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File Pursuant to Rule 424(b)(1)
Registration No. 333-89239
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PROSPECTUS
DECEMBER 15, 1999
[XPEDIOR LOGO]
8,535,000 SHARES OF COMMON STOCK
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XPEDIOR INCORPORATED:
- - We provide innovative and comprehensive eBusiness solutions to Global 2000
companies and emerging Internet businesses.
SYMBOL & MARKET:
- - XPDR/Nasdaq National Market
THE OFFERING:
- - The underwriters have an option to purchase an additional 1,280,250 shares of
common stock from Metamor to cover over-allotments.
- - This is our initial public offering.
- - We plan to use the proceeds from this offering to repay outstanding debt and
for general corporate purposes.
- - Closing: December 21, 1999.
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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price: $19.00 $162,165,000
Underwriting fees: $ 1.33 $ 11,351,550
Proceeds to Xpedior Incorporated: $17.67 $150,813,450
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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DONALDSON, LUFKIN & JENRETTE FIRST UNION SECURITIES, INC.
J.P. MORGAN & CO.
THE ROBINSON-HUMPHREY COMPANY
DLJDIRECT INC.
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[SCREEN SHOT OF ONLINEOFFICESUPPLIES.COM WEB SITE HOME PAGE]
[SCREEN SHOT OF BELL CANADA VIRTUAL STORE WEB SITE HOME PAGE]
[SCREEN SHOT OF HEWLETT-PACKARD SHOPPING VILLAGE WEB SITE HOME PAGE]
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XPEDIOR HELPED ONLINEOFFICESUPPLIES.COM TRANSFORM THE When OnlineOfficeSupplies, a ".com" start-up,
OFFICE SUPPLY BUSINESS. needed a technology company with a track
record in eCommerce, user interface design and
interactive marketing, it turned to Xpedior to
design, build and deploy its innovative
web-based business model as fast as possible.
Xpedior created an intuitive, visually
pleasing user interface. The site also
required a fully searchable database, capacity
to handle tens of thousands of individual
items and ability to process hundreds of
orders per day.
XPEDIOR HELPED BELL CANADA DEVELOP AN INTERACTIVE Bell Canada needed to create a comprehensive
ECOMMERCE AND CUSTOMER SERVICE SITE. electronic channel with the ability to handle
transactions and allow direct communications
with corporate, small business and residential
customers.
Xpedior integrated the creative look and feel
of the site into an architecture that works
securely with a credit card pre-authorization
system. To combine eCommerce with market-data
collection, Xpedior also built a
permission-based marketing system. Xpedior's
solution enabled the company to reduce
information-distribution time and collect
valuable customer data to enhance customer
service.
XPEDIOR'S ONE-TO-ONE ECOMMERCE SOLUTION WORKS FOR H-P chose Xpedior to develop its innovative
HEWLETT-PACKARD. Shopping Village -- a web destination where
businesses and consumers can find information,
access customer service and order H-P
products.
With H-P's image in mind, Xpedior created a
robust, scalable, eCommerce/knowledge
management solution with a personal-profiling
capability that enables H-P to present
shoppers with personalized promotions and
coupons, customized to their ordering history
and specific needs.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary............... 1
Risk Factors..................... 5
Special Note Regarding Forward-
Looking Statements............. 17
Where You Can Find More
Information.................... 18
Corporate Information............ 18
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...... 24
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<TABLE>
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PAGE
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Xpedior.......................... 36
Business......................... 38
Management....................... 53
Transactions with our Management
and Metamor.................... 61
Principal Stockholders........... 62
Description of Capital Stock..... 63
Shares Eligible for Future
Sale........................... 67
Underwriting..................... 69
Legal Matters.................... 72
Experts.......................... 72
Index to Financial Statements.... F-1
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PROSPECTUS SUMMARY
This summary is qualified by more detailed information appearing in other
sections of this prospectus. The other information is important, so please read
this entire prospectus carefully.
XPEDIOR
Xpedior provides innovative and comprehensive solutions to the Global 2000
and emerging Internet companies that conduct eBusiness -- the transaction of
traditional business over the Internet. We combine extensive technical expertise
with strategic consulting and creative services to build eBusiness solutions
that enable our clients to capitalize on the communications power and
transaction efficiency of the Internet. Our eBusiness solutions include one or
more of the following services, customized to fit our clients' needs:
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- - Digital Business Strategy
- - Electronic Commerce
- - Digital Branding and User
Experience Design
- - eBusiness Applications and Integration
- - eBusiness Technology Management
- - eBusiness Networks
- - eBusiness Intelligence
- - Enterprise Portals - internal company
web sites for sharing information - and
Knowledge Management
</TABLE>
We have over 1,100 employees at our 13 U.S. and three international
offices.
OUR MARKET OPPORTUNITY
International Data Corporation estimates that the worldwide market for
Internet professional services will grow from $7.8 billion in 1998 to $78.5
billion in 2003. Despite the size of this market opportunity, we believe that
there are relatively few service providers that can effectively address the full
range of problems and challenges associated with developing and implementing
comprehensive eBusiness solutions. We believe businesses will increasingly seek
assistance from companies that offer the complete set of services necessary for
them to achieve their eBusiness objectives. In our view, a comprehensive service
offering must include three fundamental eBusiness disciplines - strategic,
technical and creative. The Xpedior Solution incorporates all three of these
disciplines, allowing our professionals to deliver comprehensive, reliable and
scalable eBusiness solutions in the demanding timeframes often required in the
Internet professional services market.
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OUR STRATEGY
Our goal is to become the provider of choice for Global 2000 companies and
emerging Internet businesses that require comprehensive, customized, integrated
eBusiness solutions. To achieve this goal, we plan to:
- extend relationships with existing clients and market to new clients;
- leverage our industry-specific expertise;
- refine and extend the Xpedior Solution through the use and sharing of our
intellectual capital;
- leverage our strategic industry alliances with leading technology
companies;
- attract and retain qualified employees through aggressive recruiting and
competitive compensation packages; and
- build the identity and awareness of our brand name.
RELATIONSHIP WITH METAMOR
We are currently a subsidiary of Metamor Worldwide (Nasdaq: MMWW). Prior to
this offering, Metamor owned 99.6% of our common stock. After this offering,
Metamor will own approximately 83% of our outstanding common stock, or 80% if
the underwriters exercise their over-allotment option in full. Metamor has
announced that in 2000 it plans to distribute all of its remaining shares of
Xpedior common stock to its stockholders.
We have agreed to cooperate with Metamor to complete this distribution
because we believe that our complete separation from Metamor will enhance our
ability to pursue our business strategy. Metamor intends to seek a private
letter ruling from the IRS that the distribution of its shares of Xpedior common
stock to its stockholders would be tax-free to Metamor and its stockholders for
U.S. federal income tax purposes. If Metamor does not receive a favorable
ruling, it may not complete the distribution of our common stock, which may
prevent us from achieving the benefits we believe will result from the
separation. Metamor has the sole discretion to determine the timing and
structure of the distribution, if it occurs.
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THE OFFERING
Common stock offered by Xpedior....... 8,535,000 shares
Common stock to be outstanding after
the offering.......................... 50,000,000 shares(a)
Common stock to be held by Metamor
after the offering.................... 41,285,298 shares(b)
Use of proceeds....................... The net proceeds from this offering
are estimated to be approximately
$147.9 million. We will use the net
proceeds for:
- the repayment of approximately
$100.0 million of outstanding debt
due to Metamor; and
- general corporate purposes.
Nasdaq National Market symbol......... XPDR
Unless stated otherwise, the information in this prospectus:
- assumes that the underwriters' over-allotment option is not exercised;
and
- is presented on a pro forma basis to illustrate the impact of all
businesses acquired through September 30, 1999, as if these acquisitions
were consummated as of the beginning of the periods presented. Unless the
context otherwise requires, all references to Xpedior and its operations
include the acquired companies and their operations prior to their
acquisition.
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(a) The number of shares of common stock to be outstanding after this offering
excludes (1) options to purchase 9,034,150 shares of common stock granted
through October 31, 1999 at a weighted average exercise price of $7.34 per
share and (2) 5,786,148 shares of common stock reserved for issuance upon
exercise of options that may be granted in the future under our stock
plans.
(b) If the underwriters fully exercise their over-allotment option, Metamor
will own 40,005,048 shares of common stock after this offering.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated historical and pro forma
financial data for our business. You should read the following summary
consolidated financial data together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements and related notes included elsewhere in this prospectus. The pro
forma information illustrates the impact of all businesses acquired through
September 30, 1999, as if these acquisitions were consummated as of the
beginning of the periods presented, and should be read in conjunction with the
pro forma condensed consolidated financial statements included elsewhere in this
prospectus. The pro forma results of operations for the year ended December 31,
1998 and the pro forma and actual results for the nine months ended September
30, 1999 include stock compensation charges of $30.8 and $1.4 million,
respectively. The pro forma results of operations are not necessarily indicative
of the results that would have occurred had the acquisitions been consummated as
of the beginning of the periods presented.
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<CAPTION>
INCEPTION YEAR ENDED
(MARCH 27,
NINE MONTHS ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------------
1997) TO ------------------- ACTUAL
DECEMBER 31, ACTUAL PRO FORMA ------------------- PRO FORMA
1997 1998 1998 1998 1999 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $12,588 $72,267 $100,500 $47,405 $93,359 $102,746
Gross profit......................... 4,414 30,337 42,858 20,204 39,783 44,369
Operating income (loss).............. (1,235) 5,507 (24,235) 3,858 5,805 5,711
Loss from continuing operations...... (1,498) (581) (32,228) (314) (3,049) (3,322)
</TABLE>
The following table presents summary consolidated balance sheet data as of
September 30, 1999. The pro forma as adjusted information illustrates the impact
of this offering and our proposed use of the estimated net proceeds.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
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ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash........................................................ $ 194 $ 48,107
Working capital (includes amounts due to Metamor)........... (92,479) 55,434
Total assets................................................ 197,302 245,215
Amounts due to Metamor...................................... 100,000 --
Long-term debt, net of current maturities................... 9,068 9,068
Stockholders' equity........................................ 56,659 204,572
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RISK FACTORS
Before you invest in our common stock, you should understand the risk
involved. You should carefully consider these risk factors as well as all of the
other information contained in this prospectus before you decide to purchase
shares of our common stock. If any of the following risks actually occur, our
business, financial condition and operating results could be adversely affected.
As a result, the trading price of our common stock could decline and you may
lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE SIGNIFICANTLY
Our quarterly operating results have varied in the past and are likely to
vary significantly from quarter to quarter in the future. As a result, we
believe that period-to-period comparisons of our results of operations are not a
good indication of our future performance. A number of factors are likely to
cause these variations, including:
- our ability to obtain new client engagements and continue existing
engagements;
- seasonality in revenues relating to the number of billable days in a
given quarter and the budget cycles and budgeting decisions of our
clients;
- our ability to attract, train and retain skilled management, strategic,
technical, design, sales, marketing and support professionals;
- our employee utilization rate, including our ability to move
professionals quickly from completed projects to new engagements;
- the introduction of new services by us or our competitors;
- changes in our pricing policies or those of our competitors;
- our ability to manage costs, including personnel costs and support
services costs; and
- costs related to the expected opening or expansion of our offices.
These quarterly variations may cause our stock price to fluctuate
significantly.
IF WE CANNOT ATTRACT, TRAIN AND RETAIN QUALIFIED EMPLOYEES, WE MAY LOSE CLIENTS
AND RELATED REVENUES
Our future success depends in large part on our ability to hire, train and
retain project and engagement managers, technical architects, strategists,
engineers, design professionals, other technical professionals, and sales and
marketing and other management personnel. Any inability to hire, train and
retain a sufficient number of qualified employees could hinder the growth of our
business. Skilled personnel are in short supply, and this shortage is likely to
continue for some time. As a result, competition for these people is intense,
and the industry turnover rate for them is high. Consequently, we may have
difficulty hiring our desired numbers of qualified employees. Moreover, even if
we are able to expand our employee base, the resources required to attract and
retain employees may adversely affect our operating margins by increasing
expenses associated with our employees.
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WE MAY BE SUED BY OUR EMPLOYEES' FORMER EMPLOYERS, WHICH COULD RESULT IN
SIGNIFICANT COSTS AND DIVERT MANAGEMENT'S ATTENTION AWAY FROM OUR BUSINESS
Some companies have adopted a strategy of suing or threatening to sue
former employees and their new employers. By adopting this strategy, these
companies are attempting to discourage their current employees from seeking
employment with their competitors and their competitors from recruiting their
current employees. As we hire new employees from our current or potential
competitors we are likely to become a party to one or more lawsuits involving
the former employment of our employees. Any future litigation against us or our
employees, regardless of the outcome, may result in substantial costs and
expenses to us and may divert management's attention away from the operation of
our business.
OUR ABILITY TO OBTAIN AND MAINTAIN CLIENT ENGAGEMENTS DEPENDS LARGELY UPON THE
RETENTION OF KEY PERSONNEL, THE LOSS OF WHOM WOULD PROBABLY CAUSE US TO LOSE
CLIENTS AND/OR NEW BUSINESS OPPORTUNITIES
We believe that our success will depend in part on the continued employment
of our senior management team and key technical personnel. This dependence is
particularly important to our business because personal relationships are a
critical element of obtaining and maintaining client engagements. Accordingly,
the loss of any member of our senior management team or key technical personnel
could have a direct, adverse impact on our business. In addition, if any of
these key employees joins a competitor or forms a competing company, some of our
clients might choose to use the services of that competitor or new company
instead of our own. Furthermore, clients or other companies seeking to develop
in-house eBusiness capabilities may hire away some of our key employees. This
would not only result in the loss of key employees but could also result in the
loss of a client relationship or a new business opportunity. Any losses of
client relationships could seriously harm our business.
WE HAVE A LIMITED HISTORY AS A COMBINED COMPANY SO NEITHER OUR HISTORICAL
RESULTS OF OPERATIONS NOR OUR PRO FORMA FINANCIAL INFORMATION MAY BE AN
ACCURATE INDICATOR OF OUR FUTURE RESULTS OR PROSPECTS
We commenced operations in March 1997 with the acquisition of Metamor
Technologies, Ltd. We acquired six other companies in 1998 and one additional
company, Kinderhook Systems, Inc., in September 1999. Although Sage I.T.
Partners, Inc., one of our acquired companies, began operations in 1994, our
limited operating history as a combined company makes an evaluation of our
business and prospects very difficult. The pro forma financial information
included in this prospectus is based on the separate pre-acquisition financial
information of the eight companies. As a result, our historical results of
operations and pro forma financial information may not give you an accurate
indication of what our actual results would have been if the acquisitions had
been completed at the beginning of the periods presented or of our future
results of operations or prospects.
IF WE FAIL TO INTEGRATE THE OPERATIONS OF THE COMPANIES WE HAVE ACQUIRED OR ANY
THAT WE MAY ACQUIRE IN THE FUTURE, OUR FUTURE EARNINGS MAY SUFFER AS A RESULT
OF OPERATING INEFFICIENCIES
Although we have commenced the process of integrating the operations of our
acquired companies, our operations are not fully integrated. To date, we have
integrated most of our back office functions and initiated the creation of a
unified brand identity. We are still in the process of integrating our sales,
marketing and human resources functions, our knowledge management systems, the
Xpedior Process and our Xpediators. Our future earnings will depend heavily on
our
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continued ability to integrate the operations and manage our acquired companies.
Failure to successfully integrate any of the companies we have acquired may
cause significant operating inefficiencies and adversely affect our earnings.
Although we may continue to grow our business through strategic
acquisitions from time to time in the future, we have no immediate plans or
current agreements to acquire any additional companies or businesses. If we
acquire additional companies in the future, however, we will face integration
risks similar to those described above.
COMPETITION FROM BIGGER, MORE ESTABLISHED COMPETITORS WHO HAVE GREATER
FINANCIAL RESOURCES PLACES US AT A COMPETITIVE DISADVANTAGE AND COULD RESULT IN
PRICE REDUCTIONS, REDUCED PROFITABILITY AND LOSS OF MARKET SHARE
Some of our current competitors have longer operating histories, a larger
client base, larger professional staffs, greater brand recognition and greater
financial, technical, marketing and other resources than we do. This may place
us at a disadvantage in responding to our competitors' pricing strategies,
technological advances, advertising campaigns, strategic partnerships and other
initiatives. As a result, our competitors may be able to devote more resources
to the development, promotion and sale of their services than we can.
Competitors that offer more standardized or less customized services than we do
may have a substantial cost advantage, which could force us to lower our prices,
adversely affecting our operating margins.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
services that are superior to, or have greater market acceptance than, the
services that we offer.
OUR RAPID GROWTH HAS PLACED A STRAIN ON OUR MANAGEMENT AND OUR BUSINESS SYSTEMS
AND WE MAY HAVE TO EXPEND SIGNIFICANT MANAGEMENT AND FINANCIAL RESOURCES TO
ACCOMMODATE THIS GROWTH
We have grown rapidly and expect to continue to grow rapidly both by hiring
new employees and serving new business and geographic markets. Our growth has
placed, and will continue to place, a significant strain on our management and
our operating and financial systems to integrate these new personnel. Our
project personnel, or professional headcount, grew from 166 at December 31, 1997
to 695 at December 31, 1998 and 945 at September 30, 1999. Furthermore, our
Chief Executive Officer has only recently joined Xpedior.
Our personnel, systems, procedures and controls may be inadequate to
support our future operations. In order to accommodate the increased number of
engagements, the increased number of clients and the increased size of our
operations, we will need to hire, train and retain sufficient personnel to
manage our operations. We will also need to continually improve our financial
and management controls, reporting systems and operating systems as the size of
our company increases. We may encounter difficulties in developing and
implementing such controls and other systems. If we encounter such difficulties,
we may not be able to successfully focus on serving our clients' needs and our
financial results will suffer.
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WE ARE EXPENDING SUBSTANTIAL RESOURCES TO DEVELOP BRAND AWARENESS OF OUR
SERVICES, BUT THESE EFFORTS MAY NOT BE SUCCESSFUL IF WE CHANGE OR FAIL TO
MAINTAIN OUR BRAND OR OUR CLIENTS ARE NOT SUCCESSFUL
An important element of our business strategy is to develop and maintain
widespread awareness of our brand name. To promote our brand name, beginning in
the third quarter of fiscal 1999, we substantially increased our marketing
expenses, which may cause our operating margins to decline. We are currently a
defendant in a law suit filed by Expedia, Inc., a subsidiary of Microsoft
Corporation, that alleges our Xpedior trademark infringes on their Expedia
trademarks. This lawsuit could cause us to develop a new trademark and lose a
substantial portion of the benefits of our recent branding efforts. Moreover,
our brand or any brand that we develop in the future may be closely associated
with the business success or failure of some of our high-profile clients, some
of whom are pursuing unproven business models in competitive markets. As a
result, the failure or difficulties of one of our high-profile clients may
damage our brand. If we fail to successfully promote and maintain our brand name
or incur significant additional expenses in developing or defending our brand
name or developing or defending any additional brand names, our operating
margins and our growth may decline. See "Business -- Legal Proceedings."
OUR EXPANSION INTO INTERNATIONAL MARKETS WILL REQUIRE SIGNIFICANT MANAGEMENT
AND FINANCIAL RESOURCES AND MAY NOT BE SUCCESSFUL DESPITE OUR EFFORTS BECAUSE
OF OUR LIMITED EXPERIENCE OPERATING IN FOREIGN COUNTRIES
We plan to expand our operations internationally but may be unable to
successfully market, sell, deliver and support our services in international
markets. If we are unable to expand our international operations successfully,
our business, financial condition and operating results could be seriously
harmed because of the costs associated with international expansion and the
diversion of management's attention. We will need to devote significant
management and financial resources to our international expansion. In
particular, we will have to attract and retain experienced management,
strategic, technical, design, sales, marketing and support personnel for our
international offices. Competition for such personnel is intense, and we may be
unable to attract and retain qualified personnel.
We have limited experience in marketing, selling and supporting our
services in foreign countries. Development of these skills may be more difficult
or take longer than we anticipate, especially due to language barriers, currency
exchange risks and the fact that the Internet infrastructure in foreign
countries may be less advanced than the United States' Internet infrastructure.
We intend to expand our operations internationally in future periods by opening
additional international offices, hiring additional international management,
strategic, technical, design, sales, marketing and support personnel, and will
consider entering through acquisitions.
International markets, however, may also be affected by additional risks
that could impact the timing and degree of our international expansion plans.
These risks include the following:
- the establishment of a market for eBusiness internationally;
- longer payment cycles and problems collecting accounts receivable;
- reduced protection for intellectual property and proprietary rights in
some countries; and
- seasonal declines in business activity in certain international regions.
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OUR INABILITY TO ACCURATELY PREDICT FUTURE REVENUES BECAUSE OF THE SHORT-TERM
NATURE OF OUR ENGAGEMENTS MAY RESULT IN DECREASED PROFITABILITY AND
UNDERUTILIZATION OF OUR EMPLOYEES
Our clients generally retain us on an engagement-by-engagement basis,
rather than under long-term contracts. As a result, our revenues are difficult
to predict. Our operating expenses are relatively fixed and cannot be reduced on
short notice to compensate for unanticipated variations in the number or size of
engagements in progress. Because we incur costs based on our expectations of
future revenues, our failure to predict our revenues accurately may seriously
harm our financial condition and results of operations. Since large client
projects involve multiple engagements or stages, there is a risk that a client
may choose not to retain us for additional stages of a project or that the
client will cancel or delay additional planned projects. These cancellations or
delays could result from factors unrelated to our work product or the progress
of the project, but could be related to general business or financial conditions
of the client. Nevertheless, if a client defers, modifies or cancels an
engagement or chooses not to retain us for additional phases of a project, we
must be able to rapidly move our employees to other engagements to limit
underutilization of our employees and the resulting harm to our operating
results. The underutilization of our employees negatively impacts our
profitability because the expenses associated with our employees are fixed while
the revenues generated by our employees vary by the level of their utilization.
OUR USE OF FIXED FEE CONTRACTS MAY CAUSE US TO LOSE MONEY ON CLIENT ENGAGEMENTS
We received approximately 14% of our pro forma revenues in 1998 from
fixed-fee contracts, and this percentage may increase in the future. Fixed-fee
contracts involve estimating the resources necessary to perform the engagement
and have a significantly greater risk of generating a loss than
time-and-materials contracts. If we miscalculate the resources or time we need
to complete engagements with capped or fixed fees, our operating results could
be seriously harmed. The risk of these miscalculations for us is high because we
work with complex technologies in short timeframes. As a result, it is difficult
to judge the time and resources necessary to complete a project. If we fail to
accurately price these fixed-fee contracts or underestimate the resources
necessary to complete our projects, our profitability could be adversely
affected.
OUR AGREEMENTS NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS LIMIT OUR
ABILITY TO SERVICE ADDITIONAL PROSPECTIVE CLIENTS
We sometimes agree not to perform services for competitors of our clients
for limited periods of time. These non-compete agreements reduce the number of
our prospective clients and the number of potential sources of revenue. In
addition, these agreements increase the significance of our client selection
process because many of our clients compete in markets where only a limited
number of players gain meaningful market share. If we agree not to perform
services for a particular client's competitors and our client fails to capture a
significant portion of its market, we are unlikely to receive future revenues in
that particular market.
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OUR FAILURE TO MEET CLIENT EXPECTATIONS OR DELIVER ERROR-FREE SERVICES COULD
CAUSE US TO LOSE CLIENTS AND RESULT IN NEGATIVE PUBLICITY
We create, implement and maintain eBusiness systems and other applications
that are often critical to our clients' businesses. Any defects or errors in
these applications or failure to meet clients' expectations could result in:
- delayed or lost revenues due to adverse client reaction;
- requirements to provide 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.
Our contracts generally limit our liability for damages that may arise from
negligent acts, errors, mistakes or omissions in rendering services to our
clients. However, we cannot be sure that these contractual provisions will
protect us from liability for damages if we are sued. Furthermore, our general
liability insurance coverage may not continue to be available on reasonable
terms or in sufficient amounts to cover one or more large claims, or the insurer
may disclaim coverage as to any future claim. The successful assertion of any
large claim against us could seriously harm our business, financial condition
and operating results. Even if not successful, these claims could result in
significant legal or other costs and may be a distraction to management.
YEAR 2000 ISSUES COULD IMPACT OUR NEAR-TERM SALES AND REVENUES
Efforts by our current and future clients to address Year 2000 issues may
absorb a substantial part of their information technology budgets in the near
term. As a result, our future sales and revenues could be harmed. For a more
detailed description of our Year 2000 assessment, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000
Readiness."
WE MAY INCUR SIGNIFICANT COSTS TO DEFEND OR ESTABLISH OUR INTELLECTUAL PROPERTY
AND PROPRIETARY RIGHTS
We cannot guarantee that the steps we have taken to protect our proprietary
rights will be adequate to deter misappropriation of our intellectual property
and we may need to spend additional resources in the future to protect our
rights. The loss of revenue associated with any infringement or misappropriation
of our trade secrets, copyrights, trademarks or other proprietary information
could seriously harm our business. In addition, although we believe that our
intellectual property and proprietary rights do not infringe the intellectual
property rights of others, other parties may assert infringement claims against
us or claim that we have violated their intellectual property rights. These
claims could result in significant legal and other costs and may be a
distraction to management. Any claims relating to our use of our trademarks
could result in significant costs to defend our use or in establishing
replacement trademarks and associated branding efforts.
Our business often involves the development of software applications for
specific client engagements. We often retain the right to use any intellectual
property that is developed during a client engagement that is of general
applicability and is not specific to the client's project. We also develop
software applications for our own internal use and we retain ownership of these
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applications. We cannot assure you that clients will not demand assignment of
ownership or restrictions on our use of the work that we produce for clients in
the future. Issues relating to the ownership of and rights to use software can
be complicated, and there can be no assurance that disputes will not arise that
affect our ability to reuse this software, which could harm our business
results.
We are a defendant in a law suit filed by Expedia, Inc. that alleges our
Xpedior trademark infringes on their Expedia trademarks. See "Business -- Legal
Proceedings."
WE HAVE AGREED TO PAY ADDITIONAL CASH CONSIDERATION IN THE FIRST HALF OF 2000
TO THE FORMER OWNERS OF THE COMPANIES WE HAVE ACQUIRED, WHICH AMOUNTS MAY
DEPLETE OUR CASH RESOURCES OR REQUIRE US TO BORROW FUNDS
Under the terms of their acquisition agreements, the former owners of five
of our acquired companies have the right to receive additional cash
consideration upon satisfaction of financial and operational conditions. Payment
of these obligations may substantially deplete our cash reserves or require us
to borrow funds. The additional consideration will create additional goodwill
and increase the related amortization expense. In mid-1999, the aggregate amount
of the remaining contingent payments was approximately $36.1 million, of which
approximately $19.8 million was fixed. All remaining contingent payments are due
in March and April 2000. In addition, we have assumed liabilities associated
with a guarantee of the value of approximately 308,000 shares of Metamor common
stock issued in connection with one of our acquisitions. In the event the fair
market value of these shares is less than $14.0 million based upon the average
market price during the 20 trading days preceding April 16, 2000, we will be
obligated to pay the difference. We expect that approximately one-half of our
contingent payment obligation to NDC Group, Inc., or a maximum of $7.5 million,
and one-half of any payments to settle the stock guarantee are to be paid in
Metamor common stock. Metamor has agreed to contribute to the capital of Xpedior
without repayment the fair value of any common stock Metamor issues to satisfy
these contingent obligations. Based on the last reported market price of Metamor
common stock on December 15, 1999, our obligation under this guarantee would
have been approximately $2.0 million.
OUR WORKING CAPITAL REQUIREMENTS MAY CAUSE US TO SEEK ADDITIONAL FINANCING IN
THE NEAR-TERM AND, IF SUCH FINANCING IS UNAVAILABLE, MAY PREVENT US FROM
GROWING OUR COMPANY
Our working capital requirements and cash flow provided by operating
activities can vary greatly from quarter to quarter, depending on the volume of
business during the period and the payment terms with our customers. We expect
that the net proceeds from this offering and the availability of borrowings
under our proposed credit facility will be sufficient to meet our working
capital and capital expenditure needs for at least the next 12 months. After
that, we may need to raise additional funds or sell equity and/or debt
securities, and we cannot assure you that we will be able to obtain additional
financing or sell securities on favorable terms or at all. We will not be able
to issue a significant amount of common stock prior to our separation from
Metamor. Although Metamor has agreed to provide funding for our working capital
requirements until a credit facility is in place, we may not be able to attract
lenders for an appropriate credit facility on terms acceptable to us. If we need
additional capital and cannot raise it on acceptable terms and Metamor is
unwilling to provide additional capital, we may not be able to:
- open new offices, in the United States or internationally;
- create additional market-specific business units;
11
<PAGE> 15
- enhance our infrastructure and leveragable assets;
- hire, train and retain professionals;
- respond to competitive pressures or unanticipated requirements; or
- pursue acquisition opportunities.
Our failure to do any of these things could seriously harm our financial
condition by preventing us from being able to take advantage of new business
opportunities.
THE INDEMNIFICATION PROVISIONS OF THE ACQUISITION AGREEMENTS MAY NOT FULLY
PROTECT US AND MAY RESULT IN UNEXPECTED LIABILITIES
Some of the former owners of each acquired company are required to
indemnify us against liabilities related to the operation of their company
before we acquired it. The acquisition agreements include provisions for the
indemnification of Xpedior by the former owners of each company for breaches of
their representations and warranties in the acquisition agreements and
inaccuracy of the information provided by them for use in this prospectus. In
some cases, these former owners may not have the financial ability to meet their
indemnification responsibilities. If this occurs, we may incur unexpected
liabilities.
WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS, WHICH MAY
REDUCE OR ELIMINATE YOUR ABILITY TO SELL YOUR SHARES FOR A PREMIUM IN A CHANGE
OF CONTROL TRANSACTION
Once Metamor's ownership is reduced to a level where it no longer controls
Xpedior, various provisions of our certificate of incorporation and bylaws may
still discourage, delay or prevent a change in control of Xpedior that 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 takeover attempt;
- establishing a classified board of directors with staggered, three-year
terms, which may lengthen the time required to gain control of our board
of directors;
- prohibiting cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
- requiring super-majority voting for certain amendments to our certificate
of incorporation and bylaws;
- limiting 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, our stock incentive plans may discourage, delay or prevent a
change in control of Xpedior.
12
<PAGE> 16
IF WE HAVE TO WRITE-OFF A SIGNIFICANT AMOUNT OF GOODWILL, OUR EARNINGS WILL BE
NEGATIVELY IMPACTED
Because we have grown in large part through acquisitions, acquired
intangible assets, commonly called goodwill, represent a substantial portion of
our assets. As of September 30, 1999, goodwill comprised 74% of our total assets
and 258% of total stockholders' equity. If we make additional acquisitions, it
is likely that additional goodwill will be recorded on our books. A
determination that a significant impairment in value of our unamortized goodwill
has occurred would require us to write-off a substantial portion of our assets.
This write-off would negatively affect our earnings. In addition, it could
reduce our ability to obtain necessary capital for our business and seriously
harm our stock price.
PURCHASERS IN THIS OFFERING WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price of our common stock will be substantially
higher than the book value per share of the outstanding common stock. As a
result, if we were liquidated for book value immediately following this
offering, each stockholder purchasing in this offering would receive less than
the price they paid for their common stock. In addition, because our success is
so heavily dependent on our ability to attract and retain talented personnel, we
expect to offer a significant number of stock options to employees in the
future. These issuances may cause further dilution to investors.
RISKS RELATED TO OUR RELATIONSHIP WITH METAMOR
METAMOR WILL CONTROL THE OUTCOME OF STOCKHOLDER VOTING AND MAY EXERCISE ITS
VOTING POWER IN A MANNER ADVERSE TO YOU
Metamor currently owns 99.6% of our outstanding common stock. Following
completion of this offering, Metamor will own approximately 83% of our
outstanding common stock, or 80% if the underwriters' over-allotment option is
exercised in full. To date, Metamor has appointed all of our directors.
Following this offering, as long as Metamor owns a majority of our outstanding
voting stock, Metamor will have the ability to elect or replace all of our
directors. As a result, following this offering, Metamor will continue to have
the ability to control the policies, management and affairs of Xpedior and will
control the outcome of corporate actions requiring stockholder approval,
including the approval of transactions involving a change in control of Xpedior.
Metamor's interests may differ from those of our other stockholders. As a
result, Metamor may vote its Xpedior common stock in a manner adverse to our
other stockholders.
FAILURE OF METAMOR TO COMPLETE THE DISTRIBUTION OF OUR COMMON STOCK MAY PREVENT
US FROM TAKING ADVANTAGE OF NEAR-TERM BENEFITS IMPORTANT TO OUR BUSINESS
STRATEGY
If Metamor fails to complete the distribution of our common stock within
the time contemplated, our business may be adversely affected. Specifically, we
would likely not realize the increased brand identity, improved relationships
with our professionals and other benefits we expect to achieve as an independent
company not controlled by Metamor. Although we have undertaken a significant
branding program, we believe that operating outside of Metamor will further
position us as a pure eBusiness services company. In addition, our current
option program provides that the options granted to our management and
professionals may not be exercised until the earlier of a distribution by
Metamor of our common stock or two years after our initial public offering. As a
result, we believe that our separation from Metamor will increase our
competitiveness over time by improving our relationships with our professionals
through the
13
<PAGE> 17
granting of stock options and practices appropriate to an eBusiness services
company. This is very important to our business because our professionals place
a high value on direct participation in our company. However, we cannot assure
you as to when or the extent to which we will be able to achieve these benefits.
Although Metamor has advised us that it currently plans to complete its
divestiture of our company in 2000, it is not obligated to do so and we cannot
assure you as to whether or when the divestiture will occur. This means that we
cannot assure you when, or even if, we will obtain the expected benefits.
BECAUSE TWO OF OUR DIRECTORS ARE AFFILIATES OF METAMOR, THEY MAY HAVE CONFLICTS
OF INTEREST THAT NEGATIVELY IMPACT XPEDIOR
Currently, one of our directors, Mr. Dameris, is also President, Chief
Executive Officer and Chairman of the Board of Metamor and one of our director
nominees, Mr. Hatcher, will join Metamor's executive team and manage its
corporate strategy and development activities beginning in January 2000. These
relationships may create conflicts of interest. The directors and officers of
Metamor have fiduciary duties to manage Metamor, including its investments in
subsidiaries and affiliates such as Xpedior, in a manner beneficial to Metamor
and its stockholders. Similarly, our directors and officers have fiduciary
duties to manage Xpedior in a manner beneficial to Xpedior and its stockholders.
The duties of these affiliates of Metamor may conflict with their duties as
directors of Xpedior. In addition, other conflicts of interest exist and may
arise in the future as a result of the extensive relationships between Metamor
and Xpedior. Until Metamor completes the distribution of our common stock, the
risks relating to Metamor's control of our company, the potential business
conflicts of interest between our company and Metamor and the potential
conflicts of interest that may arise as a result of our common board member will
continue to be relevant to our stockholders.
WE MAY LOSE BUSINESS OPPORTUNITIES AS A RESULT OF CONFLICTS OF INTEREST WITH
METAMOR
Unless and until Metamor completes its divestiture of our common stock, it
will continue to be our controlling stockholder. As a result, conflicts of
interest may arise between us and Metamor in the following areas:
- business opportunities that may be attractive to both Metamor and our
company;
- tax and other matters arising from the separation of our company from
Metamor;
- the incurrence of debt by our company;
- sales or distributions by Metamor of all or any portion of its ownership
interest in our company; and
- Metamor's ability to control the management and affairs of our company.
We cannot assure you that we will be able to resolve any potential conflicts or
that, if resolved, we would not be able to receive more favorable resolution if
we were dealing with an unaffiliated party.
14
<PAGE> 18
OUR COSTS RELATED TO CORPORATE SERVICES COULD INCREASE AS OUR RELATIONSHIP WITH
METAMOR CHANGES IN THE FUTURE
We have entered into an agreement with Metamor under which Metamor provides
corporate support services to us. We also may use Metamor's legal, tax, risk and
cash management departments. In addition, Xpedior will continue to participate
in Metamor's corporate insurance program.
Our agreement with Metamor is for a one year term, but may be terminated on
60 days' notice by us. Further, following Metamor's distribution of our common
stock, we would expect to terminate this agreement after some interim
transitional period. If the agreement is terminated, we expect that we would be
able to arrange alternate suppliers for all the services important to our
business. We expect that these services would be available from third parties at
costs similar to those we pay Metamor. However, if we have to replicate
facilities, services or employees that we are not using full time, our costs
would increase. It is not possible to predict the specific areas where our costs
would increase, as that depends on the growth and needs of our business at the
time the agreement is terminated.
WE MAY INCUR MATERIAL TAX LIABILITIES IN CONNECTION WITH OUR SEPARATION FROM
METAMOR
We may incur costs and expenses, potentially including additional taxes and
employee costs, greater than those we have planned for in connection with our
separation from Metamor. In this regard, if 50% or more of the stock of Xpedior
or Metamor is acquired within two years of the separation, it is possible that a
significant tax liability could result. We cannot assure you that these costs
will not be material to our business.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS
AS A SEPARATE COMPANY BECAUSE OUR ACTUAL COST MAY DIFFER FROM THE ALLOCATIONS
AND ADJUSTMENTS MADE IN OUR FINANCIAL STATEMENTS
The historical financial information we have included in this prospectus
may not reflect what our results of operations, financial position and cash
flows would have been had we been a separate, stand-alone entity during the
periods presented or what our results of operations, financial position and cash
flows will be in the future. This is because:
- Metamor did not account for us as, and we were not operated as, a single
stand-alone business for all periods presented and we have made
adjustments and allocations to our financial information to take this
fact into account; and
- the information does not reflect many significant changes that will occur
in our funding and operations as a result of our separation from Metamor,
including employee and tax matters.
We cannot assure you that the adjustments and allocations we have made in
preparing our historical consolidated financial statements have produced
financial statements accurately reflecting what our operations would have been
during this period if we had in fact operated as a stand-alone entity. In
addition, we cannot assure you that our historical results of operations are
indicative of our future operating or financial performance.
