<PAGE>
As filed with the Securities and Exchange Commission on March 8, 2000
Registration No. 333-92559
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MODUS MEDIA, INC.
(Exact name of registrant as specified in its charter)
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Delaware 7379 04-3357799
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
690 Canton Street
Westwood, MA 02090
(781) 407-2000
(Address including zip code, and telephone number including area code, of
Registrant's principal executive offices)
----------
TERENCE M. LEAHY
Chairman of the Board
and Chief Executive Officer
Modus Media, Inc.
690 Canton Street
Westwood, MA 02090
(781) 407-2000
(Name, address including zip code and telephone number including area code, of
agent for service)
Copies to:
MARK G. BORDEN, ESQ. KEITH F. HIGGINS, ESQ.
PHILIP P. ROSSETTI, ESQ. Ropes & Gray
Hale and Dorr LLP One International Place
60 State Street Boston, Massachusetts 02110
Boston, Massachusetts 02109 Telephone: (617) 951-7000
Telephone: (617) 526-6000 Telecopy: (617) 951-7050
Telecopy: (617) 526-5000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, DATED MARCH 8, 2000
8,000,000 Shares
Modus Media, Inc.
[Logo of Modus Media appears here]
Common Stock
--------
We are selling 8,000,000 shares of our common stock. The underwriters named
in this prospectus may purchase up to 1,200,000 additional shares of our common
stock to cover over-allotments.
This is an initial public offering of common stock. We currently expect the
initial public offering price to be between $11.00 and $13.00 per share, and
have applied to have the common stock included for quotation on the Nasdaq
National Market under the symbol "EMMI".
--------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 7.
Neither the Securities and Exchange Commission 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.
--------
<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Initial Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Modus Media (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
2000.
--------
Salomon Smith Barney
Donaldson, Lufkin & Jenrette
Robertson Stephens
Thomas Weisel Partners LLC
March , 2000
<PAGE>
[Inside Front Cover -- Gatefold]
A Proven Provider of Supply Chain Management Services
[Intuit logo]
[Sun MicroSystems logo]
[Microsoft logo]
[2Wire logo]
[network associates logo]
[micron pc.com logo]
[macromedia logo]
[Electronics for Imaging logo]
[Novell logo]
[Palm Computing Platform logo]
[McAfee logo] [Meta Creations logo]
[Media Farm logo]
[beyond.com logo]
[FileMaker logo]
[IBM logo]
[AT&T logo]
[Reel.com logo]
[photoalley.com logo]
All logos are the trademarks of their respective owners.
<PAGE>
[Inside Front Cover - Gatefold]
Modus Media Worldwide
[graphic depicting world map]
20 Solution Centers
North America Europe Asia Pacific
California France(2) Australia
Idaho Ireland(4) China
North Carolina United Kingdom Japan
Utah(3) The Netherlands Singapore
Washington Taiwan
[Modus Media Logo]
<PAGE>
[Inside Front Cover]
Supply Chain Management Services
From Order Management to Delivery of Product
Customer Care Services
[small, circular [small, circular photograph of inside
photograph of Web Site] of a response center]
e-Commerce Support Services Customer Service and Support
Developing Web Storefronts Online Software Authorizations
with Direct Connections to and Tracking for Software Developers
Production Centers Processing Product Returns,
Refunds and Rebates
Order Entry and Processing
<TABLE>
<S> <C> <C>
[small, circular [small, circular photograph [small, circular photograph
photograph of solution of data information of currencies from
center operator] numbers] foreign countries]
Order Receipt Customer Registration Local Tax Calculation
and Entry Order Activity Reporting Processing Online
Phone, US Mail, Fax Payments in Multiple Currencies
Email, and Web Orders
</TABLE>
Product and Distribution Services
<TABLE>
<S> <C> <C>
[small, circular [small, circular photograph [small, circular photograph
photograph of of assembly line in a of map of Asia]
CD's] warehouse]
Procurement Production and Assembly Distribution
Disk/CD Replication Managing Inventory and Materials Logistics
Print On Demand Picking and Packing Customs and Export Compliance
Warehousing Shipping Documentation
</TABLE>
[Modus Media Logo]
<PAGE>
You should rely only on the information contained in this prospectus. Modus
Media has not authorized anyone to provide you with different information.
Modus Media is not making an offer of these securities in any state where the
offer is not permitted. You should not assume that the information provided by
this prospectus is accurate as of any date other than the date on the front of
this prospectus.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 15
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Results of Operations and Finan-
cial Condition.......................................................... 20
Business................................................................. 28
Management............................................................... 39
Certain Transactions..................................................... 48
Principal Stockholders................................................... 50
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 54
Underwriting............................................................. 56
Validity of Common Stock................................................. 58
Experts.................................................................. 58
Where You Can Find Additional Information................................ 58
Index to Consolidated Financial Statements............................... F-1
</TABLE>
Until 2000, all dealers that buy, sell or trade the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights information contained in this prospectus
and does not contain all the information that may be important to you. You
should read the entire prospectus carefully, including the section entitled
"Risk Factors" and our financial data and related notes, before making an
investment decision.
Modus Media
We are a leading, global provider of supply chain management services for
the technology industry. Our clients are software and hardware manufacturers
and Internet companies who engage us to manage and perform the multiple steps
that make up the supply chain for their products, including:
. handling customer orders for our clients that we receive by telephone,
fax or email or over the web;
. acquiring hardware components and other materials, such as paper and
CDs, that we use to produce and assemble our clients' products;
. managing inventory that we acquire or produce for our clients;
. reproducing software onto CDs and diskettes;
. assembling hardware components, such as keyboards and other accessories;
and
. fulfilling of orders by picking, packing, warehousing and shipping
products.
We also provide e-commerce support services, such as developing web site
storefronts, processing on line orders and payments, tracking orders on line
and managing product returns, rebates and refunds.
We have been in operation since 1982 and have built a worldwide
infrastructure in 12 countries, consisting of 20 facilities, which we refer to
as solution centers, and over 4,500 employees. Our clients include original
equipment manufacturers, known as OEMs, such as Dell, Hewlett Packard, IBM and
Sun Microsystems; independent software vendors, known as ISVs, such as Intuit,
Microsoft, Network Associates and Novell; and leading consumer electronics,
telecommunications and Internet companies such as AT&T, Beyond.com, E-Stamp and
Sony. The length of our relationships with our five leading clients, based on
1999 revenue, has averaged over ten years.
Companies, particularly in the technology industry, have increasingly sought
to outsource to third parties critical non-core business processes so that they
can focus on their core competencies. Market demands for increased productivity
have led companies to move beyond outsourcing only their basic production and
fulfillment processes to outsourcing all of the business processes involved in
their supply chains. The goal of supply chain management is to link supply and
demand as closely as possible in order to reduce costs, minimize business risk
and better meet client expectations for performance and quality. We believe
that the growth of e-commerce is increasing demand for supply chain
outsourcing. According to G2R, a subsidiary of Gartner Group, the market for
supply chain management outsourcing is estimated to grow from $17.0 billion in
1998 to $42.2 billion in 2003, representing a compound annual growth rate of
20%.
We offer a range of services that provide our clients with a "one-stop shop"
for their outsource requirements. Our capabilities include:
. e-commerce support services, which enable us to transmit customer orders
that we receive over the web directly to our production and distribution
centers so that we can quickly produce, pack and ship ordered products;
3
<PAGE>
. flexible production, which allows us to meet our clients' time to market
and volume requirements during periods of varying demand;
. a global presence, which enables us to coordinate our clients' worldwide
product introductions and provide customization of products to meet
local language and other requirements; and
. substantial experience in supply chain management, which has earned us a
reputation as a trusted part of our clients' supply chains.
We refer to our services as content manufacturing services and e-fulfillment
services. By content manufacturing services, we mean the supply chain
management services that we provide to OEMs and ISVs. Our e-fulfillment
services consist of content manufacturing services plus customer care and e-
commerce support activities that we provide directly to our clients' customers.
Although a majority of the orders received through our e-fulfillment
services currently are submitted by telephone or fax, we expect that an
increasing portion will be received over the web as we provide more e-
fulfillment services and the Internet becomes a more prevalent medium for
commerce. To date, we have built more than 40 e-commerce sites for our clients,
ranging from web sites for the sale of products, known as web site storefronts,
to on line order tracking and order information sites.
The following table shows our principal services:
<TABLE>
<S> <C>
e-Fulfillment Services
Content Manufacturing Services
. Development of web site storefronts and
. Maintaining clients' software connection to our production and
code for replication in distribution centers where we package
multiple versions and multiple and ship our clients' products;
languages;
. Customer response centers, which process
. Selection of vendors and orders and inquiries received by
procurement of materials for telephone, fax, email and web;
hardware assembly and software
manufacturing; . Processing online payments in multiple
currencies;
. Software production and
hardware assembly of our . Processing product returns, refunds and
clients' products; rebates;
. Management of inventory levels . Reporting on the ordering activities of
for our clients; and our clients' customers; and
. Fulfillment, where we pick, . Managing the licensing of our clients'
pack and ship our clients' software by electronically registering
products to their customers. users and providing passwords.
</TABLE>
Examples of typical services that we provide for our clients include the
following:
. For one ISV, we reproduced its software in 1,400 versions, including in
34 languages for a worldwide product launch. Each software package
contained software replicated on CD or diskette, printed documentation,
registration and marketing materials.
. For one OEM, we assemble hardware packages containing more than 100
components including, for example, a mouse, keyboard, CDs and
instruction manuals. Each package is shipped to the OEM where it is
combined with a personal computer prior to delivery.
. For one Internet company, we developed a website storefront, which
offers 10,000 products to its customers. We process orders our client's
customers place over the web, manage its product inventory, and
distribute ordered products to its customers.
Our strategy is to take advantage of the market trends towards more frequent
product introductions, mass customization and growth of e-commerce by
implementing strategies to:
. Expand our e-fulfillment services;
4
<PAGE>
. Expand services to existing clients;
. Capitalize on worldwide presence and
integrated information technology
capabilities;
. Continue to achieve high ratings in
outsourcing industry performance
measurements;
. Improve our financial returns through
investments in technology and more efficient
use of resources;
. Pursue select, high-growth markets; and
. Pursue strategic acquisitions.
------------
Effective March 2, 2000, we changed our name from Modus Media International
Holdings, Inc. to Modus Media, Inc. We are a Delaware corporation. Our
principal executive offices are located at 690 Canton Street, Westwood,
Massachusetts 02090 and our telephone number is (781) 407-2000. Our World Wide
Web site address is www.modusmedia.com. This reference is not intended to
incorporate the information on our web site into this prospectus.
The Offering
<TABLE>
<S> <C>
Common stock offered........ 8,000,000 shares
Common stock to be
outstanding after this
offering................... 34,006,116 shares
Use of proceeds............. For general corporate purposes, including working
capital, payment of debt and potential
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National
Market symbol.............. EMMI
</TABLE>
The number of shares that will be outstanding after the offering is based on
the number of shares outstanding as of December 31, 1999 and excludes:
. 6,310,616 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 1999, with a weighted average exercise
price of $1.87 per share, of which options to purchase 1,673,506 shares
were then exercisable; and
. 266,500 shares of common stock reserved for future grant under our stock
option plans.
------------
Unless specifically stated, the information in this prospectus:
. assumes no exercise of the underwriters' over-allotment option;
. assumes an initial offering price of $12.00 per share, the midpoint of
our initial public offering price range;
. reflects a 2-for-1 stock split effective as of January 24, 2000;
. assumes the conversion of all shares of non-voting common stock into
common stock; and
. reflects the filing, as of the closing of the offering, of our Second
Amended and Restated Certificate of Incorporation, referred to in this
prospectus as the restated certificate of incorporation, and the
adoption of our Amended and Restated By-Laws, referred to in this
prospectus as the restated by-laws, implementing the provisions
described below under "Description of Capital Stock--Delaware Law and
Certain Charter and By-Law Provisions, Anti-Takeover Effects."
Modus Media, Modus Media International, MMI and their logos are trademarks
of Modus Media. All other trademarks or tradenames referred to in this
prospectus are the property of their respective owners.
5
<PAGE>
Summary Consolidated Financial Data
The following summary historical consolidated financial data should be read
along with "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and the consolidated financial statements and related
notes included elsewhere in this prospectus. The as adjusted balance sheet data
gives effect to our receipt of the estimated proceeds from the sale of
8,000,000 shares of common stock we are selling in this offering at an assumed
public offering price of $12.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1996 1997 1998 1999
--------- --------- ----------- -----------
(in thousands, except share and per share
data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue........................ $ 811,905 $ 684,523 $ 630,082 $ 697,468
Gross profit................... 124,116 119,735 133,902 147,787
Restructuring charges.......... 100,883 -- -- --
Operating income (loss)(1)..... (107,675) (17,014) 17,172 18,826
Income (loss) before income
taxes(1)...................... (122,107) (29,843) 15,012 15,782
Net income (loss)(1)........... $(111,096) $ (32,667) $ 10,747 8,232
========= ========= =========== ===========
Preferred stock dividends,
net........................... 172 5,922 (6,659)
--------- ----------- -----------
Net income (loss) available to
common shareholders........... $ (32,839) $ 4,825 $ 14,891
========= =========== ===========
Net income (loss) per share(2):
Basic........................ $ 0.19 $ 0.59
=========== ===========
Diluted...................... $ 0.18 $ 0.51
=========== ===========
Number of shares used in per
share calculations(2):
Basic........................ 25,497,466 25,227,672
Diluted...................... 26,144,234 29,428,426
Selected Operating Data:
Depreciation and amortization.. $ 28,200 $ 26,371 $ 18,731 $ 17,407
EBITDA(3)...................... (79,475) 9,357 35,903 36,851
Capital expenditures........... 15,800 34,032 12,307 17,123
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
1999
--------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................. $ 29,759 $ 69,539
Working capital............................................ 29,589 69,369
Total assets............................................... 286,610 326,390
Total debt................................................. 56,303 8,603
Total shareholders' equity................................. 43,369 130,849
</TABLE>
- --------
(1) Year ended December 31, 1999 includes a stock-based compensation charge of
$9.7 million.
(2) Prior to the Reorganization on December 15, 1997, as described in Note 2
of the Consolidated Financial Statements, no common shares were
outstanding; therefore, income per share data prior to 1998 is not
meaningful and has been excluded.
(3) EBITDA is defined as operating income before depreciation and
amortization, and amortization of stock compensation expense (a non-cash
charge). EBITDA is presented because we believe that EBITDA is a widely
accepted financial indicator of an entity's ability to incur and service
debt. EBITDA should not be considered by an investor as an alternative to
net income or income from operations, as an indicator of our operating
performance or other combined operations or cash flow data prepared in
accordance with generally accepted accounting principles, or as an
alternative to cash flows as a measure of liquidity. Our computation of
EBITDA may differ from similarly titled computations of other companies.
6
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before you decide whether to buy our common stock. While these are
the risks and uncertainties we believe are most important for you to consider,
you should know that they are not the only risks or uncertainties facing us or
which may adversely affect our business. If any of the following risks or
uncertainties actually occurs, our business, financial condition and operating
results would likely suffer. In that event, the market price of our common
stock could decline, and you could lose all or part of the money you paid to
buy our common stock.
Risks Related to Our Business
Because most of our revenue is derived from a small number of key clients, our
revenue will be significantly lower than we expect if we cannot keep these
clients
A limited number of our clients account for a substantial portion of our
revenue and the loss of any one or more of these clients could cause our
revenue to decline below expectations. Our largest eight clients accounted for
approximately 63% of our revenue in 1998 and 62% in 1999. Microsoft Corporation
accounted for approximately 17% of our revenue in 1997, 23% in 1998 and 24% in
1999. IBM accounted for approximately 14% of our revenue in 1997, 12% in 1998
and less than 10% in 1999. We cannot give any assurance that our revenue from
key clients will not decline in future periods. The loss of a significant
amount of business with Microsoft, IBM or any other key client could cause our
revenue to decline significantly below our expectations.
If we do not respond rapidly to technological changes or fail to expand our e-
fulfillment services, we may lose clients and experience a significant decrease
in revenue
Our clients' products are subject to rapid change as new technologies
develop and replace existing products, such as the replacement of CD-ROM
technology with DVD technology. In addition, advances in electronic delivery of
information, such as broadband online data delivery, when fully developed and
accepted in the marketplace, could reduce the need for physical media, which
could in turn adversely affect the demand for our services. Also, new
technologies for distributing licensed software may be less expensive or more
effective than our current services, which could reduce the prices that we are
able to charge and could reduce demand for our content manufacturing services.
In addition, OEMs are increasingly incorporating more options within the
personal computer itself and therefore reducing the number of separate external
components. If we do not successfully introduce outsource solutions in response
to these and other new trends and technologies, we may lose clients and
experience a significant decrease in revenue. Moreover, if we fail to expand
our e-fulfillment service offerings to existing and new clients in areas such
as online merchandising, electronic order fulfillment and web-based customer
support, we may lose clients to competitors and be unable to attract or retain
new business.
If we fail to meet client expectations, we could lose revenue, incur increased
expenses and suffer negative publicity
Many of our engagements involve technology solutions that are critical to
our clients' businesses. Our clients face significant uncertainties in
forecasting the demand for their products, and limitations on the size of our
facilities, number of our personnel and availability of materials could make it
difficult for us to meet clients' unforecasted demand for additional
production. In addition, any disruption in our e-fulfillment services could
adversely affect our clients' ability to conduct commerce on their web sites.
Any defects or errors in our solutions, or failure to meet clients'
specifications, capacity requirements or expectations, could result in:
. delayed or lost revenue due to adverse client reaction;
. requirements to provide additional services to a client at no charge;
7
<PAGE>
. negative publicity about us and our services, which could adversely
affect our ability to attract or retain clients; and
. claims for substantial damages against us, regardless of our
responsibility for such failure, which may not be covered by our
insurance policies and which may not be limited by contractual terms of
our engagement.
Our quarterly revenues and operating results may fluctuate in future periods;
any resulting failure to meet market expectations may cause the price of our
common stock to decline
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter because some of our
products and services are relatively new and the future growth of the
outsourcing market, and the market for our products and services in particular,
is uncertain. If our quarterly revenues or operating results fall below the
expectations of investors or public market research analysts, the price of our
common stock could decline substantially. Factors that are likely to cause
quarterly fluctuations in our operating results include:
. timing of new product introductions or software releases by our clients
or their competitors;
. seasonal fluctuations in demand or fluctuations in production;
. the level of product and price competition that we encounter, including
the frequency of changes in pricing policies;
. temporary shortages in supply from vendors;
. inability to add temporary labor during seasonal peaks;
. our ability to expand our operations and the amount and timing of
expansion-related and infrastructure expenditures;
. political instability or natural disasters in the countries in which we
operate; and
. facility or systems disruption.
If Microsoft Corporation were to modify its authorized replicator program in a
way that made authorized replicator services less important to OEMs, or if we
were to lose authorized replicator status, our revenues may suffer and it may
be difficult to attract new business
We have been designated as an Authorized Replicator (AR) for Microsoft
Corporation, which gives us a worldwide license to replicate Microsoft software
products and documentation for OEMs who want to bundle licensed software with
their hardware products. Failure to maintain AR status, or to render Microsoft
AR-related services to OEMs, could result in reduced business and revenues. The
AR agreement is renegotiated annually, and the current AR agreement expires on
August 31, 2000. Microsoft recently announced that it intends to modify the AR
program during the year 2000 for Windows operating system software. The
modifications could involve a reduction in the printed materials required by
OEMs. We cannot give any assurance that we will continue as an AR for Microsoft
or that we will continue to derive revenues under this program at levels
comparable with those realized in the past.
We face substantial competition and our failure to compete successfully will
limit our ability to retain and increase our market share
The market for our services is very competitive. We expect the intensity of
competition to continue to increase. Our failure to maintain and enhance our
competitive position will limit our ability to maintain and increase our market
share, which would result in serious harm to our business. Increased
competition may also result in price reductions, reduced gross margins and loss
of market share.
We compete against companies engaged in turnkey printing, hardware assembly,
CD and diskette replication and teleservices. In addition to large regional and
global competitors, we face competition from
8
<PAGE>
numerous local producers and from internal departments of our clients and
prospective clients. Additionally, we expect competition to emerge from
companies engaged in electronic manufacturing services and logistics services
as they attempt to deliver a broader range of services. We compete on the basis
of quality, performance, service levels, global capabilities, technology,
operational efficiency and price.
Some of our competitors have substantially greater financial,
infrastructure, personnel and other resources than we have. Furthermore, some
of our competitors have well established, large and experienced marketing and
sales capabilities and greater name recognition than we have, including well
established relationships with our current and potential clients. As a result,
our competitors may be in a stronger position to respond quickly to new or
emerging technologies and changes in client requirements. They may also develop
and promote their services more effectively than we do. Also, we may lose
potential clients to competitors for various reasons, including the ability or
willingness of our competitors to offer lower prices and other incentives that
we cannot match. In addition, clients may subject projects to competitive
bidding. If two or more of our competitors consolidate and offer broader
products and services than we do, we may lose potential or existing clients. We
may not be able to compete successfully against current and future competitors,
and competitive pressures may seriously harm our business.
If we are not able to establish client sites where requested, or if we fail to
retain key clients at established sites, our client relationships, revenue and
expenses could be seriously harmed
Our clients have, at times, requested that we add capacity or open a
facility in locations near their sites. If we elect not to add required
capacity at sites near existing clients or establish sites near existing or
potential clients, clients may decide to seek alternate outsource suppliers. In
addition, if we lose a significant client of a particular site or open a site
with the expectation of business that does not materialize, our operations at
that site could become uneconomical or significantly less efficient. Any of
these events could have a material adverse effect on our client relationships,
expenses and revenues.
A decline in the technology sector could reduce our revenue
A large portion of our revenue comes from clients in the technology sector
which is intensely competitive and highly volatile. A decline in the overall
performance of the technology sector could adversely affect the demand for our
services and reduce our revenues. Additionally, if our clients' products do not
gain or do not sustain market acceptance, if PC market demand declines, or if
the market share of our technology clients declines or fails to grow at
historical levels, demand for our services may decline and we may earn lower
than expected revenue.
If the market for supply chain management services does not continue to grow,
demand for our services would decline and our financial results would suffer
We derive a substantial portion of our revenue from providing extended
supply chain management services. Our business and future growth will depend in
large part on the continued growth of the industry trend towards outsourcing
extended supply chain management and other business processes. If this trend
does not continue, or does not continue at historical levels, demand for our
services would decline and our financial results would suffer.
An inability to attract and retain qualified personnel could limit our growth,
reduce our operating efficiency and productivity, and increase expenses
We believe that our success depends largely on our ability to attract and
retain highly skilled technical, consulting, managerial, sales and marketing
personnel. If we are unable to attract such personnel, we may be unable to meet
production schedules and/or complete customer deliveries on time. Our industry
is very labor-intensive and has experienced high personnel turnover. If our
employee turnover rate increases significantly, our recruiting and training
costs could rise and our operating efficiency and productivity could decline.
We may not
be able to hire or retain the necessary personnel to implement our business
strategy. In addition, we may need
9
<PAGE>
to pay higher compensation for employees than we currently expect. Individuals
with the significant experience and technical skills that we generally require
are in very short supply and competition to hire from this limited pool is
intense.
Failure to employ a sufficient number of qualified temporary employees during
peak demand periods could result in the loss of clients or damage our
reputation in the industry
Our clients often experience both expected and unexpected surges in demand,
such as upon the introduction of a new product release, following a special
advertising campaign or as a result of seasonal high demand in anticipation of
year end holidays. In order to respond to these surges in demand, we employ a
large number of skilled temporary employees. There is a very limited supply of
temporary workers with the skills required to respond to our customers' needs
and requests. If we were unable to obtain the services of such temporary
employees, on short notice and in adequate numbers, we might fail to meet the
production and distribution requirements of our clients on a timely basis. Any
such failure could result in the loss of one or more key clients or could
damage our reputation in the industry, which could have an adverse effect on
our business.
Our growth could be limited if we are unable to manage and expand our
international operations
Our success depends on our ability to manage and expand our international
operations. We currently expect international revenue to account for a
significant percentage of our total revenue in the future. Failure to expand
our international sales and fulfillment activities could limit our ability to
grow.
We currently conduct business in Taiwan, Singapore, Ireland, the United
Kingdom, the Netherlands and other foreign locations, in addition to our North
American operations. Sales outside North America accounted for 54%, 55% and 54%
of our total revenue for 1997, 1998 and 1999. There are certain risks inherent
in conducting international operations, including:
. added fulfillment complexities in operations, including multiple
languages, currencies, bills of materials and stock keeping units;
. exposure to currency fluctuations;
. longer payment cycles;
. greater difficulties in accounts receivable collections;
. the complexity of ensuring compliance with multiple U.S. and foreign
laws, particularly differing laws on intellectual property rights and
export control; and
. labor practices, difficulties in staffing and managing foreign
operations, political instability and potentially adverse tax
consequences.
If we are unable to manage these risks, our international sales may decline
and our total revenue could decrease below expectations.
Because of the long and variable period of time required for us to sell our
services to our clients, our revenues and operating results may vary
significantly from quarter to quarter, which could adversely affect our stock
price
We cannot precisely forecast new or existing clients' quarterly sales
volume, the timing of clients' orders, the risk of delays in our clients'
software production, or a decline in the demand for our clients' products and
services. Consequently, if sales expected from a specific client in a
particular quarter are not realized in that quarter, we are unlikely to be able
to generate revenue from alternate sources in time to compensate for the
shortfall. As a result, due to the relatively large size of particular
projects, a lost or delayed sale could result in revenues that are lower than
expected. Many of our clients evaluate our services in a deliberative and time-
10
<PAGE>
consuming manner, depending on the specific technical capabilities of the
client, the size of the engagement and the complexity of the client's network
environment. We cannot accurately predict the length of a potential client's
pre-purchase evaluation, or whether our investment in pre-purchase time and
resources will result in a sale. Our inability to make such predictions may
adversely affect our operating results. If our operating results fall below the
expectations of securities analysts or investors in some future quarter or
quarters, the market price of our common stock is likely to decline.
We may incur substantial inventory expenses if we fail to manage inventory or
accumulate the inventory of clients with unsuccessful businesses
We frequently purchase components of our clients' products based on
contracts, purchase orders and, in some cases, our clients' forecasts. At
times, we purchase inventory based on internal forecasts in advance of client
commitments. If we fail to accurately gauge and manage our inventory, or if our
clients do not perform as expected, we may accumulate a substantial amount of
products or materials that we cannot profitably dispose of, and our operating
results may suffer.
Our acquisition strategy could have an adverse effect on our growth rate,
operating results and client satisfaction
A component of our business strategy is the acquisition of, or investment
in, complementary businesses, technologies, services or products. Our growth
could be slowed if we are not able to identify, acquire or make investments in
promising acquisition candidates on acceptable terms. Competition for these
acquisitions or investment targets could also result in increased cost of
acquisitions which could adversely affect our results of operations.
Acquisitions involve a number of risks, including:
. adverse effects on our reported operating results due to accounting
changes associated with the acquisitions;
. difficulties in management and integration of the acquired business;
. increased expenses, including compensation expense resulting from newly
hired employees;
. diversion of management resources and attention; and
. potential disputes with sellers of acquired businesses, technologies,
services or products.
Client dissatisfaction or performance problems with an acquired business,
technology, service or product could also have a material adverse impact on our
reputation as a whole. In addition, any acquired business, technology, service
or product could significantly underperform relative to our expectations, which
could cause an unanticipated decrease in revenue or earnings.
Our lack of written contracts with some of our clients reduces the
predictability of our revenues and inventory expenses because our clients could
cancel or modify projects or orders on short notice and without penalty
We do not have written contracts with many of our clients. We frequently
operate only on the basis of product orders with no minimum requirements.
Accordingly, we may be subject to client cancellation of projects, changes in
specifications or requirements or other client modifications for which no
written agreement exists. These types of cancellations or changes could result
in loss of revenue and/or significant expenditures of resources and funding
that we may be unable to recover. In addition, we may be subject to client
claims relating to our services that are inconsistent with the original scope
and understanding of the parties. When our understanding is not embodied in a
written contract, resolution of these claims tends to be more costly and could
adversely affect our operating results.
11
<PAGE>
Our existing client contracts allocate a significant amount of the risk from
our business arrangements to us which reduces the predictability of our
financial results
Although we work to sign multi-year contracts with our clients, our
contracts generally:
. permit termination upon relatively short notice by the client;
. contain no minimum purchase requirements;
. do not designate us as the client's exclusive outsource service
provider;
. do not penalize the client for early termination; and
. hold us responsible for products which fail to meet the client's
specifications.
As a result, our ability to predict our revenue and inventory expenses may
be adversely affected.
We rely upon contractual provisions and trademark laws to protect our
proprietary rights, which may not be sufficient to protect our intellectual
property
We rely on a combination of laws, such as copyright, trademark and trade
secret laws, and contractual restrictions, such as confidentiality agreements
and licenses, to establish and protect our proprietary rights. We currently
have pending trademark registration applications for our name and logo in the
United States and several foreign countries. Moreover, despite any precautions
that we have taken:
. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
. current federal laws that prohibit software copying provide only limited
protection from software piracy, and effective trademark, copyright and
trade secret protection may be unavailable or limited in foreign
countries;
. other companies may claim common law trademark rights based upon state
or foreign laws that precede the federal registration of our marks; and
. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the
extent of this unauthorized use.
Also, the laws of the countries in which we market our services and
solutions may offer little or no effective protection of our proprietary
technology. Reverse engineering, unauthorized copying or other misappropriation
of our proprietary technology could enable third parties to benefit from our
technology without paying us for it, which would significantly harm our
business.
If our clients' intellectual property is misappropriated or stolen while in our
possession, we may become involved in litigation over proprietary rights that
could be costly and time consuming
Many of our agreements require us to indemnify our clients for losses from
any claim of misappropriation or theft of their intellectual property while in
our possession. Any litigation, brought by us or others, even if without merit,
can be time consuming and result in the expenditure of significant financial
resources and the diversion of management's time and efforts.
Failure of computer systems and software to be year 2000 compliant could
increase our costs, disrupt our services and reduce demand from our clients
Year 2000 issues may adversely affect our business and our clients'
businesses. Many currently installed computer systems and software products
were coded to accept or recognize only two digit entries in the date code
field. These systems and software products must be able to accept four digit
entries in the date code field to distinguish 21st century dates from 20th
century dates. As a result, computer systems and/or software used by many
companies and governmental agencies that were not upgraded to be year 2000
compliant risk system failure or miscalculations causing disruptions of normal
business activities.
12
<PAGE>
If we discover a year 2000 problem with respect to a solution provided by
us, it may be difficult to determine whether the problem relates to services
which we have performed or is due to the software or technology of our clients
or the services of other providers. Any failure of our material systems or our
clients' or vendors' material systems to be year 2000 compliant could have
material adverse consequences for us. In addition, we have contractual
obligations to some of our clients which contain year 2000 warranties and
provide for damages upon any breach of such warranty. If we breach these
warranties, and our clients sue us, the damages a court may require us to pay
could negatively impact our business, financial condition and results of
operations. Moreover, we may be subject to other year 2000-related lawsuits,
whether or not the services that we have performed are year 2000 compliant. We
cannot predict the outcomes of these types of lawsuits.
International laws and regulations may result in unanticipated costs and
litigation
Our plans to expand international operations will increase our exposure to
international laws and regulations. If we cannot comply with foreign laws and
regulations, which are often complex and subject to variation and unexpected
changes, we could incur unexpected costs and potential litigation. For example,
the governments of foreign countries might attempt to regulate our products and
services or levy sales or other taxes relating to our activities. In addition,
foreign countries may impose tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers, any of which could make
it more difficult to conduct our business. The European Union recently enacted
its own privacy regulations that may result in limits on the collection and use
of certain user information, which, if applied to the sale of our services,
could negatively impact our results of operations.
Our international operations expose us to currency fluctuations in foreign
markets, which may result in a loss of revenue or increase in expenses
Our revenues, materials and labor costs in countries outside the U.S. are
denominated in local currency. Therefore, a strengthening of other currencies
versus the U.S. dollar may give us potential exposure for currency fluctuations
in foreign markets which could result in a loss of overall revenue or increase
in expenses. We do not currently engage in currency hedging activities. We have
not yet but may in the future experience foreign exchange rate losses,
especially to the extent that we do not engage in hedging.
Risks Related to this Offering
Our executive officers and directors could delay or prevent a change in
control, which could deprive our stockholders of a premium or adversely affect
the price of our stock
After this offering, our executive officers and directors and their
affiliates will together control approximately 13.2% of our outstanding common
stock. As a result, these stockholders, if they act together, will be able to
control all matters requiring approval of a majority of our stockholders,
including the election and removal of directors and any merger, sale of assets
and other significant corporate transactions. This control could have the
effect of delaying or preventing a change in control of Modus Media, could
deprive our stockholders of an opportunity to receive a premium for their
common stock as part of a sale of Modus Media or its assets and might affect
the market price of our common stock.
We have anti-takeover defenses that could delay or prevent an acquisition and
could adversely affect the price of our common stock
After this offering, the board of directors will have the authority to issue
up to five million shares of preferred stock and, without any further vote or
action on the part of the stockholders, will have the authority to determine
the price, rights, preferences, privileges and restrictions of the preferred
stock. This preferred stock, if issued, might have preference over the rights
of the holders of common stock and could adversely affect the price of our
common stock. This issuance may make it more difficult for a third party to
acquire us or to acquire a majority of our outstanding voting stock even if
doing so would be beneficial to our stockholders. We currently have no plans to
issue preferred stock.
13
<PAGE>
Also, our certificate of incorporation, bylaws and equity compensation plans
include provisions that may deter an unsolicited offer to purchase Modus Media.
These provisions, coupled with the provisions of the Delaware General
Corporation Law, may delay or impede a merger, tender offer or proxy contest
involving Modus Media. For example, we will divide our board of directors into
three classes, only one of which will be elected at each annual meeting. Our
stockholders may remove our directors only by the affirmative vote of at least
two-thirds of all classes of voting stock. These factors may further delay or
prevent a change of control of Modus Media and could result in a decline of the
market price of our common stock.
Our stock price may be highly volatile which could result in substantial losses
for investors purchasing shares in this offering
The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology and Internet companies in
particular, has experienced extreme volatility. As a result, investors in our
common stock may experience a decrease in the value of their common stock
regardless of our operating performance or prospects. We cannot be sure that an
active public market for our common stock will develop or continue after this
offering. Investors may not be able to sell their common stock at or above our
initial public offering price. Prices for the common stock will be determined
in the marketplace and may be influenced by many factors, including variations
in our financial results, changes in earnings estimates by industry research
analysts, investors' perceptions of us and general economic, industry and
market conditions.
14
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. In some cases you can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will," and "would" or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of
operations or of our financial position or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed above in
the section captioned "Risk Factors," as well as any cautionary language in
this prospectus, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. Before you invest in our common stock, you
should be aware that the occurrence of the events described in these risk
factors and elsewhere in this prospectus could have an adverse effect on our
business, results of operations and financial position.
USE OF PROCEEDS
We expect the net proceeds from our sale of 8,000,000 shares of common stock
will be approximately $87.5 million at an assumed initial public offering price
of $12.00 per share and after deducting estimated underwriting discounts and
our estimated offering expenses. If the underwriters' over-allotment option is
exercised in full, we estimate that our net proceeds will be approximately
$100.9 million.
We expect to use a portion of the proceeds to repay a $12.7 million note,
bearing interest at a rate of 9.5% and maturing upon the closing of this
offering, which was issued to R.R. Donnelley in connection with our repurchase
of shares of preferred stock on October 13, 1999. We also expect to use a
portion of the proceeds to repay the outstanding balance on our revolving line
of credit, which was $35.0 million at December 31, 1999. We expect to use the
balance of the proceeds for general corporate purposes, including working
capital and capital expenditures. We may also use a portion of the net proceeds
to acquire businesses, products or technologies that are complementary to ours,
although no portion of the net proceeds has been allocated for any acquisition.
Pending such uses of the net proceeds, we intend to invest these proceeds in
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all of our future earnings, if any, for
use in the operation of our business. In addition, the terms of our credit
facility restrict our ability to pay dividends.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999.
This information is presented:
. on an actual basis; and
. on an as adjusted basis to give effect to our receipt of the estimated
proceeds from the sale of 8,000,000 shares of common stock we are
selling in this offering at an assumed public offering price of $12.00
per share, after deducting estimated underwriting discounts and
commissions and offering expenses.
<TABLE>
<CAPTION>
December 31, 1999
--------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Debt:
Revolving line of credit............................ $35,000 $ --
Loan payable........................................ 12,700 --
Mortgage payable.................................... 4,127 4,127
Capital leases payable.............................. 3,406 3,406
Long term debt...................................... 1,070 1,070
------- --------
Total debt........................................ 56,303 8,603
Shareholders equity:
Preferred stock, $.01 par value, with a liquidation
value of $1,000 per share;
Authorized--120,000 actual; 5,000,000 as adjusted
Issued and outstanding--none actual; none as
adjusted......................................... -- --
Common stock, $.01 par value
Authorized--33,000,000 actual; 106,000,000 as
adjusted
Issued and outstanding--26,006,116 actual;
34,006,116 as adjusted........................... 260 340
Additional paid-in capital.......................... 33,675 121,075
Deferred stock compensation ........................ (9,481) (9,481)
Retained earnings................................... 18,183 18,183
Other comprehensive income.......................... 732 732
------- --------
Total shareholders' equity........................ 43,369 130,849
------- --------
Total capitalization............................ $99,672 $139,452
======= ========
</TABLE>
The number of shares of common stock is based on the number of shares
outstanding as of December 31, 1999 and does not include 1,673,506 shares that
could be issued upon the exercise of options outstanding as of December 31,
1999 at a weighted average exercise price of $0.39 per share.
16
<PAGE>
DILUTION
Our net tangible book value as of December 31, 1999, was approximately $40.0
million or approximately $1.54 per share of common stock. "Net tangible book
value" per share represents the amount of our total tangible assets less total
liabilities, divided by 26,006,116 shares of common stock outstanding. After
giving effect to our issuance and sale of the common stock in this offering (at
an assumed initial public offering price of $12.00 per share and after
deducting the estimated underwriting discounts and commissions and our offering
expenses), our net tangible book value as of December 31, 1999 would have been
$127.5 million, or $3.75 per share of common stock. This represents an
immediate increase in net tangible book value of $2.21 per share to existing
stockholders and an immediate dilution of $8.25 per share to new investors. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $12.00
Net tangible book value per share before this offering...... $1.54
Increase in net tangible book value per share attributable
to new investors........................................... 2.21
-----
Net tangible book value per share after this offering......... 3.75
------
Dilution per share to new investors........................... $ 8.25
======
</TABLE>
The following table summarizes the difference between the number of shares
of common stock purchased from us, the total consideration paid to us, and the
average price per share for shares held by existing stockholders and by new
investors (at an assumed initial public offering price of $12.00 per share
before deduction of estimated underwriting discounts and commissions and our
offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 26,006,116 76% $ 14,726,000 13% $ 0.57
New investors........... 8,000,000 24 96,000,000 87 12.00
---------- --- ------------ ---
Total................. 34,006,116 100% $110,726,000 100%
========== === ============ ===
</TABLE>
- --------
The table above assumes no exercise of stock options outstanding at December
31, 1999. As of December 31, 1999, there were options outstanding to purchase
6,310,616 shares of common stock at a weighted average exercise price of $1.87
per share and 266,500 shares reserved for future grants under our stock
incentive plan. To the extent any of these options are exercised, there will be
further dilution to new investors. To the extent all of such outstanding
options had been exercised as of December 31, 1999, net tangible book value per
share after this offering would be $3.45 and total dilution per share to new
investors would be $8.55.
17
<PAGE>
SELECTED FINANCIAL DATA
The consolidated statement of operations data for the fiscal years ended
December 31, 1997, 1998 and 1999, and the consolidated balance sheet data at
December 31, 1998 and 1999, are derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP, our independent
public accountants. These statements are included elsewhere in this prospectus.
The consolidated statement of operations data and consolidated balance sheet
data as of and for the year ended December 31, 1996 and the consolidated
balance sheet data at December 31, 1997 are derived from our audited
consolidated financial statements, which are not included in this prospectus.
