<PAGE>
As filed with the Securities and Exchange Commission on March 14, 2000
Registration No. 333-92559
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
AMENDMENT NO. 4 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
----------
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 14, 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
-- Representative Clients --
[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
Certain United States Federal Tax Consequences to Non-U.S. Holders of
Common Stock............................................................ 56
Underwriting............................................................. 59
Validity of Common Stock................................................. 61
Experts.................................................................. 61
Where You Can Find Additional Information................................ 61
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:
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.
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 $2.14 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 Second 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 clients' 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 weakening 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 specific
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 $2.14
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 $3.50 and total dilution per share to new
investors would be $8.50.
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
(exclusive of stock-
based compensation
shown below)........... 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 (exclusive
of stock-based compensation shown below).............. 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, $2.4 million, $2.2 million, $1.5 million and $0.9 million for 2000,
2001, 2002, 2003 and 2004, respectively. 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 (exclusive
of stock-based
compensation shown
below)................. 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 (exclusive
of stock-based
compensation shown
below)................. 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
25
<PAGE>
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.
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 substantially all of the assets 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
26
<PAGE>
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.
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 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.
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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.
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.
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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 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
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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.
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.
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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 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.
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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. Mr.
Nunnelly and Mr. Lavine will serve in the class whose term expires in 2001; Mr.
Lacy and Mr. 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
7,000,000 shares of our common stock (subject to
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<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 7,661,756 shares of Common Stock (as adjusted for stock
split) 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 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 December 31, 1999, the amount outstanding under this loan was
approximately $1.2 million.
In connection with the reorganization of Stream 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 December 31, 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 December 31, 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 connection with its December 1997 reorganization, Stream 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
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<PAGE>
shareholder of Stream, received shares of preferred stock of Modus Media, with
a redemption value 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 $21.1 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.
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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
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<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.
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<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, based upon the number of shares
outstanding at December 31, 1999, we will have 34,006,116 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 26,006,116 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 option 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.
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<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>
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK
General
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of our
common stock that may be relevant to you if you are a non-U.S. holder under
U.S. federal income tax laws. A non-U.S. holder is a beneficial owner of our
common stock that is, for U.S. federal income tax purposes:
. a nonresident alien individual;
. a foreign corporation;
. a foreign estate or trust; or
. a foreign partnership.
This discussion does not address all aspects of U.S. federal income and
estate taxation that may be relevant to you in light of your particular
circumstances. It also does not address any foreign, state or local tax
consequences. Furthermore, this discussion is based on provisions of the
Internal Revenue Code, final, temporary and proposed U.S. Treasury regulations
promulgated thereunder, and administrative and judicial interpretations as of
the date of this prospectus. All of these are subject to change, possibly with
retroactive effect, or different interpretations. If you are considering buying
our common stock, you should consult your own tax advisor about current and
possible future tax consequences of holding and disposing of our common stock
in your particular situation.
Distributions
As noted elsewhere in this prospectus, we do not intend to pay dividends. If
we change this policy and declare dividends on our common stock, any such
dividends paid to a non-U.S. holder may be subject to U.S. withholding tax. If
an income tax treaty does not apply and if the dividends are not effectively
connected with a trade or business conducted by the non-U.S. holder in the U.S.
(or if a tax treaty applies and the dividends are not attributable to a U.S.
permanent establishment maintained by the non-U.S. holder), any dividends will,
to the extent paid out of earnings and profits, be subject to U.S. withholding
tax. The withholding tax will be imposed at a 30 percent rate or, if an income
tax treaty applies, a lower rate specified by the treaty. To receive a reduced
treaty rate, a non-U.S. holder must furnish to us or our paying agent a duly
completed Form 1001 or Form W-8BEN, or other authorized substitute form,
certifying to its qualification for such rate.