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<PAGE> 19
RISKS RELATED TO THE EBUSINESS INDUSTRY
OUR FUTURE SUCCESS AND THE CONTINUED GROWTH OF OUR COMPANY DEPENDS ON INCREASED
ADOPTION OF THE INTERNET BY BUSINESSES AND CONSUMERS
The widespread acceptance and adoption of the Internet for conducting
business is likely only if the Internet provides businesses and consumers with
greater efficiencies and other advantages. If commerce on the Internet does not
continue to grow, or grows more slowly than expected, our growth rate would
decline and our business would be seriously harmed. Consumers and businesses may
reject the Internet as a viable commercial medium for a number of reasons,
including:
- potentially inadequate network infrastructure;
- delay in the development of Internet-enabling technologies and
performance improvements;
- delay in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity;
- delay in the development of security and authentication technology
necessary for the secure transmission of confidential information;
- change in, or insufficient availability of, telecommunications services
to support the Internet; and
- failure of companies to meet their customers' expectations in delivering
goods and services over the Internet.
INCREASING GOVERNMENT REGULATION COULD INCREASE OUR CLIENTS' COST OF DOING
BUSINESS OVER THE INTERNET AND SLOW THE GROWTH OF OUR BUSINESS
We are subject not only to regulations applicable to businesses generally,
but also to laws and regulations directly applicable to electronic commerce.
Although there are currently few of these laws and regulations, both state,
federal and foreign governments may adopt more of these laws and regulations.
Any legislation or regulations of this type could dampen the growth of the
Internet and decrease its acceptance as a communications and commercial medium.
If this decline occurs, companies may decide in the future not to use our
services to create an electronic business channel. This decrease in the demand
for our services would seriously harm our business and operating results.
Any new laws and regulations may govern or restrict any of the following
issues:
- user privacy;
- the pricing and taxation of goods and services offered over the Internet;
- the content of web sites;
- consumer protection; and
- the characteristics and quality of products and services offered over the
Internet.
For example, the Telecommunications Act of 1996 prohibits the transmission
of some types of information over the Internet. The scope of the Act's
prohibition is currently unsettled. In addition, although courts recently held
unconstitutional substantial portions of the Communications Decency Act, federal
or state governments may enact, and courts may uphold, similar legislation in
the future.
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<PAGE> 20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. All projections contained in this prospectus,
including those set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," are forward-looking statements. These
statements involve known and unknown risks, uncertainties and other factors that
may cause our or our industry's actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements.
Forward-looking statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology like "may," "will," "should," "expects," "plans," "projected,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of these terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined under "Risk Factors." These factors may cause our
actual results to differ materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform these statements to actual results and do not
intend to do so.
17
<PAGE> 21
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act relating to the common stock
being sold in this offering. This prospectus constitutes a part of that
registration statement. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules to the
registration statement because some parts have been omitted in accordance with
the rules and regulations of the Commission. For further information about us
and the common stock being sold in this offering, you should refer to the
registration statement and the exhibits and schedules filed as a part of the
registration statement. Statements contained in this prospectus regarding the
contents of any agreement, contract or other document referred to are not
necessarily complete; reference is made in each instance to the copy of the
contract or document filed as an exhibit to the registration statement. Each
statement is qualified by reference to the exhibit. The registration statement,
including related exhibits and schedules, may be inspected without charge at the
Commission's principal office in Washington, D.C. Copies of all or any part of
the registration statement may be obtained after payment of fees prescribed by
the Commission from:
- the Commission's Public Reference Room at the Commission's principal
office, 450 Fifth Street, N.W., Washington, D.C. 20549; or
- the Commission's regional offices in:
- New York, located at 7 World Trade Center, Suite 1300, New York, New
York 10048; or
- Chicago, located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
You may obtain information regarding the operation of the Public Reference
Room by calling the Commission at 1-800-SEC-0330. The Commission maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants, including us, that file electronically with
the Commission. The address of the site is www.sec.gov.
We intend to furnish holders of our common stock with annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports containing unaudited condensed financial
information for the first three quarters of each fiscal year. We intend to
furnish other reports as we may determine or as may be required by law.
CORPORATE INFORMATION
Xpedior Incorporated is a Delaware corporation. We incorporated in December
1997 under the name Metamor Solutions Holdings, Inc. In November 1998, we
changed our name to Metamor Consulting Solutions, Inc., and in August 1999, we
changed our name to Xpedior Incorporated. Our principal executive offices are
located at One North Franklin, Suite 1500, Chicago, Illinois 60606, and our
telephone number is (800) 462-6301. We invite you to visit our Internet site at
www.xpedior.com. The information on our web site does not constitute a part of
this prospectus. In addition, we have recently received publicity from several
widely disseminated publications. The information regarding us, our business and
our affiliates in these publications does not constitute a part of this
prospectus.
"Xpedior," "The Xpedior Process" and "eBusiness Xpediators" are trademarks
of Xpedior. This prospectus also contains trademarks and trade names of other
companies.
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<PAGE> 22
USE OF PROCEEDS
The net proceeds from the sale of the 8,535,000 shares of common stock
offered by us will be approximately $147.9 million after deducting the
underwriting discounts and commissions and estimated offering expenses. We will
not receive any proceeds from the sale of the shares to be sold by Metamor if
the underwriters exercise their over-allotment option.
The primary purposes of this offering are to provide a means of incentive
to our professionals through stock options, obtain additional equity capital,
create a public market for our common stock and facilitate future access to
public markets. We expect to use the net proceeds from this offering for:
- the repayment of $100.0 million of outstanding debt due to Metamor, plus
accrued interest since September 30, 1999; and
- general corporate purposes.
We currently owe $100.0 million in outstanding principal to Metamor for
notes issued by us in connection with:
- the initial capitalization of each of the acquired companies and
additional consideration paid after closing those acquisitions based on
increases in earnings before interest and taxes; and
- advances for working capital.
These notes are payable on demand and bear interest at the prime rate plus
3%, which at September 30, 1999 was 11.5%. Metamor has agreed to provide funding
for our working capital requirements and, after the initial public offering, to
reduce the interest rate on our outstanding intercompany indebtedness to its
incremental borrowing rate, which at September 30, 1999 was approximately 6.9%.
Management will have broad discretion in the allocation of the net proceeds
after the retirement of debt. Pending these uses, the proceeds of this offering
will be invested in short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
We have not paid any cash dividends since our inception and do not
anticipate paying any cash dividends. Instead, we will retain our earnings to
finance the expansion of our business and for general corporate purposes. Our
board of directors will have the authority to declare and pay dividends on the
common stock, in its discretion, as long as there are funds legally available to
do so.
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<PAGE> 23
CAPITALIZATION
The following table illustrates our short-term debt and capitalization as
of September 30, 1999. The as adjusted information reflects the receipt of
$147.9 million of estimated net proceeds from our sale of 8,535,000 shares of
common stock after deducting the estimated underwriting discounts and
commissions and estimated offering expenses. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and accompanying notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Cash........................................................ $ 194 $ 48,107
======== ========
Amounts due to Metamor...................................... $100,000 $ --
======== ========
7% convertible subordinated notes........................... $ 9,068 $ 9,068
-------- --------
Total long-term debt.............................. 9,068 9,068
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value per share, 5,000,000
shares authorized...................................... -- --
Common stock, $.01 par value per share, 100,000,000 shares
authorized, 41,465,000 shares issued and outstanding,
50,000,000 shares outstanding as adjusted(a)........... 415 500
Additional paid-in capital................................ 57,190 205,018
Retained earnings......................................... 666 666
-------- --------
58,271 206,184
-------- --------
Less -- receivable from stockholder....................... (1,000) (1,000)
Less -- deferred compensation............................. (612) (612)
-------- --------
Total stockholders' equity........................ 56,659 204,572
-------- --------
Total capitalization............................ $ 65,727 $213,640
======== ========
</TABLE>
- ------------------------------
(a) The number of shares of common stock to be outstanding after this offering
excludes:
- options to purchase 9,034,150 shares of common stock granted through
October 31, 1999 at a weighted average exercise price of $7.34 per
share; and
- 5,786,148 shares of common stock reserved for issuance upon exercise of
options that may be granted in the future under our stock plans.
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<PAGE> 24
DILUTION
The net tangible book value of our common stock as of September 30, 1999
was $(89.5) million or approximately $(2.16) per share. Net tangible book value
per share represents the amount of our stockholders' equity less intangible
assets, divided by 41,465,000 shares of outstanding common stock.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of common stock in
this offering and the pro forma net tangible book value per share of common
stock immediately after completion of this offering. Following:
- our sale of 8,535,000 shares of common stock in this offering at an
initial public offering price of $19.00 per share, and after deducting:
- the estimated underwriting discounts and commissions; and
- the estimated offering expenses; and
- the application of the estimated net proceeds from this offering,
our pro forma net tangible book value as of September 30, 1999 would have been
$58.4 million, or $1.17 per share. This represents an immediate increase in net
tangible book value of $3.33 per share to existing stockholders and an immediate
dilution in net tangible book value of $17.83 per share to purchasers of common
stock in this offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $19.00
------
Net tangible book value per share as of September 30,
1999................................................... $(2.16)
Increase per share attributable to new investors.......... 3.33
------
Net tangible book value per share after this offering....... 1.17
------
Dilution per share to new investors......................... $17.83
======
</TABLE>
The following table illustrates on a pro forma basis as of September 30,
1999 the difference between the number of shares of common stock purchased from
us, the total consideration paid to us and the average price paid by existing
stockholders and by the new investors purchasing shares of common stock in this
offering, before deduction of estimated discounts and commissions and estimated
offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 41,465,000 82.9% $ 55,554,000 25.5% $ 1.34
New stockholders........................ 8,535,000 17.1 162,165,000 74.5 19.00
---------- ----- ------------ -----
Total......................... 50,000,000 100.0% $217,719,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing table excludes:
- options to purchase 8,805,100 shares of common stock granted through
September 30, 1999 at a weighted average exercise price of $7.25 per
share; if all outstanding options were exercised, dilution to new
investors would equal $17.83 per share; and
- 6,015,198 shares of common stock reserved for issuance as of September
30, 1999 upon exercise of options that may be granted in the future under
our stock plans.
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<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from our
consolidated financial statements and from the financial statements of Metamor
Technologies, Ltd., our predecessor company. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and is qualified by reference to the consolidated
financial statements and related notes appearing elsewhere in this prospectus.
The selected financial data as of and for the years ended December 31, 1994 and
1995 have been derived from the unaudited financial statements of the
predecessor. The selected financial data:
- as of and for the year ended December 31, 1996;
- as of March 26, 1997; and
- for the period from January 1, 1997 to March 26, 1997
have been derived from the audited financial statements of the predecessor
included elsewhere in this prospectus. The selected consolidated financial data:
- as of December 31, 1997 and 1998 and September 30, 1999;
- for the period from inception (March 27, 1997) to December 31, 1997;
- for the year ended December 31, 1998; and
- for the nine months ended September 30, 1999
have been derived from our audited consolidated financial statements included
elsewhere in this prospectus. The selected consolidated financial data as of and
for the nine months ended September 30, 1998 have been derived from our
unaudited consolidated financial statements included elsewhere in this
prospectus. In the opinion of management, the unaudited consolidated financial
statements include all adjustments, consisting of normal recurring adjustments,
necessary for the fair presentation of the results of operations for this
period. Operating results for the nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1999.
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<PAGE> 26
The pro forma consolidated financial data illustrate the impact of all
businesses acquired through September 30, 1999 as if these acquisitions were
consummated as of the beginning of the periods presented. The pro forma
consolidated financial data should be read in conjunction with the pro forma
condensed consolidated financial statements included elsewhere in this
prospectus. The pro forma consolidated results of operations are not necessarily
indicative of the results that would have occurred had the acquisitions been
consummated as of the beginning of the periods presented or that might be
attained in the future.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(A)
--------------------------------------
PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31, 1997 TO
------------------------ MARCH 26,
1994 1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $3,729 $4,081 $6,605 $ 2,578
Cost of services.................... 2,737 3,719 4,256 1,853
------ ------ ------ -------
Gross profit........................ 992 362 2,349 725
Operating costs and expenses:
Selling, general and
administrative.................. 841 704 1,825 404
Stock compensation................ -- -- -- 6,328
Depreciation and amortization..... 41 96 133 105
------ ------ ------ -------
Total operating costs and
expenses.................. 882 800 1,958 6,837
------ ------ ------ -------
Operating income (loss)............. 110 (438) 391 (6,112)
Other expense....................... -- 49 34 7
------ ------ ------ -------
Income (loss) from continuing
operations before income taxes.... 110 (487) 357 (6,119)
Provision (benefit) for income
taxes............................. -- (42) 8 7
------ ------ ------ -------
Income (loss) from continuing
operations........................ $ 110 $ (445) $ 349 $(6,126)
====== ====== ====== =======
Loss from continuing operations per
share (diluted)...................
Number of shares used in computing
diluted loss per share(b).........
<CAPTION>
XPEDIOR INCORPORATED
--------------------------------------------------------------------
YEAR ENDED
INCEPTION DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
(MARCH 27, ------------------- -------------------------------
1997) TO ACTUAL
DECEMBER 31, ACTUAL PRO FORMA ------------------- PRO FORMA
1997 1998 1998 1998 1999 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $12,588 $72,267 $100,500 $47,405 $93,359 $102,746
Cost of services.................... 8,174 41,930 57,642 27,201 53,576 58,377
------- ------- -------- ------- ------- --------
Gross profit........................ 4,414 30,337 42,858 20,204 39,783 44,369
Operating costs and expenses:
Selling, general and
administrative.................. 4,904 20,558 29,660 13,528 26,212 30,066
Stock compensation................ -- -- 30,809 -- 1,440 1,440
Depreciation and amortization..... 745 4,272 6,624 2,818 6,326 7,152
------- ------- -------- ------- ------- --------
Total operating costs and
expenses.................. 5,649 24,830 67,093 16,346 33,978 38,658
------- ------- -------- ------- ------- --------
Operating income (loss)............. (1,235) 5,507 (24,235) 3,858 5,805 5,711
Other expense....................... 1,228 5,537 9,395 3,613 9,231 9,599
------- ------- -------- ------- ------- --------
Income (loss) from continuing
operations before income taxes.... (2,463) (30) (33,630) 245 (3,426) (3,888)
Provision (benefit) for income
taxes............................. (965) 551 (1,402) 559 (377) (566)
------- ------- -------- ------- ------- --------
Income (loss) from continuing
operations........................ $(1,498) $ (581) $(32,228) $ (314) $(3,049) $ (3,322)
======= ======= ======== ======= ======= ========
Loss from continuing operations per
share (diluted)................... $ (0.04) $ (0.01) $ (0.78) $ (0.01) $ (0.07) $ (0.08)
Number of shares used in computing
diluted loss per share(b)......... 41,285 41,285 41,285 41,285 41,341 41,341
</TABLE>
<TABLE>
<CAPTION>
XPEDIOR INCORPORATED
PREDECESSOR COMPANY --------------------------------------------------
AS OF DECEMBER 31, AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1999
----------------------- --------------------- ------------------------
1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................... $ -- $ -- $ 245 $ 2 $ 191 $ 194 $ 48,107
Working capital (includes amounts due
to Metamor).......................... (200) 486 1,338 (25,332) (95,229) (92,479) 55,434
Total assets........................... 815 1,468 3,771 34,267 138,192 197,302 245,215
Amounts due to Metamor................. -- -- -- 16,253 77,929 100,000 --
Long-term debt, net of current
maturities........................... -- -- -- -- -- 9,068 9,068
Stockholders' equity................... 353 1,053 2,399 2,828 17,776 56,659 204,572
</TABLE>
- ------------------------------
(a) On March 27, 1997, Metamor acquired Metamor Technologies, Ltd., our
predecessor company. Metamor contributed the stock of this company to us on
April 30, 1999.
(b) Reflects a 41,285-for-1 stock split. See Note 2 to our consolidated
financial statements included elsewhere in this prospectus.
23
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and the Company's Pro Forma Condensed Consolidated
Financial Statements and Consolidated Financial Statements included elsewhere in
this prospectus. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Examples of forward-looking
statements include statements regarding our future financial results, operating
results, market positions, product and services successes, business strategies,
projected costs, future products, competitive positions and plans and objectives
of management for future operations. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of risks
and uncertainties and other important factors, including those set forth under
"Risk Factors" included elsewhere in this prospectus.
INTRODUCTION
We were formed by Metamor to be the holding company for its eBusiness
solutions unit. Metamor commenced operations of this unit with the acquisition
of Metamor Technologies, Ltd., our predecessor company, on March 27, 1997, and
acquired six additional companies in 1998 as part of the eBusiness solutions
unit. Effective April 30, 1999, Metamor contributed to Xpedior all the
outstanding capital stock of the seven companies comprising its eBusiness
solutions unit. All seven companies were wholly owned subsidiaries of Metamor.
As the entities were under common control, the contribution has been accounted
for at historical cost in a manner similar to a pooling of interests. In
September 1999, we acquired one additional company, Kinderhook Systems, Inc.
Effective October 1, 1999, we distributed to Metamor a segment of our
business that provided non-eBusiness outsourcing services. This segment was a
services unit of Metamor Technologies. This segment has been reflected as
discontinued operations in our financial statements. Revenues from discontinued
operations were $13.2 million for the period from inception (March 27, 1997) to
December 31, 1997, $22.7 million for the year ended December 31, 1998, $17.0
million for the nine months ended September 30, 1998 and $15.6 million for the
nine months ended September 30, 1999.
All of the eBusiness unit companies were acquired in transactions that were
accounted for using the purchase method. The accompanying financial statements
reflect Metamor's purchase accounting adjustments to the acquired eBusiness
companies and include the results of operations of each of the companies from
the date of their acquisition. Our historical consolidated operating results
have been significantly affected by the number, timing, and size of the
acquisitions. Accordingly, pro forma financial data are provided in this
prospectus to provide a more meaningful period-to-period comparison of our
operating results. The pro forma financial data have been prepared and included
in this prospectus to illustrate the impact of the acquisitions as if they
occurred at the beginning of the periods presented. On a pro forma basis, we
estimate that our 1999 consolidated revenues will be approximately $143 million.
The pro forma financial data are not necessarily indicative of results of
operations that would have occurred had the acquisitions of the eBusiness
companies been consummated as of the beginning of the periods presented or that
might be attained in the future.
Before Metamor acquired them, our eBusiness unit companies were managed as
independent, private companies. As a consequence, their operating procedures and
results reflected different financial objectives, business practices, service
offerings and tax structures
24
<PAGE> 28
(S corporations and C corporations), which influenced their historical
operations, client base and compensation levels. Since mid-1998, we have been
integrating our eBusiness companies to implement a collective corporate
strategy. The major initiative of our integration process has been to leverage
the success of our eBusiness companies by sharing our expertise and practices
over a unified platform. The Xpedior Process and our best practices and
procedures have been refined and are being implemented throughout our company.
We have also analyzed and reviewed our internally developed solutions to develop
our Xpediators. This integration of methodologies and reusable solutions from
the best practices found within our organization may present opportunities to
increase revenues and reduce costs, but may also necessitate additional costs
and expenditures for corporate administration, including expenses necessary to
continue to train our professionals and implement our unified Xpedior Process.
These various costs and possible cost-saving and revenue enhancements may make
historical operating results difficult to compare with, and not indicative of,
future performance.
We contract on the basis that best fits our clients' needs. Our primary
form of offering services is on a time-and-materials basis. In this form of
contracting, we get paid at an agreed upon hourly rate for the time that we
expend on our clients' projects, and revenues are recorded at the time services
are performed. We also offer our services on a fixed-fee basis. This form of
contracting represented approximately 14% of our total pro forma revenues for
the year ended December 31, 1998. When we contract on a fixed-fee basis, we
realize revenues on a percentage of completion basis. Payments on our fixed-fee
contracts usually require an advance payment from the client with additional
payments due on either a milestone or a predetermined schedule. Payments billed
in excess of revenues earned are recorded as deferred revenues. Revenues earned
but not yet billed are recorded as work in process.
During the year ended December 31, 1998, our largest ten clients
represented approximately 33% of our pro forma revenues. Our largest 50 clients
during the year ended December 31, 1998 represented approximately 70% of our pro
forma revenues. Historically, we begin a client relationship with a single
project and, as our relationship grows, we increase both the number of projects
that we perform for a particular client and the size of the engagement.
Our most significant expense is cost of services, which consists primarily
of project personnel salaries, benefits and non-reimbursed direct expenses
incurred to complete projects. The number of professionals assigned to a project
will vary according to the size, complexity, duration and demands of the
project. An unanticipated termination of a significant project could also cause
us to experience lower revenues and gross profit.
To sustain our growth and improve profitability, we have made and continue
to make substantial investments in the infrastructure of our business. These
investments include the addition of senior management, administrative personnel,
business development managers, facilities and recruiting capabilities. Selling,
general and administrative expenses include the costs of recruiting, training,
marketing, facilities, as well as administrative and executive compensation
consisting of salaries, bonuses and benefits.
Stock compensation charges consist of non-cash compensation expenses
incurred in connection with the issuances, exchanges or cancellations of stock
options and other stock awards. Compensation expense has been recognized for
options granted under our stock option plan that were granted at prices below
the fair value of our common stock at the date of issuance. This difference
results in a compensation charge of $18.4 million, which is being recognized
over the three-year vesting period. A compensation charge of $0.7 million was
recognized during the nine months ended September 30, 1999.
25
<PAGE> 29
In September 1999, we issued 50,000 shares of restricted stock, which are
subject to forfeiture upon the holder's termination of employment. We have
recorded as deferred compensation $0.6 million which is being amortized over the
48-month vesting period.
We also sold 129,702 shares of restricted stock for $7.71 per share. This
arrangement is accounted for as a variable compensation plan, and compensation
expense is recognized for the difference between the fair market value and the
carrying amount. During the nine months ended September 30, 1999, compensation
expense of $0.7 million was recognized on this arrangement.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
1998 1999 1998 1999
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $47,405 $93,359 $ 72,071 $102,746
Cost of services..................................... 27,201 53,576 40,910 58,377
------- ------- -------- --------
Gross profit......................................... 20,204 39,783 31,161 44,369
Operating costs and expenses:
Selling, general and administrative................ 13,528 26,212 20,816 30,066
Stock compensation................................. -- 1,440 30,809 1,440
Depreciation and amortization...................... 2,818 6,326 4,876 7,152
------- ------- -------- --------
Total operating costs and expenses......... 16,346 33,978 56,501 38,658
------- ------- -------- --------
Operating income (loss).............................. 3,858 5,805 (25,340) 5,711
Other expense........................................ 3,613 9,231 6,212 9,599
Provision (benefit) for income taxes................. 559 (377) (709) (566)
------- ------- -------- --------
Loss from continuing operations...................... $ (314) $(3,049) $(30,843) (3,322)
======= ======= ======== ========
AS A PERCENTAGE OF REVENUES:
Revenues............................................. 100.0% 100.0% 100.0% 100.0%
Cost of services..................................... 57.4 57.4 56.8 56.8
------- ------- -------- --------
Gross profit......................................... 42.6 42.6 43.2 43.2
Operating costs and expenses:
Selling, general and administrative................ 28.5 28.1 28.9 29.3
Stock compensation................................. -- 1.5 42.8 1.4
Depreciation and amortization...................... 5.9 6.8 6.8 7.0
------- ------- -------- --------
Operating income (loss).............................. 8.1 6.2 (35.2) 5.6
</TABLE>
HISTORICAL OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues. Revenues increased 96.9% to $93.4 million for the nine months
ended September 30, 1999 from $47.4 million for the nine months ended September
30, 1998. The increase in revenues was primarily a result of the increase in
project personnel. This growth was primarily a result of the acquisition of the
seven businesses and the growth in headcount post-acquisition. Headcount at
September 30, 1999 was 945 compared with 642 at September 30, 1998. Headcount
for the nine months ended September 30, 1999 included the full benefit of
headcount added through the acquisitions of five businesses during 1998, whereas
the nine months ended September 30, 1998 included only the benefit of those
acquisitions from the date
26
<PAGE> 30
of their acquisition. Average billing rates and utilization rates were
comparable during the two periods.
Cost of Services. Cost of services increased 97.0% to $53.6 million for
the nine months ended September 30, 1999 from $27.2 million for the nine months
ended September 30, 1998. The increase in cost of services was primarily a
result of the growth in headcount noted above.
Operating Costs and Expenses. Selling, general and administrative expenses
increased 93.8% to $26.2 million for the nine months ended September 30, 1999
from $13.5 million for the nine months ended September 30, 1998. This increase
primarily related to $6.2 million in incremental expenses of the businesses
acquired in 1998 and investments in infrastructure necessary to support growth
of the business. The 1999 period includes expenses for the full period for
acquisitions made in 1998, whereas the 1998 period includes the expenses of the
acquired businesses from the date of their acquisitions. Selling, general and
administrative expenses decreased as a percentage of revenues to 28.1% for the
nine months ended September 30, 1999 from 28.5% for the nine months ended
September 30, 1998. During the nine months ended September 30, 1999, we incurred
a non-cash stock compensation charge totaling $1.4 million related to stock
option and other equity issuances below fair value.
Depreciation increased to $2.0 million for the nine months ended September
30, 1999 from $0.8 million for the nine months ended September 30, 1998. The
increase in depreciation primarily related to the fixed assets of the businesses
acquired and, to a lesser extent, depreciation on capital expenditures made
post-acquisition. Amortization increased to $4.3 million for the nine months
ended September 30, 1999 from $2.0 million for the nine months ended September
30, 1998. The increase in amortization related to amortization of intangible
assets of the acquired businesses. Depreciation and amortization increased as a
percentage of revenues to 6.8% for the nine months ended September 30, 1999 from
5.9% for the nine months ended September 30, 1998.
Other Expense. Interest expense increased 151.9% to $9.1 million for the
nine months ended September 30, 1999 from $3.6 million for the nine months ended
September 30, 1998. The increase in interest expense related to borrowings from
Metamor to fund the purchase of the acquired companies and the payments of the
post-closing contingent consideration, or earnouts, paid to the sellers of the
acquired companies and our working capital requirements.
Provision (Benefit) for Income Taxes. The benefit for income taxes for the
nine months ended September 30, 1999 was $(0.4) million, compared with a
provision of $0.6 million for the nine months ended September 30, 1998. Our
effective tax rate includes the effects of permanent differences related to
state income taxes, net of the benefit for federal taxes, and the portion of
goodwill amortization, business meals, entertainment and stock compensation
charges not deductible for federal income tax purposes. The tax effect of these
permanent differences totaled $1.0 million and $0.6 million after tax for the
nine months ended September 30, 1999 and 1998, respectively.
PRO FORMA OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues. Revenues increased 42.6% to $102.7 million for the nine months
ended September 30, 1999 from $72.1 million for the nine months ended September
30, 1998. The increase in revenues primarily related to the increase in project
personnel headcount and, to a lesser extent, increases in billing rates.
Headcount increased 30.0% to 945 at September 30, 1999 from 727 at September 30,
1998.
27
<PAGE> 31
Cost of Services. Cost of services increased 42.7% to $58.4 million for
the nine months ended September 30, 1999 from $40.9 million for the nine months
ended September 30, 1998. The increase in cost of services was primarily a
result of the growth in headcount noted above. Cost of services remained
consistent as a percentage of revenues at 56.8% for the nine months ended
September 30, 1999 and 1998, respectively.
Operating Costs and Expenses. Selling, general and administrative expenses
increased 44.4% to $30.1 million for the nine months ended September 30, 1999
from $20.8 million for the nine months ended September 30, 1998. The increase in
selling, general and administrative expenses primarily resulted from investments
in infrastructure of approximately $6.0 million necessary to support growth of
the business. Selling, general and administrative expenses increased as a
percentage of revenues to 29.3% for the nine months ended September 30, 1999
from 28.9% for the nine months ended September 30, 1998. The increase in
selling, general and administrative expenses as a percentage of revenues
primarily resulted from investments in infrastructure necessary to support
growth of the business and position it as a free-standing, publicly held
company. During the nine months ended September 30, 1999, we incurred a non-
cash stock compensation charge of $1.4 million related to stock option and other
equity issuances below fair value. During the same period in 1998, three
constituent companies incurred pre-acquisition stock compensation charges
totaling $30.8 million.
Depreciation increased to $2.1 million for the nine months ended September
30, 1999 from $1.1 million for the nine months ended September 30, 1998. The
increase in depreciation related to the increased capital expenditures necessary
to support growth in the business. Amortization increased to $5.1 million for
the nine months ended September 30, 1999 from $3.8 million for the nine months
ended September 30, 1998. The increase in amortization related to amortization
of intangible assets of the acquired businesses. Depreciation and amortization
as a percentage of revenues increased to 7.0% for the nine months ended
September 30, 1999 from 6.8% for the nine months ended September 30, 1998.
Other Expense. Interest expense increased 52.2% to $9.6 million for the
nine months ended September 30, 1999 from $6.3 million for the nine months ended
September 30, 1998. The increase in interest expense related to borrowings from
Metamor to fund earnouts of the acquired companies and our working capital
requirements during the nine months ended September 30, 1999.
Provision (Benefit) for Income Taxes. The benefit for income taxes for the
nine months ended September 30, 1999 was $(0.6) million compared with a benefit
of $(0.7) million for the nine months ended September 30, 1998. Our effective
tax rate includes the effects of permanent differences related to state income
taxes, net of the federal income tax benefit, and the portion of goodwill
amortization, business meals and entertainment and the stock compensation
charges not deductible for federal income tax purposes. The tax effect of these
permanent differences totaled $1.4 million and $29.1 million after tax for the
nine months ended September 30, 1999 and 1998, respectively.
28
<PAGE> 32
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
The historical statement of operations data for the year ended December 31,
1997 was derived by combining the predecessor's results of operations for the
period from January 1, 1997 to March 26, 1997 with Xpedior's results of
operations from inception (March 27, 1997) to December 31, 1997. The results of
operations for the period from inception (March 27, 1997) to December 31, 1997
reflect Metamor's purchase accounting adjustments. These results are not
necessarily indicative of operations that would have occurred had the
acquisition occurred as of the beginning of the period presented.
<TABLE>
<CAPTION>
HISTORICAL
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $15,166 $72,267
Cost of services............................................ 10,027 41,930
------- -------
Gross profit................................................ 5,139 30,337
Operating costs and expenses:
Selling, general and administrative....................... 5,308 20,558
Stock compensation........................................ 6,328 --
Depreciation and amortization............................. 850 4,272
------- -------
Total operating costs and expenses................ 12,486 24,830
Operating income (loss)..................................... (7,347) 5,507
Other expense............................................... 1,235 5,537
Provision (benefit) for income taxes........................ (958) 551
------- -------
Loss from continuing operations............................. $(7,624) $ (581)
======= =======
AS A PERCENTAGE OF REVENUES:
Revenues.................................................... 100.0% 100.0%
Cost of services............................................ 66.1 58.0
------- -------
Gross profit................................................ 33.9 42.0
Operating costs and expenses:
Selling, general and administrative....................... 35.0 28.4
Stock compensation........................................ 41.7 --
Depreciation and amortization............................. 5.6 5.9
------- -------
Operating income (loss)..................................... (48.4) 7.6
</TABLE>
HISTORICAL OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED
WITH THE HISTORICAL COMBINED OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31,
1997
Revenues. Revenues increased 376.5% to $72.3 million for the year ended
December 31, 1998 from $15.2 million for the year ended December 31, 1997. The
increase in revenues was primarily a result of a 318.7% increase in project
personnel to 695 at December 31, 1998 from 166 at December 31, 1997. The growth
in headcount was primarily a result of the acquisition of the six businesses
acquired in 1998.
Cost of Services. Cost of services increased 318.2% to $41.9 million for
the year ended December 31, 1998 from $10.0 million for the year ended December
31, 1997. The increase in cost of services was primarily a result of the growth
in headcount noted above. Cost of services decreased as a percentage of revenues
to 58.0% for the year ended December 31, 1998 from 66.1% for the year ended
December 31, 1997. This improvement primarily related to: (1) the higher gross
margins of the businesses acquired in 1998 compared with the gross margins of
the predecessor in 1997 and (2) expansion in the gross margins of the
predecessor primarily due to improved utilization and billing rate increases.
29
<PAGE> 33
Operating Costs and Expenses. Selling, general and administrative expenses
increased 287.3% to $20.6 million for the year ended December 31, 1998 from $5.3
million for the year ended December 31, 1997. This increase primarily related to
$11.7 million in incremental expenses of the acquired businesses and, to a
lesser extent, investments in infrastructure necessary to support growth of the
business. Selling, general and administrative expenses decreased as a percentage
of revenues to 28.4% for the year ended December 31, 1998 from 35.0% for the
year ended December 31, 1997. The decrease in selling, general and
administrative expenses as a percentage of revenues primarily resulted from (1)
acquisitions of businesses that had lower selling, general and administrative
expense margins and (2) our improved operating leverage. During 1997, our
predecessor incurred pre-acquisition stock compensation charges totaling $6.3
million.
Depreciation increased to $1.3 million for the year ended December 31, 1998
from $0.4 million for the year ended December 31, 1997. The increase in
depreciation primarily related to the fixed assets of the businesses acquired
and, to a lesser extent, depreciation on capital expenditures made
post-acquisition. Amortization increased to $3.0 million for the year ended
December 31, 1998 from $0.4 million for the year ended December 31, 1997. The
increase in amortization related to amortization of intangible assets of the
acquired businesses. Depreciation and amortization increased as a percentage of
revenues to 5.9% for the year ended December 31, 1998 from 5.6% for the year
ended December 31, 1997.
Other Expense. Interest expense increased 351.8% to $5.6 million for the
year ended December 31, 1998 from $1.2 million for the year ended December 31,
1997. The increase in interest expense related to borrowings from Metamor to
fund the purchase of the acquired companies, including earnouts, and our working
capital requirements.
Provision (Benefit) for Income Taxes. The provision for income taxes for
the year ended December 31, 1998 was $0.6 million, compared with a benefit of
$(1.0) million for the year ended December 31, 1997. Our effective tax rate
includes the effects of permanent differences related to state income taxes, net
of the federal income tax benefit, and the portion of goodwill amortization and
business meals and entertainment not deductible for federal income tax purposes.
The tax effect of these permanent differences totaled $0.6 million after tax for
the year ended December 31, 1998. The effective tax rate for 1997 includes the
pre-acquisition period of the predecessor, which was an S corporation and
therefore not required to pay federal income tax.
HISTORICAL COMBINED OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997
COMPARED WITH THE HISTORICAL OPERATING RESULTS OF THE PREDECESSOR FOR THE YEAR
ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
YEAR ENDED
DECEMBER 31,
---------------------
1996 1997
(DOLLARS)IN THOUSANDS
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $6,605 $15,166
Cost of services............................................ 4,256 10,027
------ -------
Gross profit................................................ 2,349 5,139
Operating costs and expenses:
Selling, general and administrative....................... 1,825 5,308
Stock compensation........................................ -- 6,328
Depreciation and amortization............................. 133 850
------ -------
Total operating costs and expenses................ 1,958 12,486
</TABLE>
30
<PAGE> 34
<TABLE>
<CAPTION>
HISTORICAL
YEAR ENDED
DECEMBER 31,
---------------------
1996 1997
(DOLLARS)IN THOUSANDS
<S> <C> <C>
Operating income (loss)..................................... 391 (7,347)
Other expense............................................... 34 1,235
Provision (benefit) for income taxes........................ 8 (958)
------ -------
Income (loss) from continuing operations.................... $ 349 $(7,624)
====== =======
AS A PERCENTAGE OF REVENUES:
Revenues.................................................... 100.0% 100.0%
Cost of services............................................ 64.4 66.1
------ -------
Gross profit................................................ 35.6 33.9
Operating costs and expenses:
Selling, general and administrative....................... 27.6 35.0
Stock compensation........................................ -- 41.7
Depreciation and amortization............................. 2.0 5.6
------ -------
Operating income (loss)..................................... 5.9 (48.4)
</TABLE>
Revenues. Revenues increased 129.6% to $15.2 million for the year ended
December 31, 1997 from $6.6 million for the year ended December 31, 1996. The
increase in revenues primarily related to the increase in project personnel
headcount and, to a lesser extent, increases in billing rates. Headcount
increased 104.9% to 166 at December 31, 1997 from 81 at December 31, 1996.
Cost of Services. Cost of services increased 135.6% to $10.0 million for
the year ended December 31, 1997 from $4.3 million for the year ended December
31, 1996. The increase in cost of services was primarily a result of the growth
in headcount noted above. Cost of services increased as a percentage of revenues
to 66.1% for the year ended December 31, 1997 from 64.4% for the year ended
December 31, 1996. This increase was primarily due to personnel cost increases
in excess of the related billing rate increases.
Operating Costs and Expenses. Selling, general and administrative expenses
increased 190.8% to $5.3 million for the year ended December 31, 1997 from $1.8
million for the year ended December 31, 1996. The increase in selling, general
and administrative expenses and selling, general and administrative expenses as
a percentage of revenues was primarily due to investments in infrastructure
necessary to support the growth in the business. During the year ended December
31, 1997, the predecessor incurred pre-acquisition stock compensation charges
totaling $6.3 million. Selling, general and administrative expenses increased as
a percentage of revenues to 35.0% for the year ended December 31, 1997 from
27.6% for the year ended December 31, 1996.
Depreciation totaled $0.4 million and $0.1 million for the years ended
December 31, 1997 and 1996, respectively. Amortization expense totaled $0.4
million for the year ended December 31, 1997 and related to the acquisition of
the predecessor. Depreciation and amortization increased as a percentage of
revenues to 5.6% for the year ended December 31, 1997 from 2.0% for the year
ended December 31, 1996.
Other Expense. Interest expense for the year ended December 31, 1997
totaled $1.2 million and related to the interest on debt in connection with the
acquisition of the predecessor.
Provision (Benefit) for Income Taxes. The benefit for income taxes for the
year ended December 31, 1997 was $(1.0) million. The predecessor was an S
corporation and, accordingly, federal income taxes were the responsibility of
the individual stockholders.
31
<PAGE> 35
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly financial data for the
periods indicated. We obtained this information from unaudited quarterly
consolidated financial statements and, in the opinion of our management, it
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial results for the periods.