The consolidated statement of operations data and consolidated balance sheet
data as of and for the year ended December 31, 1995 are derived from our
unaudited consolidated financial statements, which are not included elsewhere
in this prospectus. Our unaudited consolidated financial statements have been
prepared on a basis consistent with our audited consolidated financial
statements, and in the opinion of our management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the consolidated results of operations for these periods. Please be advised
that historical results are not necessarily indicative of the results to be
expected in the future, and results of interim periods are not necessarily
indicative of results of the entire year.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and our consolidated financial statements and related notes,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- ----------- -----------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue................. $ 911,500 $ 811,905 $ 684,523 $ 630,082 $ 697,468
Cost of revenue
(excluding depreciation
and amortization)...... 721,500 687,789 564,788 496,180 549,681
--------- --------- --------- ----------- -----------
Gross profit............ 190,000 124,116 119,735 133,902 147,787
Selling, general and
administrative
expenses............... 114,000 102,708 110,378 97,999 101,826
Depreciation and
amortization........... 36,200 28,200 26,371 18,731 17,407
Stock-based
compensation........... -- -- -- -- 9,728
Restructuring charges... -- 100,883 -- -- --
--------- --------- --------- ----------- -----------
Operating income
(loss)................. 39,800 (107,675) (17,014) 17,172 18,826
Interest expense........ 8,686 9,534 16,478 3,882 3,452
Other expense (income),
net.................... 1,600 4,898 (3,649) (1,722) (408)
--------- --------- --------- ----------- -----------
Income (loss) before
income taxes........... 29,514 (122,107) (29,843) 15,012 15,782
Provision (benefit) for
income taxes........... 13,491 (11,011) 2,824 4,265 7,550
--------- --------- --------- ----------- -----------
Net income (loss)....... $ 16,023 $(111,096) (32,667) 10,747 8,232
========= =========
Preferred stock
dividends, net ........ 172 5,922 (6,659)
--------- ----------- -----------
Net income (loss)
available to common
shareholders........... $ (32,839) $ 4,825 $ 14,891
========= =========== ===========
Net income (loss) per
share (1):
Basic.................. $ 0.19 $ 0.59
=========== ===========
Diluted................ $ 0.18 $ 0.51
=========== ===========
Number of shares used in
per share
calculations (1):
Basic.................. 25,497,466 25,227,672
Diluted................ 26,144,234 29,428,426
Selected Operating Data:
EBITDA (2) ............. $ 76,000 $ (79,475) $ 9,357 $ 35,903 $ 36,851
Capital expenditures.... 29,200 15,800 34,032 12,307 17,123
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....... $ 2,386 $ 7,857 $ 29,900 $ 8,447 $ 29,759
Working capital (deficit)....... 87,733 (1,993) 23,493 43,602 29,589
Total assets.................... 394,977 298,071 256,589 291,210 286,610
Long-term debt, net of current
portion........................ 41,770 24,363 21,978 21,641 55,744
Total shareholders' equity...... 196,133 82,300 80,989 93,052 43,369
</TABLE>
- --------
(1) Prior to the Reorganization on December 15, 1997, as described in Note 2
of the Consolidated Financial Statements, no common shares were
outstanding; therefore, income per share data prior to 1998 is not
meaningful and has been excluded.
(2) EBITDA is defined as operating income before depreciation and
amortization, and amortization of stock compensation expense (a non-cash
charge). EBITDA is presented because we believe that EBITDA is a widely
accepted financial indicator of an entity's ability to incur and service
debt. EBITDA should not be considered by an investor as an alternative to
net income or income from operations, as an indicator of our operating
performance or other combined operations or cash flow data prepared in
accordance with generally accepted accounting principles, or as an
alternative to cash flows as a measure of liquidity. Our computation of
EBITDA may differ from similarly titled computations of other companies.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
prospectus.
Overview
Background
We are a leading global provider of supply chain management services to the
technology industry. In 1982, we began as the Documentation Services Division
of R.R. Donnelley & Sons Company, printing and binding software manuals in the
United States. The division's service offerings evolved to include software
production and hardware assembly. Reflecting its international expansion, the
division was renamed Global Software Services in 1993. In April 1995, the
division was merged with Corporate Software, Inc., a reseller of software
products, to create Stream International Holdings, Inc.
In late 1996, we restructured our business to become a global provider of
supply chain management services to the technology industry and, at the same
time, we began to reduce our offset printing business by closing or selling
certain of our printing facilities. In December 1997, Stream recapitalized and
contributed the assets related to our business to a separate company called
Modus Media International Holdings, Inc. In January 1998, Stream distributed
all of the capital stock of Modus Media to its stockholders and Modus Media
became an independent company. Immediately after the distribution, R.R.
Donnelley & Sons Company and its affiliates exchanged our common stock for our
preferred stock. We repurchased this preferred stock in October 1999. R.R.
Donnelley and its affiliates no longer have any ownership in Modus Media. We
provide services through our operating company, Modus Media International, Inc.
and its worldwide subsidiaries. Effective March 2, 2000, we changed our name
from Modus Media International Holdings, Inc. to Modus Media, Inc.
Revenue
Revenue is recognized for our services when we ship our client's product or
when the service is performed under contracts or purchase orders from our
clients. We derive our revenue primarily from:
. content manufacturing services; and
. e-fulfillment services.
Our content manufacturing services consist of supply chain management
services provided to original equipment manufacturers (OEMs) and independent
software vendors (ISVs). These services include procurement, inventory and
materials management, production assembly and fulfillment. Our service fee
revenue for our content manufacturing services consist primarily of per
transaction fees and incremental fees added to the cost of the materials we use
in manufacturing and assembly. For example, we procure the components and print
and assemble shrink-wrapped software for software vendors and ship the product
into the retail channel as directed by the software vendor. For this, we charge
a fee for each package we assemble and a markup for the material, CDs,
diskettes, hardware components, documentation and packaging that we procure for
our clients.
Our e-fulfillment services expand our content manufacturing services by
combining them with additional services that support direct interaction with
our clients' customers. Orders for products that we provide through these
solutions come directly from our clients' customers or end users rather than
from our OEM and ISV clients. Our e-fulfillment fee revenue consists
principally of billings to clients, which may be on the basis of development
fees or per transaction fees, including design of website storefronts, and
connection of websites to fulfillment operations. For example, for our clients,
we have developed web site storefronts and fulfilled orders placed on the
storefront. For this service, we received a flat development fee and a fee for
each transaction conducted over the storefront. While a majority of the orders
that we fill through our e-fulfillment services currently are received by
telephone or facsimile, we expect that orders will increasingly be placed over
the web as we develop more e-commerce storefronts for our clients and the
Internet becomes a more prevalent medium for commerce.
20
<PAGE>
Components of Costs and Expenses
Cost of revenue primarily includes salaries and benefits for personnel in
our operations groups, costs of billable third-party contractors, materials and
freight charges, and other occupancy and operating costs. Materials and freight
charges are variable and consist primarily of CDs, instruction manuals and
computer peripherals such as keyboards and mice. We expect materials, printing,
CD duplication, packaging and labor costs to continue to be a key component of
our cost of revenue and expenses.
All operating expenses, including expenses attributable to technology
support, human resource management and other administrative functions that are
not allocable to specific client services, are recorded as selling, general and
administrative expenses.
Inventory
We typically purchase components of our clients' products based on contracts
with, or purchase orders from, our clients and, in some cases, on our clients'
forecasts. At times, we purchase inventory in advance of providing product
assembly, package and fulfillment based on our internal forecasts. We generally
have the right to be reimbursed by our client for unused inventory if purchased
for a contract or a client purchase order. We also warehouse and manage
inventory owned by our clients which is not reflected on our consolidated
balance sheet.
Results of Operations
The following table sets forth for the years ended December 31, 1997, 1998
and 1999, the percentage of consolidated revenue represented by selected items
in our consolidated statements of operations:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenue................................................. 100.0% 100.0% 100.0%
Cost of revenue (excluding depreciation and
amortization).......................................... 82.5 78.7 78.8
----- ----- -----
Gross profit.......................................... 17.5 21.3 21.2
Operating expenses:
Selling, general and administrative expenses.......... 16.1 15.6 14.6
Depreciation and amortization......................... 3.9 3.0 2.5
Stock-based compensation.............................. -- -- 1.4
----- ----- -----
Operating income (loss)............................. (2.5) 2.7 2.7
Other expense (income):
Interest expense...................................... 2.4 0.6 0.5
Other expense (income), net........................... (0.5) (0.3) (0.1)
----- ----- -----
Income (loss) before income taxes................... (4.4) 2.4 2.3
Provision for income taxes.............................. 0.4 0.7 1.1
----- ----- -----
Net income (loss)..................................... (4.8)% 1.7% 1.2%
===== ===== =====
</TABLE>
Year Ended December 31, 1999 as Compared to Year Ended December 31, 1998
Revenue
Revenue increased $67.4 million, or 10.7%, to $697.5 million for 1999 from
$630.1 million for 1998. This increase was comprised primarily of a 16.0%
increase in revenue from content manufacturing services, and a 6.6% increase in
revenue from e-fulfillment services offset by a 53.9% decrease in revenue from
offset printing and a deconsolidation of our Japanese and Korean subsidiaries.
As a percentage of revenue during these periods, revenue from content
manufacturing services increased from 73.2% to 76.8%, e-fulfillment services
revenue 21
<PAGE>
decreased from 22.2% to 21.3% and revenue from print services decreased from
4.6% to 1.9%. Growth in revenue came primarily from new clients and from a
general increase in the demand for our services as a result of continued strong
PC demand and, to a lesser extent, expanding business with existing clients.
In December 1998, we sold all of the assets at book value of our wholly
owned Korean subsidiary to Modus Media Korea Ltd. for a 20% equity interest.
Additionally, in December 1998, we sold certain assets at book value from our
wholly owned Japanese subsidiary, Modus Media International Kabushiki Kaisha,
to Sasatoku Donnelley KK and reduced our equity interest in Sasatoku Donnelley
from 60% to 40%. In 1998, we consolidated the results of operations of our
Korean and Japanese subsidiaries and, in 1999, we accounted for these entities
under the equity method as minority owned investments. In the year ended
December 31, 1998, our Japanese and Korean subsidiaries contributed $41.0
million to our revenue and had a net loss of $5.0 million. As a result of the
transactions described above, these joint ventures did not contribute to
revenues and contributed only $200,000 to our net income in 1999.
Cost of Revenue
Cost of revenue increased $53.5 million, or 10.8%, to $549.7 million for
1999 from $496.2 million for 1998. This increase in costs is comprised of a
9.1% increase in salaries and benefits, a 12.0% increase in materials and a
7.1% increase in other costs directly related to the increase in services
provided to our clients. As a percentage of revenue, cost of revenue was
relatively unchanged at 78.8% 1999 as compared to 78.7% in 1998.
Gross Profit
As a result of the foregoing factors, gross profit increased $13.9 million,
or 10.4%, to $147.8 million in 1999 from $133.9 million for 1998. As a
percentage of revenue, gross profit remained relatively unchanged at 21.2% as
compared to 21.3% for 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3.8 million, or
3.9%, to $101.8 million for 1999 from $98.0 million for 1998. This increase was
primarily attributable to increased staffing and investments in marketing and
information technology to support the continued development of business
services for our clients, as well as expenses related to human resources,
including the initiation of our corporate education program, called MMI
University. As a percentage of revenue, selling, general and administrative
expenses decreased to 14.6% for 1999, as compared to 15.6% during 1998. The
decline of these expenses as a percentage of revenue primarily reflects the
spreading of these costs over a larger revenue base.
Depreciation and Amortization
Depreciation and amortization decreased $1.3 million, or 7.0%, to $17.4
million for 1999 from $18.7 million for 1998. This decrease primarily reflects
the deconsolidation of our Japanese and Korean subsidiaries in December 1998.
Stock-based Compensation
Stock-based compensation expense was $9.7 million and $0 for 1999 and 1998,
respectively. Included in the 1999 expense is an amortization of stock
compensation expense of $0.6 million which resulted from the granting of stock
options with exercise prices below the deemed fair value of our common stock on
the date of grant. This amount is being amortized over the vesting period of
the underlying options and will result in non-cash compensation expense of $2.5
million for 2000. The remaining $9.1 million is stock-based compensation
expense resulting from cash consideration paid in excess of the exercise price
when we repurchased 1,899,624 outstanding shares of our common stock from
former employees of our former parent, Stream International Holdings Inc.
22
<PAGE>
Interest Expense
Interest expense decreased $0.4 million to $3.5 million for 1999 from $3.9
million for 1998, reflecting lower average outstanding debt balances, including
capital leases during most of 1999 as compared to 1998.
Other Income, Net
Other income was $0.4 million for 1999 versus other income of $1.7 million
in 1998. This change is primarily related to a $2.1 million gain on the sale of
an investment in a CD replication company recorded in 1998.
Income Taxes
The effective tax rate for 1999 was 47.8% versus 28.4% for 1998. The change
in the effective tax rates resulted primarily from changes in the geographical
distribution of income and losses. The effective tax rate for 1999 was higher
than the federal statutory rate primarily due to the tax benefits not realized
given the history of cumulative tax losses in certain jurisdictions. The
effective tax rate for 1998 was lower than the federal statutory rate primarily
due to our continued expansion into markets with lower tax rates.
Year Ended December 31, 1998 as Compared to Year Ended December 31, 1997
Revenue
Revenue decreased $54.4 million, or 7.9%, to $630.1 million for 1998 from
$684.5 million for 1997. This decrease was comprised primarily of a 7.3%
decrease in revenue from content manufacturing services, a 2.0% decrease in
revenue from e-fulfillment services and a 34.5% decrease in revenue from offset
printing. The decrease in revenue is primarily related to severe economic
conditions and resulting weaker currencies in Asia as well as the elimination
of unprofitable offset print businesses in North America. As a percentage of
revenue, revenue from content manufacturing services increased from 72.7% in
1997 to 73.3% in 1998, revenue from e-fulfillment services increased from 20.8%
in 1997 to 22.2% in 1998 and revenue from offset printing decreased from 6.5%
in 1997 to 4.5% in 1998.
Cost of Revenue
Cost of revenue decreased $68.6 million, or 12.1%, to $496.2 million in 1998
from $564.8 million in 1997. This decrease in cost is comprised of a 10.4%
decrease in salaries and benefits, a 14.9% decrease in materials and a 4.1%
decrease in other costs directly related to the decrease in service revenue to
our clients. As a percentage of revenue, cost of revenue decreased to 78.7% in
1998 from 82.5% in 1997. The lower cost as a percentage of revenue primarily
reflects the 34.5% decrease in revenue in the offset print business, which has
higher costs as a percentage of revenue. In addition, cost of revenue was
decreased by our productivity initiatives, such as increased automation and
programs to reduce fixed operating costs.
Gross Profit
As a result of the foregoing factors, gross profit increased by $14.2
million, or 11.9%, to $133.9 million in 1998 from $119.7 million in 1997. Gross
profit as a percentage of revenue increased to 21.3% as compared to 17.5%
during these periods.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $12.4 million, or
11.2%, to $98.0 million for 1998 from $110.4 million for 1997. This decrease
reflects the elimination of costs associated with the discontinuation of offset
printing operations in North America. The decrease also reflects the impact of
an $8.0 million charge for the write-off of accounts receivable in 1997 which
was associated with discontinuing the relationship with a former client in
1996. As a percentage of consolidated revenue, selling, general and
administrative expenses decreased to 15.6% in 1998 as compared to 16.1% in
1997.
23
<PAGE>
Depreciation and Amortization
Depreciation and amortization decreased $7.7 million, or 29.2%, to $18.7
million for 1998 from $26.4 million for 1997. This decrease reflects the write-
down of certain equipment, intangibles and other long-lived assets in 1997 in
connection with our restructuring activities.
Interest Expense
Interest expense decreased $12.6 million to $3.9 million for 1998 from $16.5
million for 1997. The decrease in interest expense was primarily attributable
to a reduction in indebtedness arising from exchanging our debt to our former
parent company, R.R. Donnelley & Sons Company, for preferred stock. In
connection with this exchange, we established a new credit facility and
discontinued our practice of factoring accounts receivable in North America.
During 1997, interest expense included $9.4 million on indebtedness to
R.R. Donnelley and $3.5 million on the factoring of receivables.
Other Income, Net
Other income decreased $1.9 million to $1.7 million for 1998 from $3.6
million for 1997. This decrease reflects foreign currency losses recorded in
1998, primarily in Asia, in contrast to the foreign currency gains recorded in
1997. In 1998, the foreign currency losses were partially offset by a $2.1
million gain on the sale of an investment.
Income Taxes
The effective tax rate for 1998 was 28.4% versus 9.5% for 1997. The increase
in the effective tax rates resulted primarily from changes in the geographical
distribution of income and losses. The effective tax rates for 1998 and 1997
were lower than the federal statutory rate primarily due to our continued
expansion into markets with lower tax rates.
Quarterly Results of Operations
The following table sets forth selected unaudited statement of operations
data for our most recent eight quarterly periods. The lower table presents this
data as a percentage of revenue. The unaudited quarterly information has been
prepared on the same basis as the annual information and, in the opinion of our
management, includes all adjustments necessary to present fairly the
information for the quarters presented.
<TABLE>
<CAPTION>
1998 Quarters Ended 1999 Quarters Ended
-------------------------------------- -----------------------------------
March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $139,377 $135,892 $143,015 $211,798 $157,492 $172,674 $176,069 $191,233
Cost of revenue
(excluding depreciation
and amortization)...... 112,762 107,972 109,682 165,764 125,617 138,343 137,870 147,851
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 26,615 27,920 33,333 46,034 31,875 34,331 38,199 43,382
SG&A expenses........... 21,902 22,200 24,700 29,197 25,200 24,774 26,573 25,279
Depreciation and
amortization........... 4,529 4,824 4,626 4,752 4,389 4,442 4,440 4,136
Stock-based
compensation........... -- -- -- -- -- -- 58 9,670
-------- -------- -------- -------- -------- -------- -------- --------
Operating income........ 184 896 4,007 12,085 2,286 5,115 7,128 4,297
Other expense (income),
net.................... 1,347 1,309 (1,092) 596 691 1,041 191 1,121
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
taxes.................. (1,163) (413) 5,099 11,489 1,595 4,074 6,937 3,176
Provision for income
taxes.................. (329) (117) 1,448 3,263 408 1,138 1,728 4,276
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)..... $ (834) $ (296) $ 3,651 $ 8,226 $ 1,187 $ 2,936 $ 5,209 $ (1,100)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
1998 Quarters Ended 1999 Quarters Ended
--------------------------------- -------------------------------
March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31
-------- ------- ------- ------ -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0 % 100.0 % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0 %
Cost of revenue
(excluding depreciation
and amortization)...... 80.9 79.5 76.7 78.3 79.8 80.1 78.3 77.3
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 19.1 20.5 23.3 21.7 20.2 19.9 21.7 22.7
SG&A expenses........... 15.7 16.3 17.3 13.8 16.0 14.3 15.1 13.2
Depreciation and
amortization........... 3.3 3.6 3.2 2.2 2.8 2.6 2.5 2.2
Stock-based
compensation........... -- -- -- -- -- -- 0.0 5.1
----- ----- ----- ----- ----- ----- ----- -----
Operating income........ 0.1 0.6 2.8 5.7 1.4 3.0 4.1 2.2
Other expense (income),
net.................... 0.9 0.9 (0.8) 0.3 0.4 0.6 0.1 0.6
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
taxes.................. (0.8) (0.3) 3.6 5.4 1.0 2.4 4.0 1.6
Provision for income
taxes.................. (0.2) (0.1) 1.0 1.5 0.3 0.7 1.0 2.2
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)..... (0.6)% (0.2)% 2.6% 3.9% 0.7% 1.7% 3.0% (0.6)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
We have historically experienced stronger revenue and earnings in the fourth
quarter. This is largely the result of strong fourth quarter personal computer
hardware and software sales associated with our client's new product launches
and holiday season purchase activity. In addition, we typically experience
better operating efficiencies and gross profit in the third and fourth quarters
resulting from spreading increased revenue over fixed costs. Other factors that
may affect the quarterly results include the following:
. the demand for our services;
. the level of price competition;
. timing of new product introductions, software releases and product
enhancements by our clients or their competitors; and
. our ability to attract, train and retain qualified personnel in all
areas of our business.
Liquidity and Capital Resources
We have funded our operations and capital expenditures primarily through
cash flows from operations, borrowings under various lines of credit and
capital lease arrangements. Currently, we have available an asset-backed
revolving line of credit of up to $130.0 million. This credit facility is
collateralized by substantially all of the Company's assets, including shares
of its subsidiaries, and the amount available for borrowings is limited to the
borrowing base, which is calculated based on eligible receivables, inventory
and fixed assets. This credit line expires on December 17, 2001. Effective upon
the closing of this offering, the credit line will be reduced from $130.0
million to $42.5 million in accordance with the credit agreement. Borrowings
under the line of credit bear interest at rates based on either LIBOR, the
lenders' prime rate or the federal funds rate, plus an applicable margin, with
commitment fees on the unused portion. At December 31, 1999, the borrowing base
was $88.9 million and our outstanding indebtedness on this line of credit was
$35.0 million. We are required to meet certain financial covenants and, as of
December 31, 1999, we were in compliance with all of these covenants.
On October 13, 1999, we repurchased all of our outstanding preferred stock
from R.R. Donnelley and its affiliates, which had an aggregate redemption value
of $71.7 million, for $60.2 million. The $11.5 million gain on the repurchase
of the preferred stock has been included in net income available to common
shareholders. A portion of the purchase price was paid in cash ($47.5 million)
and the remainder, $12.7 million, was paid by means of a promissory note
payable to R.R. Donnelley with interest payable quarterly at 9.5%. The
promissory note matures upon the earlier of October 13, 2001 or a change in
control of Modus Media (including an initial public offering). The price was
the result of extensive arms-length negotiations between R.R. Donnelley and
Modus Media between April 1999 and September 1999 after R.R. Donnelley decided
to liquidate its investment in Modus Media. We funded the repurchase with $10.0
million in cash, a loan for $12.7 million and a borrowing of $37.5 million
under our existing credit line. In November 1999, we repurchased 1,899,624
outstanding shares of our common stock for a total of $9.8 million less the
aggregate exercise price of $0.7 million. We funded this repurchase primarily
with existing cash.
25
<PAGE>
We have entered into several capital leases that are payable under various
terms through 2008. At December 31, 1999, the outstanding lease obligations
were $3.4 million.
Cash provided by operating activities increased by $81.7 million to $75.2
million for 1999 from $6.5 million used in operations for 1998. This increase
is mainly attributable to a decrease in receivables resulting from improved
collection efforts and improved working capital management. Cash used in
operating activities decreased $59.4 million to $6.5 million in 1998 from $52.9
million provided by operations for the same period of 1997. The decrease was
attributable to higher working capital requirements resulting from an increase
in receivables caused by the discontinuation of our factoring arrangement with
R.R. Donnelley, offset by an increase in net income.
Cash used in investing activities increased $8.9 million to $17.8 million
for 1999 from $8.9 million used in investing activities for 1998. This increase
is attributable to the increased level of investment in capital improvements
such as factory automation, facility expansion, upgraded computer system and
the acquisition of a small CD-ROM manufacturing company in Taiwan. In addition,
1998's activity reflected $3.3 million in proceeds from the sale of our
investment in a CD-ROM manufacturing company. Cash used in investing activities
decreased $13.5 million to $8.9 million in 1998 from $22.4 million in 1997. The
higher 1997 investment in capital reflects the expansion of facilities in
Ireland and investments in on-demand print equipment in Europe and Asia.
Cash used in financing activities increased $31.3 million to $37.1 million
for 1999 from $5.8 million for 1998. The increase in usage of cash reflects the
repurchase of preferred and common stock. Cash used in financing activities
during 1998 decreased $5.7 million to $5.8 million in 1998 from $11.5 million
in 1997. The usage of cash primarily reflects the pay down of bank debt and
capital lease obligations.
We believe our current cash and cash equivalents, net proceeds from this
offering, anticipated cash flows from future operations and existing credit
facilities will be sufficient to support our operations, capital expenditures
and various repayment obligations under our debt and lease agreements for the
next 12 months. However, if funds generated from these sources are insufficient
to satisfy our liquidity requirements, we will be required to raise additional
funds through public or private offerings. Such financing may not be available
in amounts or on terms acceptable to us, if at all. Proceeds from this offering
will be used, in part, to repay the outstanding indebtedness under our
revolving line of credit and our loan payable to R.R. Donnelley.
Year 2000 Readiness Disclosure
The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any systems
that have date sensitive applications may recognize a date using "00" as the
year 1900 rather than the year 2000, which could result in system problems or
failures. Possible year 2000 worst case scenarios include interruption of
significant parts of our business from failures of our and/or third parties'
computer systems. Any such failures may have a material adverse impact on
future results.
Our approach to year 2000 readiness included three main areas:
. Focus on large systems (finance, email, front-end order entry) followed
by a review of hardware, software, and non-information technology
systems
. Assess vendor and supplier year 2000 readiness
. Engage an independent firm to review our year 2000 readiness plan
As of the end of 1999, we completed an inventory of our internal IT and non-
IT systems, assessed the extent to which these systems would be affected,
determined whether the affected systems should be repaired, replaced or retired
and developed contingency plans. Our plan was reviewed by an independent firm.
We implemented our remediations and performed comprehensive tests and refined
contingency plans.
26
<PAGE>
As of the end of 1999, we completed an inventory of our vendors of goods and
services. We mailed surveys to these vendors, evaluated their responses and
sent follow-up letters, as necessary. Further, we performed year 2000 readiness
audits of selected key vendors. We also developed mitigation and contingency
plans for those vendors that were considered critical to our business
operations.
During 1999, we completed installing enterprise resource planning systems in
each of our solution centers in order to facilitate year 2000 readiness.
Currently, we have not encountered any significant business interruption
from the year 2000 issue on our internal IT and non-IT systems. We will
continue to monitor our systems and vendors to ensure that issues do not
manifest themselves over next few months. Although we do not anticipate any
future significant business interruption, we can give no assurance that such
interruption will not occur.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. We are required
to adopt SFAS No. 133, as amended by SFAS No. 137, no later than fiscal year
2001. This statement establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or a liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. We plan to adopt this statement in fiscal year 2001.
Our management does not believe that the adoption of SFAS No. 133 will have a
material effect on our financial position or results of operations.
Quantitative and Qualitative Disclosure About Market Risk
We are subject to market risk associated with changes in interest rates. Our
interest rate exposure is primarily related to borrowings under our line of
credit under which the interest rate floats with the market. At December 31,
1999, we had $35.0 million of borrowings under the line.
We are subject to market risk associated with changes in foreign currency
exchange rates. Over 50% of our revenues are derived from international
operations. We currently do not act to mitigate our foreign currency rate risk
although we are considering entering into contracts to do so.
27
<PAGE>
BUSINESS
We are a leading, global provider of supply chain management services for
the technology industry. Hardware and software manufacturers and Internet
companies engage us to manage and perform the multiple processes that must
occur between the acquisition of materials for their products and the
production, assembly, packaging and delivery of those products to their
customers. These many discrete processes are traditionally referred to as the
supply chain. In addition, we provide services directly to our clients'
customers, such as management of orders and handling of customer inquiries
placed via phone, fax, or email, and management of product returns. We also
offer e-commerce services including developing web site storefronts, receiving
and filling customer orders placed over the web, processing online payments and
providing online order tracking for clients and their customers. We have been
in operation since 1982 and have built a worldwide infrastructure in 12
countries, consisting of 20 facilities and over 4,500 people.
Industry Overview
Companies have increasingly sought to outsource critical non-core business
processes so that they can focus on their core competencies. In the early phase
of outsourcing, companies contracted with third-party manufacturers to perform
basic production and fulfillment processes. More recently, market demands for
increased productivity have led companies to outsource additional business
processes to external providers whose core competencies include those
processes. Technology companies, in particular, have increasingly sought to
outsource the business processes involved in their supply chains. The supply
chain consists of the many steps that must occur between the acquisition of
materials for a product to the delivery of that product. These steps include
procurement of hardware components and management of inventory, production and
assembly, order fulfillment and distribution, and customer care.
The goal of supply chain management is to supply products consistent with
demand in order to reduce costs, minimize financial risk and better meet client
expectations for performance and quality. By outsourcing one or more business
processes in the supply chain, companies seek not merely to improve their
productivity and efficiency, but also to use the outsourced business processes
as a critical part of their overall competitive strategy. In performing
multiple steps of the supply chain for its clients, the outsource provider can
expand its role from that of a contractor merely supplying products to that of
a business partner whose services help the client achieve its strategic
objectives.
Outsourcing Trends
According to G2R, Inc., a subsidiary of Gartner Group, the market for supply
chain management outsourcing is estimated to grow from $17.0 billion in 1998 to
$42.2 billion in 2003, representing a compound annual growth rate of 20%.
Demand for supply chain management services is increasing due to the following
market trends:
. Increased Focus On Core Competencies. The rapid pace of technological
change is resulting in more frequent product introductions, which
require companies to devote more resources to product innovation and
development. By taking advantage of the expertise and technology of
outsource providers, companies can focus their own resources on their
core competencies, such as product development and marketing activities.
In this way, companies can significantly improve their new product
introduction and delivery cycles.
. Increasing Competitive Pressures. As competitive pressures drive down
prices and require improved product performance, companies must improve
their operating efficiencies to maintain or increase profitability.
Companies can reduce their costs by relying on outsource providers, who
can provide services more effectively because of their multiple products
and clients.
. Need for Global Capabilities. As companies seek to expand into new
markets, and as the Internet offers the opportunity to reach clients
cost-effectively throughout the world, there is increasing demand for
experienced outsource providers who can offer production and fulfillment
capabilities on a global basis. Companies having or seeking a global
presence need outsource partners who can support their product offerings
and coordinate supply with demand across all geographic markets.
28
<PAGE>
. Need to Improve Customer Satisfaction. To satisfy customer demand for
higher levels of service, companies are providing faster and more
accurate delivery and better assistance to customers. Because many
companies are unable to efficiently provide customer care on a global
basis, they are increasingly relying on outsource providers to manage
their relationship with customers.
. Mass Customization. Customers can now order both hardware and software
products that are custom-configured to meet their particular
requirements. For example, customers typically order personal computers
with different keyboard, storage device and memory options and with
different combinations of installed software. Companies selling these
products are thus faced with the challenge of supplying customized
products both quickly and in large or small quantities. To meet this
challenge, companies are increasingly relying on outsource providers
that have the capability to satisfy these complex requirements.
e-Commerce Trends
The growth of e-commerce is also contributing to increased demand for
outsourcing of business processes. While e-commerce companies typically have
core competencies in on-line merchandising and brand marketing, they often do
not have the capability to perform business processes such as order processing,
procurement, management of inventory and materials, production and assembly,
fulfillment and customer care. For example, Jupiter Communications estimates
that 46% of e-commerce web sites lack immediate, or real-time, integration with
an inventory management system, 44% lack real-time integration with call center
support and 41% lack real-time integration with a fulfillment system.
Unlike the traditional distribution model in which the outsource provider
receives orders from the vendor, in the e-commerce model the outsource provider
receives orders directly from retailers or end users. The fulfillment of orders
placed over the Internet is particularly complex because e-commerce businesses
typically encourage end users to customize their orders. Adding to this
complexity, end users purchasing products through web sites expect that order
processing and product delivery will occur with speed and accuracy. The
complexity of commerce on the Internet creates an opportunity for outsource
providers to manage the supply chain for the e-commerce merchant and solidify
the merchant's relationships with its customers. The outsource provider can
thus provide an entire solution and play a critical role in the e-commerce
merchant's competitive strategy.
Outsource Services
In order to meet the needs of both traditional vendors and emerging e-
commerce vendors for the outsourcing of supply chain management processes, an
outsource provider must be able to offer services in one or more of the
following areas:
. e-Commerce Support Services, which include the development of web sites
for e-commerce transactions, commonly referred to as web site
storefronts, the management of commercial transactions conducted on the
web and real-time, or immediate, connection to fulfillment operations
where the ordered products are assembled and shipped;
. Procurement and Inventory Management, which includes procuring materials
at low cost on a just-in-time basis and optimizing levels of inventory
so that a client's production requirements can be met without running
out of stock and with minimal inventory risk;
. Production, which includes setting production levels to meet planned and
unplanned changes in demand and producing the ordered products quickly
and accurately;
. Fulfillment, which includes all of the steps necessary to execute a
transaction, ranging from taking orders to assembling the ordered
product and arranging for delivery quickly and to the correct
destination; and
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. Customer Relationship Management, which includes providing reliable and
timely information regarding the shipment and status of ordered products
and answering customer questions regarding orders, shipping, billing,
returns and product information.
While many outsource providers offer one or more of these services, there
are few providers that can offer all of these services on a globally integrated
basis. Companies seeking to outsource a significant portion of their business
processes require a provider that has the technology and expertise to
seamlessly integrate these complex business processes with their own
operations. The outsource provider is often a direct link between two of the
most valuable assets of a company, namely its products and its customers. As a
result, the outsource provider must have the experience and expertise necessary
to earn and maintain the trust of the company as a reliable and integral part
of its supply chain.
The Modus Media Solution
We offer a broad range of supply chain management services that enable our
clients to focus on their core competencies, improve their productivity and
tailor their supply chain processes to achieve a competitive advantage. The
Modus Media solution includes the following:
. Integrated Services. We establish strategic relationships with our
clients by providing a full range of integrated services that satisfy
our clients' supply chain management requirements. Our broad portfolio
of services provide a "one-stop shop" to which the client can outsource
part or all of its business processes that occur between the procurement
of materials for their products and the production, assembly, packaging
and delivery of those products to their customers. This also includes e-
commerce support services such as the design of web site storefronts,
handling customer orders and payments online, and post-sale services
such as processing of product returns. By providing an integrated end-
to-end solution, we are able to help clients link supply and demand
quickly and thus reduce costs and improve performance throughout their
supply chain.
. Global Presence. We have built worldwide operations in 12 countries,
consisting of 20 solution centers, which enables us to offer production
and fulfillment capabilities on a global basis. These centers are
connected by a wide area network and use common technology to store
clients' product and ordering information. In this way we are able to
provide customized product configurations for each order. As a result,
we can support simultaneous product launches in multiple languages and
in multiple geographic markets.
. Management of Complex Business Processes. Our experience in designing
and re-engineering supply chain processes provides us with a significant
knowledge base that we use to optimize these processes for our clients.
Our supply chain processes are supplemented by sophisticated information
technologies. Our information technology system uses software that
allows us to automatically match the availability of materials and
production capacity with order demand. This system has been designed to
be flexible so that we can easily modify our supply chain processes to
meet the changing requirements of our clients. This also enables us to
produce and deliver customized build-to-order hardware and software
products for e-commerce businesses.
. Flexible Production Capacity. Leading OEMs and ISVs increasingly seek to
outsource large-scale production and assembly programs. These companies
often experience both expected and unexpected surges in demand, such as
upon the introduction of a new product release or following a special
advertising campaign. Our worldwide facilities enable us to meet our
clients' time-to-market and volume requirements during periods of
varying demand. In addition, by shortening production cycles, we can
reduce our clients' inventory requirements and overall production costs.
We also use internal forecasts to anticipate client demand and employ a
skilled temporary labor force to provide quick ramp-ups and ramp-downs
in production.
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. Proven Supply Chain Partner. We have substantial experience in supply
chain management and believe that we have established a reputation as a
trusted part of our clients' supply chain operations. To maintain our
long-term relationships, we must consistently meet our clients'
stringent performance requirements in areas such as inventory turnover,
order fill rates and product quality. To strengthen our client
relationships, we have organized our 550 business managers by client and
solution center, with groups of managers representing the same client in
multiple centers. The length of our relationships with our five leading
clients, based on 1999 revenue, has averaged over ten years.
. Management of Content Across Multiple Media. We can store electronically
millions of data files and images that we use to produce software
products, manuals and other documentation on demand. This capability
allows us to replicate software and print materials in quantities, and
at times, specified by our clients, enhancing the client's ability to
customize products for specific customers. We also have the capability
to produce software on multiple types of media, such as diskettes and
CDs. In addition, we can manage complex software licensing programs,
including electronic licensing programs in which we provide passwords
and registration over the Internet to enable licensed users to gain
access to installed software.
Strategy
Our objective is to increase revenues and earnings by maintaining and
enhancing our position as a leading, global provider of supply chain management
services for companies in the technology industry. We believe that we can take
advantage of the market trends towards more frequent introductions of new
products, mass customization and growth of e-commerce by implementing the
following strategies:
Expand Our e-Fulfillment Services. We believe we have significant
opportunities to provide a larger number of e-fulfillment services for existing
e-commerce clients and for clients who have not yet implemented e-commerce
based services. Examples of e-fulfillment services we offer include developing
web site storefronts, processing orders and customer inquiries received by
telephone, fax, email and the web, processing online payments in multiple
currencies and providing passwords and registration as part of our electronic
licensing services.
Expand Services to Existing Clients. We have long-standing relationships
with many leading OEMs and ISVs and we believe that they will continue to seek
making their supply chain more efficient. We believe that we can take advantage
of the trend toward increasing outsourcing by managing more of the processes
involved in our clients' supply chains, from receiving orders and procuring
materials used in the production of our clients' products, through the
production and assembly of products, to providing for the delivery of products,
tracking the status of orders and processing returns. In addition, we plan to
continue to develop and market new offerings and services to our existing
clients.
Capitalize on Our Worldwide Presence and Our Integrated Information
Technology Capabilities. We have 20 solution centers worldwide and are able to
deliver products and services on a global basis. This allows us to efficiently
coordinate the production and delivery of our clients' products in multiple
countries throughout the world with different languages, currencies and
regulations. We believe that these capabilities provide important strategic and
competitive advantages in the market for globally integrated outsourced
services.
Continue to Achieve High Ratings in Outsourcing Industry Performance
Measurements. We have built our corporate culture on operational efficiency and
excellence. The outsourcing industry has typically evaluated the performance of
outsource providers using recognized performance measures, such as total supply
chain
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management cost, upside production flexibility and delivery performance. We
believe that we have performed favorably when measured against these industry
standards and, as a result, that we have established a reputation as a trusted
part of our clients' supply chain. We believe clients in this industry will
continue to place significant importance on these measurements and we seek to
continue to achieve high ratings in performance measurements for the
outsourcing industry.
Improve Our Financial Returns Through Investments in Technology and More
Efficient Use of Resources. We seek to reduce our costs, increase the
efficiency of our operations and improve our financial returns by investing in
new and existing technologies, automating more of our factory processes and
adjusting our mix of service offerings to match changes in demand. We are also
seeking to improve our operating margins by selling additional e-fulfillment
services to existing clients for whom we already perform supply chain
management services. In addition, we seek to control costs by, among other
things, our use of temporary employees during times of peak demand and by using
our relationships with suppliers to obtain the best price for materials and
components.
Pursue Select, High-Growth Markets and Expand Client Base. We intend to
pursue clients in high-growth market segments, such as e-commerce and
telecommunications, that are outsourcing their critical non-core activities. We
intend to capitalize on our full range of supply chain management services to
attract clients in these high growth markets and expand and diversify our
client base.
Pursue Strategic Acquisitions. We intend to pursue strategic acquisitions
that will provide us with additional industry expertise, enhance our range of
service offerings, expand our capacity, broaden our client base and expand our
geographical presence. As outsourcing trends require more significant global
and technological capabilities, outsource providers who do not offer a full
range of services are seeking strategic partners. We believe that we can take
advantage of the trend toward consolidation through strategic acquisitions.
Modus Media Services
We offer our clients a diverse range of supply chain services. Our services
can be used either to address specific needs within the supply chain or to
manage the entire supply chain. For all of our services, we acquire materials
and fulfill orders on behalf of our clients for their customers. Our services
are depicted in the diagram below.
Content Manufacturing Services
Our content manufacturing services consist of the following:
Procurement. We manage the purchase of materials, finished goods and
hardware components from vendors selected either by our clients or by us. These
materials include items such as paper, blank CDs and diskettes. Finished goods
include software CDs, printed booklets and other printed documents. Hardware
components include keyboards, mice, cables and network interface cards. Our
procurement services also include vendor evaluation and selection, product
price negotiation, forecasting product quantities and managing the timing of
purchases.
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Inventory Management. Our inventory management system allows us to
electronically consolidate and track information on material availability,
production schedules and our clients' orders. In addition, information on
inventory management is made available to our clients over the web so that they
can check actual inventory levels at any time. Our clients are also able to
access information regarding pricing, reorder levels and inventory values. We
also store inventory owned by our clients in our warehouses.
Production and Assembly. Our production capabilities allow us to convert our
clients' electronic data and image master files into CDs or printed materials
that can be distributed to our clients or directly to their retail outlets. For
example, we maintain electronic files for one client with software in 1,400
versions, including 34 languages, allowing us to quickly and efficiently
produce customized products within hours of receiving the client's order. Our
hardware and software assembly process allows us to incorporate various
hardware, software and printed components into either finished products or
component parts. For some products, such as a personal computer, we assemble as
many as 100 distinct components into a package. We are increasingly employing
automation to realize efficiency, to better manage our variable costs and to
increase production capacity.
Fulfillment and Distribution. Our fulfillment services include order
processing, picking, packing, warehousing and shipping. We use several semi-
automated packaging and labeling lines for our pick and pack operation. We also
streamline and customize the fulfillment procedures based upon each client's
requirements. In addition, our 20 solution centers facilitate compliance with
export regulations and provide regional shipping efficiencies. We provide
detailed reports to our clients on our supply chain activities in multiple
currencies and languages.