If an income tax treaty does not apply, dividends that are effectively
connected with the conduct of a trade or business within the United States of a
non-U.S. holder (and, if a tax treaty applies, dividends that are attributable
to a U.S. permanent establishment maintained by the non-U.S. holder) are exempt
from U.S. federal withholding tax. To qualify for such exemption, the non-U.S.
holder must furnish to us or our paying agent a duly completed Form 4224 or
Form W-8ECI, or other authorized substitute form, certifying to its
qualification for the exemption. However, dividends exempt from U.S.
withholding tax because they are effectively connected or they are attributable
to a U.S. permanent establishment are subject to U.S. federal income tax on a
net income basis at the regular graduated U.S. federal income tax rates. Any
such effectively connected dividends or dividends attributable to a U.S.
permanent establishment received by a foreign corporation may, under some
circumstances, be subject to an additional branch profits tax at a 30 percent
rate or a lower rate as specified by an applicable income tax treaty.
Under current U.S. Treasury regulations, dividends paid before January 1,
2001 to an address outside the United States are presumed to be paid to a
resident of the country of address for purposes of the withholding discussed
above and for purposes of determining the applicability of a tax treaty rate.
However, U.S. Treasury regulations applicable to dividends paid after December
31, 2000 eliminate this presumption, subject to various transition rules.
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<PAGE>
For dividends paid after December 31, 2000, a non-U.S. holder generally will
be subject to U.S. backup withholding tax at a 31 percent rate under the backup
withholding rule described below, rather than at a 30 percent rate or a reduced
rate under an income tax treaty, as described above, unless the non-U.S. holder
complies with certain Internal Revenue Service certification procedures or, in
the case of payments made outside the U.S. with respect to an offshore account,
certain IRS documentary evidence procedures or is a corporation or other exempt
recipient that meets certain requirements. Further, to claim the benefit of a
reduced rate of withholding under a tax treaty for dividends paid after
December 31, 2000, a non-U.S. holder must comply with certain modified IRS
certification requirements. Special rules also apply to dividend payments made
after December 31, 2000 to foreign intermediaries, United States or foreign
wholly owned entities that are disregarded for U.S. federal income tax purposes
and entities that are treated as fiscally transparent in the U.S., the
applicable income tax treaty jurisdiction, or both. You should consult your own
tax advisor concerning the effect, if any, of the rules affecting post-December
31, 2000 dividends on your possible investment in our common stock.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale or other disposition of our common
stock unless one of the following applies:
. The gain is effectively connected with a trade or business of the non-
U.S. holder in the U.S. and, if an income tax treaty applies, the gain is
attributable to a U.S. permanent establishment maintained by the non-U.S.
holder. In this case, the non-U.S. holder will, unless an applicable
treaty provides otherwise, be taxed on its net taxable gain derived from
the sale at regular graduated U.S. federal income tax rates. If the non-
U.S. holder is a foreign corporation, it may be subject to an additional
branch profits tax equal to 30 percent of its effectively connected
earnings and profits within the meaning of the Internal Revenue Code for
the taxable year, as adjusted for certain items, unless it qualifies for a
lower rate under an applicable income tax treaty and duly demonstrates such
qualification.
. The non-U.S. holder is an individual, holds our common stock as a
capital asset, is present in the U.S. for 183 or more days in the taxable
year of the disposition, and either the income from the disposition is
attributable to an office or other fixed place of business maintained by
the holder in the U.S. or the holder has a "tax home" in the U.S. In this
case, the non-U.S. holder will be subject to a flat 30-percent tax on the
gain derived from the sale, which may be offset by certain U.S. capital
losses.
. We are or have been a U.S. real property holding corporation for U.S.
federal income tax purposes at any time during the shorter of the five-
year period ending on the date of the disposition or the period during
which the non-U.S. holder held our common stock. We believe that we never
have been and are not currently a U.S. real property holding corporation
for U.S. federal income tax purposes. Although we consider it unlikely
based on our current business plans and operations, we may become a U.S.
real property holding corporation in the future. Even if we were to
become a U.S. real property holding corporation, any gain realized by a
non-U.S. holder would not be subject to U.S. federal income tax as
described in this paragraph if our common stock were considered to be
"regularly traded on an established securities market" and the non-U.S.
holder did not own, actually or constructively, at any time during the
shorter of the periods described above, more than five percent of our
common stock.
. The non-U.S. holder is subject to tax pursuant to the provisions of U.S.
federal income tax laws applicable to certain U.S. expatriates.
