<PAGE>
As filed with the Securities and Exchange Commission on August 22, 2000
Registration No. 333-41004
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
ZEFER CORP.
(Exact name of registrant as specified in its charter)
Delaware 7389 04-3462742
(State or other (Primary Standard Industrial (IRS Employer
jurisdiction of Classification Code Identification Number)
incorporation or Number)
organization) -------------
711 Atlantic Avenue
Boston, Massachusetts 02111
(617) 451-8000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-------------
WILLIAM A. SEIBEL
Chairman of the Board, President and Chief Executive Officer
ZEFER Corp.
711 Atlantic Avenue
Boston, Massachusetts 02111
(617) 451-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------
Copies to:
SEAN W. MULLANEY, ESQ. DAVID E. REDLICK, ESQ. WILLIAM J. WHELAN, III,
ZEFER CORP. JAMES R. BURKE, ESQ. ESQ.
711 Atlantic Avenue Hale and Dorr LLP Cravath, Swaine & Moore
Boston, Massachusetts 60 State Street Worldwide Plaza
02111 Boston, Massachusetts 02109 825 Eighth Avenue
Telephone: (617) 451-8000 Telephone: (617) 526-6000 New York, New York 10019
Telecopy: (617) 451-8001 Telecopy: (617) 526-5000Telephone: (212) 474-1000
Telecopy: (212) 474-3700
-------------
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 of
1933, 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 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
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 it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 22, 2000
4,500,000 Shares
[LOGO OF ZEFER]
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$9.00 and $11.00 per share. We have applied to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "ZEFR".
Funds controlled by GTCR Golder Rauner, L.L.C., or GTCR, will hold
approximately 64.4% of our common stock after this offering. These funds have
appointed two of the members of our board of directors. We expect to use
approximately $19.4 million of the net proceeds of this offering to repay
outstanding indebtedness guaranteed by GTCR.
The underwriters have an option to purchase a maximum of 675,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Price Underwriting
to Discounts and Proceeds
Public Commissions to ZEFER
------ ------------- --------
<S> <C> <C> <C>
Per Share........................................ $ $ $
Total............................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
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.
Credit Suisse First Boston Deutsche Banc Alex. Brown
The date of this prospectus is , 2000.
<PAGE>
from
digital vision.....
[ZEFER LOGO APPEARS HERE]
<PAGE>
ZEFER provides Internet consulting and implementation services to companies to
help them create and execute strategies and new business models for the digital
economy.
3PLex.com
[3PLEX.COM WEBSITE SCREEN IMAGE]
A B2B exchange focused on the
transportation industry.
www.3plex.com
The Children's Place
[CHILDREN'S PLACE WEBSITE SCREEN IMAGE]
A bricks-and-mortar retailer
builds an online business.
www.childrensplace.com
<PAGE>
to
business results
Zuellig Pharma
[ZUELLIG PHARMA WEBSITE SCREEN IMAGE]
An extranet delivering real-time
information to suppliers,
salespeople and managers.
www.zuelligpharma.com
Publicaciones Semana
[SEMANA.COM WEBSITE SCREEN IMAGE]
An online magazine,
search engine and portal.
www.semana.com
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 6
Use of Proceeds...................... 13
Dividend Policy...................... 14
Capitalization....................... 15
Dilution............................. 17
Selected Pro Forma and Historical
Financial Data...................... 18
Selected Historical Financial Data... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business............................. 29
Management........................... 40
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Certain Relationships and Related
Transactions........................ 52
Principal Stockholders............... 56
Description of Capital Stock......... 57
Shares Eligible for Future Sale...... 59
U.S. Federal Tax Considerations for
Non-United States Holders........... 61
Underwriting......................... 65
Notice to Canadian Residents......... 68
Legal Matters........................ 68
Experts.............................. 69
Where You Can Find More
Information......................... 69
Index to Financial Statements........ F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
as of the date of this document.
Dealer Prospectus Delivery Obligation
Until , 2000, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary may not contain all of the information that is important to
you. You should carefully read the entire prospectus, including the financial
statements and related notes, before investing in our common stock.
[LOGO OF ZEFER]
ZEFER Corp. was founded for the purpose of providing consulting and software
application development and implementation services that enable companies to
effectively use the Internet in their businesses. We advise clients with
respect to the ways in which they can use the Internet for such purposes as
streamlining their operations or reaching new markets. We then develop the
software applications required to achieve our clients' strategic goals. A key
aspect of our service offering is that we involve business strategy consultants
throughout our engagements in order to continually improve the client services
that we provide in light of evolving markets and technologies. We refer to this
as a "strategy-led" approach.
As part of our consulting services, we help our clients identify business
objectives and create and prioritize a portfolio of initiatives for using the
Internet in their businesses. We design these initiatives to offer a variety of
ways to maximize competitiveness in the new economic environment that has
resulted from the widespread acceptance of the Internet. After creating an
initial Internet strategy, we architect and build scalable, flexible
applications that can be adapted over time to our clients' evolving needs. We
also assist our clients in implementing these applications by linking the
applications with the clients' computer systems and other software and testing
and deploying the applications. We refer to the applications that we build and
implement and our consulting services as "solutions" because our clients use
these services to solve business problems or achieve business goals.
Our strategy-led approach includes:
. analyzing the client's industry, business model and goals;
. developing a portfolio of Internet initiatives in the context of an
overall business strategy; and
. developing and launching various Internet initiatives in a sequence that
is designed to maximize business value over the long term.
We deliver our services through teams of consultants with backgrounds in
business strategy, experience design, technology and program management.
Experience design is the art of constructing the various visual and auditory
elements that a user encounters when visiting a website. Because these teams
include consultants with different skills who work closely together throughout
a client engagement, we refer to them as being "integrated" and
"multidisciplinary." Our integrated, multidisciplinary approach allows us to
deliver high quality Internet initiatives without the time delays and increased
costs associated with handing off a project from one team to another or among
multiple service providers. Our commitment to research and innovation allows us
to provide our clients with Internet professional services that are at the
forefront of Internet technologies and experience design. Our consultants are
trained in the latest practices and technologies in their disciplines.
Our delivery model is based upon a proprietary methodology that we call
ENABLE. This methodology consists of four phases: ENvision, Architect, Build
and Launch, and Evolve. Our ENABLE methodology is designed to ensure that we:
. involve all of our competencies in each phase of our engagements;
. take advantage of the standards, benchmarks and approaches we have
developed; and
. follow detailed control procedures that are designed to ensure that we
are delivering high quality solutions.
1
<PAGE>
Our objective is to become the leading provider of strategy-led Internet
professional services. Our business strategy for accomplishing this objective
includes continuing to attract and retain outstanding professionals, continuing
to develop long-term client relationships, continuing to serve cutting-edge
clients, enhancing and extending our service offering and continuing to build
the ZEFER brand.
We were incorporated in Delaware in March 1999. Our principal executive
offices are located at 711 Atlantic Avenue, Boston, Massachusetts 02111 and our
telephone number is (617) 451-8000. Our world wide web address is
www.ZEFER.com. The information on our website is not incorporated by reference
into this prospectus and should not be considered to be a part of this
document. Our web site address is included in this document as an inactive
textual reference only.
We have applied to register "ZEFER" as a trademark in the United States,
Canada and in the European Union. ZEFER 360(degrees) is an unregistered
trademark. All other trademarks or trade names in this prospectus are the
property of their respective owners.
Risk Factors
Investing in our common stock involves risk. In particular, we have a
history of operating losses, incurred an operating loss of $34.7 million for
the period from our inception to December 31, 1999 and an operating loss of
$33.7 million for the six months ended June 30, 2000 and expect to continue to
incur operating losses in the future. In addition, after this offering, our
executive officers and directors and funds controlled by GTCR Golder Rauner,
L.L.C., or GTCR, will beneficially own an aggregate of approximately 79.3% of
our capital stock. The funds controlled by GTCR will hold approximately 64.4%
of our capital stock. Additionally, two of our directors are affiliated with
GTCR. If our executive officers and directors and the funds controlled by GTCR
were to choose to act together, they would be able to control the election of
directors and all other matters submitted to our stockholders for approval, as
well as our management and affairs. Please see "Risk Factors."
The Offering
<TABLE>
<C> <S>
Common stock offered by ZEFER....................... 4,500,000 shares
Common stock to be outstanding after this offering.. 50,675,463 shares
Use of proceeds..................................... Repayment of debt,
working capital and other
general corporate
purposes, including
possible acquisitions
Proposed Nasdaq symbol.............................. ZEFR
</TABLE>
The number of shares of our common stock that will be outstanding after this
offering excludes 7,772,162 shares subject to outstanding options as of June
30, 2000 under our 1999 Incentive Plan and 1999 Stock Option Plan at a weighted
average exercise price of $5.88 per share and 16,894,504 additional shares
available for issuance under these plans as of such date.
Unless otherwise indicated, all information in this prospectus:
. assumes that the underwriters will not exercise their over-allotment
option;
. reflects the issuance during the third quarter of 2000 of an aggregate
of 8,231.9970 shares of class A preferred stock to existing holders of
class A preferred stock at a price of $1,000 per share for an aggregate
of $8,231,997, and the issuance during the third quarter of 2000 of an
aggregate of 966.7593 shares of class A preferred stock at a price of
$0.01 per share to GTCR Capital Partners, L.P., an affiliate of GTCR, in
consideration of financing provided to us;
2
<PAGE>
. reflects the incurrence during the third quarter of 2000 of an
additional $4.0 million of subordinated indebtedness payable to GTCR
Capital Partners;
. reflects the exchange upon the closing of this offering of all
outstanding shares of class A preferred stock, including related accrued
and unpaid dividends as of September 30, 2000, for 6,125,106 shares of
common stock at an exchange rate based on an assumed initial public
offering price of $10.00 per share, the mid-point of the range on the
cover of this prospectus;
. assumes the automatic conversion of 200,000 shares of class B
convertible preferred stock into 201,255 shares of common stock upon the
closing of this offering; and
. assumes the conversion upon the closing of this offering of a $2.0
million promissory note issued to Renaissance Worldwide, Inc. into
250,000 shares of common stock, which is based on a conversion rate
equal to 80% of the assumed initial public offering price.
Summary Financial Data
The following pro forma and historical statement of operations data present
specified pro forma and historical results of operations for us, an entity
originally known as ZEFER Corp. and referred to in this prospectus as Original
ZEFER, the divisions of Renaissance Worldwide, Inc., Spyplane, LLC and Waite &
Company, Inc. The pro forma financial data give effect to the acquisition of
each of these businesses as if each had been acquired on January 1, 1999. The
pro forma financial data do not purport to represent what our actual results of
operations would have been had each of these businesses been acquired on
January 1, 1999, nor do they project our results of operations for any future
period.
We made no acquisitions after September 13, 1999. Therefore the table below
presents our actual statement of operations data for the three month periods
ended December 31, 1999, March 31, 2000 and June 30, 2000.
<TABLE>
<CAPTION>
Pro Forma Historical
----------------------------------------------- -------------------------------
Three Months Ended
Year Ended -----------------------------------------------------------------
December 31, March 31, June 30, September 30, December 31, March 31, June 30,
1999 1999 1999 1999 1999 2000 2000
------------- --------- -------- ------------- ------------ --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 33,084 $ 3,957 $ 5,612 $ 10,212 $ 13,303 $18,328 $ 26,763
Loss from operations.... (48,228) (7,236) (9,190) (10,380) (21,422) (18,104) (15,629)
Net loss................ (46,082) (7,975) (8,514) (7,073) (22,520) (21,616) (18,393)
Basic and diluted net
loss per share......... $ (1.53) $ (0.27) $ (0.28) $ (0.23) $ (0.74) $ (0.71) $ (0.57)
Weighted average
shares................. 30,212 29,693 29,917 30,311 30,450 30,607 32,363
</TABLE>
The following historical statement of operations data present the results of
operations of the divisions of Renaissance for the years ended December 31,
1997 and 1998 and the five months ended May 28, 1999 and the results of
operations of Original ZEFER for the period from inception (March 19, 1998)
through December 31, 1998 and the four months ended April 30, 1999. In
addition, the following data present our results of operations for the period
from our inception (March 18, 1999) through December 31, 1999, the period from
our inception (March 18, 1999) through June 30, 1999 and the six months ended
June 30, 2000.