Microsoft Authorized Replicator. We have authorized replicator status with
Microsoft, which licenses us to replicate its software products for authorized
Microsoft business partners, primarily OEMs. We have been among a limited
number of authorized replicators of Microsoft products since 1991. We have
historically entered into annual contracts with Microsoft, and our current
contract expires in August 2000.
We offer our content manufacturing services to OEMs and ISVs as follows:
OEM Applications. We provide OEMs with a single source for sub- and final-
assembly, packaging and shipping of hardware. Each of these packages contain
many components, such as a mouse, a keyboard and a network interface card. In
addition, these packages contain software, documentation and other printed
material. We manufacture or purchase all components and assemble and package
them for distribution. For sub-assembly services, we send the components
directly to the OEM's production line on a just-in-time basis as one part
number to simplify the client's production process.
OEM Case Study. Our client, a leading OEM, had experienced
significant growth and was challenged to manage the flow of hardware
components, software and documentation required by its production
lines. The client found that it had incurred significant excess
inventory of many items and that it had shut down its production line
on numerous occasions due to parts shortages of other components.
These problems led to decreased customer satisfaction and decreased
profitability. We proposed redesigning the OEM's supply chain and
production process. We took over procurement, production and assembly
of all items associated with the client's product and implemented a
more efficient manufacturing model. As a result, the OEM's production
line shutdowns have significantly decreased and its cash collections
have improved.
ISV Applications. We provide ISVs with flexible, just-in-time delivery
programs allowing software shipments to be closely coordinated with our
clients' inventory and distribution requirements. A software package is
typically comprised of software replicated on CD or diskette, printed
documentation, registration, licensing and marketing materials. We coordinate
the production of packaged software products and the on-time supply of bulk
orders either to distributors or direct to retail stores. Our ISV solutions
offer large scale
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customization, and the ability to manage our clients' master files and
distribution requirements and adhere to local specifications and languages in
different geographic locations.
ISV Case Study. Our client, a leading ISV focused on the desktop,
graphic and Internet design marketplace, had accumulated high levels
of obsolete CDs and related inventory due to forecasting volatility,
inefficient distribution management and excessive lead times in the
manufacturing cycle. The client requested that we provide a solution
to reduce inventory levels, shorten manufacturing lead times and
increase inventory turns. We proposed the implementation of an on-
demand manufacturing model, which eliminated a distribution step and
enabled the ISV to ship directly to retail stores. As a result, the
client's lead-time was reduced, inventory levels decreased, inventory
turns increased, the time necessary to fulfill orders decreased and
retailers had more flexibility in merchandising.
e-Fulfillment Applications
Our e-fulfillment applications are typically offered in combination with one
or more content manufacturing services and include the following:
. Developing of web site storefronts and connecting of web sites to our
production and distribution centers;
. Operating customer response centers, which process orders and product
inquiries from our clients' customers received by telephone, fax, email
and over the web;
. Processing online payments in multiple currencies;
. Processing product returns, refunds and rebates;
. Reporting on the ordering activities of our clients' customers; and
. Providing passwords and registration as part of our electronic licensing
services.
Orders for products that are filled through e-fulfillment services come
directly from end users or retailers rather than from our OEM and ISV clients.
While a majority of the orders fulfilled through our e-fulfillment services are
currently being received by us via telephone or facsimile, we expect that
orders will increasingly be placed over the web as we develop more e-commerce
web sites for our clients and the Internet becomes a more prevalent medium for
the transaction of commerce. To date, we have built more than 40 e-commerce
sites for our clients, ranging from e-commerce web sites to online order
tracking and order information sites. In some cases, we have built multiple
sites for the same client.
Orders for products that we fulfill through our e-fulfillment services are
handled in one of six response centers located worldwide. As of December 31,
1999, these centers employed approximately 760 response center representatives,
a portion of whom were part-time employees. Through these customer response
centers we also handle individual end-user questions or requests, and billing
or credit card transactions. Related services provided for our clients
generally include collection activities, management of data files containing
customer information and reporting on the ordering profile of our clients'
customers.
Our electronic licensing services are offered through our Open Channel
Solutions division. This division manages complex software licensing programs,
including electronic licensing programs in which we electronically deliver
passwords and registrations over the Internet to enable licensed users to gain
access to installed software.
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E-Fulfillment Case Study. Our client, a developer of personal
digital assistants, required a business process outsourcing partner
that offered assembly and packaging combined with call center and
web-based ordering capabilities and a distribution infrastructure in
North America. The client also needed a partner with the flexibility
to handle unforeseen increases in demand. Within four weeks, we
developed a web site storefront for the client and, within five
weeks, began accepting orders in our response centers. Using a
secured link, we transmit data across our wide area network so that
solution centers in North America can process nearly 20,000 orders
per month.
Clients
We provide services to a broad array of original equipment manufacturers,
independent software vendors and e-commerce companies. The following chart
alphabetically lists a representative sample of our clients and the services
that we provide to them.
<TABLE>
<CAPTION>
Client Content Manufacturing Services e-Fulfillment Services
- ------ ------------------------------ ----------------------
<S> <C> <C>
3Com...................... X
ABN-AMRO.................. X
Acer...................... X
AT&T...................... X
Beyond.com................ X
Dell...................... X X
E-Stamp................... X
Gateway................... X
Hewlett-Packard........... X X
IBM....................... X X
Intuit.................... X
Macromedia................ X
Micron.................... X
Microsoft................. X X
Network Associates........ X X
Novell.................... X X
Packard Bell.............. X
Palm Computing............ X
Sony...................... X X
Sun Microsystems.......... X X
</TABLE>
Technology
We believe that automation of internal processes and automated links to our
suppliers, clients and their customers are critical to our business. To provide
a competitive advantage in meeting our clients' demands, we use advanced
technologies enhanced with proprietary applications and the knowledge and
experience of our management and personnel. Our technology capabilities allow
us to support and automate most supply chain management processes, including
on-demand manufacturing, electronic licensing, integrated product introductions
and efficient management of inventory and materials. In addition, we use a
communications network consisting of digitally linked data centers, which are
capable of supporting various messaging standards and protocols to ensure
secure and effective communication among our solution centers, our clients and
their customers, and our suppliers.
Our technology infrastructure includes software applications that allow our
solution centers worldwide to consistently manage inventory, order processing,
shipping, accounting and other operations. We refer to these software
applications as our enterprise resource planning system. We enhance this system
with proprietary applications to customize processes for our clients' specific
needs and to provide comprehensive
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information on all functions and services. In 1999, we upgraded this system to
standardize our manufacturing, finance and distribution platforms. In addition,
this system has been integrated with other applications and technologies, such
as customer relationship management software and content management servers.
We maintain a computer network that enables our clients to deliver product
specifications and ordering information by means of a secure network link. This
allows our clients to transfer content over the Internet or via private
connections to us, enabling an orderly workflow for materials within our
internal network. Our clients can transmit content and work orders to a single
network location, which processes and retransmits this data to the appropriate
solution center for production and distribution. We enable the movement of
content, such as master files of data and digital images, for printing on
demand around the world.
As of December 31, 1999 we employed 191 information technology professionals
in a range of activities, including network management, web development,
internal support and design.
Sales and Marketing
Our services are sold through a worldwide direct sales force, comprised of
approximately 50 full-time, professional sales executives. We recently
initiated a Global Client Sales group within our direct sales force that is
designed to provide full-time account teams to service our leading global
clients. This Global Client Sales organization is complemented by regional
sales teams that provide geographic sales leadership and account management
services to our clients.
We also formed product marketing, product development and supply chain
design organizations in order to create, support and advance our selling
effort. Our marketing organization assists in the selling and development of
new offerings and is responsible for identifying potential clients, marketing
our services, developing sales tools and consulting services. Our marketing
organization is currently focused on promoting the integration of clients'
Internet technologies with our e-fulfillment capabilities, as well as the
packaging, positioning and enhancement of our supply chain management services.
Competition
We participate in a competitive marketplace. However, we believe that no
single competitor presently offers the same full range of technology-enabled,
global and integrated supply chain management services. We compete against
companies engaged in teleservices, CD and diskette replication, hardware
assembly and printing. Recent competitors have emerged such as StarTek and
Sykes that primarily provide call center services. CD and diskette replicators,
such as Zomax, Bertelsmann, and Technicolor/Nimbus, provide media-based
solutions. Hardware assembly companies such as Logistix also provide solutions
to the same base of clients we serve. Turnkey printing companies such as Banta,
Quebecor and Printech provide document-intensive supply chain solutions to the
same base of clients we presently serve.
In addition to these large regional and global competitors, we face
competition from numerous local producers and from internal departments of our
clients and prospective clients. Additionally, we expect competition to emerge
from companies engaged in electronic manufacturing services and logistics
services as they attempt to deliver a broader range of services. We compete on
the basis of quality, performance, service levels, global capabilities,
technology, operational efficiency and price.
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Operations and Solution Centers
Our operations are organized as a "hub and spoke" structure within each
geographic region. The "hubs" are large solution centers in centralized
locations worldwide that have significant economies of scale and offer a full
range of our services. The "spokes" are satellite solution centers that perform
services such as production and fulfillment on a just-in-time basis to clients
located nearby. We typically start a solution center with a large initial
client and then diversify the client base to spread risk.
We operate 20 solution centers worldwide with an aggregate square footage of
approximately 2.0 million. All of our solution centers are leased, other than
Singapore and Kildare, Ireland, which are owned. Set forth below is the
location and size for each of our largest solution centers. Each of these
solution centers provides content manufacturing and e-fulfillment services.
<TABLE>
<CAPTION>
Facility Location Area (sq. ft.)
----------------- --------------
<S> <C>
North America:
Fremont, CA................................................ 160,000
Raleigh, NC................................................ 140,400
Lindon, UT................................................. 392,500
Salt Lake City, UT......................................... 126,000
Europe:
Dublin, Ireland............................................ 110,000
Kildare, Ireland........................................... 135,000
Apeldoorn, Netherlands..................................... 217,300
Cumbernauld, Scotland...................................... 140,000
Asia:
Singapore.................................................. 129,000
</TABLE>
We also maintain solution centers in Boise, Idaho; Preston, Washington;
Angers, France; Orleans, France; Limerick, Ireland; Willsborough, Ireland;
Sydney, Australia; Shenzhen, China; Ochiai, Japan; and Taipei, Taiwan. In
addition, we are party to two minority owned joint ventures located in Ebina,
Japan and KeyHeung, Korea. In addition, we maintain customer response centers
within six of these solution centers for the resolution of questions regarding
shipping, billing and technical support as well as a variety of other
questions. We have implemented the Customer Operations Performance Center
(COPC) standards in our North American solution centers in 1999. All of our
major solution centers are ISO 9002 certified.
Employees
Our success in recruiting, hiring, and training large numbers of full-time,
skilled employees and obtaining large numbers of temporary employees during
peak client demand periods is critical to our ability to provide high quality
outsourced services. As of December 31, 1999 we employed over 4,500 employees.
The number of temporary employees varies significantly during the year due to
the seasonal variations of our business. We believe that the demographics
surrounding our solution centers, and our reputation and compensation package,
should allow us to continue to attract and retain qualified employees. We
believe that we maintain good employee relations.
We are committed to training our employees, and we benchmark our training
investment versus the Fortune 500 on a quarterly basis. In 1999, we initiated a
corporate program, MMI University, in which selected employees receive broad
education in a wide variety of functional areas. We provide in-house training
for customer care employees on the features of our clients' products and
service offerings as well as our internal systems.
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Intellectual Property
Our operations frequently incorporate proprietary and confidential
information. We rely upon a combination of copyright and trademark laws and
non-disclosure and other intellectual property contractual arrangements to
protect our proprietary rights. We have pending trademark registrations on the
name Modus Media International and our logo in the United States, the United
Kingdom, Benelux, Ireland, France, Australia, China, Malaysia, Singapore,
Taiwan, Japan and Korea. In addition, we have pending registrations as to
certain other marks in the United States and abroad. We seek to limit
disclosure of our intellectual property by requiring employees and consultants
with access to our proprietary information and the proprietary information of
our clients to execute confidentiality agreements with us and by restricting
access to our source code. Due to rapid technological change, we believe that
factors such as the technological and creative skills of our personnel, new
product developments and enhancements to existing products are more important
than the various legal protections of our technology to establishing and
maintaining a technology leadership position.
Legal Proceedings
We are not a party to any material legal proceeding. We are, from time to
time, a party to litigation arising in the normal course of our business.
Management believes that none of these actions, individually or in the
aggregate, will have a material adverse effect on our financial position or
results of operations.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their ages and positions as of
December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Terence M. Leahy.............. 44 Chairman of the Board of Directors, Chief
Executive Officer and Director
Richard M. Darer.............. 46 Executive Vice President and Chief Financial
Officer
Patrick G. Donnellan.......... 49 Executive Vice President and Chief Operating
Officer
Ronald Leitch................. 40 Executive Vice President and Chief Process
and Technology Officer
Edward D. Rose................ 37 President, Open Channel Solutions Division
W. Kendale Southerland........ 37 Executive Vice President,
Sales/Marketing/Product Development
Mary L. Wilson................ 48 Senior Vice President, General Counsel and
Secretary
Michael J. Dudich............. 42 Senior Vice President, Human Resources
Linwood A. Lacy, Jr........... 54 Director
Jonathan S. Lavine............ 33 Director
Mark E. Nunnelly.............. 41 Director
Robert F. White............... 44 Director
</TABLE>
Terence M. Leahy has served as our Chairman of the Board and Chief
Executive Officer since December 1997. Mr. Leahy also served as Co-President
of Stream International Inc. from April 1995 to May 1996 and Chief Executive
Officer of Stream International Inc. from 1996 to 1997. Mr. Leahy oversaw the
restructuring of Stream into three different companies in 1997. From January
1994 to March 1995, Mr. Leahy served as business unit president of R.R.
Donnelley's Global Software Services division, which merged with Corporate
Software Inc. to create Stream International Holdings, Inc. in 1995. From 1982
to 1994, Mr. Leahy held various positions at R.R. Donnelley, including
positions at the Global Software Services division since 1993. Mr. Leahy is a
graduate of New York University Journalism School.
Richard M. Darer has served as our Executive Vice President Chief Financial
Officer since September 1998. Prior to joining Modus Media, Mr. Darer served
as Senior Vice President of Finance and Administration and Chief Financial
Officer of Gensym Corporation, an ERP software and services supplier, from
April 1997 to August 1998. From June 1996 to March 1997, Mr. Darer served as
Chief Financial Officer and Vice President of Administration at White Pine
Software, an Internet content software developer. From July 1994 to June 1996,
Mr. Darer served as Corporate Controller of Sequoia Systems and then as its
Vice President, Treasurer and Controller after its merger with Texas
Microsystems. Mr. Darer holds a Bachelor of Science in mathematics from
Polytechnic Institute of Brooklyn, a Master of Science in industrial
engineering from Northeastern University, and a Master of Business
Administration from Harvard Business School.
Patrick G. Donnellan has served as our Executive Vice President and Chief
Operating Officer since May 1999. Previously, Mr. Donnellan served as
President of Modus Media/North America from September 1997 to April 1999. From
July 1995 to August 1997, Mr. Donnellan served as Vice President of Operations
at Stream International/Europe. From December 1994 to June 1995, Mr. Donnellan
served as Director of Business Development for Stream International. Mr.
Donnellan holds a Bachelor of Arts in mathematics and politics from University
College, Galway, Ireland.
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Ronald Leitch has served as Executive Vice President, Chief Technology and
Process Officer since May 1999. From September 1997 to April 1999, Mr. Leitch
served as President of Modus Media/Europe. From April 1996 to August 1997, Mr.
Leitch served as Vice President and General Manager of Stream
International/Northern Europe. From March 1994 to April 1996, Mr. Leitch served
as Managing Director of the Dutch Operations at R.R. Donnelley's Global
Software Services business unit. Mr. Leitch holds a Post Graduate Diploma in
engineering management from the London School of Business and has a Bachelor of
Science in electronics and computing.
Edward D. Rose has served as President of Open Channel Solutions, a division
of Modus Media, since January 1999. From March 1997 to January 1999, Mr. Rose
served in various other capacities for Modus Media including Chief Technology
Officer and Senior Vice President of Marketing and Product Development.
Previously, Mr. Rose served as Vice President of Electronic Commerce for Stream
International from August 1996 to March 1997. From June 1994 to August 1996,
Mr. Rose served as Vice President of Publishing Technology in R.R. Donnelley's
Financial and Information Services Group. Mr. Rose completed his Bachelor of
Fine Arts with honors at Alfred University and attended the Rochester Institute
of Technology for graduate work in electronic imaging.
W. Kendale Southerland has been Executive Vice President, Sales, Marketing
and Product Development since May 1999. From December 1997 to April 1999, Mr.
Southerland served as President of Modus Media/Asia. From June 1997 to December
1997, Mr. Southerland served as Senior Vice President for Modus Media/South
Asia. From August 1995 to June 1997, Mr. Southerland served as Managing
Director for our Singapore operations. From 1990 to 1995, Mr. Southerland held
various positions within the Modus Media organization. Mr. Southerland holds a
Bachelor of Science in industrial management from Georgia Institute of
Technology.
Mary L. Wilson has served as our Senior Vice President and General Counsel
since March 1998. Prior to joining Modus Media, Ms. Wilson served as General
Counsel at PictureTel Corporation, a video conferencing solutions developer,
from October 1995 to June 1997. From September 1992 to October 1995, Ms. Wilson
was an attorney in private practice. Ms. Wilson received her Bachelor of Arts
in psychology from Michigan State University and her Juris Doctor from
University of Virginia Law School.
Michael J. Dudich joined Modus Media as Senior Vice President, Human
Resources in November 1999. From September 1998 to October 1999 Mr. Dudich was
Senior Vice President, Human Resources for Cookson Electronics, a leading
provider of assembly materials, equipment and technology solutions to the
printed circuit board industry. From June 1986 to September 1998, Mr. Dudich
served in various human resource capacities for divisions of General Electric
Company. Mr. Dudich received his Bachelor of Science in industrial management
from the University of Akron.
Linwood A. Lacy, Jr. has been a director of Modus Media since August 1998.
In November 1997, Mr. Lacy retired from Micro Warehouse Incorporated where he
had served as President and Chief Executive Officer since October 1996. From
1985 to May 1996, Mr. Lacy served as the Co-Chairman and Chief Executive
Officer of Ingram Micro, Inc., a computer distributor and a subsidiary of
Ingram Industries, Inc. Mr. Lacy holds a Bachelor of Science in chemical
engineering from the University of Virginia and a Master of Business
Administration from the Darden Graduate School of Business Administration at
the University of Virginia. Mr. Lacy also serves as a director of pcOrder.com,
Entex Information Services, Inc. and Earthlink Networks, Inc.
Jonathan S. Lavine has served as a Director of Modus Media since December
1997. Mr. Lavine joined Bain Capital as an investment executive in 1993 and has
been a Managing Director since 1997. He also has been Chief Investment Officer
of Sankaty Advisors, a fixed income affiliate of Bain Capital since 1997. Prior
to joining Bain Capital, Mr. Lavine worked as a consultant at McKinsey &
Company. Previously, Mr. Lavine worked in the Mergers and Acquisitions
Department of Drexel Burnham Lambert. Mr. Lavine received an Master of Business
Administration from Harvard Business School and a B.A. from Columbia College.
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<PAGE>
Mark E. Nunnelly has served as a Director of Modus Media since December
1997. Mr. Nunnelly joined Bain Capital as a General Partner in 1990 and has
served as Managing Director since April 1993. Mr. Nunnelly received a Master of
Business Administration, from Harvard Business School and received a Bachelor
of Arts from Centre College. Mr. Nunnelly is also a member of the board of
directors of Dominos, DoubleClick Inc. and Dade International.
Robert F. White has served as a Director of Modus Media since January 1998.
He has been a Managing Director of Bain Capital since its inception in 1984.
Mr. White received his Master of Business Administration from Harvard Business
School, and a Bachelor of Arts in mathematics and economics from Bowdoin
College. He is also a director of Brookstone, Inc.
Executive Officers
Each officer serves at the discretion of our Board of Directors and holds
office until his successor is elected and qualified or until his earlier
resignation or removal. There are no family relationships among any of our
directors or executive officers.
Election of Directors
Following this offering, the board of directors will be divided into three
classes, each of whose members will serve for a staggered three-year term.
Messrs. Nunnelly and Lavine will serve in the class whose term expires in 2001;
Messrs. Lacy and White will serve in the class whose term expires in 2002; and
Mr. Leahy will serve in the class whose term expires in 2003. Upon the
expiration of the term of a class of directors, directors in such class will be
elected for three-year terms at the annual meeting of stockholders in the year
in which such term expires.
Compensation of Directors
We reimburse non-employee directors for reasonable out-of-pocket expenses
incurred in attending meetings of the board of directors. Mr. Lacy received
stock options totalling 40,000 shares of common stock in each of July and
December 1998 at an exercise price of $0.29 per share.
Board Committees
The board of directors has established a Compensation Committee and an Audit
Committee. The Compensation Committee, which consists of Mr. Lacy and Mr.
Nunnelly, reviews executive salaries, administers any bonus, incentive
compensation and stock option plans, and approves the salaries and other
benefits of our executive officers. In addition, the Compensation Committee
consults with our management regarding pension and other benefit plans and our
compensation policies and practices. The Audit Committee, which consists of Mr.
White, Mr. Lavine and Mr. Lacy, reviews the professional services provided by
our independent accountants, the independence of such accountants from our
management, our annual financial statements and our system of internal
accounting controls. The Audit Committee also reviews such other matters with
respect to our accounting, auditing and financial reporting practices and
procedures as it may find appropriate or may be brought to its attention.
Executive Compensation
The following table sets forth, for the year ended December 31, 1999, the
cash compensation paid and shares underlying options granted to our:
. Chief Executive Officer; and
. four other most highly compensated executive officers who received
annual compensation in excess of $100,000, referred to collectively as
the Named Executive Officers.
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<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation(1) Awards
------------------------------------- --------------
Other Annual Shares All Other
Name and Salary Bonus Compensation Underlying Compensation
Principal Position Year ($) ($) ($) Options (#)(2) ($)
------------------ ---- -------- ---------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Terence M. Leahy........ 1999 $425,000 $ 300,900 $ 0 200,000 $211,260(3)
Chairman of the Board 1998 340,000 1,104,850 0 1,400,000 20,741(4)
of Directors and Chief
Executive Officer
Richard M. Darer........ 1999 241,346 177,173 0 100,000 5,121(5)
Executive Vice 1998 60,000 75,000 0 200,000 375(6)
President and Chief
Financial Officer
Patrick G. Donnellan.... 1999 291,504 135,549 75,983(7) 100,000 130,167(8)
Executive Vice 1998 264,774 195,129 144,996(9) 295,000 159,304(10)
President and Chief
Operating Officer
Ronald Leitch........... 1999 230,575 140,472 0 100,000 156,554(11)
Executive Vice 1998 160,390 132,191 0 220,000 50,196(12)
President and Chief
Process and Technology
Officer
W. Kendale Southerland.. 1999 238,248 110,448 35,425(13) 100,000 174,971(14)
Executive Vice 1998 175,752 140,333 117,645(15) 265,000 207,870(16)
President,
Sales/Marketing/Product
Development
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission,
the compensation set forth in the table does not include medical, group
life or other benefits which are available to all of our salaried
employees, and certain perquisites and other benefits, securities or
property which do not exceed the lesser of $50,000 or 10% of the person's
salary and bonus shown in the table.
(2) We did not make any restricted stock awards, grant any stock appreciation
rights or make any long-term incentive payments during fiscal 1999 to our
executive officers. Options granted to the Named Executive Officers were
granted at fair market value as determined by the board of directors
based on all factors available to them on the grant date.
(3) Comprised of $2,400 of employee retirement plan matching payments made by
us, $8,860 of insurance premiums paid by us and $200,000 in debt
forgiveness.
(4) Comprised of $2,400 of employee retirement and savings plan matching
payments made by us, $10,498 of insurance premiums paid by us and $7,843
for the buyout of unused vacation time.
(5) Comprised of $1,121 in life insurance premiums paid by us and $4,000 of
employee retirement plan matching payments.
(6) Comprised of life insurance premiums paid by us.
(7) Comprised of reimbursements for foreign tax liabilities.
(8) Comprised of a $83,349 payment for foreign service and related expenses,
$500 for tax return preparation services, $45,000 in pension plan
contributions and $1,318 of life insurance premiums paid by us.
(9) Comprised of reimbursement for foreign tax liabilities.
(10) Comprised of a $96,762 payment for foreign service and related expenses,
$7,550 for the buyout of unused vacation time, $500 for tax return
preparation services, $45,000 in pension plan contributions, $8,709 in
relocation expenses and $783 of life insurance premiums paid by us.
(11) Comprised of $55,984 in reimbursements for expenses related to foreign
service, $38,220 in pension contributions, $62,170 in relocation expenses
and $180 in life insurance premiums paid by us.
(12) Comprised of $29,813 in reimbursements for expenses related to foreign
service and $20,383 in pension contributions.
(13) Comprised of reimbursements for foreign tax liabilities.
(14) Comprised of a $77,489 payment for foreign service and related expenses,
$2,400 of employee retirement plan matching payments made by us, $1,012
of life insurance premiums paid by us, $93,570 in relocation expenses and
$500 for tax return preparation services.
(15) Comprised of reimbursements for foreign tax liabilities.
(16) Comprised of a $173,946 payment for foreign service and related expenses,
$2,400 of employee retirement and savings plan matching payments made by
us, $34,853 in income from the exercise of non-statutory stock options
and $701 of life insurance premiums paid by us.
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<PAGE>
Stock Options
The following table contains information concerning the grant of options to
purchase shares of our common stock to each of our Named Executive Officers
during the fiscal year ended December 31, 1999:
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock
Appreciation for Option
Individual Grants Term(3)
----------------------------------------------- -----------------------
Number of Percent of
Securities Total Options
Underlying Granted To Exercise
Options Employees in Price Expiration
Name Granted (#) Fiscal Year(1) ($/Sh)(2) Date(4) 5% ($) 10% ($)
---- ----------- -------------- --------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Terence M. Leahy........ 200,000 8.7% $5.175 9/29/09 $ 650,906 $ 1,651,598
Richard M. Darer........ 100,000 4.4% 5.175 9/29/09 323,453 825,799
Patrick G. Donnellan.... 100,000 4.4% 5.175 9/29/09 323,453 825,799
Ronald Leitch........... 100,000 4.4% 5.175 9/29/09 323,453 825,799
W. Kendale Southerland.. 100,000 4.4% 5.175 9/29/09 323,453 825,799
</TABLE>
- --------
(1) Based on an aggregate of 2,290,500 shares subject to options granted to our
employees in 1999.
(2) All options were granted at or above fair market value as determined by the
board of directors on the date of grant.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on our
common stock over the term of the options. The potential realizable values
set forth above do not take into account applicable tax and expense
payments that may be associated with such option exercises. Actual
realizable value, if any, will be dependent on the future price of the
common stock on the actual date of exercise, which may be earlier than the
stated expiration date. The 5% and 10% assumed annualized rates of stock
price appreciation over the exercise period of the options used in the
table above are mandated by the rules of the Commission and do not
represent our estimate or projection of the future price of the common
stock on any date. There is no representation either express or implied
that the stock price appreciation rates for the common stock assumed for
purposes of this table will actually be achieved.
(4) These options typically vest over four years. They become exercisable as
they vest.
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<PAGE>
Fiscal Year-End Option Values
The following table sets forth information for each of the Named Executive
Officers with respect to the value of options outstanding as of December 31,
1999.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Value
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised In-The-
Acquired Underlying Unexercised Money Options at
on Value Options at Fiscal Year-End (#) Fiscal Year-End ($)(1)
Exercise Realized ------------------------------ ----------------------------
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- -------- ------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Terence M. Leahy........ 0 0 768,000/560,000 8,448,000/6,160,000
Richard M. Darer........ 15,000 73,275 65,000/220,000 715,000/2,420,000
Patrick G. Donnellan.... 0 0 103,750/230,250 1,141,250/2,532,750
Ronald Leitch........... 0 0 95,000/225,000 1,045,000/2,475,000
W. Kendale Southerland.. 0 0 91,748/214,748 1,009,228/2,362,228
</TABLE>
- --------
(1) There was no public trading market for the common stock as of December 31,
1999. Accordingly, as permitted by the rules of the Commission, these
values have been calculated on the basis of the fair market value of our
common stock as of December 31, 1999, of $11.00 per share, as determined by
the board of directors, less the aggregate exercise price.
Employment Agreements
We have an employment agreement with Terence Leahy, dated January 1, 1998.
The initial term of this agreement expires on December 31, 2000. The agreement
provides that Mr. Leahy will receive a minimum base salary of $340,000 per year
subject to increase by annual review of the board, plus certain performance-
based bonuses. The agreement also provides that if Mr. Leahy is terminated
without cause, or resigns for good reason, he will receive monthly severance
payments, each in an amount equal to his monthly base compensation at the time
of his termination or resignation, until eighteen months after such termination
or resignation. In addition, in such circumstances Mr. Leahy will receive a
pro-rated bonus for the number of days employed with us during the year of the
termination or resignation as well as any unpaid portion of any bonus for the
year preceding the year of the termination or resignation.
We also have a severance agreement with Mr. Darer dated August 6, 1998,
providing for severance payments totaling eighteen months' base salary if he is
terminated without cause or if he resigns for good reason after an acquisition
event (as that term is defined in our 1997 Stock Incentive Plan). In such
circumstances, Mr. Darer would also be eligible to receive a prorated bonus for
the number of days he was employed with us during the year of the termination.
Prior to the close of this offering, we will enter into severance agreements
with all other executive officers. These severance agreements provide for
severance payments totaling twelve months base salary to an officer terminated
without cause. The severance period may be extended at our discretion on a
month-to-month basis up to a total of eighteen months if the officer is not re-
employed at the end of twelve months. The severance agreements will also
provide for the payment of a pro-rated bonus to a terminated executive for the
number of days employed in the year of termination. In the event a termination
without cause occurs within twenty-four months following an acquisition event
(as that term is defined in our 1997 Stock Incentive Plan), the severance
period is automatically extended to eighteen months.
Options granted to the executive officers on September 29, 1999, which
expire on September 29, 2009, provide for 100% acceleration if the executive is
terminated without cause or resigns for good reason within six months of an
acquisition event, as that term is defined in the 1997 Stock Incentive Plan.
The other options granted to the executive officers have acceleration
provisions which are consistent with the options granted to our other employees
under the 1997 Stock Incentive Plan.
Benefit Plans
1997 Stock Incentive Plan. Our 1997 Stock Incentive Plan was adopted by our
board of directors and approved by our stockholders in December 1997. Up to
5,600,000 shares of our common stock (subject to
44
<PAGE>
adjustment in the event of stock splits and other similar events) may be issued
pursuant to awards granted under the 1997 plan.
The 1997 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock awards and other stock-based awards.
Our officers, employees, directors, consultants and advisors are eligible to
receive awards under the 1997 plan. Under present law, however, incentive stock
options may be granted only to employees. No participant may receive any award
for more than 1,800,000 shares in any calendar year.
Optionees receive the right to purchase a specified number of shares of our
common stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. We may grant
options at an exercise price less than, equal to or greater than the fair
market value of our common stock on the date of grant. Under present law,
incentive stock options and options intended to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code may not be
granted at an exercise price less than the fair market value of the common
stock on the date of grant or less than 110% of the fair market value in the
case of incentive stock options granted to optionees holding more than 10% of
the voting power of Modus Media. The 1997 plan permits our board of directors
to determine how optionees may pay the exercise price of their options,
including by cash, check or in connection with a "cashless exercise" through a
broker, by surrender to us of shares of common stock, by delivery to us of a
promissory note, or by any combination of the permitted forms of payments.
As of December 31, 1999 approximately 200 persons would have been eligible
to receive awards under the 1997 plan, including eight executive officers and
one non-employee director. The granting of awards under the 1997 plan is
discretionary.
Our board of directors administers the 1997 plan. Our board of directors has
the authority to adopt, amend and repeal the administrative rules, guidelines
and practices relating to the plan and to interpret its provisions. It may
delegate authority under the 1997 plan to one or more committees of the board
of directors and, subject to certain limitations, to one or more of our
executive officers. Subject to any applicable limitations contained in the 1997
plan, our board of directors or a committee of the board of directors or
executive officer to whom our board of directors delegates authority, as the
case may be, selects the recipients of awards and determines:
. The number of shares of common stock covered by options and the dates
upon which such options become exercisable;
. The exercise price of options;
. The duration of options; and
. The number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase
price.
In the event of a merger, liquidation or other acquisition event, our board
of directors may (i) provide that all outstanding options or other stock-based
awards will be assumed or substituted for by the successor corporation on such
terms the board determines to be appropriate, (ii) provide that any outstanding
options or awards will terminate, to the extent unexercised, immediately prior
to consummation of the event, (iii) in the event of a cash transaction, provide
that cash consideration in the amount of the acquisition price less the
exercise price be exchanged for termination of options or awards, (iv) provide
that all restricted stock awards outstanding shall become immediately free of
all restrictions upon consummation of the event, or (v) provide for a cash
payment to participants in the event of a transaction in which stockholders
receive cash in exchange for stock. Existing option grants under the 1997 plan
provide for 80% acceleration of options if the employee is terminated without
cause or resigns for good reason after a merger, liquidation or other
acquisition event.
45
<PAGE>
No award may be granted under the 1997 plan after December 15, 2007, but the
vesting and effectiveness of awards previously granted may extend beyond that
date. Our board of directors may at any time amend, suspend or terminate the
1997 plan, except that no award granted after an amendment of the 1997 plan and
designated as subject to Section 162(m) of the Internal Revenue Code by our
board of directors shall become exercisable, realizable or vested, to the
extent the amendment was required to grant the award, unless and until the
amendment is approved by our stockholders.
1997 Class A and Class B Replacement Stock Option Plans
In connection with the Stream reorganization, in December 1997, we adopted
the Modus Media 1997 Class A Replacement Stock Option Plan and the Modus Media
1997 Class B Replacement Stock Option Plan (collectively, the "Replacement
Plans"). Immediately prior to the spin-off of Modus Media on January 9, 1998,
options for a total of 3,751,516 shares of Common Stock were outstanding under
the Replacement Plans. Pursuant to the terms of the Replacement Plans, no
further options were available or were granted. The Replacement Plans provided
for the grant of substitute options in Modus Media to those of our employees,
officers and directors, and those of Stream and Corporate Software & Technology
(CST) who held Class A and Class B Stream options at the time of the Stream
reorganization. All such options are non-statutory options, and payment of the
exercise price may be made in cash, shares of Common Stock, a combination of
the two or any other method approved by our board of directors. All substitute
options in Modus Media held by Stream and CST employees accelerated and
expired, to the extent not exercised, in November 1999, upon the acquisition of
Stream and the merger and change of control of CST. On or about November 21,
1999, we purchased from employees of Stream and CST an aggregate of 1,899,624
shares of Common Stock issuable on exercise of options under the Replacement
Plans at $5.18 per share.
The 2000 Management Incentive Plan
Our 2000 Management Incentive Plan was adopted by our board of directors in
January 2000. The objective of the 2000 Management Incentive Plan is to
recognize and reward the achievement of financial and business goals by
management and certain other key employees. The program, in conjunction with
base salary, is designed to offer total cash compensation opportunities that
are competitive with market levels. Eligible employees are assigned a target
payout for the 2000 Management Incentive Plan, expressed as a percentage of
total, regular base earnings, including paid time off and holiday hours. This
percentage represents the potential dollar award that will be earned at 100%
achievement of goals for all three components of the 2000 Management Incentive
Plan. The participant is assigned a target payout for each component, expressed
as a percentage of regular base salary. The first component relates to
performance by an organizational unit, such as global, regional or Solution
Center (or a combination thereof) against budgeted performance. The second
component is similar to the first, but measured and recorded quarterly. The
third component is tied to individual performance against goals established by
the participant and his/her manager. A participant must be actively employed by
Modus Media or a subsidiary of Modus Media through the date that bonuses are
paid during the first quarter of 2001 to receive any payout on annual
components. There are no annual payouts under the plan unless we meet certain
financial performance measures.
2000 Director Stock Option Plan
Our 2000 Director Stock Option Plan was adopted by our board of directors
and is expected to be approved by our stockholders in March, 2000. Under the
plan, our directors who are not employees of Modus Media or a subsidiary of
Modus Media receive non-statutory options to purchase shares of common stock. A
total of 300,000 shares of common stock may be issued upon the exercise of
options granted under the plan.
Pursuant to the plan, each non-employee director who first becomes a non-
employee director after the closing of this offering will be granted an option
to purchase 20,000 shares of common stock on the date of his or her initial
election to our board of directors which will vest ratably over four years on
each anniversary of the date of grant. Each non-employee director will also
receive an option to purchase 10,000 shares of common
46
<PAGE>
stock on the first anniversary of his or her initial election to the board of
directors. In addition, each non-employee director will receive an option to
purchase 5,000 shares of common stock on each of the second and third
anniversary of his or her initial election to the board of directors. The
options granted annually vest upon the date one year from the date of grant, so
long as the optionee remains our director. The exercise price per share of all
such options will be the fair market value of a share of common stock on the
date of grant.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan was adopted by the board of directors
and is expected to be approved by our stockholders in March, 2000. The purchase
plan authorizes the issuance of up to a total of 2,500,000 shares of common
stock to participating employees. Subject to local laws and regulations, we
intend to broaden participation in this plan to our employees worldwide.
All of our United States employees, who are customarily employed by us for
more than 20 hours a week and have been employed by us for more than six months
are eligible to participate in the purchase plan. Employees who would
immediately after the grant own 5% or more of the total combined voting power
or value of our stock or any subsidiary are not eligible to participate.
The purchase plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 10% of an employee's
compensation, subject to certain limitations. On the first day of a designated
payroll deduction period, referred to as the offering period, we will grant to
each eligible employee who has elected to participate in the purchase plan an
option to purchase shares of common stock. On the last day of the offering
period, the employee is deemed to have exercised the option, at the option
exercise price, to the extent of accumulated payroll deductions. Under the
terms of the purchase plan, the option price is an amount equal to 85% of the
fair market value per share of the common stock on either the first day or the
last day of the offering period, whichever is lower. The Compensation Committee
may, in its discretion, choose an offering period of 12 months or less for each
of the offerings and choose a different offering period for each offering.
If an employee is not a participant on the last day of the offering period,
the employee is not entitled to exercise any option, and the amount of the
employee's accumulated payroll deductions will be refunded. An employee's
rights under the purchase plan terminate upon voluntary withdrawal from the
purchase plan at any time, or when such employee ceases employment for any
reason, except that upon termination of employment because of death, the
employee's beneficiary has certain rights to elect to exercise the option to
purchase the shares which the accumulated payroll deductions in the
participant's account would purchase at the date of death.
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<PAGE>
CERTAIN TRANSACTIONS
Loans to Officers
In January 1998, in connection with the execution of an employment
agreement, Terence Leahy, our Chief Executive Officer, executed an Amended and
Restated 7.75% Unsecured Promissory Note for the principal sum of $1,000,000
payable to us. This note restated a note to Stream International Inc. which was
assigned to us in connection with the reorganization of Stream International in
1997. The entire principal amount of this note becomes due upon the earlier of
(a) a merger or a sale of Modus Media in which Mr. Leahy receives at least
$3 million for his stock and options, or (b) the termination of Mr. Leahy's
employment by us for cause or by Mr. Leahy without good reason. If we terminate
Mr. Leahy's employment with us for any reason other than for cause, or if Mr.
Leahy resigns for good reason, or if his employment is terminated due to death
or disability, the principal and interest payable under this note will be
forgiven. As of November 30, 1999, the amount outstanding under this loan was
approximately $1.2 million.
In connection with the reorganization of Stream International in 1997, we
assumed a 7.34% Secured Non-Recourse Note to Mr. Leahy for the principal sum of
$400,000. Fifty percent of the principal amount of this loan was forgiven on
January 1, 1999. The remaining fifty percent of this loan and accrued interest
was forgiven on January 1, 2000. As of December 31, 1999, the amount
outstanding under this loan was approximately $311,000, which amount was
forgiven in its entirety on January 1, 2000.
On July 20, 1999, in connection with his relocation from Singapore to the
United States, W. Kendale Southerland executed an Amended and Restated 7.25%
Unsecured Promissory Note payable to us in the principal amount sum of $70,000.
The entire principal amount of the loan becomes due upon the first to occur of
(a) a merger or sale of Modus Media in which Mr. Southerland receives at least
$300,000 for his shares and options, (b) the termination of Mr. Southerland's
employment by us for cause, or by Mr. Southerland, or (c) July 20, 2004. If we
terminate Mr. Southerland's employment with us for any reason other than for
cause, all principal and interest payable under this note will be forgiven. As
of November 30, 1999, the amount outstanding under this loan was approximately
$72,000.