The accompanying unaudited quarterly pro forma financial statements are
based on adjustments to the historical consolidated financial statements to
illustrate the impact of the acquisitions as if those acquisitions were
consummated as of January 1, 1998. The adjustments are the same as those used in
preparing the Unaudited Pro Forma Financial Statements included elsewhere in
this prospectus and should be read in conjunction with those statements. The
quarterly pro forma consolidated statements of operations assume the
acquisitions were consummated as of the beginning of the periods presented. The
quarterly pro forma consolidated statements of operations are not necessarily
indicative of results that would have occurred had the acquisitions been
consummated as of January 1, 1998 or that might be attained in the future.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The quarterly pro forma financial statements should be read in
conjunction with the historical consolidated financial statements of Xpedior,
the historical financial statements of the Acquired Companies and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS DATA:
Revenues................................. $9,852 $15,158 $22,395 $24,862 $27,769 $31,044 $34,546
Cost of services......................... 6,207 8,538 12,456 14,729 16,044 17,618 19,914
------ ------- ------- ------- ------- ------- -------
Gross profit............................. 3,645 6,620 9,939 10,133 11,725 13,426 14,632
Operating costs and expenses:
Selling, general and administrative.... 2,811 4,434 6,283 7,030 7,334 8,358 10,520
Stock compensation..................... -- -- -- -- -- -- 1,440
Depreciation and amortization.......... 690 928 1,200 1,454 2,053 2,029 2,244
------ ------- ------- ------- ------- ------- -------
Total operating costs and
expenses....................... 3,501 5,362 7,483 8,484 9,387 10,387 14,204
------ ------- ------- ------- ------- ------- -------
Operating income......................... 144 1,258 2,456 1,649 2,338 3,039 428
Other expense............................ 903 1,266 1,444 1,924 2,308 3,231 3,692
------ ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes.................... (759) (8) 1,012 (275) 30 (192) (3,264)
Provision (benefit) for income taxes..... (200) 140 619 (8) 119 (28) (468)
------ ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations............................. $ (559) $ (148) $ 393 $ (267) $ (89) $ (164) $(2,796)
====== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenues................................. $20,484 $ 24,363 $27,224 $28,429 $31,030 $34,051 $37,665
Cost of services......................... 12,220 13,620 15,070 16,732 17,807 19,289 21,281
------- -------- ------- ------- ------- ------- -------
Gross profit............................. 8,264 10,743 12,154 11,697 13,223 14,762 16,384
Operating costs and expenses:
Selling, general and administrative.... 5,819 7,114 7,883 8,844 8,538 9,472 12,056
Stock compensation..................... 1,759 29,050 -- -- -- -- 1,440
Depreciation and amortization.......... 1,502 1,618 1,756 1,748 2,338 2,308 2,506
------- -------- ------- ------- ------- ------- -------
Total operating costs and
expenses....................... 9,080 37,782 9,639 10,592 10,876 11,780 16,002
------- -------- ------- ------- ------- ------- -------
Operating income (loss).................. (816) (27,039) 2,515 1,105 2,347 2,982 382
Other expense............................ 1,765 2,038 2,409 3,183 3,069 3,210 3,320
------- -------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes.................... (2,581) (29,077) 106 (2,078) (722) (228) (2,938)
Provision (benefit) for income taxes..... (688) (40) 19 (693) (90) (46) (430)
------- -------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations............................. $(1,893) $(29,037) $ 87 $(1,385) $ (632) $ (182) $(2,508)
======= ======== ======= ======= ======= ======= =======
</TABLE>
32
<PAGE> 36
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements have principally related to the acquisitions of
businesses, working capital and capital expenditures. These requirements have
been met primarily through funds provided by Metamor and cash flows from
operations.
As of September 30, 1999, we had outstanding borrowings from Metamor of
$100.0 million at a weighted average interest rate of 11.5%. These borrowings
primarily relate to acquisition costs and, to a lesser extent, working capital
requirements. We intend to repay the amounts due to Metamor out of the proceeds
from this offering.
Metamor allocates its corporate overhead to its operating units based on
revenues of the units. This allocation includes costs associated with services
Metamor provides to the business units such as mergers and acquisitions, legal,
tax, risk and cash management. The overhead allocation from Metamor is included
in our selling, general and administrative expenses and totaled $1.4 million for
the year ended December 31, 1998 and $1.9 million for the nine months ended
September 30, 1999. Following the completion of this offering, Metamor will
continue to provide us with these services. However, it will cease making a
general allocation of its overhead to us and allocate only those expenses
related to actual services provided. Following the offering, we expect the
allocation of costs for services provided by Metamor will be minimal.
For the year ended December 31, 1998, cash paid for acquisitions and
related earnouts totaled $61.7 million. For the nine months ended September 30,
1999, cash paid for acquisitions and related earnouts totaled $48.1 million.
Total cash paid for acquisitions since inception was $125.8 million, all of
which was paid by Metamor. Of this amount, Xpedior issued notes to Metamor for
$86.8 million, which is included in the $100.0 million due to Metamor, and
Metamor contributed the remainder to the capital of Xpedior.
We had working capital, excluding amounts due to Metamor, of $7.5 million
at September 30, 1999. Our operating cash flows and working capital requirements
are significantly affected by the timing of payroll and the receipt of payment
from our clients. Generally, we pay our professionals semi-monthly and receive
payments from our clients, currently averaging 90 days from the date services
were performed. Cash flows provided by (used in) operating activities were
$(15.5) million and $(1.7) million for the nine months ended September 30, 1999
and 1998. The use of cash in operations in 1999 reflected investments in working
capital (principally accounts receivable) related to our growth during this
period.
Over the next twelve months, we anticipate that we will spend:
- approximately $16.0 million in incremental branding and marketing
expenses;
- approximately $19.8 million in earnouts that have been fixed, which are
payable in March and April 2000; and
- approximately $12.0 million in capital expenditures to support the growth
of the business.
In addition, we have contingent liabilities of up to $16.3 million related
to earnouts that are based on the performance of two of the acquired companies,
of which $15.0 million relates to NDC Group, Inc. We expect that approximately
one-half of the NDC earnout, if earned and payable, will be paid in Metamor
common stock, for which Metamor has agreed to contribute that payment to our
capital and not require repayment by us. We also have assumed the cash portion
of any future settlement associated with a guarantee of the value of
approximately 308,000 shares of Metamor common stock issued in connection with
the acquisition of NDC. If
33
<PAGE> 37
the fair market value of these shares is less than $14.0 million based upon the
average market price for the 20 trading days preceding April 16, 2000, we will
be obligated to pay the difference to the former NDC shareholders. We expect
that the settlement of this guarantee, if triggered, will be paid one-half in
cash, which we have assumed, and one-half in Metamor common stock. Metamor has
agreed to contribute to our capital the stock it issues for the non-cash portion
of the settlement and not require repayment by us. Based on the last reported
sale price of Metamor common stock of $33 3/16 on December 15, 1999, our
obligation under the guarantee would have been approximately $2.0 million.
We are currently in preliminary discussions with commercial banks for a
credit facility to fund our working capital requirements over the next twelve
months. We expect to have a credit facility in place following our initial
public offering. In the interim, Metamor has agreed to provide funding for our
working capital requirements and to reduce the interest rate on our outstanding
intercompany indebtedness to its incremental borrowing rate, which at September
30, 1999 was approximately 6.9%.
We believe that the cash proceeds from this offering, the availability of
borrowings from our proposed credit facility and cash flow from operating
activities will be sufficient to meet our working capital and capital
expenditure requirements for at least the next twelve months. However, we could
elect, or we could be required, to raise additional funds during that period and
we may need to raise additional capital in the future. Additional capital may
not be available at all, or may not be available on terms favorable to us. We
may also issue equity or equity-related securities for acquisitions from time to
time in the future. Any additional issuance of equity or equity-related
securities will be dilutive to our stockholders.
YEAR 2000 READINESS
Historically, many computer systems, software applications and products
have been programmed to only accept a two-digit code for the date. This will
become an issue as we enter the year 2000 and these type of systems do not have
the ability to differentiate between 1900 and 2000. As a result of this problem,
many systems that are not capable of four-digit year recognition have either
been modified or replaced.
The inability of computer systems to differentiate between centuries could
have a negative business impact on us, our clients and our vendors.
We have reviewed and, where appropriate, upgraded the principal internal
systems that we rely upon to operate our business and believe that these systems
are Year 2000 compliant. To date, the amounts we have spent preparing for the
effects of the Year 2000 issue have not been material and we do not expect to
incur material costs in the future.
We do not currently have any information concerning the general Year 2000
compliance status of our clients, nor do we intend to examine our clients' Year
2000 readiness. If our clients are not Year 2000 compliant, they may experience
material costs to remedy Year 2000 problems. In such case, Year 2000 issues
could reduce or eliminate the budgets that current or potential clients allocate
for purchasing our services. In addition, we anticipate that many of our clients
may limit spending on our services as they attend to Year 2000 issues. As a
result, our business, financial condition and operating results could be harmed.
We rely on the products and services of many external vendors. These
products and services include, but are not limited to, utilities,
telecommunications, software products, and computer hardware. We are in the
process of obtaining certifications from key vendors of software products
34
<PAGE> 38
and computer hardware. We most likely will not be able to obtain certificates of
compliance from all of these vendors. However, we are not dependent on any
single vendor and believe that we can obtain products and services from
alternative vendors in the event our current vendors experience Year 2000
problems. Additionally, we will not be able to and do not intend to receive
compliance certifications from the providers of utilities, telecommunications or
other services. We also rely on Metamor for various support services. To the
extent that Metamor experiences Year 2000 problems, we believe we can obtain
these services from third party service providers at prevailing market rates. If
we fail to provide Year 2000 compliant eBusiness solutions to our clients, our
reputation could be harmed and we could incur substantial legal liability which
in turn could seriously harm our business and operating results.
We believe that, although our risk of operational disruption from systems
failures due to Year 2000 issues is minimal, we could suffer adverse
consequences as a result of interruptions in electrical power,
telecommunications or other critical third party infrastructure services. In a
worst case scenario, our computer systems could be rendered inoperable, and we
could be unable to develop or support our eBusiness solutions. We have reviewed
this most reasonably likely worst case scenario and have developed contingency
plans to address our critical applications. These contingency plans include
manual workarounds and adjusting personnel deployment strategies.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. We have not entered into any
derivative financial instruments and do not believe that the adoption of
Financial Accounting Standards No. 133 will have an impact on our results of
operations, financial position of cash flows.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We currently are exposed to market risks related to changes in interest
rates. The proceeds from this offering will be invested short term in financial
instruments. The value of these financial instruments will be affected by
fluctuations in interest rates and could fall in value if interest rates rise.
Additionally, our future borrowings will have a variable component that will
fluctuate as interest rates change. If market interest rates were to increase
immediately and uniformly by 10%, there would not be a material impact on the
results of operations or on our balance sheet.
35
<PAGE> 39
XPEDIOR
OUR HISTORY
We were formed by Metamor in December 1997 to be the holding company for
its eBusiness solutions unit. Metamor commenced operations of this unit with the
acquisition of Metamor Technologies, Ltd., our predecessor company, on March 27,
1997, and acquired six additional companies in 1998 that became a part of the
eBusiness solutions unit. These acquisitions include Sage I.T. Partners, Inc.
and Workgroup Productivity Corp. in January 1998, NDC Group, Inc. in April 1998,
Virtual Solutions, Inc. in June 1998, Advanced Information Solutions, Inc. in
July 1998 and New Technology Partners Consulting in November 1998. Effective
April 30, 1999, Metamor contributed to us all the outstanding capital stock of
the seven companies comprising its eBusiness solutions unit. All seven companies
were wholly owned subsidiaries of Metamor. As the entities were under common
control, the contribution has been accounted for at historical cost in a manner
similar to a pooling of interests. In September 1999, we acquired Kinderhook
Systems, Inc. These companies have brought complementary skills, customer
relationships and geographic coverage to our business.
In connection with the acquisitions of Sage I.T. Partners, Inc., Workgroup
Productivity Corp., NDC Group, Inc., Virtual Solutions, Inc., Advanced
Information Solutions, Inc. and New Technology Partners Consulting, Metamor
agreed to make contingent purchase price payments based on the performance of
the companies after the date of acquisition. While our efforts to integrate each
company into our operations began immediately upon its acquisition, our
continuing obligations relating to the contingent acquisition payments limited
our integration efforts, particularly the sales and marketing functions. In July
and August 1999, all of the remaining contingent payments, with the exception of
those relating to NDC Group and New Technology Partners Consulting, were fixed,
eliminating many of the obstacles to more completely integrating these
businesses.
SEPARATION FROM METAMOR
METAMOR'S PLAN TO DIVEST XPEDIOR. We are currently a subsidiary of Metamor
Worldwide. After the completion of this offering, Metamor will own approximately
83% of our outstanding common stock, or approximately 80% if the underwriters
exercise their over-allotment option in full. Metamor has announced that in 2000
it plans to distribute all of its shares of Xpedior common stock to its
stockholders. Metamor expects to accomplish this distribution through one of the
following:
- Split-Off. An exchange offer by Metamor in which holders of Metamor's
common stock would be invited to tender their shares in exchange for
shares of our common stock; or
- Spin-Off. A pro rata distribution by Metamor of its shares of our common
stock to holders of Metamor's common stock; or
- Combined Split-Off/Spin-Off. A combination of the above transactions.
We refer to this distribution, in whatever form it may take, as the
"Xpedior distribution."
Metamor has also advised us that, based on its current plans, if it decides
to accomplish the Xpedior distribution through a split-off exchange offer and
not enough of its common stockholders tender their shares to enable Metamor to
divest itself of all of its shares of Xpedior
36
<PAGE> 40
common stock, it would distribute its remaining shares of Xpedior common stock
to its stockholders in a spin-off.
Metamor has the sole discretion to determine the timing, structure and all
terms of its distribution of our common stock. Metamor has advised us that it
believes it would be desirable to have an intervening period of several months
between this offering and the Xpedior distribution, and that Metamor accordingly
does not currently expect that it would complete the Xpedior distribution prior
to mid-2000. We have agreed to cooperate with Metamor to complete the
divestiture because we believe that our complete separation from Metamor will
enhance our ability to pursue our business strategy. Metamor intends to seek a
private letter ruling from the IRS that the distribution of its shares of
Xpedior common stock to its stockholders would be tax-free to Metamor and its
stockholders for U.S. federal income tax purposes. We cannot assure you that the
IRS will provide Metamor with a favorable ruling. Metamor is not obligated to
complete the divestiture and we cannot assure you as to whether or when it will
occur.
Metamor has also advised us that it would not complete the Xpedior
distribution if its board of directors determines that the Xpedior distribution
is no longer in the best interests of Metamor and its stockholders. Metamor has
further advised us that it currently expects the principal factors it would
consider in making this determination, as well as the principal factors it would
consider in making the determination as to the timing, structure and terms of
the Xpedior distribution, to be:
- the market price of our common stock;
- the market price of Metamor's common stock;
- satisfaction that the Xpedior distribution will be tax-free to Metamor
and its stockholders and as to the other tax consequences of the
transactions;
- the absence of any court orders or regulations prohibiting or restricting
the completion of the Xpedior distribution; and
- other conditions affecting the businesses of Xpedior or Metamor that make
it no longer in the best interests of such businesses to be fully
separated.
BENEFITS OF THE SEPARATION. We believe that we will benefit from our
complete separation from Metamor. As an independent eBusiness company, we expect
to be better able to retain and attract motivated and talented management and
professional personnel. In addition, the separation will allow us to develop and
evaluate an eBusiness focused strategy independent of Metamor's broader approach
to the information technology services market. We believe that our management's
and professionals' focus will be strengthened by incentive programs tied to the
market performance of our common stock.
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<PAGE> 41
BUSINESS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from these forward-looking
statements.
OVERVIEW
Xpedior provides innovative and comprehensive eBusiness solutions to Global
2000 companies and emerging Internet businesses. We use our Xpedior Process and
our reusable solutions, or Xpediators, to deliver a broad range of services
designed to help our clients succeed in the emerging networked economy. We
combine extensive technical expertise with strategy consulting and creative
design services to enable our clients to capitalize on the communications power
and transaction efficiency of the Internet. Since 1994, we have demonstrated our
ability to develop eBusiness solutions that allow our clients to generate new
revenue opportunities and operate more efficiently.
Our extensive experience providing eBusiness solutions has enabled us to
develop and evolve our Xpedior Process and suite of Xpediators. The Xpedior
Process is our five-stage methodology for delivering eBusiness solutions to our
clients. Our Xpediators are a collection of proven, reusable solutions,
including software architectures, components and applications, that we leverage
in delivering a broad range of services. Our professionals collaborate at our
solution centers in San Francisco, Chicago, Dallas, New York and Alexandria,
Virginia where they are able to share expertise and best practices to develop
and deliver Internet technology solutions. By combining our Xpedior Process and
Xpediators with our solution centers, we are able to reduce our clients'
time-to-market and maximize the quality of our solutions.
Our eBusiness solutions integrate one or more of the following services,
customized to fit a client's needs:
<TABLE>
<S> <C>
- - Digital Business Strategy
- - Electronic Commerce
- - Digital Branding and User
Experience Design
- - eBusiness Applications and Integration
- - eBusiness Technology Management
- - eBusiness Networks
- - eBusiness Intelligence
- - Enterprise Portals and Knowledge
Management
</TABLE>
We have over 1,100 employees at our 12 U.S. and three international
offices. We have developed extensive expertise in the financial services,
healthcare, media and publishing, retail and distribution and telecommunications
industries. We can leverage this expertise in delivering our solutions and
marketing our services to potential new clients.
INDUSTRY BACKGROUND
OUR CLIENTS' MARKETPLACE
International Data Corporation, or IDC, estimates that the number of
Internet users worldwide will grow from approximately 104 million in 1998 to
more than 510 million in 2003. This growth has fundamentally changed the way
that customers and businesses communicate, obtain information and purchase goods
and services. Forrester Research estimates that the market for
business-to-business eCommerce will grow from $43 billion in 1998 to $1.3
trillion in 2003 and that business-to-consumer eCommerce will grow from $8
billion to $108 billion over the same period.
38
<PAGE> 42
The emergence of eBusiness has created a new competitive environment for
businesses, one in which many traditional barriers to competition no longer
exist. The Internet has enabled organizations of all types and sizes to create
new sales opportunities, enhance customer service, improve efficiencies, reduce
costs and improve communication. Buyers are now able to choose products and
services by electronically researching data from a wide spectrum of vendors,
often without regard to geographic location. In light of these factors, we
believe that eBusiness strategies are critical to success in today's
marketplace.
A substantial amount of capital is being invested to make businesses more
efficient and competitive through the use of the Internet and electronic
communications. Competition in virtually all industries is increasing, often
from the emergence of companies with radical new business models that challenge
established industry players. These traditional businesses must redefine or
refocus their businesses to succeed in this new economy or risk being overtaken
by upstart competitors. To respond with sufficient speed to these new
competitive pressures, both established companies and industry upstarts
increasingly find it necessary to turn to outside services organizations such as
Xpedior to provide insight and scarce expertise or to complement their internal
capabilities.
THE EBUSINESS SERVICES MARKET OPPORTUNITY
IDC estimates that the worldwide market for Internet professional services
will grow from $7.8 billion in 1998 to $78.5 billion in 2003. Despite the size
of this market opportunity, we believe that there are relatively few companies
that effectively develop and implement comprehensive eBusiness solutions. For
example, boutique web design firms and online agencies typically focus on user
interface and front-end design and do not have the expertise required for rapid
development and deployment of high transaction volume eBusiness systems. In
addition, traditional information technology services firms are focused
primarily on enhancements to existing technology infrastructure and the
implementation of traditional business applications, and lack the necessary
focus and experience to execute eBusiness solutions efficiently and quickly.
The delivery of comprehensive eBusiness solutions requires expertise in
three fundamental service disciplines -- strategic, technical and creative.
Professionals from each of the three disciplines must work together to maximize
the speed at which a solution can be imagined, designed and delivered.
Initially, our eBusiness strategists work closely with the client's senior
executives to help them imagine and define strategic eBusiness plans. Unlike
traditional strategy consultants, however, eBusiness strategists must understand
technology and the capabilities of the Internet and electronic communications,
since these technologies allow the creation of business strategies that might be
inconceivable in the traditional economy. Following the development of an
eBusiness strategy, our eBusiness technology professionals build the systems and
technology infrastructure required to implement the strategy. These
professionals, including experts in software, networking, technology integration
and operations, must be able to build systems that leverage the clients'
existing technology infrastructure and serve as platforms for continued
development of the eBusiness. Concurrent with the development of the eBusiness
strategy and implementation of the necessary technology infrastructure, our
creative professionals work with the client and the strategy and technology
professionals to define the interactive marketing strategy and to create
compelling user interfaces for the client's eBusiness.
Historically, eBusiness service providers have not been able to offer their
clients expertise in each of these three disciplines, nor have these providers
been capable of performing their services in the demanding timeframes often
required for Internet initiatives. We believe organizations of
39
<PAGE> 43
all types will increasingly seek assistance from providers that offer the
comprehensive set of services needed for them to achieve their eBusiness
objectives in the necessary timeframes.
THE XPEDIOR SOLUTION
We have developed the Xpedior Solution to execute our engagements and meet
our clients' needs for rapid implementation of reliable, scaleable and
sustainable eBusinesses. The core of the Xpedior Solution is the five-stage
Xpedior Process, which we leverage through the use of our solution centers, our
Xpediators and our knowledge management systems.
THE XPEDIOR PROCESS
The Xpedior Process is our five-stage methodology for developing reliable,
innovative eBusiness solutions for our clients. The Xpedior Process is the
result of our extensive experience and helps to ensure quality delivery of our
services to our clients. We customize the Xpedior Process to meet each client's
particular needs and support each of our service lines, which span the
strategic, technical and creative disciplines. The process is highly iterative.
It is designed to be used initially as a basis for constructing a robust,
expandable eBusiness platform for a client. Thereafter, it can serve as a
framework for continued evolution of that platform. Unlike other processes,
which often rely almost exclusively on written specifications, the Xpedior
Process makes extensive use of interactive workshops and visualization
techniques such as storyboards and prototypes. We use the information learned
through our client engagements to update and improve our process.
The Xpedior Process is comprised of the following stages:
- Imagine. In the imagine stage, our professionals work extensively with
our client's senior business and technical personnel to explore the
possible opportunities and impacts of the emerging networked economy on
the client's business. During the imagine stage, we quickly develop
eBusiness strategies for our clients and identify potential solutions
that can be developed to implement those strategies.
- Define. In the define stage, we continue to work closely with our
client's business and technical personnel to further define one or more
of the solutions identified in the imagine stage. Alternatively, in some
instances our clients will come to us with a specific solution in mind.
In those circumstances, our process begins with the define stage. In
either case, during this stage we define the user experience of the
system using prototypes and storyboards and identify the functionality to
be implemented.
- Architect. In the architect stage, our professionals work closely with
our client's technical personnel to define the technical environment that
will support the client's eBusiness. This includes understanding the
client's existing technology infrastructure in an effort to maximize its
use and ensure that new eBusiness applications are compatible with the
client's existing infrastructure. In addition, our professionals evaluate
the suitability of our Xpediators, as well as third-party software, for
construction of the client's solution.
At the end of the define and architect stages, which may be
undertaken concurrently, the client is presented with a blueprint of the
solution. Typically, we then construct the solution at one of our
solution centers or at the client's facilities.
- Build. During the build stage, the client's eBusiness solution is
constructed and extensively tested. This process consists of a series of
planned iterations during which the solution blueprint is programmed and
refined. Upon completion of numerous iterations,
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<PAGE> 44
the system goes through a final system test to ensure that the developed
solution meets the requirements of the client that were identified in the
define stage. The result of the build stage is a complete eBusiness
computing platform that meets the client's specifications and will serve
as a platform for continued evolution of the client's eBusiness.
- Deliver. During the deliver stage, we implement the solution and
transition the ongoing operation, maintenance and support of the solution
to the client. Delivering the solution typically entails installation of
hardware and software systems, managing business process changes,
educating system users and implementing a support structure for the
client. Alternatively, we can assume responsibility for these functions
through our eBusiness outsourcing practice.
Typically, upon completion of the deliver stage, Xpedior is retained to
evolve the delivered eBusiness solution to meet changing business needs and
capitalize on technological advances. To accomplish this, we repeat the Xpedior
Process, progressing through each stage as necessary.
EBUSINESS XPEDIATORS
Our Xpediators are reusable solutions that we leverage to reduce the time
required to deliver solutions to our clients, while simultaneously providing
increased quality due to their proven nature. We devote significant resources to
our Xpediators, including maintaining a full-time team dedicated to their
development and promoting and supporting their use throughout the company. Our
Xpediators are grouped into three categories:
- Xpediator Frameworks. Our Xpediator Frameworks are comprehensive
software architectures for developing large-scale eBusiness applications
that complement leading application server environments such as the
Sun-Netscape Alliance's Application Server, BEA's Web Logic Server,
SilverStream and the Forte Application Development Environment. Xpediator
Frameworks provide robust, scaleable and extendible software architecture
that serves as a base for evolution of a client's eBusiness systems.
- Xpediator Components. Our Xpediator Components are reusable software
components used to implement common eBusiness functions, such as shopping
cart and credit card processing. Our components provide functionality for
eBusiness areas such as payment processing and high volume eBusiness
transaction processing.
- Xpediator Solutions. Our Xpediator Solutions are comprehensive
applications for specific eBusiness functions such as interactive user
interface systems that provide access to information and knowledge across
entire enterprises and care management systems that control judicial
dockets using the Internet. Xpediator Solutions are typically solutions
that we developed in conjunction with specific clients and retained the
rights to use in connection with future client engagements.
SOLUTION CENTERS
We develop a significant portion of our solutions at our solution centers
in San Francisco, Chicago, Dallas, New York and Alexandria, Virginia. Our
solution centers provide a high-tech environment where our professionals and
teams of solution center specialists are able to share expertise and best
practices across client engagements, while maintaining continuous communication
with our clients. When development has been completed, the work returns to the
appropriate client or hosting facility for final implementation.
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The solution centers are focused on the development and delivery of
repeatable, scaleable solutions that can be customized as needed. This approach
ultimately reduces the time-to-market for our solutions. In addition, we believe
that the opportunity to work in our solution centers represents a compelling
alternative for professionals seeking to be in a collaborative environment and
maintain a more stable lifestyle with reduced travel requirements.
KNOWLEDGE MANAGEMENT
We employ knowledge management systems that we intend to consolidate and
expand throughout the organization, allowing us to continue our commitment to
sharing best practices throughout the company. We have found that while each
engagement has certain unique elements, most solutions employ information and
processes that can be used in other solutions. Our experience with particular
industries, business processes and technologies generates institutional
intellectual capital that can be reused to continuously improve the solutions we
provide to our clients and sharpen the effectiveness of our professionals. This
intellectual capital includes the products of each stage of the Xpedior Process,
including strategies, technical and functional designs and plans, and reusable
source code to which Xpedior has retained the intellectual property rights.
An important factor in leveraging the power of the knowledge management
system is the establishment of a culture that encourages and rewards
contribution to and use of the system. To this end, use of and contribution to
the knowledge management systems will be a key element of the professional
advancement criteria for all Xpedior professionals.
STRATEGY
Our objective is to be the provider of choice for comprehensive,
customized, integrated eBusiness solutions to Global 2000 companies and emerging
Internet businesses. Our strategy to achieve this objective includes the
following key elements:
EXTEND RELATIONSHIPS WITH EXISTING CLIENTS AND AGGRESSIVELY MARKET TO POTENTIAL
NEW CLIENTS
We intend to increase our sales to current clients by cross-selling
existing services to them and assisting them as their eBusiness strategies
evolve. We plan to broaden our client base by aggressively investing in brand
recognition and continuing to expand geographically. As part of our strategy to
extend our client relationships, we will consider pursuing strategic
acquisitions as opportunities may arise.
EXPLOIT INDUSTRY-SPECIFIC EXPERTISE
Through our experience designing, developing, implementing and managing
eBusiness solutions for a wide variety of companies, we have developed extensive
experience with industry-specific solutions. We believe that our expertise in
these areas enables our teams to provide more valuable strategic and technical
insights. It also significantly enhances our ability to help other companies in
the same industries successfully adopt their own eBusiness solutions. To date,
our expertise includes the financial services, healthcare, media and publishing,
retail and distribution, telecommunications and Internet-based business
industries. We intend to continue to focus our sales and marketing efforts on
these industries.
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REFINE, LEVERAGE AND EXTEND THE XPEDIOR SOLUTION
Our professionals have developed a broad base of institutional knowledge
and best practices through extensive and varied service engagements. Our
strategy is to capture and deploy this intellectual capital through our
knowledge management systems and by continuing to refine the Xpedior Process.
During the course of our client engagements, we also seek to identify distinct
solutions that can be developed into and distributed as new Xpediators. These
proven, reusable solutions provide us with speed and quality advantages over our
competitors that have not developed similar assets. Our solution centers have
also played a role, and are expected in the future to play a more critical role,
in the dissemination process. By sharing resources, including scarce technology
expertise, and using state-of-the-art computing facilities, we are able to
develop solutions with greater efficiency than if we were to develop the
equivalent solution at a client site. As we expand geographically and increase
the number of professionals employed on client engagements, our ability to share
resources among our professionals will be critical to the successful growth of
our business.
EXPAND AND LEVERAGE STRATEGIC INDUSTRY ALLIANCES
We have established strategic alliances with leading technology companies,
including Microsoft, IBM, Sun Microsystems, Hewlett-Packard and BroadVision.
Through these non-exclusive alliances, we join with the marketing and sales
organizations of these alliance partners to pursue sales opportunities and
better fulfill client needs. These alliances typically result in referrals to
new clients and provide access to technology and expertise. We intend to
continue to strengthen these relationships and pursue additional strategic
industry alliances.
ATTRACT AND RETAIN QUALIFIED EMPLOYEES
We believe that our ability to retain and attract top industry
professionals will continue to be essential to our success in delivering
innovative eBusiness solutions. We intend to continue to recruit aggressively
and to focus on the retention of our employees through a collaborative corporate
culture, the cohesive nature and lifestyle benefits of our solution center
approach, our established training and development and competitive compensation
programs.
BUILD THE IDENTITY AND AWARENESS OF OUR BRAND
We are adopting a single corporate vision, name, identity and brand across
our organization. Our management and employees will receive incentive
compensation that is based on overall corporate performance. We believe it is
critical to establish strong, internal management systems and processes to
maintain a high, uniform level of client service and efficient utilization of
our resources.
SERVICES
Our eBusiness solutions include one or more of the following services,
customized to fit our clients' needs.
DIGITAL BUSINESS STRATEGY
We help our clients create competitive advantage through the development of
clear, innovative and executable eBusiness strategies. We do this by helping
them to imagine how the emerging networked economy provides opportunities for,
or potentially threatens, their existing businesses. We then deliver digital
business plans, retool business processes for the digital
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economy and develop executable action plans for our clients' businesses. Our
capabilities are based upon our industry knowledge, our broad experience in the
digital economy and our commitment to our clients' success.
ELECTRONIC COMMERCE
We work with our clients to implement electronic commerce applications and
systems that enable them to create new revenue streams, reduce costs and compete
more effectively. The applications we build include business-to-business
applications which enable our customers to work more effectively with their
partners, suppliers and customers, as well as business-to-consumer applications
enabling retailers to sell directly to consumers. We specialize on applications
for personalized selling and marketing as well as high volume and high
availability transaction processing systems.
DIGITAL BRANDING AND USER EXPERIENCE DESIGN
We design online brands for our clients through our experienced team of
creative visual designers and interactive marketing experts, and by managing the
branding and design process in partnership with third party designers. In
addition, our team of experts works to extend our customers' existing brand
identities into the online and interactive mediums like the Internet. Our user
experience design group also works closely with each of our practice areas to
apply their skills in interactive design, information architecture and creative
design to enhance the user experience.
EBUSINESS APPLICATIONS AND INTEGRATION
We integrate the eBusiness systems we build with the client's existing back
office and front office infrastructure, and develop systems that enable our
customers to capitalize on digital business strategies. We do this by:
- extending our clients' enterprise resource management systems to trading
partners over the Internet;
- integrating their front office systems, such as customer care, with
web-based eBusiness facilities; and
- extending to the Internet business-to-business or business-to-consumer
transactions that execute in their traditional systems.
EBUSINESS TECHNOLOGY MANAGEMENT
We provide a wide range of eBusiness technology management services
including managing private networks, operating data warehousing facilities and
managing complex eBusiness applications, as well as the outsourcing of a
client's entire technology environment. We perform these services by providing
teams that manage and execute our clients' technical eBusiness functions.
EBUSINESS NETWORKS
We provide a broad complement of networking services including local and
wide area network design, server and application infrastructure support and
network rollout and support. We leverage our experience in managing nationwide
private networks, and our alliances with
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leading Internet service providers, hosting companies and equipment providers,
to deliver sophisticated networking services.
EBUSINESS INTELLIGENCE
We provide eBusiness intelligence services focused on the design and
development of solutions for the collection, retention and use of valuable
customer and market data. These services include building data warehouses,
decision support systems, one-to-one marketing facilities and permission-based
marketing systems. As more and more of our clients' interaction with their
customers takes place in the digital domain, the ability to manage and
capitalize on the vast amounts of data generated by eBusiness is increasingly a
key element of our eBusiness solutions.
ENTERPRISE PORTALS AND KNOWLEDGE MANAGEMENT
We provide services that allow our clients to capture, consolidate and
redeploy institutional knowledge stored throughout their digital enterprise and
use that knowledge to their competitive advantage. We do this through the
design, construction and installation of a broad range of knowledge management
services. We develop systems that allow our clients to collaborate more
efficiently with their employees, customers and partners to reduce
time-to-market for their products and improve quality.
CLIENT CASE STUDIES
The following client case studies illustrate the value of our services and
our unique capabilities to deliver innovative, reliable solutions in rapid
timeframes.
ONLINEOFFICESUPPLIES.COM
In 1998, the founder of OnlineOfficeSupplies.com determined that only a
small percentage of office supply purchases were being made online. While the
major retailers had web sites, they were geared to drive foot traffic to their
stores or to allow customers to register for paper-based catalogs. Fears
regarding cannibalization, site maintenance, the number of potential accounts
and varying price structures presented large obstacles for traditional office
supply superstores trying to develop an Internet strategy. Traditional
catalog-based retailers were not meeting the needs of manufacturers, as it could
take up to 18 months for a new product to be featured in a catalog.
Given the size of the potential market and industry analysts' forecasts of
growth, OnlineOfficeSupplies.com engaged us to design, build and deploy an
innovative online office supply superstore. We worked in tandem with
OnlineOfficeSupplies.com's partner, United Stationers, to develop and implement
an integrated order fulfillment process. Since this partner lacked the internal
expertise to develop new Internet technology, we used an electronic data
interchange model to transfer orders to the fulfillment center and obtain
customer order information.
The initial site was deployed in only 14 weeks and OnlineOfficeSupplies.com
helped transform the office supply procurement process for small businesses,
home offices and corporate customers.
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HEWLETT-PACKARD
Hewlett-Packard's competitors were beginning to provide direct sales to
consumers via the Internet. H-P realized the potential of eBusiness and the need
to move quickly. H-P's objective was to sell its full range of computers,
supplies and peripherals directly to its customers online, in addition to its
sales through traditional distribution channels.
In response to H-P's need to implement a creative solution that would
provide a competitive advantage in marketing its products, we developed a
solution that linked H-P's SAP Enterprise order management and inventory systems
with FedEx to assure fulfillment and product availability. To expedite H-P's
time-to-market, this Xpedior Solution was built using reliable software
technology from BroadVision, customized and integrated by our project team.
One-to-One Marketing(R) features of the system enable H-P to present shoppers
with personalized promotions and coupons, customized to their ordering history
and specific needs.
Construction of H-P's Shopping Village, www.shopping.hp.com, was completed
in just 14 weeks and allows customers to order products, review order status and
receive account information online. As a result of its successful experience
with Xpedior, H-P has engaged us to help it develop and implement another
eBusiness solution for its small business sales channel, the H-P Business Store.
BELL CANADA
Bell Canada was quickly shifting its business from a product focus to a
market focus. To achieve its goal of creating a comprehensive electronic channel
with the ability to handle transactions and allow direct communications with
corporate, small business and residential customers, Bell needed a solution that
would allow French and English speaking customers a way to learn about their
products and services quickly and easily. Bell Canada indicated that of over 50
million customer sales and service transactions during 1998, roughly 20% were
coming through the web and voice-response channels. Its research showed that the
percentage of high-value customers of those who chose to interact with the Bell
Canada via the Internet was three times higher than non-interactive channel
customers.
Our task was to develop a comprehensive site that would enable Bell Canada
to better communicate with its customers, learn about preferences and interests
and lead them through a secure electronic transaction. We created the Bell
Virtual Store, a catalog-based transaction system that allows for management
promotion and online sale of Bell Canada products and services. Our design of a
site with easy to use and convenient features like the shopping basket, the
order summary and the secure and rapid credit card payment option made shopping
online easy for even the most novice computer user. Transactions can be charged
directly to credit cards or, for some services, can be added to the next
customer bill. Products are maintained remotely and product pricing and
description can be modified in real time. The online catalog provides different
product descriptions for each of Bell Canada's four markets -- residential,
small office, home office and large business.
We also developed a customer profiling system. By capturing user data and
preferences, the site targets one-to-one marketing promotions to get the right
offer to the right customer at the appropriate time.
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AMERICAN MEDICAL ASSOCIATION
As the healthcare industry moved to implement eBusiness strategies, the
American Medical Association needed to adapt in order to fulfill its mission.
Since 1994, we have been the AMA's key provider in the establishment and
expansion of its comprehensive eBusiness strategy. Through our solution, the AMA
provides information to its membership, the ability to search relevant
publications, and continuing medical education subscription and sign up, as well
as links to additional applications such as PhysicianSelect. Members can also
purchase AMA products and services on the site. We have been the prime provider
of strategy, design and technology for the AMA in the development of its
end-to-end Internet solutions.
We developed and continue to adapt the AMA's web site, which has been
recognized by PC Magazine 100, Yahoo, USA Today Hot Site, and others as a top
site in its field. In particular, PhysicianSelect, an application we built for
the AMA, has been featured on Good Morning America and other national morning
talk shows, which addressed the AMA's leading position in the healthcare
information advocacy space.
SALES AND MARKETING
Through our sales force and marketing organization, we market and sell our
services to Global 2000 companies and emerging Internet businesses. As of
October 31, 1999, our sales force totaled 40 people. Each of our offices has its
own sales representatives who sell our services to the clients and prospective
clients located in their geographic region. These local representatives report
to a regional vice president. Our commission-based sales representatives work
closely with our senior professionals to tailor our sales efforts and manage
client relationships. In addition, our sales representatives work closely with
our alliance partners to extend our sales and marketing efforts.
Our marketing efforts are intended to promote Xpedior as a leading provider
of innovative and reliable eBusiness solutions to an audience of senior business
and technology executives at Global 2000 companies and emerging Internet
businesses. As of October 31, 1999, our marketing organization consisted of nine
personnel at the national level and ten regional field marketing personnel.