3
<PAGE>
<TABLE>
<CAPTION>
Historical
-------------------------------------------------------------------------------------
Divisions of
Renaissance Original ZEFER Registrant
----------------------- ---------------------------- -------------------------------
Period
Five from Six
Months Period from Period from Inception Months
Years Ended Ended Inception to Four Months Inception to to Ended
December 31, May 28, December 31, Ended April 30, December 31, June 30, June 30,
1997 1998 1999 1998 1999 1999 1999 2000
------ ------- ------- ------------ --------------- ------------ --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $9,539 $13,798 $ 3,886 $ 621 $ 491 $ 25,277 $ 2,572 $ 45,091
Income (loss) from
operations............. 2,654 (3,763) (4,718) (561) (2,262) (34,656) (3,730) (33,733)
Net income (loss)....... 1,294 (4,195) (5,043) (554) (2,281) (31,150) (2,545) (40,009)
Basic and diluted net
loss per share......... $ (1.16) $ (0.13) $ (1.27)
Weighted average
shares................. 26,793 19,176 31,479
</TABLE>
The following balance sheet data should be read in conjunction with
"Selected Historical Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes included elsewhere in this prospectus. The pro forma information
reflects:
. the issuance during the third quarter of 2000 of an aggregate of
9,198.7563 shares of class A preferred stock to existing holders of
class A preferred stock and GTCR Capital Partners, an affiliate of GTCR,
for $8.2 million;
. the exchange upon the closing of this offering of all outstanding shares
of class A preferred stock, including related accrued and unpaid
dividends as of September 30, 2000, for 6,125,106 shares of common stock
at an exchange rate based on an assumed initial public offering price of
$10.00 per share;
. the incurrence during the third quarter of 2000 of an additional $4.0
million of subordinated indebtedness payable to GTCR Capital Partners;
. the automatic conversion of 200,000 shares of class B convertible
preferred stock into 201,255 shares of common stock upon the closing of
this offering; and
. the conversion upon the closing of this offering of a $2.0 million
promissory note issued to Renaissance Worldwide, Inc. into 250,000
shares of common stock, which is based on a conversion rate equal to 80%
of the assumed initial public offering price.
The pro forma as adjusted information reflects:
. receipt of estimated net proceeds of $39.4 million from the sale by us
of 4,500,000 shares of common stock in this offering, after deducting
the estimated underwriting discounts and commissions and estimated
offering expenses; and
. the application of a portion of the net proceeds to repay $19.4 million
of outstanding bank indebtedness under a revolving line of credit
guaranteed by GTCR.
4
<PAGE>
<TABLE>
<CAPTION>
June 30, 2000
----------------------------
Pro
Pro Forma As
Actual Forma Adjusted
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......................... $ 3,001 $ 15,208 $ 35,142
Working capital (deficit)......................... (27,891) (14,434) 5,500
Total assets...................................... 68,337 80,544 100,478
Lines of credit................................... 19,416 19,416 --
Other debt, including current portion............. 2,800 800 800
Subordinated debt payable to GTCR................. 21,475 25,450 25,450
Redeemable preferred stock........................ 50,944 -- --
Total stockholders' equity (deficit).............. (60,298) 1,987 41,337
</TABLE>
The amounts shown in the above table as subordinated debt payable to GTCR
exclude an original issue discount of $1.5 million related to such debt that we
are also obligated to pay.
5
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should consider carefully
the risks and uncertainties described below and the other information in this
prospectus, including the financial statements and related notes, before
deciding to invest in shares of our common stock. 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 Relating To Our Business
Our future success is uncertain because we have a limited operating history
We have a limited operating history in the new and rapidly changing Internet
professional services market. We were incorporated in March 1999 and acquired
three businesses during 1999, each of which had a limited operating history.
Accordingly, our historical results of operations may not reflect the current
nature of our service offering and you should not rely on them as an indicator
of our future performance. In particular, our larger work force and the greater
variety of services that we offer may affect our future results as compared to
our historical results.
We have a history of losses and expect to incur losses in the future
We expect to continue to incur increasing sales and marketing, hiring and
training, infrastructure development and general and administrative expenses.
As a result, we will need to generate significant revenues to achieve
profitability. We cannot be certain whether or when this will occur because of
the significant risks and uncertainties that affect our business.
We experienced a net loss of $31.1 million for the period from our inception
to December 31, 1999 and a net loss of $40.0 million for the six months ended
June 30, 2000. For the period from our inception through December 31, 1999 we
experienced a pro forma net loss of $46.1 million. The pro forma net loss gives
effect to the results of operations of the companies that we acquired as if we
had acquired such companies on January 1, 1999. The pro forma net loss includes
net losses incurred by these companies prior to the dates we acquired them,
interest expense on borrowings to finance the acquisitions, and expenses
relating to depreciation and amortization arising from the acquisitions. We
expect to continue to incur significant operating losses as we expand our
business. If we do achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis in the future.
Our growth could be limited if we are unable to attract, develop and retain
personnel with management expertise, Internet expertise and consulting and
technical skills
The rapid expansion of usage of the Internet in recent years has resulted in
greatly increased competition for personnel with the skills that we need for
our service offering. This competition is particularly intense in the regions
where our facilities are located. As a result, we believe that our success
depends largely on our ability in this competitive environment to attract,
develop and retain highly skilled professionals to manage, deliver and sell our
services. We may not be able to hire or retain the necessary number or mix of
personnel to implement our business strategy. In addition, we may need to incur
higher compensation expenses than we currently expect in order to attract and
retain qualified personnel.
Our markets are highly competitive and our failure to compete in them
successfully would limit our ability to maintain our existing clients or
attract new clients
We compete in the rapidly evolving market of Internet professional service
providers. This market is highly competitive. Our competitors include a wide
variety of Internet-focused professional service firms, strategic management
consulting companies, traditional information technology service firms, systems
integration firms and internal IT departments of our prospective clients. Many
of our competitors have longer
6
<PAGE>
operating histories, better name recognition, larger client bases and greater
financial, technical, marketing and public relations resources than we have.
Because the Internet professional services market has relatively low barriers
to entry, we believe competition will intensify as the market evolves. If we do
not compete successfully, we will not be able to maintain or increase our
market share, which would result in serious harm to our business.
Our results of operations would suffer if we are unable to keep pace with the
rapid technological change of the Internet, changing business methodologies and
evolving client requirements
The Internet professional services industry is characterized by a rapidly
evolving technological landscape, evolving business methodologies and
constantly changing client requirements. The manner in which firms have
conducted business on the Internet has changed dramatically in the last few
years, and our future success depends in part on our ability to anticipate and
adapt to new changes. We expended $1.8 million for the period from our
inception through December 31, 1999 and $3.7 million for the six months ended
June 30, 2000 on research and innovation programs to keep our service offering
attractive to clients and up to date. We also expend significant resources on
ongoing training of our personnel. We expect that these research and innovation
and training expenses will increase in future periods. Nonetheless, because of
the intense competition in the market in which we compete and the difficulty of
predicting which technological changes will be widely adopted, these
expenditures by us may not be sufficient for us to remain competitive.
We may be unable to successfully manage our growth, which would negatively
impact our business
Since our founding, we have rapidly expanded our operations by hiring new
employees, completing three acquisitions, adding new clients, extending
existing client relationships and expanding our geographic markets. For
instance, our employees increased from 222 at June 30, 1999 to 762 at August
18, 2000. Our growth has placed and will continue to place a significant strain
on our management, operating and financial systems and sales, marketing and
administrative resources. If we cannot effectively manage our expanding
operations, we may not be able to continue to grow or we may grow at a slower
pace. Furthermore, our operating costs may escalate faster than planned.
To successfully manage our growth we must:
. attract and retain leading business, design, technical and project
management talent;
. expand our training and development programs for our existing and new
employees;
. improve our management, financial, human resource and information
systems and controls; and
. build a base of intellectual capital that can be leveraged for client
development and service delivery.
We may undertake additional acquisitions which may affect our ability to manage
and maintain our business, may result in adverse accounting treatment and may
be difficult to integrate into our business
Since our inception, we have acquired three businesses. In the future, we
may undertake additional acquisitions of professional service firms that
provide Internet consulting or Internet software application design and
implementation services or other businesses that complement our existing
operations. Such acquisitions could involve a number of risks, including:
. the diversion of the attention of management and other key personnel;
. inability to effectively integrate the acquired business into our
culture, client delivery methodology and other standards, controls,
procedures and policies;
. inability to retain the management, key personnel and other employees of
the acquired business;
. inability to retain the acquired company's customers; and
. the amortization of goodwill, which may adversely affect our reported
results of operations.
7
<PAGE>
Client satisfaction or performance problems with an acquired business also
could affect our reputation as a whole. In addition, any acquired business
could significantly underperform relative to our expectations.
Difficulties presented by international operations could negatively affect our
business
We have clients outside the United States and may face risks in doing
business abroad that we do not face domestically. Among the international risks
we believe are most likely to affect us are:
. difficulties in staffing and managing international operations;
. longer payment cycles;
. problems in collecting accounts receivable;
. language and cultural differences;
. local economic conditions in foreign markets;
. international currency issues, including fluctuations in currency
exchange rates and the conversion to the euro by all countries of the
European Union; and
. restrictions on the import and export of sensitive U.S. technologies,
such as data security and encryption technologies, that we may wish to
use in solutions we develop for clients.
Any of these factors could adversely impact our business results.
We generally enter into fixed-price contracts and risk incurring losses on
particular engagements if we miscalculate the time or resources needed to
complete them
Approximately 90% of our revenues for the period from our inception through
December 31, 1999 was derived from fixed-price contracts. Approximately 83% of
our revenues for the six months ended June 30, 2000 was derived from fixed-
price contracts. Because of the complex nature of the services we provide, it
is sometimes difficult to accurately estimate the cost, scope and duration of
particular client engagements. If we underestimate the resources required by
client engagements, we may be required to devote additional resources to these
engagements without receiving additional compensation, which would adversely
affect our results of operations and financial condition.
The developing market for Internet professional services and the level of
acceptance of the Internet as a business medium will affect our business
The market for Internet professional services is relatively new and is
evolving rapidly. Our future growth is dependent upon our ability to provide
Internet professional services that are accepted by our existing and future
clients as an integral part of their business models. The level of demand for
and acceptance of Internet professional services is highly uncertain and
dependent upon a number of factors, including:
. the growth in consumer access to and acceptance of new interactive
technologies such as the Internet;
. the adoption of Internet-based business models by companies; and
. the development of technologies that facilitate two-way communication
between companies and targeted audiences.
Significant issues concerning the commercial use of Internet technologies
include security, reliability, cost, ease of use and quality of service. These
issues remain unresolved and may inhibit the growth of Internet business
solutions that utilize these technologies.
Industry analysts and others have made many predictions concerning the
growth of the Internet as a business medium. These predictions should not be
relied upon. If the market for Internet professional services fails to develop,
or develops more slowly than expected, or if our services do not achieve market
acceptance, our business will not succeed and the value of your investment in
our common stock will decline.