On August 10, 1999, in connection with his relocation from Ireland to the
United States Ronald Leitch executed an Amended and Restated 7.25% Unsecured
Promissory Note payable to us in the principal amount of $62,500. Interest on
the loan accrues at a rate of 7.25% per year. The entire principal amount
becomes due upon (a) a merger or sale of Modus Media in which Mr. Leitch
receives at least 300,000 for his shares and options, (b) the termination of
Mr. Leitch's employment with us for cause, or (iii) August 10, 2004, whichever
event or date occurs first. If we terminate Mr. Leitch for any reason other
than for cause, all principal and interest payable under this note will be
forgiven. As of November 30, 1999, the amount outstanding under this loan was
approximately $64,000.
In connection with the Stream reorganization, in December 1997, we assumed a
7.34% Secured Non-Recourse Promissory Note dated September 15, 1995 for the
principal sum of $2,000,000 to Rory J. Cowan, the former Chairman of the Board
of Stream. The note, which is due April 21, 2000, is secured by a pledge of
1,000,000 of our shares and shares of Corporate Software & Technology, and
Stream. As of December 31, 1999, the amount outstanding under this loan
including accrued interest was $2,631,000.
Contribution Agreement
In December, 1997, Stream International Holdings Inc. effected a
reorganization and contributed the assets and liabilities related to our
business to its subsidiary, Modus Media, in exchange for our common and
preferred stock. In January 1998, Stream distributed all of the capital stock
of Modus Media to its stockholders, and we became an independent company.
Stream concurrently spun-off another subsidiary, Corporate Software and
Technology, Inc. In connection with the reorganization, R.R. Donnelley & Sons
Company, which was the principal shareholder of Stream, received shares of
preferred stock of Modus Media, with a redemption value
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<PAGE>
of $40.6 million, in cancellation of indebtedness owed to it. R.R. Donnelley
then exchanged our common stock for additional shares of preferred stock,
valued at approximately $21.7 million. In October 1999, we repurchased all
shares of preferred stock from R.R. Donnelley, including additional shares
issued as dividends thereon, for a total purchase price of $60.2 million, of
which $10.0 million was paid in cash, $37.5 million was borrowings under our
existing credit line and $12.7 million was paid by a loan that will become due
and payable upon the closing of this offering.
Tax Sharing Agreement
In connection with the reorganization, Modus Media, Stream and an affiliate
of Stream entered into a tax sharing agreement under which we will indemnify
Stream, and Stream will indemnify us, in respect of any taxes relating to our
respective businesses prior to the consummation of the reorganization, after
taking into account the net operating loss carryforwards and other tax
attributes of Stream immediately prior to consummation of the reorganization.
The tax sharing agreement provides rules for determining whether certain items
relate to a particular business and also defines the parties' obligations with
respect to filing tax returns and their rights and obligations with respect to
claims made by the Internal Revenue Service or other taxing authority with
respect to periods prior to the date of the reorganization. As of December 31,
1999, there were no material claims pending under this agreement.
Management Agreement
In connection with the Stream reorganization in 1997, Modus Media paid to
Bain Capital, Inc., for prior services, the sum of $1.7 million, of which
$710,000 was paid in cash and $1.0 million was paid by issuance of 3,445,028
shares of our common stock. Also in 1997 we entered into a management agreement
with an affiliate of Bain which required us to pay a fee of $1.5 million in
each of 1998 and 1999 in exchange for certain financial and managerial
services. This agreement terminates upon the closing of this offering. Bain
Capital is an affiliate of the Bain Capital Funds, which hold approximately 39%
of our common stock. Three of our directors, Jonathan Lavine, Mark Nunnelly and
Robert White, are Managing Directors of Bain Capital.
Services Agreement
In August 1999 we entered into an agreement with Synchronicity Mastering
Services, LLC pursuant to which Synchronicity Mastering Services provides us
with CD stampers. In September 1999, we issued a prepayment of $100,000 for
mastering services that were provided in 1999. Edward Rose, an executive
officer of Modus Media, owns 11.29% of Synchronicity Mastering Services.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of December 31, 1999 and as adjusted to
reflect the sale of the shares in this offering by:
. each person who is known by us to own beneficially more than 5% of the
outstanding shares of common stock;
. each of our directors and Named Executive Officers; and
. all our directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares of Common Stock Shares Beneficially
Beneficially Owned Prior Owned After the
to the Offering(1) Offering(1)
Name and Address of -------------------------------- ---------------------------
Beneficial Owner Number Percent Number Percent
------------------- --------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Bain Capital Funds(2)... 10,048,804 38.6% 10,048,804 29.5%
c/o Bain Capital, Inc
Two Copley Place
Boston, Massachusetts
02116
Morton H. Rosenthal..... 2,781,532 10.7 2,781,532 8.2
97 Lake View Avenue
Cambridge,
Massachusetts 02138
Chemical Equity 2,686,054 10.3 2,686,054 7.9
Associates.............
c/o Chase Capital
Partners
380 Madison Avenue
New York, New York
10017
BankAmerica Investment 1,798,976(3) 6.9 1,798,976(3) 5.3
Corporation............
c/o Bank of America
Illinois
231 South LaSalle
Street
Chicago, Illinois 60697
Rory J. Cowan........... 1,761,874 6.8 1,761,874 5.2
281 Fairhaven Hill
Concord, Massachusetts
01742
Directors and Executive
Officers
Terence M. Leahy........ 1,206,660(4) 4.5 1,296,660(11) 3.7
Mark E. Nunnelly........ 2,500,138(5) 9.6 2,500,138(5) 7.4
Robert F. White......... 0 0 0 0
Jonathan S. Lavine...... 0 0 0 0
Linwood A. Lacy, Jr..... 32,000 * 44,000(12) *
Richard M. Darer........ 80,000(6) * 110,000(13) *
Patrick Donnellan....... 230,750(7) * 260,750(14) *
W. Kendale Southerland.. 150,252(8) * 175,252(15) *
Ronald Leitch........... 95,000(9) * 125,000(16) *
All executive officers
and directors as a
group (12 persons)..... 4,417,300(10) 16.2% 4,667,800(17) 13.2%
</TABLE>
- --------
* Less than 1% of the outstanding common stock.
(1) The number of shares of common stock deemed outstanding prior to this
offering includes 26,006,116 shares of common stock outstanding as of
December 31, 1999, and with respect to each beneficial owner, shares
issuable pursuant to options held by the such owner which may be
exercised within 60 days after December 31, 1999 as set forth in
footnotes (2) and (10). The number of shares of common stock deemed
outstanding after this offering includes the 8,000,000 shares that we are
offering for sale in this offering. Beneficial ownership is determined in
accordance with the rules of the Commission, and includes voting and
investment power with respect to shares. Unless otherwise indicated
below, to our knowledge, all persons named in the table have sole voting
and investment power with respect to their shares of common stock, except
to the extent authority is shared by spouses under applicable law. Unless
50
<PAGE>
otherwise indicated, the address of each person listed is c/o Modus Media
International, 690 Canton Street, Westwood, MA.
(2) Consists of (i) 1,913,652 shares of Common Stock held by Bain Capital
Fund IV, L.P., whose sole general partner is Bain Capital Partners IV,
L.P., whose sole general partner is Bain Capital Investors, Inc., a
Delaware corporation wholly owned by W. Mitt Romney, (ii) 2,189,986
shares of Common Stock owned by Bain Capital Fund IV-B, L.P., whose sole
general partner is Bain Capital Partners IV, L.P., whose sole general
partner is Bain Capital Investors, Inc., a Delaware corporation wholly
owned by W. Mitt Romney, (iii) 2,042,670 shares of Common Stock held by
Information Partners Capital Fund, L.P., whose general partner is
Information Partners, a Massachusetts General Partnership, and whose
managing general partner is Bain Capital Partners IV, L.P., the sole
general partner of which is Bain Capital Investors, Inc., a Delaware
corporation wholly owned by W. Mitt Romney; (iv) 287,028 shares of
Common Stock held by BCIP Associates, a Delaware general partnership of
which W. Mitt Romney is a general partner and member of the management
committee; (v) 170,440 shares of Common Stock held by BCIP Trust
Associates, L.P., a Delaware limited partnership of which W. Mitt Romney
is a general partner and member of the management committee; and (vi)
3,445,028 shares of non-voting Common Stock held by Bain Capital
Partners V, L.P., whose sole general partner is Bain Capital Investors
V, Inc., a Delaware corporation wholly owned by W. Mitt Romney. The
address of these entities is: Two Copley Place, 7th Floor, Boston, MA
02116.
(3) Consists of shares of non-voting common stock.
(4) Includes 768,000 shares subject to outstanding stock options that are
exercisable within the 60 day period following December 31, 1999.
(5) Consists of 2,042,670 shares held by Information Partners Capital Fund,
L.P., whose general partner is Information Partners, a Massachusetts
general partnership, of which Mr. Nunnelly is a general partner, 287,028
shares held by BCIP Associates, a Delaware general partnership of which
Mr. Nunnelly is a general partner, and 170,440 shares held by BCIP Trust
Associates, LP, a Delaware limited partnership of which Mr. Nunnelly is
a general partner. Mr. Nunnelly disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
(6) Includes 65,000 shares subject to outstanding stock options that are
exercisable within the 60 day period following December 31, 1999.
(7) Includes 103,750 shares subject to outstanding stock options that are
exercisable within the 60 day period following December 31, 1999.
(8) Includes 91,748 shares subject to outstanding stock options that are
exercisable within the 60 day period following December 31, 1999.
(9) Consists of shares subject to outstanding stock options that are
exercisable within the 60 day period following December 31, 1999.
(10) Includes 1,222,248 shares of common stock issuable upon the exercise of
stock options that are exercisable within the 60 day period following
December 31, 1999.
(11) Includes 768,000 shares subject to outstanding stock options that are
exercisable within the 60 day period following December 31, 1999 and
90,000 shares of common stock issuable upon the exercise of stock options
that vest upon the closing of this offering.
(12) Includes 12,000 shares of common stock issuable upon the exercise of
stock options that vest upon the closing of this offering.
(13) Includes 65,000 shares subject to outstanding options that are
exercisable within the 60 day period following December 31, 1999 and
30,000 shares of common stock issuable upon the exercise of stock options
that vest upon the closing of this offering.
(14) Includes 103,750 shares subject to outstanding options that are
exercisable within the 60 day period following December 31, 1999 and
30,000 shares of common stock issuable upon the exercise of stock options
that vest upon the closing of this offering.
(15) Includes 91,748 shares subject to outstanding options that are
exercisable within the 60 day period following December 31, 1999 and
25,500 shares of common stock issuable upon the exercise of stock options
that vest upon the closing of this offering.
(16) Consists of 95,000 shares subject to outstanding stock options that are
exercisable within the 60 day period following December 31, 1999 and
30,000 shares of common stock issuable upon the exercise of stock options
that vest upon the closing of this offering.
(17) Includes 1,222,248 shares of common stock issuable upon the exercise of
stock options that are exercisable within the 60 day period following
December 31, 1999 and 250,500 shares of common stock issuable upon the
exercise of stock options that vest upon the closing of this offering.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, our authorized capital stock
will consist of 100,000,000 shares of common stock, $.01 par value per share,
6,000,000 shares of non-voting common stock, and 5,000,000 shares of preferred
stock, $.01 par value per share.
The following summary description of our capital stock is not intended to be
complete and is qualified in its entirety by reference to the provisions of
applicable law and to our restated certificate of incorporation and restated
by-laws, filed as exhibits to the registration statement of which this
prospectus is a part.
Common Stock
As of December 31, 1999, there were 20,762,112 shares of common stock
outstanding held by 141 stockholders of record and 5,244,004 shares of non-
voting common stock outstanding held by two stockholders of record. Based upon
the number of shares outstanding as of that date, and giving effect to the
issuance of the 8,000,000 shares of common stock offered by us in this
offering, there will be 28,762,112 shares of common stock and 5,244,004 shares
of non-voting common stock outstanding upon the closing of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Holders of non-voting common stock are not entitled to any votes,
except as required by law. Directors are elected by a plurality of the votes of
the shares present in person or by proxy at the meeting and entitled to vote in
such election. Holders of common stock and non-voting common stock are entitled
to receive ratably such dividends, if any, as may be declared by the board of
directors out of funds legally available therefor, subject to any preferential
dividend rights of outstanding preferred stock. If the board of directors
declares or pays a dividend on common stock, it must declare or pay the same
dividend for the non-voting common stock. If the board of directors declares or
pays a dividend on the non-voting common stock, it must declare or pay the same
dividend on the common stock. Upon the liquidation, dissolution or winding up
of Modus Media, the holders of common stock and non-voting common stock are
entitled to receive ratably our net assets available after the payment of all
our debts and other liabilities, subject to the prior rights of any outstanding
preferred stock. Each share of non-voting common stock is convertible into a
share of common stock, except to the extent the holder is prohibited from
holding shares of voting common stock under the Bank Holding Company Act of
1956. Holders of our common stock have no preemptive, subscription or
redemption rights, nor are they entitled to the benefit of any sinking fund.
The outstanding shares of common stock are, and the shares offered by us in
this offering will be, when issued and paid for, validly issued, fully paid and
nonassessable. The rights, powers, preferences and privileges of holders of
common stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock which our board of
directors may designate and issue in the future.
Preferred Stock
Our board of directors will be authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 5,000,000 shares of preferred stock, in one or more
series. Each such series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or
relative rights or privileges as shall be determined by our board of directors,
which may include, among others, dividend rights, voting rights, redemption
provisions, liquidation preferences, conversion rights and preemptive rights.
There were no shares of preferred stock outstanding as of December 31, 1999.
Our stockholders have granted the board of directors authority to issue the
preferred stock and to determine its rights and preferences in order to
eliminate delays associated with a stockholder vote on specific issuances. The
rights of the holders of common stock will be subject to the rights of holders
of any preferred stock issued in the future. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could adversely affect the voting power or other
rights of the holders of common stock, and could make it more difficult for a
third party to acquire, or discourage a third party from attempting to acquire,
a majority of our outstanding voting stock.
52
<PAGE>
Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover Effects
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three
years did own, 15% or more of the corporation's voting stock.
Our restated certificate of incorporation and restated by-laws provide for
the division of the board of directors into three classes, as nearly equal in
size as possible, with staggered three-year terms. See "Management--Election of
Directors." In addition, our restated certificate of incorporation and restated
by-laws provide that directors may be removed only for cause by the affirmative
vote of the holders of at least two-thirds of the shares of our capital stock
entitled to vote. Under our restated certificate of incorporation and restated
by-laws any vacancy on the board of directors, however occurring, including a
vacancy resulting from an enlargement of the board, may only be filled by vote
of a majority of the directors then in office. The classification of the board
of directors and the limitations on the removal of directors and filling of
vacancies could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, control of Modus
Media.
Our restated certificate of incorporation and restated by-laws also provide
that, after the closing of this offering, any action required or permitted to
be taken by our stockholders at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting
and may not be taken by written action in lieu of a meeting. Our restated
certificate of incorporation and restated by-laws further provide that special
meetings of the stockholders may only be called by the Chairman of the board of
directors, our President, or by the board of directors. Under the restated by-
laws, in order for any matter to be considered "properly brought" before a
meeting, a stockholder must comply with certain requirements regarding advance
notice to us. The foregoing provisions could have the effect of delaying until
the next stockholders' meeting stockholder actions which are favored by the
holders of a majority of our outstanding voting securities. These provisions
may also discourage another person or entity from making a tender offer for our
common stock, because such person or entity, even if it acquired a majority of
our outstanding voting securities, would be able to take action as a
stockholder (such as electing new directors or approving a merger) only at a
duly called stockholders meeting, and not by written consent.
Limitation of Liability and Indemnification
Our restated certificate of incorporation provides that our directors and
officers shall be indemnified by us to the fullest extent authorized by
Delaware law, as it now exists or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with the service for
or on our behalf. In addition, our restated certificate of incorporation
provides that our directors will not be personally liable for monetary damages
to us for breaches of their fiduciary duty as directors, unless they violated
their duty of loyalty to us or our stockholders, acted in bad faith, knowingly
or intentionally violated the law, authorized illegal dividends or redemptions
or derived an improper personal benefit from their action as directors.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 34,014,116 shares of common
stock outstanding (assuming no exercise of outstanding options). Of these
shares, the 8,000,000 shares (9,200,000 shares out of 35,214,116 shares
outstanding if the over-allotment option is exercised in full) to be sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended, except that any
shares purchased by our affiliates, as that term is defined in Rule 144 under
the Securities Act, may generally only be sold in compliance with the
limitations of Rule 144 described below.
Sales of Restricted Shares
The remaining 26,014,116 shares of common stock outstanding upon completion
of this offering are deemed "restricted shares" under Rule 144 or Rule 701
under the Securities Act. Approximately 1,502,526 restricted shares will be
eligible for sale in the public market without any limitation on the date of
this prospectus. Upon expiration of the lock-up agreements described below, 180
days after the date of this prospectus, an additional 23,654,098 shares of
common stock will be eligible for sale in the public market pursuant to Rule
144.
In general, under Rule 144, a stockholder who has beneficially owned his or
her restricted shares for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
. one percent of the then outstanding shares of common stock
(approximately 340,061 shares immediately after this offering); or
. the average weekly trading volume in the common stock in the over-the-
counter market during the four calendar weeks preceding the date on
which notice of such sale is filed, provided certain requirements
concerning availability of public information, manner of sale and notice
of sale are satisfied.
In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement,
in order to publicly sell shares of common stock which are not restricted
securities. A stockholder who is not one of our affiliates and has not been our
affiliate for at least three months prior to the sale and who has beneficially
owned restricted shares for at least two years may resell the shares without
limitation. In meeting the one- and two-year holding periods described above, a
holder of restricted shares can include the holding periods of a prior owner
who was not our affiliate. The one- and two-year holding periods described
above do not begin to run until the full purchase price or other consideration
is paid by the person acquiring the restricted shares from the issuer or one or
our affiliates. Rule 701 provides that currently outstanding shares of common
stock acquired under our employee compensation plans may be resold beginning 90
days after the date of this prospectus by:
. persons, other than our affiliates, subject only to the manner of sale
provisions of Rule 144; and
. our affiliates under Rule 144 without compliance with its one-year
minimum holding period, subject to certain limitations.
Options
Rule 701 also provides that the shares of common stock acquired upon the
exercise of currently outstanding options or pursuant to other rights granted
under our 1997 Stock Incentive Plan may be resold beginning 90 days after the
date of this prospectus by:
. persons, other than our affiliates, subject only to the manner of sale
provisions of Rule 144; and
. our affiliates under Rule 144, without compliance with its one-year
minimum holding period, subject to certain limitations.
54
<PAGE>
At December 31, 1999, approximately 1,673,506 shares of common stock were
issued or issuable pursuant to vested options or pursuant to other rights
granted under our 1997 Class A and Class B Replacement Stock Option Plans and
our 1997 Stock Incentive Plan of which approximately 92,750 shares are not
subject to lock-up agreements with the underwriters and will be eligible for
sale in the public market in accordance with Rule 701 under the Securities Act
beginning 90 days after the date of this prospectus.
Following the date of this prospectus, we intend to file one or more
registration statements on Form S-8 under the Securities Act to register up to
6,880,000 shares of common stock issuable under our 1997 Stock Incentive Plan,
300,000 shares of common stock issuable under our 2000 Director Stock Option
Plan and 2,500,000 shares of common stock issuable under our 2000 Employee
Stock Purchase Plan. These registration statements would become effective upon
filing.
Lock-up Agreements
Subject to limited exceptions, we and our executive officers, directors and
stockholders, who collectively own approximately 24,033,476 shares of our
common stock, have agreed that, without the prior written consent of Salomon
Smith Barney Inc., during the period ending 180 days after the date of this
prospectus, we will not
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, or otherwise transfer or dispose of
any shares of our common stock, whether now owned or later acquired by
the person executing the agreement or with respect to which the person
executing the agreement later acquires the power of disposition, or file
any registration statement under the Securities Act relating to any
shares of our common stock for a period of 180 days after the date of
this prospectus, or
. make any demand for or exercise any right with respect to the
registration of any shares of common stock or any security convertible
into or exercisable or exchangeable for common stock,
regardless of whether any such transactions described in the above two clauses
of this paragraph are to be settled by delivery of such common stock or such
other securities, in cash or otherwise. In addition, for a period of 180 days
from the date of this prospectus, except as required by law, we have agreed
that our board of directors will not consent to any offer for sale, sale or
other disposition, or any transaction which is designed or could be expected,
to result in, the disposition by any person, directly or indirectly, of any
shares of common stock without the prior written consent of Salomon Smith
Barney Inc. See "Underwriting."
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, each underwriter named below has severally
agreed to purchase, and we have agreed to sell to each underwriter, the number
of shares of our common stock set forth opposite its name below:
<TABLE>
<CAPTION>
Number
Name of shares
---- ----------
<S> <C>
Salomon Smith Barney Inc.......................................
Donaldson, Lufkin & Jenrette Securities Corporation............
FleetBoston Robertson Stephens Inc.............................
Thomas Weisel Partners LLC.....................................
---------
Total........................................................ 8,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the shares, other than those covered by the over-
allotment option described below, if they purchase any of the shares.
The underwriters, for whom Salomon Smith Barney Inc., FleetBoston Robertson
Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Thomas
Weisel Partners, LLC are acting as representatives, propose to offer some of
the shares directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the shares to dealers at the public
offering price less a concession not in excess of $ per share. The
underwriters may allow, and these dealers may reallow, a concession of not in
excess of $ per share on sales to other dealers. If all of the shares are not
sold at the initial offering price, the representatives may change the public
offering price and the other selling terms. The representatives have advised us
that the underwriters do not intend to confirm any sales to any accounts over
which they exercise discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 1,200,000 additional shares of
our common stock at the public offering price less the underwriting discount.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent this
option is exercised, each underwriter will be obligated, subject to various
conditions, to purchase a number of additional shares approximately
proportionate to its initial commitment.
We, our officers and directors and substantially all of our existing
shareholders have agreed that, for a period of 180 days from the date of this
prospectus, we and they will not, without the prior written consent of Salomon
Smith Barney Inc., dispose of or hedge any shares of our common stock or
securities convertible or exchangeable for our common stock. Salomon Smith
Barney Inc. in its sole discretion may release any of the securities subject to
these lock-up agreements at any time without notice.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the shares will be
determined by negotiations between us and the representatives. Among the
factors to be considered in determining the initial public offering price were
our record of operations, our current financial condition, our future
prospects, our markets, the economic conditions in and future prospects for the
industry in which we compete, our management, and currently prevailing general
conditions in the equity securities markets, including current market
valuations of publicly traded companies considered comparable to us. We cannot
assure you, however, that the prices at which the shares will sell in the
public market after this offering will not be lower than the price at which
they are sold by the underwriters or than an active trading market in our
common stock will develop and continue after this offering.
56
<PAGE>
We have applied to have the common stock included for quotation on the
Nasdaq National Market under the symbol "EMMI".
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
Paid by Us
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share........................................ $ $
Total............................................ $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell shares of our common stock in the open
market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of our common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of our common stock made for the purpose of preventing or retarding a
decline in the market price of our common stock while this offering is in
progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of our common stock to be higher
than the price that otherwise would exist in the open market in the absence of
such transactions. These transactions may be effected on the Nasdaq National
Market or in the over-the-counter market, or otherwise and, if commenced, may
be discontinued at any time.
We will pay the offering expenses, including registration fees, costs of
printing and engraving and legal and accounting fees, estimated to be
approximately $1.8 million, excluding underwriting discounts and commissions.
We have agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
At our request, the underwriters have reserved up to five percent of the
common stock offered in this prospectus for sale to our employees and their
family members and to our business associates at the initial public offering
price set forth on the cover page of this prospectus. These persons must commit
to purchase shares no later than the close of business on the day following the
date of this prospectus. The number of shares available for sale to the general
public will be reduced to the extent these persons purchase the reserved
shares.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-managing
underwriter in 132 filed public offerings of equity securities, of which 101
have been completed, and has acted as a syndicate member in an additional 71
public offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
57
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. Legal matters for the
underwriters will be passed upon by Ropes & Gray, Boston, Massachusetts.
EXPERTS
Our consolidated financial statements and financial statement schedule as of
December 31, 1998 and 1999 and for the years ended December 31, 1997, 1998 and
1999 included in this prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 to register the shares of our common stock described in
this prospectus. This prospectus is part of that registration statement, and
provides you with a general description of the common stock being registered,
but does not include all of the information you can find in the registration
statement or the exhibits. You should refer to the registration statement and
its exhibits for more information about Modus Media and the shares of common
stock being registered.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file with the Commission at the
Commission's public reference room at 450 Fifth Street, N.W., Judiciary Plaza,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained at prescribed rates by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Commission maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.
58
<PAGE>
MODUS MEDIA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Modus Media, Inc.:
We have audited the accompanying consolidated balance sheets of Modus Media,
Inc. (formerly known as Modus Media International Holdings, Inc.) as of
December 31, 1998 and 1999, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended December
31, 1997, 1998 and 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Modus
Media, Inc. as of December 31, 1998 and 1999 and the results of its operations
and its cash flows for the years ended December 31, 1997, 1998 and 1999, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
March 2, 2000
F-2
<PAGE>
MODUS MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
As of December
31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 8,447 $ 29,759
Receivables, less allowance for doubtful accounts of
$4,402 in 1998 and $5,179 in 1999....................... 135,582 117,801
Inventories, net......................................... 49,030 46,813
Prepaid expenses and other current assets................ 17,795 14,164
-------- --------
Total current assets................................... 210,854 208,537
Property, plant and equipment, net of accumulated
depreciation............................................ 70,752 68,271
Other noncurrent assets.................................. 9,604 9,802
-------- --------
Total assets........................................... $291,210 $286,610
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........................ $ 2,021 $ 559
Accounts payable......................................... 107,203 121,208
Accrued liabilities...................................... 58,028 57,181
-------- --------
Total current liabilities.............................. 167,252 178,948
Long-term debt, net of current portion................... 21,641 55,744
Deferred income taxes.................................... 2,482 1,727
Other noncurrent liabilities............................. 6,783 6,822
-------- --------
Total liabilities...................................... 198,158 243,241
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, with a liquidation value
of $1,000 per share
Authorized--120,000 in 1998 and 1999
Issued and outstanding--66,959 in 1998 and none in
1999................................................... 66,959 --
Common stock, $.01 par value
Authorized--33,000,000 in 1998 and 1999
Issued and outstanding--24,370,556 in 1998 and
26,006,116 in 1999..................................... 244 260
Additional paid-in capital............................... 22,831 33,675
Deferred stock compensation.............................. -- (9,481)
Retained earnings........................................ 3,292 18,183
Other comprehensive income (loss)........................ (274) 732
-------- --------
Total shareholders' equity............................. 93,052 43,369
-------- --------
Total liabilities and shareholders' equity............. $291,210 $286,610
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MODUS MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue......................................... $684,523 $630,082 $697,468
Cost of revenue (excluding depreciation and
amortization).................................. 564,788 496,180 549,681
-------- -------- --------
Gross profit.................................. 119,735 133,902 147,787
Operating Expenses:
Selling, general and administrative expenses... 110,378 97,999 101,826
Depreciation and amortization.................. 26,371 18,731 17,407
Stock-based compensation....................... -- -- 9,728
-------- -------- --------
Operating income (loss)....................... (17,014) 17,172 18,826
Other Expense (Income):
Interest expense............................... 16,478 3,882 3,452
Other expense (income), net.................... (3,649) (1,722) (408)
-------- -------- --------
Income (loss) before income taxes............. (29,843) 15,012 15,782
Provision for Income Taxes...................... 2,824 4,265 7,550
-------- -------- --------
Net income (loss)............................. (32,667) 10,747 8,232
Preferred Stock Dividends....................... 172 5,922 4,885
Net benefit on repurchase of preferred stock.. -- -- (11,544)
-------- -------- --------
Net income (loss) available to common
shareholders................................. $(32,839) $ 4,825 $ 14,891
======== ======== ========
Net income per share:
Basic....................................... $ 0.19 $ 0.59
======== ========
Diluted..................................... $ 0.18 $ 0.51
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MODUS MEDIA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------- --------------- ------------ ----------- --------- ---------- ------------
Net Parent $1,000 Additional Deferred Other
Company Number of Liquidation Number of $.01 Paid-In Stock Retained Comprehensive
Investment Shares Value Shares Par Value Capital Compensation Earnings Income (Loss)
---------- --------------- ------------ ----------- --------- ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1996......... $131,703 -- $ -- -- $ -- $ -- $-- $ -- $ --
-------- ------- ------- ----------- ----- -------- ------- ------- -----
Comprehensive
income--
Net loss........ (31,306) --
Translation
adjustment
(including taxes
of $287)........ 3,020 -- -- -- -- -- -- -- --
-------- ------- ------- ----------- ----- -------- ------- ------- -----
Total
comprehensive
loss............ (28,286) -- -- -- -- -- -- -- --
Net transfers
from the Parent
Company......... (20,895) -- -- -- -- -- -- -- --
Dividend to the
Parent Company.. (40,646) -- -- -- -- -- -- -- --
Conversion of
Parent Company
debt to equity.. 40,646 -- -- -- -- -- -- -- --
Capitalization
of the Company--
Common stock
issued.......... (41,876) -- -- 96,517,474 966 40,910 -- -- --
Preferred stock
issued.......... (40,646) 40,646 40,646 -- -- -- -- -- --
-------- ------- ------- ----------- ----- -------- ------- ------- -----
Balance, December
15, 1997......... -- 40,646 40,646 96,517,474 966 40,910 -- -- --
Net loss........ -- -- -- -- -- -- -- (1,361) --
9.5% cumulative
dividends on
preferred
stock........... -- -- -- -- -- -- (172) --
-------- ------- ------- ----------- ----- -------- ------- ------- -----
Balance, December
31, 1997......... $ -- 40,646 $40,646 96,517,474 $ 966 $ 40,910 $ -- $(1,533) $ --
Comprehensive
income--
Net income...... -- -- -- -- -- -- -- 10,747 --
Translation
adjustment
(including tax
benefits of
$73)............ -- -- -- -- -- -- -- -- (274)
-------- ------- ------- ----------- ----- -------- ------- ------- -----
Total
comprehensive
income.......... -- -- -- -- -- -- -- 10,747 (274)
Conversion of
common stock to
preferred
stock........... -- 21,132 21,132 (72,774,932) (728) (20,404) -- -- --
Redemption of
preferred
stock........... -- (913) (913) -- -- 913 -- -- --
Contribution of
capital......... -- -- -- -- -- 1,231 -- -- --
Issuance of
common stock
under stock
option plans.... -- -- -- 628,014 6 181 -- -- --
9.5% cumulative
dividends on
preferred
stock........... -- 6,094 6,094 -- -- -- -- (5,922) --
-------- ------- ------- ----------- ----- -------- ------- ------- -----
Balance, December
31, 1998......... $ -- 66,959 $66,959 24,370,556 $ 244 $ 22,831 $ -- $ 3,292 $(274)
Comprehensive
income--
Net income...... -- -- -- -- -- -- -- 8,232 --
Translation
adjustment
(including taxes
of $298)........ -- -- -- -- -- -- -- -- 1,006
-------- ------- ------- ----------- ----- -------- ------- ------- -----
Total
comprehensive
income.......... -- -- -- -- -- -- -- 8,232 1,006
Issuance of
common stock
under stock
option plans.... -- -- -- 3,602,184 36 1,435 -- -- --
Purchase and
retirement of
common stock.... -- -- -- (1,966,624) (20) (9,900) -- -- --
Deferred stock
compensation.... -- -- -- -- -- 19,209 (19,209) -- --
Stock-based
compensation.... -- -- -- -- -- -- 9,728 -- --
Redemption of
preferred
stock........... -- (100) (100) -- -- 100 -- -- --
9.5% cumulative
dividends on
preferred
stock........... -- 4,885 4,885 -- -- -- -- (4,885) --
Repurchase of
preferred
stock........... -- (71,744) (71,744) -- -- -- -- -- --
Net benefit on
repurchase of
preferred
stock........... -- -- -- -- -- -- -- 11,544 --
-------- ------- ------- ----------- ----- -------- ------- ------- -----
Balance, December
31, 1999......... $ -- -- $ -- 26,006,116 $ 260 $ 33,675 $(9,481) $18,183 $732
======== ======= ======= =========== ===== ======== ======= ======= =====
<CAPTION>
Total
---------
<S> <C>
Balance, December
31, 1996......... $131,703
---------
Comprehensive
income--
Net loss........ (31,306)
Translation
adjustment
(including taxes
of $287)........ 3,020
---------
Total
comprehensive
loss............ (28,286)
Net transfers
from the Parent
Company......... (20,895)
Dividend to the
Parent Company.. (40,646)
Conversion of
Parent Company
debt to equity.. 40,646
Capitalization
of the Company--
Common stock
issued.......... --
Preferred stock
issued.......... --
---------
Balance, December
15, 1997......... 82,522
Net loss........ (1,361)
9.5% cumulative
dividends on
preferred
stock........... (172)
---------
Balance, December
31, 1997......... $ 80,989
Comprehensive
income--
Net income...... 10,747
Translation
adjustment
(including tax
benefits of
$73)............ (274)
---------
Total
comprehensive
income.......... 10,473
Conversion of
common stock to
preferred
stock........... --
Redemption of
preferred
stock........... --
Contribution of
capital......... 1,231
Issuance of
common stock
under stock
option plans.... 187
9.5% cumulative
dividends on
preferred
stock........... 172
---------
Balance, December
31, 1998......... $ 93,052
Comprehensive
income--
Net income...... 8,232
Translation
adjustment
(including taxes
of $298)........ 1,006
---------
Total
comprehensive
income.......... 9,238
Issuance of
common stock
under stock
option plans.... 1,471
Purchase and
retirement of
common stock.... (9,920)
Deferred stock
compensation.... --
Stock-based
compensation.... 9,728
Redemption of
preferred
stock........... --
9.5% cumulative
dividends on
preferred
stock........... --
Repurchase of
preferred
stock........... (71,744)
Net benefit on
repurchase of
preferred
stock........... 11,544
---------
Balance, December
31, 1999......... $ 43,369
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MODUS MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (32,667) $ 10,747 $ 8,232
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization.................. 26,371 18,731 17,407
Stock-based compensation....................... -- -- 9,728
Amortization of deferred financing costs....... -- 1,361 1,286
Loss on disposal of fixed assets............... -- -- 718
Deferred income taxes.......................... 2,824 (342) (755)
Gain on sale of investment..................... -- (2,088) --
Changes in assets and liabilities--
Receivables, net.............................. 17,814 (59,591) 17,811
Inventories................................... 29,503 (3,133) 2,217
Prepaid expenses and other current assets..... (11,935) (2,507) 3,631
Accounts payable.............................. (11,395) 22,501 14,005
Accrued liabilities........................... 844 15,872 1,756
Noncurrent assets and liabilities............. (1,025) (562) (341)
Intercompany receivable from Stream........... 49,403 -- --
Restructuring reserve......................... (16,837) (7,457) (481)
--------- -------- --------
Net cash provided by (used in) operating
activities.................................. 52,900 (6,468) 75,214
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (34,032) (12,307) (17,123)
Proceeds from sale of investment............... -- 3,288 --
Payment of business acquisition, net of cash
acquired...................................... -- -- (1,545)
Net proceeds from disposal of fixed assets..... 11,682 119 887
--------- -------- --------
Net cash used in investing activities........ (22,350) (8,900) (17,781)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) third-party debt.. (18,028) (1,988) 41,824
Cash paid to secure third-party financing...... (3,369) (1,907) --
Net transfers from Parent Company.............. 7,799 -- --
Increase (decrease) of capital lease
obligations................................... 2,071 (3,334) (10,302)
Purchase and retirement of common stock........ -- -- (9,920)
Cash proceeds related to pre-Reorganization tax
receivable.................................... -- 1,231 --
Repurchase of preferred stock.................. -- -- (60,200)
Exercise of stock options...................... -- 187 1,471
--------- -------- --------
Net cash used in financing activities........ (11,527) (5,811) (37,127)
--------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS.................................... 3,020 (274) 1,006
--------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 22,043 (21,453) 21,312
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.... 7,857 29,900 8,447
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR.......... $ 29,900 $ 8,447 $ 29,759
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Assets acquired through capital lease.......... $ 3,738 $ 1,748 $ 46
========= ======== ========
Dividend to the Parent Company................. $ 40,646 $ -- $ --
========= ======== ========
Conversion of Parent Company debt to preferred
stock......................................... $ 40,646 $ -- $ --
========= ======== ========
Conversion of Parent Company Investment to
common stock.................................. $ 41,876 $ -- $ --
========= ======== ========
Conversion of common stock to preferred stock.. $ -- $ 21,132 $ --
========= ======== ========
Conversion of cash dividends to preferred
stock......................................... $ -- $ 172 $ --
========= ======== ========
Dividends on preferred stock................... $ 172 $ 5,922 $ 4,885
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest......................... $ 16,448 $ 2,354 $ 1,182
========= ======== ========
Cash paid for income taxes..................... $ 79 $ 4,607 $ 4,894
========= ======== ========
Detail of acquisition:
Fair value of assets acquired.................. -- -- $ 2,615
Liabilities assumed............................ -- -- 1,070
--------- -------- --------
Net cash paid for acquisition................ -- -- 1,545
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(1) Nature of Business
Modus Media, Inc. (f/k/a Modus Media International Holdings, Inc.) (the
Company or MMI) is a global provider of supply chain management services to the
technology industry. The Company offers a full range of outsource services
including procurement, management of inventory and materials, production,
fulfillment, e-commerce and customer care services. The principal North
American operations are located in California, Utah, Washington, and North
Carolina. Principal European subsidiaries include operations in Ireland, the
United Kingdom, the Netherlands and France. Principal Asian subsidiaries
include operations in Singapore, Taiwan, Australia and China. In addition, the
Company holds minority interests in joint ventures in Korea and Japan.
(2) The Reorganization
The Company began as a division of R.R. Donnelley & Sons Company (R.R.
Donnelley or the Parent Company). Pursuant to an April 21, 1995 contribution
agreement (the Contribution Agreement), R.R. Donnelley purchased approximately
80% of Corporate Software, Inc. (now known as Corporate Software & Technology
or CS&T) and merged it with the division (now known as Modus Media, Inc., or
the Company) to create Stream International Holdings Inc. (Stream).
From April 21, 1995 to December 15, 1997, the Company conducted its business
as a unit of Stream. On December 15, 1997, Stream effected a reorganization
(the Reorganization), pursuant to which Stream contributed certain assets and
liabilities to two wholly-owned subsidiaries, the Company and CS&T. Because the
Reorganization occurred between entities under common control the book basis of
assets and liabilities were not adjusted and have been accounted for on a
carryover basis. Effective with the Reorganization, Stream allocated to the
Company approximately $40.6 million of its (intercompany) indebtedness to R.R.
Donnelley or 22.2% of the total Stream debt at September 30, 1997. The
allocation percentage of 22.2% was determined based on the relative fair value
of the three business units based on an independent appraisal. The debt to R.R.
Donnelley was then exchanged for 40,646 shares of the Company's preferred
stock.
On January 9, 1998, Stream distributed to its stockholders all of the
outstanding voting stock, held by Stream, of the Company and CS&T. In addition,
R.R. Donnelley exchanged its equity interest in the Company of approximately
36.4 million shares of the Company's common stock for 21,132 shares of
preferred stock valued at $21.1 million.
Prior to the Reorganization, certain shared expenses among the Stream
business units were allocated based on specific or proportional allocation
methods which management believed were reasonable. See Note 5(d) for further
information on these shared services.
(3) Summary of Significant Accounting Policies
(a) Basis of Presentation and Consolidation
The accompanying financial statements include the accounts of the Company
and its foreign operations. The accounts of the Company's foreign operations
have been translated into United States dollars in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Net operating results through December 15, 1997, the date of the
Reorganization, were recorded as a return of capital to or contributions from
the Parent Company.
F-7
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(b) Cash and Cash Equivalents
Cash and cash equivalents include all cash and investments with maturity
dates of three months or less.
(c) Accounts Receivable
Accounts receivable include outstanding trade accounts receivable as well
as certain unbilled amounts owed to the Company by clients in accordance with
contracts. The amounts of unbilled receivables at December 31, 1998 and 1999
was approximately $6.9 million and $11.2 million, respectively.
(d) Inventories
Inventories include material, labor and overhead and are valued at the
lower of cost or market. Materials include, but are not limited to compact
discs, instruction manuals and computer peripherals such as keyboards and
mice. Substantially all of the Company's domestic inventories are valued using
the first-in, first-out method. The cost of the remaining inventories is
principally determined using a specific identification method.