Going forward, we intend to focus on two primary strategies to expand our
customer base and increase sales to existing customers:
BUILD THE BRAND
We believe that we will benefit from increased brand awareness by executing
a national branding campaign with a consistent message across our markets. We
plan to build brand awareness through:
- advertising in leading business and technology publications;
- industry tradeshow marketing;
- summits and seminars with existing and potential clients;
- public relations activities aimed at positioning the company in industry
related publications; and
- various direct marketing activities.
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EXPAND SALES ORGANIZATION
We currently have business development professionals located in 12 domestic
and three international offices. In addition to expanding our local,
geographic-based sales organization, we have established and intend to expand
our national sales organization. Our national sales organization is primarily
focused on the development of strategic services targeting specific industries,
including financial services, healthcare, high technology, media and publishing,
retail and distribution, telecommunications and eCommerce/Internet. This
organization works closely with our strategic service professionals to market
and develop additional business.
CLIENTS
For the year ended December 31, 1998, our ten largest clients represented
approximately 33% of our pro forma revenues and our 50 largest clients
represented approximately 70% of our pro forma revenues. No single client
represented 9.2% or more of our revenues during 1998.
Set forth below is a partial list of our clients selected at random and for
whom we performed significant services in 1998 or 1999, categorized by vertical
industry.
<TABLE>
<CAPTION>
TELECOMMUNICATIONS RETAIL AND DISTRIBUTION ECOMMERCE/INTERNET
<S> <C> <C>
AT&T FedEx AsiaMail.com
Bell Atlantic HEB Stores CareerBuilder.com
Bell Canada Longs Drug Stores CharitableWay.com
GTE Marketing Specialists CreditLand.com
Level 3 Communications Memec DigitalWork.com
MCI WorldCom NutraLite Ineto.com
Nextel PepsiCo Internet Engineering Task Force
Telus Safeway Medical-Records.com
USWest Sears MODE (Music on Demand Europe)
Williams Conferencing Wyle OnlineOfficeSupplies.com
Winstar PRIO
HIGH TECHNOLOGY VCN (Virtual Creative Network)
FINANCIAL SERVICES
BEA Systems MEDIA AND PUBLISHING
Allianz Cadence Design Systems
Aon Insurance Hewlett-Packard Dearborn Financial Publishing
Bank of America IBM Stanley Kaplan & Associates
Charles Schwab Lucent Tribune Company
Citibank Macromedia GOVERNMENTAL AND HIGHER EDUCATION
Discover Card Netscape Alameda County, California
Fireman's Fund Rogerson Aircraft Commonwealth of Massachusetts
First American Real Estate Sun Microsystems City of Chicago
ING Barings Cook County (Illinois) Assessors
Moneygram HEALTHCARE Office
SNS RAAEL St. John's University
State Farm American Medical Association University of Minnesota
Strong Capital Management Amgen
Zurich American Dialysis Clinics Incorporated
</TABLE>
STRATEGIC ALLIANCES
We pursue strategic alliances with leaders in the technology industry to
generate incremental sales opportunities and leverage current product knowledge.
We choose our alliance partners based on their leadership in a particular
product or service category and our ability to obtain
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preferential access to new technologies created by these companies. We have
entered into alliances with the following companies:
SOFTWARE PARTNERS
Allaire
BEA Systems
BroadVision
Delano Technology
Corporation
Forte Software
Microsoft
NetscapeSun Alliance
SilverStream Software
HARDWARE PARTNERS
Hewlett-Packard
IBM
Sun Microsystems
WEB HOSTING PARTNERS
Exodus Communications
Frontier Global Center
GTE Internetworking
Telus Advanced
Communications
UUNet
We have developed many of these alliances into beneficial, long-term
relationships. For example, as a result of our alliances we have gained early
access to advanced technologies from Microsoft, BroadVision and SilverStream. In
addition, we have received awards and recognition from our alliance partners. We
have been a Microsoft Certified Solution Provider at the Partner Level since
1995. We are also one of only seven IBM Alliance Partners in the U.S. (one of 20
worldwide) and a BroadVision Integration Partner. As a result of our elevated
position with these companies, we also benefit from joint sales, marketing,
training and sales support programs.
OUR PEOPLE AND CULTURE
As of October 31, 1999, we had 1,192 full-time employees, comprised of 937
professionals and 255 administrative and support employees. We believe we pay
competitive salaries and provide other awards for performance and achievement.
None of the our employees are represented by unions and, except for senior
management and certain other employees, our employees are retained on an at-will
basis. We believe our relations with our employees are good. Recognizing that
our employees are key to our success, we believe the following strategies will
enable us to continue to attract and retain the necessary personnel:
RECRUITING
We believe our ongoing success depends upon our continued ability to
recruit and retain professionals with outstanding skills and abilities. To
attract qualified candidates, we maintain a recruiting organization consisting
of 16 professionals as of October 31, 1999. Employee referrals are the single
largest source for employee candidates. We reward our employees for referring
candidates through our employee referral programs. In addition to being a
cost-effective means of recruiting, we believe this is a positive indication of
the employee's attitude toward us. Additional sources for employee candidates
include advertising, college recruiting and employment placement firms.
CULTURE
We believe that we have established a culture that fosters innovation and
professional development, and rewards both individual accomplishment and
collaborative contributions. We provide career advancement opportunities for
individuals based primarily on merit, rather than tenure, which we believe
provides an attractive environment for individuals who are committed to
succeeding.
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EDUCATION AND PROFESSIONAL DEVELOPMENT
Our educational and professional development programs are designed to
advance the skills of our professionals. Our employees routinely receive
feedback on their professional advancement so that decisions on project
assignments and educational opportunities can be made. Our education programs
begin with company orientation as well as a variety of technical, industry and
professional training.
COMPENSATION
We believe that our salaries are competitive. We also provide other awards
for performance and achievement. In addition to cash compensation, we have
recently instituted a stock option program that we anticipate will have a
positive impact on our ability to attract and retain professionals. All of our
employees receive stock options and are eligible to receive additional stock
options based on performance.
COMPETITION
Competition in the eBusiness services market and its component markets is
intense. Our current competitors include:
- emerging web consulting firms, including Proxicom, Razorfish, Scient,
USWeb and Viant, which are focused on Internet-based, electronic business
and digital business solutions;
- systems integrators, including Andersen Consulting, Ernst & Young,
PricewaterhouseCoopers and Sapient;
- strategy and management consulting firms, including Bain, Boston
Consulting Group and Diamond Technology Partners;
- regional specialized information technology firms;
- vendor-based services organizations of companies, including IBM and
Oracle; and
- internal management and information technology departments of current and
future client organizations.
There are relatively low barriers to entry in the eBusiness services
market. In addition, we do not own any patented technology that stops
competitors from entering the eBusiness services market or providing services
similar to ours. Therefore, we expect that competition will continue to
intensify and increase in the future. In fact, some large information technology
consulting firms have announced that they will focus more resources on eBusiness
opportunities. Because we contract with our clients on an
engagement-by-engagement basis, there is no guarantee that we will be retained
by our existing or future clients on later stages of work.
FACILITIES
Our headquarters are located in Chicago, Illinois. Our solution centers are
located in Chicago, Illinois; San Francisco, California; Dallas, Texas; New
York, New York; and Alexandria, Virginia. In addition to our solution centers
and headquarters which are leased, we lease offices in the following locations:
Houston, Texas; Landover, Maryland; El Segundo, California; Bedford, New
Hampshire; Jacksonville, Florida; Downers Grove, Illinois; Englewood, Colorado;
Troy, Michigan; London, England; Perth, Australia and Toronto, Ontario. We
anticipate that we will continue to expand our offices and open offices in new
locations as
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business conditions require. We expect that we will need additional space as we
expand our business and believe that we will be able to obtain suitable space as
needed.
LEGAL PROCEEDINGS
On December 7, 1999, Expedia, Inc., a subsidiary of Microsoft Corporation,
filed a trademark infringement lawsuit against us in the United States District
Court for the Central District of California. The lawsuit alleges that our use
of the Xpedior trademark infringes on the Expedia trademark. The suit also
alleges that uses of the Xpedior mark are likely to cause confusion and dilution
of the marks held by Expedia. The lawsuit further alleges that Xpedior engaged
in unfair competition and unlawful or unfair business practices in violation of
the California Business and Professions Code. The suit seeks:
- unspecified damages, including treble damages and profits;
- an injunction against further alleged infringement; and
- costs of the suit and attorneys' fees.
We do not believe that Expedia's claims have merit; however, we are in
discussions with Expedia to explore the possibility of a mutually amicable
solution to this lawsuit. We cannot provide any assurance that our discussions
will result in a satisfactory solution or that they will continue. In the event
a mutually satisfactory resolution is not reached, we intend to vigorously
defend ourselves in this lawsuit and do not expect the outcome of this lawsuit
to have a material adverse effect on our business. However, since the lawsuit
was recently filed, we are not presently able to estimate the likelihood of an
adverse result or the range of possible loss relating to this matter. In the
event of an adverse result, we could be required to do one or more of the
following:
- pay damages, including treble damages and profits;
- permanently cease use of our Xpedior trademark; and/or
- develop a new trademark.
NDC Group, Inc., one of our subsidiaries, along with Metamor, filed suit in
May 1999 against some former officers and shareholders of NDC and other parties
in the Circuit Court of the City of Alexandria, Virginia for several causes of
action, including breaches of fiduciary duties and numerous covenants and
agreements. In this suit, NDC and Metamor are seeking monetary and injunctive
relief against the defendants. Some of the defendants have filed Cross-Bills
alleging breach of employment and other agreements and duties of good faith and
fair dealings and other tort claims against NDC, Metamor and Xpedior.
Additionally, some of these same defendants have filed similar claims in the
United States District Court for the Eastern District of Virginia. The
defendants that filed the Cross-Bills and the complaint in district court are
seeking indeterminable monetary damages.
The Eastern District of Virginia action has been stayed in deference to the
Circuit Court proceeding. A trial in the Circuit Court is currently anticipated
to begin in April 2000. We believe that Xpedior, NDC and Metamor have strong
cases in these matters and strong defenses against each of the complaints.
However, Xpedior, NDC and Metamor may not prevail in this litigation.
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We are not aware of any pending legal proceedings against us, including the
Virginia litigation, that, individually or in the aggregate, would have a
material adverse effect on our results of operations or financial condition. We
may in the future be party to litigation arising in the course of our business.
These claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources.
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MANAGEMENT
OFFICERS AND DIRECTORS
The executive officers, directors and director-nominees of Xpedior and
their ages and positions as of the initial public offering are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
David N. Campbell......................... 58 President, Chief Executive Officer and
Director
J. Brian Farrar........................... 36 Executive Vice President, Chief Operating
Officer and Director
Eugene Rooney............................. 34 Executive Vice President and Director
Steven M. Isaacson........................ 45 Senior Vice President and Chief Financial
Officer
James W. Crownover........................ 56 Chairman of the Board of Directors
Peter T. Dameris.......................... 39 Director
Robert K. Hatcher......................... 36 Director Nominee
Marc J. Shapiro........................... 52 Director Nominee
John M. Whiteside......................... 43 Director Nominee
</TABLE>
David N. Campbell has served as our President and Chief Executive Officer
since joining us in September 1999 and will become a director after consummation
of this offering. From January 1999 to September 1999, Mr. Campbell was
President of GTE Technology Organization, the centralized technology unit of
GTE. From 1995 to January 1999, he served as President of BBN Technologies, the
Internet technology development and services organization of BBN Corporation,
which was acquired by GTE in 1997. Prior to that time, he served as Chairman and
Chief Executive Officer of Computer Task Group, Inc., an international
integrated information technology services company. Mr. Campbell is also a
director of Tektronix, Inc. and Gibraltar Steel, Inc., and was appointed by
President Clinton to the Advisory Board of the President's Commission on
Critical Infrastructure Protection. He holds a Bachelor of Science degree from
Niagara University and a Master of Science degree from State University of New
York at Buffalo.
J. Brian Farrar has served as our Executive Vice President and Chief
Operating Officer since July 1999 and will become a director after consummation
of this offering. Since March 1998, Mr. Farrar has served as President of
Metamor Technologies, Ltd., a subsidiary of Xpedior which was acquired by it in
March 1997. From October 1994 until March 1998, Mr. Farrar was a Vice President
and Principal of Metamor Technologies, eBusiness services. Mr. Farrar has
published numerous books on Internet and technology-related topics translated
into a variety of languages around the world. He holds a Master of Business
Administration degree from Indiana University and a Bachelor of Arts degree from
Wabash College.
Eugene Rooney has served as our Executive Vice President since October 1999
and will become a director after consummation of this offering. Since 1994, Mr.
Rooney has been the President of Sage I.T. Partners, Inc., a subsidiary of
Xpedior which was acquired by it in January 1998. Prior to that time, he served
as Vice President of Product Development for Metropolis Software, a leading
vendor of field sales automation software. Mr. Rooney is also a director of
Medical-Records.com. He received a Bachelor of Science degree in Management from
Rensselaer Polytechnic Institute in Troy, New York.
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Steven M. Isaacson has served as our Chief Financial Officer since April
1998 and as a Senior Vice President since October 1999. Mr. Isaacson has served
as Chief Operating Officer and Chief Financial Officer of Metamor Technologies,
Ltd. since June 1996. Prior to that time, he served as Executive Vice President
and Chief Financial Officer of American Classic Voyages Co., a cruise line with
operations in North America. Mr. Isaacson is a Certified Public Accountant. He
holds a Bachelor of Science degree in Accounting from the University of Illinois
and Master of Science degree in Taxation from DePaul University in Chicago,
Illinois.
James W. Crownover has served as our Chairman of the Board since joining us
in September 1999. Mr. Crownover joined McKinsey & Company, Inc. in 1968. He
served as the managing director of the Southwest practice of McKinsey from 1984
to 1994 and as a member of McKinsey's Shareholders' Committee, its elected board
of directors, from 1990 to 1998. Mr. Crownover is also a director of Unocal
Corporation and Altra Energy Technologies. He is an honors graduate of Rice
University and received his Master of Business Administration degree from the
Stanford Graduate School of Business.
Peter T. Dameris has served as one of our directors since December 1997.
Mr. Dameris has been President, Chief Executive Officer and Secretary and has
served as a director of Metamor Worldwide, Inc. since October 1999. From January
1999 to September 1999, he served as Executive Vice President -- Corporate
Development and Secretary of Metamor. Mr. Dameris joined Metamor in January 1995
as Vice President, General Counsel and Secretary and was promoted to Senior Vice
President in September 1996. Prior to that time, he was a partner with the law
firm of Cochran, Rooke and Craft, LLP. Mr. Dameris is also a director of U.S.
Concrete, Inc., a provider of ready-mixed concrete and related products and
services. He received his Bachelor of Arts degree from Southern Methodist
University and his law degree from the University of Texas.
Robert K. Hatcher will become a director after consummation of this
offering. Mr. Hatcher is currently a partner with the law firm of Vinson &
Elkins L.L.P. and has been with the firm since 1990. Effective January 2000, Mr.
Hatcher will leave Vinson & Elkins L.L.P. and join Metamor Worldwide, Inc. to
manage Metamor's corporate strategy and development activities. He holds a
Bachelor of Arts degree from Southern Methodist University and a law degree and
a Masters of Business Administration degree from Tulane University.
Marc J. Shapiro will become a director after consummation of this offering.
Mr. Shapiro is the Vice Chairman for Finance, Risk Management and Administration
of The Chase Manhattan Corporation, and a member of its Executive Committee.
From January 1972 to September 1997, he held various positions with Texas
Commerce Bank (subsequently renamed Chase Bank of Texas), and served as
President and Chief Executive Officer for the eight years ended September 1997.
Mr. Shapiro is also a director of Burlington Northern Santa Fe Corporation and
Weingarten Realty Investors. He received his Bachelor of Arts degree from
Harvard University and a Masters of Business Administration degree from Stanford
University.
John M. Whiteside will become a director after consummation of this
offering. In May 1999, Mr. Whiteside launched netASPx, an application service
provider. Prior to launching netASPx, Mr. Whiteside was President and Chief
Executive Officer of Service Net since March 1997. Prior to 1997, he served as
General Manager of IBM Global Network and as Senior Vice President of Global
Alliance Management at MCI Communications Corporation. He holds a Bachelor of
Science degree in Geophysics from Yale College and a Master of Business
Administration degree from Harvard Graduate School.
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<PAGE> 58
BOARD OF DIRECTORS
Xpedior currently has two directors. Upon the completion of this offering,
the terms of the office of the board of directors will be divided into three
classes: Class I, whose term will expire at the annual meeting of the
stockholders to be held in 2000; Class II, whose term will expire at the annual
meeting of stockholders to be held in 2001; and Class III, whose term will
expire at the annual meeting of stockholders to be held in 2002. After
completion of this offering, the Class I directors will be Messrs. Crownover,
Dameris and Hatcher; the Class II directors will be Messrs. Campbell and Rooney;
and the Class III directors will be Messrs. Whiteside, Farrar and Shapiro. At
each annual meeting of stockholders after the initial classification, each
elected director will serve from the time of his election and qualification
until the third annual meeting following his election. This classification of
the board of directors may have the effect of delaying or preventing changes in
control of Xpedior or its management. All of our officers serve at the
discretion of the board of directors. There are no family relationships among
the directors and officers of Xpedior.
Board Committees. Our board of directors will have an audit committee and
a compensation committee. The audit committee will consist of Messrs. Crownover,
Shapiro and Whiteside. The audit committee makes recommendations to the board of
directors regarding the selection of independent accountants, reviews the
results and scope of audit and other services provided by our independent
accountants and reviews and evaluates our audit and control functions. The
compensation committee will also consist of Messrs. Crownover, Shapiro and
Whiteside. The compensation committee administers our stock plans and makes
decisions concerning salaries and incentive compensation for our employees.
DIRECTOR COMPENSATION
The Chairman of the Board receives $100,000 in annual cash compensation and
received options to purchase 200,000 shares of common stock which will vest over
three years in equal installments. The remaining outside directors and outside
director nominees have received an initial grant of options to purchase 30,000
shares of common stock which will vest over three years in equal installments
and will receive subsequent annual grants of options to purchase 5,000 shares
which will vest immediately upon issuance. Directors who are also executive
officers will not receive any compensation for their services as directors other
than reimbursement of all reasonable out-of-pocket expenses for attendance at
board meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee is currently or has been at any
time since the formation of Xpedior, an officer or employee of Xpedior. No
member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
INDEMNIFICATION
Xpedior has entered into indemnification agreements with each of its
directors, director nominees and executive officers. The form of indemnity
agreement provides that we will indemnify our directors or executive officers
for expenses incurred because of their status as a director or executive
officer, to the fullest extent permitted by Delaware law.
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<PAGE> 59
Xpedior's certificate of incorporation and bylaws contain provisions
relating to the limitation of liability and indemnification of our directors and
officers. The certificate of incorporation provides that directors shall not be
personally liable to Xpedior or its stockholders for monetary damages for any
breach of fiduciary duty as a director, except for liability for:
- any breach of a director's duty of loyalty to Xpedior or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
- any transaction from which the director derives any improper personal
benefit.
Our certificate of incorporation also provides that if the Delaware General
Corporation Law is amended to authorize corporate action further eliminating or
limiting the personal liability of directors after our stockholders approve the
certificate of incorporation, then the liability of our directors shall be
eliminated or limited to the fullest extent permitted by the amended Delaware
General Corporation Law. The foregoing provisions of our certificate of
incorporation are not intended to limit the liability of directors or officers
for any violation of applicable federal securities laws. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, our bylaws
provide that:
- we are required to indemnify our directors and executive officers to the
fullest extent permitted by the Delaware General Corporation Law;
- we may, in our discretion, indemnify other officers, employees and agents
to the fullest extent permitted by the Delaware General Corporation Law;
- we are generally required to advance all expenses incurred by our
directors and executive officers in connection with a legal proceeding to
the fullest extent permitted by the Delaware General Corporation Law;
- the rights conferred in the bylaws are not exclusive;
- we may, in our discretion, enter into indemnification agreements with our
directors, officers, employees and agents; and
- we may not retroactively amend the bylaw provisions relating to indemnity
in a way that would adversely affect the rights of our directors or
executive officers.
Our bylaws further provide that we shall indemnify our directors to the
fullest extent permitted by Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth summary information
concerning the compensation earned during 1998 by the Chief Executive Officer
and the other most highly compensated officers. The chief executive officer of
Xpedior served in this capacity as part of his position as an officer of Metamor
and, as such, his compensation was paid by Metamor, not by Xpedior. Mr. Campbell
was elected as our President and Chief Executive Officer in September 1999. We
use the term "named executive officers" to refer to these people in this
prospectus.
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The table excludes perquisites and other personal benefits received by a named
executive officer that do not exceed the lesser of $50,000 or 10% of any such
officer's salary and bonus disclosed in the table.
<TABLE>
<CAPTION>
1998
ANNUAL
COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
<S> <C> <C>
Kenneth R. Johnsen.......................................... $ -- $ --
President and Chief Operating Officer of Metamor and
Chief Executive Officer of Xpedior
David M. Pickrell........................................... 250,000 187,500
President of Xpedior
J. Brian Farrar............................................. 156,250 193,723
President of Metamor Technologies, Ltd.
Steven M. Isaacson.......................................... 156,250 159,687
Chief Financial Officer and Chief Operating Officer of
Metamor Technologies, Ltd.
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
In the fiscal year ended December 31, 1998, none of the named executive
officers received options to purchase common stock, nor were they able to
exercise any stock options. None of the named executive officers held stock
options at December 31, 1998.
EMPLOYMENT AGREEMENTS
In September 1999, Mr. Campbell entered into an employment agreement with
us and we elected him our President and Chief Executive Officer. The agreement
provides that Mr. Campbell will receive a minimum annual base salary of
$375,000. Under the agreement, Mr. Campbell also may receive bonuses up to 150%
of his base salary based upon his meeting or exceeding performance objectives.
At the same time, we granted him an option to purchase 1,000,000 shares of our
common stock at $7.71 per share. In addition, we issued Mr. Campbell 50,000
shares of common stock that may be forfeited upon termination of his employment.
These forfeiture restrictions lapse for:
- 25,000 of such shares after 24 full months of employment;
- an additional 12,500 of such shares after 36 full months of employment;
and
- the remaining 12,500 shares after 48 full months of employment.
Mr. Campbell also purchased 129,702 shares of common stock at $7.71 per
share. Mr. Campbell is restricted from selling any of his common stock until the
earlier of the second anniversary of our initial public offering or the
distribution to the stockholders of Metamor of its remaining interest in
Xpedior. Mr. Campbell's employment agreement provides that if he terminates his
employment with us on or before September 9, 2001, we can require him to sell
back to us the 129,702 shares of common stock for an amount equal to the actual
cost plus $400,000.
In addition, as part of Mr. Campbell's employment with us, we have agreed
to provide Mr. Campbell the benefits that he is entitled to receive under: (1) a
non-competition agreement between Mr. Campbell and Computer Task Group dated as
of March 1, 1984 and (2) the Computer Task Group Executive Benefit Plan, as
restated and effective January 31, 1997. We
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<PAGE> 61
agreed to provide the benefits in the event Computer Task Group ceases to make
the payments described in these instruments. The agreements provide that,
through November 4, 2002, Mr. Campbell will receive:
- monthly payments aggregating approximately $255,000 per year;
- reimbursement for medical premiums;
- premiums for a life insurance policy; and
- continued benefits under the Computer Task Group Executive Benefit Plan.
Mr. Campbell will also receive monthly payments aggregating approximately
$165,000 per year and continued benefits under the Computer Task Group Executive
Benefit Plan after November 4, 2002 until his death. In addition, we have agreed
to indemnify Mr. Campbell in the event his employment with us violates any legal
obligations owed to Computer Task Group. Computer Task Group has indicated that
while it will not seek any injunctive relief relating to Mr. Campbell's
employment with Xpedior, it is terminating all of the benefits owed to Mr.
Campbell, including those which we have agreed to undertake. We believe that the
agreement has not been breached by Mr. Campbell and that the former employer is
obligated to make the required payments. Although we plan to pursue this matter
vigorously and believe that we have strong legal defenses, there can be no
assurance as to the outcome of this matter.
Either we or Mr. Campbell can terminate the employment agreement at any
time. If the employment agreement is not terminated on or before September 9,
2001, the term of the agreement will be extended for one additional year. If we
terminate the agreement prior to the expiration of the initial term without
cause, then we will pay him an amount equal to two years salary plus certain
health benefits. If Mr. Campbell's employment terminates because: (1) of his
death or disability or (2) we fail to renew the term for an additional year
beyond the initial term, then we will pay him (or his estate) an amount equal to
one year's salary (plus his most recent incentive bonus in the case of death).
We have also agreed to pay other benefits offered to Mr. Campbell by his former
employer in the event Mr. Campbell's employment with us terminates.
Mr. Farrar entered into an employment agreement with us effective October
13, 1999. The agreement provides that Mr. Farrar will receive a minimum annual
base salary of $250,000. Under the agreement, Mr. Farrar also: (1) may receive
bonuses up to 150% of his base salary based upon his meeting or exceeding
performance objectives and (2) will be allowed to participate in all benefit
plans offered by us to similarly situated employees.
Either we or Mr. Farrar can terminate the employment agreement at any time.
If the employment agreement is not terminated on or before October 13, 2001, the
term of the agreement will be extended for one additional year. If we terminate
the agreement prior to the expiration of the initial term without cause, then we
will pay him an amount equal to two years salary plus health benefits. If Mr.
Farrar's employment terminates because: (1) of death or disability or (2) we
fail to renew the term for an additional year beyond the initial term, then we
will pay him (or his estate) an amount equal to one year's salary (plus an
amount equal to his most recent incentive bonus in the case of death).
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<PAGE> 62
EMPLOYEE STOCK PLANS
XPEDIOR STOCK INCENTIVE PLAN
On August 5, 1999, in connection with this offering and the expected
divestiture, our board of directors approved and adopted the Xpedior Stock
Incentive Plan. The purpose of the plan is to provide our directors, employees,
advisors and professionals additional incentive and reward opportunities to
enhance our profitable growth. The plan provides for the granting of:
- incentive stock options intended to qualify under Section 422 of the
Internal Revenue Code;
- options that do not constitute incentive stock options;
- restricted stock awards; and
- stock appreciation rights.
The plan is administered by a committee of the board of directors. The
committee will consist of two or more outside directors within the meaning of
section 162(m) of the Code. In general, the committee is authorized to select
the recipients of awards and to establish the terms and conditions of those
awards.
The number of shares of common stock that may be issued under the plan may
not exceed 15,000,000 shares, adjusted to reflect stock dividends, stock splits,
recapitalizations, and similar changes in our capital structure. Shares of
common stock which are attributable to awards that have expired, terminated, or
been canceled or forfeited are available for issuance or use in connection with
future awards. The number of shares of common stock that may be granted under
the plan to any one individual during any calendar year may not exceed
2,000,000, adjusted to reflect stock dividends, stock splits, recapitalizations
and similar changes in our capital structure.
The price at which a share of common stock may be purchased upon exercise
of an option granted under the plan will be determined by the committee. In the
case of an incentive stock option, the purchase price will not be less than the
fair market value of a share of common stock on the date such option is granted.
In the case of an option that does not constitute an incentive stock option, the
purchase price will not be less than 85% of the fair market value of a share of
common stock on the date the option is granted. Additionally, a stock
appreciation right may be granted in connection with the grant of an option. A
stock appreciation right allows the holder to surrender the right to purchase
shares under the related option in return for a payment in: (1) cash; (2) shares
of common stock; or (3) a combination of cash and common stock. The amount of
the payment will equal the difference between the fair market value of the
shares of common stock on the date the right is exercised and the purchase price
for the shares under the related option.
Stock options granted under the plan are not freely transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by the optionee. Options granted under the plan must generally be exercised
within three months of the optionee's separation of service with us or within
twelve months after the optionee's termination by death or disability. In no
event may options be exercised earlier than: (1) the date of a complete spin-off
of all Xpedior common stock held by Metamor; or (2) two years after a public
offering of our common stock.
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Shares of common stock that are the subject of a restricted stock award
under the Plan will be governed by restrictions on disposition by the holder of
such award and an obligation of the holder to forfeit and surrender the shares
to us under certain circumstances. The forfeiture restrictions will be
determined by the committee in its sole discretion. The committee may provide
that the forfeiture restrictions will lapse upon:
- the attainment of one or more performance goals or targets established by
the committee which are based on:
- the price of a share of common stock;
- our earnings per share;
- our market share;
- the market share of one of our business units designated by the
committee;
- our sales;
- the sales of one of our business units designated by the committee;
- our net income (before or after taxes) or the net income of any one
of our business units designated by the committee;
- our cash flow return on investment or the cash flow return on
investment of any one of our business units designated by the
committee;
- our earnings before or after interest, taxes, depreciation and/or
amortization of Xpedior or of any one of our business units
designated by the committee;
- the economic value added; or
- the return on stockholders' equity;
- the award holder's continued employment with us or continued service as a
consultant or director for a specified period of time;
- the occurrence of any event or the satisfaction of any other condition
specified by the committee in its sole discretion; or
- a combination of any of the foregoing.
No awards under the plan may be granted after ten years from the date the
plan was adopted by the board of directors. The plan will remain in effect until
all options granted under the plan have been satisfied or expired, and all
shares of restricted stock granted under the plan have vested or been forfeited.
The board of directors in its discretion may terminate the plan at any time as
to any shares of common stock for which awards have not been granted. The plan
may be amended, other than to increase the maximum aggregate number of shares
that may be issued under the plan or to change the class of individuals eligible
to receive awards under the plan, by the board of directors without the consent
of our stockholders. No change in any award previously granted under the plan
may be made that would impair the rights of the holder of that award without the
approval of the holder.
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TRANSACTIONS WITH OUR MANAGEMENT AND METAMOR
We have entered into significant transactions with Metamor and have
significant relationships with Metamor. For purposes of governing these
transactions and relationships, we will enter into, or continue in effect, on a
transitional basis, various agreements and relationships, including those
described below. Some of the agreements summarized below will be included as
exhibits to the registration statement related to this prospectus. The following
summaries of these agreements discuss the material provisions of the agreements
and are qualified completely by reference to these exhibits, which we
incorporate in this prospectus by reference.
Metamor currently provides various support services to us such as legal,
tax, risk and cash management. Metamor has also historically provided valuation,
negotiation and due diligence services relating to our merger and acquisition
activity. Costs are allocated to us based upon usage, or where no direct method
can be efficiently applied due to administrative burden, based on revenues.
Metamor has agreed to continue to provide legal, tax, risk and cash management
services and personnel at prevailing market rates as required by us for a period
of twelve months after the offering. These services may be modified by us on 60
days' advance notice to Metamor. Thereafter, we will either continue our
relationship with Metamor for these services as mutually agreed, bring such
services and personnel in house or procure these services from a third party.
Following completion of this offering, Metamor will own approximately 83% of our
outstanding common stock, or 80% if the underwriters' over-allotment option is
exercised in full.
We owe $100.0 million in outstanding principal under notes issued to
Metamor, together with accrued interest payable at September 30, 1999. We expect
to repay this debt with a portion of the net proceeds of this offering. These
notes are payable on demand at the prime rate plus 3%, which at September 30,
1999 was 11.5%. All the interest expense of Xpedior was charged by Metamor and
included in the advances for working capital. Interest expense charged by
Metamor totaled $1.2 million in 1997, $5.6 million in 1998 and $9.1 million for
the nine months ended September 30, 1999.
We also assigned approximately $9.2 million in accounts receivable to
Metamor effective September 30, 1999 for the repayment of advances for working
capital by Metamor during the period.
We have entered into an Assignment and Indemnification Agreement with
Metamor. Under this agreement, Metamor will assign all of its rights and
obligations under the agreements relating to Metamor's acquisition of the
companies comprising Xpedior as appropriate for the operations of Xpedior. As
part of this agreement, we have agreed to indemnify Metamor for any liabilities
resulting from or arising out of the operations of the acquired companies and
assigned earnout payments.
For a description of transactions with directors and officers, see
"Management -- Employment Agreements."
Currently, one of our directors, Mr. Dameris, is also the Chairman of the
Board, President and Chief Executive Officer of Metamor, and one of our director
nominees, Mr. Hatcher, will join Metamor's executive team and manage its
corporate strategy and development activities beginning in January 2000. These
relationships may create conflicts of interest. Mr. Dameris and Mr. Hatcher have
agreed to work closely with the audit committee of our board of directors to
identify and resolve any conflicts of interest that may arise.
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PRINCIPAL STOCKHOLDERS
The following table provides, as of October 31, 1999, information relating
to shares beneficially owned by our stockholders:
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED(B)
SHARES ---------------------
BENEFICIALLY BEFORE AFTER
STOCKHOLDERS OWNED(A) OFFERING OFFERING
<S> <C> <C> <C>
Metamor Worldwide, Inc.(b) ................................. 41,285,298 99.6% 82.6%
4400 Post Oak Parkway, Suite 1100
Houston, Texas 77027
David N. Campbell........................................... 179,702 * *
One North Franklin, Suite 1500
Chicago, Illinois 60606
</TABLE>
- ------------------------------
* Less than one percent
(a) Assumes no exercise of the underwriters' over-allotment option to purchase
up to 1,280,250 shares of common stock from Metamor. If the underwriters'
over-allotment option is exercised in full, upon completion of this offering
Metamor would beneficially own 40,005,048 shares of common stock
representing approximately 80% of the outstanding common stock.
(b) The calculations in this table of the percentage of outstanding shares are
based on 41,465,000 shares of our common stock outstanding as of October 31,
1999, and 50,000,000 shares outstanding immediately following the completion
of this offering and assumes no exercise of the underwriters' over-allotment
option.
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DESCRIPTION OF CAPITAL STOCK
Our amended and restated certificate of incorporation, which will be filed
immediately prior to the closing of this offering, authorizes the issuance of up
to 100,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share. The rights and preferences
of the preferred stock may be established from time to time by our board of
directors. Prior to this offering, 41,465,000 shares of common stock were issued
and outstanding. No shares of preferred stock have been issued.
The following summarizes the material provisions of our capital stock and
anti-takeover provisions of our certificate of incorporation and bylaws. This
summary is qualified by our certificate of incorporation and bylaws, which have
been filed as exhibits to the registration statement related to this prospectus,
and by Delaware law.
COMMON STOCK
Immediately following this offering, 50,000,000 shares of common stock will
be issued and outstanding. Holders of common stock are entitled to one vote per
share on all matters to be voted upon by the stockholders. Because holders of
common stock do not have cumulative voting rights, the holders of a majority of
the shares of common stock can elect all of the members of the board of
directors standing for election. Subject to preferences of any preferred stock
that may be issued in the future, the holders of common stock are entitled to
receive any dividends that may be declared by the board of directors. The common
stock is entitled to receive pro rata all of our assets available for
distribution to its stockholders. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and non-assessable.
PREFERRED STOCK
The board of directors has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rates, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of that series, which may be superior to those of the common stock,
without further vote or action by the stockholders. There will be no shares of
preferred stock outstanding upon the closing of the offering and we have no
present plans to issue any preferred stock.
One of the effects of undesignated preferred stock may be to enable the
board of directors to render more difficult or to discourage an attempt to
obtain control of us by means of a tender offer, proxy contest, merger or
otherwise, and as a result to protect the continuity of our management. The
issuance of shares of the preferred stock by the board of directors as described
above may adversely affect the rights of the holders of common stock. For
example, preferred stock issued by us may rank prior to the common stock as to
dividend rights, liquidation preference or both, may have full or limited voting
rights and may be convertible into shares of common stock. Accordingly, the
issuance of shares of preferred stock may discourage bids for the common stock
or may otherwise adversely affect the market price of the common stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND
BYLAWS
CLASSIFIED BOARD OF DIRECTORS AND LIMITATIONS ON REMOVAL OF DIRECTORS
Our board of directors is divided into three classes. The directors of each
class are elected for three-year terms, with the terms of the three classes
staggered so that directors from a single
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class are elected at each annual meeting of the stockholders. Until the time,
called the "Trigger Date," as Metamor together with its subsidiaries does not
own a majority of the outstanding voting stock of Xpedior, the holders of a
majority of our outstanding voting stock may remove a director with or without
cause, appoint persons to fill vacancies on the board of directors and nominate
persons to stand for election to the board of directors. On and after the
Trigger Date, stockholders may remove a director only for cause and to do so, at
least 66 2/3% of the voting power of the outstanding voting stock must vote for
removal. The board of directors, not the stockholders, will have the right to
appoint persons to fill vacancies on the board of directors after the Trigger
Date.
WRITTEN CONSENT OF STOCKHOLDERS
Our certificate of incorporation provides that prior to the Trigger Date
any action required or permitted to be taken by our stockholders may be taken at
a duly called meeting of stockholders or by written consent of stockholders
owning the minimum number of shares required to approve such action. On and
after the Trigger Date, any action by our stockholders must be taken at an
annual or special meeting of stockholders. Special meetings of the stockholders
may be called only by the board of directors. This provision, which requires a
vote of at least 66 2/3% of the voting power of the outstanding shares of common
stock to be amended, could have the effect of deterring hostile takeovers or
delaying changes in control.
ADVANCE NOTICE PROCEDURE FOR STOCKHOLDER PROPOSALS
Our bylaws establish an advance notice procedure for the nomination of
candidates for election as directors as well as for stockholder proposals to be
considered at annual meetings of stockholders. These advance notice procedures
are not applicable prior to the Trigger Date. In general, notice of intent to
nominate a director must be delivered to or mailed and received at our principal
executive offices as follows:
- for an election to be held at the annual meeting of stockholders, 120
days prior to the anniversary date of the proxy statement for the
immediately preceding annual meeting of stockholders; and
- for an election to be held at a special meeting of stockholders to elect
directors, not later than the close of business of the 10th day following
the day on which the notice of the date of the meeting was mailed or
public disclosure of the date of the meeting was made, whichever first
occurs, and must contain specified information concerning the person to
be nominated.
Notice of stockholders' intent to raise business at an annual meeting must
be delivered to or mailed and received at our principal executive offices not
less than 120 days prior to the anniversary date of the proxy statement for the
preceding annual meeting of stockholders. These procedures may operate to limit
the ability of stockholders to bring business before a stockholders meeting,
including the nomination of directors or considering any transaction that could
result in a change in control.
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LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
Our certificate of incorporation provides that no director shall be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability as follows:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of laws;
- for unlawful payment of a dividend or unlawful stock purchase or stock
redemption; and
- for any transaction from which the director derived an improper personal
benefit.
The effect of these provisions is to eliminate our rights and those of our
stockholders, through stockholders' derivative suits on our behalf, to recover
monetary damages against a director for breach of fiduciary duty as a director,
including breaches resulting from grossly negligent behavior, except in the
situations described above. These provisions will not change after the Trigger
Date.