8
<PAGE>
We may be unable to redeploy our professionals effectively if engagements are
terminated unexpectedly, which would adversely affect our revenues
Our clients can cancel or reduce the scope of their engagements with us on
short notice. If they do so, we may be unable to reassign our professionals to
new engagements without delay. The cancellation or reduction in scope of an
engagement could, therefore, reduce the utilization rate of our professionals,
which would have a
negative impact on our financial condition and results of operations.
A significant portion of our revenues is derived from dot-com companies, many
of which have limited operating histories and significant net losses
During the period from inception (March 18, 1999) through June 30, 2000, we
derived approximately 36% of our revenues from services performed for dot-com
companies. Many dot-com companies are recently organized, have limited
operating histories, have significant net losses and have limited corporate
sponsorship or financial resources. The volatility of the stock market in
recent months has made it difficult for many dot-com companies to raise funds,
and a number of companies have gone bankrupt. As a result, our customer base
could be more volatile than that of competitors whose customer base consist of
more mature and established companies. If we experience greater than expected
customer loss or an inability to collect fees from our customers in a timely
manner because of this volatility, our ability to achieve revenue and earnings
targets or maintain an adequate cash position could be materially adversely
affected.
A small number of our clients account for a significant portion of our
revenues, which may decline if we cannot keep or replace these client
relationships
During the period from our inception through December 31, 1999, five clients
accounted for approximately 31% of our revenues. During the six months ended
June 30, 2000, five clients accounted for approximately 26% of our revenues. We
anticipate that our results of operations in any given period may continue for
the foreseeable future to depend to a significant extent upon revenues from a
small number of clients. In addition, we anticipate that such clients will
continue to vary over time, so that the achievement of our long-term goals will
require us to obtain additional significant clients on an ongoing basis. Either
our loss of existing clients or our failure to generate new clients would have
an adverse effect on our financial condition and results of operations.
Failure of computer systems and software to be year 2000 compliant could
increase our costs, disrupt our service and reduce demand from our clients
We confront the year 2000 problem in two contexts.
Our Clients. The failure of our clients to ensure that their operations are
year 2000 compliant could have an adverse effect on them, which in turn could
limit their ability to retain us as a third-party service provider or process
our invoices in a timely manner. In addition, clients or potential clients may
delay purchasing our services to the extent such clients or potential clients
are required to devote resources to resolving the year 2000 problem.
Our Services. The solutions that we provide to our clients integrate
software and other technology from different providers. If there is a year 2000
problem with respect to a solution provided by us, it may be difficult to
determine whether the problem relates to services that we have performed or is
due to the software, technology or services of other providers. Furthermore, a
number of our contracts, including contracts with some of our largest clients,
contain express or implied warranties with respect to year 2000 readiness. As a
result, we may be subjected to year 2000-related lawsuits, whether or not the
services that we have performed are year 2000 compliant. We cannot be certain
what the outcomes of these types of lawsuits may be.
Our business may suffer if we have disputes with clients over our right to
reuse intellectual property developed during client engagements
Part of our business involves the development of software applications for
discrete client engagements. Ownership of client-specific software is generally
held by the client, although we typically retain the right to
9
<PAGE>
reuse some of the processes and other intellectual property developed in
connection with client engagements. Issues relating to the right to use
intellectual property can be complicated. Accordingly, disputes may arise that
could adversely affect our ability to reuse applications, processes and other
intellectual property that result from particular client engagements. Such
disputes could damage our relationships with our clients and our business
reputation, divert our management's attention and have an adverse effect on our
ability to grow our business.
Intellectual property infringement claims against us, even without merit, could
cost a significant amount of money to defend and may divert management's
attention
As the number of Internet applications in our target market increases and
the functionality of these applications overlaps, we may become subject to
infringement claims. We cannot be certain that our services, the solutions that
we deliver or the software used in our solutions do not or will not infringe
valid patents, copyrights or other intellectual property rights held by third
parties. If there is infringement, we could be liable for substantial damages.
Infringement claims, even if without merit, can be time consuming and expensive
to defend. They may divert management's attention and resources and could cause
service implementation delays. They also could require us to enter into costly
royalty or licensing agreements.
We may not have sufficient funds to repay our loan agreement with a GTCR
affiliate
Our loan agreement with GTCR Capital Partners matures on the first
anniversary of the closing date of this offering. We expect the outstanding
indebtedness under the loan agreement will be approximately $27.0 million after
this offering. It is likely that we will require funds from external sources,
such as a new loan facility, in order to repay the GTCR loan. GTCR Capital
Partners has a security interest in substantially all of our assets. If we are
unable to repay the loan, GTCR Capital Partners would be able to foreclose on
our assets.
We may need additional capital, which may not be available to us, and which, if
raised, may dilute your ownership interest in us
We used $18.5 million of net cash in operating activities for the period
from our inception to December 31, 1999 and $14.0 million for the six months
ended June 30, 2000. We expect to continue to require cash for our operating
activities for the foreseeable future. After this offering we expect to have
outstanding indebtedness of approximately $27.8 million. We may need to raise
additional funds through public or private equity or debt financing in order
to:
. fund our working capital requirements;
. support additional capital expenditures;
. service our existing debt, particularly our indebtedness to GTCR Capital
Partners that matures on the first anniversary of the closing date of
this offering;
. take advantage of acquisition or expansion opportunities; or
. develop new services.
Any additional capital raised through the sale of equity will dilute your
ownership interest in us and may be on terms that are unfavorable to you.
Risks Relating To This Offering
You should read the entire prospectus carefully and should not consider any
particular statement in this prospectus or in published news reports, or any
published financial projections, without carefully considering the risks and
other information contained in this prospectus
A number of press and other articles in the last five months have mentioned
our revenues, customers, public offering plans and other information about our
business. While the information in these articles was derived in some cases
from interviews with our management and information provided by us, the
articles frequently have presented information out of context and have not
disclosed the related risks and uncertainties described in this prospectus.
10
<PAGE>
We had no control over the content of these and other articles, and any
statements from our management or information provided by us appearing in or
paraphrased in such articles were not intended to be relied upon by potential
investors in making an investment decision to purchase shares in this offering.
You should make your investment decision only after reading the entire
prospectus carefully, including the risks described in this section and
throughout this prospectus.
On June 15, 2000, our public relations firm sent an email concerning us and
our business to members of the press and industry analysts. On July 10, 2000,
after we filed the registration statement relating to this offering with the
SEC, the public relations firm sent a second email to the persons who received
the June 15 email reporting that we had filed the registration statement and,
therefore, were in the "quiet period" in which the Securities Act restricts our
public communications. The public relations firm appended the June 15 e-mail to
some of the July 10 emails. Because the July 10 email also included the June 15
email, there is a risk that the July 10 email may be deemed to constitute a
prospectus which did not meet the requirements of the Securities Act and was
not preceded or accompanied by the preliminary prospectus as required by the
Securities Act. As a result, we could be subject to potential liability under
the federal securities laws.
The July 6, 2000 edition of the Pittsburgh Post-Gazette stated that our 2000
revenue is expected to triple in amount from the $33 million revenue reported
in 1999, with 20% coming from dot.coms and 80% from traditional businesses. We
currently believe that this estimate of our 2000 revenue is reasonable, but
that approximately 25% to 35% of our 2000 revenue will come from dot.com
clients. Our ability to meet these projections, however, is subject to the
risks described elsewhere in this prospectus.
We have received, and may continue to receive, a high degree of media
coverage, including coverage that is not directly attributable to statements
made by our officers and employees. To the extent any statements appearing in
the media are inconsistent with, or conflict with, information contained in
this prospectus, or relate to information not contained in this prospectus,
they should not be relied upon by prospective investors.
After this offering, our executive officers, directors and funds controlled by
GTCR will still be able to control all matters submitted to stockholders for
approval
When this offering is completed, our executive officers, directors and funds
controlled by GTCR, which we refer to as the "GTCR Funds," will, in the
aggregate, beneficially own shares representing approximately 79.3% of our
capital stock. As a result, these persons, if they were to choose to act
together, will be able to control all matters submitted to our stockholders for
approval, as well as our management and affairs. For example, these persons, if
they were to choose to act together, will control the election of directors and
any merger, consolidation or sale of all or substantially all of our assets.
Antitakeover defenses that we have in place could delay or prevent an
acquisition and could adversely affect the price of our common stock because
purchasers cannot acquire a controlling interest
Provisions of our certificate of incorporation and bylaws and provisions of
Delaware law could delay, defer or prevent an acquisition or change of control
of us or otherwise adversely affect the price of our common stock. These
provisions may deprive you of the opportunity to sell your shares at a premium
over prevailing prices. This potential inability to obtain a control premium
could reduce the market price of our common stock. Please refer to "Description
of Capital Stock" for a more detailed discussion of these and other provisions.
Purchasers in this offering will suffer immediate and substantial dilution of
their investment
Purchasers of common stock in this offering will pay a price per share that
substantially exceeds the per share value of our tangible assets after
subtracting our liabilities and the per share price paid by our existing
stockholders and by persons who exercise currently outstanding options to
acquire our common stock. Accordingly, you will experience immediate and
substantial dilution of approximately $9.54 per share, representing the
difference between our pro forma net tangible book value per share after giving
effect to this offering and the initial public offering price. In addition,
purchasers of common stock in this offering will have contributed approximately
38.1% of the aggregate price paid by all purchasers of our stock but will own
only approximately 8.9% of our common stock outstanding after this offering.
See "Dilution."
11
<PAGE>
Our stock price could be 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-related companies
in particular have experienced extreme volatility. This volatility has often
been unrelated to the operating performance of particular companies. 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. The price for our common
stock will be determined in the marketplace and may be influenced by many
factors, including:
. variations in our financial results or those of companies that are
perceived to be similar to ours;
. changes in earnings estimates by industry research analysts;
. investors' perceptions of us; and
. general economic, industry and market conditions.
Substantial sales of our common stock could cause our stock price to decline
If our existing stockholders sell a large number of shares of our common
stock or the public market perceives that existing stockholders might sell
shares of common stock, the market price of the common stock could
significantly decline. All of the shares offered under this prospectus will be
freely tradable without restriction or further registration under the federal
securities laws unless purchased by our "affiliates" as that term is defined in
Rule 144 under the Securities Act of 1933. Of the remaining 46,175,463 shares
outstanding at the time of this offering, 43,773,846 shares may be sold
pursuant to Rule 144 upon the expiration of 180-day lock-up agreements.
Existing stockholders holding an aggregate of 40,731,167 shares of common
stock have rights with respect to the registration of these shares of common
stock with the Securities and Exchange Commission. If we register their shares
of common stock, they can sell those shares in the public market.
Promptly following this offering, we intend to register approximately
25,166,666 shares of common stock that are authorized for issuance under our
stock plans. As of June 30, 2000, 7,772,162 shares were subject to outstanding
options, of which 410,648 shares had vested. Once we register these shares,
they can be freely sold in the public market upon issuance, subject to the
"lock-up" agreements referred to above and the restrictions imposed on our
affiliates under Rule 144.
Finally, it is possible that Credit Suisse First Boston Corporation will
release shares subject to the lock-up agreements referred to above prior to the
scheduled expiration dates. This would result in the shares of our common stock
that are subject to such agreements becoming eligible for sale in the public
market at an earlier time than currently anticipated. The decision as to
whether to release the shares subject to these lock-up agreements is in the
discretion of Credit Suisse First Boston Corporation. If Credit Suisse First
Boston Corporation releases these shares prior to the scheduled expiration
dates of the lock-up and stockholders whose shares are released exercise their
registration rights, we could be required to register up to 40,731,167 shares
of our common stock for resale.