The components of inventories, net were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Raw materials..................................... $ 27,223 $ 29,587
Work-in-process................................... 4,356 3,371
Finished goods and completed components........... 17,451 13,855
-------- --------
$ 49,030 $ 46,813
======== ========
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Capitalized computer
software is included in machinery and equipment. The Company provides for
depreciation and amortization using the straight-line method over estimated
useful lives of 33 to 40 years for buildings and 2 to 12 years for machinery
and equipment. Leasehold improvements are depreciated using the straight-line
method over the remaining lease terms or estimated useful lives, whichever is
shorter. Maintenance and repair costs are charged to operating expenses as
incurred. When properties are retired or otherwise disposed of, the asset cost
and accumulated depreciation are eliminated and the resulting gain or loss, if
any, is included in the consolidated statements of income. Effective in fiscal
1999 costs of computer software developed or obtained for internal use have
been either expensed or capitalized in accordance with Statement of Position
98-1.
Property, plant and equipment consisted of the following (in thousands):
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Leasehold improvements............................ $ 10,716 $ 12,133
Buildings (including assets under capital lease of
$10,954 in 1998, and $3,339 in 1999)............. 26,034 25,978
Machinery and equipment (including assets under
capital lease of $14,196 in 1998 and $11,796 in
1999)............................................ 140,094 145,174
-------- --------
Total property, plant and equipment............. 176,844 183,285
Less--Accumulated depreciation and amortization... 106,092 115,014
-------- --------
Net property, plant and equipment............... $ 70,752 $ 68,271
======== ========
</TABLE>
F-8
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(f) Investments in Joint Ventures
As of December 31, 1999, the Company has investments in two joint ventures
accounted for under the equity method. The affiliates provide a full range of
integrated services including software manufacturing, hardware assembly, on-
demand manufacturing and response management. At December 31, 1999, these
investments with a value of $0.7 million were included in other noncurrent
assets on the balance sheet. The Company's equity in earnings from these
affiliates are included in other expense (income) in the statements of
operations and totaled $0, $0 and $0.2 million for the years ended December 31,
1997, 1998 and 1999, respectively.
(g) Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Accrued compensation and other benefits............ $24,026 $23,384
Accrued taxes...................................... 6,622 9,106
Accrued customer rebates and advances.............. 7,299 9,451
Accrued occupancy expenses......................... 7,452 3,853
Other accrued liabilities.......................... 12,629 11,387
------- -------
$58,028 $57,181
======= =======
</TABLE>
(h) Common Stock Split
On January 18, 2000, the Company's Board of Directors approved a 2-for-1
stock split, which was effected as a stock dividend to shareholders on January
24, 2000. All per share and share outstanding data in the Consolidated
Financial Statements and Notes to Consolidated Financial Statements have been
retroactively restated to reflect the stock split.
(i) Income Taxes
The provision for income taxes is based on income before taxes as reported
in the accompanying consolidated statements of income. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount that is realizable, based upon the realization criteria defined in SFAS
No. 109, Accounting for Income Taxes.
United States federal income taxes are not provided on the unremitted
accumulated earnings of foreign subsidiaries, as such earnings are considered
to be permanently reinvested abroad.
(j) Foreign Currency Translation
Foreign currencies are translated in accordance with SFAS No. 52, Foreign
Currency Translation. Under this standard, assets and liabilities of the
Company's international subsidiaries are translated into United States dollars
at current exchange rates. Income and expense items are translated at average
exchange rates prevailing during the year.
F-9
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Gains and losses arising from the translation of the Company's international
subsidiaries' financial statements are accounted for in shareholders' equity.
Gains and losses from foreign currency transactions are included in other
expense (income) in the statements of operations. The Company recorded a
foreign currency transaction gain of $2.5 million in 1997, a loss of $0.7
million in 1998 and a gain of $0.7 million in 1999.
(k) Revenue Recognition
The Company offers a full range of outsource services. Billings for these
services consist of per transaction fees, incremental fees added to the cost of
the materials used in manufacturing and assembly, and other billings to
clients, which may be on the basis of project or development fees or per
transaction fees for outsource services, including e-commerce storefront
development, response center transactions such as calls or emails and customer
relationship management. Revenue is recognized for these services when a
service arrangement exists, the service has been rendered, fees are fixed or
determinable, and collectibility is reasonably assured. Provisions for returns,
rebates and bad debts are recorded when revenue is recognized.
(l) Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts receivable, short-term
debt and accounts payable approximate their carrying value due to the immediate
or short-term maturity of these financial instruments. The fair value of long-
term debt is based on the current rates offered to the Company for debt
instruments of similar risks and maturities and approximates its carrying
value.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(n) Reclassification and Presentation
Certain reclassifications have been made to prior period amounts to conform
with the current year presentation.
(o) New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as
amended by SFAS No. 137, is required to be adopted by the Company no later than
fiscal year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or a liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. The Company plans to adopt this statement in fiscal
year 2001. Management does not believe that the adoption of SFAS No. 133 will
have a material effect on the Company's financial position or results of
operations.
Effective January 1, 1999, the Company adopted the provisions of the
American Institute of Certified Public Accountants' SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for
F-10
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Internal Use." SOP 98-1 requires that entities capitalize certain costs related
to internal use software once certain criteria have been met. There was no
material impact of adoption on the Company's financial position or results of
operations.
(4) Business Acquisition
On December 31, 1999, the Company acquired substantially all the assets of
CTS Company, LTD (CTS) for a cash purchase price of $1.5 million. CTS is a
Taiwanese manufacturer of compact discs. Because the acquisition was completed
on December 31, 1999, no results of operations have been included in the
accompanying Statement of Operations. The acquisition has been accounted for
under the purchase method of accounting. Accordingly, the purchase price has
been allocated to the assets acquired and the liabilities assumed based on
their estimated fair values. The purchase price was financed through available
cash. The purchase price in excess of the net assets is $0.5 million and is
being amortized on a straight-line basis over 5 years.
The pro forma results for 1999, assuming the acquisition had been made at
the beginning of the year, would not be materially different from reported
results.
(5) Related Party Transactions
(a) Accounts Receivable Sold With Recourse
During 1997, pursuant to an agreement with R.R. Donnelley, the Company sold
certain accounts receivable, with recourse, to R.R. Donnelley Receivables, Inc.
(DRI), a wholly owned subsidiary of R.R. Donnelley. The agreement required that
DRI pay the Company weekly amounts based on estimated monthly billings for
eligible domestic receivables, as defined. During the eleven and a half months
ended December 15, 1997, the Company factored $286.4 million of receivables to
DRI and the related factoring charge amounted to $3.5 million. The agreement
was terminated on December 15, 1997, in connection with the Reorganization. The
Company agreed to a final settlement with DRI during 1998 on disputed
receivables, which was not material to the Company's financial position or
results of operations.
(b) Sales and Purchases with R.R. Donnelley
Prior to the Reorganization, R.R. Donnelley sales representatives sold
products that were produced in the Company's facilities. Such sales amounted to
$13.9 million for the year ended December 31, 1997 and have been included in
revenue in the accompanying statement of income. The Company also purchased, at
arm's- length, approximately $7.3 million of print related materials from
entities affiliated with R.R. Donnelley during the year ended December 31,
1997.
(c) Loans to Officers
The Company has extended nonrecourse loans to certain officers and former
officers of the Company. The loans, which totaled $3.5 million, $3.7 million
and $3.3 million at December 31, 1997, 1998, and 1999, bear interest at rates
ranging from 7.25% to 7.75% and mature at the earlier of a defined maturity
date between 2000 and 2004, or a liquidity event, such as a sale or other
change in control. Interest on the loans is due at maturity. The loans and
accrued interest receivable are classified as other noncurrent assets in the
accompanying consolidated balance sheets.
F-11
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(d) Transactions with Other Related Parties
Effective December 15, 1997, the Company entered into a management agreement
with a current shareholder, which requires the shareholder to provide
managerial, financial and transactional advice and services to the Company. For
each of the years ended December 31, 1998 and 1999, the management fee for this
agreement was $1.5 million and is included in the Company's selling, general,
and administrative expenses.
As part of the Reorganization, the Company entered into agreements
(collectively, the Transitional Service Agreements) with Stream and CS&T for
certain services formerly shared among such entities. Pursuant to the
Transitional Service Agreements, the Company received certain legal,
information technology and other services and provided certain tax, employee
benefit and financial reporting services. Expenses related to purchased
services were approximately $1.0 million and $0.2 million in 1997 and 1998,
respectively. These expenses were offset by approximately $4.3 million and $0.2
million of charges in 1997 and 1998, respectively, for services performed by
the Company. No such services were provided nor were expenses incurred during
the year ended December 31, 1999.
The Company has entered into a tax sharing agreement with Stream and CS&T
under which they will indemnify the Company, and the Company will indemnify
Stream and CS&T, with respect to any taxes relating to their businesses prior
to the Reorganization, after taking into account, under rules set forth in the
tax sharing agreement, the net operating loss carryforwards and other tax
attributes of Stream immediately prior to the Reorganization (and in limited
circumstances losses and other tax attributes of the Company carried back to
periods prior to the Reorganization). The tax sharing agreement also defines
the parties' obligations for filing tax returns, and their rights and
obligations for claims made by the Internal Revenue Service or other taxing
authorities for periods prior to the Reorganization.
In 1998, the Company received a $1.2 million tax refund, arising from its
business operations prior to the April 21, 1995 Contribution Agreement. This
amount was recorded as a contribution of capital in the consolidated statement
of shareholders' equity.
(6) Debt Financing
Borrowings during the first eleven and a half months of 1997 were in the
form of an intercompany loan with R.R. Donnelley with interest based on LIBOR
plus 35 basis points. Interest expense on this facility was approximately $9.4
million for the period ended December 15, 1997. Effective with the
Reorganization, the Company discontinued all intercompany loan activity with
R.R. Donnelley.
On December 15, 1997, the Company, Modus Media International, Inc. and
certain of its international subsidiaries entered into a credit agreement with
a group of banks for a revolving line of credit of $130 million, expiring on
December 17, 2001. The credit facility is collateralized by substantially all
of the Company's assets, including shares of its subsidiaries, and the amount
available for borrowings is limited to the borrowing base, which is calculated
based on eligible receivables, inventories and fixed assets. The credit
agreement also contains certain covenants, of which the most restrictive
relates to tangible net worth. As of December 31, 1999 the Company was in
compliance with all debt covenants. Borrowings under the agreement bear
interest at rates based on either LIBOR, the banks' prime rate or the Federal
Funds rate, plus an applicable margin. The applicable interest rate at December
31, 1999 was 8.47%. As of December 31, 1998 and December 31, 1999, the
borrowing base was $81.9 million and $88.9 million, respectively.
Borrowings under the line of credit have been classified as long-term since
the Company has the ability and intent to maintain such debt on a long-term
basis. Commitment fees are 37.5 basis points on the unused portion of the line
of credit.
F-12
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Certain of the Company's foreign subsidiaries have additional lines of
credit available to fund local working capital requirements. The lines of
credit are collateralized by certain assets of the local entities.
Approximately $13.6 million and $13.4 million of these facilities were unused
at December 31, 1998, and December 31, 1999, respectively.
The Company's debt was as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Revolving line of credit.......................... $ 10,000 $ 35,000
Loan payable for repurchase of preferred stock due
in 2002 at an interest rate of 9.5%.............. -- 12,700
Bank debt assumed in business acquisition due in
2007 at an interest rate of 7.0%................. -- 1,070
Mortgage payable due in 2004 at an interest rate
of 5.14%......................................... -- 4,127
Capital leases payable in varying amounts through
2008 at a weighted average interest rate of
7.16%............................................ 13,662 3,406
-------- --------
23,662 56,303
Less--Current portion............................. 2,021 559
-------- --------
Long-term portion............................... $ 21,641 $ 55,744
======== ========
</TABLE>
(7) Commitments and Contingencies
(a) Lease Commitments
The Company leases certain offices, facilities and equipment under
noncancellable leases, which expire at various dates through 2008. Rent expense
for operating leases was $12.4 million, $16.3 million and $17.5 million for the
years ended December 31, 1997, 1998 and 1999, respectively. At December 31,
1999, future minimum lease payments for noncancellable leases were payable as
follows (in thousands):
<TABLE>
<CAPTION>
Year Operating Capital
---- --------- -------
<S> <C> <C>
2000...................................................... $16,269 $ 1,588
2001...................................................... 12,303 386
2002...................................................... 10,579 332
2003...................................................... 8,426 324
2004...................................................... 6,209 323
Thereafter................................................ 18,504 1,300
------- -------
Total minimum payments.................................. $72,290 4,253
=======
Less--Amounts representing interest..................... (847)
-------
Present value of minimum lease payments................. $ 3,406
=======
</TABLE>
F-13
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(b) Commitments and Contingencies
Certain key executives are covered by employment agreements, which establish
salaries, certain benefits and incentive compensation and separation terms.
Some key executives in foreign countries are also covered by agreements, which
contain provisions that are typical in those countries.
In connection with the Reorganization, the Company, Stream and CS&T entered
into agreements, which contain general indemnities between the companies. Under
the agreements, each of the companies indemnifies the others for any losses,
liabilities or damages in connection with any liability, claim or action
assumed by such company in the Reorganization.
The Company is a party to certain litigation arising in the ordinary course
of business, which, in the opinion of management, will not have a material
adverse effect on the Company's financial position or results of operations.
(c) Significant Customers and Concentration of Credit Risk
For the year ended December 31, 1997, two customers accounted for
approximately 17% and 14% of total Company revenue. For the year ended December
31, 1998, two customers accounted for approximately 23% and 12% of total
Company revenue. For the year ended December 31, 1999, one customer accounted
for approximately 24% of total Company revenue. No other customers accounted
for greater than 10% of total Company revenue for the years ended December 31,
1997, 1998, or 1999.
Financial instruments that subject the Company to concentrations of credit
risk consist primarily of trade receivables with customers in the technology
industry. The large number of customers comprising the Company's customer base
and their geographic dispersion mitigates this credit risk. To reduce credit
risk, the Company performs ongoing credit evaluations of its customers'
financial condition and maintains allowances for potentially uncollectible
accounts.
(8) Income Taxes
The provision for income taxes was comprised of the following (in
thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current:
Domestic............................................ $ -- $ -- $ --
Foreign............................................. -- 4,607 8,305
Deferred.............................................. 2,824 (342) (755)
------ ------ ------
$2,824 $4,265 $7,550
====== ====== ======
</TABLE>
Income before income taxes included approximately $6.6 million, $28.0
million and $26.6 million related to foreign operations for the years ended
December 31, 1997, 1998 and 1999, respectively.
F-14
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The Company's effective tax rate differed from the statutory United States
federal income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate................................. (35.0)% 35.0% 35.0%
Foreign tax effect, net................................ (10.0) (40.1) (28.2)
Valuation allowance items.............................. 54.5 31.6 40.2
Other.................................................. -- 1.9 0.8
----- ----- -----
9.5% 28.4% 47.8%
===== ===== =====
</TABLE>
The components of the Company's deferred income tax assets and liabilities
were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets--
Receivable allowances.......................... $ 921 $ 1,412
Inventory adjustments.......................... 1,680 2,473
Property, plant and equipment.................. 1,397 742
Accrued liabilities............................ 670 1,521
Tax loss carryforwards......................... 7,865 11,581
------- -------
Total deferred tax assets.................... 12,533 17,729
Less--Valuation allowance........................ (12,533) (17,729)
------- -------
Deferred tax assets, net of valuation
allowance................................... $ -- $ --
======= =======
Deferred tax liabilities--
Property, plant and equipment.................. $ 2,482 $ 1,727
------- -------
Total deferred tax liabilities............... 2,482 1,727
------- -------
Net deferred tax liabilities..................... $ 2,482 $ 1,727
======= =======
</TABLE>
Undistributed earnings and profits of foreign subsidiaries subject to U.S.
tax upon repatriation amounted to approximately $62.2 million at December 31,
1999. U.S. federal income taxes are not provided on the unremitted accumulated
earnings of foreign subsidiaries, as such earnings are considered to be
permanently reinvested abroad.
A valuation allowance has been established to fully reserve the tax benefits
associated with certain temporary differences and the net operating loss
carryforwards as it cannot be determined, given the history of cumulative tax
losses in certain tax jurisdictions, that it is more likely than not these
deferred tax assets will be realized. These tax loss carryforwards of $29.0
million at December 31, 1999 will generally expire between 2000 and 2019. A tax
benefit of approximately $4.3 million associated with the exercise of stock
options will be allocated to equity when realized.
F-15
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(9) Employee Benefit Plans
(a) Defined Contribution Plans
The Company has a defined contribution 401(k) plan covering substantially
all domestic employees who meet certain eligibility requirements. Participants
may make contributions to the 401(k) plan from 1% to 15% of their compensation,
as defined in the plan. The Company also contributes a certain percentage of
the employee's annual compensation to the 401(k) plan, subject to certain
limitations. Company contributions are fully vested after two years of service.
Contributions and costs attributable to the 401(k) plan amounted to $0.6
million, $0.6 million, and $0.8 million for the years ended December 31, 1997,
1998, and 1999, respectively.
Certain of the Company's foreign subsidiaries also have defined contribution
plans covering those employees who meet certain eligibility requirements.
Participants may make contributions to the plans from 1% to 20% of their
compensation, as defined. The Company also contributes a certain percentage of
the employee's annual compensation to the plans, subject to certain
limitations. Contributions attributable to the plans amounted to $1.3 million,
$1.4 million and $0.9 million for the years ended December 31, 1997, 1998 and
1999, respectively.
(b) Defined Benefit Pension Plans
Certain of the Company's foreign subsidiaries have defined benefit pension
plans for long-term employees. The plans are based on an employee's years of
service and earnings. The retirement plan liabilities and their related costs
are computed in accordance with the laws and appropriate actuarial practices of
the individual countries. The change in benefit obligation and plan assets
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of period.......... $4,407 $4,629 $5,716
Service cost....................................... (108) (95) (87)
Plan participants' contributions................... 547 622 629
Amendments......................................... -- 1,176 1,024
Benefits paid...................................... (217) (616) (246)
------ ------ ------
Benefit obligation at end of period................ $4,629 $5,716 $7,036
====== ====== ======
Change in Plan Assets:
Fair value of plan assets at beginning of period... $2,254 $3,782 $4,886
Actual return on plan assets....................... 694 586 1,094
Acquisition........................................ 79 -- 13
Employer contribution.............................. 425 512 524
Plan participants' contributions................... 547 622 696
Benefits paid...................................... (217) (616) (246)
------ ------ ------
Fair value of plan assets at end of period......... $3,782 $4,886 $6,967
====== ====== ======
Funded status...................................... $ (847) $ (830) $ (69)
Unamortized prior service cost..................... -- -- --
Unrecognized actuarial gain........................ 960 825 250
------ ------ ------
Net amount of asset (liability) reflected in
consolidated balance sheet........................ $ 113 $ (5) $ 181
====== ====== ======
</TABLE>
The net periodic benefit costs were $0.1 million, $0.2 million and $0.3
million for the years ended December 31, 1997, 1998 and 1999, respectively.
F-16
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The average rate of compensation increase and the expected return on plan
assets used to account for the plans were 6% and 8%, respectively, for each of
the years ended December 31, 1997, 1998 and 1999.
(10) Shareholders' Equity
(a) Common Stock
The Company has authorized common stock and nonvoting common stock. The
holders of common stock are entitled to one vote for each share held, and the
holders of nonvoting common stock have no voting rights. In late November,
1999, the Company repurchased 1,899,624 shares of common stock from non-
employees at $5.18 per share for an aggregate purchase price of $9.8 million.
Common stock consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Common stock, authorized--30,000,000 shares;
shares issued and outstanding................. 19,126,552 20,762,112
Nonvoting common stock, authorized--3,000,000
shares; shares issued and outstanding......... 5,244,004 5,244,004
---------- ----------
Total shares outstanding....................... 24,370,556 26,006,116
========== ==========
</TABLE>
(b) Preferred Stock
The Company has authorized 120,000 shares of 9.50% series senior cumulative
preferred stock. Preferred stock shares issued and outstanding at December 31,
1998 were 66,959. Preferred dividends accrue at the rate of $95 per annum per
share and are payable in cash, additional shares, or any combination of the
two. At December 31, 1998, cumulative preferred dividends in arrears were
approximately $526,000. On October 13, 1999, the Company repurchased all of its
outstanding preferred stock, 71,744 shares, valued at $71.7 million, for $60.2
million, comprised of cash and a note for $12.7 million. The note accrues
interest at a rate of 9.5% per annum and interest is to be paid quarterly. The
note matures on the earliest of October 13, 2002, a change in control of the
Company or a public offering of the Company's shares. At December 31, 1999,
there were no preferred stock shares issued and outstanding nor were there any
cumulative preferred dividends in arrears. The preferred stock value in excess
of the repurchase amount of $11.5 million was added to net earnings to arrive
at net earnings available to common shareholders.
(c) Stock Option Plans
In connection with the Reorganization, outstanding awards under Stream's
stock option plans were replaced by substitute awards under the Company's Class
A and Class B Replacement Option Plans. The Company also established the 1997
Stock Incentive Plan (the Plan), which is administered by the Board of
Directors of the Company. The Plan, as amended, provides for the issuance of up
to 5.6 million options to purchase shares of common stock, at exercise prices
and vesting periods determined by the Board and defined in the applicable
option agreements. Options may be granted to employees, officers, directors,
consultants and advisors of the Company under the Plan.
F-17
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Option grants generally vest over four or five years. For the options which
vest over five years, exercisability is partially subject to the attainment of
certain liquidity thresholds. Options can not be issued under the Plan after
December 15, 2007; however, options previously granted under the Plan may still
be exercised beyond that date. The Plan also contains certain provisions for
the option holders in the event of an acquisition, as defined in the Plan.
Options granted under the plan were granted at the estimated fair values at the
grant dates and, consequently, no compensation expense was recognized in any of
the reported periods.
During 1995, the FASB issued SFAS No. 123, Accounting for Stock Based
Compensation, which defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost for those plans using the method of accounting prescribed by the
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees. Entities electing to remain with the accounting in APB No. 25
must make pro forma disclosures of net income and earnings per share, as if the
fair value based method of accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based employee compensation
plans under APB No. 25. However, for pro forma disclosure purposes, the Company
has computed the compensation expense in 1997, 1998 and 1999 for all options
granted, using the Black-Scholes option pricing model as prescribed by SFAS No.
123. The fair value of the 1997, 1998 and 1999 options granted is estimated on
the date of grant using the following assumptions: a dividend yield of 0%, an
expected volatility of 18% and an expected life of 5 years for each year, and a
risk-free interest rate of 6.22%, 5.71% and 5.81%, respectively for 1997, 1998
and 1999.
The method prescribed by SFAS No. 123 has not been applied to the options
granted prior to January 1, 1995, and as a result, the resulting pro forma
compensation expense may not be representative of the amount to be expected in
future years. The Company's compensation expense is attributable to options in
the Company that Stream and CS&T granted to the Company's employees and does
not reflect any compensation attributable to employees of Stream or CS&T.
If the Company had accounted for these plans in accordance with SFAS No.
123, the Company's net income would have been reduced and net loss would have
been increased to the following pro forma amounts (in thousands except per
share data):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1997 1998 1999
-------- ------ -------
<S> <C> <C> <C>
Net income (loss) available to common
shareholders:
As reported.................................... $(32,839) $4,825 $14,891
Pro forma...................................... (33,470) 4,341 14,246
Earnings per share:
Basic earings per share, pro forma for the
effect of
SFAS No. 123.................................. $ 0.17 $ 0.56
Diluted earnings per share, pro forma for the
effect of
SFAS No. 123.................................. 0.17 0.48
</TABLE>
F-18
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
On January 9, 1998, the outstanding awards under Stream's stock option plans
were replaced by substitute awards such that for each option then held, the
option holder received an option in the Company, Stream and CS&T. The
substitute awards have the same ratio of the exercise price per option to the
market value per share, the same aggregate difference between market value and
exercise price and the same vesting provisions, option periods and other terms
and conditions of the options that they replaced.
The following table summarizes the status of the Company's stock option
plans and changes to the plans during the periods indicated:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1996.................. 8,946,324 $0.41
Granted........................................... 383,000 0.48
Exercised......................................... (221,904) 0.06
Forfeited/cancelled............................... (1,445,664) 0.36
----------
Outstanding at December 31, 1997.................. 7,661,756 0.43
Granted........................................... 3,400,000 0.29
Exercised......................................... (680,316) 0.30
Forfeited/cancelled............................... (2,560,560) 0.41
----------
Outstanding at December 31, 1998.................. 7,820,880 0.35
Granted........................................... 2,715,378 4.57
Exercised......................................... (3,602,184) 0.40
Forfeited/cancelled............................... (623,458) 0.37
----------
Outstanding at December 31, 1999.................. 6,310,616 $2.14
==========
Options exercisable at:
December 31, 1997............................... 4,969,428 $0.42
December 31, 1998............................... 3,395,464 0.40
December 31, 1999............................... 1,673,506 0.39
Weighted average fair value of options granted during the year at fair
market value:
December 31, 1997............................... $0.56
December 31, 1998............................... $0.40
December 31, 1999............................... $6.35
</TABLE>
Options available for grant at December 31, 1997, 1998 and 1999 were
1,007,512, 200,000 and 266,500, respectively. The following table summarizes
information about stock options outstanding and exercisable at December 31,
1999:
<TABLE>
<CAPTION>
Weighted Average
Remaining
Range of Outstanding at Contractual Exercisable at
Exercise Prices December 31, 1999 Life (Years) December 31, 1999
--------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
$ 0.06 182,748 5.07 182,748
0.29-0.36 3,368,368 8.12 1,010,758
0.60-0.87 480,000 5.30 480,000
1.15 430,000 9.45 --
5.18 1,789,500 9.78 --
11.00 60,000 9.96 --
------------ --------- ---- ---------
$0.06-$11.00 6,310,616 8.40 1,673,506
============ ========= ==== =========
</TABLE>
F-19
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(d) Stock-based Compensation
In November 1999, the Company repurchased 1,899,624 shares of common stock
from non-employees for an aggregate purchase price of $9.8 million. The Company
has recorded a stock-based compensation charge of $9.1 million, which
represents the aggregate difference between the original stock price and the
cash consideration per share paid by the Company of $5.18.
In addition, the Company issued 1,999,500 stock options to employees at
exercise prices ranging from $1.15 to $5.18, which at the time of grant was
below the fair market value of the Company's common stock. As a result of these
options and grants, the Company recorded deferred stock compensation of $10.1
million, which represents the aggregate difference between the option exercise
price and the deemed fair market value of the common stock determined for
financial reporting purposes for grants to employees. This amount will be
recognized as stock-based compensation expense over the vesting period of the
underlying stock options. The Company recorded stock-based compensation expense
of $0.6 million during the year-ended December 31, 1999 related to these
options.
(11) Earnings Per Share
The following table sets forth the computation of basic and diluted income
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1998 1999
------- ------------
<S> <C> <C> <C>
Basic:
Net income available to common shareholders........... $ 4,825 $ 14,891
======= ========
Weighted average shares outstanding................... 25,497 25,228
======= ========
Net income per share.................................. $ 0.19 $ 0.59
======= ========
Diluted:
Net income available to common shareholders........... $ 4,825 $ 14,891
======= ========
Weighted average shares outstanding................... 25,497 25,228
Effect of dilutive common stock options............... 647 4,200
------- --------
Total............................................... 26,144 29,428
======= ========
Net income per share.................................. $ 0.18 $ 0.51
======= ========
</TABLE>
Prior to the Reorganization, no common shares were outstanding; therefore,
income per share data prior to 1998 is not meaningful and has been excluded.
(12) Segment Information
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information in fiscal 1999. The Company has three
reportable business segments based on geographic regions: the Americas, Europe
and Asia-Pacific. The Company identifies such segments based upon geographical
regions of operations because each operating segment offers a full range of
outsource services including e-commerce support services, content management,
procurement, materials management, manufacturing, fulfillment and customer
relationship management, but serves strategically different markets.
F-20
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The accounting policies of the geographic segments are the same as those
described in the summary of significant accounting policies as described in
Note 3. In each geographical region the chief operating decision maker
evaluates the performance of the geographic segments based on segment earnings
before interest and taxes. Revenue for each segment is based on the location of
the subsidiary providing the service. Inter-segment revenue and transfers
between geographic regions are accounted for at prices that approximate arm's-
length transactions. The table below presents information about the Company's
reportable segments (in thousands). Corporate information is included to
reconcile segment data to the consolidated financial statements.
F-21
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue from unaffiliated customers:
Americas................................... $312,918 $282,934 $319,286
Europe..................................... 225,140 237,702 268,633
Asia-Pacific............................... 146,465 109,446 109,549
-------- -------- --------
$684,523 $630,082 $697,468
======== ======== ========
Intersegment revenue:
Americas................................... $ 24,915 $ 3,640 $ 1,914
Europe..................................... 1,088 1,268 1,490
Asia-Pacific............................... 660 435 2,264
-------- -------- --------
26,663 5,343 5,668
-------- -------- --------
Total revenue................................ 711,186 635,425 703,136
Intersegment eliminations.................... (26,663) (5,343) (5,668)
-------- -------- --------
$684,523 $630,082 $697,468
======== ======== ========
EBIT:
Americas................................... $ (4,237) $ 20,828 $ 17,264
Europe..................................... 13,942 18,834 15,603
Asia-Pacific............................... 1,720 1,396 15,310
Corporate.................................. (24,790) (22,164) (28,943)
-------- -------- --------
Total EBIT............................... (13,365) 18,894 19,234
Interest expense........................... (16,478) (3,882) (3,452)
-------- -------- --------
Income (loss) before income taxes........ $(29,843) $ 15,012 $ 15,782
======== ======== ========
Total property, plant and equipment, net:
Americas................................... $ 16,546 $ 16,471
Europe..................................... 30,600 25,911
Asia-Pacific............................... 22,177 24,261
Corporate.................................. 1,429 1,628
-------- --------
$ 70,752 $ 68,271
======== ========
Total assets (excluding intersegment
balances):
Americas................................... $105,381 $107,277
Europe..................................... 125,147 114,560
Asia-Pacific............................... 57,635 61,902
Corporate.................................. 3,047 2,871
-------- --------
Total assets............................. $291,210 $286,610
Intersegment balances:
Americas................................... $ 2,037 $ 1,290
Europe..................................... 933 1,807
Asia-Pacific............................... 889 6,992
Corporate.................................. 9,480 898
-------- --------
13,339 10,987
-------- --------
Total assets................................. 304,549 297,597
Intersegment eliminations.................... (13,339) (10,987)
-------- --------
$291,210 $286,610
======== ========
</TABLE>
F-22
<PAGE>
MODUS MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(13) Restructuring Charge
In 1996, management undertook a restructuring of its worldwide manufacturing
operations by exiting its offset printing business and focusing on becoming a
provider of global supply chain management solutions. The Company recorded a
pretax charge of $100.9 million, which included the restructuring of its
operations and the write-down of certain equipment, intangibles and other long-
lived assets. The restructuring charge included approximately $28.3 million for
severance and termination benefits and $7.5 million for the remaining lease
obligations related to the closure of four facilities: two in North America,
one in Europe, and one in Asia. The remaining charge related primarily to
impairment losses on long-lived assets, which were calculated based on the
excess carrying amounts of the assets over the assets' fair values. The fair
value of a long-lived asset was generally determined using undiscounted
estimates of the future cash flows generated by that asset.
At December 31, 1998 and 1999, the remaining accrual relating to the above-
mentioned charges totaled $0.5 million and $0, respectively. Cash expenditures
and non-cash expenditures were $16.8 million and $11.2 million, respectively,
for 1997, $7.5 million and $3.7 million, respectively, for 1998, and $0.5
million and $0, respectively, for 1999.
(14) Subsequent Events
(a) Increase in Authorized Capital
On January 18, 2000, the shareholders approved an increase in the authorized
number of shares of common stock to 100,000,000, of non-voting common stock to
6,000,000 and of preferred stock to 5,000,000. This change became effective
January 24, 2000.
(b) Commitments and Contingencies
In February 2000, the Company entered into an operating lease for general
office and warehouse facility space in the Netherlands. The annual lease
commitment over the term of the lease is approximately $1.8 million.
F-23
<PAGE>
[Inside Back Cover]
Apeldoorn, The Netherlands
[Circular photograph of exterior of Apeldoorn center]
Cumbernauld, Scotland Fremont, California
[circular photograph of [circular photograph
exterior of Cumbernauld of exterior of
center] Fremont center]
[Modus Media Logo]
Global . Integrated . Trusted.
[circular photograph of [circular photograph
exterior of Kildare center] of exterior of Salt
Lake City center]
Kildare, Ireland
[circular photograph of Salt Lake City, Utah
exterior of Singapore center]
Singapore
20 Solution Centers Worldwide
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8,000,000 Shares
Modus Media, Inc.
Common Stock
[LOGO OF MODUS MEDIA]
--------
PROSPECTUS
, 2000
--------
Salomon Smith Barney
Donaldson, Lufkin & Jenrette
Robertson Stephens
Thomas Weisel Partners LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee........................................... $ 39,600
NASD filing fee................................................ 15,500
Nasdaq National Market listing fee............................. 95,000
Printing and engraving expenses................................ 400,000
Legal fees and expenses........................................ 600,000
Accounting fees and expenses................................... 350,000
Blue Sky fees and expenses (including legal fees).............. 15,000
Transfer agent and registrar fees and expenses................. 10,000
Miscellaneous.................................................. 274,900
----------
Total........................................................ $1,800,000
==========
</TABLE>
The Company will bear all expenses shown above.
Item 14. Indemnification of Directors and Officers.
The Registrant's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") provides that, except to the extent prohibited by the
Delaware General Corporation Law (the "DGCL"), the Registrant's directors shall
not be personally liable to the Registrant or its stockholders for monetary
damages for any breach of fiduciary duty as directors of the Registrant. Under
the DGCL, the directors have a fiduciary duty to the Registrant which is not
eliminated by this provision of the Restated Certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the Registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by the DGCL.
This provision also does not affect the directors' responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws. The Registrant has obtained liability insurance for its
officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL including for an unlawful payment of dividend or
unlawful stock purchase or redemption, or (iv) for any transaction from which
the director derived an improper personal benefit. The DGCL provides further
that the indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, a vote of stockholders or otherwise. The
Restated Certificate eliminates the personal liability of directors to the
fullest extent permitted by the DGCL and, together with the Registrant's
Amended and Restated By-Laws (the "Restated By-Laws"), provides that the
Registrant shall fully indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative)
by reason of the fact that such person is or was a director or officer of the
Registrant, or is or was
II-1
<PAGE>
serving at the request of the Registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding. Reference is made to the
Registrant's Form of Amended and Restated Certificate of Incorporation and Form
of Amended and Restated By-Laws filed as Exhibits 3.2 and 3.4 hereto,
respectively.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Act"). Reference is made to the
form of Underwriting Agreement to be filed as Exhibit 1.1 hereto.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Restated Certificate. The Registrant is not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.
Item 15. Recent Sales of Unregistered Securities.
Since its incorporation as an independent company in December 1997, the
Company has issued the following securities that were not registered under the
Securities Act as summarized below:
(a) Issuances of Capital Stock. On December 10, 1997, we issued
3,445,028 shares of our non-voting common stock to Bain Capital, Inc. as
partial payment for services rendered to us. On December 15, 1997, we
issued 40,646 shares of our preferred stock to R.R. Donnelley in exchange
for the cancellation of certain inter-company debt assigned to us pursuant
to the reorganization of Stream International Inc. On January 9, 1998, we
were spun off from Stream and, pursuant to that spin-off, our shares were
distributed to the shareholders of Stream. Following the spin-off, R.R.
Donnelley exchanged its shares of our common stock for 21,132 additional
shares of our preferred stock. Dividends on our preferred stock were
accrued and were paid in kind by the issuance of 6,094 additional shares of
our preferred stock in December 1998, less an offset of 913 shares. Our
Board of Directors authorized additional dividends on our preferred stock
during 1999 and such dividends accrued on our books. On October 13, 1999,
we repurchased in full all of the issued and outstanding shares of our
preferred stock. On April 21, 1998, we exchanged 1,798,976 shares of our
common stock, which were owned by BankAmerica Investment Corporation, for
1,798,976 shares of our non-voting common stock.
(b) Certain Grants and Exercises of Stock Options. The Company's 1997
Class A and Class B Replacement Stock Option Plan and 1997 Stock Incentive
Plans were adopted by the Board of Directors and sole stockholder of the
Company on December 15, 1997. As of December 31, 1999, options to purchase
4,256,224 shares of common stock had been exercised for a consideration of
$1.6 million under the Company's 1997 stock option plans and options to
purchase 6,310,616 shares of common stock were outstanding under the
Company's 1997 stock option plans.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 of
the Securities Act. All of the foregoing securities are deemed restricted
securities for the purposes of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
*1.1 --Form of Underwriting Agreement
**3.1 --Amended and Restated Certificate of Incorporation of the
Registrant, as amended
3.2 --Form of Second Amended and Restated Certificate of
Incorporation of the Registrant, to be effective upon the
closing of this offering
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
**3.3 --Amended and Restated By-Laws of the Registrant
3.4 --Form of Second Amended and Restated By-Laws of the Registrant,
to be effective upon the closing of this offering
4.1 --Specimen common stock certificate
4.2 --See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Second Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws of the Registrant defining the
rights of holders of common stock of the Registrant
5.1 --Opinion of Hale and Dorr LLP
**10.1 --Contribution Agreement, dated as of December 15, 1997, among
Stream International Inc. (f/k/a Stream International Holdings,
Inc.), the Registrant and Modus Media International, Inc.
**10.2 --Tax Sharing Agreement, dated as of December 15, 1997, among
Stream International Inc., the Registrant, Modus Media
International, Inc., Corporate Software & Technology Holdings,
Inc. and Corporate Software & Technology, Inc.
**10.3 --The Registrant's 1997 Stock Incentive Plan, as amended
**10.4 --Forms of Option Grants under the Registrant's 1997 Stock
Incentive Plan
10.5 --The Registrant's 2000 Management Incentive Plan
10.6 --The Registrant's 2000 Employee Stock Purchase Plan
**10.7 --Sublease, dated June 18, 1997, by and between The Travelers
Indemnity Company and Stream International Inc., as amended
**10.8 --Lease, dated December 19, 1994, between Lieboch Limited, R.R.
Donnelley Ireland Turnkey Services Kildare and Allied Irish
Banks, p.l.c.
**10.9 --Lease, dated December 2, 1996, by and between Housing &
Development Board and Stream International Pte Ltd., as amended
**10.10 --Lease, dated December 3, 1994, by and between Novell, Inc. and
R.R. Donnelley & Sons Company, as assigned by Assignment and
Assumption of Lease, dated April 21, 1995, by and between R.R.
Donnelley & Sons Company and Stream International Holdings,
Inc., as amended
**10.11 --Amended and Restated 7 3/4 Unsecured Promissory Note, dated
March 7, 1997, by and between Terence M. Leahy, as the
Borrower, and the Registrant
**10.12 --Amended and Restated 7.25% Unsecured Promissory Note, dated
July 20, 1999, by and between W. Kendale Southerland, as the
Borrower, and the Registrant
**10.13 --Amended and Restated 7.25% Unsecured Promissory Note by and
between Ronald Leitch, as the Borrower, and the Registrant
**10.14 --Employment Agreement, as amended, by and between the
Registrant and Terence M. Leahy dated January 1, 1998
**10.15 --Credit Agreement dated as of December 15, 1997, among the
Registrant, Modus Media International, Inc. and Modus Media
International Kabushiki Kaisha, as Borrowers, and the Banks
named therein, as Lenders, as amended
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
**10.16 --Agreement dated January 20, 1999 between the Industrial
Development Agency (Ireland), Modus Media International Kildare
and Modus Media International Holdings, Inc.
**10.17 --Business Transfer Agreement dated December 28, 1998 by and
between Modus Media International Kabushiki Kaisha and Sasatoku
Donnelley Kabushiki Kaisha
**10.18 --Amended and Restated Joint Venture Agreement dated January
1999 by and between Modus Media International, Inc. and
Sasatoku Printing Co. Ltd.
**10.19 --Master Agreement dated November 11, 1998 by and among Modus
Media International, Inc., the Korean management team of Modus
Media International Korea, Ltd. ("MMIK") and MMIK
**+10.20 --Replication Agreement, dated September 1, 1999, by and between
Microsoft Licensing, Inc. and Modus Media International, Inc.
**10.21 --7.34% Secured Non-Recourse Promissory Note dated September 15,
1995 by and between Rory J. Cowan, as borrower, and Stream
International, Inc.