DELAWARE TAKEOVER STATUTE
Under the terms of our certificate of incorporation and as permitted under
Delaware law we have elected not to be governed by Delaware's anti-takeover law.
This law provides that specified persons who, together with affiliates and
associates, own, or within three years did own, 15% or more of the outstanding
voting stock of a corporation may not engage in certain business combinations
with the corporation for a period of three years after the date on which the
person became an interested stockholder. The law does not include interested
stockholders prior to the time our common stock is authorized for quotation on
the Nasdaq National Market. This includes Metamor. The law defines the term
"business combination" to encompass a wide variety of transactions with or
caused by an interested stockholder, including mergers, asset sales and other
transactions in which the interested stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders. With approval of
our stockholders, we could amend our certificate of incorporation in the future
to become governed by the anti-takeover law. This provision would then have an
anti-takeover effect for transactions not approved in advance by our Board of
Directors, including discouraging takeover attempts that might result in a
premium over the market price for the shares of our common stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is The Bank of New
York, and its telephone number is (212) 815-4038.
REGISTRATION RIGHTS AGREEMENT
We have entered into an agreement with Metamor that allows Metamor to
require us to register shares of our common stock owned by Metamor following
this offering. Beginning six months after this offering, Metamor has the right
to demand a total of three such registrations. In addition, Metamor has the
right, which it may exercise at any time, to include its shares in any
registration of common stock made by us in the future. Metamor also has the
right to request that we file a registration statement registering shares of our
common stock held by Metamor for resale in a public offering. In this case, the
number of shares requested to be
65
<PAGE> 69
registered shall have an aggregate offering price of at least $5 million. We
have agreed to cooperate fully in connection with any registration for Metamor's
benefit and with any offering made under the registration rights agreement and
to pay all costs and expenses, other than underwriting discounts and
commissions, related to shares sold by Metamor in connection with any
registration covered by the agreement. The rights of Metamor under the
registration rights agreement are transferable by Metamor. The agreement is for
an indefinite term. See "Shares Eligible for Future Sale."
We have also entered into an agreement with the former shareholders of
Kinderhook Systems, Inc. that allows them to require us to register shares of
our common stock after the earlier of the distribution of our stock by Metamor
or the second anniversary of this offering in the event of a conversion or
redemption for common stock of the 7% Convertible Subordinated Promissory Notes
Due 2002. The number of shares requested to be registered must have an aggregate
offering price of at least $5 million or represent at least 50% of the aggregate
principal amount of the Notes.
66
<PAGE> 70
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 50,000,000 shares of common
stock outstanding. Of the 50,000,000 shares outstanding:
- all of the shares offered by this prospectus will be available for
immediate sale in the public market as of the date of this prospectus;
and
- 41,465,000 shares will be governed by a lock-up period ending 180 days
after the date of this prospectus (the "180-day lock-up period"), after
which they will be available for sale in the public market, in compliance
with volume and other limitations of Rule 144.
See "Underwriting." The foregoing is summarized in the following table:
<TABLE>
<CAPTION>
DAYS AFTER DATE OF APPROXIMATE SHARES
THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT
<S> <C> <C>
On effectiveness................... 8,535,000 Freely tradeable shares sold in
this offering
180 days after offering............ 41,465,000 180-day lock-up expires; shares
saleable under Rule 144 or 701
</TABLE>
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person, or persons whose shares are aggregated, who has
beneficially owned shares for at least one year is entitled to sell within any
three-month period commencing 90 days after the date of this prospectus a number
of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 500,000 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
Sales under Rule 144 must also comply with manner of sale requirements, and
depending on the amount sold, require the filing of a Form 144.
Under Rule 144(k), a person, or persons whose shares are aggregated, is
entitled to sell his or her shares without regard to the limitations described
above if:
- the person has not been an affiliate of ours, such as an officer,
director or 10%-or-greater stockholder, at any time during the 90 days
immediately preceding the sale; and
- the person has beneficially owned his or her shares for at least two
years.
Persons deemed to be affiliates must always sell in accordance with Rule 144,
even after the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to this offering,
there has been no public market for the common stock, and there can be no
assurance that a significant public market for the common stock will develop or
be sustained after the offering. Any future sale of substantial amounts of the
common stock in the open market may adversely affect the market price of the
common stock offered by this prospectus.
67
<PAGE> 71
We, our directors and executive officers and Metamor have agreed not to
sell any common stock without the prior consent of Donaldson, Lufkin & Jenrette
Securities Corporation for the 180-day lock-up period. We may, however, without
such consent, grant options, sell shares under our stock plans and issue shares
to acquire other companies.
Any of our employees or professionals who purchased his or her shares under
a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. Through October 31, 1999, the holders of options exercisable into
9,034,150 shares of common stock will be eligible to sell their shares after the
vesting of their options and the expiration of the 180-day lock-up period.
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register all shares of common stock governed by outstanding
stock options and common stock issued or issuable under our stock plans. We
expect to file the registration statement covering shares offered by the Xpedior
Stock Incentive Plan within 180 days after the date of this prospectus, thus
permitting the resale of these shares by non-affiliates in the public market
without restriction under the Securities Act.
In addition, after this offering, Metamor will be entitled to have its
shares registered under the Securities Act. Registration of such shares under
the Securities Act would result in these shares becoming freely tradable without
restriction under the Securities Act immediately on the effectiveness of such
registration.
68
<PAGE> 72
UNDERWRITING
Under the terms and conditions contained in an underwriting agreement,
dated December 15, 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, First Union Securities,
Inc., J.P. Morgan Securities Inc., The Robinson-Humphrey Company, LLC and
DLJdirect Inc., have severally agreed to purchase from us the number of shares
of common stock set forth opposite their names below:
<TABLE>
<CAPTION>
UNDERWRITERS: NUMBER OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... 3,222,875
First Union Securities, Inc............................... 1,357,000
J.P. Morgan Securities Inc................................ 1,187,375
The Robinson-Humphrey Company, LLC........................ 1,017,750
DLJdirect Inc. ........................................... 150,000
BancBoston Robertson Stephens Inc. ....................... 100,000
Bear, Stearns & Co. Inc. ................................. 100,000
Deutsche Bank Securities Inc.............................. 100,000
Credit Lyonnais Securities (USA) Inc. .................... 100,000
Goldman, Sachs & Co. ..................................... 100,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated........ 100,000
Morgan Stanley & Co. Incorporated......................... 100,000
PaineWebber Incorporated.................................. 100,000
SG Cowen Securities Corporation........................... 100,000
William Blair & Company, L.L.C. .......................... 50,000
J.C. Bradford & Co. ...................................... 50,000
Gerard Klauer Mattison & Co., Inc. ....................... 50,000
Hanifen, Imhoff Inc. ..................................... 50,000
Janney Montgomery Scott LLC............................... 50,000
Johnston, Lemon & Co. Incorporated........................ 50,000
Ladenburg Thalmann & Co. Inc. ............................ 50,000
McDonald Investments Inc., a KeyCorp Company.............. 50,000
Parker/Hunter Incorporated................................ 50,000
Raymond James & Associates, Inc. ......................... 50,000
Sanders Morris Mundy...................................... 50,000
Sands Brothers & Co., Ltd. ............................... 50,000
Suntrust Equitable Securities Corporation................. 50,000
WR Hambrecht + Co., LLC................................... 50,000
---------
Total............................................. 8,535,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock in
this offering are conditioned upon approval by their counsel of legal matters
concerning this offering and satisfaction of conditions precedent by us. The
underwriters are obligated to purchase and accept delivery of all the shares of
common stock in this offering, other than those shares covered by the
over-allotment option described below, if any are purchased.
The underwriters initially propose to offer some of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page of this prospectus and some of the shares to dealers at the
initial public offering price less a concession not in excess of $0.80 per
share. The underwriters may allow, and those dealers may re-allow, a concession
not in
69
<PAGE> 73
excess of $0.10 per share on sales to other dealers. After the initial offering
of the common stock to the public, the representatives may change the public
offering price and concessions. The underwriters do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid by us in
connection with this offering. This information is presented assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares of our common stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
<S> <C> <C>
Per share.................................................. $ 1.33 $ 1.33
Total...................................................... $11,351,550 $13,054,283
</TABLE>
We will pay the offering expenses, estimated to be approximately $2.9
million. We will pay to the underwriters underwriting discounts and commissions
in an amount equal to the public offering price per share of common stock less
the amount the underwriters pay to us for each share of common stock sold by us.
Metamor has granted to the underwriters an option, exercisable for 30 days
after the date of this prospectus, to purchase up to 1,280,250 additional shares
of common stock at the initial public offering price less the underwriting
discounts and commissions. The underwriters may exercise this option solely to
cover over-allotments, if any, made in connection with this offering. To the
extent the underwriters exercise this option, each underwriter will be
obligated, upon satisfaction of certain conditions, to purchase a number of
additional shares approximately proportionate to that underwriter's initial
purchase commitments.
We, together with Metamor, have agreed to indemnify the underwriters
against liabilities, including liabilities under the Securities Act, or to
contribute to payments that the underwriters may be required to make for these
liabilities.
For a period ending 180 days from the date of this prospectus, we and our
executive officers, directors and Metamor have agreed not to, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation:
- offer, pledge, sell, contract to sell or sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock, whether any such transaction described above is to be settled by
delivery of common stock or other securities, in cash, or otherwise.
In addition, during such lock-up period, we have also agreed not to file
any registration statement relating to, and each of our executive officers,
directors and stockholders have agreed not to make any demand for, or exercise
any right relating to, the registration of any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
Prior to this offering, no public market has existed for our common stock.
We will negotiate the initial public offering price for our common stock with
the representatives, but the price may
70
<PAGE> 74
not reflect the market price for our common stock after this offering. The
factors considered in determining the initial public offering price include:
- the history of and prospects for our industry in which we compete;
- our past and present operations;
- our historical results of operations;
- our prospects for future operational results;
- the recent market prices of securities of generally comparable companies;
and
- the general conditions of the securities market at the time of this
offering.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "XPDR" upon official notification of issuance.
Other than in the United States, no action has been taken by us, the
selling stockholders or the underwriters that would permit a public offering of
the shares of common stock included in this offering in any jurisdiction where
action for that purpose is required. The shares included in this offering may
not be offered or sold, directly or indirectly, nor may this prospectus or any
other offering material or advertisements in connection with the offer and sale
of any shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons who receive this prospectus
are advised to inform themselves about and to observe any restrictions relating
to this offering and the distribution of this prospectus. This prospectus is not
an offer to sell or a solicitation of an offer to buy any shares of common stock
in any jurisdiction where that would not be permitted or legal.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot this offering,
creating a syndicate short position. The underwriters may bid for and purchase
our shares of common stock in the open market to cover such syndicate short
positions or to stabilize the price of our common stock. In addition, the
underwriting syndicate may reclaim selling concessions from syndicate members
and selected dealers if they repurchase previously distributed common stock in
syndicate covering transactions, in stabilizing transactions or otherwise, or if
Donaldson, Lufkin & Jenrette Securities Corporation receives a report which
indicates that the clients of such syndicate members have "flipped" our common
stock. These activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares of common stock offered by this
prospectus for sale to our officers, directors, employees and their family
members and to business associates of Xpedior, including clients, consultants
and other friends. These persons must commit to purchase after the registration
statement has become effective but before the open of business on the following
business day. The number of shares available for sale to the general public will
be reduced to the extent these persons purchase the reserved shares.
Under the Conduct Rules of the National Association of Securities Dealers,
Inc., or NASD, when 10% or more of the net proceeds of a public offering of
equity securities are to be paid to a member of the NASD participating in such
public offering or an affiliate of such member, the price at which the equity
securities are distributed to the public must be no lower than that
71
<PAGE> 75
recommended by a "qualified independent underwriter" as defined in Rule 2720 of
the Conduct Rules of the NASD. First Union Securities, Inc. is a member of the
NASD and is an affiliate of First Union National Bank, a lender under Metamor's
credit facility. First Union Securities, Inc. will receive more than 10% of the
net proceeds from this offering as a result of our repayment of amounts owed to
Metamor which it will use to repay all of the borrowings outstanding under
Metamor's credit facility. See "Use of Proceeds."
As a result, this offering is being made in compliance with Rule 2710(c)(8)
of the Conduct Rules of the NASD. Donaldson, Lufkin & Jenrette Securities
Corporation will act as a qualified independent underwriter in connection with
this offering and assume the customary responsibilities of acting as a qualified
independent underwriter in pricing and conducting due diligence for this
offering. Accordingly, the price of the common stock sold to the public will be
no lower than that recommended by Donaldson, Lufkin & Jenrette Securities
Corporation acting as qualified independent underwriter for this offering.
Donaldson, Lufkin & Jenrette Securities Corporation will receive a fee of $5,000
for acting as the qualified independent underwriter.
LEGAL MATTERS
The validity of the issuance of the common stock offered by this prospectus
will be passed upon for us by Vinson & Elkins L.L.P., Houston, Texas. Mr.
Hatcher, currently a partner of Vinson & Elkins L.L.P., has agreed to serve as a
director of Xpedior after consummation of this offering, and has been granted
options to purchase 30,000 shares of common stock. Legal matters in connection
with this offering will be passed upon for the underwriters by Akin, Gump,
Strauss, Hauer & Feld, L.L.P.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements of Xpedior Incorporated at September 30, 1999, December 31,
1998 and 1997 and for the nine-month period ended September 30, 1999, the year
ended December 31, 1998 and the period from inception (March 27, 1997) to
December 31, 1997 as set forth in their report. Ernst & Young LLP has also
audited the financial statements of Metamor Technologies, Ltd. (predecessor
company) at March 26, 1997 and for the period from January 1, 1997 to March 26,
1997, the financial statements of NDC Group, Inc. at April 15, 1998 and for the
period from July 1, 1997 to April 15, 1998, the financial statements of Sage
I.T. Partners, Inc. at January 6, 1998 and for the period from January 7, 1997
to January 6, 1998, the financial statements of Workgroup Productivity
Corporation at January 1, 1998 and for the period from January 2, 1997 to
January 1, 1998, and the financial statements of Virtual Solutions, Inc. at
December 29, 1996 and for the year ended December 29, 1996 as set forth in their
reports. We have included our financial statements and the other financial
statements referenced above in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP reports, given on their authority as
experts in accounting and auditing.
The financial statements of Virtual Solutions, Inc. as of December 28, 1997
and for the year then ended included in this prospectus and registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon their authority as experts in accounting and auditing.
Morrison & Morrison, Ltd., independent auditors, have audited the financial
statements of Metamor Technologies, Ltd. at December 31, 1996 and for the year
then ended, as set forth in
72
<PAGE> 76
their report. We have included these financial statements in the prospectus and
elsewhere in the registration statement in reliance on Morrison & Morrison,
Ltd.'s report given on their authority as experts in accounting and auditing.
The financial statements of Kinderhook Systems, Inc. as of December 31,
1998 and 1997 and for each of the two years in the period ended December 31,
1998 included in this prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on their authority as
experts in accounting and auditing.
73
<PAGE> 77
XPEDIOR INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
XPEDIOR INCORPORATED AND SUBSIDIARIES
Pro Forma Financial Statements (Unaudited):
Pro Forma Condensed Consolidated Statements of
Operations............................................ F-2
Notes to Unaudited Pro Forma Financial Statements...... F-5
Consolidated Financial Statements:
Report of Independent Auditors......................... F-8
Consolidated Balance Sheets............................ F-9
Consolidated Statements of Operations.................. F-10
Consolidated Statements of Stockholder's Equity........ F-11
Consolidated Statements of Cash Flows.................. F-12
Notes to Consolidated Financial Statements............. F-13
METAMOR TECHNOLOGIES, LTD.
Report of Independent Auditors............................ F-27
Report of Independent Certified Public Accountants........ F-28
Balance Sheets............................................ F-29
Statements of Operations.................................. F-30
Statements of Stockholders' Equity........................ F-31
Statements of Cash Flows.................................. F-32
Notes to Financial Statements............................. F-33
WORKGROUP PRODUCTIVITY CORPORATION
Report of Independent Auditors............................ F-38
Balance Sheet............................................. F-39
Statement of Operations................................... F-40
Statement of Stockholders' Equity......................... F-41
Statement of Cash Flows................................... F-42
Notes to Financial Statements............................. F-43
SAGE I.T. PARTNERS, INC.
Report of Independent Auditors............................ F-47
Balance Sheet............................................. F-48
Statement of Operations................................... F-49
Statement of Stockholders' Equity......................... F-50
Statement of Cash Flows................................... F-51
Notes to Financial Statements............................. F-52
NDC GROUP, INC.
Report of Independent Auditors............................ F-57
Balance Sheet............................................. F-58
Statement of Operations................................... F-59
Statement of Stockholders' Equity......................... F-60
Statement of Cash Flows................................... F-61
Notes to Financial Statements............................. F-62
VIRTUAL SOLUTIONS, INC.
Report of Independent Public Accountants.................. F-67
Report of Independent Auditors............................ F-68
Balance Sheets............................................ F-69
Statements of Operations and Retained Earnings............ F-70
Statements of Cash Flows.................................. F-71
Notes to Financial Statements............................. F-72
KINDERHOOK SYSTEMS, INC.
Report of Independent Accountants......................... F-78
Balance Sheets............................................ F-79
Statements of Operations and Retained Earnings............ F-80
Statements of Cash Flows.................................. F-81
Notes to Financial Statements............................. F-82
</TABLE>
F-1
<PAGE> 78
XPEDIOR INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------
XPEDIOR KINDERHOOK ADJUSTMENTS
INCORPORATED SYSTEMS, INC. (NOTE 4) PRO FORMA
<S> <C> <C> <C> <C>
Revenues..................................... $93,359 $9,387 $ -- $102,746
Cost of Services............................. 53,576 4,801 -- 58,377
------- ------ ------- --------
Gross Profit................................. 39,783 4,586 -- 44,369
Operating Costs and Expenses:
Selling, general and administrative........ 26,212 3,854 -- 30,066
Stock compensation......................... 1,440 -- -- 1,440
Depreciation and amortization.............. 6,326 54 772(a) 7,152
------- ------ ------- --------
33,978 3,908 772 38,658
------- ------ ------- --------
Operating Income............................. 5,805 678 (772) 5,711
Other Income (Expense):
Interest expense........................... (9,147) 10 (464)(b) (9,601)
Other, net................................. (84) 86 -- 2
------- ------ ------- --------
(9,231) 96 (464) (9,599)
Income (loss) from Continuing Operations
before Income Taxes........................ (3,426) 774 (1,236) (3,888)
Provision (Benefit) for Income Taxes......... (377) 59 (248)(c) (566)
------- ------ ------- --------
Income (loss) from Continuing Operations..... $(3,049) $ 715 $ (988) $ (3,322)
======= ====== ======= ========
Loss from Continuing Operations per Share
(Basic and Diluted)........................ $ (0.07) $ (0.08)
======= ========
Number of Shares Used to Compute Loss per
Share...................................... 41,341 41,341
======= ========
</TABLE>
See notes to unaudited pro forma statements.
F-2
<PAGE> 79
XPEDIOR INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------------------------------------------
WORKGROUP ADVANCED
XPEDIOR PRODUCTIVITY SAGE I.T. NDC VIRTUAL INFORMATION
INCORPORATED CORP. PARTNERS, INC. GROUP, INC. SOLUTIONS, INC. SOLUTIONS, INC.
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $72,267 $ -- $ 126 $ 3,480 $6,407 $3,258
Cost of Services................ 41,930 12 113 1,877 4,299 1,638
------- ---- ------- -------- ------ ------
Gross Profit.................... 30,337 (12) 13 1,603 2,108 1,620
Operating Costs and Expenses:
Selling, general and
administrative.............. 20,558 8 41 1,072 1,957 651
Stock compensation............ -- -- 1,759 28,213 837 --
Depreciation and
amortization................ 4,272 -- 3 101 68 33
------- ---- ------- -------- ------ ------
24,830 8 1,803 29,386 2,862 684
------- ---- ------- -------- ------ ------
Operating Income (Loss)......... 5,507 (20) (1,790) (27,783) (754) 936
Other Income (Expense):
Interest expense.............. (5,562) -- -- -- -- --
Other, net.................... 25 -- -- 12 9 2
------- ---- ------- -------- ------ ------
(5,537) -- -- 12 9 2
Income (Loss) from Continuing
Operations before Income
Taxes......................... (30) (20) (1,790) (27,771) (745) 938
Provision (Benefit) for Income
Taxes......................... 551 -- (698) (464) (277) --
------- ---- ------- -------- ------ ------
Income (Loss) from Continuing
Operations.................... $ (581) $(20) $(1,092) $(27,307) $ (468) $ 938
======= ==== ======= ======== ====== ======
Loss from Continuing Operations
per Share (Basic and
Diluted)...................... $ (0.01)
=======
Number of Shares Used to Compute
Loss per Share................ 41,285
=======
<CAPTION>
HISTORICAL
------------------------------
NEW TECHNOLOGY
PARTNERS KINDERHOOK ADJUSTMENTS
CONSULTING SYSTEMS, INC. (NOTE 4) PRO FORMA
<S> <C> <C> <C> <C>
Revenues........................ $4,754 $10,208 $ -- $100,500
Cost of Services................ 2,749 5,024 -- 57,642
------ ------- ------- --------
Gross Profit.................... 2,005 5,184 -- 42,858
Operating Costs and Expenses:
Selling, general and
administrative.............. 1,160 4,213 29,660
Stock compensation............ -- -- -- 30,809
Depreciation and
amortization................ 98 63 1,986(a) 6,624
------ ------- ------- --------
1,258 4,276 1,986 67,093
------ ------- ------- --------
Operating Income (Loss)......... 747 908 (1,986) (24,235)
Other Income (Expense):
Interest expense.............. (28) (9) (3,907)(b) (9,506)
Other, net.................... 19 44 -- 111
------ ------- ------- --------
(9) 35 (3,907) (9,395)
Income (Loss) from Continuing
Operations before Income
Taxes......................... 738 943 (5,893) (33,630)
Provision (Benefit) for Income
Taxes......................... -- 89 (603)(c) (1,402)
------ ------- ------- --------
Income (Loss) from Continuing
Operations.................... $ 738 $ 854 $(5,290) $(32,228)
====== ======= ======= ========
Loss from Continuing Operations
per Share (Basic and
Diluted)...................... $ (0.78)
========
Number of Shares Used to Compute
Loss per Share................ 41,285
========
</TABLE>
See notes to unaudited pro forma statements.
F-3
<PAGE> 80
XPEDIOR INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------------------------------------------
WORKGROUP ADVANCED
XPEDIOR PRODUCTIVITY SAGE I.T. NDC VIRTUAL INFORMATION
INCORPORATED CORP. PARTNERS, INC. GROUP, INC. SOLUTIONS, INC. SOLUTIONS, INC.
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $47,405 $ -- $ 126 $ 3,480 $6,407 $3,258
Cost of Services............... 27,201 12 113 1,877 4,299 1,638
------- ---- ------- -------- ------ ------
Gross Profit................... 20,204 (12) 13 1,603 2,108 1,620
Operating Costs and Expenses:
Selling, general and
administrative............. 13,528 8 41 1,072 1,957 651
Stock compensation........... -- -- 1,759 28,213 837 --
Depreciation and
amortization............... 2,818 -- 3 101 68 33
------- ---- ------- -------- ------ ------
16,346 8 1,803 29,386 2,862 684
------- ---- ------- -------- ------ ------
Operating Income (Loss)........ 3,858 (20) (1,790) (27,783) (754) 936
Other Income (Expense):
Interest expense............. (3,631) -- -- -- --
Other, net................... 18 -- -- 12 9 2
------- ---- ------- -------- ------ ------
(3,613) -- -- 12 9 2
Income (Loss) From Continuing
Operations before Income
Taxes........................ 245 (20) (1,790) (27,771) (745) 938
Provision (Benefit) From
Continuing Operations for
Income Taxes................. 559 -- (698) (464) (277) --
------- ---- ------- -------- ------ ------
Income (Loss) From Continuing
Operations................... $ (314) $(20) $(1,092) $(27,307) $ (468) $ 938
======= ==== ======= ======== ====== ======
Loss From Continuing Operations
per Share (Basic and
Diluted)..................... $ (0.01)
=======
Number of Shares Used to
Compute Loss per Share....... 41,285
=======
<CAPTION>
HISTORICAL
------------------------------
NEW TECHNOLOGY
PARTNERS KINDERHOOK ADJUSTMENTS
CONSULTING SYSTEMS, INC. (NOTE 4) PRO FORMA
<S> <C> <C> <C> <C>
Revenues....................... $3,915 $7,480 $ -- $ 72,071
Cost of Services............... 2,246 3,524 -- 40,910
------ ------ ------- --------
Gross Profit................... 1,669 3,956 -- 31,161
Operating Costs and Expenses:
Selling, general and
administrative............. 832 2,727 20,816
Stock compensation........... -- -- -- 30,809
Depreciation and
amortization............... 84 67 1,702(a) 4,876
------ ------ ------- --------
916 2,794 1,702 56,501
------ ------ ------- --------
Operating Income (Loss)........ 753 1,162 (1,702) (25,340)
Other Income (Expense):
Interest expense............. (28) (7) (2,643)(b) (6,309)
Other, net................... 19 37 -- 97
------ ------ ------- --------
(9) 30 (2,643) (6,212)
Income (Loss) From Continuing
Operations before Income
Taxes........................ 744 1,192 (4,345) (31,552)
Provision (Benefit) From
Continuing Operations for
Income Taxes................. -- -- 171(c) (709)
------ ------ ------- --------
Income (Loss) From Continuing
Operations................... $ 744 $1,192 $(4,516) $(30,843)
====== ====== ======= ========
Loss From Continuing Operations
per Share (Basic and
Diluted)..................... $ (0.75)
========
Number of Shares Used to
Compute Loss per Share....... 41,285
========
</TABLE>
See notes to unaudited pro forma statements.
F-4
<PAGE> 81
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. GENERAL
Xpedior Incorporated ("Xpedior" or the "Company") was formed by Metamor
Worldwide, Inc. ("Metamor" or the "Parent") to be the holding company for its
eBusiness solutions unit. Metamor commenced operations of this unit with the
acquisition of Metamor Technologies, Ltd. on March 27, 1997 and acquired six
additional companies in 1998 (see note 3). Effective April 30, 1999, Metamor
contributed to Xpedior all the outstanding capital stock of the seven companies
comprising its eBusiness solutions unit (the "Acquired Companies"), all of which
were wholly owned subsidiaries of Metamor. As the entities were under common
control, the contribution has been accounted for at historical cost in a manner
similar to a pooling of interests. The historical consolidated financial
statements of Xpedior reflect the "push down" of Metamor's purchase accounting
adjustments to the Acquired Companies.
2. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated financial
statements are based on adjustments to the historical consolidated financial
statements of Xpedior Incorporated to give effect to the acquisitions described
in Note 3 (the "Acquired Companies"). The pro forma condensed consolidated
statements of operations assume the acquisitions were consummated as of the
beginning of the periods presented. The pro forma condensed consolidated
statements of operations are not necessarily indicative of results that would
have occurred had the acquisitions been consummated as of the beginning of the
periods presented or that might be attained in the future.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The Pro Forma Financial Statements should be read in conjunction
with the historical consolidated financial statements of Xpedior, the historical
financial statements of the Acquired Companies and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
The Company has included in the pro forma condensed consolidated statements
of operations the results of operations for each of the acquired companies for
the period from the beginning of the period presented in the pro forma condensed
consolidated statement of operations through the date of acquisition. The
following pre-acquisition results of operations for the acquired companies were
included to derive the pro forma condensed consolidated statements of
operations:
<TABLE>
<CAPTION>
COMPANY PERIOD
- ------- ------
<S> <C>
Workgroup Productivity Corp. (Unaudited)(a,b)......... January 1, 1998
Sage I.T. Partners, Inc. (Unaudited)(a,b)............. January 1 - January 6, 1998
NDC Group, Inc. (Unaudited)(a,b)...................... January 1 - April 15, 1998
Virtual Solutions, Inc. (Unaudited)(a,b).............. January 1 - June 16, 1998
Advanced Information Solutions, Inc.
(Unaudited)(a,b).................................... January 1 - July 14, 1998
New Technology Partners Consulting (Unaudited)(a)..... January 1 - September 30, 1998
New Technology Partners Consulting (Unaudited)(b)..... January 1 - November 11, 1998
Kinderhook Systems, Inc. (Unaudited)(a)............... January 1 - September 30, 1998
Kinderhook Systems, Inc. (Audited)(b)................. January 1 - December 31, 1998
</TABLE>
F-5
<PAGE> 82
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COMPANY PERIOD
- ------- ------
<S> <C>
Kinderhook Systems, Inc. (Unaudited)(c)............... January 1 - September 30, 1998
</TABLE>
- ---------------
(a) Included in pro forma statement of operations for the nine months ended
September 30, 1998.
(b) Included in pro forma statement of operations for the year ended December
31, 1998.
(c) Included in pro forma statement of operations for the nine months ended
September 30, 1999.
3. ACQUISITIONS
All the companies comprising Xpedior were acquired in acquisitions that
were accounted for as purchases. Accordingly the operating results are reflected
in the consolidated results of Xpedior from the date of acquisition. Summary
information on the acquisitions follows:
On March 27, 1997, the Parent acquired Metamor Technologies, Ltd., an
Illinois-based eBusiness solutions company. Purchase consideration totaled $37.0
million in cash, which included purchase consideration paid after closing based
on the increase in earnings before interest and taxes ("EBIT"), as defined
("Earnouts"). The sellers are not entitled to any future Earnouts.
On January 2, 1998, Metamor acquired Workgroup Productivity Corp., an
Illinois-based eBusiness solutions company. Purchase consideration totaled $10.0
million in cash, which included Earnouts for 1998. In August 1999, the sellers
entered into an agreement with Metamor whereby all future Earnouts were fixed at
$4.8 million. This obligation, which is payable in March 2000, and resulting
goodwill were recorded as of the effective date of the agreement.
On January 7, 1998, Metamor acquired Sage I.T. Partners, Inc., a
California-based eBusiness solutions company. Purchase consideration totaled
$16.6 million in cash, which included Earnouts for 1998. In July 1999, the
sellers entered into an agreement with Metamor whereby all future Earnouts were
fixed at $8.8 million. This obligation, which is payable in March 2000, and
resulting goodwill were recorded as of the effective date of the agreement.
On April 16, 1998, Metamor acquired NDC Group, Inc., a Virginia-based
eBusiness solutions company, for $18.3 million in cash and 0.4 million shares of
Metamor's common stock valued at $15.5 million, 0.3 million shares which are
subject to a price guarantee (the "Issued Stock"). The guarantee on the Issued
Stock provides that the fair market value, as defined, will not be less than
$14.0 million as of April 16, 2000. In the event that the fair market value of
the Issued Stock is less than $14.0 million, the Company will pay the sellers in
cash for the difference. The guarantee will be adjusted for any Issued Stock
sold prior to the measurement date. The purchase consideration included Earnouts
for 1998. The sellers are entitled to future Earnouts of up to $15.0 million in
cash based on the increase in EBIT as defined.
On June 17, 1998, Metamor acquired Virtual Solutions, Inc., a Texas-based
eBusiness solutions company. Purchase consideration totaled $15.0 million in
cash, which included Earnouts for 1998. In August 1999, the sellers entered into
an agreement with Metamor whereby all future Earnouts were fixed at $6.3
million. This obligation, which is payable in April 2000, and resulting goodwill
were recorded as of the effective date of the agreement.
On July 15, 1998, Metamor acquired Advanced Information Solutions, Inc., an
Illinois-based eBusiness solutions company. Purchase consideration totaled $7.5
million in cash.
F-6
<PAGE> 83
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
On November 12, 1998, Metamor acquired New Technology Partners Consulting,
a Massachusetts-based eBusiness solutions company. Purchase consideration
totaled $7.8 million in cash and the sellers are entitled to Earnouts of up to
$1.3 million.
On September 24, 1999, the Company acquired Kinderhook Systems, Inc., a New
York-based eBusiness solutions business for $14.9 million in cash and $9.1
million of 7% subordinated convertible notes of the Company. These notes are
convertible at the option of the holders into common stock of the Company at the
initial public offering price during a 30-day period after the earlier of the
distribution of Xpedior stock by Metamor or the second anniversary of an initial
public offering. The notes are guaranteed by Metamor until the completion of the
initial public offering.
Earnouts are accrued in the period they become probable and can be
reasonably estimated. The accrual of Earnouts increases the amount of goodwill
and related amortization subsequent to the settlement of the contingent
liability.
4. ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical
condensed consolidated statements of operations as if the acquisitions described
in Note 3 were consummated as of the beginning of the periods presented:
(a) To reflect incremental amortization (on a straight-line basis over
20 years) of goodwill related to the purchase of the Acquired Companies.
(b) To reflect incremental interest expense on amounts due to Parent
related to its funding of the cash portion of the purchase price of the
Acquired Companies.
(c) To reflect (i) the change in income taxes related to pro forma
adjustments, and (ii) income taxes on the Acquired Companies that were S
corporations as if they were C corporations for federal income tax
purposes.
F-7
<PAGE> 84
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Xpedior Incorporated
We have audited the accompanying consolidated balance sheets of Xpedior
Incorporated and subsidiaries (the "Company") as of December 31, 1997 and 1998
and September 30, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the period from inception (March 27,
1997) to December 31, 1997, the year ended December 31, 1998 and 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Xpedior
Incorporated and subsidiaries at December 31, 1997 and 1998 and September 30,
1999 and the consolidated results of their operations and their cash flows for
the period from inception (March 27, 1997) to December 31, 1997, the year ended
December 31, 1998, and the nine months ended September 30, 1999, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 10, 1999
F-8
<PAGE> 85
XPEDIOR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1998 1999
<S> <C> <C> <C>
Current Assets:
Cash $ 2 $ 191 $ 194
Accounts receivable, net of allowance of $47, $560 and
$735................................................... 5,529 23,570 33,178
Prepaid expenses and other................................ 576 921 2,788
------- -------- --------
Total current assets.............................. 6,107 24,682 36,160
Net Assets of Discontinued Operations....................... 1,568 731 2,252
Fixed Assets, net........................................... 1,997 7,747 11,282
Intangible Assets, net of accumulated amortization of $482,
$3,477 and $7,791......................................... 24,470 104,520 146,145
Other....................................................... 125 512 1,463
------- -------- --------
Total Assets...................................... $34,267 $138,192 $197,302
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Amounts due to Parent..................................... $16,253 $ 77,929 $100,000
Accounts payable.......................................... 599 1,447 1,130
Payroll and related taxes................................. 772 6,915 6,955
Amounts due sellers of acquired companies................. 12,086 29,651 19,835
Deferred revenues......................................... 1,729 3,698 557
Other..................................................... -- 271 162
------- -------- --------
Total current liabilities......................... 31,439 119,911 128,639
Deferred Income Taxes and Other............................. -- 505 2,936
Convertible Subordinated Notes.............................. -- -- 9,068
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.01; 5,000,000 shares
authorized, none outstanding........................... -- -- --
Common stock, par value $.01; 100,000,000 shares
authorized, 41,285,298, 41,285,298 and 41,465,000
shares issued and outstanding.......................... 413 413 415
Additional paid-in capital................................ 2,254 15,253 57,190
Retained earnings......................................... 161 2,110 666
------- -------- --------
2,828 17,776 58,271
------- -------- --------
Less -- receivable from stockholder....................... -- -- (1,000)
Less -- deferred compensation............................. -- -- (612)
------- -------- --------
Total stockholders' equity........................ 2,828 17,776 56,659
------- -------- --------
Total Liabilities and Stockholders' Equity........ $34,267 $138,192 $197,302
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 86
XPEDIOR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 27, NINE MONTHS ENDED
1997) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ----------------------
1997 1998 1998
(UNAUDITED) 1999
<S> <C> <C> <C> <C>
Revenues.................................... $12,588 $72,267 $47,405 $93,359
Cost of Services............................ 8,174 41,930 27,201 53,576
------- ------- ------- -------
Gross Profit................................ 4,414 30,337 20,204 39,783
Operating Costs and Expenses:
Selling, general and administrative....... 4,904 20,558 13,528 26,212
Stock compensation........................ -- -- -- 1,440
Depreciation and amortization............. 745 4,272 2,818 6,326
------- ------- ------- -------
5,649 24,830 16,346 33,978
------- ------- ------- -------
Operating Income (Loss)..................... (1,235) 5,507 3,858 5,805
Other Income (Expense):
Interest expense.......................... (1,231) (5,562) (3,631) (9,147)
Other, net................................ 3 25 18 (84)
------- ------- ------- -------
(1,228) (5,537) (3,613) (9,231)
------- ------- ------- -------
Income (Loss) from Continuing Operations
before Income Taxes....................... (2,463) (30) 245 (3,426)
Provision (Benefit) for Income Taxes........ (965) 551 559 (377)
------- ------- ------- -------
Loss from Continuing Operations............. (1,498) (581) (314) (3,049)
Income from Discontinued Operations, net of
income taxes of $1,095, $1,669, $1,230
(unaudited), and $1,059, respectively..... 1,659 2,530 1,865 1,605
------- ------- ------- -------
Net Income (Loss)........................... $ 161 $ 1,949 $ 1,551 $(1,444)
======= ======= ======= =======
Earnings (Loss) per Share (Basic and
Diluted):
Loss from continuing operations........... $ (0.04) $ (0.01) $ (0.01) $ (0.07)
Income from discontinued operations....... 0.04 0.06 0.05 0.04
------- ------- ------- -------
Net income (loss)......................... $ 0.00 $ 0.05 $ 0.04 $ (0.03)
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE> 87
XPEDIOR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RECEIVABLE TOTAL
COMMON PAID-IN RETAINED FROM DEFERRED STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCKHOLDERS COMPENSATION EQUITY
<S> <C> <C> <C> <C> <C> <C>
INITIAL CAPITALIZATION OF
XPEDIOR --
Issuance of 41,285,298 shares
of common stock to Parent
and contribution from
Parent..................... $413 $ 2,254 $ -- $ -- $ -- $ 2,667
Net income...................... -- -- 161 -- -- 161
---- ------- ------- ------ ------- -------
BALANCE AT DECEMBER 31, 1997.... 413 2,254 161 -- -- 2,828
Contribution from Parent........ -- 12,999 -- -- -- 12,999
Net income...................... -- -- 1,949 -- -- 1,949
---- ------- ------- ------ ------- -------
BALANCE AT DECEMBER 31, 1998.... 413 15,253 2,110 -- -- 17,776
Contribution from Parent........ -- 38,887 -- -- -- 38,887
Issuance of 50,000 shares of
restricted stock, net......... 1 624 -- -- (612) 13
Sale of 129,702 shares of common
stock......................... 1 999 -- (1,000) -- --
Stock compensation charge for:
Sale of common stock.......... -- 725 -- -- -- 725
Issuance of stock options..... -- 702 -- -- -- 702
Net loss........................ -- -- (1,444) -- -- (1,444)
---- ------- ------- ------ ------- -------
BALANCE AT SEPTEMBER 30, 1999... $415 $57,190 $ 666 (1,000) (612) $56,659
==== ======= ======= ====== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE> 88
XPEDIOR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 27, NINE MONTHS ENDED
1997) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ----------------------
1997 1998 1998
(UNAUDITED) 1999
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 161 $ 1,949 $ 1,551 $ (1,444)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 1,014 4,673 3,165 6,326
Deferred income tax provision
(benefit).............................. (200) 491 469 (129)
Stock compensation....................... -- -- -- 1,440
Provision for doubtful accounts.......... 27 513 276 175
Changes in assets and liabilities net of
effects of acquisitions:
Accounts receivable.................... (3,520) (9,268) (9,850) (17,183)
Prepaid expenses and other............. (164) 1,392 (261) (2,293)
Accounts payable....................... (951) (843) (674) (897)
Accrued liabilities.................... 2,482 7,813 3,668 (1,539)
------- -------- ------- --------
Net cash provided by (used in)
operating activities.............. (1,151) 6,720 (1,656) (15,544)
------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................ (1,774) (5,261) (3,371) (5,280)
Other....................................... 7 (358) 51 (882)
------- -------- ------- --------
Net cash used in investing
activities........................ (1,767) (5,619) (3,320) (6,162)
------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Working capital advances from (payments to)
Parent, net.............................. 2,920 (912) 5,400 21,709
------- -------- ------- --------
Net cash provided by (used in)
financing activities.............. 2,920 (912) 5,400 21,709
------- -------- ------- --------
Net increase in cash.......................... 2 189 424 3
Cash, beginning of period..................... -- 2 2 191
------- -------- ------- --------
Cash, end of period........................... $ 2 $ 191 $ 426 $ 194
======= ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE> 89
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND OPERATIONS
Xpedior Incorporated ("Xpedior" or the "Company") was formed by Metamor
Worldwide, Inc. ("Metamor" or the "Parent") to be the holding company for its
eBusiness solutions unit. Metamor commenced operations of this unit with the
acquisition of Metamor Technologies, Ltd. on March 27, 1997 and acquired six
additional companies in 1998 (see note 3). Effective April 30, 1999, Metamor
contributed to Xpedior all the outstanding capital stock of the seven companies
comprising its eBusiness solutions unit (the "Acquired Companies"), all of which
were wholly owned subsidiaries of Metamor. As the entities were under common
control, the contribution has been accounted for at historical cost in a manner
similar to a pooling of interest. On September 24, 1999, Xpedior acquired an
eBusiness solutions company. The cash portion of the purchase price was paid by
Metamor and contributed to Xpedior's capital.