This Document Includes 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 important factors listed
above, 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.
12
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 4,500,000 shares of
common stock will be approximately $39.4 million, assuming an initial public
offering price of $10.00 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 $45.6 million.
We expect to use a portion of the net proceeds from this offering to repay
approximately $19.4 million of outstanding indebtedness under a revolving line
of credit with Harris Trust and Savings Bank. This indebtedness was incurred on
July 16, 1999 to fund operating losses and bears interest at the prime lending
rate, which was 9.5% as of June 30, 2000. This indebtedness is guaranteed by
GTCR and is due on demand. The GTCR Funds will own approximately 64.4% of our
common stock following this offering.
We expect to use the remaining $20.0 million of net proceeds, together with
cash from operations, for working capital and other general corporate purposes,
including possible acquisitions of professional service firms that provide
Internet consulting or Internet software application design and implementation
services or other businesses that complement our existing operations. We may
also make minority investments in some of our clients. From time to time we
engage in discussions with potential acquisition candidates and with clients
regarding investment opportunities. However, we have no current plans,
commitments or agreements with respect to any acquisitions or investments and
we may not make any acquisitions or investments.
Pending use of the net proceeds, we intend to invest these proceeds in
short-term, investment grade, interest-bearing instruments.
13
<PAGE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our shares of common
stock. We intend to retain future earnings, if any, to finance our growth
strategy. We do not anticipate paying cash dividends on our common stock in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, our operating results, our current and
anticipated cash needs, restrictions in any future financing agreements and our
plans for expansion.
Some of our existing lines of credit prohibit the declaration or payment of
cash dividends to our stockholders so long as any indebtedness under these
lines is outstanding. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and note
7 of the ZEFER Corp. financial statements.
14
<PAGE>
CAPITALIZATION
The following table sets forth our actual, pro forma and pro forma as
adjusted capitalization as of June 30, 2000. The pro forma information
reflects:
. the issuance during the third quarter of 2000 of an aggregate of
9,198.7563 shares of class A preferred stock to existing holders of
class A preferred stock and GTCR Capital Partners for proceeds of
$8.2 million;
. the exchange upon the closing of this offering of all outstanding shares
of class A preferred stock, including related accrued and unpaid
dividends as of September 30, 2000, for 6,125,106 shares of common stock
at an exchange rate based on an assumed initial public offering price of
$10.00 per share;
. the incurrence during the third quarter of 2000 of an additional $4.0
million of subordinated indebtedness payable to GTCR Capital Partners;
. the filing of a certificate of amendment upon the closing of this
offering that eliminates the class A and class B preferred stock and
authorizes 200,000,000 shares of common stock and 5,000,000 shares of
undesignated preferred stock;
. the automatic conversion of 200,000 shares of class B convertible
preferred stock into 201,255 shares of common stock upon the closing of
this offering; and
. the conversion upon the closing of this offering of a $2.0 million
promissory note issued to Renaissance Worldwide, Inc. into 250,000
shares of common stock, which is based on a conversion rate equal to 80%
of the assumed initial public offering price.
The pro forma as adjusted information reflects:
. receipt of estimated net proceeds of $39.4 million from the sale by us
of 4,500,000 shares of common stock in this offering, after deducting
the estimated underwriting discounts and commissions and estimated
offering expenses; and
. the application of a portion of the net proceeds to repay $19.4 million
of outstanding bank indebtedness under a revolving line of credit
guaranteed by GTCR.
The share numbers exclude 7,772,162 shares of common stock issuable upon
exercise of stock options outstanding as of June 30, 2000 at a weighted average
exercise price of $5.88 per share and 16,894,504 shares of common stock
available for issuance under our 1999 Incentive Plan and 1999 Stock Option Plan
as of June 30, 2000. The amounts shown in the following table as subordinated
debt payable to GTCR exclude an original issue discount of $1.5 million related
to such debt that we are also obligated to pay. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and the financial
statements and related notes included elsewhere in this prospectus. See also
"Use of Proceeds."
15
<PAGE>
<TABLE>
<CAPTION>
June 30, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except
share and per share data)
<S> <C> <C> <C>
Cash and cash equivalents.................... $ 3,001 $ 15,208 $35,142
======== ======== =======
Lines of credit.............................. $ 19,416 $ 19,416 $ --
Other debt, including current portion........ 2,800 800 800
Subordinated debt payable to GTCR............ 21,475 25,450 25,450
Class A redeemable preferred stock, $0.01 par
value per share; 96,632 shares authorized,
actual; 41,870 shares outstanding, actual;
no shares authorized or outstanding, pro
forma and pro forma as adjusted............. 50,944 -- --
Stockholders' equity (deficit):
Class B convertible preferred stock, $0.01
par value per share; 200,000 shares
authorized, actual; 200,000 shares
outstanding, actual; no shares authorized
or outstanding, pro forma and pro forma as
adjusted .................................. 2,000 -- --
Undesignated preferred stock, $0.01 par
value per share; no shares authorized or
outstanding, actual; 5,000,000 shares
authorized and no shares outstanding, pro
forma and pro forma as adjusted............ -- -- --
Common stock, $0.001 par value per share;
100,000,000 shares authorized, actual;
39,596,602 shares outstanding, actual;
200,000,000 shares authorized, pro forma
and pro forma as adjusted; 46,172,963
shares outstanding, pro forma; 50,672,963
shares outstanding, pro forma as adjusted.. 40 46 51
Additional paid-in-capital.................. 14,547 79,792 119,137
Treasury stock.............................. (33) (33) (33)
Subscriptions receivable.................... (768) (768) (768)
Deferred compensation....................... (4,925) (4,925) (4,925)
Accumulated deficit......................... (71,158) (72,125) (72,125)
-------- -------- -------
Total stockholders' equity (deficit)..... (60,297) 1,987 41,337
-------- -------- -------
Total capitalization................... $ 34,338 $ 47,653 $67,587
======== ======== =======
</TABLE>
16
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of June 30,
2000 was approximately $(15.8) million, or $(0.34) per share. Pro forma net
tangible book value per share represents the amount of our total tangible
assets reduced by our total liabilities, divided by the number of shares of
common stock outstanding as of June 30, 2000, assuming (a) the issuance during
the third quarter of 2000 of 9,198.7563 shares of class A preferred stock to
existing holders of class A preferred stock and GTCR Capital Partners, (b) the
exchange of all outstanding shares of class A preferred stock, including
related accrued and unpaid dividends as of September 30, 2000, for 6,125,106
shares of common stock at an exchange rate based on an assumed initial public
offering price of $10.00 per share, (c) the automatic conversion of 200,000
shares of class B convertible preferred stock into 201,255 shares of common
stock upon the closing of this offering and (d) the conversion of a $2.0
million promissory note issued to Renaissance Worldwide, Inc. into 250,000
shares of common stock. After giving effect to the sale by us of 4,500,000
shares of common stock in this offering, deducting the estimated underwriting
discounts and commissions and estimated offering expenses and applying a
portion of the net proceeds to repay $19.4 million of outstanding bank
indebtedness under a revolving line of credit, our pro forma net tangible book
value as of June 30, 2000 would have been approximately $23.5 million, or
$0.46 per share. This represents an immediate increase in pro forma net
tangible book value of $0.80 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $9.54 per share to
purchasers of common stock in this offering.
If the initial public offering price is higher or lower, the dilution to new
investors will be greater or less, respectively. Dilution is determined by
subtracting pro forma net tangible book value per share after the offering from
the amount of cash paid by a new investor for a share of common stock. The
following table illustrates the per share dilution to new investors:
<TABLE>
<CAPTION>
Per share
--------------
<S> <C> <C>
Assumed initial public offering price........................... $10.00
Pro forma net tangible book value as of June 30, 2000......... $(0.34)
Increase in pro forma net tangible book value attributable to
new investors................................................ 0.80
------
Pro forma net tangible book value after this offering........... 0.46
------
Dilution to new investors....................................... $ 9.54
======
</TABLE>
The following table sets forth on a pro forma basis as of June 30, 2000 the
difference between the number of shares of common stock purchased from us,
assuming the issuance of 6,576,361 shares of common stock in exchange for the
shares of class A preferred stock and upon conversion of the class B
convertible preferred stock and the Renaissance note, the total consideration
paid to us and the average price paid by existing stockholders and by new
investors, before deduction of estimated underwriting discounts and commissions
and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration price
------------------ -------------------- per
Number Percent Amount Percent share
---------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 46,172,963 91.1% $ 73,194,382 61.9% $ 1.59
New investors................... 4,500,000 8.9 45,000,000 38.1 $10.00
---------- ----- ------------ -----
Total......................... 50,672,963 100.0% $118,194,382 100.0%
========== ===== ============ =====
</TABLE>
As of June 30, 2000, there were options outstanding to purchase a total of
7,772,162 shares of common stock at a weighted average exercise price of $5.88
per share under our stock plans. To the extent any of these stock options are
exercised, there will be additional dilution to new investors.
17
<PAGE>
SELECTED PRO FORMA AND HISTORICAL FINANCIAL DATA
The following pro forma and historical statement of operations data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes included elsewhere in this prospectus. The following table includes pro
forma statement of operations data for us, Original ZEFER, the divisions of
Renaissance Worldwide, Inc., Spyplane, LLC and Waite & Company, Inc. The pro
forma statement of operations data give effect to the acquisition of each of
these businesses as if each had been acquired on January 1, 1999 and are
derived from our unaudited financial statements and the unaudited financial
statements of these businesses. The pro forma statement of operations data do
not purport to represent what our actual results of operations would have been
had each of these businesses been acquired on January 1, 1999, nor do they
project our results of operations for any future period.
We made no acquisitions after September 13, 1999. Therefore the table below
presents our actual statement of operations data for the three months ended
December 31, 1999, March 31, 2000 and June 30, 2000.