Federal Estate Tax
Common stock owned or treated as owned by an individual non-U.S. holder at
the time of death, or common stock as to which the non-U.S. holder made certain
lifetime transfers, will be included in such holder's gross estate for U.S.
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
57
<PAGE>
Information Reporting and Backup Withholding Tax
Under U.S. Treasury regulations, we must report annually to the IRS and to
each non-U.S. holder the amount of dividends paid to such holder and the tax
withheld with respect to such dividends. These information reporting
requirements apply even if withholding was not required because the dividends
were effectively connected dividends or withholding was reduced by an
applicable income tax treaty. Under an applicable tax treaty, information may
also be made available to the tax authorities in the country in which the non-
U.S. holder resides.
United States federal backup withholding generally is a withholding tax
imposed at the rate of 31 percent on certain payments to persons that fail to
furnish certain required information. Backup withholding generally will not
apply to dividends paid before January 1, 2001, to non-U.S. holders.
As a general matter, information reporting and backup withholding will not
apply to a payment by or through a foreign office of a foreign broker of the
proceeds of a sale or other disposition of our common stock effected outside
the U.S. However, information reporting requirements, but not backup
withholding (unless the broker has actual knowledge that the owner is not a
non-U.S. holder) generally will apply to a payment by or through a foreign
office of a broker of the proceeds of a sale of our common stock effected
outside the U.S. if that broker:
. is a U.S. person for U.S. federal income tax purposes,
. is a foreign person that derives 50 percent or more of its gross income
for certain periods from the conduct of a trade or business in the U.S.,
. is a controlled foreign corporation as defined in the Internal Revenue
Code, or
. is a foreign partnership with certain U.S. connections for payments made
after December 31, 2000.
Information reporting requirements will not apply in the above cases if the
broker has documentary evidence in its records that the holder is a non-U.S.
holder (and the broker has no actual knowledge to the contrary) and certain
conditions are met.
Payment by or through a U.S. office of a broker of the proceeds of a sale or
other disposition of our common stock is subject to both backup withholding and
information reporting unless the holder certifies to the payor as to its status
as a non-U.S. holder on a duly completed Form W-8BEN, or other authorized
substitute form, under penalties of perjury or otherwise establishes an
exemption.
Amounts withheld under the backup withholding rules to not constitute a
separate U.S. federal income tax. Rather, any amounts withheld under the backup
withholding rules will be refunded or allowed as a credit against the holder's
U.S. federal income tax liability, if any, provided the required information or
appropriate claim for refund is timely filed with the IRS.
The foregoing discussion is a summary of certain U.S. federal income and
estate tax consequences of the ownership, sale or other disposition of our
common stock by non-U.S. holders. You are urged to consult your own tax advisor
with respect to the particular tax consequences to you of ownership, sale or
other disposition of our common stock, including the effect of any state,
local, foreign or other tax laws.
58
<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.
We have applied to have the common stock included for quotation on the
Nasdaq National Market under the symbol "EMMI".
59
<PAGE>
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.
60
<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.
61
<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
(exclusive of
stock-based compensation shown below).......... 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, 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 $130.0 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 7.0 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.
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 provided a guarantee of lease payments on
behalf of its Netherlands subsidiary in connection with the Netherlands
subsidiary's entering 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 Second Amended and Restated Certificate of Incorporation
and Form of Second 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. 4 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Westwood,
Massachusetts, on this 14th day of March, 2000.
MODUS MEDIA, 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. 4 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 14, 2000
______________________________________ Directors, and Chief
Terence M. Leahy Executive Officer
(Principal Executive
Officer)
/s/ Richard M. Darer Chief Financial Officer March 14, 2000
______________________________________ (Principal Financial
Richard M. Darer Officer)
* Director March 14, 2000
______________________________________
Linwood A. Lacy, Jr.
* Director March 14, 2000
______________________________________
Jonathan S. Lavine
* Director March 14, 2000
______________________________________
Mark E. Nunnelly
* Director March 14, 2000
______________________________________
Robert F. White
*By: /s/ Richard M. Darer
______________________________________
Richard M. Darer
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 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.
<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 14, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MODUS MEDIA,
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>