**10.22 --1997 Class A Replacement Option Plan
**10.23 --1997 Class B Replacement Option Plan
10.24 --The Registrant's 2000 Director Stock Option Plan
10.25 --Lease, dated February 4, 2000, between Modus Media
International B.V. and ABN Amro Onroerend Goed Lease en
Financieringen B.V.
*10.26 --Severance Agreement between the Registrant and Richard M.
Darer dated August 6, 1998.
*11.1 --Statement re Computation of Earnings per Share
**21.1 --Subsidiaries of the Registrant
23.1 --Consent of Arthur Andersen LLP
23.2 --Consent of Hale and Dorr LLP (included in Exhibit 5.1)
**24.1 --Powers of Attorney (see page II-5)
27.1 --Financial Data Schedule
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act, which portions are
omitted and filed separately with the Securities and Exchange Commission.
II-4
<PAGE>
(b) Financial Statement:
Schedule II--Valuation and Qualifying Accounts
Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions Balance
Balance at Charged to at End
Beginning Costs and of
Description of Period Expenses Deductions Period
- ----------------------------------- ---------- ---------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31, 1997...... $ 4,909 $9,003 $ (6,799)(a) $ 7,113
Year ended December 31, 1998...... $ 7,113 $2,776 $ (5,487)(a) $ 4,402
Year ended December 31, 1999...... $ 4,402 $2,157 $ (1,380)(a) $ 5,179
Restructuring Reserve:
Year ended December 31, 1997...... $39,744 $ -- $(28,076)(b) $11,668
Year ended December 31, 1998...... $11,668 $ -- $(11,187)(b) $ 481
Year ended December 31, 1999...... $ 481 $ -- $ (481)(b) $ --
</TABLE>
(a) Uncollectible accounts receivable written off against the allowance, net of
recoveries.
(b) Payments and other write-offs for restructuring costs.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the Delaware General
Corporation Law, the Restated Certificate of the registrant, the Underwriting
Agreement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Westwood,
Massachusetts, on this 8th day of March, 2000.
MODUS MEDIA INTERNATIONAL HOLDINGS,
INC.
/s/ Terence M. Leahy
By: _________________________________
Terence M. Leahy
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Terence M. Leahy Chairman of the Board of March 8, 2000
______________________________________ Directors, and Chief
Terence M. Leahy Executive Officer
(Principal Executive
Officer)
/s/ Richard M. Darer Chief Financial Officer March 8, 2000
______________________________________ (Principal Financial
Richard M. Darer Officer)
* Director March 8, 2000
______________________________________
Linwood A. Lacy, Jr.
* Director March 8, 2000
______________________________________
Jonathan S. Lavine
* Director March 8, 2000
______________________________________
Mark E. Nunnelly
</TABLE>
<TABLE>
<S> <C> <C>
* Director March 8, 2000
______________________________________
Robert F. White
*By: /s/ Terence M. Leahy
______________________________________
Terence M. Leahy
Attorney-in-fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
*1.1 --Form of Underwriting Agreement
**3.1 --Amended and Restated Certificate of Incorporation of the
Registrant, as amended
3.2 --Form of Second Amended and Restated Certificate of
Incorporation of the Registrant, to be effective upon the
closing of this offering
**3.3 --Amended and Restated By-Laws of the Registrant
3.4 --Form of Second Amended and Restated By-Laws of the Registrant,
to be effective upon the closing of this offering
4.1 --Specimen common stock certificate
4.2 --See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Second Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws of the Registrant defining the
rights of holders of common stock of the Registrant
5.1 --Opinion of Hale and Dorr LLP
**10.1 --Contribution Agreement, dated as of December 15, 1997, among
Stream International Inc. (f/k/a Stream International Holdings,
Inc.), the Registrant and Modus Media International, Inc.
**10.2 --Tax Sharing Agreement, dated as of December 15, 1997, among
Stream International Inc., the Registrant, Modus Media
International, Inc., Corporate Software & Technology Holdings,
Inc. and Corporate Software & Technology, Inc.
**10.3 --The Registrant's 1997 Stock Incentive Plan, as amended
**10.4 --Forms of Option Grants under the Registrant's 1997 Stock
Incentive Plan
10.5 --The Registrant's 2000 Management Incentive Plan
10.6 --The Registrant's 2000 Employee Stock Purchase Plan
**10.7 --Sublease, dated June 18, 1997, by and between The Travelers
Indemnity Company and Stream International Inc., as amended
**10.8 --Lease, dated December 19, 1994, between Lieboch Limited, R.R.
Donnelley Ireland Turnkey Services Kildare and Allied Irish
Banks, p.l.c.
**10.9 --Lease, dated December 2, 1996, by and between Housing &
Development Board and Stream International Pte Ltd., as amended
**10.10 --Lease, dated December 3, 1994, by and between Novell, Inc. and
R.R. Donnelley & Sons Company, as assigned by Assignment and
Assumption of Lease, dated April 21, 1995, by and between R.R.
Donnelley & Sons Company and Stream International Holdings,
Inc., as amended
**10.11 --Amended and Restated 7 3/4 Unsecured Promissory Note, dated
March 7, 1997, by and between Terence M. Leahy, as the
Borrower, and the Registrant
**10.12 --Amended and Restated 7.25% Unsecured Promissory Note, dated
July 20, 1999, by and between W. Kendale Southerland, as the
Borrower, and the Registrant
**10.13 --Amended and Restated 7.25% Unsecured Promissory Note by and
between Ronald Leitch, as the Borrower, and the Registrant
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
**10.14 --Employment Agreement, as amended, by and between the
Registrant and Terence M. Leahy dated January 1, 1998
**10.15 --Credit Agreement dated as of December 15, 1997, among the
Registrant, Modus Media International, Inc. and Modus Media
International Kabushiki Kaisha, as Borrowers, and the Banks
named therein, as Lenders, as amended
**10.16 --Agreement dated January 20, 1999 between the Industrial
Development Agency (Ireland), Modus Media International
Kildcare and Modus Media International Holdings, Inc.
**10.17 --Business Transfer Agreement dated December 28, 1998 by and
between Modus Media International Kabushiki Kaisha and Sasatoku
Donnelley Kabushiki Kaisha
**10.18 --Amended and Restated Joint Venture Agreement dated January
1999 by and between Modus Media International, Inc. and
Sasatoku Printing Co. Ltd.
**10.19 --Master Agreement dated November 11, 1998 by and among Modus
Media International, Inc., the Korean management team of Modus
Media International Korea, Ltd. ("MMIK") and MMIK
**+10.20 --Replication Agreement, dated September 1, 1999, by and between
Microsoft Licensing, Inc. and Modus Media International, Inc.
**10.21 --7.34% Secured Non-Recourse Promissory Note dated September 15,
1995 by and between Rory J. Cowan, as borrower, and Stream
International, Inc.
**10.22 --1997 Class A Replacement Option Plan
**10.23 --1997 Class B Replacement Option Plan
10.24 --The Registrant's 2000 Director Stock Option Plan
10.25 --Lease, dated February 4, 2000, between Modus Media
International B.V. and ABN Amro Onroerend Goed Lease en
Financieringen B.V.
*10.26 --Severance Agreement between the Registrant and Richard M.
Darer dated August 6, 1998.
*11.1 --Statement re Computation of Earnings per Share
**21.1 --Subsidiaries of the Registrant
23.1 --Consent of Arthur Andersen LLP
23.2 --Consent of Hale and Dorr LLP (included in Exhibit 5.1)
**24.1 --Powers of Attorney (see page II-5)
27.1 --Financial Data Schedule
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act, which portions are
omitted and filed separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 3.2
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MODUS MEDIA, INC.
Modus Media, Inc., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware, does hereby certify as
follows:
1. The name of the Corporation was originally Modus Media International,
Inc., and the original Certificate of Incorporation was filed with the Secretary
of State of the State of Delaware on March 5, 1997. On December 10, 1997, the
Corporation filed an Amendment to its Certificate of Incorporation with the
Secretary of State of the State of Delaware changing its name to Modus Media
International Holdings, Inc. On December 15, 1997, the Corporation filed an
Amended and Restated Certificate of Incorporation with the Secretary of State of
the State of Delaware. On April 21, 1998, the Corporation filed an Amendment to
its Amended and Restated Certificate of Incorporation with the Secretary of
State of the State of Delaware. On January 27, 2000, the Corporation filed an
Amendment to its Amended and Restated Certificate of Incorporation with the
Secretary of State of Delaware. On March 2, 2000, the Corporation filed an
Amendment to its Certificate of Incorporation with the Secretary of State of the
State of Delaware changing its name to Modus Media, Inc.
2. This Second Amended and Restated Certificate of Incorporation amends
and restates the Amended and Restated Certificate of Incorporation of the
Corporation. At a duly called meeting of the Board of Directors of the
Corporation at which a quorum was present at all times, a resolution was duly
adopted, pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, setting forth a Second Amended and Restated Certificate of
Incorporation of the Corporation and declaring said Second Amended and Restated
Certificate of Incorporation advisable. The stockholders of the Corporation duly
approved said proposed Second Amended and Restated Certificate of Incorporation
by written consent in accordance with Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware. The resolution setting forth the
Second Amended and Restated Certificate of Incorporation is as follows:
RESOLVED: That the Amended and Restated Certificate of Incorporation of the
- --------
Corporation, be and hereby is amended and restated in its entirety so
that the same shall read as follows:
FIRST. The name of the Corporation is:
Modus Media, Inc.
<PAGE>
SECOND. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or promoted
by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 111,000,000 shares, consisting of
(i) 100,000,000 shares of Common Stock, $.01 par value per share ("Common
Stock"), (ii) 6,000,000 shares of non-voting Common Stock, $.01 par value per
share ("Non-Voting Common Stock"), and (iii) 5,000,000 shares of Preferred
Stock, $.01 par value per share ("Preferred Stock").
The following is a statement of the designations and the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof in respect of each class of capital stock of the Corporation.
A. COMMON STOCK AND NON-VOTING COMMON STOCK.
-----------------------------------------
1. General. The voting, dividend and liquidation rights of the holders
-------
of the Common Stock and Non-Voting Common Stock are subject to and qualified by
the rights of the holders of any outstanding Preferred Stock of any series as
may be designated by the Board of Directors upon any issuance of the Preferred
Stock of any series.
2. Voting. The holders of the Common Stock are entitled to one vote for
------
each share held at all meetings of stockholders. There shall be no cumulative
voting. The holders of Non-Voting Common Stock shall have no voting rights,
except as otherwise required by law.
The number of authorized shares of Common Stock and Non-Voting Common Stock
may be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the stock
of the Corporation entitled to vote, irrespective of the provisions of
Section 242(b)(2) of the General Corporation Law of Delaware.
3. Dividends. Subject to the provisions of paragraph 5(c) of this
---------
Section A of Article Fourth, dividends may be declared and paid on the Common
Stock and Non-Voting Common Stock from funds lawfully available therefor as and
when determined by the Board of Directors and subject to any preferential
dividend rights of any then outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
-----------
whether voluntary or involuntary, holders of Common Stock and Non-Voting Common
Stock will be entitled to receive all assets of the Corporation available for
distribution to its stockholders, subject to any preferential rights of any then
outstanding Preferred Stock.
-2-
<PAGE>
5. Conversion.
----------
(a) Any holder of Non-Voting Common Stock shall have the right, at
its option, at any time and from time to time, to convert, subject to the terms
and provisions of this paragraph 5, any or all of such holder's shares of Non-
Voting Common Stock into fully paid and non-assessable shares of Common Stock at
the rate (subject to adjustment as provided below) of one share of Common Stock
for each share of Non-Voting Common Stock surrendered for conversion; provided,
however, that if the holder in any such conversion is subject to the Bank
Holding Company Act of 1956, as amended (12 U.S.C. Section 1841, et seq.) and
the regulations promulgated thereunder (collectively and including any successor
provisions, the "BHCA Act"), such conversion may be made only if (i) the BHCA
Act would not prohibit such holder from holding such shares of Common Stock and
(ii) such shares of Common Stock to be received upon such conversion will be
distributed or sold (v) in connection with any public equity offering registered
under the Securities Act, (w) in a "broker's transaction" (as defined in
Rule 144(g) under the Securities Act) pursuant to Rule 144 under the Securities
Act or any similar rule then in effect, (x) to a Person or group (within the
meaning of the Exchange Act) of Persons if, after such distribution or sale,
such Person or group of Persons would not, in the aggregate, own, control or
have the right to acquire more than 2% of the outstanding securities of the
Corporation entitled to vote on the election of directors of the Corporation,
(y) to a Person or group (within the meaning of the Exchange Act) of Persons if,
prior to or concurrently with such sale, such Persons or group of Persons had
control of the Corporation or (z) in any other manner permitted under the BHCA
Act; and provided further, that if the holder converts any shares of the Non-
Voting Common Stock as provided in clauses (i) and (ii) above and any
distribution or sale of the Common Stock fails to occur for any reason, such
holder may convert the Common Stock into the Non-Voting Common Stock converted
in anticipation of such distribution or sale.
(b) Such conversion right shall be exercised by the surrender to the
Corporation of the shares of the applicable class of Common Stock to be
converted in the manner provided above at any time during usual business hours
at its principal place of business, accompanied by written notice that the
holder elects to convert such shares of Common Stock and specifying the name or
names (with address) in which a certificate or certificates for shares of such
Common Stock are to be issued and (if so required by the Corporation) by a
written instrument or instruments of transfer in form reasonably satisfactory to
the Corporation duly executed by the holder or its duly authorized legal
representative and transfer tax stamps or funds therefor, if required pursuant
to paragraph 5(d). Such written notice shall also include the representation and
warranty of the converting holder to the Corporation, on which the Corporation
shall be entitled to conclusively rely, to the effect either (i) that such
holder is not subject to the BHCA Act with respect to such conversion or (ii)
that such conversion will be made in accordance with clauses (i) and (ii) of the
preceding paragraph 5(a). As promptly as practicable after the surrender, as
herein provided, of any shares of Common Stock for conversion pursuant to
paragraph 5(a), the Corporation shall deliver to or upon the written order of
the holder of such shares of Common Stock so surrendered a certificate or
certificates representing the number of fully paid and non-assessable shares of
the Common Stock into which such shares of Common Stock may be or have been
converted in accordance with the provisions of this paragraph 5. Such conversion
shall be deemed to have been made immediately prior to the close of business on
the date that such shares of Common Stock shall have been surrendered in
satisfactory form for conversion, and the Person or Persons entitled to receive
the
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<PAGE>
shares of Common Stock deliverable upon conversion of such shares of Common
Stock shall be treated for all purposes as having become the record holder or
holders of such shares of Common Stock at such appropriate time.
(c) So long as shares of each of the Common Stock and the Non-Voting
Common Stock are outstanding or authorized or reserved for issuance, the
Corporation shall not effect any stock split, stock dividend, reclassification,
reorganization, recapitalization or consolidation of the Common Stock or the
Non-Voting Common Stock, unless the Corporation shall also contemporaneously
effect a stock split, stock dividend, reclassification, reorganization or
consolidation on the same terms with respect to the other class of Common Stock.
(d) In case of any recapitalization, reorganization or
reclassification of the Capital Stock of the Corporation, any merger or
consolidation of the Corporation with or into another Person, or the sale of all
or substantially all of the assets of the Corporation, each share of Non-Voting
Common Stock that remains outstanding after such recapitalization,
reorganization, reclassification, merger, consolidation or sale shall thereafter
be convertible into the number of shares of stock or other securities or
property (including cash) to which a holder of the number of shares of Common
Stock deliverable upon conversion of such share of Non-Voting Common Stock would
have been entitled upon the record date of (or date of, if no record date is
fixed) such recapitalization, reorganization, reclassification, merger,
consolidation, share exchange, sale, lease or other disposition and, in any
case, appropriate adjustment (as determined by the Board of Directors of the
Corporation) shall be made in the application of the provisions herein set forth
with respect to the rights and interests thereafter of the holders of such Non-
Voting Common Stock to the end that the provisions set forth herein shall
thereafter be applicable, as nearly as equivalent as is practicable, in relation
to any shares of stock or the securities or property (including cash) thereafter
deliverable upon the conversion of the shares of Non-Voting Common Stock.
6. Definitions.
-----------
As used in paragraph 5 above, the following terms shall have the
following meanings (with terms defined in the singular having comparable
meanings when used in the plural and vice versa), unless the context otherwise
requires:
"Commission" means the Securities and Exchange Commission or any
similar agency then having jurisdiction to enforce the Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission promulgated thereunder.
"Person" means any individual, firm, corporation, partnership, limited
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, governmental body or other entity of any kind.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
-4-
<PAGE>
B. PREFERRED STOCK.
----------------
Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issue of the shares thereof, to determine and fix such voting powers, full
or limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including without limitation thereof, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be stated and expressed in such resolutions, all to the full extent now or
hereafter permitted by the General Corporation Law of Delaware. Without limiting
the generality of the foregoing, the resolutions providing for issuance of any
series of Preferred Stock may provide that such series shall be superior or rank
equally or be junior to the Preferred Stock of any other series to the extent
permitted by law. Except as otherwise provided in this Second Amended and
Restated Certificate of Incorporation, no vote of the holders of the Preferred
Stock, Common Stock or Non-Voting Common Stock shall be a prerequisite to the
designation or issuance of any shares of any series of the Preferred Stock
authorized by and complying with the conditions of this Second Amended and
Restated Certificate of Incorporation, the right to have such vote being
expressly waived by all present and future holders of the capital stock of the
Corporation.
FIFTH. The Corporation shall have a perpetual existence.
SIXTH. In furtherance of and not in limitation of powers conferred by
statute, it is further provided:
1. Election of directors need not be by written ballot, except as and to
the extent provided in the By-Laws of the Corporation.
2. The Board of Directors is expressly authorized to adopt, amend or
repeal the By-Laws of the Corporation, except as and to the extent provided in
the By-Laws of the Corporation.
SEVENTH. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in
-5-
<PAGE>
such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
Corporation.
EIGHTH. Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability. No amendment to or repeal of this provision shall apply to or have
any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.
NINTH. 1. Actions, Suits and Proceedings Other than by or in the Right of
---------------------------------------------------------------
the Corporation. The Corporation shall indemnify each person who was or is a
- ---------------
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
---------------
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. Notwithstanding
anything to the contrary in this Article, except as set forth in Section 7
below, the Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by the Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
Corporation. Notwithstanding anything to the contrary in this Article, the
Corporation shall not indemnify an Indemnitee to the extent such Indemnitee is
reimbursed from the proceeds of insurance, and in the event the Corporation
makes any indemnification payments to an Indemnitee and such Indemnitee is
subsequently reimbursed from the proceeds of insurance, such Indemnitee shall
promptly refund such indemnification payments to the Corporation to the extent
of such insurance reimbursement.
-6-
<PAGE>
2. Actions or Suits by or in the Right of the Corporation. The
------------------------------------------------------
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and, to the extent permitted by law,
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such action, suit or proceeding and any appeal
therefrom, if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware shall
determine upon application that, despite the adjudication of such liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses (including attorneys' fees)
which the Court of Chancery of Delaware shall deem proper.
3. Indemnification for Expenses of Successful Party. Notwithstanding the
------------------------------------------------
other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the
---------------
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
4. Notification and Defense of Claim. As a condition precedent to his
---------------------------------
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such claim,
other than as provided below in this Section 4. The Indemnitee shall have the
right to employ his own counsel in connection with such claim, but the fees and
expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the
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<PAGE>
Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that
there may be a conflict of interest or position on any significant issue between
the Corporation and the Indemnitee in the conduct of the defense of such action
or (iii) the Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of counsel
for the Indemnitee shall be at the expense of the Corporation, except as
otherwise expressly provided by this Article. The Corporation shall not be
entitled, without the consent of the Indemnitee, to assume the defense of any
claim brought by or in the right of the Corporation or as to which counsel for
the Indemnitee shall have reasonably made the conclusion provided for in
clause (ii) above.
5. Advance of Expenses. Subject to the provisions of Section 6 below, in
-------------------
the event that the Corporation does not assume the defense pursuant to Section 4
of this Article of any action, suit, proceeding or investigation of which the
Corporation receives notice under this Article, any expenses (including
attorneys' fees) incurred by an Indemnitee in defending a civil or criminal
action, suit, proceeding or investigation or any appeal therefrom shall be paid
by the Corporation in advance of the final disposition of such matter; provided,
--------
however, that the payment of such expenses incurred by an Indemnitee in advance
- -------
of the final disposition of such matter shall be made only upon receipt of an
undertaking by or on behalf of the Indemnitee to repay all amounts so advanced
in the event that it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified by the Corporation as authorized in this Article.
Such undertaking shall be accepted without reference to the financial ability of
the Indemnitee to make such repayment.
6. Procedure for Indemnification. In order to obtain indemnification or
-----------------------------
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the Corporation of the written request
of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines within such 60-day period that the Indemnitee did not
meet the applicable standard of conduct set forth in Section 1 or 2, as the case
may be. Such determination shall be made in each instance by (a) a majority vote
of the directors of the Corporation consisting of persons who are not at that
time parties to the action, suit or proceeding in question ("disinterested
directors"), whether or not a quorum, (b) a majority vote of a committee of
disinterested directors designated by majority vote of disinterested directors,
whether or not a quorum, (c) a majority vote of a quorum of the outstanding
shares of stock of all classes entitled to vote for directors, voting as a
single class, which quorum shall consist of stockholders who are not at that
time parties to the action, suit or proceeding in question, (d) independent
legal counsel (who may, to the extent permitted by law, be regular legal counsel
to the Corporation), or (e) a court of competent jurisdiction.
7. Remedies. The right to indemnification or advances as granted by this
--------
Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise required by law, the burden of proving
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<PAGE>
that the Indemnitee is not entitled to indemnification or advancement of
expenses under this Article shall be on the Corporation. Neither the failure of
the Corporation to have made a determination prior to the commencement of such
action that indemnification is proper in the circumstances because the
Indemnitee has met the applicable standard of conduct, nor an actual
determination by the Corporation pursuant to Section 6 that the Indemnitee has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the Indemnitee has not met the applicable standard of
conduct. The Indemnitee's expenses (including attorneys' fees) incurred in
connection with successfully establishing his right to indemnification, in whole
or in part, in any such proceeding shall also be indemnified by the Corporation.
8. Subsequent Amendment. No amendment, termination or repeal of this
--------------------
Article or of the relevant provisions of the General Corporation Law of Delaware
or any other applicable laws shall affect or diminish in any way the rights of
any Indemnitee to indemnification under the provisions hereof with respect to
any action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the final adoption of such
amendment, termination or repeal.
9. Other Rights. The indemnification and advancement of expenses
------------
provided by this Article shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
Corporation, and shall continue as to an Indemnitee who has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Article shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article. In addition, the Corporation may, to the extent authorized from time to
time by its Board of Directors, grant indemnification rights to other employees
or agents of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Article.
10. Partial Indemnification. If an Indemnitee is entitled under any
-----------------------
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. Insurance. The Corporation may purchase and maintain insurance, at
---------
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expense,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation Law of Delaware.
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<PAGE>
12. Merger or Consolidation. If the Corporation is merged into or
-----------------------
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. Savings Clause. If this Article or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
14. Definitions. Terms used herein and defined in Section 145(h) and
-----------
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and
Section 145(i).
15. Subsequent Legislation. If the General Corporation Law of Delaware is
----------------------
amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the Corporation shall indemnify such persons to
the fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
TENTH. This Article is inserted for the management of the business and for
the conduct of the affairs of the Corporation.
1. Number of Directors; Election of Directors. The number of directors
------------------------------------------
of the Corporation shall not be less than three. The exact number of directors
within the limitations specified in the preceding sentence shall be determined
from time to time by, or in the manner provided in, the By-laws of the
Corporation. Election of directors need not be by written ballot, except as and
to the extent provided in the By-laws of the Corporation.
2. Classes of Directors. The Board of Directors shall be and is divided
--------------------
into three classes: Class I, Class II and Class III. No one class shall have
more than one director more than any other class. If a fraction is contained in
the quotient arrived at by dividing the authorized number of directors by three,
then, if such fraction is one-third, the extra director shall be a member of
Class I, and if such fraction is two-thirds, one of the extra directors shall be
a member of Class I and one of the extra directors shall be a member of Class
II, unless otherwise provided by resolution of the Board of Directors.
3. Terms of Office. Each director shall serve for a term ending on the
---------------
date of the third annual meeting following the annual meeting at which such
director was elected; provided, that each initial director in Class I shall
serve for a term expiring at the Corporation's annual meeting of stockholders
held in 2001; each initial director in Class II shall serve for a term expiring
at the Corporation's annual meeting of stockholders held in 2002; and each
initial director in Class III shall serve for a term expiring at the
Corporation's annual meeting of stockholders held in 2003; provided further,
that the term of each director shall continue until the
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<PAGE>
election and qualification of his successor and be subject to his earlier death,
resignation or removal.
4. Allocation of Directors Among Classes in the Event of Increases or
------------------------------------------------------------------
Decreases in the Authorized Number of Directors. In the event of any increase
- -----------------------------------------------
or decrease in the authorized number of directors, (i) each director then
serving as such shall nevertheless continue as a director of the class of which
he is a member until the expiration of his current term, subject to his earlier
death, resignation or removal and (ii) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors among the three classes of directors in accordance with
the provisions of Section 2 of this Article TENTH. To the extent possible,
consistent with the provisions of Section 2 of this Article TENTH, any newly
created directorships shall be added to those classes whose terms of office are
to expire at the latest dates following such allocation, and any newly
eliminated directorships shall be subtracted from those classes whose terms of
offices are to expire at the earliest dates following such allocation, unless
otherwise provided from time to time by resolution of the Board of Directors.
5. Quorum. A majority of the directors at any time in office shall
------
constitute a quorum for the transaction of business. In the event one or more of
the directors shall be disqualified to vote at any meeting, then the required
quorum shall be reduced by one for each director so disqualified, provided that
in no case shall less than one-third of the number of directors fixed pursuant
to Section 1 of this Article TENTH constitute a quorum. If at any meeting of the
Board of Directors there shall be less than such a quorum, a majority of the
directors present may adjourn the meeting from time to time without further
notice other than announcement at the meeting, until a quorum shall be present.
6. Action at Meeting. Every act or decision done or made by a majority
-----------------
of the directors present at a meeting duly held at which a quorum is present
shall be regarded as the act of the Board of Directors unless a greater number
is required by law, by this Certificate of Incorporation, or by the By-laws of
the Corporation.
7. Removal. Directors of the Corporation may be removed only for cause
-------
by the affirmative vote of the holders of at least two-thirds (2/3) of the votes
which all the stockholders would be entitled to cast in any annual election of
directors or class of directors.
8. Vacancies. Any vacancy in the Board of Directors, however occurring,
---------
including a vacancy resulting from an enlargement of the Board, shall be filled
only by vote of a majority of the directors then in office, although less than a
quorum, or by a sole remaining director. A director elected to fill a vacancy
shall be elected to hold office until the next election of the class for which
such director shall have been chosen, subject to the election and qualification
of his successor and to his earlier death, resignation or removal.
9. Stockholder Nominations and Introduction of Business, Etc. Advance
---------------------------------------------------------
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided by the By-laws of the Corporation.
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<PAGE>
10. Amendments to Article. Notwithstanding any other provisions of law,
---------------------
this Certificate of Incorporation or the By-laws of the Corporation, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least two-thirds (2/3) of the votes which
all the stockholders would be entitled to cast in any annual election of
directors or class of directors shall be required to amend or repeal, or to
adopt any provision inconsistent with, this Article TENTH.
ELEVENTH. Except as otherwise provided herein, the Corporation reserves the
right to amend, alter, change or repeal any provision contained in this Second
Amended and Restated Certificate of Incorporation, in the manner now or
hereafter prescribed by statute and this Second Amended and Restated Certificate
of Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
TWELFTH. Stockholders of the Corporation may not take any action by written
consent in lieu of a meeting. Notwithstanding any other provisions of law, this
Second Amended and Restated Certificate of Incorporation or the By-Laws of the
Corporation, and notwithstanding the fact that a lesser percentage may be
specified by law, the affirmative vote of the holders of at least two-thirds
(2/3) of the votes which all the stockholders would be entitled to cast in any
annual election of directors or class of directors shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Article TWELFTH.
THIRTEENTH. Special meetings of stockholders may be called at any time by
only the Chairman of the Board of Directors, the Chief Executive Officer,
President or the Board of Directors. Business transacted at any special meeting
of stockholders shall be limited to matters relating to the purpose or purposes
stated in the notice of meeting. Notwithstanding any other provision of law,
this Second Amended and Restated Certificate of Incorporation or the By-Laws of
the Corporation, and notwithstanding the fact that a lesser percentage may be
specified by law, the affirmative vote of the holders of at least two-thirds
(2/3) of the votes which all the stockholders would be entitled to cast in any
annual election of directors or class of directors shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Article THIRTEENTH.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Second Amended and Restated Certificate of Incorporation
to be signed by its Chairman of the Board, President and Chief Executive Officer
this _____ day of March, 2000.
MODUS MEDIA, INC.
By:_______________________________
Terence M. Leahy
Chairman of the Board, President and
Chief Executive Officer
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<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED BY-LAWS
OF
MODUS MEDIA, INC.
ARTICLE I. - - Stockholders
---------------------------
1. Place of Meetings. All meetings of stockholders shall be held at such
-----------------
place within or without the State of Delaware as may be designated from time to
time by the Board of Directors, the Chairman of the Board or the President or,
if not so designated, at the registered office of the corporation.
2. Annual Meeting. The annual meeting of stockholders for the election
--------------
of directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Board of
Directors, the Chairman of the Board or the President (which date shall not be a
legal holiday in the place where the meeting is to be held) at the time and
place to be fixed by the Board of Directors, the Chairman of the Board or the
President and stated in the notice of the meeting. If no annual meeting is held
in accordance with the foregoing provisions, the Board of Directors shall cause
the meeting to be held as soon thereafter as is convenient. If no annual meeting
is held in accordance with the foregoing provisions, a special meeting may be
held in lieu of the annual meeting, and any action taken at that special meeting
shall have the same effect as if it had been taken at the annual meeting, and in
such case all references in these By-Laws to the annual meeting of the
stockholders shall be deemed to refer to such special meeting.
3. Special Meetings. Special meetings of stockholders may be called at
----------------
any time only by the Chairman of the Board, the Chief Executive Officer and
President or the Board of Directors. Business transacted at any special meeting
of stockholders shall be limited to matters relating to the purpose or purposes
stated in the notice of meeting.
4. Notice of Meetings. Except as otherwise provided by law, written
------------------
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
5. Voting List. The officer who has charge of the stock ledger of the
-----------
corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, at a place within the city where the meeting is to
be held. The list shall also be produced and kept at
<PAGE>
the time and place of the meeting during the whole time of the meeting, and may
be inspected by any stockholder who is present.
6. Quorum. Except as otherwise provided by law, the Certificate of
------
Incorporation or these By-Laws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.
7. Adjournments. Any meeting of stockholders may be adjourned to any
------------
other time and to any other place at which a meeting of stockholders may be held
under these By-Laws by the stockholders present or represented at the meeting
and entitled to vote, although less than a quorum, or, if no stockholder is
present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
8. Voting and Proxies. Each stockholder entitled to vote in accordance
------------------
with the terms of the Certificate of Incorporation and in accordance with the
provisions of these By-Laws shall be entitled to one vote, in person or by
proxy, for each share of stock entitled to vote held by such stockholder, but no
proxy shall be voted after three years from its date unless such proxy provides
for a longer period. Upon the demand of any stockholder, the vote for directors
and the vote upon any question before the meeting, shall be by ballot. All
elections for directors shall be decided by plurality vote; all other questions
shall be decided by majority vote except as otherwise provided by the
Certificate of Incorporation, these By-Laws or the laws of the State of
Delaware.
A complete list of the stockholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
9. Action at Meeting. When a quorum is present at any meeting, the
-----------------
holders of a majority of the stock present or represented and voting on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of a majority of the
stock of that class present or represented and voting on a matter) shall decide
any matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Certificate of
Incorporation or these By-Laws. Any election by stockholders shall be determined
by a plurality of the votes cast by the stockholders entitled to vote at the
election.
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<PAGE>
10. Nomination of Directors. Only persons who are nominated in accordance
-----------------------
with the following procedures shall be eligible for election as directors.
Nomination for election to the Board of Directors of the corporation at a
meeting of stockholders may be made by the Board of Directors or by any
stockholder of the corporation entitled to vote for the election of directors at
such meeting who complies with the notice procedures set forth in this
Section 10. Such nominations, other than those made by or on behalf of the Board
of Directors, shall be made by notice in writing delivered or mailed by first
class United States mail, postage prepaid, to the Secretary, and received not
less than 60 days nor more than 90 days prior to such meeting; provided,
however, that if less than 70 days' notice or prior public disclosure of the
date of the meeting is given to stockholders, such nomination shall have been
mailed or delivered to the Secretary not later than the close of business on the
10th day following the date on which the notice of the meeting was mailed or
such public disclosure was made, whichever occurs first. Such notice shall set
forth (a) as to each proposed nominee (i) the name, age, business address and,
if known, residence address of each such nominee, (ii) the principal occupation
or employment of each such nominee, (iii) the number of shares of stock of the
corporation which are beneficially owned by each such nominee, and (iv) any
other information concerning the nominee that must be disclosed as to nominees
in proxy solicitations pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including such person's written consent to be named as
a nominee and to serve as a director if elected); and (b) as to the stockholder
giving the notice (i) the name and address, as they appear on the corporation's
books, of such stockholder and (ii) the class and number of shares of the
corporation which are beneficially owned by such stockholder. The corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the corporation to determine the eligibility of such
proposed nominee to serve as a director of the corporation.
The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
11. Notice of Business at Annual Meetings. At an annual meeting of the
-------------------------------------
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before an annual meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, if such business relates to the election of directors of the
corporation, the procedures in Section 10 of Article I must be complied with. If
such business relates to any other matter, the stockholder must have given
timely notice thereof in writing to the Secretary. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation not less than 60 days nor more than 90 days prior to
the meeting; provided, however, that in the event that less than 70 days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the date on which
such notice of the date of the meeting was mailed or such public disclosure was
made, whichever occurs first. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before
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<PAGE>
the annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the corporation's books, of
the stockholder proposing such business, (c) the class and number of shares of
the corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in these By-Laws to the contrary, no business shall be conducted at any annual
meeting except in accordance with the procedures set forth in this Section 11
and except that any stockholder proposal which complies with Rule 14a-8 of the
proxy rules (or any successor provision) promulgated under the Securities
Exchange Act of 1934, as amended, and is to be included in the corporation's
proxy statement for an annual meeting of stockholders shall be deemed to comply
with the requirements of this Section 11.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 11, and if he should so
determine, the chairman shall so declare to the meeting that any such business
not properly brought before the meeting shall not be transacted.
12. Action without Meeting. Stockholders may not take any action by
----------------------
written consent in lieu of a meeting.
13. Organization. The Chairman of the Board, or in his absence the Vice
------------
Chairman of the Board, or the President, in the order named, shall call meetings
of the stockholders to order, and shall act as chairman of such meeting,
provided, however, that the Board of Directors may appoint any stockholder to
act as chairman of any meeting in the absence of the Chairman of the Board. The
Secretary of the corporation shall act as secretary at all meetings of the
stockholders; but in the absence of the Secretary at any meeting of the
stockholders, the presiding officer may appoint any person to act as secretary
of the meeting.
ARTICLE II. - - Directors
--------------------------
1. General Powers. The business and affairs of the corporation shall be
--------------
managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the corporation except as otherwise provided by law, the
Certificate of Incorporation or these By-Laws. In the event of a vacancy in the
Board of Directors, the remaining directors, except as otherwise provided by
law, may exercise the powers of the full Board until the vacancy is filled.
2. Number; Election and Qualification. The number of directors which
----------------------------------
shall constitute the whole Board of Directors shall be determined by resolution
of the Board of Directors, but in no event shall be less than three. The number
of directors may be decreased at any time and from time to time by a majority of
the directors then in office, but only to eliminate vacancies existing by reason
of the death, resignation, removal or expiration of the term of one or more
directors. The directors shall be elected at the annual meeting of stockholders
by such stockholders as have the right to vote on such election. Directors need
not be stockholders of the corporation.
3. Classes of Directors. The Board of Directors shall be and is divided
--------------------
into three classes: Class I, Class II and Class III. No one class shall have
more than one director more than
-4-
<PAGE>
any other class. If a fraction is contained in the quotient arrived at by
dividing the designated number of directors by three, then, if such fraction is
one-third, the extra director shall be a member of Class I, and if such fraction
is two-thirds, one of the extra directors shall be a member of Class I and one
of the extra directors shall be a member of Class II, unless otherwise provided
from time to time by resolution adopted by the Board of Directors.
4. Terms of Office. Each director shall serve for a term ending on the
---------------
date of the third annual meeting following the annual meeting at which such
director was elected; provided, that each initial director in Class I shall
serve for a term ending on the date of the annual meeting of stockholders in
2001; each initial director in Class II shall serve for a term ending on the
date of the annual meeting of stockholders in 2002, and each initial director in
Class III shall serve for a term ending on the date of the annual meeting of
stockholders in 2003; and provided further, that the term of each director shall
be subject to the election and qualification of his successor and to his earlier
death, resignation or removal.
5. Allocation of Directors Among Classes in the Event of Increases or
------------------------------------------------------------------
Decreases in the Number of Directors. In the event of any increase or decrease
- ------------------------------------
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as a director of the class of which he or she is a
member and (ii) the newly created or eliminated directorships resulting from
such increase or decrease shall be apportioned by the Board of Directors among
the three classes of directors so as to ensure that no one class has more than
one director more than any other class. To the extent possible, consistent with
the foregoing rule, any newly created directorships shall be added to those
classes whose terms of office are to expire at the latest dates following such
allocation, and any newly eliminated directorships shall be subtracted from
those classes whose terms of offices are to expire at the earliest dates
following such allocation, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.
6. Quorum; Action at Meeting. A majority of the directors at any time in
-------------------------
office shall constitute a quorum for the transaction of business. In the event
one or more of the directors shall be disqualified to vote at any meeting, then
the required quorum shall be reduced by one for each director so disqualified,
provided that in no case shall less than one-third (1/3) of the number of
directors fixed pursuant to Section 2 above constitute a quorum. If at any
meeting of the Board of Directors there shall be less than such a quorum, a
majority of those present may adjourn the meeting from time to time. Every act
or decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present shall be regarded as the act of the Board
of Directors unless a greater number is required by law, by the Certificate of
Incorporation or these By-Laws.
7. Vacancies. Any vacancy in the Board of Directors, however occurring,
---------
including a vacancy resulting from an enlargement of the Board, shall be filled
only by vote of a majority of the directors then in office, although less than a
quorum, or by a sole remaining director. A director elected to fill a vacancy
shall be elected to hold office until the next election of the class for which
such director shall have been chosen, subject to the election and qualification
of his successor and to his earlier death, resignation or removal.
-5-
<PAGE>
8. Resignation. Any director may resign by delivering his written
-----------
resignation to the corporation at its principal office or to the Chairman of the
Board or Secretary. Such resignation shall be effective upon receipt unless it
is specified to be effective at some other time or upon the happening of some
other event.
9. Regular Meetings. Regular meetings of the Board of Directors may be
----------------
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.
10. Special Meetings. Special meetings of the Board of Directors may be
----------------
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board, President, two or more directors, or by
one director in the event that there is only a single director in office.
11. Notice of Special Meetings. Notice of any special meeting of
--------------------------
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 24 hours in advance of the meeting, (ii) by sending a telegram, telecopy
or telex, electronic mail or delivering written notice by hand, to his last
known business or home address at least 24 hours in advance of the meeting, or
(iii) by mailing written notice to his last known business or home address at
least 72 hours in advance of the meeting. A notice or waiver of notice of a
meeting of the Board of Directors need not specify the purposes of the meeting.
12. Meetings by Telephone Conference Calls. Directors or any members of
--------------------------------------
any committee designated by the directors may participate in a meeting of the
Board of Directors or such committee by means of conference telephone, video
conference or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation by such
means shall constitute presence in person at such meeting.
13. Action by Consent. Any action required or permitted to be taken at
-----------------
any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the Board or committee.
14. Committees. The Board of Directors may designate one or more
----------
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members of the committee present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in
-6-
<PAGE>
the resolution of the Board of Directors and subject to the provisions of the
General Corporation Law of the State of Delaware, shall have and may exercise
all the powers and authority of the Board of Directors in the management of the
business and affairs of the corporation and may authorize the seal of the
corporation to be affixed to all papers which may require it. Each such
committee shall keep minutes and make such reports as the Board of Directors may
from time to time request. Except as the Board of Directors may otherwise
determine, any committee may make rules for the conduct of its business, but
unless otherwise provided by the directors or in such rules, its business shall
be conducted as nearly as possible in the same manner as is provided in these
By-Laws for the Board of Directors.