<TABLE>
<CAPTION>
Pro Forma Historical
---------------------------------------------- --------------------------------
Three Months Ended
------------------------------------------------------------------
Year Ended
December 31, March 31, June 30, September 30, December 31, March 31, June 30,
1999 1999 1999 1999 1999 2000 2000
------------ --------- -------- ------------- ------------ --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 33,084 $ 3,957 $ 5,612 $ 10,212 $ 13,303 $ 18,328 $ 26,763
Operating expenses:
Cost of services...... 23,152 4,000 4,528 6,110 8,514 11,590 15,379
Hiring and training... 5,765 193 246 1,337 3,989 4,370 5,187
Research and
innovation........... 1,832 30 98 406 1,298 1,722 1,942
Sales and marketing... 8,307 778 971 1,636 4,922 3,695 3,903
General and
administrative....... 22,657 2,300 3,998 6,070 10,289 8,809 9,349
Depreciation and
amortization......... 17,972 3,892 4,000 4,799 5,281 5,272 5,572
Stock-based
compensation......... 1,627 -- 961 234 432 974 1,060
-------- ------- -------- -------- -------- -------- --------
Total operating
expenses........... 81,312 11,193 14,802 20,592 34,725 36,432 42,392
-------- ------- -------- -------- -------- -------- --------
Loss from operations.... (48,228) (7,236) (9,190) (10,380) (21,422) (18,104) (15,629)
Interest and other
expense, net........... (3,614) (739) (1,088) (689) (1,098) (3,512) (2,764)
-------- ------- -------- -------- -------- -------- --------
Loss before taxes....... (51,842) (7,975) (10,278) (11,069) (22,520) (21,616) (18,393)
Benefit from income
taxes.................. 5,760 -- 1,764 3,996 -- -- --
-------- ------- -------- -------- -------- -------- --------
Net loss................ $(46,082) $(7,975) $ (8,514) $ (7,073) $(22,520) $(21,616) $(18,393)
======== ======= ======== ======== ======== ======== ========
Net loss per share...... $ (1.53) $ (0.27) $ (0.28) $ (0.23) $ (0.74) $ (0.71) $ (0.57)
======== ======= ======== ======== ======== ======== ========
Weighted average
shares................. 30,212 29,693 29,917 30,311 30,450 30,607 32,363
======== ======= ======== ======== ======== ======== ========
Operating Expenses as a Percentage of Revenues:
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services........ 70.0 101.1 80.7 59.8 64.0 63.2 57.5
Hiring and training..... 17.4 4.9 4.4 13.1 30.0 23.8 19.4
Research and
innovation............. 5.5 0.8 1.7 4.0 9.8 9.4 7.3
Sales and marketing..... 25.1 19.7 17.3 16.0 37.0 20.2 14.6
General and
administrative......... 68.5 58.1 71.2 59.4 77.3 48.1 34.9
Depreciation and
amortization........... 54.3 98.4 71.3 47.0 39.7 28.8 20.8
Stock-based
compensation........... 5.0 -- 17.2 2.3 3.2 5.3 4.0
-------- ------- -------- -------- -------- -------- --------
Total operating
expenses........... 245.8% 282.9% 263.8% 201.6% 261.0% 198.8% 158.5%
======== ======= ======== ======== ======== ======== ========
</TABLE>
18
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
We were incorporated in Delaware on March 18, 1999 and reorganized on
April 30, 1999 for the purpose of continuing the business of Original ZEFER,
which was incorporated on March 19, 1998. Subsequent to our reorganization with
Original ZEFER, we acquired Spyplane, LLC on May 14, 1999, the divisions of
Renaissance Worldwide, Inc. on May 28, 1999, and Waite & Company, Inc. on
September 13, 1999. The following statement of operations and balance sheet
data present the financial condition and results of operations of the divisions
of Renaissance for and as of the years ended December 31, 1997 and 1998 and the
five months ended May 28, 1999 and the financial condition and results of
operations of Original ZEFER for and as of the period from inception (March 19,
1998) through December 31, 1998 and the four months ended April 30, 1999. In
addition, the following data present our financial condition and results of
operations for and as of the period from our inception (March 18, 1999) through
December 31, 1999, the period from our inception (March 18, 1999) through June
30, 1999 and the six months ended June 30, 2000. For purposes of these selected
financial data, our predecessor information includes selected financial data
for Original ZEFER and the divisions of Renaissance. The statement of
operations data and balance sheet data are derived from our audited financial
statements and the audited financial statements of Original ZEFER and the
divisions of Renaissance included elsewhere in this prospectus. The historical
results are not necessarily indicative of results to be expected in any future
period. You should read the data set forth below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
Predecessor
--------------------------------------------------------
Divisions of Renaissance Original ZEFER Registrant
-------------------------- ---------------------------- ----------------------------------------
Period from
Five inception
Months Period from Period from (March 18, 1999)
Years Ended Ended Inception to Four Months Inception to through Six Months
December 31, May 28, December 31, Ended April 30, December 31, June 30, Ended June
1997 1998 1999 1998 1999 1999 1999 30, 2000
------- ------- -------- ------------ --------------- ------------ ---------------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 9,539 $13,798 $ 3,886 $ 621 $ 491 $ 25,277 $ 2,572 $ 45,091
Operating Expenses:
Cost of services....... 4,461 10,056 4,780 469 589 15,736 1,634 26,969
Hiring and training.... -- 196 160 7 10 5,542 217 9,557
Research and
innovation............ -- -- -- -- -- 1,832 128 3,664
Sales and marketing.... 592 4,126 1,013 140 125 7,056 523 7,598
General and
administrative........ 1,635 2,843 2,461 511 1,012 18,420 2,303 18,158
Depreciation and
amortization.......... 197 340 190 55 56 10,681 1,497 10,844
Stock-based
compensation(1)....... -- -- -- -- 961 666 -- 2,034
------- ------- -------- ------ ------- --------- ------- --------
Total operating
expenses............. 6,885 17,561 8,604 1,182 2,753 59,933 6,302 78,824
Income (loss) from
operations............. 2,654 (3,763) (4,718) (561) (2,262) (34,656) (3,730) (33,733)
Interest income......... 4 -- -- 12 7 43 6 157
Interest and other
expense................ (38) (432) (325) (5) (26) (2,297) (585) (6,433)
Provision for (benefit
from) income taxes..... 1,326 -- -- -- -- (5,760) 1,764 --
------- ------- -------- ------ ------- --------- ------- --------
Net income (loss)....... $ 1,294 $(4,195) $ (5,043) $ (554) $(2,281) $ (31,150) $(2,545) $(40,009)
======= ======= ======== ====== ======= ========= ======= ========
Basic and diluted net
income (loss) per
share.................. $ (1.16) $(0.13) $ (1.27)
========= ======= ========
Weighted average
shares................. 26,793 20,144 31,479
========= ======= ========
Balance Sheet Data (at
end of period):
Cash and cash
equivalents............ $ 102 $ 312 $ 57 $ 539 $ 143 $ 1,271 $ 2,362 $ 3,001
Working capital
(deficit).............. 653 1,482 (2,653) 386 (994) (23,377) 181 (27,891)
Total assets............ 4,719 7,946 6,549 1,026 1,136 51,290 30,823 68,337
Lines of credit......... -- 1,734 1,748 -- -- 19,566 150 19,416
Other debt, including
current portion........ 806 341 298 -- -- 2,980 2,980 2,800
Subordinated debt
payable to GTCR........ -- -- -- -- -- 11,119 -- 21,475
Redeemable preferred
stock.................. -- -- -- 1,200 1,200 25,803 18,194 50,944
Total stockholders'
equity (deficit)....... 1,955 2,599 (1,667) (609) (1,928) (24,670) 1,367 (60,298)
</TABLE>
--------------------
(1) For the period from inception to December 31, 1999, the cost of
services, hiring and training, research and innovation, sales and
marketing and general and administrative expenses of the Registrant
are exclusive of stock-based compensation expense of $165, $9, $24,
$277 and $191, respectively. For the six months ended June 30, 2000
the cost of services, hiring and training, research and innovation,
sales and marketing and general and administrative expenses of the
registrant are exclusive of stock-based compensation expense of $768,
$23, $64, $457 and $721, respectively. These amounts are included in
the stock-based compensation line item. See Note 11 of the ZEFER Corp.
financial statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Pro Forma and
Historical Financial Data," "Selected Historical Financial Data" and our
financial statements and notes thereto appearing elsewhere in this prospectus.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including those set forth under "Risk Factors" and elsewhere
in this prospectus.
Overview
We were organized on March 18, 1999 for the purpose of continuing the
business of our predecessor, which we refer to as Original ZEFER. Original
ZEFER was established on March 19, 1998 to provide strategy-led Internet
consulting services. Original ZEFER had revenues of $0.6 million for the period
from its inception to December 31, 1998, and $0.5 million for the four months
ended April 30, 1999.
We have completed the following strategic acquisitions that have enabled us
to gain critical resources and delivery capabilities, expand into new
geographic regions and deliver larger projects:
. Spyplane. On May 14, 1999, we acquired all of the outstanding membership
interests of Spyplane LLC, a San Francisco-based digital branding and
design firm. Digital branding is the adaptation of a brand name or logo
onto a digital platform. Spyplane had revenues of $0.3 million for the
period beginning on its inception, May 7, 1998 and ending on December
31, 1998 and revenues of $0.5 million for the period from January 1,
1999 to May 14, 1999.
. The Divisions of Renaissance. On May 28, 1999, we acquired two divisions
of Renaissance Worldwide, Inc. One division was engaged in web
application development and the other division was engaged in customer
relationship management consulting and implementation. The Divisions of
Renaissance had combined revenues of $13.8 million for the year ended
December 31, 1998 and $3.9 million for the five months ended May 28,
1999.
. Waite & Company. On September 13, 1999, we acquired Waite & Company,
Inc., a Boston-based strategic marketing and management-consulting firm.
Waite & Company had revenues of $3.3 million for the year ended December
31, 1998 and $2.9 million for the period from January 1, 1999 to
September 13, 1999.
We are a strategy-led Internet consulting and implementation firm. We derive
our revenues primarily from providing Internet consulting and implementation
services to our clients. We expect that our revenues will be driven primarily
by the number, scope and pricing of our client engagements along with our
capacity to deliver such engagements. Our operating results will be determined
primarily by our headcount, utilization of billable consultants and level of
selling, general and administrative and other operating expenditures.
Approximately 90% of our revenues for the period from our inception through
December 31, 1999 was derived from services performed on a fixed-price basis,
and approximately 83% of our revenues for the six months ended June 30, 2000
was derived from services performed on a fixed-price basis. We expect to
continue to derive a substantial majority of our revenue from fixed-price
contracts in the future. The balance of our revenues are derived from time and
materials engagements. A majority of our engagements last from three to six
months. To determine the proposed fixed price of an engagement, we use an
estimation process that takes into account:
. the type and overall complexity of the project;
. the anticipated number and type of consultants needed and their
associated billing rates; and
. the estimated duration of and risks associated with the engagement.
20
<PAGE>
All fixed-price proposals must receive the approval of a member of our
senior management team. We recognize revenues from fixed-price engagements
using the percentage of completion method, based on the ratio of costs incurred
to date to the total estimated project costs. We calculate project costs based
on the direct payroll and associated employee benefits of the consultants on
the engagement, plus any direct, unbilled out-of-pocket expenses. Finance
personnel meet regularly with project managers to ensure that the budgeted
costs to complete the engagement, which are used to calculate revenue
recognition, reflect the current actual status of the project and the updated
anticipated costs to complete the engagement. We make provisions for estimated
losses on engagements during the period in which such losses become probable
and can be reasonably estimated. These losses have not been significant to
date. We sometimes recognize revenues in advance of billing our customers and
therefore maintain a significant unbilled receivables balance. We make
provisions for uncollectible accounts receivable, which have not been
significant to date. We offset out-of-pocket expenses reimbursed by the client
against the expenses incurred and do not recognize such reimbursements as
revenues.
Cost of services consists primarily of salaries and associated employee
benefits for personnel directly associated with the delivery of services in
client engagements and non-reimbursed out-of-pocket expenses incurred by such
consultants. We expect that cost of services will increase over time in
absolute dollars in conjunction with wage increases and inflation, as well as
increases in the number of billable professionals related to volume.
Hiring and training expenses consist primarily of salaries and related
expenses associated with attracting, recruiting, training and retaining
qualified professionals. We expect these expenses to increase over time in
absolute dollars as our employee base grows and we complete the construction of
a new innovation and training facility in Boston.
Research and innovation expenses consist primarily of (1) salaries and
related employee benefits of employees assigned directly to internal research
and development projects, as well as direct expenses for these projects, such
as special equipment, software and travel-related expenses; (2) the costs
associated with the dedicated knowledge management team as well as the unified
services team, which is responsible for developing and enhancing our ENABLE
methodology; and (3) the expense and fees associated with our board of
advisors, which consists of experts in the fields of study relevant to the
development of innovative thinking. Our dedicated knowledge management team is
a group of our professionals whom we have assigned to identify methodologies,
best practices and other processes that we have developed for use throughout
our organization in ongoing and future client engagements.We expect research
and innovation costs to increase in both absolute dollars and as a percentage
of revenues in the near term as we seek to enhance our competitive position.
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for employees dedicated to our sales and marketing efforts.
Additionally, we include costs associated with advertising, public relations,
seminars, mailings, Internet campaigns and other sponsored marketing events and
promotions in sales and marketing expenses. We expect sales and marketing
expenses to increase in absolute dollars as we expand our direct sales force
and promotional efforts.