Xpedior provides eBusiness solutions to clients in the following service
areas: (i) digital business strategy; (ii) electronic commerce; (iii) digital
branding and user experience design; (iv) eBusiness systems and integration; (v)
eBusiness technology management; (vi) network design and security; (vii)
eBusiness intelligence; and (viii) enterprise portals, collaboration and
knowledge management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements present on a consolidated basis the
accounts of Xpedior and its subsidiaries. All significant intercompany
transactions have been eliminated.
The Acquired Companies were all acquired by Metamor in transactions that
were accounted for using the purchase method. The accompanying financial
statements reflect the "push down" of Metamor's purchase accounting adjustments
to the Acquired Companies and include the results of operations of the Acquired
Companies from the date of acquisition.
Effective October 1, 1999, the Company distributed to Metamor a segment
that provided non-eBusiness outsourcing services. This segment was a services
unit of Metamor Technologies, Ltd., which was acquired in March 1997. This
segment is reflected as discontinued operations in the accompanying financial
statements. Revenues from discontinued operations were $13.2 million for the
period from inception (March 27, 1997) to December 31, 1997, $22.7 million for
the year ended December 31, 1998 and $17.0 million and $15.6 million for the
nine months ended September 30, 1998 and 1999, respectively. Net assets from
discontinued operations consist primarily of accounts receivables, fixed assets,
intangibles and liabilities to be distributed to Metamor.
The consolidated financial statements for the nine months ended September
30, 1998 included herein have been prepared without audit pursuant to the rules
and regulations of the Securities and Exchange Commission. Accordingly, certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted.
The Company believes that the presentations and disclosures herein are adequate
to make the information not misleading. The consolidated financial statements
reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of that interim period.
F-13
<PAGE> 90
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fixed Assets
Fixed assets, which consist primarily of computer equipment and furniture
and fixtures, are recorded at cost. Depreciation is computed on a straight-line
basis over the estimated useful lives of the assets, which range from 3 to 7
years. Amortization of leasehold improvements is computed on a straight-line
basis over the useful life of the asset or lease term, whichever is shorter.
Accumulated depreciation and amortization was $0.5 million and $2.2 million at
December 31, 1997 and 1998 respectively, and $4.1 million at September 30, 1999.
The Company believes all fixed assets are fully realizable.
Intangible Assets
Intangible assets primarily consist of goodwill associated with the
acquired businesses. Goodwill is amortized on a straight-line basis over 20
years. In the event that facts and circumstances indicate intangible or other
long-lived assets may be impaired, the Company evaluates the recoverability of
such assets. The estimated future undiscounted cash flows associated with the
asset are compared to the asset's carrying amount to determine if a write-down
to fair value or discounted cash flow value is necessary. The Company believes
all intangible assets are fully realizable.
Revenue Recognition
Revenues are recorded at the time services are performed, except for
fixed-price contracts, which are accounted for using the
percentage-of-completion method. Estimated losses on fixed-price contracts are
recorded in the period the losses are determinable. Amounts received prior to
performance of the related services are recorded as deferred revenue and
recognized at the time services are performed.
Income Taxes
The Company and its subsidiaries are included in the consolidated federal
income tax return of Metamor. Income taxes for Xpedior have been calculated as
if it had filed a separate consolidated return with its subsidiaries.
The Company follows the liability method of accounting for income taxes.
Under this method, deferred income tax assets and liabilities are determined
based on differences between the financial statement and income tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. Benefits from operating losses have
been utilized by the Parent in its consolidated return and have been recorded as
a reduction in the amounts due to Parent. The Company's interim provisions for
income taxes were computed using its estimated effective tax rate for the year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-14
<PAGE> 91
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Split
Effective August 26, 1999, the Company's common stock was split
41,285,298-for-1. The Company's common share amounts have been restated to give
effect to the split.
New Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"). The Company is required to adopt
FAS 133 effective January 1, 2001. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. The Company does
not anticipate that the adoption of this Statement will have a significant
effect on its results of operations or financial position.
3. ACQUISITIONS
Xpedior is comprised of eight eBusiness solutions companies that were
acquired in transactions accounted for using the purchase method. The effects of
the seven acquisitions made by Metamor have been pushed down to Xpedior (See
notes 1 and 2). The results of operations of the acquired companies are included
in the Company's consolidated results of operations from the date of
acquisition. Summary information of the acquired companies follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 27, NINE MONTHS
1997) TO YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
<S> <C> <C> <C>
Acquisitions completed:........................ 1 6 1
===== ===== =====
Purchase consideration (in millions):
Cash paid, net of amounts previously
accrued................................... $16.1 $50.9 $18.4
Fair value of Metamor common stock issued.... -- 13.9 1.6
Fair value of Xpedior convertible notes
issued.................................... -- -- 9.1
Amounts due sellers of acquired companies.... 12.1 29.7 19.8
Liabilities assumed.......................... 3.9 5.4 1.0
----- ----- -----
Fair value of assets acquired (including
intangible assets)........................ $32.1 $99.9 $49.9
===== ===== =====
Purchase allocations (in millions):
Tangible assets acquired..................... $ 7.1 $16.9 $ 3.9
Intangible assets (all Goodwill)............. 25.0 83.0 46.0
----- ----- -----
Fair value at assets acquired................ $32.1 $99.9 $49.9
===== ===== =====
</TABLE>
On March 27, 1997, Metamor acquired Metamor Technologies, Ltd., an
Illinois-based eBusiness solutions company. Purchase consideration totaled $37.0
million in cash, which included purchase consideration paid after closing based
on the increase in earnings before interest and taxes ("EBIT"), as defined
("Earnouts"). The sellers are not entitled to any additional purchase
consideration.
On January 2, 1998, Metamor acquired Workgroup Productivity Corp., an
Illinois-based eBusiness solutions company. Purchase consideration totaled $10.0
million in cash, which
F-15
<PAGE> 92
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
included Earnouts for 1998. In August 1999, the sellers entered into an
agreement with Metamor whereby all future Earnouts were fixed at $4.8 million.
This obligation, which is payable in March 2000, and resulting goodwill were
recorded as of the effective date of the agreement.
On January 7, 1998, Metamor acquired Sage I.T. Partners, Inc., a
California-based eBusiness solutions company. Purchase consideration totaled
$16.6 million in cash, which included Earnouts for 1998. In July 1999, the
sellers entered into an agreement with Metamor whereby all future Earnouts were
fixed at $8.8 million. This obligation, which is payable in March 2000, and the
resulting goodwill were recorded as of the effective date of the agreement.
On April 16, 1998, Metamor acquired NDC Group, Inc. ("NDC"), a
Virginia-based eBusiness solutions company, for $18.3 million in cash and 0.4
million shares of Metamor's common stock valued at $15.5 million, 0.3 million
shares which are subject to a price guarantee (the "Issued Stock"). The purchase
consideration included Earnouts for 1998.
The guarantee on the Issued Stock provides that the fair market value, as
defined, will not be less than $14.0 million as of April 16, 2000. In the event
that the fair market value of the Issued Stock is less than $14.0 million, the
Company may be obligated to pay the sellers for the difference. The guarantee
will be adjusted for any Issued Stock sold prior to the measurement date. The
sellers are also entitled to future Earnouts of up to $15.0 million based on the
increase in EBIT as defined. Up to one-half of any payments to settle the
guarantee and the remaining Earnouts are expected to be paid in Metamor common
stock. Metamor has agreed to contribute to the capital of Xpedior the fair value
of any common stock it issues to satisfy these contingent obligations.
On June 17, 1998, Metamor acquired Virtual Solutions, Inc., a Texas-based
eBusiness solutions company. Purchase consideration totaled $15.0 million in
cash, which included Earnouts for 1998. In August 1999, the sellers entered into
an agreement with Metamor whereby all future Earnouts were fixed at $6.3
million. This obligation, which is payable in April 2000, and resulting goodwill
were recorded as of the effective date of the agreement.
On July 15, 1998, Metamor acquired Advanced Information Solutions, Inc., an
Illinois-based eBusiness solutions company. Purchase consideration totaled $7.5
million in cash.
On November 12, 1998, Metamor acquired New Technology Partners Consulting,
a Massachusetts-based eBusiness solutions company. Purchase consideration
totaled $7.8 million in cash and the sellers are entitled to Earnouts of up to
$1.3 million.
On September 24, 1999, the Company acquired Kinderhook Systems, Inc., a New
York-based eBusiness solutions business for $14.9 million in cash and $9.1
million of 7% subordinated convertible notes of the Company. The cash portion of
the purchase price was paid by Metamor, which contributed an equal amount to the
capital of Xpedior. These notes are convertible at the option of the holders
into common stock of the Company at the initial public offering price during a
30-day period after the earlier of the distribution of Xpedior stock by Metamor
or the second anniversary of an initial public offering. The notes are
guaranteed by Metamor until the completion of the initial public offering.
Earnouts are accrued in the period they become probable and can be
reasonably estimated. The accrual of Earnouts increases the amount of goodwill
related to an acquisition.
F-16
<PAGE> 93
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited results of operations have been prepared assuming
all acquisitions consummated on or before September 30, 1999 had occurred as of
the beginning of the periods presented. These results are not necessarily
indicative of results of future operations nor of results that would have
occurred had the acquisitions been consummated as of the beginning of the
periods presented.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1997 1998 1999
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues............................................ $ 61,088 $100,500 $102,746
Net loss............................................ $(12,453) $(32,228) $ (3,322)
Loss per share (Basic and Diluted).................. $ (0.30) $ (0.78) $ (0.08)
</TABLE>
4. AMOUNTS DUE TO PARENT AND TRANSACTIONS WITH PARENT
Amounts due to Parent consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1997 1998 1999
<S> <C> <C> <C>
Notes payable, interest at bank's base rate plus 3%
(11.5% at September 30, 1999), payable on demand --
Acquisition notes..................................... $13,333 $75,921 $ 86,811
Advances for working capital.......................... 2,920 2,008 13,189
------- ------- --------
Total....................................... $16,253 $77,929 $100,000
======= ======= ========
</TABLE>
The acquisition notes were issued to Metamor by Xpedior in connection with
(i) the initial capitalization of each of the Acquired Companies, and (ii) the
subsequent payment of Earnouts by Metamor. Effective July 31, 1999, Metamor
contributed $17.0 million of this indebtedness to the capital of Xpedior.
Advances for working capital relate to net cash transfers between Xpedior
and Metamor, expense allocations from Metamor (including income taxes) and
interest on intercompany indebtedness with Metamor. All the interest expense of
Xpedior was charged by Metamor and included in the advances for working capital.
Interest expense allocated by Metamor totaled $1.2 million in 1997, $5.6 million
in 1998 and $9.1 million for the nine months ended September 30, 1999. Effective
September 30, 1999, the Company assigned approximately $9.2 million in accounts
receivable to Metamor in repayment of a portion of the advances for working
capital. Xpedior expects to repay the amounts due to Parent out of the proceeds
of its initial public offering.
Included in the net cash transfers between Xpedior and Metamor are
receivables collected by Metamor on Xpedior's behalf totaling $0.9 million for
the period from inception to December 31, 1997, $0.2 million for the year ended
December 31, 1998 and $1.3 million for the nine months ended September 30, 1999.
Xpedior expects to obtain a separate credit facility following the
completion of its initial public offering. Until this facility is obtained,
Metamor has agreed to fund Xpedior's cash
F-17
<PAGE> 94
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requirements. Following the offering, Metamor will reduce the interest rate on
outstanding intercompany indebtedness with Xpedior, if any, to its incremental
borrowing rate under its senior credit agreement, which at September 30, 1999
was LIBOR plus 1.5 percent.
The Company participates in the centralized cash management program of
Metamor. Under this program, the Company's cash balances are transferred daily
to Metamor accounts and its daily cash requirements are funded by Metamor. The
advances for working capital are adjusted for the net cash transfers between the
two companies. Metamor allocates to Xpedior a portion of the expenses that are
charged by the commercial banks for operating the program.
Metamor allocates its corporate overhead to its operating units in a
reasonable manner based on revenues of the units. This allocation includes costs
associated with services Metamor provides to the business units such as mergers
and acquisitions, legal, tax, risk and cash management. The overhead allocation
from Metamor is included in selling, general and administrative expenses of
Xpedior and totaled $1.0 million for the period from inception to December 31,
1997, $1.4 million for the year ended December 31, 1998 and $1.9 million for the
nine months ended September 30, 1999. Following completion of Xpedior's initial
public offering, Metamor will cease making a general allocation of its overhead
to Xpedior and allocate only those expenses related to actual services provided.
Xpedior participates in Metamor's long-term incentive plan and its employee
stock purchase plan. Xpedior's share of costs of those programs is included in
the expense allocations from Metamor. Upon a distribution of Xpedior stock to
Metamor Stockholders, employees of Xpedior would cease participation in
Metamor's long-term incentive plan. Stock options in Metamor held by Xpedior
employees may be converted into Xpedior stock options. Xpedior's employees would
also cease participation in Metamor's employee stock purchase plan.
5. INCOME TAXES
The provision (benefit) for income taxes from continuing operations
consisted of the following (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 27,
1997) TO YEAR ENDED NINE MONTHS
DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30,
1997 1998 1999
<S> <C> <C> <C>
Current:
Federal............................... $(673) $ 433 $(233)
State................................. (92) (373) (15)
----- ----- -----
(765) 60 (248)
----- ----- -----
Deferred:
Federal............................... (176) 36 (90)
State................................. (24) 455 (39)
----- ----- -----
(200) 491 (129)
----- ----- -----
$(965) $ 551 $(377)
===== ===== =====
</TABLE>
F-18
<PAGE> 95
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between income taxes computed at the federal statutory
income tax rate and the provision for income taxes follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 27,
1997) TO YEAR ENDED NINE MONTHS
DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30,
1997 1998 1999
<S> <C> <C> <C>
Income tax benefit computed at federal
statutory income tax rate................. $(862) $ (11) $(1,199)
State income tax expense(benefit), net of
federal (benefit)....................... (116) 52 (171)
Non-deductible portion of business meals,
entertainment and other................. 13 69 91
Non-deductible portion of stock
compensation............................ -- -- 41
Amortization of nondeductible goodwill.... -- 441 861
----- ----- -------
Provision (benefit) for income taxes...... $(965) $ 551 $ (377)
===== ===== =======
</TABLE>
The net current and noncurrent components of deferred income taxes
reflected in the consolidated balance sheets follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
<S> <C> <C> <C>
Net current asset (liability).......................... $ 82 $ (204) $ 7
Net noncurrent asset (liability)....................... 118 (471) (684)
---- ------- -------
Net asset (liability).................................. $200 $ (675) $ (677)
==== ======= =======
</TABLE>
Deferred tax assets and liabilities were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
<S> <C> <C> <C>
Deferred tax assets:
Accrued vacation.................................... $143 $ 486 $ 269
Deferred compensation............................... 201 263 535
Bad debt............................................ 18 190 126
Other............................................... 104 394 393
---- ------- -------
Total deferred tax assets................... 466 1,333 1,323
---- ------- -------
Deferred tax liabilities:
Goodwill............................................ 179 442 596
Excess financial over tax basis of acquisitions..... -- 958 623
Other............................................... 87 608 781
---- ------- -------
Total deferred tax liabilities.............. 266 2,008 2,000
---- ------- -------
Net deferred tax asset (liability).......... $200 $ (675) $ (677)
==== ======= =======
</TABLE>
F-19
<PAGE> 96
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company leases various office space and equipment under noncancelable
operating leases expiring through 2006. Rent expense was $194,991 for the period
from inception (March 27, 1997) through December 31, 1997, $1,370,404 for the
year ended December 31, 1998 and $2,462,150 for the nine months ended September
30, 1999. The related future minimum lease payments as of September 30, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING:
<S> <C>
1999................................................... $ 1,216,657
2000................................................... 4,952,037
2001................................................... 4,803,098
2002................................................... 4,683,273
2003................................................... 4,292,238
Thereafter............................................. 7,111,378
-----------
$27,058,681
===========
</TABLE>
Certain of the Company's executives are covered by employment agreements
covering, among other things, base compensation, incentive-bonus determinations
and payments in the event of termination or a change in control of the Company.
Under terms of certain acquisitions, the Parent is required to make
additional payments to sellers generally to the extent future earnings, as
defined, exceed certain stipulated levels. These obligations have been
transferred by the Parent to Xpedior in connection with the contribution of
those acquired companies to Xpedior. The provisions of these contingent payments
(Earnouts) are described in Note 3.
Certain of the Company's executives are covered by employment agreements
covering, among other things, base compensation, incentive-bonus determinations
and payments in the event of termination or a change in control of the Company.
Xpedior has agreed to provide its president and CEO the benefits under a
non-competition agreement between him and a former employer, in the event the
former employer ceases to make the payments. Under this agreement, the CEO is
entitled to monthly payments aggregating $255,000 per year through November
2002, thereafter reduced to $165,000 per year until his death. The CEO is also
entitled to receive benefits under the former employer's benefit plan and
through November 2002, reimbursement for medical premiums and payment of
premiums for a life insurance policy.
In September 1999, the former employer terminated all of the benefits owed
to the executive, including those which Xpedior has agreed to undertake. Xpedior
believes that the agreement has not been breached by its president and CEO and
that the former employer is obligated to make the required payments. Although
Xpedior plans to pursue this matter vigorously and believes that it has strong
legal defenses, there can be no assurance as to the outcome of this matter.
Metamor and NDC filed suit in May 1999 against some former officers and
shareholders of NDC and other parties for several causes of action, including
breaches of fiduciary duties and numerous covenants and agreements. Metamor and
NDC are seeking monetary and injunctive
F-20
<PAGE> 97
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
relief against the defendants. Some of the defendants have filed Cross-Bills
alleging breach of employment and other agreements and duties of good faith and
fair dealings and other tort claims against NDC, Metamor and Xpedior.
Additionally, some of these same defendants have filed similar claims in the
United States District Court for the Eastern District of Virginia. The
defendants that filed the Cross-Bills and the complaint in District Court are
seeking indeterminable damages.
A trial of these actions is currently anticipated to begin in April 2000.
Management believes that Xpedior, NDC and Metamor have strong cases in these
matters and strong defenses against each of the complaints. However, NDC and
Metamor may not prevail in this litigation because litigation is subject to
inherent uncertainties.
Both Metamor and the Company are defendants in various other lawsuits and
claims arising in the normal course of business. Management believes it has
valid defenses in these cases and is defending them vigorously. While the
results of litigation cannot be predicted with certainty, management believes
the final outcome of such litigation will not have a material effect on the
financial position or results of operations of the Company.
Metamor's senior credit agreement is secured by a pledge of the common
stock of its material subsidiaries, including Xpedior, which is considered a
material subsidiary. Shares of Xpedior not held by Metamor, including those to
be sold to the public or issued under Xpedior's incentive programs, are not
subject to the pledge. Metamor's senior credit agreement contains covenants,
which among other things, limit total indebtedness of Metamor to 4.5 times
earnings before interest, taxes, depreciation and amortization, limit the
payment of dividends and require the maintenance of certain financial ratios. As
of September 30, 1999, Metamor was in compliance with the terms of this
agreement.
F-21
<PAGE> 98
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SUPPLEMENTAL CASH FLOW INFORMATION
The Acquired Companies comprising Xpedior were all acquired by Metamor in
all cash transactions, except for NDC in which Metamor issued a combination of
cash and its common stock (see note 3). In pushing down the effects of these
acquisitions to Xpedior, Metamor made a capital contribution to Xpedior for a
portion of the purchase consideration and Xpedior issued notes to Metamor for
the remainder (see note 4). Metamor also paid the cash portion of the purchase
consideration for Kinderhook (see note 3) and contributed an equal amount to the
capital of Xpedior. These non-cash transactions of Xpedior are summarized below
(in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 27, NINE MONTHS
1997) TO YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
<S> <C> <C> <C>
Consideration (including Earnouts) paid by
Metamor for the acquired companies --
Cash......................................... $16,000 $61,691 $48,138
Fair value of stock issued................... -- 13,896 1,639
------- ------- -------
Total................................ $16,000 $75,587 $49,777
======= ======= =======
Capitalization of Xpedior with respect to
purchase of
acquired companies:
Capital contributions by Metamor............. $ 2,667 $12,999 $21,874
Notes issued to Metamor(1)................... 13,333 62,588 27,903
------- ------- -------
Total................................ $16,000 $75,587 $49,777
======= ======= =======
</TABLE>
- ---------------
(1) Effective July 31, 1999, Metamor contributed to the capital of Xpedior $17.0
million of the amounts due Metamor by Xpedior. This contribution is not
reflected in these amounts.
Xpedior is included in the consolidated income tax return of Metamor and it
participates in Metamor's cash management program (see notes 2 and 4). Metamor
allocates to Xpedior its share of consolidated income taxes and adjusts
intercompany indebtedness for the current portion. All of Xpedior's interest
expense relates to indebtedness with Metamor. Accrued interest on this
indebtedness is included in advances for working capital from Metamor.
F-22
<PAGE> 99
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EARNINGS PER SHARE
The following table sets forth the computation of basis and diluted
earnings per share from continuing operations:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 27, NINE MONTHS
1997 TO YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Numerator:
Loss from continuing operations -- numerator for
basic earnings per share.......................... $(1,498) $ (581) $(3,049)
Effect of dilutive securities:
Convertible subordinated notes.................... -- -- 14
------- ------- -------
Numerator for diluted earnings per share -- loss
available to common stockholders after assumed
conversions....................................... $(1,498) $ (581) $(3,035)
======= ======= =======
Denominator:
Denominator for basic loss per
share -- weighted-average shares.................. 41,285 41,285 41,299
Effect of dilutive securities:
Stock options..................................... -- -- 28
Convertible subordinated notes.................... -- -- 14
------- ------- -------
Dilutive potential common shares..................... -- -- 42
Denominator for diluted loss per share -- adjusted
weighted-average shares and assumed conversions... 41,285 41,285 41,341
======= ======= =======
Basic and diluted loss per share....................... $ (0.04) $ (0.01) $ (0.07)
</TABLE>
During the periods presented, the Company had no nominal issuances.
9. STOCK PLANS
Stock Incentive Plan. The Company's Stock Incentive Plan (the "Plan")
provides for the issuance of stock options, stock appreciation rights and
restricted stock. All full time employees and directors of the Company or its
affiliates are eligible to participate. An aggregate of 15.0 million shares of
common stock has been reserved for issuance under the Plan. Generally, options
granted have ten-year terms and vest over three years. Stock options issued
under the Plan can be either incentive stock options or non-qualified stock
options. The exercise price of an incentive stock option will not be less than
the fair market value of the common stock on the date the option is granted.
The Company applies APB 25 in accounting for the Plan. Compensation expense
has been recognized for options granted under its stock option plan that were
granted at prices below the fair value of the Company's common stock at the date
of issuance. This difference results in a compensation charge of $18.4 million,
which is being recognized over the vesting period. A compensation charge of $0.7
million was recognized during the nine months ended September 30, 1999.
F-23
<PAGE> 100
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma information regarding net income and earnings per common shares
is set forth in the table below as if the Company had accounted for its employee
stock options under the fair value method. The fair value of these options was
estimated at the date of grant using a Black-Scholes option pricing
("Black-Scholes") model with the following weighted average assumptions for the
nine months ended September 30, 1999: (i) risk-free interest rate of 6.0%, (ii)
a dividend yield of 0.0%, (iii) volatility factors of the expected market price
of the Company's common stock of 1.28 and (iv) an expected life of three years.
The Black-Scholes model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including expected volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the vesting period of the stock options.
Had compensation for the Company's stock-based compensation plan been determined
based on the fair value, as described above, at the grant dates for awards under
the Plan, the Company's net loss and loss per common share would have been
adjusted to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
----------------------
AS PRO
REPORTED FORMA
--------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Loss from continuing operations............................. $(3,049) $(4,783)
Net loss.................................................... $(1,444) $(3,178)
Earnings per share:
Basic and diluted
Loss from continuing operations........................ $ (0.07) $ (0.12)
Net loss............................................... $ (0.03) $ (0.08)
</TABLE>
F-24
<PAGE> 101
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Through September 30, 1999, the Company issued non-qualified stock options
under the Plan, which had exercise prices equal to the fair value of the common
stock at the date of grant. A summary of the Company's stock option activity and
related information follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------------------------
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE EXERCISE PRICES
------- -------- ---------------
<S> <C> <C> <C>
Outstanding -- beginning of period................ -- $ --
Granted......................................... 9,186 7.25 $6.91 - $10.71
Exercised....................................... -- --
Forfeited....................................... (381) -- $6.91 - $10.71
-------
Outstanding -- end of period...................... 8,805 $7.25
=======
Options exercisable at end of period.............. --
Weighted average fair value of options granted
during the period............................... $ 7.37
</TABLE>
The weighted average remaining contractual life of options outstanding at
September 30, 1999 is 9.9 years.
In September 1999, the Company issued 50,000 shares of restricted stock to
its president and CEO, which are subject to forfeiture upon termination. The
Company has recorded as deferred compensation $0.6 million which is being
amortized over the 48-month vesting period.
The Company also sold 129,702 shares of restricted stock to the executive
for $7.71 per share. Under terms of an employment agreement, the Company can
repurchase the stock in the event the Company does not complete its initial
public offering or the executive terminates his employment prior to September 9,
2001. The repurchase price equals the price paid for the stock by the executive
plus $400,000. This arrangement is accounted for as a variable compensation
plan, and compensation expense is recognized for the difference between the fair
value and the carrying amount. During the nine months ended September 30, 1999,
compensation expense of $0.7 million was recognized on this arrangement.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has determined, based on available market information and
appropriate valuation methodologies, that the fair value of its financial
instruments approximates carrying value. The carrying value of accounts
receivable and accounts payable approximate fair value due to the short-term
maturity of the instruments. The carrying value of the amounts due to Parent
approximates fair value because the interest rates under the agreement are
variable, based on current market.
11. SEGMENT REPORTING
The Company operates in one reportable segment and its foreign-based
revenues and assets represented less than 10 percent of the Company's
consolidated revenues and assets.
F-25
<PAGE> 102
XPEDIOR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. CREDIT RISK
The Company believes its portfolio of accounts receivable is well
diversified and, as a result, its credit risks are minimal. The Company
continually evaluates the creditworthiness of its customers and monitors
accounts on a periodic basis, but typically does not require collateral.
13. SUBSEQUENT EVENTS
On October 18, 1999, the Company filed a registration statement with the
Securities and Exchange Commission on Form S-1 covering the sale of up to 8.5
million shares to the public (9.8 million shares assuming the underwriters'
over-allotment option is exercised). Proceeds from the sale will be used to
repay amounts due to Parent and for general working capital needs of the
Company.
F-26
<PAGE> 103
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Xpedior Incorporated
We have audited the accompanying balance sheet of Metamor Technologies,
Ltd. (the "Company"), as of March 26, 1997, and the related statements of
operations, stockholders' equity, and cash flows for the period from January 1,
1997 to March 26, 1997. These statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metamor Technologies, Ltd.,
at March 26, 1997, and the results of its operations and its cash flows for the
period from January 1, 1997 to March 26, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
July 3, 1999
except for Note 1
as to which the date is August 31, 1999
F-27
<PAGE> 104
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Metamor Technologies, Ltd.
We have audited the accompanying balance sheet of Metamor Technologies,
Ltd. (the "Company"), as of December 31, 1996, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metamor Technologies, Ltd.
as of December 31, 1996 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
MORRISON & MORRISON, LTD.
Chicago, Illinois
February 4, 1997
except for Notes 1 and 12
as to which the date is September 16, 1999
F-28
<PAGE> 105
METAMOR TECHNOLOGIES, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 26,
1996 1997
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 244,520 $ 2,660
Accounts receivable, net of allowance of $20,000.......... 2,156,094 3,909,561
Prepaid expenses and other receivables.................... 224,556 283,215
---------- -----------
Total current assets.............................. 2,625,170 4,195,436
Net assets of discontinued operations....................... 401,018 228,337
Equipment and leasehold improvements, net................... 724,596 1,165,004
Deposits and other assets................................... 20,367 13,662
---------- -----------
Total assets...................................... $3,771,151 $ 5,602,439
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable.............................................. $ 500,000 $ 750,000
Accounts payable and accrued expenses..................... 597,912 1,697,912
Deferred revenue.......................................... 189,752 77,342
---------- -----------
Total current liabilities......................... 1,287,664 2,525,254
Deferred compensation and other............................. 84,720 11,696
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized,
2,500,000 shares issued and outstanding................ 1,000 1,000
Additional paid-in capital................................ -- 8,467,913
Retained earnings (accumulated deficit)................... 2,397,767 (5,403,424)
---------- -----------
Total stockholders' equity........................ 2,398,767 3,065,489
---------- -----------
Total liabilities and stockholders' equity........ $3,771,151 $ 5,602,439
========== ===========
</TABLE>
See accompanying notes.
F-29
<PAGE> 106
METAMOR TECHNOLOGIES, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED 1997 TO
DECEMBER 31, MARCH 26,
1996 1997
<S> <C> <C>
Revenues.................................................... $6,604,648 $ 2,578,176
Cost of services............................................ 4,256,277 1,852,803
---------- -----------
Gross profit................................................ 2,348,371 725,373
Operating expenses:
Selling, general, and administrative...................... 1,825,227 404,150
Depreciation and amortization............................. 132,607 104,695
Stock compensation........................................ -- 6,328,504
---------- -----------
1,957,834 6,837,349
---------- -----------
Income (loss) from operations............................... 390,537 (6,111,976)
Other expense (income):
Deferred compensation..................................... 31,185 --
Other expense............................................. 1,980 1,591
Interest expense.......................................... 3,940 6,179
Interest income........................................... (3,123) (1,003)
---------- -----------
Total other expense............................... 33,982 6,767
---------- -----------
Income (loss) from continuing operations before taxes....... 356,555 (6,118,743)
Provision for state replacement tax......................... 7,900 7,501
---------- -----------
Income (loss) from continuing operations.................... 348,655 (6,126,244)
Income (loss) from discontinued operations.................. 1,782,686 (1,587,447)
---------- -----------
Net income (loss)........................................... $2,131,341 $(7,713,691)
========== ===========
</TABLE>
See accompanying notes.
F-30
<PAGE> 107
METAMOR TECHNOLOGIES, LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
<S> <C> <C> <C> <C>
Balance at January 1, 1996.................... $1,000 $ -- $ 1,004,483 $ 1,005,483
Net income.................................. -- -- 2,131,341 2,131,341
Distributions............................... -- -- (738,057) (738,057)
------ ---------- ----------- -----------
Balance at December 31, 1996.................. 1,000 -- 2,397,767 2,398,767
Conversion of phantom stock and buy-out of
stock options............................ -- 8,467,913 -- 8,467,913
Net loss.................................... -- -- (7,713,691) (7,713,691)
Distributions............................... -- -- (87,500) (87,500)
------ ---------- ----------- -----------
Balance at March 26, 1997..................... $1,000 $8,467,913 $(5,403,424) $ 3,065,489
====== ========== =========== ===========
</TABLE>
See accompanying notes.
F-31
<PAGE> 108
METAMOR TECHNOLOGIES, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED 1997 TO
DECEMBER 31, MARCH 26,
1996 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $2,131,341 $(7,713,691)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 404,906 104,695
Stock compensation..................................... 94,736 8,467,913
Changes in assets and liabilities:
Accounts receivable.................................. (1,614,219) (1,897,786)
Unbilled receivables................................. (345,493) (183,668)
Prepaid expenses and other receivables............... (40,831) (58,659)
Other assets......................................... 7,292 6,705
Accounts payable and accrued expenses................ 680,155 1,577,185
Deferred revenue..................................... 51,483 (13,484)
Deferred compensation and other...................... -- (192,169)
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (517,820) --
---------- -----------
Net cash provided by operating activities................... 851,550 97,041
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment and leasehold additions......................... (592,438) (501,401)
---------- -----------
Net cash used in investing activities....................... (592,438) (501,401)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit.......................... 500,000 250,000
Distributions to shareholder.............................. (738,057) (87,500)
---------- -----------
Net cash (used in) provided by financing activities......... (238,057) 162,500
---------- -----------
Net increase (decrease) in cash and cash equivalents........ 21,055 (241,860)
Cash and cash equivalents at beginning of period............ 223,465 244,520
---------- -----------
Cash and cash equivalents at end of period.................. $ 244,520 $ 2,660
========== ===========
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 11,970 $ 6,179
========== ===========
Income taxes paid......................................... $ 17,175 $ --
========== ===========
</TABLE>
See accompanying notes.
F-32
<PAGE> 109
METAMOR TECHNOLOGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
MARCH 26, 1997
1. BASIS OF PRESENTATION
Metamor Technologies, Ltd. (the "Company") is the predecessor company of
Xpedior Incorporated ("Xpedior"). Effective August 31, 1999, the Company
distributed to Metamor Worldwide, Inc. ("Metamor"), the Parent of Xpedior, Inc.,
a non-eBusiness outsourcing services segment. Accordingly, the accompanying
financial statements reflect this segment as discontinued operations. Revenues
from discontinued operations were approximately $13.5 million for the year ended
December 31, 1996 and $3.6 million for the period from January 1, 1997 to March
26, 1997. Net assets of the discontinued operations consist primarily of
accounts receivable, fixed assets and liabilities.
2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Business
The Company, is an Illinois-based provider of eBusiness consulting
services. The Company was acquired by Metamor (the "Acquisition") on March 27,
1997 (see Note 12).
Use of Estimates
The process of preparing financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company's revenues are predominantly generated from contracts for
consulting services. The Company recognizes revenue on time and materials
contracts as the services are performed for clients. Revenues on major
fixed-price contracts are recognized using the percentage-of-completion method.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
Income Taxes
The Company's shareholders have elected to be taxed as a small business
corporation under the provisions of Subchapter S of the Internal Revenue Code.
Accordingly, federal income tax is the responsibility of the individual
shareholder, and no provision for federal income tax is shown in the
accompanying financial statements.
State replacement tax is the responsibility of the Company, and provision
for those taxes is shown in the financial statements. The Company has elected to
report its income for tax purposes on a cash basis. As a result, certain income
and expense items are accounted for in different periods for income tax
reporting purposes than for financial reporting purposes.
F-33
<PAGE> 110
METAMOR TECHNOLOGIES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Distributions
Distributions represent cash distributions to shareholders primarily for
income taxes.
Stock Options
The Company follows Accounting Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees ("APB 25"), and related interpretations in
accounting for its employee stock options plan.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property and equipment are recorded at cost. Depreciation is provided
utilizing accelerated methods over the estimated useful lives of five and seven
years. Leasehold improvements are amortized on a straight-line basis over the
terms of the lease, and computer software is amortized on a straight-line basis
over a three-year period.
Equipment and leasehold improvements consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 26,
1996 1997
<S> <C> <C>
Computer equipment.................................. $ 904,277 $1,077,921
Office and other equipment.......................... 244,973 490,983
Computer software................................... 97,624 221,250
Leasehold improvements.............................. 33,487 69,641
---------- ----------
1,280,361 1,859,795
Less accumulated depreciation and amortization...... 555,765 694,791
---------- ----------
$ 724,596 $1,165,004
========== ==========
</TABLE>
4. OPERATING LEASES
The Company conducts operations in leased office facilities in Chicago,
Illinois. The leases expire at various dates through 2005. Rental expense from
continuing operations, inclusive of real estate taxes and operating expenses
under these leases for the year ended December 31, 1996 and the period from
January 1, 1997 to March 26, 1997, net of reimbursement from subleased space,
was approximately $287,000 and $7,000, respectively. The sublease expired on
March 30, 1997.