15. Compensation of Directors. Directors may be paid such compensation
-------------------------
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
ARTICLE III. - - Officers
-------------------------
1. Enumeration. The officers of the corporation shall consist of a
-----------
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice Chairman of the Board, and one or more Vice Presidents, Assistant
Treasurers, and Assistant Secretaries. The Board of Directors may appoint such
other officers as it may deem appropriate.
2. Election. The President, Treasurer and Secretary shall be elected
--------
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3. Qualification. No officer need be a stockholder. Any two or more
-------------
offices may be held by the same person.
4. Tenure. Except as otherwise provided by law, by the Certificate of
------
Incorporation or by these By-Laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
5. Resignation and Removal. Any officer may resign by delivering his or
-----------------------
her written resignation to the corporation at its principal office or to the
Chairman of the Board, President or Secretary. Such resignation shall be
effective upon receipt unless it is specified to be effective at some other time
or upon the happening of some other event.
Any officer may be removed at any time, with or without cause, by vote of a
majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following his resignation or removal, or any right to damages on
account of such removal, whether his
-7-
<PAGE>
compensation be by the month or by the year or otherwise, unless such
compensation is expressly provided in a duly authorized written agreement with
the corporation.
6. Vacancies. The Board of Directors may fill any vacancy occurring in
---------
any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.
7. Chairman of the Board and Vice Chairman of the Board. The Board of
----------------------------------------------------
Directors may appoint a Chairman of the Board and may designate the Chairman of
the Board as Chief Executive Officer. If the Board of Directors appoints a
Chairman of the Board, he shall perform such duties and possess such powers as
are assigned to him by the Board of Directors. Unless otherwise provided by the
Board of Directors, he shall preside at all meetings of the stockholders, and if
he is a director, at all meetings of the Board of Directors. If the Board of
Directors appoints a Vice Chairman of the Board, he shall, in the absence or
disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be vested in him or her by
the Board of Directors. The person designated as the Chief Executive Officer of
the Company shall, subject to the direction of the Board of Directors, have
general charge and supervision of the business of the corporation.
8. President. Unless the Board of Directors has designated the Chairman
---------
of the Board or another officer as Chief Executive Officer, the President shall
be the Chief Executive Officer of the corporation. The President shall perform
such other duties and shall have such other powers as the Chief Executive
Officer or the Board of Directors may from time to time prescribe.
9. Vice Presidents. Any Vice President shall perform such duties and
---------------
possess such powers as the Board of Directors or the Chief Executive Officer may
from time to time prescribe. In the event of the absence, inability or refusal
to act of the Chief Executive Officer, then, in the order determined by the
Board of Directors, the President (if he is not the Chief Executive Officer) and
the Vice President (or if there shall be more than one, the Vice Presidents)
shall perform the duties of the Chief Executive Officer and when so performing
shall have all the powers of and be subject to all the restrictions upon the
Chief Executive Officer. The Board of Directors may assign to any Vice President
the title of Executive Vice President, Senior Vice President or any other title
selected by the Board of Directors.
10. Secretary and Assistant Secretaries. The Secretary shall perform such
-----------------------------------
duties and shall have such powers as the Board of Directors or the Chief
Executive Officer may from time to time prescribe. In addition, the Secretary
shall perform such duties and have such powers as are incident to the office of
the secretary, including without limitation the duty and power to give notices
of all meetings of stockholders and special meetings of the Board of Directors,
to attend all meetings of stockholders and the Board of Directors and keep a
record of the proceedings, to maintain a stock ledger and prepare lists of
stockholders and their addresses as required, to be custodian of corporate
records and the corporate seal and to affix and attest to the same on documents.
-8-
<PAGE>
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the Chief Executive Officer or the Secretary may from
time to time prescribe. In the event of the absence, inability or refusal to act
of the Secretary, the Assistant Secretary (or if there shall be more than one,
the Assistant Secretaries in the order determined by the Board of Directors)
shall perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
11. Treasurer and Assistant Treasurers. The Treasurer shall perform such
----------------------------------
duties and shall have such powers as may from time to time be assigned to him or
her by the Board of Directors or the Chief Executive Officer. In addition, the
Treasurer shall perform such duties and have such powers as are incident to the
office of treasurer, including without limitation the duty and power to keep and
be responsible for all funds and securities of the corporation, to deposit funds
of the corporation in depositories selected in accordance with these By-Laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
The Assistant Treasurers shall perform such duties and possess such powers
as the Board of Directors, the Chief Executive Officer or the Treasurer may from
time to time prescribe. In the event of the absence, inability or refusal to act
of the Treasurer, the Assistant Treasurer (or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors)
shall perform the duties and exercise the powers of the Treasurer.
12. Salaries. Officers of the corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
ARTICLE IV. - - Capital Stock
------------------------------
1. Issuance of Stock. Unless otherwise voted by the stockholders and
-----------------
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
2. Certificates of Stock. Every holder of stock of the corporation shall
---------------------
be entitled to have a certificate, in such form as may be prescribed by law and
by the Board of Directors, certifying the number and class of shares owned by
him or her in the corporation. Each such certificate shall be signed by, or in
the name of the corporation by, the Chairman or Vice Chairman, if any, of the
Board of Directors, or the President or a Vice President, and the Treasurer or
any Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a facsimile.
-9-
<PAGE>
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the By-Laws,
applicable securities laws or any agreement among any number of stockholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement of the existence of such restriction.
3. Transfers. Except as otherwise established by rules and regulations
---------
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these By-Laws, the corporation shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to such stock, regardless of any transfer, pledge or other disposition of such
stock until the shares have been transferred on the books of the corporation in
accordance with the requirements of these By-Laws.
4. Lost, Stolen or Destroyed Certificates. The corporation may issue a
--------------------------------------
new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
5. Record Date. The Board of Directors may fix in advance a date as a
-----------
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders, or entitled to receive payment of any
dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 60 days prior to any other action to
which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
-10-
<PAGE>
ARTICLE V. - - General Provisions
---------------------------------
1. Fiscal Year. Except as from time to time otherwise designated by the
-----------
Board of Directors, the fiscal year of the corporation shall begin on the first
day of January of each year and end on the last day of December of each year.
2. Corporate Seal. The corporate seal shall be in such form as shall be
--------------
approved by the Board of Directors.
3. Waiver of Notice. Whenever any notice whatsoever is required to be
----------------
given by law, by the Certificate of Incorporation or by these By-Laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telecopy or any other available
method, whether before, at or after the time stated in such waiver, or the
appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
4. Voting of Securities. Except as the directors may otherwise
--------------------
designate, the Chairman of the Board or Treasurer may waive notice of, and act
as, or appoint any person or persons to act as, proxy or attorney-in-fact for
this corporation (with or without power of substitution) at any meeting of
stockholders or shareholders of any other corporation or organization, the
securities of which may be held by this corporation.
5. Evidence of Authority. A certificate by the Secretary, or an
---------------------
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
6. Certificate of Incorporation. All references in these By-Laws to the
----------------------------
Certificate of Incorporation shall be deemed to refer to the Second Amended and
Restated Certificate of Incorporation of the corporation, as amended and in
effect from time to time.
7. Transactions with Interested Parties. No contract or transaction
------------------------------------
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:
a. The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum;
b. The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and
-11-
<PAGE>
the contract or transaction is specifically approved in good faith by vote
of the stockholders; or
c. The contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified, by the Board of Directors,
a committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
8. Severability. Any determination that any provision of these By-Laws
------------
is for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-Laws.
9. Pronouns. All pronouns used in these By-Laws shall be deemed to refer
--------
to the masculine, feminine or neuter, singular or plural, as the identity of the
person or persons may require.
ARTICLE VI. - - Amendments
---------------------------
1. By the Board of Directors. These By-Laws may be altered, amended or
-------------------------
repealed or new by-laws may be adopted by the affirmative vote of a majority of
the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
2. By the Stockholders. Subject to the following paragraph, these By-
-------------------
Laws may be altered, amended or repealed or new by-laws may be adopted by the
affirmative vote of the holders of a majority of the shares of the capital stock
of the corporation issued and outstanding and entitled to vote at any regular or
special meeting of stockholders, provided notice of such alteration, amendment,
repeal or adoption of new by-laws shall have been stated in the notice of such
regular or special meeting.
3. Certain Provisions. Notwithstanding any other provision of law, the
------------------
Certificate of Incorporation or these By-Laws (including the preceding
paragraph), and notwithstanding the fact that a lesser percentage may be
specified by law, the affirmative vote of the holders of at least two-thirds
(2/3) of the votes which all the stockholders would be entitled to cast in any
annual election of directors or class of directors shall be required to amend or
repeal, or to adopt any provisions inconsistent with, Article II of these
By-Laws.
-12-
<PAGE>
EXHIBIT 4.1
MODUS MEDIA, INC.
MMI
COMMON STOCK
COMMON STOCK
CUSIP 607861 10 1
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS IS TO CERTIFY THAT
is the owner of
SEE REVERSE
FOR RESTRICTIONS
ON TRANSFER
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01, of
MODUS MEDIA, INC. transferable on the books of the Corporation by the holder
hereof, in person or by duly authorized attorney, upon the surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are subject to the laws of the State of Delaware and to the Certificate
of Incorporation and By-Laws of the Corporation, as now or hereafter amended.
This certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
VICE PRESIDENT AND TREASURER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
================================================================================
MODUS MEDIA, INC. (the "Corporation") will furnish without charge to each
stockholder who so requests from its Secretary the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions thereof.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM
TEN ENT
JT TEN
- -as tenants in common
- -as tenants by the entireties
- -as joint tenants with right of
<PAGE>
survivorship and not as tenants
in common
UNIF GIFT MIN ACTD Custodian
(Cust) (Minor)
under Uniform Gifts to Minors
Act
(State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE.
Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated,
(The signature to this assignment must correspond with the name as written upon
the face of this Certificate in every particular, without alteration or
enlargement or any change whatever.)
SIGNATURE(S) GUARANTEED:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
[HALE AND DORR LLP LOGO APPEARS HERE]
WWW.HALEDORR.COM
60 State Street Boston, Massachusetts 02109
617-526-6000 fax 617-526-5000
March 8, 2000
Modus Media International Holdings, Inc.
690 Canton Street
Westwood, MA 02090
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (File No. 333-92559) (the "Registration Statement") filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of 9,200,000 shares of Common Stock, $.01 par value per share (the "Shares"), of
Modus Media International Holdings, Inc., a Delaware corporation (the
"Company"), including 1,200,000 Shares issuable upon exercise of an over-
allotment option granted by the Company.
The Shares are to be sold by the Company pursuant to an underwriting
agreement (the "Underwriting Agreement") to be entered into by and among the
Company and Salomon Smith Barney, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, FleetBoston Robertson Stephens Inc. and Thomas Weisel Partners LLC,
as representatives of the several underwriters named in the Underwriting
Agreement, the form of which has been filed as Exhibit 1 to the Registration
Statement.
We are acting as counsel for the Company in connection with the issue and
sale by the Company of the Shares. We have examined signed copies of the
Registration Statement as filed with the Commission. We have also examined and
relied upon the Underwriting Agreement, minutes of meetings of the stockholders
and the Board of Directors of the Company as provided to us by the Company,
stock record books of the Company as provided to us by the Company, the
Certificate of Incorporation and By-Laws of the Company, each as restated and/or
amended to date, and such other documents as we have deemed necessary for
purposes of rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.
[LETTERHEAD ADDRESS LINE APPEARS HERE]
<PAGE>
Modus Media International Holdings, Inc.
March 8, 2000
Page 2
We assume that the appropriate action will be taken, prior to the offer and
sale of the Shares in accordance with the Underwriting Agreement, to register
and qualify the Shares for sale under all applicable state securities or "blue
sky" laws.
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of the Commonwealth of Massachusetts, the General
Corporation Law of the State of Delaware and the federal laws of the United
States of America.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized for issuance and, when the Shares are issued
and paid for in accordance with the terms and conditions of the Underwriting
Agreement, the Shares will be validly issued, fully paid and nonassessable.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. This opinion
is based upon currently existing statutes, rules, regulations and judicial
decisions, and we disclaim any obligation to advise you of any change in any of
these sources of law or subsequent legal or factual developments which might
affect any matters or opinions set forth herein.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Validity of Common
Stock." In giving such consent, we do not hereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Commission.
Very truly yours,
HALE AND DORR LLP
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT 10.5
[LOGO]
M O D U S
M E D I A
I N T E R N A T I O N A L
Management Incentive Plan
Effective January 1, 2000
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Modus Media International, Inc.
Management Incentive Plan (MIP)
Plan Document
Effective January 1, 2000
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
-------- ----
<S> <C>
I. Purpose 3.
II. Effective Date of Plan 3.
III. Eligibility 3.
IV. MIP Target Payouts 3.
V. Measurement 3.
VI. Transition Issues 4.
VII. Administration 4.
Plan Exhibits
-------------
A. Plan Components 6.
B. MBO Process Overview 9.
C. Certificate of Acknowledgement 13.
D. Participant Notification Sheet 14.
</TABLE>
- -------------------------------------------------------------------------------
2
<PAGE>
Modus Media International
Management Incentive Plan (MIP)
Plan Document
- --------------------------------------------------------------------------------
I. Purpose
-------
The objective of the Management Incentive Plan (MIP) is to recognize and to
reward the achievement of financial, business and individual performance
goals that are essential to the success of Modus Media. It is also designed
to measure and to reward how effectively we demonstrate and embrace our
values. This program, in conjunction with base salary, is designed to offer
designated employees of Modus Media International Holdings, Inc. and/or its
subsidiaries (the "Company") total cash compensation opportunities that are
fully competitive with market levels.
II. Effective Date of Plan
----------------------
The effective date for implementation of the Plan shall be January 1, 2000.
A Plan year is equivalent to a calendar year. The Plan may be modified or
terminated at any time by the Chief Executive Officer of the Company,
without notice or consent of the Participants.
III. Eligibility
-----------
Certain designated employees whose role and responsibilities are deemed by
executive management to be critical to operations and who have direct
responsibility for achieving the financial results of the Company, are
eligible for participation in the Management Incentive Plan. Participation
Tiers, Target Percentage, Plan Components and Component Weightings are
defined by the position.
Proposed participation in the MIP Plan for new Participants, those joining
the plan after January 1, 2000, must be approved by the CEO or the SVP,
Human Resources of the Company. All Participants will be notified of
eligibility in writing and provided a copy of the MIP document as well as
individual MIP components and targets, as shown in Exhibit D. As a
condition to participating in the MIP, Participants will be required to
execute a written acknowledgement, in the form attached hereto as Exhibit
C, that they have read and understand the MIP. Properly executed forms
should be returned to the Director of Compensation in the Westwood Office.
IV. MIP Target Payout
-----------------
Eligible employees will be assigned a target payout for the MIP, expressed
as a percentage of total base salary, set forth in Exhibit D. This
percentage represents the potential dollar award that will be earned at
100% achievement of goals for all Plan components. The target payout
percentage will vary according to the Participant's position. Actual plan
payments will vary based on performance.
- --------------------------------------------------------------------------------
3
<PAGE>
V. Measurement
-----------
The Management Incentive Plan consists of four components for those
participants in Tiers I-X, and three components for those participants in
Tiers XI and XII. The Participant will be assigned a target payout for each
component, expressed as a percentage of base salary, to be used to
calculate an amount (i.e. 10 % of $50,000 base salary equals $5,000). The
weightings of the components and the resultant target percentages will vary
according to the Participant's position. Plan components are set forth in
Exhibit A and the MBO process is set forth in Exhibit B.
VI. Transition Issues
-----------------
A Participant in the Plan must be actively employed by the Company through
payment dates to receive any payout on plan components. Since the annual
components are calculated on base salary as of December 31 of the plan
year, payouts for annual components will be pro-rated for those eligible
Participants who join the plan during the year, prior to October 1.
Employees who transfer out of an eligible position during the year into a
non-eligible position in the Company, but who are still employed as of the
payment date, will be considered for an award based on the number of weeks
in the eligible position and earnings accrued during those weeks as a ratio
to the full year.
Plan Participants who are on a leave of absence greater than 30 days during
a plan year will have their payment pro-rated for actual time worked.
Employees hired or promoted for the first time into bonus eligible
positions after October 1 will not be eligible to participate in any
component of the Plan for that plan year.
Retroactive pay adjustments will not be applied. Payments will be at the
base salary in effect at the end of each calendar quarter for quarterly
components and as of December 31 for annual components.
All Plan Participants will have their MIP payment calculations performed in
their local currency.
VII. Administration
--------------
The adoption of this Plan shall not be deemed to give any employee the
right to be retained in the employ of the Company or to interfere with the
right of the Company to discharge any employee at any time, nor shall it be
deemed to give the Company the right to require any employee to remain in
its employ. This plan supercedes any incentive provisions detailed in a
Management Contract.
The financial targets assigned and recognized as goals on any of the
performance factors may be revised or otherwise modified by the executive
management of the Company at any time, to account for any material change
in the business or the Company. Any such revisions or modifications will be
made in writing to all Participants as soon as possible after the need for
such change is determined.
- --------------------------------------------------------------------------------
4
<PAGE>
A Participant's right to receive payment of an award under the Plan shall
be no greater than the right of an unsecured general creditor of the
Company. All awards under the Plan shall be paid from the general funds of
the Company, and no special or separate fund shall be established and no
segregation of assets shall be made to assure payment of such awards.
The Company reserves the right to amend, terminate and modify this plan at
its discretion, with or without notice to the participants.
All matters of plan interpretation should be directed to the SVP, Human
Resources, and will be resolved at his/her discretion subject to the
approval of the CEO.
The Plan shall be governed by and construed in accordance with the laws of
the Commonwealth of Massachusetts.
Approvals:
__________________________________________
Michael Dudich
Senior Vice President Human Resources
__________________________________________
Terence Leahy
Chief Executive Officer
- --------------------------------------------------------------------------------
5
<PAGE>
Exhibit 10.6
MODUS MEDIA, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
The purpose of this Plan is to provide eligible employees of Modus Media,
Inc. (the "Company") and certain of its subsidiaries with opportunities to
purchase shares of the Company's common stock, $.01 par value (the "Common
Stock"). Two million five hundred thousand (2,500,000) shares of Common Stock
in the aggregate have been approved for this purpose. This Plan is intended to
qualify as an "employee stock purchase plan" as defined in Section 423 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated thereunder, and shall be interpreted consistent therewith.
1. Administration. The Plan will be administered by the Company's Board of
--------------
Directors (the "Board") or by a Committee appointed by the Board (the
"Committee"). The Board or the Committee has authority to make rules and
regulations for the administration of the Plan and its interpretation and
decisions with regard thereto shall be final and conclusive.
2. Eligibility. All employees of the Company, including Directors who are
-----------
employees, and all employees of any subsidiary of the Company (as defined in
Section 424(f) of the Code) designated by the Board or the Committee from time
to time (a "Designated Subsidiary"), are eligible to participate in any one or
more of the offerings of Options (as defined in Section 9) to purchase Common
Stock under the Plan provided that:
(a) they are customarily employed by the Company or a Designated
Subsidiary for more than 20 hours a week and for more than five months in a
calendar year; and
(b) they have been employed by the Company or a Designated Subsidiary
for at least six months prior to enrolling in the Plan; and
(c) they are employees of the Company or a Designated Subsidiary on the
first day of the applicable Plan Period (as defined below).
No employee may be granted an option hereunder if such employee,
immediately after the option is granted, owns 5% or more of the total combined
voting power or value of the stock of the Company or any subsidiary. For
purposes of the preceding sentence, the attribution rules of Section 424(d) of
the Code shall apply in determining the stock ownership of an employee, and all
stock which the employee has a contractual right to purchase shall be treated as
stock owned by the employee.
3. Offerings. The Company will make one or more offerings ("Offerings") to
---------
employees to purchase stock under this Plan. Offerings will begin each June 1st
and December 1st or the first business day thereafter (the "Offering
Commencement Dates"). Each Offering Commencement Date will begin a six month
period (a "Plan Period") during which payroll deductions will be made and held
for the purchase of Common Stock at the end of the Plan Period. The Board or the
Committee may, at its discretion, choose a different Plan Period of twelve (12)
months or less for subsequent Offerings. Notwithstanding anything to the
contrary, the first Plan Period shall begin on the date that is thirty (30) days
after the first date that the Common Stock is publicly traded following the
<PAGE>
Company's initial public offering ("IPO"), or the first business day thereafter,
and shall end on May 31, 2000.
4. Participation. An employee eligible on the Offering Commencement Date
-------------
of any Offering may participate in such Offering by completing and forwarding a
payroll deduction authorization form to the employee's appropriate payroll
office at least ___ days prior to the applicable Offering Commencement Date. The
form will authorize a regular payroll deduction from the Compensation received
by the employee during the Plan Period. Unless an employee files a new form or
withdraws from the Plan, his deductions and purchases will continue at the same
rate for future Offerings under the Plan as long as the Plan remains in effect.
The term "Compensation" means the amount of money reportable on the employee's
Federal Income Tax Withholding Statement, excluding overtime, shift premium,
incentive or bonus awards, allowances and reimbursements for expenses such as
relocation allowances for travel expenses, income or gains on the exercise of
Company stock options or stock appreciation rights, and similar items, whether
or not shown on the employee's Federal Income Tax Withholding Statement, but
including, in the case of salespersons, sales commissions to the extent
determined by the Board or the Committee.
5. Deductions. The Company will maintain payroll deduction accounts for
----------
all participating employees. With respect to any Offering made under this Plan,
an employee may authorize a payroll deduction in any dollar amount up to a
maximum of 10% of the Compensation he or she receives during the Plan Period or
such shorter period during which deductions from payroll are made. Payroll
deductions may be at the rate of 1%, 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9% or 10% of
Compensation with any change in compensation during the Plan Period to result in
an automatic corresponding change in the dollar amount withheld.
No employee may be granted an Option (as defined in Section 9) which
permits his rights to purchase Common Stock under this Plan and any other
employee stock purchase plan (as defined in Section 423(b) of the Code) of the
Company and its subsidiaries, to accrue at a rate which exceeds $25,000 of the
fair market value of such Common Stock (determined at the Offering Commencement
Date of the Plan Period) for each calendar year in which the Option is
outstanding at any time.
6. Deduction Changes. An employee may decrease or discontinue his payroll
-----------------
deduction once during any Plan Period, by filing a new payroll deduction
authorization form. However, an employee may not increase his payroll deduction
during a Plan Period. If an employee elects to discontinue his payroll
deductions during a Plan Period, but does not elect to withdraw his funds
pursuant to Section 8 hereof, funds deducted prior to his election to
discontinue will be applied to the purchase of Common Stock on the Exercise Date
(as defined below).
-2-
<PAGE>
7. Interest. Interest will not be paid on any employee accounts, except to
--------
the extent that the Board or the Committee, in its sole discretion, elects to
credit employee accounts with interest at such per annum rate as it may from
time to time determine.
8. Withdrawal of Funds. An employee may at any time prior to the close of
-------------------
business on the last business day in a Plan Period and for any reason
permanently draw out the balance accumulated in the employee's account and
thereby withdraw from participation in an Offering. Partial withdrawals are not
permitted. The employee may not begin participation again during the remainder
of the Plan Period. The employee may participate in any subsequent Offering in
accordance with terms and conditions established by the Board or the Committee.
9. Purchase of Shares. On the Offering Commencement Date of each Plan
------------------
Period, the Company will grant to each eligible employee who is then a
participant in the Plan an option ("Option") to purchase on the last business
day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter
provided for, the largest number of whole shares of Common Stock of the Company
as does not exceed the number of shares determined by multiplying $2,083 by the
number of full months in the Offering Period and dividing the result by the
closing price (as defined below) on the Offering Commencement Date of such Plan
Period.
The purchase price for each share purchased will be 85% of the closing
price of the Common Stock on (i) the first business day of such Plan Period or
(ii) the Exercise Date, whichever closing price shall be less. Such closing
price shall be (a) the closing price on any national securities exchange on
which the Common Stock is listed, (b) the closing price of the Common Stock on
the Nasdaq National Market or (c) the average of the closing bid and asked
prices in the over-the-counter-market, whichever is applicable, as published in
The Wall Street Journal. If no sales of Common Stock were made on such a day,
- -----------------------
the price of the Common Stock for purposes of clauses (a) and (b) above shall be
the reported price for the next preceding day on which sales were made.
Each employee who continues to be a participant in the Plan on the Exercise
Date shall be deemed to have exercised his Option at the Option Price on such
date and shall be deemed to have purchased from the Company the number of full
shares of Common Stock reserved for the purpose of the Plan that his accumulated
payroll deductions on such date will pay for, but not in excess of the maximum
number determined in the manner set forth above.
Any balance remaining in an employee's payroll deduction account at the end
of a Plan Period will be automatically refunded to the employee, except that any
balance which is less than the purchase price of one share of Common Stock will
be carried forward into the employee's payroll deduction account for the
following Offering, unless the employee elects not to participate in the
following Offering under the Plan, in which case the balance in the employee's
account shall be refunded.
10. Issuance of Certificates. Certificates representing shares of Common
------------------------
Stock purchased under the Plan may be issued only in the name of the employee,
in the name of the employee and another person of legal age as joint tenants
with rights of survivorship, or (in the Company's sole discretion) in the
-3-
<PAGE>
name of a brokerage firm, bank or other nominee holder designated by the
employee. The Company may, in its sole discretion and in compliance with
applicable laws, authorize the use of book entry registration of shares in lieu
of issuing stock certificates.
11. Rights on Retirement, Death or Termination of Employment. In the event
--------------------------------------------------------
of a participating employee's termination of employment prior to the last
business day of a Plan Period, no payroll deduction shall be taken from any pay
due and owing to an employee and the balance in the employee's account shall be
paid to the employee or, in the event of the employee's death, (a) to a
beneficiary previously designated in a revocable notice signed by the employee
(with any spousal consent required under state law) or (b) in the absence of
such a designated beneficiary, to the executor or administrator of the
employee's estate or (c) if no such executor or administrator has been appointed
to the knowledge of the Company, to such other person(s) as the Company may, in
its discretion, designate. If, prior to the last business day of the Plan
Period, the Designated Subsidiary by which an employee is employed shall cease
to be a subsidiary of the Company, or if the employee is transferred to a
subsidiary of the Company that is not a Designated Subsidiary, the employee
shall be deemed to have terminated employment for the purposes of this Plan.
12. Optionees Not Stockholders. Neither the granting of an Option to an
--------------------------
employee nor the deductions from his pay shall constitute such employee a
stockholder of the shares of Common Stock covered by an Option under this Plan
until such shares have been purchased by and issued to him.
13. Rights Not Transferable. Rights under this Plan are not transferable
-----------------------
by a participating employee other than by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only by the
employee .
14. Application of Funds. All funds received or held by the Company under
--------------------
this Plan may be combined with other corporate funds and may be used for any
corporate purpose.
15. Adjustment in Case of Changes Affecting Common Stock. In the event of
----------------------------------------------------
a subdivision of outstanding shares of Common Stock, or the payment of a
dividend in Common Stock, the number of shares approved for this Plan, and the
share limitation set forth in Section 9, shall be increased proportionately, and
such other adjustment shall be made as may be deemed equitable by the Board or
the Committee. In the event of any other change affecting the Common Stock, such
adjustment shall be made as may be deemed equitable by the Board or the
Committee to give proper effect to such event.
16. Merger. If the Company shall at any time merge or consolidate with
------
another corporation and the holders of the capital stock of the Company
immediately prior to such merger or consolidation continue to hold at least 80%
by voting power of the capital stock of the surviving corporation ("Continuity
of Control"), the holder of each Option then outstanding will thereafter be
entitled to receive at the next Exercise Date upon the exercise of such Option
for each share as to which such Option shall be exercised the securities or
property which a holder of
-4-
<PAGE>
one share of the Common Stock was entitled to upon and at the time of such
merger or consolidation, and the Board or the Committee shall take such steps in
connection with such merger or consolidation as the Board or the Committee shall
deem necessary to assure that the provisions of Section 15 shall thereafter be
applicable, as nearly as reasonably may be, in relation to the said securities
or property as to which such holder of such Option might thereafter be entitled
to receive thereunder.
In the event of a merger or consolidation of the Company with or into
another corporation which does not involve Continuity of Control, or of a sale
of all or substantially all of the assets of the Company while unexercised
Options remain outstanding under the Plan, (a) subject to the provisions of
clauses (b) and (c), after the effective date of such transaction, each holder
of an outstanding Option shall be entitled, upon exercise of such Option, to
receive in lieu of shares of Common Stock, shares of such stock or other
securities as the holders of shares of Common Stock received pursuant to the
terms of such transaction; or (b) all outstanding Options may be cancelled by
the Board or the Committee as of a date prior to the effective date of any such
transaction and all payroll deductions shall be paid out to the participating
employees; or (c) all outstanding Options may be cancelled by the Board or the
Committee as of the effective date of any such transaction, provided that notice
of such cancellation shall be given to each holder of an Option, and each holder
of an Option shall have the right to exercise such Option in full based on
payroll deductions then credited to his account as of a date determined by the
Board or the Committee, which date shall not be less than ten (10) days
preceding the effective date of such transaction.
17. Amendment of the Plan. The Board may at any time, and from time to
---------------------
time, amend this Plan in any respect, except that (a) if the approval of any
such amendment by the shareholders of the Company is required by Section 423 of
the Code, such amendment shall not be effected without such approval, and (b) in
no event may any amendment be made which would cause the Plan to fail to comply
with Section 423 of the Code.
18. Insufficient Shares. In the event that the total number of shares of
-------------------
Common Stock specified in elections to be purchased under any Offering plus the
number of shares purchased under previous Offerings under this Plan exceeds the
maximum number of shares issuable under this Plan, the Board or the Committee
will allot the shares then available on a pro rata basis.
19. Termination of the Plan. This Plan may be terminated at any time by
-----------------------
the Board. Upon termination of this Plan all amounts in the accounts of
participating employees shall be promptly refunded.
20. Governmental Regulations. The Company's obligation to sell and deliver
------------------------
Common Stock under this Plan is subject to listing on a national stock exchange
or quotation on the Nasdaq National Market (to the extent the Common Stock is
then so listed or quoted) and the approval of all governmental authorities
required in connection with the authorization, issuance or sale of such stock.
-5-
<PAGE>
21. Governing Law. The Plan shall be governed by Delaware law except to
-------------
the extent that such law is preempted by federal law.
22. Issuance of Shares. Shares may be issued upon exercise of an Option
------------------
from authorized but unissued Common Stock, from shares held in the treasury of
the Company, or from any other proper source.
23. Notification upon Sale of Shares. Each employee agrees, by entering
--------------------------------
the Plan, to promptly give the Company notice of any disposition of shares
purchased under the Plan where such disposition occurs within two years after
the date of grant of the Option pursuant to which such shares were purchased.
24. Effective Date and Approval of Shareholders. The Plan shall take
-------------------------------------------
effect on the first business day following the Company's initial public
offering, subject to approval by the shareholders of the Company as required by
Section 423 of the Code, which approval must occur within twelve months of the
adoption of the Plan by the Board.
Adopted by the Board of Directors
on March 1, 2000
Approved by the stockholders
on March __, 2000
-6-
<PAGE>
EXHIBIT 10.24
MODUS MEDIA, INC.
2000 DIRECTOR STOCK OPTION PLAN
1. Purpose.
--------
The purpose of this 2000 Director Stock Option Plan (the "Plan") of Modus
Media, Inc. (the "Company") is to encourage ownership in the Company by non-
employee directors of the Company whose continued services are considered
essential to the Company's future progress and to provide them with a further
incentive to remain as directors of the Company.
2. Administration.
---------------
The Board of Directors (the "Board") shall supervise and administer the
Plan. All questions concerning interpretation of the Plan or any options
granted under it shall be resolved by the Board and such resolution shall be
final and binding upon all persons having an interest in the Plan. The Board
may, to the full extent permitted by or consistent with applicable laws or
regulations, delegate any or all of its powers under the Plan to a committee
appointed by the Board, and if a committee is so appointed, all references to
the Board in the Plan shall mean and relate to such committee.
3. Participation in the Plan.
--------------------------
Directors of the Company who are not employees of the Company or any
subsidiary of the Company ("non-employee directors") shall be eligible to
receive options under the Plan.
4. Stock Subject to the Plan.
--------------------------
(a) The maximum number of shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), which may be issued under the Plan shall be
300,000 shares, subject to adjustment as provided in Section 7.
(b) If any outstanding option under the Plan for any reason expires or is
terminated without having been exercised in full, the shares covered by the
unexercised portion of such option shall again become available for issuance
pursuant to the Plan.
(c) All options granted under the Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
(d) Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
-1-
<PAGE>
5. Terms, Conditions and Form of Options.
--------------------------------------
Each option granted under the Plan shall be evidenced by a written
agreement in such form as the Board shall from time to time approve, which
agreements shall comply with and be subject to the following terms and
conditions:
(a)(i) Automatic Option Grant Dates. Options shall automatically be
----------------------------
granted to all non-employee directors as follows:
(x) each person who first becomes a non-employee director after the
closing date of the Company's initial public offering of Common Stock pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, shall be granted an option to purchase 20,000 shares of Common Stock on
the date of his or her initial election to the Board; and
(y) each non-employee director shall be granted an option to purchase
10,000 shares of Common Stock on the first anniversary of his or her initial
election to the Board, provided that he or she is serving as a director of the
Company on such date.
(z) each non-employee director shall be granted an option to purchase
5,000 shares of Common Stock on each of the second and third anniversary of his
or her initial election to the Board, provided that he or she is serving as a
director of the Company on each such date.
(ii) Periodic Grants of Options. Subject to execution by the
--------------------------
non-employee director of an appropriate option agreement, the Board may grant
additional options to purchase a number of shares to be determined by the Board
in recognition of services provided by a non-employee director in his or her
capacity as a director, provided that such grants are in compliance with the
requirements of Rule 16b-3, as promulgated under the Securities Exchange Act of
1934, as amended from time to time.
Each date of grant of an option pursuant to this Section 5(a) is
hereinafter referred to as an "Option Grant Date."
(b) Option Exercise Price. The option exercise price per share for each
---------------------
option granted under the Plan shall equal (i) the closing price on any national
securities exchange on which the Common Stock is listed, (ii) the closing price
of the Common Stock on the Nasdaq National Market or (iii) the average of the
closing bid and asked prices in the over-the-counter market, whichever is
applicable, as published in The Wall Street Journal, on the Option Grant Date.
-----------------------
If no sales of Common Stock were made on the Option Grant Date, the price of the
Common Stock for purposes of clauses (i) and (ii) above shall be the reported
price for the next preceding day on which sales were made.
(c) Transferability of Options. Except as the Board may otherwise
--------------------------
determine or provide in an option granted under the Plan, any option granted
under the Plan to an optionee shall not be transferable by the optionee other
than by will or the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Code or Title I of the
-2-
<PAGE>
Employee Retirement Income Security Act, or the rules thereunder, and shall be
exercisable during the optionee's lifetime only by the optionee or the
optionee's guardian or legal representative. References to an optionee, to the
extent relevant in the context, shall include references to authorized
transferees.
(d) Vesting Period.
--------------
(i) General. Each option granted under the Plan pursuant to Section
-------
5(a)(i)(x) above shall become exercisable (vest) in four equal annual
installments beginning on the first anniversary of such Option Grant Date. Each
option granted under the Plan pursuant to Section 5(a)(i)(y) and 5(a)(i)(z)
above shall become exercisable in full upon the date one year from the Option
Grant Date. No further vesting shall occur with respect to an option granted
pursuant to Section 5(a)(i)(x), 5(a)(i)(y) or 5(a)(i)(z) after the optionee
ceases to be a non-employee director of the Company. Each option granted under
the Plan pursuant to Section 5(a)(ii) above shall become exercisable on such
terms as shall be determined by the Board and set forth in the option agreement
with the respective optionee.
(ii) Acceleration Upon Acquisition Event. Notwithstanding the
-----------------------------------
foregoing, each outstanding option granted under the Plan shall immediately
become exercisable in full upon the occurrence of an Acquisition Event (as
defined in Section 8) with respect to the Company.
(iii) Right to Receive Restricted Stock. Notwithstanding the provisions
---------------------------------
of Section 5(d)(i) above, the Board shall have the authority to grant options
(including options granted pursuant to Section 5(a)(i) above) which are
immediately exercisable subject to the Company's right to repurchase any
unvested shares of stock acquired by the optionee on exercise of an option in
the event such optionee's service as a director terminates for any reason.
(e) Termination. Each option shall terminate, and may no longer be
-----------
exercised, on the earlier of (i) the date ten years after the Option Grant Date
of such option or (ii) the first anniversary of the date on which the optionee
ceases to serve as a director of the Company.
(f) Exercise Procedure. An option may be exercised only by written notice
------------------
to the Company at its principal office accompanied by (i) payment in cash or by
certified or bank check of the full consideration for the shares as to which
they are exercised, (ii) delivery of outstanding shares of Common Stock (which
have been outstanding for at least six months) having a fair market value on the
last business day preceding the date of exercise equal to the option exercise
price, or (iii) an irrevocable undertaking by a creditworthy broker to deliver
promptly to the Company sufficient funds to pay the exercise price or delivery
of irrevocable instructions to a creditworthy broker to deliver promptly to the
Company cash or a check sufficient to pay the exercise price.
(g) Exercise by Representative Following Death of Director. An optionee,
------------------------------------------------------
by written notice to the Company, may designate one or more persons (and from
time to time change such designation), including his or her legal
representative, who, by reason of the optionee's death, shall acquire the right
to exercise all or a portion of the option. If the person or persons so
designated wish to exercise any portion of the option, they must do so within
the term of the
-3-
<PAGE>
option as provided herein. Any exercise by a representative shall be subject to
the provisions of the Plan.
6. Limitation of Rights.
---------------------
(a) No Right to Continue as a Director. Neither the Plan, nor the granting
----------------------------------
of an option nor any other action taken pursuant to the Plan, shall constitute
or be evidence of any agreement or understanding, express or implied, that the
Company will retain the optionee as a director for any period of time.
(b) No Stockholders' Rights for Options. An optionee shall have no rights
-----------------------------------
as a stockholder with respect to the shares covered by his or her option until
the date of the issuance to him or her of a stock certificate therefor, and no
adjustment will be made for dividends or other rights (except as provided in
Section 7) for which the record date is prior to the date such certificate is
issued.
(c) Compliance with Securities Laws. Each option shall be subject to the
-------------------------------
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental or regulatory body, or the disclosure of non-
public information or the satisfaction of any other condition is necessary as a
condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval, or satisfaction of
such condition shall have been effected or obtained on conditions acceptable to
the Board. Nothing herein shall be deemed to require the Company to apply for
or to obtain such listing, registration or qualification, or to satisfy such
condition.
7. Adjustment Provisions for Mergers, Recapitalizations and Related
----------------------------------------------------------------
Transactions.
- -------------
If, through or as a result of any merger, consolidation, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, or other similar transaction, (i) the outstanding shares of Common Stock
are exchanged for a different number or kind of securities of the Company or of
another entity, or (ii) additional shares or new or different shares or other
securities of the Company or of another entity are distributed with respect to
such shares of Common Stock, the Board shall make an appropriate and
proportionate adjustment in (a) the maximum number and kind of shares reserved
for issuance under the Plan, (b) the number and kind of shares or other
securities subject to then outstanding options under the Plan, (c) the price for
each share subject to any then outstanding options under the Plan (without
changing the aggregate purchase price for such options), and (d) the number of
shares issuable pursuant to Section 5(a)(i) above, to the end that each option
shall be exercisable, for the same aggregate exercise price, for such securities
as such option holder would have held immediately following such event if he had
exercised such option immediately prior to such event. No fractional shares
will be issued under the Plan on account of any such adjustments.
-4-
<PAGE>
8. Acquisition Event.
------------------
For purposes of the Plan, an "Acquisition Event" shall be deemed to have
occurred only if any of the following events occurs: (i) any merger or
consolidation which results in the voting securities of the Company outstanding
immediately prior thereto representing immediately thereafter (either by
remaining outstanding or by being converted into voting securities of the
surviving or acquiring entity) less than 50% of the combined voting power of the
voting securities of the Company or such surviving or acquiring entity
outstanding immediately after such merger or consolidation; (ii) any sale of all
or substantially all of the assets of the Company; or (iii) the complete
liquidation of the Company.
9. Termination and Amendment of the Plan.
--------------------------------------
The Board may suspend or terminate the Plan or amend it in any respect
whatsoever.
10. Notice.
-------
Any written notice to the Company required by any of the provisions of the
Plan shall be addressed to the Treasurer of the Company and shall become
effective when it is received.
11. Governing Law.
--------------
The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the internal laws of the State of Delaware (without regard
to any applicable conflicts of laws or principles).
12. Effective Date.
---------------
The Plan shall take effect upon the closing of the Company's initial public
offering of Common Stock.
Adopted by the Board of Directors on
March 1, 2000.
Approved by the Stockholders on
March __, 2000.