General and administrative expenses consist primarily of human resources,
information technology, finance, legal and administrative personnel and
facilities and general operating costs. We expect these expenses to increase in
absolute dollars to support the growth of our business.
Depreciation and amortization expenses consist primarily of the amortization
of goodwill and other intangibles related to acquisitions. They also include
depreciation of property and equipment.
21
<PAGE>
Historical Results of Operations
ZEFER
Six Months Ended June 30, 2000 Compared to the Period from Our Inception
(March 18, 1999) to June 30, 1999
The six months ended June 30, 2000 and the three and one half-month period
from inception to June 30, 1999 are not comparable periods. The amounts
described below for the three and one half-month period from March 18, 1999 to
June 30, 1999 would have been higher if a comparable six-month period had been
used.
Revenues. Revenues for the six months ended June 30, 2000 increased by $42.5
million to $45.1 million from $2.6 million for the period ended June 30, 1999.
The increase reflected both organic growth and growth from the acquisitions
described above.
Operating Expenses. Cost of services for the six months ended June 30, 2000
increased by $25.3 million to $26.9 million, or 60% of revenues, from $1.6
million, or 64% of revenues, for the period ended June 30, 1999. The increase
was due to an increase in the number of billable professionals to 511 at June
30, 2000 from 136 at June 30, 1999. Hiring and training costs for the six
months ended June 30, 2000 increased by $9.3 million to $9.5 million, or 21% of
revenues, from $0.2 million, or 8% of revenues, for the period ended June 30,
1999. The increase was attributable to expanded recruiting efforts, including
outside professional recruiting fees and advertising, an increase in training
of the larger employee base and expansion of our human resources and training
departments. Research and innovation expenses for the six months ended June 30,
2000 increased by $3.6 million to $3.7 million, or 8% of revenues, from $0.1
million, or 5% of revenues, for the period ended June 30, 1999. The increase in
research and innovation expenses was due to the development of our ENABLE
methodology and knowledge management infrastructure. Sales and marketing
expenses for the six months ended June 30, 2000 increased by $7.1 million to
$7.6 million, or 17% of revenues, from $0.5 million, or 20% of revenues, for
the period ended June 30, 1999. The increase was attributable to the
establishment of our sales and marketing departments, and the incurrence of
advertising expenses and sales commissions. General and administrative expenses
for the six months ended June 30, 2000 increased by $15.9 million to $18.2
million, or 40% of revenues, from $2.3 million, or 90% of revenues, for the
period ended June 30, 1999. The increase in general and administrative expenses
was a result of increasing payroll for administrative employees and the
infrastructure required to support the expanded business and employee base.
Depreciation and amortization expense for the six months ended June 30, 2000
increased by $9.3 million to $10.8 million, or 24% of revenues, from $1.5
million, or 58% of revenues, for the period ended June 30, 1999. Of this
amount, amortization of goodwill and other intangibles related to acquisitions
was $7.2 million, or 16% of revenues, for the period ended June 30, 2000
compared to $1.3 million, or 51% of revenues, for the period ended June 30,
1999. Depreciation of purchased computer equipment, software and furniture and
fixtures during the six months ended June 30, 2000 was $3.6 million, or 8% of
revenues, compared to $0.2 million, or 7% of revenues, for the period ended
June 30, 1999.
For the six months ended June 30, 2000, cost of services, hiring and
training, research and innovation, sales and marketing and general and
administrative expenses described above are exclusive of stock-based
compensation expenses of $0.8 million, $23,000, $64,000, $0.5 million and $0.7
million, respectively. We recorded no deferred compensation or amortization of
deferred compensation during the period ended June 30, 1999.
Stock-based Compensation. We recorded deferred stock-based compensation of
$0.4 million for the six months ended June 30, 2000, compared to zero for the
period ended June 30, 1999. Amortization of deferred stock-based compensation
increased to $2.0 million, or 5% of revenues, for the six months ended June 30,
2000. Deferred compensation represents the difference between the exercise
price of stock options granted or the sale price of restricted common stock and
the fair market value of the underlying common stock at the date of grant. The
difference is recorded as a component of stockholders' deficit and is being
amortized over the
22
<PAGE>
vesting period of the applicable options and restricted common stock, which is
typically four years. At June 30, 2000, approximately $4.9 million of deferred
compensation remained to be amortized over future periods. The impact over the
vesting period will be as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000......................................................... $1,671,487
2001......................................................... 1,815,698
2002......................................................... 984,202
2003......................................................... 428,272
2004......................................................... 24,845
----------
$4,924,504
==========
</TABLE>
Interest and Other Expense and Provision for Income Taxes. Interest expense,
net of interest income, for the six months ended June 30, 2000 increased by
$5.7 million to $6.3 million, or 14% of revenues, from $0.6 million, or 22% of
revenues, for the period ended June 30, 1999, primarily due to the interest on
our class A preferred stock and subordinated debt. Other expense for the six
months ended June 30, 2000 and the period ended June 30, 1999 were zero. Since
our inception, our operating losses have generated significant net operating
loss carryforwards that will be used to offset future taxable income. During
the six months ended June 30, 2000, we provided a full valuation allowance
against the NOL generated during the period due to uncertainty surrounding the
timing and realizability of this asset, resulting in no benefit from or
provision for income taxes. For the period ended June 30, 1999, we recorded a
benefit from income taxes of $1.8 million, or 69% of revenues, as a result of
NOLs generated during the period.
Period from Our Inception (March 18, 1999) to December 31, 1999
Revenues. Revenues for the period from inception to December 31, 1999 were
$25.3 million. During the period revenues increased as a result of an increase
in the number of client engagements and an expansion of our service offerings,
along with the increased scope and complexity of engagements. The increase
reflected both organic growth and the acquisitions described above.
Operating Expenses. Cost of services for the period were $15.7 million, or
62% of revenues, reflecting increasing numbers of billable professionals as we
expanded our capacity to meet the increase in demand for Internet consulting
and implementation services. Hiring and training costs were $5.5 million, or
22% of revenues, reflecting our recruiting and retention efforts, including
expansion of our human resources department, our use of external recruiters and
the assimilation and training of an expanding employee base. We initiated our
research and innovation activities during 1999 with costs of $1.8 million, or
7% of revenues, for the period. Most of our research and innovation expenses
related to the development of our proprietary ENABLE methodology and knowledge
management infrastructure. Sales and marketing expenses for the period were
$7.1 million, or 28% of revenues, reflecting the building of a sales and
marketing organization to support rapid growth. General and administrative
expenses for the period were $18.4 million, or 73% of revenues, reflecting our
investment in the infrastructure required to rapidly scale our business.
Depreciation and amortization for the period was $10.7 million, or 42% of
revenues. Of this amount, amortization of goodwill and other intangibles
related to acquisitions was $8.1 million, or 32% of revenues, while
depreciation of purchased computer equipment, software and furniture and
fixtures during the period was $2.6 million, or 10% of revenues.
Cost of services, hiring and training, research and innovation, sales and
marketing and general and administrative expenses described above are exclusive
of stock-based compensation expenses of $0.2 million, $9,000, $24,000, $0.3
million and $0.2 million, respectively, discussed below.
Stock-Based Compensation. We recorded deferred compensation of $7.7 million
in the period from inception through December 31, 1999, of which $0.5 million
was amortized as stock-based compensation during 1999. The deferred
compensation of $7.7 million excludes $0.2 million of stock-based compensation
related to unrestricted stock issued to management.
23
<PAGE>
Interest and Other Expense and Benefit from Income Taxes. Interest and
other expense for the period was $2.3 million, or 9% of revenues, primarily
due to the accrued interest on the class A preferred stock. The benefit from
taxes for the period was $5.8 million, or 23% of revenues, due to the
application of net operating loss carryforwards against deferred tax
liabilities recorded in connection with certain acquisitions.
Though we did not begin operations until March 18, 1999, our predecessors,
Original ZEFER and the Divisions of Renaissance, did have prior operating
histories.
Original ZEFER
Four Months Ended April 30, 1999 Compared to Period from Inception (March 19,
1998) to December 31, 1998
Revenues. Revenues for the four months ended April 30, 1999 decreased by
$0.1 million to $0.5 million from $0.6 million for the period from inception
to December 31, 1998. The decrease is primarily due to the fact we are
comparing a four month period to a nine month period, partially offset by an
increase in the number of client engagements.
Operating Expenses. Cost of services for the period ended April 30, 1999
increased by $0.1 million to $0.6 million from $0.5 million for the period
from inception to December 31, 1998. Cost of services increased as a percent
of revenues to 120% for the period ended April 30, 1999 from 76%, reflecting
increasing numbers of billable professionals as we expanded our capacity to
meet the increase in demand for Internet consulting and implementation
services. Hiring and training costs increased by $3,000 to $10,000, or 2% of
revenues, for the period ended April 30, 1999 from $7,000, or 1% of revenues,
for the period from inception to December 31, 1998 reflecting increased
recruiting efforts. Sales and marketing expenses decreased $15,000 to
$125,000, or 25% of revenues, for the period ended April 30, 1999 from
$140,000, or 23% of revenues, for the period from inception to December 31,
1998. General and administrative expenses increased to $1.0 million for the
period ended April 30, 1999 from $500,000 for the period from inception to
December 31, 1998, reflecting our investment in the infrastructure required to
rapidly scale our business. Compensation expense increased to $1.0 million for
the period ended April 30, 1999 as a result of stock issuances to employees of
Original ZEFER.
Interest and Other Expense. Interest and other expense increased $26,000 to
$19,000 for the period ended April 30, 1999 from a net benefit $7,000, for the
period from inception to December 31, 1998 primarily due to increased interest
on capital leases for computer equipment.
Divisions of Renaissance
Five Months Ended May 28, 1999 Compared to the Twelve Months Ended December
31, 1998
The five-month period ended May 28, 1999 and the twelve-month period ended
December 31, 1998 are not comparable periods. The amounts described below for
the five-month period ended May 28, 1999 would have been higher if a
comparable twelve-month period had been used.
Revenues. Revenues for the five months ended May 28, 1999 compared to the
twelve months ended December 31, 1998 decreased by $9.9 million to $3.9
million from $13.8 million primarily because the periods are not comparable.
Operating Expenses. Cost of services decreased by $5.3 million to $4.8
million, or 123% of revenues, for the five-month period ended May 28, 1999
from $10.1 million, or 73% of revenues, for the period ended December 31,
1998. This decrease was primarily due to the fact that we are comparing a
five-month period to a twelve-month period, and was partially offset by
accrued severance costs related to Renaissance's reduction in billable
professionals prior to our acquisition. Hiring and training costs decreased by
$36,000 to $160,000, or 4% of revenues, for the period ended May 28, 1999 from
$196,000, or 1% of revenues, for the period ended December 31, 1998. Sales and
marketing expenses decreased by $3.1 million to $1.0 million, or 26% of
revenues, for the period ended May 28, 1999 from $4.1 million, or 30% of
revenues. This decrease in sales and marketing expenses was primarily due to
the fact that we are comparing a five month period to a twelve month
24
<PAGE>
period, and was somewhat offset by higher selling costs. General and
administrative expenses, including depreciation and amortization, decreased by
$0.5 million to $2.7 million, or 68% of revenues, for the period ended May 28,
1999 from $3.2 million, or 23% of revenues, for the period ended December 31,
1998. This decrease in general and administrative expenses, including
depreciation and amortization, was primarily due to the fact that we are
comparing a five month period to a twelve month period, and was partially
offset by higher administrative costs related to Renaissance's reduction in the
workforce and restructuring prior to our acquisition.