The leases for office space in Chicago, Illinois, include rent abatements
and scheduled base rent increases over the term of the leases. The total amount
of the base rent payments is being charged to expense on the straight-line
method over the term of the leases. The Company has recorded as accrued rent the
excess of rent expense over cash payments since inception of the leases. Accrued
rent at December 31, 1996 and March 26, 1997 was $97,944 and $105,987,
respectively.
F-34
<PAGE> 111
METAMOR TECHNOLOGIES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of March 26, 1997, approximate future minimum cash lease payments for
each succeeding fiscal year under the leases are as follows:
<TABLE>
<S> <C>
1997.................................................... $ 311,499
1998.................................................... 415,332
1999.................................................... 415,332
2000.................................................... 415,332
2001.................................................... 415,332
Thereafter.............................................. 1,557,495
----------
Total future minimum lease payments........... $3,530,322
==========
</TABLE>
The Company leases certain property and equipment under agreements which
are classified as operating leases. Rent expense from continuing operations
incurred under these leases was approximately $45,000 and $39,000 for the year
ended December 31, 1996 and the period from January 1, 1997 to March 26, 1997,
respectively. As of March 26, 1997, approximate future minimum lease payments
under operating leases are as follows:
<TABLE>
<S> <C>
1997..................................................... $ 90,226
1998..................................................... 111,410
1999..................................................... 34,296
2000..................................................... 31,362
2001..................................................... 7,596
--------
Total future minimum lease payments............ $274,890
========
</TABLE>
5. NOTES PAYABLE
The Company has a line of credit with a bank, whereby it may borrow up to
$800,000. Borrowings under this agreement bear interest at the bank's prime rate
and expired on April 30, 1997. There were borrowings under this agreement at
December 31, 1996 and March 26, 1997 in the amount of $500,000 and $750,000 with
an interest rate of 8.25% at March 26, 1997.
6. EMPLOYEE BENEFIT PLAN
The Company has a profit-sharing plan and trust pursuant to the Internal
Revenue Code of 1986 which covers all eligible employees. The plan includes an
employee savings plan with employer participation in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plan allows
participants to make pretax contributions with the Company matching a certain
percentage of employee contributions. In addition, the Company, at its
discretion, may make additional contributions. The contribution for the year
ended December 31, 1996 and the period from January 1, 1997 to March 26, 1997,
which included only matching contributions, amounts to approximately $10,300 and
$4,800, respectively.
7. PHANTOM STOCK PURCHASE PLAN
The Company has a Phantom Stock Purchase Plan to provide deferred
compensation for the benefit of certain employees. The plan is designed to
provide the participants the limited right to participate in future capital
appreciation, profits, and dividends. Under this plan, units corresponding to
shares of stock are credited to a participant's account. The value of these
shares
F-35
<PAGE> 112
METAMOR TECHNOLOGIES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
is to be measured by the increase in book value of the shares of the Company's
stock between the respective assignment dates and the date of such retirement,
death, or disability. Plan contributions will only be made if the Plan is
terminated in connection with a merger, consolidation, reorganization of the
Company into or with another company or affiliate, sale of substantially all of
the Company's assets, or a public stock offering of the Company's stock. At
December 31, 1996, the Company has reflected a liability for deferred
compensation of $73,024.
As part of the Acquisition, all of the phantom stock was converted to
common stock. The primary shareholder of the Company provided common shares for
the total 525,000 phantom shares to convert into 525,000 common shares on March
26, 1997 and, therefore, shares outstanding did not change. The Company recorded
a compensation charge of $6,800,663, of which $1,373,865 was included in
discontinued operations due to the conversion based on the Acquisition price per
share.
8. COMMITMENTS AND CONTINGENCIES
At March 26, 1997, the Company had an outstanding standby letter of credit
for $490,000 to guarantee payment of certain leases.
9. MAJOR CUSTOMER INFORMATION
Sales to two major customers for the period from January 1, 1997 to March
26, 1997 accounted for approximately 80% of total sales from continuing
operations. The accounts receivable balance for the above major customers was
approximately $2,350,000 at March 26, 1997.
Sales to two major customers in 1996 accounted for 41% of total sales from
continuing operations in 1996. The accounts receivable balance for the above
major customers was approximately $900,000 at December 31, 1996.
10. COMMON STOCK
On July 1, 1996, the Board of Directors authorized a 247.5-to-1 stock
split, thereby increasing the number of issued and outstanding shares to
2,500,000. In conjunction with the split, the Company issued 2,489,899 shares
and increased the number of authorized shares from 15,000 to 10,000,000.
Additionally, 51 shares were issued by the Company.
11. COMMON STOCK OPTIONS
The Company adopted incentive and non-qualified stock option plans for
employees effective as of July 1, 1996. The incentive stock option plan is
intended to qualify under Section 422 of the Internal Revenue Code. Under the
terms of the plan, options to purchase common stock are granted at not less than
the estimated fair value at the date of the grant and are exercisable during
specific future periods. These options may not be exercised in whole or in part
until the Company has registered its common stock for sale to the public,
therefore, the incentive stock plan is a variable plan.
As part of the Acquisition the Company bought out the stock options for
$14.08 per stock option which represented a substantial change to the plan and
triggered a compensation charge.
F-36
<PAGE> 113
METAMOR TECHNOLOGIES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company recorded a one-time compensation charge of $1,667,250, of which
$765,544 was included in discontinued operations as a result of this
transaction.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
UNDER OPTION PRICE
OPTION PER SHARE
<S> <C> <C>
Outstanding at January 1, 1996......................... -- $ --
Options granted...................................... 88,000 10.80
------- ------------
Outstanding at December 31, 1996....................... 88,000 10.80
Options granted...................................... 23,489 12.00
Options canceled..................................... 6,115 10.80
Options bought out by the Company as part of
Acquisition....................................... 105,374 10.86
------- ------------
Outstanding at March 26, 1997.......................... -- $ --
======= ============
</TABLE>
At March 26, 1997, no options were outstanding and all stock-based
compensation related to options that were cashed out has been recorded in the
amounts reported. Assuming the Company had used the alternative fair value
method of accounting for stock-based compensation under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, net
income would not have been affected.
12. SUBSEQUENT EVENT
Effective March 27, 1997, the Company was acquired by Metamor in exchange
for approximately $16.0 million in cash. In connection with the merger, all
phantom stock was converted into common shares and the Company bought out and
canceled all stock options. As of June 1999, the previous stockholders of the
Company have received an additional $21.0 million of contingent consideration
based on earnings before interest and taxes, as defined in the merger agreement.
There is no additional contingent consideration due to the sellers.
F-37
<PAGE> 114
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Xpedior Incorporated
We have audited the accompanying balance sheet of Workgroup Productivity
Corporation (the "Company") as of January 1, 1998, and the related statements of
operations, stockholders' equity, and cash flows for the period from January 2,
1997 to January 1, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Workgroup Productivity
Corporation at January 1, 1998, and the results of its operations and its cash
flows for the period from January 2, 1997 to January 1, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
August 19, 1999
F-38
<PAGE> 115
WORKGROUP PRODUCTIVITY CORPORATION
BALANCE SHEET
JANUARY 1, 1998
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 256,207
Accounts receivable, net of allowance for doubtful
accounts of $48,759.................................... 925,816
Other current assets...................................... 32,471
----------
Total current assets.............................. 1,214,494
Fixed assets, net of accumulated depreciation and
amortization.............................................. 419,980
----------
Total assets...................................... $1,634,474
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 354,481
Accrued expenses.......................................... 120,299
Accrued payroll........................................... 186,722
Accrued severance......................................... 103,343
Note payable to officer................................... 323,895
Other current liabilities................................. 68,823
----------
Total current liabilities......................... 1,157,563
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, 1,500,000 shares authorized;
1,052,631 shares issued and outstanding................ 487,400
Additional paid-in capital................................ 221,853
Accumulated deficit....................................... (232,342)
----------
Total stockholders' equity........................ 476,911
----------
Total liabilities and stockholders' equity........ $1,634,474
==========
</TABLE>
See accompanying notes.
F-39
<PAGE> 116
WORKGROUP PRODUCTIVITY CORPORATION
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 2, 1997 TO JANUARY 1, 1998
<TABLE>
<S> <C>
Revenues.................................................... $4,504,017
Cost of services............................................ 1,740,709
----------
Gross profit................................................ 2,763,308
Operating costs and expenses:
Selling, general, and administrative...................... 2,106,969
Stock compensation charge................................. 509,753
Depreciation and amortization............................. 61,684
----------
Total operating costs and expenses................ 2,678,406
----------
Operating income............................................ 84,902
Other expense, net.......................................... 8,941
----------
Net income.................................................. $ 75,961
==========
</TABLE>
See accompanying notes.
F-40
<PAGE> 117
WORKGROUP PRODUCTIVITY CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
-------------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 2, 1997............ 1,000,000 $199,500 $ -- $ 321,144 $ 520,644
Stock compensation charge for:
Issuance of common stock....... 52,631 287,900 -- -- 287,900
Issuance of stock options...... -- -- 221,853 -- 221,853
Distributions.................. -- -- -- (629,447) (629,447)
Net income..................... -- -- -- 75,961 75,961
--------- -------- -------- --------- ---------
BALANCE, JANUARY 1, 1998............ 1,052,631 $487,400 $221,853 $(232,342) $ 476,911
========= ======== ======== ========= =========
</TABLE>
See accompanying notes.
F-41
<PAGE> 118
WORKGROUP PRODUCTIVITY CORPORATION
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 2, 1997 TO JANUARY 1, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 75,961
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 61,684
Provision for doubtful accounts........................ 24,830
Stock compensation charge.............................. 509,753
Changes in operating assets and liabilities:
Accounts receivable.................................. (689,027)
Other current assets................................. (21,879)
Accounts payable..................................... 243,052
Accrued expenses..................................... 317,226
Other liabilities.................................... 262,550
---------
Net cash provided by operating activities................... 784,150
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (344,274)
---------
Net cash used in investing activities....................... (344,274)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable to officer......... 485,662
Payments on note payable to officer....................... (161,767)
Distributions............................................. (629,447)
---------
Net cash used in financing activities....................... (305,552)
---------
Net increase in cash and cash equivalents................... 134,324
Cash and cash equivalents at beginning of period............ 121,883
---------
Cash and cash equivalents at end of period.................. $ 256,207
=========
Cash paid during the period for interest.................. $ 18,029
=========
</TABLE>
See accompanying notes.
F-42
<PAGE> 119
WORKGROUP PRODUCTIVITY CORPORATION
NOTES TO FINANCIAL STATEMENTS
JANUARY 1, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Workgroup Productivity Corporation (the "Company") is an Illinois-based
provider of eBusiness consulting services. The Company was acquired by Metamor
Worldwide, Inc. ("Metamor") on January 2, 1998 (see Note 8).
Cash and Cash Equivalents
All short term investments with an original maturity of 90 days or less are
considered to be cash equivalents.
Revenue Recognition
Revenues are recorded at the time services are performed.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Income Taxes
The Company's shareholders have elected to be taxed as a small business
corporation under the provisions of Subchapter S of the Internal Revenue Code.
Accordingly, federal income tax is the responsibility of the individual
shareholders and no provision for federal income tax is shown in the
accompanying financial statements.
Distributions
Distributions represent cash distributions to shareholders primarily for
income taxes.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, and accounts payable
approximate their fair values due to the short-term maturities of these
instruments. The carrying value of borrowings under the notes payable
approximates fair value because the interest rates under the agreement
approximate current market.
Stock Split
On September 18, 1997, the Company's Board of Directors authorized a
1,000-for-1 split of its common stock. All share amounts in the accompanying
financial statements have been restated to give effect to the stock split. In
conjunction with the stock split, the Company's Board of Directors authorized an
increase in the number of authorized shares of common stock from 1,000 to
1,500,000 in order to give effect to the stock split.
F-43
<PAGE> 120
WORKGROUP PRODUCTIVITY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), and related interpretations in
accounting for its employee stock options plan. The pro forma disclosures
required by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("FAS 123"), which established a fair-value based
method of accounting for stock-based compensation plans, are set forth in Note
7.
2. FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives of five and seven years.
Amortization of leasehold improvements is computed on a straight-line basis over
the lease term.
Fixed assets at January 1, 1998 consisted of the following:
<TABLE>
<S> <C>
Furniture and fixtures................................... $ 251,288
Office equipment......................................... 223,045
Leasehold improvements................................... 89,167
---------
563,500
Less accumulated depreciation and amortization........... (143,520)
---------
$ 419,980
=========
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities in Chicago, Denver and Los
Angeles, and certain computer equipment under operating leases expiring at
various times during the next five years. Certain lease agreements provide for
periodic increases in lease payments. Rental expense under the leases was
$88,178 for the period ended January 1, 1998. As of January 1, 1998, the related
future minimum lease payments under these operating leases were as follows:
<TABLE>
<S> <C>
1999..................................................... $ 314,936
2000..................................................... 349,712
2001..................................................... 313,366
2002..................................................... 298,682
2003..................................................... 290,852
Thereafter............................................... 246,114
----------
$1,813,662
==========
</TABLE>
Certain of the Company's executives are covered by employment agreements
covering, among other things, base compensation, incentive-bonus determinations
and payments in the event of termination or change in control of the Company.
4. EMPLOYEE BENEFIT PLAN
The Company sponsors a profit sharing plan with a tax deferred savings
401(k) feature. Under provisions of the Plan, employees are permitted to make
tax-deferred contributions to the plan up to the limits established by the
Internal Revenue Service. The Company may also make
F-44
<PAGE> 121
WORKGROUP PRODUCTIVITY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
deductible contributions to the plan at management's discretion. The Company
made no contributions to the plan during the period ended January 1, 1998.
5. RELATED PARTY TRANSACTIONS
At January 1, 1998, the Company had a note payable to the majority
stockholder in the amount of $323,895, bearing interest at 5.6%. The Company
paid interest of approximately $18,029 related to this note during 1997.
Payments are equal to or greater than $1,000 over the course of five years at
the discretion of the majority stockholder.
6. CREDIT RISK
A majority of the Company's revenues are from a few customers. There are no
geographic or industry concentrations in the Company's customers. Sales to two
major customers for the period ended January 1, 1998 each accounted for 19% of
the Company's revenues. Accounts receivable balance from these customers totaled
$248,864 at January 1, 1998.
7. STOCK PLANS
During the year ended January 1, 1998, the Company adopted the Workgroup
Productivity Corporation 1997 Stock Option Plan (the "Plan") under which
incentive or nonqualified stock options may be granted to key employees for the
purchase of an aggregate of 100,000 shares of common stock of the Company (the
"Common Stock"). The Plan is administered by the Board of Directors. Under terms
of the Plan, stock options vest over a four-year period from the date of grant
and expire after ten years.
In September 1997, the Company granted 76,884 nonqualified stock options to
purchase Common Stock with an exercise price of $1.95 per common share. In
December 1997, the Company also granted 9,569 nonqualified stock options to
purchase Common Stock with an exercise price of $4.95 per common share. The
grant of options resulted in compensation expense of $221,853 for the excess of
the fair value of the Common Stock over the exercise price at the date of the
grant. Due to the acquisition of the Company as discussed in Note 8, all stock
options were bought out by Metamor and any remaining deferred compensation was
recorded in the current period financial statements.
In September 1997, the Company granted 52,631 shares of Common Stock to a
key employee. The Company recorded a compensation charge of $287,900, based on
the fair value of the Common Stock at the date of grant.
The following is a summary of stock option activity for the period ended
January 1, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE FAIR VALUE
OPTIONS PRICE PER SHARE
<S> <C> <C> <C>
Outstanding at January 1, 1997................. -- $ -- $ --
Granted...................................... 86,453 2.28 3.90
Forfeited.................................... (31,884) $1.95 $3.55
------- ----- -----
Outstanding at January 1, 1998................. 54,569 $2.48 $4.10
======= ===== =====
</TABLE>
F-45
<PAGE> 122
WORKGROUP PRODUCTIVITY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has elected to follow APB 25 and related interpretations in
accounting for stock-based compensation arrangements.
Pro forma information regarding net income is required by FAS 123, which
also requires that the information be determined as if the Company had accounted
for its employee stock options granted under the fair value method of FAS 123.
The fair value for these options was estimated at the date of grant using the
minimum value option pricing model using the following assumptions: dividend
yield of 0.0%, risk-free interest rate of 6.0%, and a weighted average expected
life of 3 months. The Company's pro forma information for the period ended
January 1, 1998, as if the Company had accounted for its employee stock options
granted under the fair value method prescribed by FAS 123, is the same as
reported in the accompanying financial statements.
8. SUBSEQUENT EVENT
Effective January 2, 1998, all of the outstanding common stock of the
Company was acquired by Metamor for approximately $5.8 million in cash. Under
terms of the merger agreement, the previous stockholders of the Company are
entitled to contingent consideration of up to $16.0 million based on the
increase in earnings before interest and taxes, as defined.
F-46
<PAGE> 123
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Xpedior Incorporated
We have audited the accompanying balance sheet of Sage I.T. Partners, Inc.
(the "Company"), as of January 6, 1998, and the related statements of
operations, stockholders' equity, and cash flows for the period from January 7,
1997 to January 6, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sage I.T. Partners, Inc., at
January 6, 1998, and the results of its operations and its cash flows for the
period from January 7, 1997 to January 6, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
July 6, 1999
F-47
<PAGE> 124
SAGE I.T. PARTNERS, INC.
BALANCE SHEET
JANUARY 6, 1998
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents................................. $ 76,987
Accounts receivable, net of allowance of $15,000.......... 1,646,384
Deferred tax assets....................................... 576,231
Other current assets...................................... 19,476
-----------
Total current assets.............................. 2,319,078
Fixed assets:
Furniture and fixtures.................................... 174,156
Computer equipment........................................ 239,936
Leasehold improvements.................................... 22,612
Assets under capital lease................................ 163,434
-----------
600,138
Less accumulated depreciation and amortization............ (267,927)
-----------
332,211
Other assets................................................ 51,307
-----------
Total assets...................................... $ 2,702,596
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 274,433
Line of credit............................................ 500,000
Current portion of capital lease obligation............... 54,070
Accrued liabilities....................................... 149,903
Deferred revenues......................................... 26,909
Accrued bonuses........................................... 130,398
-----------
Total current liabilities......................... 1,135,713
Equipment line of credit.................................... 121,377
Capital lease obligation, net of current portion............ 30,978
Commitments and contingencies
Stockholders' equity:
Common stock -- no par value, 10,000,000 shares
authorized, 2,000,000 shares issued and outstanding.... 20,000
Additional paid-in capital................................ 2,418,371
Accumulated deficit....................................... (1,023,843)
-----------
Total stockholders' equity........................ 1,414,528
-----------
Total liabilities and stockholders' equity........ $ 2,702,596
===========
</TABLE>
See accompanying notes.
F-48
<PAGE> 125
SAGE I.T. PARTNERS, INC.
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 7, 1997 TO JANUARY 6, 1998
<TABLE>
<S> <C>
Revenues.................................................... $ 7,470,957
Cost of services............................................ 5,117,868
-----------
Gross profit................................................ 2,353,089
Operating costs and expenses:
Selling, general, and administrative...................... 1,900,804
Stock compensation charge................................. 2,418,371
Depreciation and amortization............................. 139,632
-----------
4,458,807
-----------
Operating loss.............................................. (2,105,718)
Interest expense............................................ 63,218
-----------
Loss before income taxes.................................... (2,168,936)
Benefit for income taxes.................................... 820,192
-----------
Net loss.................................................... $(1,348,744)
===========
</TABLE>
See accompanying notes.
F-49
<PAGE> 126
SAGE I.T. PARTNERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 7, 1997.......... 2,000,000 $20,000 $ -- $ 324,901 $ 344,901
Stock compensation charge
related to issuance of stock
options...................... -- -- 2,418,371 -- 2,418,371
Net loss........................ -- -- -- (1,348,744) (1,348,744)
--------- ------- ---------- ----------- -----------
BALANCE, JANUARY 6, 1998.......... 2,000,000 $20,000 $2,418,371 $(1,023,843) $ 1,414,528
========= ======= ========== =========== ===========
</TABLE>
See accompanying notes.
F-50
<PAGE> 127
SAGE I.T. PARTNERS, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 7, 1997 TO JANUARY 6, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(1,348,744)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 139,632
Deferred income tax benefit............................... (825,249)
Stock compensation charge................................. 2,418,371
Changes in operating assets and liabilities:
Accounts receivable.................................... (711,250)
Accounts payable....................................... 151,257
Accrued liabilities.................................... 262,372
Deferred revenue....................................... (48,514)
Other assets........................................... (53,838)
-----------
Net cash used in operating activities....................... (15,963)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......................... (312,472)
-----------
Net cash used in investing activities....................... (312,472)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit............................ 421,377
Payments on capital lease obligations....................... (43,956)
-----------
Net cash provided by financing activities................... 377,421
-----------
Net increase in cash and cash equivalents................... 48,986
Cash and cash equivalents at beginning of period............ 28,001
-----------
Cash and cash equivalents at end of period.................. $ 76,987
===========
Cash paid during the period for:
Interest.................................................. $ 64,466
===========
Income taxes.............................................. $ 11,379
===========
</TABLE>
During the period, the Company financed certain equipment acquisitions, totaling
$12,600, with capital lease obligations. See Note 2.
See accompanying notes.
F-51
<PAGE> 128
SAGE I.T. PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 6, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Sage I.T. Partners, Inc. (the "Company"), is a California-based provider of
eBusiness consulting services. The Company was acquired by Metamor Worldwide,
Inc. ("Metamor") on January 7, 1998 (see Note 9).
Cash and Cash Equivalents
All short-term investments with an original maturity of 90 days or less are
considered cash equivalents.
Revenue Recognition
Revenues are recorded at the time services are performed, except for
fixed-price contracts for which revenues are recognized under the
percentage-of-completion method. Estimated losses on fixed-price contracts are
recorded in the period the losses are determinable.
Fixed Assets
Fixed assets are recorded at cost. Certain equipment was acquired under
capital lease arrangements (see Note 2). Depreciation of property and equipment
and amortization of assets under capital leases are provided using accelerated
methods for financial reporting purposes over estimated useful lives of three to
seven years.
Research and Development Costs
Research and development costs are expensed as incurred. Such costs were
approximately $324,000 during the period.
Income Taxes
The Company follows the liability method of accounting for income taxes.
Under this method, deferred income tax assets and liabilities are determined
based on differences between the financial statement and income tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, and accounts payable
approximate their fair values due to the short-term maturities of these
instruments. The carrying value of
F-52
<PAGE> 129
SAGE I.T. PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
borrowings under the notes payable approximates fair value because the interest
rates under the agreement approximate current market.
Stock Options
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), and related interpretations in
accounting for its employee stock options plan. The pro forma disclosures
required by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("FAS 123"), which established a fair-value based
method of accounting for stock-based compensation plans, are set forth in Note
6.
2. CAPITAL LEASES
The Company leases computer equipment under various capital lease
agreements. Interest was imputed at rates ranging from 15% to 25% on the
computer equipment leases. The related future minimum lease payments as of
January 6, 1998 are as follows:
<TABLE>
<S> <C>
1999...................................................... $67,174
2000...................................................... 31,270
2001...................................................... 1,088
-------
Total minimum lease payments.............................. 99,532
Less amount representing interest......................... 14,484
-------
Present value of net minimum lease payments............... 85,048
Less current portion...................................... 54,070
-------
$30,978
=======
</TABLE>
Assets under capital lease shown at January 6, 1998 are net of accumulated
amortization of $120,254.
3. COMMITMENTS AND CONTINGENCIES
The Company leases various office space and equipment under noncancelable
operating leases. Rent expense was $220,705 during the period. The related
future minimum lease payments as of January 6, 1998 follows:
<TABLE>
<S> <C>
1999..................................................... $317,410
2000..................................................... 229,529
2001..................................................... 80,447
2002..................................................... 40,263
--------
$667,649
========
</TABLE>
4. RETIREMENT PLAN
The Company sponsors a 401(k) profit sharing plan for the benefit of its
employees. Employees are permitted to make tax-deferred contributions to the
plan up to limits established by the Internal Revenue Service. The Company may
also make deductible contributions to the
F-53
<PAGE> 130
SAGE I.T. PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Plan at management's discretion. There were no Company contributions to the plan
during the period.
5. CREDIT RISK
A majority of the Company's revenues are from a few customers. There are no
geographic or industry concentrations in the Company's revenues. The Company had
three customers which comprised 15%, 13%, and 11% of revenues for the period
ended January 6, 1998.
6. STOCK PLANS
The Company adopted a stock plan (the "Plan") in 1994 under which
incentive, nonstatutory stock options, or stock purchase rights may be granted
to employees and consultants for the purchase of an aggregate of 900,000 shares
of common stock of the Company (the "Common Stock"). The Plan is administered by
the Board of Directors. Under terms of the Plan, stock options vest over a four
year period from the date of grant and expire after ten years.
During the current year, the Company granted 393,000 stock options to
purchase Common Stock with an exercise price ranging from $0.20 -- 0.35 per
common share. The grant of options resulted in compensation expense of
$2,418,371 for the excess of the fair value of the Common Stock over the
exercise price at the date of the grant. Due to acquisition by Metamor as
discussed in Note 9, all stock options were bought out by Metamor and any
remaining deferred compensation was recorded in the current period financial
statements.
The following is a summary of stock option activity for the period ended
January 6, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE FAIR
EXERCISE VALUE PER
OPTIONS PRICE SHARE
<S> <C> <C> <C>
Outstanding at January 7, 1997........................ 315,000 $.14 $ .02
Granted............................................. 393,000 .35 6.16
Canceled............................................ (14,000) .20 .02
------- ---- -----
Outstanding at January 6, 1998........................ 694,000 $.26 $3.50
======= ==== =====
</TABLE>
Pro forma information regarding net income is required by FAS 123, which
also requires that the information be determined as if the Company had accounted
for its employee stock options granted under the fair value method of FAS 123.
The fair value for these options was estimated at the date of grant using the
minimum value option pricing model using the following assumptions: dividend
yield of 0.0%, risk-free interest rate of 6.0%, and a weighted average
contractual expected life of 18 months. The Company's pro forma information for
the period ended January 6, 1998, as if the Company had accounted for its
employee stock options granted under the fair value method prescribed by FAS 123
is the same as reported in the accompanying financial statements.
F-54
<PAGE> 131
SAGE I.T. PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<S> <C>
Federal current.......................................... $ 94
State current............................................ 4,963
Federal and state deferred............................... (825,249)
---------
$(820,192)
=========
</TABLE>
The Company recognizes taxable income on a cash basis. The deferred income
taxes reflect the temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. Deferred tax
assets (liabilities) were comprised of the following:
<TABLE>
<S> <C>
Deferred tax assets:
Bad debts.............................................. $ 5,843
Accounts payable....................................... 106,892
Accrued liabilities.................................... 82,311
Deferred revenue....................................... 10,481
Other.................................................. 2,532
Accrued vacation....................................... 26,866
Net operating loss carryforwards....................... 988,415
----------
Total deferred tax assets...................... 1,223,340
Deferred tax liability:
Accounts receivable.................................... (647,109)
----------
Net deferred tax asset......................... $ 576,231
==========
</TABLE>
There was no valuation reserve against deferred tax assets since all are
expected to be realized in future years.
The differences between income taxes computed at the federal statutory
income tax rate and the provision for income taxes follow:
<TABLE>
<S> <C>
Income tax benefit computed at federal statutory income
tax rate................................................. $(737,438)
State income taxes (net of federal benefit).............. (101,603)
Non-deductible portion of business meals and
entertainment.......................................... 9,412
Other.................................................... 9,437
---------
$(820,192)
=========
</TABLE>
As of January 6, 1998, the Company has net operating loss carryforwards of
approximately $2,540,900 for federal and state income taxes, expiring in 2012.
8. LINES OF CREDIT
The Company maintains a $500,000 revolving line of credit, secured by
certain equipment, accounts receivable, inventory, contract rights, and general
intangibles. Under this arrangement, the Company can borrow up to 70% of the
Company's qualifying receivables. Interest is payable at the bank's prime rate
plus 1.75% (10.25% at January 6, 1998).
F-55
<PAGE> 132
SAGE I.T. PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also had a $150,000 equipment line of credit that provides for
a six-month drawdown period prior to amortization and matures June 30, 2000. The
Company pays interest on borrowings under the equipment line at the bank's prime
rate plus 2.25% (10.75% at January 6, 1998).
The loan and security agreements with the bank require the Company to meet
certain liquidity and profitability covenants.
9. SUBSEQUENT EVENT
Effective January 7, 1998, the Company was acquired by Metamor for
approximately $11.0 million in cash. Under terms of the merger agreement, the
previous stockholders of the Company are entitled to contingent consideration of
up to $35.0 million based on the increase in earnings before interest and taxes,
as defined.
F-56
<PAGE> 133
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Xpedior Incorporated
We have audited the balance sheet of NDC Group, Inc. as of April 15, 1998
and the related statements of operations, stockholders' equity, and cash flows
for the period from July 1, 1997 to April 15, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the Company's financial statements referred to above
present fairly, in all material respects, the financial position of NDC Group,
Inc. at April 15, 1998, and the results of its operations and its cash flows for
the period from July 1, 1997 to April 15, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
September 15, 1999
F-57
<PAGE> 134
NDC GROUP, INC.
BALANCE SHEET
APRIL 15, 1998
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash...................................................... $ 18,450
Accounts receivable, net of allowance of $219,000......... 2,630,510
Notes from stockholders................................... 429,896
Prepaid expenses.......................................... 46,909
------------
Total current assets.............................. 3,125,765
Property and equipment, net of accumulated depreciation and
amortization of $312,880.................................. 742,238
Other assets................................................ 43,116
------------
Total assets...................................... $ 3,911,119
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Line of credit............................................ $ 960,000
Accounts payable.......................................... 381,136
Accrued payroll and related taxes......................... 343,636
Other accrued expenses.................................... 233,081
Income taxes payable...................................... 437,205
------------
Total current liabilities......................... 2,355,058
Commitments and contingencies
Stockholders' equity
Common stock, no par value; 4,000,000 shares authorized;
1,775,000 shares issued and outstanding................ 17,221,000
Additional paid-in capital................................ 11,492,000
Accumulated deficit....................................... (27,156,939)
------------
Stockholders' equity........................................ 1,556,061
------------
Total liabilities and stockholders' equity........ $ 3,911,119
============
</TABLE>
See accompanying notes.
F-58
<PAGE> 135
NDC GROUP, INC.
STATEMENT OF OPERATIONS
PERIOD FROM JULY 1, 1997 TO APRIL 15, 1998
<TABLE>
<S> <C>
Revenues.................................................... $ 7,902,384
Cost of services............................................ 4,856,670
------------
Gross profit................................................ 3,045,714
Operating costs and expenses:
Selling, general, and administrative expenses............. 2,459,163
Depreciation and amortization............................. 148,000
Stock compensation charge................................. 28,613,000
------------
31,220,163
------------
Operating loss.............................................. (28,174,449)
Other income (expense):
Interest expense.......................................... (41,977)
Interest income........................................... 32,111
------------
(9,866)
------------
Loss before income taxes.................................... (28,184,315)
Benefit from income taxes................................... 105,308
------------
Net loss.................................................... $(28,079,007)
============
</TABLE>
See accompanying notes.
F-59
<PAGE> 136
NDC GROUP, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM JULY 1, 1997 TO APRIL 15, 1998
<TABLE>
<CAPTION>
RETAINED
SHARES OF ADDITIONAL EARNINGS
COMMON COMMON PAID-IN (ACCUMULATED
STOCK STOCK CAPITAL DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997............... 520,000 $ 50,000 $ -- $ 922,068 $ 972,068
Exercise of stock options.......... 30,000 50,000 50,000
Stock compensation charge for:
Issuance of common stock......... 1,225,000 17,121,000 -- 17,121,000
Issuance of stock options........ -- -- 11,492,000 -- 11,492,000
Net loss........................... -- -- -- (28,079,007) (28,079,007)
--------- ----------- ----------- ------------ -------------
BALANCE, APRIL 15, 1998.............. 1,775,000 $17,221,000 $11,492,000 $(27,156,939) $ 1,556,061
========= =========== =========== ============ =============
</TABLE>
See accompanying notes.
F-60
<PAGE> 137
NDC GROUP, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM JULY 1, 1997 TO APRIL 15, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(28,079,007)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 148,000
Provision for doubtful accounts........................... 128,000
Deferred income tax benefit............................... (543,192)
Stock compensation charge................................. 28,613,000
Changes in operating assets and liabilities:
Accounts receivable.................................... (585,990)
Prepaid expenses and other............................. (77,699)
Accounts payable....................................... 119,153
Income taxes payable................................... 435,337
Accrued liabilities.................................... 25,269
------------
Net cash provided by operating activities................... 182,871
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (442,061)
Advances to stockholder..................................... (376,774)
------------
Net cash used in investing activities....................... (818,835)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations............. (21,857)
Net proceeds on line of credit.............................. 610,000
Proceeds from sale of common stock.......................... 50,000
------------
Net cash provided by financing activities................... 638,143
Net increase in cash........................................ 2,179
Cash at beginning of period................................. 16,271
------------
Cash at end of period....................................... $ 18,450
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for interest........................ $ 41,977
============
Cash paid during period for taxes........................... $ --
============
</TABLE>
See accompanying notes.
F-61
<PAGE> 138
NDC GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 15, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
NDC Group, Inc. (the "Company") is a Virginia-based provider of eBusiness
consulting services. The Company was acquired by Metamor Worldwide, Inc.
("Metamor") on April 16, 1998 (see Note 10).
Revenue Recognition
The majority of the Company's revenues are derived from time and material
contracts and revenues are recognized as the services are performed. Revenues
from fixed fee contracts are recognized on a percentage of completion basis and
estimated losses on these contracts are recorded in the period the losses are
determinable.
Property, Equipment, and Depreciation
Property and equipment, which consists primarily of computer equipment and
furniture and fixtures, are recorded at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets of three to
five years. Amortization of leasehold improvements is computed on a
straight-line basis over the useful life of the asset or lease term, whichever
is shorter.
Income Taxes
The Company follows the liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between the financial statement and income tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from these estimates.
Stock-based Compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations ("APB 25") in
accounting for its employee stock options and other stock based awards and
transactions. The pro forma disclosures required by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS
123"), which established a fair-value based method of accounting for stock-based
compensation plans, are set for in Note 5.
F-62
<PAGE> 139
NDC GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. LINE OF CREDIT
The Company has a revolving credit agreement with a financial institution
which provides for borrowings up to $1,000,000 with a variable interest rate
(10% at April 15, 1998). The line of credit is collateralized by substantially
all assets of the Company and is guaranteed by the principal stockholder of the
Company. At April 15, 1998, the Company has total borrowings of $960,000 and
unused available borrowings of $40,000. The line of credit was repaid and
retired upon the consummation of the merger of the Company with Metamor (See
Note 10).
3. RETIREMENT PLAN
The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code. The plan provides retirement benefits for employees who meet
certain age and service eligibility requirements. The Company may make
discretionary contributions. During the period from July 1, 1997 to April 15,
1998 no contributions were made by the Company.
4. LEASE COMMITMENTS
The Company leases its office and certain equipment under noncancelable
operating leases. Rent expense for the period from July 1, 1997 to April 15,
1998 was $150,051. The related future minimum rental payments for the
twelve-month period ending April 15 are as follows:
<TABLE>
<S> <C>
1999.................................................... $ 243,305
2000.................................................... 250,480
2001.................................................... 257,866
2002.................................................... 262,435
2003.................................................... 188,903
----------
Total................................................... $1,202,989
==========
</TABLE>
5. STOCK-BASED COMPENSATION
In fiscal year ended June 30, 1997, the Company adopted three stock option
plans authorizing the granting to employees and others, of options to purchase
common stock at exercise prices no less than 100% of the fair market value of
the common stock on the date of the grant. Options for up to 200,000 shares may
be granted under the Company's "Continuous Service Plan." Options under this
plan become exercisable at dates ranging between three and one-half and five
years after the date of the grant and expire thirty days after the exercisable
date. Under the "Senior Executive and Members of the Board Plan" and the
"Advisory Group Plan," options may be granted for 100,000 and 150,000 shares of
stock, respectively. Under both of these two plans, options are exercisable as
of the effective date of the grant and expire two years after the date of the
grant.
On April 10, 1998, all vested and unvested stock options under the three
plans mentioned above were canceled, and new vested options were granted to
certain executives and employees of the Company in accordance with the "New
Vested Option Exchange Agreement." This agreement allowed the holders of the new
vested options the right to participate in the proceeds of the merger agreement
between the Company and Metamor discussed in Note 10 in exchange for the
cancellation of the new vested options. In connection with these grants, the
Company
F-63
<PAGE> 140
NDC GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recognized $11,492,000 of compensation expense for the excess of the fair value
of the options over the exercise price of the options. Fair value was determined
based on the acquisition price of the subsequent sale of the Company which is
deemed to be an arm's length transaction. (See Note 10)
The following tables summarize option activities of the four stock option
plans:
<TABLE>
<CAPTION>
CONTINUOUS SERVICE PLAN ADVISORY BOARD PLAN
----------------------------- -----------------------------
NUMBER OF WEIGHTED- NUMBER OF WEIGHTED-
SHARES UNDER AVERAGE SHARES UNDER AVERAGE
OPTION EXERCISE PRICE OPTIONS EXERCISE PRICE
<S> <C> <C> <C> <C>
Outstanding at June 30, 1997.............. -- $ -- 142,500 $2.39
Granted................................... 50,000 3.00 -- --
Exercised................................. -- -- -- --
Cancelled................................. 50,000 3.00 142,500 2.39
------ ----- ------- -----
Outstanding at April 15, 1998............. -- $ -- -- $ --
====== ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
SENIOR EXECUTIVE AND MEMBERS NEW VESTED OPTION EXCHANGE
OF THE BOARD PLAN AGREEMENT
----------------------------- -----------------------------
NUMBER OF WEIGHTED- NUMBER OF WEIGHTED-
SHARES UNDER AVERAGE SHARES UNDER AVERAGE
OPTION EXERCISE PRICE OPTIONS EXERCISE PRICE
<S> <C> <C> <C> <C>
Outstanding at June 30, 1997.............. $ -- $ -- $ -- $ --
Granted................................... 225,000 3.00 -- --
Granted................................... -- -- 375,000 3.00
Granted................................... -- -- 1,671,050 9.23
Exercised................................. -- -- -- --
Cancelled................................. 225,000 3.00 -- --
-------- ----- ---------- -----
Outstanding at April 15, 1998............. $ -- $ -- $2,046,050 $8.09
======== ===== ========== =====
</TABLE>
Pro forma information regarding net income is required by FAS 123, which
also requires that the information be determined as if the Company had accounted
for its employee stock options granted under the fair value method of FAS 123.