-5-
<PAGE>
EXHIBIT 10.25
-------------
[translation from Dutch]
Lease
1999T1000845MK/bm
This fourth day of February, two thousand, before me, Luutzen Frederik Tamminga,
a civil-law notary in Rotterdam, the Netherlands, personally appeared:
1. Mr Meindert Rudolf Hendrik Krans, working at Weena 325 in (3013 AL)
Rotterdam, born in Haarlem, the Netherlands, on the sixteenth of November,
nineteen hundred and seventy, acting in this matter as the holder of a
written power of attorney issued by Modus Media International B.V., a
------------------------------
private limited liability company, having its registered office and
maintaining a place of business at Landdrostlaan 51 in (7327 GM) Apeldoorn,
the Netherlands, registered in the Trade Register of the Chamber of
Commerce and Industry of Apeldoorn under number 08055138;
. this company hereinafter to be called the "Lessee"; and
------
2. Ms Brigitte Francisca Anna Maria van der Laan, working at Weena 325 in
(3013 AL) Rotterdam, born in Haarlem on the seventh of June, nineteen
hundred and seventy-one, acting in this matter as the holder of a written
power of attorney issued by ABN AMRO Onroerend Goed Lease en Financieringen
-------------------------------------------
B.V., a private limited liability company, having its registered office and
----
maintaining a place of business at Wisselwerking 22 in (1112 XP) Diemen,
the Netherlands (postal address PO Box 1020 BA Amsterdam), registered in
the Trade Register of the Chamber of Commerce and Industry of Amsterdam
under number 33184851;
. this company hereinafter also to be called the "Lessor";
------
1
<PAGE>
Acting in their aforementioned capacities, the persons appearing declared
as follows:
I. Introduction
- -----------------
The Lessor is the legal and beneficiary owner of a parcel of land and the
office and commercial property standing thereon, located at
Boogschutterstraat at the corner with Oost Veluweweg in Apeldoorn, the
Netherlands, constituting the Lessor's portion, measuring approximately
five hectares, thirty-seven ares and twenty-eight centiares, of the parcels
of land registered in the Land Registry as municipality of Apeldoorn,
section AF, numbers 844, 845, 1314, 1323, 1324, 1325, 1405 and 1516,
numbers 1314 and 1324 of these parcels being encumbered with a right in rem
as referred to in Article 5(3)(b) of the Dutch Public Works Removal of
Impediments in Private Law Act (Belemmeringenwet Privaatrecht) for the
benefit of the Veluwe Water Management Authority, the registered property
hereinafter to be called the "Registered Property".
-------------------
II. Construction Phase
- -----------------------
The Lessor entered into a turnkey agreement (the "Turnkey Agreement") with
-----------------
Giesbers Bouw B.V. (the "Building Contractor") for the construction of an
-------------------
office and business premises (the "Office and Business Premises") on the
----------------------------
Registered Property in accordance with the drawings and specifications
attached to this deed,
- the Registered Property and the Office and Business Premises
hereinafter to be called the "Leased Property".
---------------
The Lessor also entered into management agreements with DHV AIB B.V. and
Misel Bouwmanagement B.V. for the management of the construction of the
Office and Business Premises (the "Management Agreements").
---------------------
In the event that the Lessor receives a penalty from the Building
Contractor pursuant to the Turnkey Agreement, the Lessor will deduct that
amount from the Debit Balance as defined below. The total amount of the
purchase and original costs will not exceed an amount of fifty-three
million Dutch guilders (NLG 53,000,000).
The purchase and original costs include, inter alia, the following:
2
<PAGE>
- the purchase price of the Registered Property;
- instalments payable to Giesbers Bouw B.V. pursuant to the Turnkey
Agreement;
- costs of relocating the IJsselleiding, which pipe and relocation is
known to the parties;
- amounts payable to DHV AIB B.V. pursuant to the Management Agreement
entered into with it;
- expenses payable by the Lessee to the Lessor as compensation for the
entering into the Turnkey Agreement in the amount of one hundred and
seventy-five thousand Dutch guilders (NLG 175,000) exclusive of VAT,
which amount comprises the costs of Misel Bouwmanagement B.V.'s
activities pursuant to the Management Agreement entered into with it;
- all other expenses that the Lessor is obliged to incur with respect to
the construction of the Office and Business Premises, including but
not limited to the costs of the time spent by the Lessor's employees;
- the annual interest for the period commencing when the Lessor makes
the first payment in connection with the purchase of the Registered
Property and/or the construction of the Office and Business Premises
and (partially) ending when the Lease referred to below (partially)
enters into force, on the "Debit Balance" (i.e. the sum of (1) the
-------------
total of the payments made by the Lessor at that time; and (2) the
interest added to the Debit Balance in the manner described below,
equal to the ABN AMRO Euro Base Rate, as applicable in each instance
(at present four percent (4%), the minimum being three-and-a-half
percent (3.5%) a year, plus a surcharge of one-and-a-half percent
(1.5%) a year, at present resulting in a debit interest of five-and-a-
half percent (5.5%) a year. Until further notice, the ABN AMRO Euro
Base Rate will consist of the prevailing repo rate (the base
refinancing transaction rate) of the European Central Bank (the "ECB")
---
as applicable from time to time, increased by a debit interest
surcharge to be determined by ABN AMRO Bank N.V. Upon a change in the
base
3
<PAGE>
refinancing transaction rate by the ECB or in the debit interest
surcharge by ABN AMRO Bank N.V., or in the composition or
determination of the ABN AMRO Euro Base Rate by ABN AMRO Bank N.V.,
the debit interest will be adjusted accordingly. The base refinancing
transaction rate will be rounded off to the nearest one-tenth percent
(0.10%) for the benefit of the determination of the ABN AMRO Euro Base
Rate, and percentages ending on five-hundredths of percents (0.05%)
will be rounded up. The changes in the debit interest surcharge
referred to above, as well as any future changes in the way of
composition or determination of the ABN AMRO Euro Base Rate, will be
published by ABN AMRO in at least three well-read Dutch national daily
newspapers. The amount of the interest referred to above will be
calculated by the Lessor and added to the Debit Balance on the last
day of each calendar quarter. On the commencement date of the lease
referred to below, the Debit Balance will be increased by the current
interest up to the commencement date;
- the handling fee payable by the Lessee to the Lessor;
- the notarial costs that are due in connection with the drafting of
this Lease and all other documents related thereto;
- the land registry fees;
- the interest rate fixing fee;
- the interest on the VAT pre-financed by the Lessor.
If, in so far as and when the total amount of the purchase and original
costs exceed an amount of fifty-three million Dutch guilders (NLG
53,000,000), the Lessee will be obliged to pay the Lessor, at the Lessor's
first request, the surplus.
III Lease
- ----------
The Lessor and the Lessee enter into a lease with respect to the Leased
Property.
This Lease is concluded subject to the following
4
<PAGE>
PROVISIONS
- ----------
Article 1
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a. As from the date on which the Building Contractor completes the Leased
Property in accordance with the Turnkey Agreement"that date hereinafter to
be called the "Completion Date""the Lessor will make the Leased Property
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available to the Lessee, which will accept it, for a period of ten (10)
years after the last day of the calendar quarter that includes the
Completion Date.
b. Should the Lessor be unable to make the Leased Property available to the
Lessee on the Completion Date, the Lessor will not be liable for the
ensuing damage suffered by the Lessee. That fact will have no consequences
with respect to the provisions of Article 2(a).
Article 2
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a. The Lessee will pay the Lessor compensation"hereinafter to be called the
"Lease Price""for the use of the Leased Property of one million six
thousand three hundred and seventy-four Dutch guilders and nine cents (NLG
1,006,374.09) per quarter, increased by the VAT on that amount. The Lease
Price is based on the interest rate fixed by the Lessee of four point
ninety-five percent (4.95%) and on the total purchase and original costs of
the Leased Property of up fifty-three million Dutch guilders (NLG
53,000,000), exclusive of VAT (the "Lease Amount"), to be paid in arrears
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before or on the last day of each calendar quarter, without any discount or
set-off, to the bank account indicated by the Lessor, for the first time on
the last day of the calendar quarter following the calendar quarter that
includes the Completion Date. Before or on the last day of the calendar
quarter that includes the Completion Date, the Lessee will pay the Lessor,
for the use of the Leased Property up to the last day of the calendar
quarter, an amount equivalent to an annual interest rate of four point
ninety-five percent (4.95%) of the Lease Amount for that period.
To determine the amounts owed by the Lessee to the Lessor, the Lessor's
records will constitute full evidence unless counter-evidence is provided.
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The Lessee's payments will be made to subsequently pay for: first any
costs; second, any losses, loss of profits and loss of interest due to late
payment; third, interest components of the Lease Price; and fourth, the
depreciation component of the Lease Price.
b. Each time a fixed-interest period for the Lease Price ends, to be counted
as from the first day of the calendar quarter following the calendar
quarter that includes the Completion Date, the Lease Price will be adjusted
to the amount that is equivalent to a quarterly annuity that is calculated
on the basis of the following five principles:
1. the remainder of the Lease Amount on the date of the Lease Price
adjustment, which remaining Lease Amount will be determined by
deducting from the Lease Amount the sum of the depreciation components
in the lease prices paid to the Lessor by the Lessee until the date of
the Lease Price adjustment;
2. quarterly payment of the Lease Price in arrears;
3. the interest rate applied by the Lessor on the date of the Lease Price
Adjustment for the calculation of lease prices of leases with regard
to registered property other than aircraft and ships;
4. the remaining term of the Lease as from the date of the Lease Price
Adjustment; and
5. the fact that during the Lease's remaining term referred to in
paragraph 4, the Leased Property will be depreciated in such a manner
that on the date ten (10) years after the last day of the calendar
quarter that includes the Completion Date, the book value will be
thirty-five million Dutch guilders (NLG 35,000,000).
The first fixed-interest period for the Lease Price will end on the date
five (5) years after the last day of the calendar quarter that includes the
Completion Date. The Lessee is always entitled to opt for a new fixed-
interest period at the end of a fixed-interest period for the Lease Price,
in which case the Lessee may choose between the fixed-interest periods then
offered by the Lessor. If the Lessee wishes to exercise this right, the
Lessee must inform the Lessor accordingly by registered
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letter, at least one month before the date on which the interest will be
adjusted, stating the fixed-interest period chosen by the Lessee as from
the next date of interest adjustment, on the understanding that a fixed-
interest period will end not later than the day on which this Lease ends.
If the Lessee does not, or does not timely, exercise its right referred to
in the two sentences immediately preceding this sentence, the ending fixed-
interest period will be followed by a new fixed-interest period of the same
duration as the ending fixed-interest period for the Lease Price, on the
understanding that any fixed-interest period will end ultimately on the day
on which this Lease ends.
c. As the Lessee will use the Leased Property for purposes that qualify for a
right to full deduction or virtually full deduction of VAT pursuant to
Article 15 of the Dutch Turnover Tax Act of 1968 (Wet op de omzetbelasting
1968), the parties hereby irrevocably opt for a Lease Price subject to VAT.
By signing the present instrument, the Lessee irrevocably authorises the
Lessor on its behalf to make an application as referred to in Article
11(1)(b)(5) of the Dutch Turnover Tax Act of 1968, as well as to complete
and file the documents necessary for that purpose. If, in any financial
year, the Lessee has not used the Leased Property for purposes that qualify
for full or virtually full deduction of VAT pursuant to Article 15 of the
Dutch Turnover Tax Act of 1968, the Lessee undertakes towards the Lessor
that it will provide the Lessor with a statement signed by the Lessee
within four weeks of the termination of the Lessee's relevant financial
year, stating that the Lessee did not use the Leased Property for purposes
that qualify for a right to full or virtually full deduction of VAT
pursuant to Article 15 of the Dutch Turnover Tax Act of 1968 in the
relevant financial year.
d. If, at any time during the term of this Lease, pursuant to the provisions
of Article 11(1)(b)(5) of the Dutch Turnover Tax Act of 1968 or on any
other ground, it is no longer possible to opt for a Lease Price subject to
VAT and the Lessor must consequently, pursuant to the provisions of Article
15 of the Dutch Turnover Tax Act of 1968 in conjunction with Article 13 of
the Dutch Turnover Tax Act of 1968
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Implementing Resolution and/or any other article, for a number of years
annually pay the Government Tax Collector part of the VAT paid and deducted
by the Lessor with regard to the purchase of the Leased Property (the
"Prepaid Tax"), the Lessee will, at the Lessor's first request and within
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one week after receipt of such request, pay the Lessor an amount equal to
that part of the Prepaid Tax as well as all other damage and losses that
the Lessor may incur as a result of the event referred to in this
paragraph. The Lessor may not address the request referred to in the
preceding sentence to the Lessee until the Lessor has filed the tax return
on the basis of which the Lessor owes the relevant part of the Prepaid Tax
with the competent Tax Inspector or has incurred the relevant damage or the
relevant loss.
e. As the Lessee will occupy (part of) the Leased Property before the
completion Date, the obligations arising for the Lessee from paragraphs (c)
and (d) of this Article will also apply to such earlier occupation. From
the date of occupation of part of the Leased Property up to the Completion
Date, the Lessee will owe the Lessor a Lease Price, increased by VAT on
that amount, to be paid every quarter in arrears. The Lease Price will be
based on the total purchase and original costs of the occupied part of the
Leased Property and an interest rate of four point ninety-five percent
(4.95%).
Article 3
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a. The Lessee will use the Leased Property only as business premises.
b. The Lessee itself must arrange for any licences and/or on exemptions
required for the conduct of its business. The Lessee will also ensure that
the Leased Property meets the requirements, including the safety
regulations, stipulated and to be stipulated by authorities. Refusal or
withdrawal of a licence or exemption will not be a ground for dissolution
or nullification of this Lease, or for any claim for damages against the
Lessor.
c. The Lessee guarantees sound business operations in the Leased Property.
d. The Lessee will operate the business established in the Leased Property
itself or with an affiliated company. Without the Lessor's
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prior written consent, the Lessee may not grant full or partial use of the
Leased Property, or surrender or lease the Leased Property to third
parties. The Lessor will not unreasonably withhold that consent. If the
Lessor grants permission as referred to in the previous sentence, that will
be subject to the condition that the Lessee pledges the rights from the
agreement with the third party to the Lessor.
e. Without the other party's prior written consent, neither the Lessee nor the
Lessor may dispose of its rights under this Lease or to contribute them to
a (another) company, partnership or the like, or to exercise its rights in
such a context. The aforesaid consent cannot be withheld on unreasonable
grounds.
Article 4
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All costs of gas, water, electricity, heating and the like, and charges and
taxes such as cleaning charges, environmental charges, water board charge and
real property tax including the part that relates to the use pursuant to a right
in rem (i.e. the owner's part) will be entirely for the Lessee's account. The
parties will endeavour to charge those costs directly to the Lessee in so far as
possible. The Lessee must pay the Lessor all charges and taxes that are imposed
on the Lessor with regard to the Leased Property or that it owes, with the
exception of the company tax, within ten days after the Lessor has informed the
Lessee in writing, enclosing a copy of the invoice or bill.
Article 5
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In so far as the value of the Leased Property's general market value is not
affected as a result, the Lessee is entitled to make changes and improvements in
a Leased Property, but only in so far as the Lessor has given its permission in
writing. The Lessor may make such permission subject to conditions.
Article 6
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The Lessor and the Lessee are familiar with:
. the letter of twenty-five October nineteen hundred and ninety-nine from
Oranjewoud to ABN AMRO regarding the appraisal of the soil surveys
performed, a copy of which letter will be attached to this deed;
. the exploratory soil and groundwater surveys of which soil and groundwater
survey reports were drawn up by DHV Oost Nederland in December nineteen
hundred and ninety-four, December nineteen hundred
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and ninety-six and June nineteen hundred and ninety-eight and by Consumij
in October nineteen hundred and ninety-six, which reports are sufficiently
known to the parties.
If, during the term of this Lease, toxic, chemical and/or other hazardous or
environmentally polluting substances are contained in the soil and/or the ground
water of the Leased Property, the Lessee will be required to remove those
substances immediately from the soil and/or the ground water, unless otherwise
agreed between the Lessor and the Lessee.
Article 7
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a. I. The Lessee must manage and use the Leased Property as a diligent user
and ensure that it is always in a good state of repair. The Lessee will
conclude maintenance contracts with regard to the installations
belonging to the Leased Property. Upon request, the Lessor will be given
access thereto at any time or will provide the Lessor with copies
thereof. The Lessor will have access to the Leased Property at least
once every six months in order to check whether its state of repair
corresponds with the requirements set and to be set by the Lessor.
a. II. As soon as possible after the Completion Date, in consultation between
the Lessor and the Lessee by order of the Lessor and for the Lessee's
account, Rene Clercx Beheer O.G. B.V. of Stationstraat 1 in Helmond, the
Netherlands, hereinafter to be called the "Manager", will draw up a
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report named "Long-Term Maintenance Plan" with regard to the Leased
Property.
a. III. The Manager (which hereinafter will also mean any successor to Rene
Clercx Beheer O.G. B.V., to be designated by the Lessor) will ensure on
behalf of the Lessor that the Leased Property is maintained in
accordance with the report "Long-Term Maintenance Plan" and is therefore
hereby authorised to contact the Lessee on behalf of the Lessor with
regard to all issues relating to the maintenance of the Leased Property.
The aforesaid power of attorney does not affect the Lessor's rights to
contact the Lessee directly for that purpose. The costs of management,
drafting the "Long-Term Maintenance Plan" report and annually updating
the report will be NLG 7,500, exclusive of VAT, a year and will be for
the Lessee's account.
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a. IV All maintenance and repair work (maintenance includes both day-to-day and
periodic maintenance) whether or not arising from the report "Long-Term
Maintenance Plan" will be performed at the Lessor's instruction and for
the account of the Lessee and in accordance with the requirements to be
stipulated by the Lessor.
b.I The care for the constructive maintenance of the Leased Property will be
the Lessor's responsibility. It will also arrange for replacements of
installations belonging to the Leased Property. All costs involved in the
above will be for the Lessee's account regardless of the reason why the
repair or other work is required. It must compensate the Lessor for those
costs within ten days after being informed thereof. The Lessee is required
to provide every cooperation to the preparation and performance of the
work.
b.II Unless, in its opinion, urgent repairs are involved, the Lessor must
inform the Lessee of its plans in that respect in writing at least four
weeks before it wishes to carry out repairs or other work on the Leased
Property, providing a description of the planned work and the price
involved. If the Lessee has not responded within two weeks, the provisions
set out in the last two sentences under b.I. will apply.
b.III If the Lessee does not agree that the relevant repairs or other work will
be performed and/or it does not wish the work and the materials to be used
to be for its account up to the amount specified by the Lessor, it must
inform the Lessor accordingly within two weeks after receipt of the
aforesaid notification by registered letter, stating to what part of the
proposal its objects. If the parties then do not reach agreement, the work
will be performed only if PRC Bouwcentrum B.V., having its registered
office in Bodegraven, the Netherlands, at the parties" joint request or at
the request of the Lessor but after the Lessee has been given the
opportunity to explain its position, has confirmed or indicated to what
extent performance of the planned work is necessary for the preservation
of the Leased Property or its value and that the stated price is
reasonable. Within those limits the provisions of the last two sentences
of b.I are applicable. That also applies if the Lessee's objection to the
proposal made by the Lessor is filed with the Lessor
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after the expiry of the period of two weeks referred to above. The costs
of PRC Bouwcentrum B.V. are for the Lessee's account unless PRC
Bouwcentrum B.V. ascertains that the performance of the relevant work is
not desirable.
b.IV The Lessee is not entitled to damages or any reduction of the Lease Price
if the Leased Property cannot be used due to the performance of work or
any defect or damage, regardless of how long that situation lasts and
regardless of the cause.
c. At the end of this Lease, unless such end occurs because the Lessee
purchases the Leased Property from the Lessor or this Lease is followed by
a new lease or rental agreement between the Lessor and the Lessee with
regard to the Leased Property, the Lessee is required to make available
the Leased Property fully vacated, cleaned and in a good state of repair,
by surrendering the keys to the Lessor. If the Lessor so requires, the
Lessee is required to remove any goods that are attached permanently or
otherwise to the Leased Property and to make the Leased Property available
in its original state. The Lessee is deemed to have waived its rights
towards the Lessor to any and all property that is found in the Leased
Property after it is made available as referred to in the first sentence
of this point (c). The Lessor is authorised to remove the aforesaid
property without any liability on its side for the Lessee's account.
d. If and as soon as it is established that the provisions of the first
sentence of paragraph (c) of this Article will be applicable, a soil and
groundwater survey to be performed by order of and for the account of the
Lessee should reveal that the soil and/or the groundwater are not polluted
to such a degree with toxic, chemical and/or other hazardous or
environmentally polluting substances that such pollution needs to be
reversed in accordance with the then applicable environmental requirements
and regulations. The costs of such survey will be for the Lessee's
account. The survey referred to in the preceding sentence must be convened
by the Lessor. If the survey shows that the soil and/or the groundwater
are so badly polluted with toxic, chemical and/or other hazardous or
environmentally polluting substances that
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such pollution must be reversed pursuant to then applicable environmental
regulations and degrees, the Lessee must reverse or commission the reversal
of such pollution. The costs of such reversal will be for the Lessee's
account. If the aforesaid reversal has not yet taken place after the end of
this Lease due to a cause for which the Lessor is not accountable, and the
Lessor therefore cannot avail of the Leased Property, the Lessee will be
required to compensate to the Lessor for the damage incurred by the Lessor
as a result, without prejudice to the Lessor's right to commission the
aforesaid reversal for the account of the Lessee.
Article 8
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a. The Lessor does not provide any warranty regarding visible and/or invisible
defects. The Lessee indemnifies the Lessor against claims from third
parties in that respect.
b. For the term of this Lease, the Lessor will take out a comprehensive risk
insurance at the prevailing market premium to insure the total
reconstruction value of the Leased Property against the consequences of
fire, storm and water damage and such other risks as the Lessor and the
Lessee will further agree with each other. In addition, the Lessor will
take out insurance on the Leased Property for the term of this Lease, at
the prevailing market premium, in which the entire reconstruction value of
the Leased Property will be insured for the consequences of all events not
covered by the insurance referred to in the preceding sentence, including
but not limited to earthquakes and floods. The premiums for the insurance
policies referred to in the preceding sentence will be paid by the Lessee
to the Lessor within ten days after the premium invoice is forwarded. The
insurance will not cover the Lessee's business risks, which will remain
entirely for the Lessee's account.
c. This Lease will remain in force if the Leased Property is lost in full or
in part due to an event. In that case, the Lessor will be required to use
any insurance payments if and in so far as they are or have been paid to
the Lessor, to restore/reconstruct the Leased property in its original
state and to pay any surplus to the Lessee. Otherwise, the Lessor has
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no obligations towards the Lessee. In that case, the Lessee will be obliged
to pay the lease instalments in full. A reduction of those instalments is
excluded.
Article 9
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a. If the Lessee has complied with all of its obligations resulting from this
Lease and this Lease is still in force, the Lessee will have the right to
purchase the Leased Property on the day ten (10) years after the last day
of the calendar quarter that includes the Completion Date at a purchase
price that is hereby fixed in consultation for that event at thirty-five
million Dutch guilders (NLG 35,000,000), exclusive of VAT, any additional
costs and taxes regarding the transfer being for the account of the Lessee.
b. If, on the day ten years after the last day of the calendar quarter that
includes the Completion Date, the Lessee decides not to exercise the right
to purchase referred to in paragraph (a), the Lease will be extended for a
period of five (5) years. In that case, the Lease Price will be determined
in accordance with Article 2(b)(I), on the understanding that Article
2(b)(I)(5) should be read as "the fact that depreciation of the Leased
Property during the remaining term of the Lease will be such that on the
day fifteen (15) years after the last day of the calendar quarter that
includes the Completion Date, the book value will be twenty-seven million
five hundred thousand Dutch guilders (NLG 27,500,000)".
c. If the Lessee has then satisfied all of its obligations arising from this
Lease and this Lease is still in force, the Lessee will be entitled to
purchase the Leased Property on the day fifteen (15) years after the last
day of the calendar quarter that includes the Completion Date at a purchase
price that is hereby fixed in mutual consultation for that event at twenty-
seven million five hundred thousand Dutch guilders (NLG 27,500,000),
exclusive of VAT, the additional costs and taxes regarding the transfer
being for the account of the Lessee.
d. The Lessor will draw the Lessee's attention to its rights referred to in
paragraphs (a) en (c) by registered letter addressed to the Lessee not
later than one year before ten (10) or fifteen (15) years, respectively,
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have passed since the last day of the calendar quarter that includes the
Completion Date. If the Lessee wishes to exercise that right, it must
inform the Lessor accordingly by registered letter within six months after
the Lessee has received from the Lessor the registered letter referred to
in the preceding sentence. If, for any reason whatsoever, the Lessee has
not received a registered letter as referred to in the first sentence of
this paragraph from the Lessor, the Lessee will have the right to inform
the Lessor not later than the day three (3) months before ten (10) or
fifteen (15) years have passed since the last day of the calendar quarter
that includes the Completion Date, by registered letter addressed to the
Lessor, that the Lessee wishes to exercise its purchase right referred to
in paragraph (a). The notarial deed of transfer will be executed on the day
referred to in paragraph (a) or (c), respectively, or on the day agreed
between the parties in further consultation. This will be done before a
civil-law notary to be designated by the Lessor. If the Lessor so desires,
the Lessee will be required, before the execution of the aforesaid deed, to
file together with the Lessor a request to exempt the transfer from VAT
with the competent Inspector of Turnover Tax. The transfer itself will be
effected free from any lease, mortgage and/or attachments and subject to a
waiver of all rights and claims to seek dissolution of the Lease. Upon the
transfer of the Leased Property, the Lessor will assign to the Lessee, if
it so wishes, all claims that the Lessor may exercise against third parties
that have damaged the Leased Property and against the insurer(s) for the
risks referred to in Article 8(b). In that case the Lessor will also pay
the Lessee any amounts that it has collected as damages and has not
invested in the Leased Property. If the Lessee does not timely exercise its
purchase rights or if, after having exercised the aforesaid rights, does
not timely cooperate in the transfer of the Leased Property at the price
referred to in paragraph (a), the Lessor will be irrevocably authorised to
declare the purchase/transfer of rights expired, without prejudice to its
right to compensation from the Lessee of costs, damage and interest. In
that case the provisions of Article 7(c) and (d) will apply accordingly.
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e. If the Lessee decides on the day fifteen (15) years after the last day of
the calendar quarter that includes the Completion Date not to exercise the
purchase right granted to it under paragraph (c), the Lessee will have the
possibility of agreeing on a new lease period with the Lessor or may
conclude with the Lessor a lease with regard to the Leased Property on
conditions to be agreed in more detail at that time.
f. Not later than one year before fifteen (15) years have passed after the
last day of the calendar quarter that includes the Completion Date, the
Lessor will draw the Lessee's attention, by registered letter addressed to
the Lessee, to its right referred to in paragraph (e). If the Lessee wishes
to exercise the right granted to it in paragraph (e), it must inform the
Lessor accordingly by registered letter within six months after the Lessee
has received from the Lessor the registered letter referred to in the
preceding sentence. If, for any reason whatsoever, the Lessee has not
received a registered letter as referred to in the first sentence of this
paragraph from the Lessor, the Lessee will have the right up to three (3)
months before fifteen (15) years have passed since the last day of the
calendar quarter that includes the Completion Date, to inform the Lessor,
by registered letter addressed to the Lessor, of the fact that the Lessee
wishes to make use of its right referred to in paragraph (c). In the
registered letters referred to in the second and third sentences of this
paragraph from the Lessee to the Lessor, the Lessee must indicate whether
it opts for concluding a new lease period or for concluding a lease with
the Lessor. As soon as possible after receipt by the Lessor of the
registered letter referred to in this paragraph (f), the Lessee and the
Lessor will enter into negotiations with each other concerning the
conditions for a new lease period or a lease.
g. If the Lessee decides on the day fifteen (15) years after the last day of
the calendar quarter that includes the Completion Date not to exercise the
purchase right granted to it under paragraph (c), or to exercise the right
to enter into a new lease period or new lease with respect to the Leased
Property granted to it under paragraph (e), this Lease will end on the day
fifteen (15) years after the last day of the calendar quarter
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that includes the Completion Date, without notice being required by either
party. In that event, the provisions of Article 7(c) and (d) will apply.
h. Subject to the condition that the Lessee has fulfilled all of its
obligations arising from this Lease and that this Lease is still in force,
the Lessee will have the right to purchase the Leased Property at a date
earlier than those stated in (a) and (c) at a purchase price that will be
equivalent to the amount that is determined by reducing the original Lease
Amount by the sum of the depreciation components in the lease prices paid
to the Lessor by the Lessee until that day.
i. If the Lessee wishes to make use of the right granted to it in paragraph
(g), it must report this by registered letter to the Lessor not later than
three months before the date on which the Lessee wishes to purchase the
Leased Property. The provisions of the fourth and subsequent sentences of
paragraph (d) of this Article will then apply accordingly. If the Lessee
exercises the rights granted to it in paragraph (h), the Lessee will owe
the Lessor compensation in addition to the price described in paragraph
(g). That compensation will be equivalent to the difference between (i) the
sum of the cash value of the interest components in the Lease Price
expressed on the dates of early purchase to the next date on which a Lease
Price revision would have taken place until the end date of the Lease in
the event that the dates on which a revision of the Lease Price takes place
have expired and ii) the sum of the cash value of the interest components
that the Lessor could receive on the date of premature purchase on the
interbank market on money loans, with amounts that are similar at that time
to the amount described in paragraph (g) and which have an interest period
similar to the period referred to in paragraph (i), on the understanding
that the compensation may nevertheless be one percent (1%) of the price
described in paragraph (g). The cash values will be calculated at the
interest rate applicable on the dates of the premature purchase and
referred to under (ii) of the preceding sentence. The Lessee will not owe
compensation on the grounds of premature purchase if the premature
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purchase takes place on one of the dates referred to in Article 2(b) of
this Lease.
Article 10
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The Lessee will owe the Lessor interest on any amount not timely paid to the
Lessor and for each day of late payment until the date of payment, at a rate
equivalent to the statutory interest rate, but at least twelve percent (12%) a
year, in which respect a year is deemed to have three hundred and sixty days and
a month thirty days.
Article 11
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1. If:
a. The Lessee, after being given sound notice of default by the Lessor,
fails to fulfil or to timely or properly fulfil any obligation towards
the Lessor under this Lease or on any other ground whatsoever;
b. the Lessee fails to fulfil or to timely or properly fulfil any
obligation under any other lease or money loan or financing agreement
with, or under any guarantee towards the Lessor;
c. the Lessee, without the Lessor's prior written permission, decides to
terminate its business, to fully or partially cease, sell, lease or
alienate its business, if a power, permit or registration necessary
for the performance of the Lessee's business expires or is denied or
is withdrawn from the Lessee, if, in the Lessor's opinion, the
Lessee's business is drastically changed, if the Lessee decides to
relocate the performance of its business to another country, if the
Lessee acts contrary to any statutory regulation relating to the
conduct of its business, if the Lessee ceases to seek achieving its
current object as defined in its Articles of Association or loses its
legal personality;
d. the Lessee is dissolved, or liquidated or if the Lessee decides or
apparently intends to dissolve or liquidate its business;
e. the Lessee applies for a suspension of payments, files a petition in
bankruptcy, is declared bankrupt, offers a settlement outside
bankruptcy or relinquishes its assets;
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f. an attachment under a writ of execution is levied on all or, in the
Lessor's opinion, substantially all of the Lessee's assets, or if a
pre-judgment attachment levied thereon is not annulled or cancelled
within 60 days after the day of attachment, or if the goods or, in the
Lessor's opinion, substantially all of them are alienated or
encumbered, disowned or confiscated, without the Lessor's prior
written consent, or have been lost or damaged;
g. the Lessee enters into a merger or community of interests with one or
more third parties or if, in the Lessor's opinion, a drastic change
occurs in the control of the Lessee's business activities, or if, in
the Lessor's opinion, a drastic change occurs in the Articles of
Association or regulations of the Lessee due to which the Lessee's
activities change to such a degree that, in the Lessor's opinion, the
Lessor cannot be required to continue those agreements;
h. the Lessee discharges its shareholders from an obligation to pay up
not fully paid-up shares, to purchase shares in its own capital, make
a repayment on shares or a payment from the reserves, or adopt a
resolution to that effect or has the apparent intention to do so, all
of this without the Lessor's prior written consent;
i. 1. one of the events referred to in (b), (d) or (e) occurs with
regard to one or more of the businesses or companies that are included
in the Lessee's consolidated balance sheet or with regard to one or
more businesses or companies that have a controlling interest in the
Lessee;
2. one of the events referred to in (c), (f), (g) or (h) occurs with
regard to one or more of the businesses or companies that are included
in the Lessee's consolidated balance sheet or with regard to which one
or more businesses or companies that have a controlling interest in
the Lessee, and the Lessee and the Lessor have not, within a
reasonable period to be specified by the Lessor, reached written
agreement on the situation that has arisen;
19
<PAGE>
3. one or more of the businesses or companies that are included in the
Lessee's consolidated balance sheet or with regard to which one or
more businesses or companies that have a controlling interest in the
Lessee fail/fails to fulfil any of the obligation towards the Lessor
and/or ABN AMRO Bank N.V. in connection with credit and/or guarantee
facilities provided by the Lessor and/or ABN AMRO Bank N.V., and the
Lessee and the Lessor have not, within a reasonable period to be
specified by the Lessor, reached written agreement on the situation
that has arisen;
j. one or more of the following circumstances occur with regard to the
Leased Property: designation for expropriation, inclusion on the list
of Protected Buildings, inclusion in a land consolidation order,
demolition of the encumbered property or part thereof;
k. one or more of the following circumstances occur: loss, destruction,
damage, loss or expiration by any cause whatsoever of all or part of
the goods or rights that serve in whole or part as security to the
Lessor for the Lessee's obligations under the Lease and that security
has not been replaced by the Lessee within 30 days of receipt of a
written request for that purpose;
l. the Lessee has provided the Lessor with incorrect information or has
withheld information from it that is material to the Lessor with a
view to the conclusion of the Lease; legislation or the interpretation
thereof has changed or a government measure has been taken that
relates to or affects or may affect the Lease and/or the security
provided and/or the value thereof, and the Lessee and the Lessor have
not reached written agreement within a reasonable period to be
stipulated by the Lessor on the adjustment of the relevant provisions
and/or security, subject to the condition that the Lessor's position
does not change in what it considers a negative sense and the Lessee
has not made use, before the end of the
20
<PAGE>
aforesaid period, of the right referred to in Article 9(g) to purchase
the Leased Property.
the Lessor may regard this Lease as dissolved and terminated with immediate
effect, without notice of default or demand for performance being required
and without judicial intervention, in which case the Lessee will be
required immediately to vacate the Leased Property and to make it available
to the Lessor, while surrendering the keys. The provisions of Article 7(c),
second, third and fourth sentences, and of Article 7(d) will then apply
accordingly. If the Lessor exercises its right referred to in the first
sentence of this article, it will inform the Lessee accordingly by
registered letter or bailiff's writ. The Lessee undertakes to immediately
inform the Lessor of the occurrence of one or more of the circumstances
referred to in paragraphs (a) to (k). The provisions of paragraph (i) under
(2) do not imply that the enterprise or company referred to in that
paragraph will be obliged to request the Lessor's (prior) consent if it is
faced with a circumstance referred to in this paragraph under (c), (f) or
(h).
2. If the Lessor dissolves the lease pursuant to the above provisions, the
Lessee will pay the Lessor a lump-sum compensation payable on call to
compensate the Lessor's loss and loss of profit. That compensation will be
1% of the amount equivalent to the amount that is determined by reducing
the original Lease Amount by the sum of the depreciation components in the
lease prices paid to the Lessor by the Lessee until the moment of
dissolution of the Lease.
Article 12
- ----------
The costs of all extra-judicial measures, in any event including costs of
collection and costs of legal aid, incurred in connection with non-performance
and/or breach by the Lessee are for its account. The parties hereby set those
costs in that event at ten percent (10%) of the amount payable by the Lessee at
that time, increased by all costs pertaining to and relating to the vacation of
the Leased Property by the Lessee.
Article 13
- ----------
Within two weeks after the Lessee's balance sheets and the profit and loss
account with explanatory notes (those documents hereinafter jointly to be
21
<PAGE>
called the "Annual Accounts") with regard to any financial year have been
adopted, the Lessee will send the Lessor a copy of the Annual Accounts,
accompanied by a statement of the Lessee's accountant. The Lessee undertakes
towards the Lessor to ensure that the adoption of the Annual Accounts with
regard to any financial year will take place not later than the 11th month after
the end of the relevant financial year.
Article 14
- ----------
The Lessee elects domicile in the Leased Property, also for purposes of judicial
enforcement.
Article 15
- ----------
This Lease is governed to the extent possible by the General Terms and
Conditions of ABN AMRO Bank N.V. as deposited on the twenty-second of December
nineteen hundred and ninety-five with the Registrar of the Amsterdam District
Court, except in so far as otherwise provided in this Lease. A copy of those
General Terms and Conditions is attached to this deed. In those General Terms
and Conditions, the term "bank" must be read as "Lessor" and the term "client"
must be read as "Lessee". The Lessee declared to have received a copy of those
General Terms and Conditions, to be familiar with them and to regard them as
having been included verbatim in this deed.
LIABLE CAPITAL
- --------------
The Lessee undertakes towards the Lessor that no dividend or other profit
distributions will be made without the Lessor's permission as long as the liable
capital is less than thirty-five million Dutch guilders (NLG 35,000,000), or
would, as a result of such distributions, drop to less than thirty-five million
Dutch guilders (NLG 35,000,000). With a view to the continuity of the Lessee's
business, the Lessee undertakes towards the Lessor that the liable capital will
be at least twenty-five percent (25%) of the (adjusted) balance sheet total
during the term of this Lease. "Liable capital" will be understood to mean the
share capital plus free distributable reserves plus any loans subordinated in
respect of the Lessor plus hidden tax liabilities, less intangible assets,
including a correction for net intercompany receivables (i.e. "affiliated
companies non-trade"). The correction for net intercompany claims will not be
made either if the sister company to which
22
<PAGE>
the Lessee gives the claim is sufficiently solvent and profitable in the
Lessor's opinion, or if, should the sister company in question be insufficiently
solvent and/or profitable in the Lessor's opinion, the Lessee is able to
demonstrate to the Lessor's satisfaction that Modus Media International
Incorporation warrants the repayment of the amount of the claim. Exclusively for
the application of this Article, the liable capital is expressed in a percentage
of the balance sheet total, whereby the book value of the Leased Property and
other off-balance obligations have been taken into consideration. The Lessee
undertakes towards the Lessor that it will not assume any liability for the
obligations of an affiliated company without the Lessor's prior permission. The
Lessee undertakes towards the Lessor to adjust the current amount of the
intercompany receivables in order to comply with the above-mentioned percentage
of liable capital.
CORPORATE GUARANTEE
- -------------------
Modus Media International Incorporation will provide the Lessor with a corporate
guarantee as security for the Lessee's performance of its obligations under the
present Lease.
MANDATE AND POWERS OF ATTORNEY
- ------------------------------
The mandates of the persons appearing are evidenced by two non-notarial deeds
that will be attached to this deed. I, the civil-law notary, have been shown
sufficient evidence of the existence of the powers of attorney included in the
mandates.
FINAL PROVISIONS
- ----------------
This deed was drawn up in one original copy and executed in Rotterdam, the
Netherlands, on the date first above written. The persons appearing have
identified themselves to me, the civil-law notary. They were informed of the sum
and substance of this deed. They declared that they were informed well in time
of the content of the deed, agreed to that content and did not require it to be
read aloud in its entirety. Immediately after a limited reading, this deed was
signed by the persons appearing and by me, the civil-law notary.
23
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Boston, MA
March 8, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MODUS MEDIA
INTERNATIONAL HOLDINGS, INC. FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 29,759
<SECURITIES> 0
<RECEIVABLES> 122,980
<ALLOWANCES> 5,179
<INVENTORY> 46,813
<CURRENT-ASSETS> 208,537
<PP&E> 183,285
<DEPRECIATION> 115,014
<TOTAL-ASSETS> 286,610
<CURRENT-LIABILITIES> 178,948
<BONDS> 55,744
0
0
<COMMON> 260
<OTHER-SE> 43,109
<TOTAL-LIABILITY-AND-EQUITY> 286,610
<SALES> 697,468
<TOTAL-REVENUES> 697,468
<CGS> 549,681
<TOTAL-COSTS> 549,681
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,452
<INCOME-PRETAX> 15,782
<INCOME-TAX> 7,550
<INCOME-CONTINUING> 8,232
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,232
<EPS-BASIC> 0.59
<EPS-DILUTED> 0.51
</TABLE>
