per annum of the original
purchase price.
Conversion
Each share of Series A Preferred Stock is convertible, at the option of the
holder, at any time, into one share of common stock, adjusted for certain
dilutive events, as defined. In addition, all shares of Series A Preferred
Stock shall be automatically converted into shares of common stock upon the
closing of an underwritten public offering in which the price per share to the
public is not less than $10.00 and the aggregate gross proceeds to the Company
are not less than $15,000,000.
Voting Rights
The Series A Preferred stockholders are entitled to vote on all matters
with the common stockholders as one class of stock. The Series A Preferred
stockholders are entitled to the number of votes equal to the number of shares
of common stock into which each share of the Series A Preferred Stock is then
convertible.
Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the corporation including a sale or merger of the Company, as
defined, the holders of the Series A Preferred Stock then outstanding will be
entitled to be paid an amount equal to $6.00 per share, adjusted for certain
dilutive events, as defined, plus any dividends declared but unpaid on such
shares prior to any payment to common stockholders.
F-20
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited period)
Redemption Rights
The Company will be required to redeem, subject to certain conditions, on
October 7, 2004, October 7, 2005 and October 7, 2006, each a (Mandatory
Redemption Date), the percentage of Series A Preferred Stock, as listed in the
following table at a price equal to $6.00 per share plus any dividends declared
but unpaid from the original issue date to the mandatory redemption date per
share.
<TABLE>
<CAPTION>
Portion of Shares of
Mandatory Preferred Stock to be
Redemption Date Redeemed
--------------- -------------------------
<S> <C>
October 7, 2004 33%
October 7, 2005 50%
October 7, 2006 All outstanding shares of
Series A Preferred Stock
</TABLE>
(13) Subsequent Event
On November 9, 1999, the Company's Board of Directors approved an increase
in the Company's authorized common stock to 50,000,000 shares, approved the
1999 Employee Stock Purchase Plan, pursuant to which 750,000 shares will be
authorized for issuance, and approved the 1999 Director Stock Option Plan,
pursuant to which 200,000 shares will be authorized for issuance. The increase
in authorized common stock and the approval of the 1999 Employee Stock Purchase
Plan are subject to completion of an initial public offering.
F-21
<PAGE>
The outside cover of the gatefold is comprised of a bridge spanning the bottom
of the page. Under the bridge is water. Over the bridge is blue sky. In the
center of the page is the C-bridge logo with the text "Evolution In Technology"
and a small orange line underneath and the text "Revolution In Business"
underneath the orange line.
<PAGE>
[C-BRIDGE LOGO APPEARS HERE]