Interest and Other Expense. Interest and other expense decreased by $0.1
million to $0.3 million, or 8% of revenues, for the five month period ended May
28, 1999 from $0.4 million, or 3% of revenues, for the period ended December
31, 1998. This decrease in interest and other expenses was primarily due to the
fact that we are comparing a five month period to a twelve month period.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Revenues for the year ended December 31, 1998 increased by $4.3
million to $13.8 million from $9.5 million for the year ended December 31,
1997. This increase was primarily due to the establishment of the customer
relationship management practice in 1998.
Operating Expenses. Cost of services increased by $5.6 million to $10.1
million for the year ended December 31, 1998 from $4.5 million for the year
ended December 31, 1997. This increase was primarily due to an increase in the
number of billable professionals due to the establishment of the CRM division
in March 1998. Hiring and training costs increased to $0.1 million for the year
ended December 31, 1998 primarily due to the hiring and training of billable
CRM professionals. Sales and marketing increased by $3.5 million to
$4.1 million for the year ended December 31, 1998 from $0.6 million for the
year ended December 31, 1997. This increase was primarily due to the
development of a dedicated sales force. General and administrative expenses,
including depreciation and amortization, increased by $1.4 million to $3.2
million for the year ended December 31, 1998 from $1.8 million for the year
ended December 31, 1997. This increase was primarily due to an increase in the
number of billable professionals in the CRM division. We did not make any
research and innovation expenditures during 1997 or 1998.
Interest and Other Expenses. Interest and other expenses increased by $0.4
million to $0.4 million for the year ended December 31, 1998 from zero. This
increase was primarily due to an increase in indebtedness taken on by the
divisions of Renaissance during 1998.
Liquidity and Capital Resources
Since inception we have financed our operations and capital expenditures
primarily through the sale of common and preferred stock and capital lease and
other debt financing. As of June 30, 2000, we had raised $51.2 million of
capital from the sale of common and preferred stock to third parties. We raised
an additional $8.2 million from the sale of preferred stock during the third
quarter of 2000. As of June 30, 2000, we had $3.0 million in cash and cash
equivalents. We expect that accounts receivable will continue to increase
proportionately to the extent our revenues continue to rise. Any such increase
that occurs at a greater rate than increases in revenues is likely to have an
adverse effect on cash flows from operating activities.
We have a revolving line of credit for $20.0 million with Harris Bank and
Trust Company. Borrowings under this line of credit bear interest at the prime
lending rate (9.5% at June 30, 2000). All borrowings under this line are
guaranteed by GTCR. As of June 30, 2000, there were outstanding borrowings
under this line of credit in the amount of $19.4 million. We intend to repay
the outstanding balance under this line of credit with a portion of the net
proceeds of this offering.
We also have a capital equipment line with TLP Leasing, Inc. pursuant to
which we have financed computer equipment and office furniture. Amounts
financed under this capital equipment line have an imputed interest rate of
11.0% per annum. As of June 30, 2000, $320,526 was outstanding under this line.
25
<PAGE>
As part of the consideration for our acquisition of Spyplane, we issued to
the former members of Spyplane promissory notes in the aggregate principal
amount of $980,000. These notes bear interest at a rate of 8.0% per annum. One
half of the accrued interest plus $180,000 of the outstanding principal, or an
aggregate of $220,000, was paid on May 14, 2000. The remaining unpaid principal
and interest on the note is due on May 14, 2001.
As part of the consideration for our acquisition of the divisions of
Renaissance, we issued to Renaissance Worldwide Inc. a promissory note in the
aggregate principal amount of $2.0 million. The note bears interest at a rate
equal to the 30-day LIBOR (6.6% at June 30, 2000) plus 2.0% per annum and
interest is payable quarterly through May 2002. At the option of Renaissance,
the principal amount outstanding under the Renaissance note is convertible into
our common stock at the conversion price equal to 80% of the initial public
offering price. Renaissance has exercised its option to convert the full amount
of this promissory note.
On November 24, 1999, we entered into a loan agreement with GTCR Capital
Partners, an affiliate of GTCR. The loan agreement provides for up to $32.2
million of borrowings, of which we borrowed $12.8 million on November 24, 1999
to fund operations and repurchase shares of stock held by GTCR. During the six
months ended June 30, 2000, we borrowed an additional $10.2 million to fund
operations. We borrowed an additional $4.0 million for the same purpose during
the third quarter of 2000. As of August 10, 2000, $27.0 million of
indebtedness, which includes $1.5 million of unamortized original issuance
discount, was outstanding under the loan. Borrowings under this loan agreement
bear interest at 12.0% per annum. Interest is payable quarterly in arrears
beginning December 31, 1999. The loan is secured by substantially all of our
assets. The loan becomes due on the first anniversary of the closing date of
this offering.
After the consummation of this offering, GTCR Capital Partners has no
obligation to make additional loans to us under the loan agreement. If we
dispose of any assets or subsidiaries for net proceeds in excess of $0.1
million, we must apply the net proceeds of such disposition to prepay the loan.
It is likely that we will require funds from external sources, such as a new
loan facility, in order to repay this loan.
As of December 31, 1999, we had a revolving line of credit for $0.2 million
with Silicon Valley Bank East. On February 16, 2000, we repaid in full the
outstanding balance under this line of credit and terminated the line.
Net cash used in operating activities
During the period from inception (March 18, 1999) through December 31, 1999,
our operating activities used $18.5 million of cash. Net cash used by operating
activities during this period resulted from a net loss of $31.1 million and
increases in accounts receivable of $3.4 million, prepaid expenses and other
current assets of $1.4 million and a deferred tax benefit of $5.8 million.
These uses of cash were partially offset by increases in accounts payable and
accrued expenses of $4.6 million and $5.5 million, respectively, and non-cash
charges relating to depreciation and amortization of $10.7 million, non-cash
interest charges of $1.4 million and non-cash compensation charges of $0.7
million. The increase in accounts receivable was primarily attributable to
increased volume of revenues and accounts receivable purchased from acquired
entities.
During the six months ended June 30, 2000, our operating activities used
$14.0 million of cash. Net cash used by operating activities during this period
resulted primarily from a net loss of $40.0 million, increases in accounts
receivable of $7.9 million and increases in prepaid expenses and other current
assets of $0.8 million. These uses of cash were partially offset by increases
in accounts payable, accrued expenses and deferred revenue of $0.7 million,
$10.4 million and $6.1 million, respectively, and non-cash charges relating to
depreciation and amortization of $10.8 million, non-cash interest charges of
$4.2 million, non-cash stock-based compensation charges of $2.0 million and
$0.5 million of deferred rents.
Net cash used in investing activities
During the period from inception through December 31, 1999, our investing
activities used $39.7 million in cash. Net cash used by investing activities
during this period resulted primarily from cash paid for the
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acquisitions of Original ZEFER, Spyplane, LLC, the divisions of Renaissance and
Waite & Company, Inc. totaling $26.3 million, capital expenditures of $9.0
million and an increase in long-term other assets of $4.5 million. The capital
expenditures were primarily for computer equipment and software required by our
increase in headcount and furniture and fixtures related to the build-out of
our leased facilities.
During the six months ended June 30, 2000, our investing activities used
$17.4 million in cash. Net cash used by investing activities during this period
resulted primarily from capital expenditures of $15.1 million and an increase
in other assets of $2.3 million. The capital expenditures were primarily for
computer equipment and software required by our increase in headcount and
furniture and fixtures relating to the build-out of our leased facilities. We
expect that capital expenditures will continue to increase to the extent that
we continue to increase our headcount, open additional offices, invest in
research and innovation and generally expand our operations. Additionally,
while we currently have no plans to acquire additional businesses, future
investing activities may include the acquisition of businesses.
Net cash provided by financing activities
During the period from inception through December 31, 1999, our financing
activities provided $59.5 million in cash. Net cash provided by financing
activities during this period resulted from net borrowings on a line of credit
of $19.4 million, proceeds from the issuance of redeemable preferred stock of
$24.2 million, proceeds from the issuance of subordinated debt to GTCR of $11.1
million, proceeds from the issuance of common stock of $4.4 million and
proceeds from the repayment of subscriptions receivable of $0.5 million.
During the six months ended June 30, 2000, our financing activities provided
$33.1 million in cash. Net cash provided by financing activities during this
period resulted primarily from proceeds from the issuance of class A preferred
stock of $20.6 million, proceeds from the issuance of convertible preferred
stock of $2.0 million, proceeds from the issuance of subordinated debt to GTCR
of $10.2 million and the payment of subscriptions receivable of $0.9 million.
These sources of cash were partially offset by repayments on our line of credit
of $0.2 million, principal payment on notes payable of $0.2 million and
principal payments on capital lease obligations of $0.2 million.
During the third quarter of 2000, we borrowed an additional $4.0 million of
subordinated debt under our agreement with GTCR. During the third quarter, we
also issued to GTCR and management an additional 8,232 shares of class A
preferred stock at $1,000 per share for gross proceeds of approximately $8.2
million. In addition, we issued warrants to purchase 967 shares of class A
preferred stock at an exercise price of $.001 per share. We valued the warrants
at $967,000 and recorded interest expense of approximately $1.0 million.
We believe that our existing cash resources and our projected cash flow from
operations will be sufficient to fund our planned operations for the next
twelve months. However, we may require significant additional funds for
possible future acquisitions of businesses, products or technologies
complementary to our business and are likely to require funds from external
sources, such as a new loan facility, to repay the loan from GTCR Capital
Partners. If we do not complete this offering, we likely will not expand our
operations at as rapid a pace as we currently plan.
Our ability to repay the outstanding indebtedness owed to GTCR Capital
Partners and to fund operations beyond twelve months will be dependent upon the
success of our operations and our future prospects which, in turn, will affect
our ability to raise debt or equity on commercially reasonable terms. If
additional funds are required, we may raise such funds from time to time
through public or private sales of equity or from borrowings. We currently have
no plans for further equity offerings but may undertake such offerings
depending upon our results of operations, capital requirements and the state of
the economy and capital markets.
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Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. It requires an entity to recognize all derivatives as either assets
or liabilities in the balance sheet and measure those instruments at fair
value. Pursuant to SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133,
SFAS No. 133 is effective for all quarters of fiscal years beginning after June
15, 2000. SFAS No. 133 is not expected to have a material impact on our
financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--An Interpretation of APB
Opinion No. 25." Interpretation No. 44 clarifies the application of APB No. 25
in certain situations, as defined. Interpretation 44 is effective July 1, 2000
but is retroactive for certain events that occurred after December 15, 1998. We
do not expect that the adoption of Interpretation 44 will materially affect our
results of operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition," in December 1999. We are required to
adopt this new accounting guidance through a cumulative charge to operations,
in accordance with Accounting Principles Board Opinion (APB) No. 20,
"Accounting Changes," during the fourth quarter of 2000. We believe that the
adoption of the guidance provided in SAB No. 101 will not have a material
impact on future operating results.
Market Risk Disclosure
We are exposed to market risk from changes in interest rates primarily
through our borrowing activities. Our ability to finance future acquisitions
may be impacted if we are unable to obtain appropriate financing at acceptable
rates. We do not believe that interest rate risk is material to our business.
In July 1999, we entered into a $20.0 million unsecured demand line of
credit with a bank of which $19.4 million was outstanding as of June 30, 2000.
Borrowings on the line bear interest at the prime lending rate, which was 9.5%
at June 30, 2000. We intend to repay the outstanding balance under this line
with a portion of the net proceeds of this offering.
To date, we have not utilized derivative financial instruments or derivative
commodity instruments. We do not expect to employ these or other strategies to
hedge market risk in the foreseeable future. We do invest our cash in money
market funds, which are subject to minimal credit and market risk. We believe
the market risks associated with these financial instruments are immaterial.