The fair value for these options was estimated at the date of grant using the
minimum value option pricing model using the following assumptions: dividend
yield of 0.0%, risk free interest rate of 6.0%, and a weighted average expected
life of 0 months (due to the Metamor acquisition -- see Note 10). The Company's
pro forma information for the period ended April 15, 1998, as if the Company had
accounted for its employee stock options granted under the fair value method
prescribed by FAS 123, is the same as reported in the accompanying financial
statements.
6. INCOME TAXES
The provision for income taxes for the period from July 1, 1997 to April
15, consists of the following:
<TABLE>
<S> <C>
Current:
Federal.............................................. $ 364,727
State................................................ 73,157
Deferred:
Federal.............................................. (543,192)
-----------
Income tax benefit..................................... $ (105,308)
===========
</TABLE>
F-64
<PAGE> 141
NDC GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The differences between income taxes computed at the federal statutory
income tax rate and the provision for income taxes for the period from July 1,
1997 to April 15, 1998 follows:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
Tax benefit at statutory federal income tax rate............ $(9,582,671)
Valuation allowance......................................... 9,419,548
Nondeductible expenses...................................... 9,531
State income taxes, net of federal income tax benefit....... 48,284
-----------
Income tax benefit.......................................... $ (105,308)
===========
</TABLE>
The deferred tax assets and liabilities as of April 15, 1998 are composed
of the following:
<TABLE>
<S> <C>
DEFERRED TAX ASSETS:
Bad debt expense...................................... $ 98,600
Stock compensation.................................... 9,728,140
----------
Total deferred tax assets..................... $9,826,740
----------
DEFERRED TAX LIABILITIES:
Conversion from cash basis to accrual basis........... $ (371,192)
Property and equipment................................ (36,000)
----------
Total deferred tax liabilities................ (407,192)
----------
Valuation allowance........................... (9,419,548)
----------
Net deferred tax assets....................... $ --
==========
</TABLE>
The Company has recorded a valuation allowance due to the uncertainty of
the ability to utilize the net deferred tax assets in the future.
7. COMMON STOCK
During the period from July 1, 1997 to April 15, 1998 the Company increased
the number of authorized shares from 1,000,000 to 4,000,000. The Company granted
1,225,000 shares of common stock to certain employees. In connection with the
stock issuances, the Company recognized $17,121,000 of compensation expense
based on the fair value of the common stock. Fair value was determined based on
the acquisition price of the subsequent sale of the Company which is deemed to
be an arm's length transaction. (See Note 10)
In fiscal year ended June 30, 1997 the Company entered into an agreement
with a consultant in which the consultant was granted an option to purchase
30,000 shares of common stock for a total of $50,000 and the option was
exercised in 1998.
8. RELATED PARTY TRANSACTIONS
At April 15, 1998, the Company had unsecured notes receivable from
stockholders totaling $429,896. These notes bear interest at 7% and are due on
demand. Interest income from these notes for the period from July 1, 1997 to
April 15, 1998 was $32,111.
On October 1, 1997, the Company entered into an employment search and
placement services agreement with an affiliate company owned by two stockholders
of the Company. The term of the agreement was for 39 months, and the
compensation paid to the affiliate company
F-65
<PAGE> 142
NDC GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
was based on the monthly projected hiring needs of the Company. For the period
from July 1, 1997 to April 15, 1998 total payments made to the affiliate company
for employment search and placement services were $217,607.
9. FINANCIAL CREDIT RISK
All accounts receivable are made on an unsecured basis. The Company
believes it is not exposed to any significant credit risk on accounts
receivable.
A significant amount of the Company's revenues are from three companies.
Revenues from these customers for the period from July 1, 1997 to April 15,
1998, were 24%, 21%, and 11% of revenue.
10. SUBSEQUENT EVENTS
Effective April 16, 1998, all of the outstanding Common Stock of the
Company was acquired by Metamor for approximately $20.5 million. Under terms of
the merger agreement, the previous stockholders and option holders of the
Company are entitled to contingent consideration of up to $26.0 million based on
the increase in earnings before interest and taxes, as defined.
F-66
<PAGE> 143
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Virtual Solutions, Inc.:
We have audited the accompanying balance sheet of Virtual Solutions, Inc.
as of December 28, 1997, and the related statements of operations and retained
earnings and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Virtual Solutions, Inc. at
December 28, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 2, 1998
F-67
<PAGE> 144
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Virtual Solutions, Inc.
We have audited the accompanying balance sheet of Virtual Solutions, Inc.
as of December 29, 1996, and the related statements of operations and retained
earnings and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Virtual Solutions, Inc. at
December 29, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Fort Worth, Texas
April 10, 1997
F-68
<PAGE> 145
VIRTUAL SOLUTIONS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28, MARCH 29,
1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............................. $1,095,290 $1,224,215 $ 724,621
Accounts receivable:
Billed, net of allowance for doubtful accounts of
$32,157, $29,344 and $33,214..................... 1,338,225 2,078,879 2,308,372
Unbilled........................................... 176,755 180,061 156,074
Other.............................................. 2,139 21,952 129,362
Prepaid expenses and other current assets............. 76,099 194,066 261,139
---------- ---------- ----------
Total current assets.......................... 2,688,508 3,699,173 3,579,568
Property and equipment, at cost:
Computer equipment.................................... 324,288 494,860 578,459
Furniture and fixtures................................ 67,650 110,503 140,799
Office equipment...................................... 2,941 21,347 24,069
Leasehold improvements................................ 5,600 5,600 5,600
---------- ---------- ----------
400,479 632,310 748,927
Less accumulated depreciation......................... 144,368 227,137 259,664
---------- ---------- ----------
256,111 405,173 489,263
Intangible and other assets, net of accumulated
amortization of $5,014, $17,596 and $20,974........... 131,016 88,189 95,871
---------- ---------- ----------
Total assets.................................. $3,075,635 $4,192,535 $4,164,702
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade............................... $ 351,989 $ 487,294 $ 437,340
Accrued expenses...................................... 402,224 675,337 674,372
Unearned revenue...................................... 31,100 -- --
Due to officer........................................ 25,000 -- --
Revolving line of credit.............................. 225,000 -- --
Deferred income taxes................................. 141,382 417,400 495,142
---------- ---------- ----------
Total current liabilities..................... 1,176,695 1,580,031 1,606,854
Deferred income taxes................................... -- 24,403 24,403
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 500,000 shares
authorized, 7,525 shares issued and outstanding.... 75 75 75
Common stock, $.01 par value, 500,000 shares
authorized, 100,000 shares issued and
outstanding........................................ 1,000 1,000 1,000
Additional paid-in capital............................ 1,901,425 1,901,425 1,901,425
Retained earnings..................................... 221,440 898,101 830,945
---------- ---------- ----------
2,123,940 2,800,601 2,733,445
Less:
Note receivable from officer.......................... 187,500 187,500 187,500
Unvested restricted stock............................. 37,500 25,000 12,500
---------- ---------- ----------
Total shareholders' equity.................... 1,898,940 2,588,101 2,533,445
---------- ---------- ----------
Total liabilities and shareholders' equity.... $3,075,635 $4,192,535 $4,164,702
========== ========== ==========
</TABLE>
See accompanying notes.
F-69
<PAGE> 146
VIRTUAL SOLUTIONS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED QUARTER ENDED QUARTER ENDED
DECEMBER 29, DECEMBER 28, MARCH 30, MARCH 29,
1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Service fees.............................. $7,901,288 $12,456,408 $2,557,787 $3,201,104
Cost of services.......................... 5,733,790 7,748,053 1,565,764 2,354,595
---------- ----------- ---------- ----------
Gross Profit.............................. 2,167,498 4,708,355 992,023 846,509
Operating Costs and Expenses:
Selling, general and administrative..... 2,370,617 3,599,156 848,077 933,304
Depreciation and amortization........... 56,085 95,350 21,113 35,906
---------- ----------- ---------- ----------
2,426,702 3,694,506 869,190 969,210
---------- ----------- ---------- ----------
(Loss) income from operations............. (259,204) 1,013,849 122,833 (122,701)
Interest income........................... 15,494 67,169 12,787 15,423
---------- ----------- ---------- ----------
(Loss) income before income taxes......... (243,710) 1,081,018 135,620 (107,278)
Income tax (benefit) provision............ (66,118) 404,357 50,722 (40,122)
---------- ----------- ---------- ----------
Net (loss) income......................... (177,592) 676,661 84,898 (67,156)
Retained earnings at beginning of
period.................................. 399,032 221,440 221,440 898,101
---------- ----------- ---------- ----------
Retained earnings at end of period........ $ 221,440 $ 898,101 $ 306,338 $ 830,945
========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-70
<PAGE> 147
VIRTUAL SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED QUARTER ENDED QUARTER ENDED
DECEMBER 29, DECEMBER 28, MARCH 30, MARCH 29,
1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.......................... $ (177,592) $ 676,661 $ 84,898 $ (67,156)
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:
Depreciation and amortization............ 56,085 95,350 21,113 35,906
Vesting of restricted stock for
consulting fees....................... 12,500 12,500 12,500 12,500
Deferred tax (benefit) provision......... (66,118) 300,421 50,722 77,742
Changes in working capital accounts --
Accounts receivable, net.............. (428,501) (763,773) (298,966) (312,916)
Prepaid expenses and other current
assets.............................. (71,185) (117,967) (88,855) (67,074)
Intangibles and other assets.......... (127,093) 30,246 30,740 (11,060)
Accounts payable, trade............... (854) 135,305 (29,460) (49,954)
Accrued expenses and other
liabilities......................... 293,039 273,113 27,753 (965)
Unearned revenue...................... 31,100 (31,100) -- --
---------- ---------- ---------- ----------
Net cash (used in) provided by operating
activities............................... (478,619) 610,756 (189,555) (382,977)
INVESTING ACTIVITY
Purchase of property and equipment......... (176,370) (231,831) (4,109) (116,617)
FINANCING ACTIVITIES
Net borrowings (payments) under revolving
line of credit........................... 100,000 (225,000) -- --
Borrowings from officer.................... 25,000 -- -- --
Repayments of note from officer............ -- (25,000) (25,000) --
Payments on notes payable.................. (45,949) -- -- --
Proceeds from issuance of preferred
stock.................................... 1,500,000 -- -- --
Proceeds from issuance of common stock..... 139,000 -- -- --
---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities............................... 1,718,051 (250,000) (25,000) --
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents.............................. 1,063,062 128,925 (218,664) (499,594)
Cash and cash equivalents at beginning of
period................................... 32,228 1,095,290 1,095,290 1,224,215
---------- ---------- ---------- ----------
Cash and cash equivalents at end of
period................................... $1,095,290 $1,224,215 $ 876,626 $ 724,621
========== ========== ========== ==========
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest... 2$3,740..... $ 5,564
========== ==========
Cash paid during the period for taxes...... -$-......... $ 190,400
========== ==========
</TABLE>
See accompanying notes.
F-71
<PAGE> 148
VIRTUAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Virtual Solutions, Inc. (the "Company") is an integrated technology
consulting and custom software development company serving customers in a
variety of industries throughout the United States. The Company's customized
technology implementation services include, distributed computing,
object-oriented development, N-tier client/server systems, data warehousing,
middle-ware, advanced operating systems, and systems management technologies.
The Company's principal offices are located in Irving, Texas.
The Company uses a 52 or 53 week year ending on the Sunday closest to
December 31.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents represent cash on hand, demand deposits, money
market accounts, and short-term investments with original maturities of three
months or less.
Property and Equipment
Property and equipment, which is stated at cost, is depreciated using
accelerated methods over the estimated useful lives of the property and
equipment as follows:
<TABLE>
<S> <C>
Computer equipment...................................... 3 to 5 years
Furniture and fixtures.................................. 7 years
Office equipment........................................ 7 years
</TABLE>
Long-lived assets are reviewed periodically for recoverability in
accordance with Statement of Financial Accounting Standards No. 121 and carrying
values are adjusted as necessary.
Intangible and Other Assets
Intangible and other assets consists of refundable deposits, organization
costs and trademarks. Capitalized amounts for intangibles and other assets are
being amortized on a straight-line basis over periods ranging from 12 to 60
months.
Revenue Recognition
Service fees, based on time and expenses incurred, are recorded as revenue
when the service has been provided. Service fees from fixed price contracts are
recognized in earnings proportionately over the contract periods or as services
are provided. Estimated losses on fixed price contracts are recorded in the
period the losses are determinable.
Income Taxes
Deferred income taxes are recognized using the liability method. Under this
method of accounting, deferred income taxes are recorded for the difference
between the financial reporting and income tax bases of assets and liabilities
using enacted tax rates in effect for the period in which the differences are
expected to reverse. The Company's interim provisions for income taxes were
computed using its estimated effective tax rate for the year.
F-72
<PAGE> 149
VIRTUAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Incentive Compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB 25") and related interpretations in
accounting for its incentive compensation plan.
Interim Financial Information
The financial statements for the quarters ended March 30, 1997 and March
29, 1998 are unaudited. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted from the unaudited
interim financial information. In the opinion of management, the unaudited
interim financial statements include all adjustments, consisting solely of
normal recurring adjustments, necessary for a fair presentation.
The results of operations for the interim periods are not necessarily
indicative of the results of operations for the respective full years.
3. MAJOR CUSTOMERS
During 1996, service fees from four customers approximated $6,081,000, or
77% of total service fees (30%, 17%, 17% and 13%, respectively). During 1997,
service fees from three customers approximated $6,942,000, or 55% of total
service fees (25%, 16% and 14%, respectively). These customers' balances
approximated $1,068,000 and $1,315,000 of accounts receivable at December 29,
1996 and December 28, 1997, respectively. The Company routinely assesses the
financial strength of its customers and generally collateral is not required.
Historically, the Company's credit losses have been insignificant and within
management's expectations. One of these customers, representing 30% and 25% in
service fees during 1996 and 1997, respectively, is a preferred shareholder in
the Company (see Note 10).
4. REVOLVING LINE OF CREDIT
The Company has a $500,000 revolving line of credit ("revolver") with a
bank which matures April 30, 1998. At December 29, 1996 and December 28, 1997,
borrowings under the revolver were $225,000 and $0. Interest is payable monthly
at prime plus 1/2% (9.0% at December 28, 1997). The revolver is collateralized
by the Company's accounts receivable and guaranteed by the officers and
shareholders of the Company.
F-73
<PAGE> 150
VIRTUAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. FEDERAL INCOME TAXES
Income tax (benefit) provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 28,
1996 1997
<S> <C> <C>
Current............................................. $ -- $103,936
Deferred............................................ (66,118) 300,421
-------- --------
Total income tax (benefit) provision...... $(66,118) $404,357
======== ========
</TABLE>
The components of the net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28,
1996 1997
<S> <C> <C>
Deferred tax assets:
Accounts payable and accrued expenses............. $ 257,626 $ 394,687
Net operating loss carryforward................... 149,325 --
--------- ---------
Total deferred tax assets................. 406,951 394,687
Deferred tax liabilities:
Accounts receivable............................... (504,160) (775,503)
Prepaid expense and other assets.................. (36,961) (36,584)
Property and equipment............................ (7,212) (24,403)
--------- ---------
Total deferred tax liabilities............ (548,333) (836,490)
--------- ---------
Net deferred tax liabilities.............. $(141,382) $(441,803)
========= =========
</TABLE>
The net deferred tax liabilities are a result of the Company filing its tax
return on the cash receipts and disbursements basis of accounting and relate
principally to differences in the carrying value of receivables, payables and
other accrued expenses. At December 29, 1997, the Company has a net operating
loss carryforward of approximately $439,000, which will, if unused, expire in
2011. The difference between the federal income tax benefit and income taxes
computed using the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 28,
1996 1997
<S> <C> <C>
Federal income tax (benefit) provision at statutory
rate................................................ $(82,861) $367,546
Nondeductible expenses.............................. 15,780 16,215
Other............................................... 963 20,596
-------- --------
Federal income tax (benefit) provision.............. $(66,118) $404,357
======== ========
</TABLE>
6. LEASES
The Company leases its office facilities, certain computer and office
equipment, and furniture under operating leases expiring at various times during
the next five years. Certain lease agreements provide for periodic increases in
lease payments. Rental expense under the leases approximated $352,000 and
$559,000 in 1996 and 1997, respectively. During 1996, the Company relocated its
corporate offices and entered into a new noncancelable operating lease
agreement. A portion of the Company's previous office space was sub-leased to a
third party for the remainder of the lease term. Subsequent to December 29,
1996, the Company sub-leased to a third party under an operating lease expiring
in April 1999. Sublease rental income was approximately
F-74
<PAGE> 151
VIRTUAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$17,000 and $75,000 in 1996 and 1997, respectively. Certain lease agreements are
personally guaranteed by officers and shareholders of the Company.
Future minimum lease payments and sublease rental income as of December 28,
1997 under operating leases that have initial or remaining noncancelable lease
terms in excess of one year are as follows:
<TABLE>
<CAPTION>
LEASE SUB-LEASE NET
COMMITMENT RENTAL INCOME COMMITMENTS
<S> <C> <C> <C>
1998........................................... $ 617,688 $(62,033) $ 555,655
1999........................................... 432,627 $(11,227) $ 421,400
2000........................................... 356,932 -- $ 356,932
2001........................................... 127,138 -- $ 127,138
2002........................................... -- -- --
---------- -------- ----------
Total................................ $1,534,385 $(73,260) $1,461,125
========== ======== ==========
</TABLE>
7. EMPLOYEE BENEFIT PLAN
The Company provides a 401(k) benefit plan (the "Plan") covering
substantially all employees. Employees are eligible to participate after
completing six months of service and can make voluntary contributions of up to
15% of their compensation each year subject to Internal Revenue Code
limitations. The Plan provides for matching contributions by the Company at the
discretion of the Board of Directors. Total plan expense for the years ended
December 29, 1996 and December 28, 1997 was approximately $30,000 and $48,000,
respectively.
8. OFFICERS' LIFE INSURANCE
The Company pays the premium on three officers' life insurance policies for
which the Company is the beneficiary. The proceeds are to be used to purchase
the officers' stock from any holders who may inherit it. Premiums paid during
1996 and 1997 were approximately $39,000 and $39,000.
9. CAPITAL STOCK
In June 1996, the Company amended its Articles of Incorporation to increase
the number of Company common shares authorized to 500,000 and to change the par
value to $.01. The shareholders subsequently entered into a new shareholders'
agreement which provided for an increase in the number of issued and outstanding
shares to 100,000, of which 3,000 are restricted at December 29, 1996.
In August 1996, the Company entered into a Restricted Stock Agreement with
an officer and his wholly-owned S corporation, which provides for the issuance
of 3,000 restricted shares of the Company's common stock in lieu of payment for
consulting services provided by the officer's S corporation in the amount of
$50,000. The restricted shares vest ratably over four years. At December 29,
1996 and December 28, 1997, 750 and 1,500 restricted shares are vested and the
remaining 2,250 and 1,500 are unvested, respectively.
In October 1996, the Company issued 7,525 shares of preferred stock to a
significant customer for $1,500,000 in cash. The shares have been designated by
the Company as Series A
F-75
<PAGE> 152
VIRTUAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock (Preferred Stock) and are convertible into common stock at any
time at the holders' option, or automatically upon a change in control of the
Company. Accordingly, 7,525 shares of common stock are reserved for issuance
upon conversion.
The Company can repurchase the Preferred Stock at par no sooner than
September 30, 2001 at a price of $199.34 per share. Holders of the Preferred
Stock are entitled to a Liquidation Preference, as defined, of $199.34 per share
and dividends at a rate of $19.93 per share when dividends are declared on the
common stock.
10. RELATED PARTY TRANSACTIONS
At December 29, 1996 and December 28, 1997, the Company has a note
receivable from an officer in the amount of $187,500, bearing interest at 6.83%.
This note represents partial consideration for the purchase of 15,000 shares of
common stock for $351,500.
The Company has a note payable to an officer in the amount of $25,000 at
December 29, 1996. The note bears interest at 10% and is payable upon demand.
This note including interest was repaid by the Company during 1997.
Fees for services provided to the preferred stockholder were $2.4 million
and $3.1 million in 1996 and 1997, respectively. Included in accounts receivable
at December 29, 1996 and December 28, 1997 are approximately $619,000 and
$600,000, respectively, due from the preferred stockholder for services rendered
in the normal course of business.
11. INCENTIVE COMPENSATION PLAN
During 1995, the Company adopted a Stock Appreciation Rights Plan (the SAR
Plan) whereby individual employees can be granted stock appreciation rights
(Rights). The effects of the SAR Plan were insignificant to the financial
statements.
During April 1997, the Company replaced the SAR Plan with a Performance
Stock Plan (the "PS Plan") under which 6,000 shares of performance stock that
imitate the performance of the Company's common stock can be granted to
individual key employees. Eligibility in the PS Plan is subject to the
discretion of the Board of Directors on an annual basis. The performance stock
vests ratably over a period of three years from the date of issuance but is not
exercisable until the occurrence of a "triggering event" (see below). If
employment of a participant is terminated for any reason other than death or
disability, the rights of that participant lapse without notice 30 days from the
date of termination. In the case of termination of a participant by death or
disability, the rights of that participant lapse without notice 12 months after
the date of termination. The right of a participant to convert shares of
performance stock into cash or other consideration is subject to the occurrence
of a "triggering event" (a change in control of the Company), as specified in
the PS Plan document. The amount of cash or other consideration the participant
is eligible to receive upon the occurrence of a "triggering event" is equal to
(i) the aggregate current market value of the shares converted on the conversion
date less (ii) the aggregate award value of the shares converted. As a result of
the specific provisions of the PS Plan, the liability and related compensation
expense, if any, will be recognized in the financial statements when a
"triggering event" occurs. All shares of performance stock will lapse if a
"triggering event" does not occur within 10 years of the date of grant.
F-76
<PAGE> 153
VIRTUAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENT (UNAUDITED)
In June 1998, the Company was acquired by Metamor Worldwide, Inc. for
approximately $10.3 million in cash. Under terms of the purchase agreement, the
previous stockholders of the Company are entitled to contingent consideration of
up to $18.0 million based on the increase in earnings before interest and taxes,
as defined.
F-77
<PAGE> 154
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Kinderhook Systems, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, retained earnings, and cash flows present fairly, in all material
respects, the financial position of KINDERHOOK SYSTEMS, INC. (the "Company") at
December 31, 1998 and 1997 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 5, 1999
F-78
<PAGE> 155
KINDERHOOK SYSTEMS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JULY 31,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 118,906 $ 50,073 $1,436,415
Accounts receivable, net of allowance for doubtful
accounts of $187,806 and $369,474................... 1,729,644 2,900,193 2,071,616
Other receivables...................................... 37,683 32,876 50,402
Prepaid expenses....................................... 50,719 90,262 59,498
---------- ---------- ----------
Total current assets........................... 1,936,952 3,073,404 3,617,931
Furniture and equipment, net............................. 108,352 187,109 170,217
Security deposit......................................... 24,424 55,442 74,071
---------- ---------- ----------
Total assets................................... $2,069,728 $3,315,955 $3,862,219
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses.................. $ 80,885 $ 333,776 $ 196,885
Other payables......................................... 44,873 220,087 314,326
Deferred income tax.................................... 142,483 219,327 145,865
---------- ---------- ----------
Total current liabilities...................... 268,241 773,190 657,076
---------- ---------- ----------
Deferred rent expense.................................... 25,911 24,581 22,716
---------- ---------- ----------
Total liabilities.............................. 294,152 797,771 679,792
---------- ---------- ----------
Commitments
Stockholder's equity
Capital stock -- $.01 per share par value; 20,000,000 and
12,000,000 shares authorized December 31, 1998 and
1997, respectively, 7,200,000 issued and outstanding... 10 72,000 72,000
Additional paid-in capital............................... 225,490 153,500 153,500
Unearned compensation.................................... (115,000) (57,500) (23,956)
Unrealized gain on securities available for sale......... 1,658 -- --
Retained earnings........................................ 1,663,418 2,350,184 2,980,883
---------- ---------- ----------
Total stockholder's equity..................... 1,775,576 2,518,184 3,182,427
---------- ---------- ----------
Total liabilities and stockholder's equity..... $2,069,728 $3,315,955 $3,862,219
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE> 156
KINDERHOOK SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED
DECEMBER 31, JULY 31,
------------------------ -----------------------
1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C>
Consulting Services Revenue................. $6,270,087 $10,207,913 $5,566,904 $7,353,785
Cost of Services............................ 2,658,882 5,024,209 2,379,289 3,452,583
---------- ----------- ---------- ----------
Gross Profit.............................. 3,611,205 5,183,704 3,187,615 3,901,202
Selling, general and administrative
expenses.................................. 2,783,645 4,212,162 2,171,579 3,179,716
Depreciation and Amortization............... 83,281 62,945 50,500 41,632
---------- ----------- ---------- ----------
Operating Income (Loss)..................... 744,279 908,597 965,536 679,854
Interest Expense............................ (6,124) (9,502) (4,049) (889)
Other Income................................ 53,839 44,206 27,916 16,320
---------- ----------- ---------- ----------
Income before provision for income
taxes.................................. 791,994 943,301 989,403 695,285
Provision for income taxes.................. 48,805 89,555 44,043 58,737
---------- ----------- ---------- ----------
Net income................................ 743,189 853,746 945,360 636,548
Retained earnings, beginning of period...... 1,124,128 1,663,418 1,663,418 2,350,184
Less: Distribution to stockholder........... (203,899) (166,980) (166,977) (5,849)
---------- ----------- ---------- ----------
Retained earnings, end of period............ $1,663,418 $ 2,350,184 $2,441,801 $2,980,883
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE> 157
KINDERHOOK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED
DECEMBER 31, JULY 31,
----------------------- ------------------------
1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 743,189 $ 853,746 $ 945,360 $ 636,548
--------- ----------- ----------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense....................... 83,281 62,945 50,500 41,632
Compensation expense....................... 57,500 57,500 -- 33,542
Changes in assets and liabilities:
Deferred rent........................... 1,100 (1,330) -- (1,865)
Accounts receivable..................... (528,644) (1,170,549) (1,108,093) 828,577
Other receivables....................... (37,683) 4,807 24,671 (17,526)
Prepaid expenses and Other expenses..... (31,357) (39,543) (15,512) 30,764
Accounts payables and accrued
expenses.............................. 23,936 252,891 12,686 (140,345)
Other payables.......................... (3,561) 175,214 255,451 94,240
Deferred taxes.......................... -- 76,844 -- (73,462)
--------- ----------- ----------- ----------
Total adjustments.................. (435,428) (581,221) (780,297) 795,557
--------- ----------- ----------- ----------
Net cash provided by operating
activities....................... 307,761 272,525 165,063 1,432,105
--------- ----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment........ (117,805) (141,702) (63,952) (21,285)
Security deposits.......................... (24,424) (31,018) (10,925) (18,629)
Sale of investments in marketable
securities.............................. 11,658 (1,658) -- --
--------- ----------- ----------- ----------
Net cash used for investing
activities....................... (130,571) (174,378) (74,877) (39,914)
--------- ----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to stockholder................ (203,899) (166,980) (166,977) (5,849)
--------- ----------- ----------- ----------
Net cash used for financing
activities....................... (203,899) (166,980) (166,977) (5,849)
--------- ----------- ----------- ----------
Net increase (decrease) in cash.............. (26,709) (68,833) (76,791) 1,386,342
Cash and cash equivalents, beginning of
year....................................... 145,615 118,906 118,906 50,073
--------- ----------- ----------- ----------
Cash and cash equivalents, end of
year............................. $ 118,906 $ 50,073 $ 42,115 $1,436,415
========= =========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Taxes.............................. $ 37,189 $ 66,903 $ -- $ --
Interest........................... $ 6,124 $ 9,504 $ 4,049 $ 889
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE> 158
KINDERHOOK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business:
Kinderhook Systems, Inc. (the "Company"), a Delaware Corporation, is a
software consulting and application development company specializing in
eBusiness including internet, extranet, intranet sites and groupware solutions.
The Company has developed a wide range of automated solutions including sales
force automation, project management, budgeting, resource allocation and
scheduling, financial management, purchasing, and publishing. The Company
partners with leading software firms such as IBM, Lotus, Microsoft and Netscape.
By working with the sales forces of these partners, the Company is able to reach
a wide range of large corporate clients in industries which include financial
services, telecommunications, pharmaceuticals, manufacturing, consumer products,
and media and information technology.
Revenue Recognition:
Revenue is billed on a time and materials basis and is recognized as
services are performed.
Cash and Cash Equivalents:
The Company considers all highly liquid instruments purchased with original
maturities of three months or less to be cash equivalents.
Fixed Assets:
Depreciation of computer equipment, office equipment, and furniture and
fixtures is provided for by the straight-line method over their estimated lives
ranging from three to seven years. Depreciation of computer software is
depreciated by the straight-line method over three years. Amortization of
leasehold improvements is provided for over the lesser of the term of the
related lease or estimated useful lives. Accumulated amortization includes the
amortization of assets recorded under capital lease. The cost of additions and
betterments is capitalized, and repairs and maintenance costs are charged to
operations in the periods incurred. When depreciable assets are retired or sold,
the cost and related allowances for depreciation are removed from the accounts
and the gain or loss is recognized.
Income Taxes:
The Company provides for income taxes on the basis of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined on the basis of differences between the financial
statement and tax basis of assets and liabilities at enacted tax rates
applicable to the years in which the differences are expected to reverse.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported
F-82
<PAGE> 159
KINDERHOOK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
amount of assets and liabilities, 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.
Stock-Based Employee Compensation:
The accompanying financial statements have been prepared in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under
APB 25, generally no compensation expense is recognized in the accompanying
financial statements in connection with the awarding of stock option grants to
employees provided that, as of the grant date, all terms associated with the
award are fixed and the minimum value of the Company's stock, as of the grant
date, is not greater than the amount an employee must pay to acquire the stock
as defined; however, to the extent that stock options are granted to
non-employees for goods or services, the fair value of these options is included
in operating results as an expense.
Disclosures required by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation ("SFAS No. 123"), have been
included in Note 7.
Interim Financial Data
The financial data at July 31, 1999 and for the seven months ended July 31,
1999 and 1998 are unaudited. In the opinion of management, they include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the results of operations and cash flows. The results of operations for
the seven months ended July 31, 1999 are not necessarily indicative of the
operating results to be expected for the entire year ending December 31, 1999.
2. COMMITMENTS:
The Company generally leases its office facilities, office equipment and
computer equipment under operating leases that expire between 1999 and 2002. The
future minimum noncancelable lease commitments at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
OFFICE
SPACE EQUIPMENT TOTAL
<S> <C> <C> <C>
1999...................................... $ 640,473 $308,715 $ 949,188
2000...................................... 609,559 170,791 780,350
2001...................................... 581,185 45,860 627,045
2002...................................... 326,667 27,652 354,319
---------- -------- ----------
$2,157,884 $553,018 $2,710,902
========== ======== ==========
</TABLE>
Rent expense amounted to $584,650 and $271,097 for the years ended December
31, 1998 and 1997, respectively.
3. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of accounts receivable. Three
customers accounted for 21%, 11% and 10% of the Company's total revenues for the
fiscal year ended December 31, 1998 and 23%, 19% and
F-83
<PAGE> 160
KINDERHOOK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6% for the fiscal year ended December 31, 1997. The Company generally requires
no collateral from its customers.
4. FIXED ASSETS:
Fixed assets at December 31, 1997 and 1998, consist of the following:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Computer equipment.................................... $ 210,840 $ 340,256
Office equipment...................................... 22,375 29,249
Leasehold improvements................................ 15,674 21,086
--------- ---------
248,889 390,591
Less, Accumulated depreciation and amortization....... (140,537) (203,482)
--------- ---------
$ 108,352 $ 187,109
========= =========
</TABLE>
Depreciation expense amounted to $62,945, and $83,281, for the years ended
December 31, 1998 and 1997, respectively.
5. DEFINED CONTRIBUTION SAVINGS PLAN:
The Company sponsors a defined contribution employee savings plan (the
"Plan") covering substantially all of its employees. An employee becomes
eligible to participate in the Plan immediately upon employment after reaching
the age of 21. The Plan provides for employee contributions between 1% and 15%
of eligible compensation, as defined. The Company contributed approximately
$71,000 to the savings plan for the year ended December 31, 1998 and no such
contributions were made for the year ended December 31, 1997.
The Company may make discretionary contributions to the Plan which vest
over a period of three years.
6. INCOME TAXES:
The Company is an "S" Corporation for Federal and New York State income tax
purposes. Accordingly, the Company is not subject to Federal income taxes;
however, it is subject to the New York State "S" Corporation Franchise Tax and
New York City General Corporation Tax. As an "S" Corporation, the Company's
profits and losses are passed directly to its shareholder for inclusion in the
shareholder's personal income tax return for Federal and New York State income
tax purposes.
Deferred income taxes are recognized for differences between the financial
statement and tax bases of assets and liabilities ("temporary differences") at
enacted tax rates in effect for the year in which such temporary differences are
expected to reverse. Accordingly, the effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.
The income tax provision is composed of state and local taxes amounting to
approximately $18,000 and deferred taxes of approximately $72,000 for the year
ended December 31, 1998.
F-84
<PAGE> 161
KINDERHOOK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to state and local
deferred tax liabilities at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
TYPES OF DIFFERENCES 1997 1998
<S> <C> <C>
Deferred tax asset:
Unexercised stock options............................. $ 4,688 $ 9,107
Total deferred tax asset...................... 4,688 9,107
-------- --------
Deferred tax liability:
Cash to accrual conversion............................ 147,171 228,434
-------- --------
Total deferred tax liability.................. 147,171 228,434
-------- --------
Net deferred tax liability.................... $142,483 $219,327
======== ========
</TABLE>
7. NON-QUALIFIED STOCK OPTIONS:
In December 1995, the Board of Directors of the Company authorized the
issuance of non-qualified stock options to purchase up to 1,600,000 shares of
the Company's Common Stock. The stock options generally vest over a period of
three to five years.
In December 1995 and July 1996, 800,000 and 420,800 stock options,
respectively, were issued at an exercise price of $.03. The difference between
the exercise price and the fair value of the options at the measurement date is
amortized over the vesting period. Approximately $57,500 has been recorded as
compensation expense for each of the years ended December 31, 1997 and 1998.
Unamortized compensation expense is included as a component of stockholder's
equity.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock-Issued to Employees" and related interpretations in accounting for its
stock option issuances. The Company has adopted the disclosure-only provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation", whereby compensation
expense is recognized ratably over the vesting period. Had compensation cost for
the Company's stock options issued at the fair value of the Company's stock been
determined based on the fair value of the stock options at the grant date for
awards in 1997 and 1998 consistent with the provisions of SFAS No. 123, the
Company's net income would have been adjusted to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
<S> <C> <C>
Net income:
As reported....................................... $743,189 $853,746
Pro forma......................................... $732,035 $830,717
</TABLE>
The fair value of each option grant is estimated using the minimum value
method of the Black-Scholes option pricing model which assumes no volatility.
The weighted average assumptions used for grants made in 1997 and 1998 were as
follows: Risk free interest rates of 4.63%-5.87% in 1998 and 5.81%-6.93% in
1997; Expected option life 7 years; Dividend yield 0.0%.
F-85
<PAGE> 162
KINDERHOOK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the non-qualified stock options:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
<S> <C> <C>
Options outstanding December 31, 1996............... 1,220,800 $.03
---------
Granted............................................. 78,000 $.21 - $1.23
---------
Options outstanding December 31, 1997............... 1,298,800 $.03 - $1.23
=========
Options exercisable -- December 31, 1997............ 696,320 $.03
---------
Granted............................................. 123,000 $1.25 - $1.90
Cancelled........................................... 16,000 $.86 - $1.23
---------
Options outstanding December 31, 1998............... 1,405,800 $.03 - $1.90
=========
Options exercisable -- December 31, 1998............ 1,067,280 $.03 - $1.23
=========
</TABLE>
8. STOCKHOLDER'S EQUITY:
On June 5, 1998, the Board of Directors ("BOD") approved a 4 for 1 stock
split which increased the outstanding shares to 7,200,000. The stock split has
been retroactively restated to the inception date. The BOD also approved an
increase to the number of authorized shares to 20,000,000.
Distribution to shareholder represents a cash distribution to shareholder
for income taxes.
9. LINE OF CREDIT:
The Company maintains a revolving line of credit which provides for
borrowing up to $2,000,000, of which $1,742,239 is available for direct debt and
$257,761 is available for a standby letter of credit. The agreement expires on
June 30, 1999. Interest accrued at the prime rate plus .5% and is payable
monthly on outstanding balances. At December 31, 1998 and 1997 no balance was
outstanding on this line of credit.
The agreement is personally guaranteed by the stockholder of the Company.
Advances under the line are limited to 75% of eligible accounts receivable.
10. SUBSEQUENT EVENT (UNAUDITED):
Effective September 24, 1999, the Company was acquired by Xpedior
Incorporated ("Xpedior"). Purchase consideration consisted of $14.9 million in
cash and convertible debt of Xpedior valued at $9.1 million. In connection with
the acquisition by Xpedior, the Company repurchased certain options held by
employees for approximately $190,000 in cash.
F-86
<PAGE> 163
[GRAPHIC DEPICTION OF OPEN ROAD MOUNTAIN SCENERY OVERLAID WITH TEXT BOX]
To soar in today's digital world, companies must increasingly adapt to
rapid, fundamental changes in technology. Xpedior designs solutions that satisfy
our clients' need to rapidly implement reliable, scalable and sustainable
eBusinesses.
CONTACT US AT:
[email protected]
CORPORATE HEADQUARTERS:
One North Franklin Street
Suite 1500
Chicago, IL 60606
312-251-2000 or
800-462-6301
[XPEDIOR LOGO]
www.xpedior.com
<PAGE> 164
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DECEMBER 15, 1999
[XPEDIOR LOGO]
8,535,000 SHARES OF COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
DONALDSON, LUFKIN & JENRETTE
FIRST UNION SECURITIES, INC.
J.P. MORGAN & CO.
THE ROBINSON-HUMPHREY COMPANY
DLJDIRECT INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Xpedior have
not changed since the date hereof.
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Until January 9, 2000 (25 days after the date of this prospectus), all dealers
that effect transactions in these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
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