Year 2000 Impact
We have not experienced any problems with our computer systems relating to
distinguishing twenty-first century dates from twentieth century dates, which
generally are referred to as year 2000 problems. We are also not aware of any
material year 2000 problems with our clients or vendors. Accordingly, we do not
anticipate incurring material expenses or experiencing any material operational
disruptions as a result of any year 2000 problems.
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BUSINESS
Overview
We provide consulting and software application development and
implementation services that enable companies to effectively use the Internet
in their businesses. The growth of the Internet economy has created
opportunities for many businesses to significantly improve cost efficiencies,
create revenue growth and redeploy assets in accordance with new business
models. We assist clients in identifying business objectives and creating and
prioritizing a portfolio of initiatives for using the Internet in their
businesses. These initiatives are designed to offer our clients a variety of
ways to maximize their competitiveness in the new economic environment that has
resulted from the widespread acceptance of the Internet. After creating an
initial Internet strategy, we architect and build scalable, flexible solutions
that can be adapted over time to the evolving needs of our clients. We also
assist our clients in implementing these applications by linking the
applications with the clients' computer systems and other software and testing
and deploying the applications. We believe that our strategy-led services
enable our clients to rapidly develop and deploy online businesses, redefine
their business models and build on their existing assets.
As of August 18, 2000, we had 559 billable professionals. Since March 1999
we have served more than 150 clients. We have offices in Boston, New York,
Pittsburgh, Chicago, San Francisco and London.
Industry Background
Innovations in Internet technology and widespread acceptance of Internet-
based business models have been the primary drivers in the evolution of the
Internet economy. We believe the Internet economy has evolved in three distinct
waves as companies have increasingly realized the value of the Internet to
their businesses. Throughout these waves, companies have increasingly looked to
outside service providers to help them capitalize on the opportunities offered
by the Internet. International Data Corporation estimates that the demand for
Internet services worldwide will grow from $16.2 billion in 1999 to $99.1
billion in 2004.
First Wave. The first wave began in the early 1990s with the introduction of
the browser and the initial commercialization of the world wide web. Businesses
using the Internet in the first wave generally experimented with their websites
as marketing channels by posting static information and graphics known as
brochureware. To create these non-interactive websites, businesses generally
engaged professional service providers with graphic design skills, as the
implementation of these relatively simple websites involved limited
technological and strategic business input.
Second Wave. The second wave began during the mid-1990s with technological
innovations that enabled the development of transaction-oriented applications
for the Internet. These applications in turn led to greater commercial
acceptance of the Internet. Taking advantage of the second wave technological
innovations, businesses have focused on building discrete Internet software
applications to enhance traditional revenue generation channels or to effect
cost reductions through supply chain efficiencies. Most of these new
applications, such as online banking, online ordering and sales force
automation, have been transaction-oriented and tailored to specific business
processes, as opposed to directed at developing a comprehensive Internet
strategy. To implement these new and more complex applications, we believe
businesses have generally engaged professional service providers with not only
website design skills but also strong technology and project management
capabilities.
Third Wave. During the late 1990s, while some businesses continued to seek
first and second wave solutions, a third wave began as other businesses started
adopting Internet-based business models in response to the increasing number of
consumers and businesses using the Internet. According to International Data
Corporation, the number of Internet users will grow from 165 million in 1998 to
662 million in 2003, while worldwide e-commerce revenues will increase from
approximately $60 billion to more than $1.6 trillion over the same period.
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The growth in the use of the Internet has enabled entrepreneurial dot-com
companies, such as Amazon.com, to develop new Internet-based business models
that have fundamentally changed the economics of entire industries. In response
to these changes in industry economics, many traditional businesses are
adopting Internet-based business models or otherwise developing Internet
strategies that build on their existing assets to compete more effectively.
Third Wave Internet Professional Service Providers. We believe that third
wave Internet service providers must have the following skills:
. the strategy skills to identify and prioritize a portfolio of Internet
initiatives;
. the branding and experience design capabilities to distinguish a
business from its competitors and to provide a compelling online
customer experience;
. the technological skills to build and integrate complex, flexible and
scalable applications that incorporate cutting-edge technologies; and
. large-scale program management skills.
We believe that many Internet professional service providers do not offer
their customers a full range of strategy-led services. We further believe these
service providers often create solutions that are reactive to the client's
immediate business needs, rather than driven by the client's overall business
strategy. As a result, in our view, these service providers end up implementing
discrete business applications, which often are short-lived, instead of
scalable and adaptable business solutions. Moreover, we believe that these
service providers are less apt to understand the broader business strategy of
the customer and, therefore, are less likely to be in a position to continually
adapt an initial solution to the changing business environment.
In addition, we believe that traditional information technology service
providers often lack the integrated and multidisciplinary business strategy,
experience design, technology and program management skills required in the
third wave of the Internet economy or that they compartmentalize their
competencies throughout client engagements. As a result, multiple service
providers or multiple departments within the service provider participate in
developing and implementing a solution, which causes time delays and poorly
integrated solutions. In addition, in our experience, many traditional IT
service providers fail to establish the type of ongoing post-implementation
relationship with their clients that enables the clients to take immediate
advantage of Internet opportunities as they arise and evolve.
The ZEFER Approach
We formed our business for the express purpose of delivering strategy-led
Internet professional services to help companies compete successfully in the
third wave Internet economy. The key elements of our service offering are as
follows:
Strategy-led. We believe that our strategy-led approach is critical to
helping our clients develop and implement successful Internet strategies to
achieve a competitive advantage. This strategy-led approach includes:
. analyzing the client's industry, business model and goals;
. developing a portfolio of Internet initiatives in the context of an
overall business strategy; and
. developing and launching various Internet initiatives in a sequence that
maximizes business value over the long term.
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We involve our Internet strategists not only at the beginning of an
engagement, but during each phase of the project. This allows us to continually
improve the client solution by reexamining strategic decisions in light of
evolving markets and technologies.
Integrated and Multidisciplinary. We deliver our strategy-led service
offering through integrated, multidisciplinary teams of consultants with
backgrounds in business strategy, experience design, technology and program
management. These professionals bring skills in diverse areas, including
traditional management consulting, digital branding and cognitive engineering,
and systems integration, customer relationship management and Internet
security. We define cognitive engineering, as applied to the Internet, to be
the process of making a website intuitive and easy to use.
This collaborative approach allows us to provide two key client benefits.
First, we believe that we are able to deliver higher quality Internet
initiatives because each discipline provides insight into the ultimate solution
during all phases of the project. Second, by staffing the engagement with a
multidisciplinary team, we develop and implement Internet initiatives without
the time delays and increased costs associated with handing off a project from
one team to another or among multiple service providers at the beginning and
end of discrete phases of a project.
Innovative. Our commitment to research and innovation allows us to provide
our clients with Internet professional services that are at the forefront of
Internet technologies and experience design. Our consultants are trained in the
latest practices and technologies in their disciplines. For example, one of our
research and innovation projects led to our developing an Internet application
that is able to deliver location-specific information by taking advantage of
the ability to identify the geographic location of a user accessing the web
through a cellular phone-enabled browser.
Adaptive. There are no permanent answers in the nascent and rapidly changing
Internet economy. Accordingly, we architect and build scalable, flexible
solutions that can be adapted over time in response to the client's changing
needs, technological innovations and consumer and business trends. This
adaptive approach also promotes long-term client relationships during which we
continue to generate and prioritize initiatives that address the dynamic and
ever-changing business landscape created by the Internet.
The ZEFER Strategy
Our objective is to become the leading provider of strategy-led Internet
professional services. Our business strategy for achieving this objective is as
follows:
Attract and Retain Outstanding Professionals. We believe that attracting and
retaining outstanding professionals is essential to our growth and the delivery
of high quality solutions to our clients. During the twelve-month period ended
June 30, 2000, we hired an average of approximately 31 billable professionals
per month. The key elements of our hiring and retention program are as follows:
. Culture. We have a culture of collaboration, innovation and commitment
in an open work environment. We offer professionals the opportunity to
work with talented people in a variety of disciplines, which enhances
each professional's understanding of his or her own area of
concentration as well as the specialties of others.
. Training and Development. We have a comprehensive learning and
development program that focuses on professional and personal
development. This program includes the establishment of mentor
relationships with peers and senior professionals and a formal skills-
based curriculum. In addition, we are constructing a new innovation and
training center that we expect to complete in the fourth quarter of
2000.
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. Compensation. We pay competitive salaries, grant stock options to all
employees, award annual performance bonuses and authorize managers to
award cash and in-kind bonuses at any time for exemplary performance.
Develop Long-term Client Relationships. We are focused on developing long-
term client relationships through our strategy-led approach. We believe that
working with our clients in developing and launching various Internet
initiatives in a sequence that maximizes business value creates a portfolio of
implementation engagements over a period of time.
Enhance and Extend our Integrated Service Offering. We are continually
enhancing our integrated service offering through our research and innovation
efforts. These efforts are intended to ensure that our consultants are not only
trained in the latest Internet technologies and practices, but are at the
forefront in the development of new technologies and practices. In addition, we
are extending our service offering by hiring personnel with additional skills.
For example, during 1999 we added customer relationship management, or CRM,
capabilities. Our CRM consultants specialize in automating and integrating
customer management solutions to enable our clients to find, serve and retain
customers.
Serve Cutting-edge Clients. We plan to continue to perform a significant
portion of our engagements for clients that emphasize strategic and
technological innovation. We expect some of these clients to become the leading
businesses of the future. We believe that our more traditional clients value
the experience that we gain from working with these cutting-edge clients. In
addition, a strong base of cutting-edge clients allows us to attract and retain
talented professionals who are eager to work with the latest technologies and
business models.
Build the ZEFER Brand. We are building the ZEFER brand to establish our
presence in the competitive market for Internet professional services. We have
established a strategic marketing campaign to advertise and promote our
Internet service offering in newspapers, magazines and other media. We have
also conducted executive seminars with The Wall Street Journal Interactive and
are engaged in a direct mail campaign targeting business executives. In
addition, we have implemented a public relations program consisting of media
relations development, publication of articles and participation in industry
events and other speaking engagements.
Further Develop Expertise in Targeted Industries. We are building our
expertise in serving selected key industries. We believe that this increased
expertise will enhance our ability to rapidly create solutions that are
tailored to the particular requirements of different industries. The key
industries that we have targeted are consumer packaged goods and retail,
financial services, healthcare and pharmaceuticals, media and entertainment,
and technology. We are focusing our efforts on these industries because we
believe that businesses in these industries are rapidly adopting Internet
business strategies in the third wave Internet economy.
Expand Alliances. We have selectively established alliances with software
and hardware vendors, including BroadVision, Loudcloud, Microsoft, Siebel, Sun
Microsystems and Vantive. These relationships provide us with a range of
benefits, including access to the latest versions of technology developed by
our collaborators, training programs for our employees and new sales leads, co-
marketing opportunities and channels of distribution for our services. We
intend to enhance our existing alliances and establish additional alliances
with vendors that can offer us leading technologies and valuable marketing
opportunities.
The ZEFER Delivery Model
Our delivery model is based upon a proprietary methodology that we call
ENABLE. We use ENABLE to assist our clients in choosing and implementing
successful Internet strategies. Our ENABLE methodology is designed to ensure
that we:
. involve professionals from all of our competencies in each phase of our
engagements;
. take advantage of the standards, benchmarks and approaches that we have
developed so that we can deliver solutions in a rapid, repeatable and
efficient manner; and
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. follow detailed control procedures that are designed to ensure that we
are delivering high quality solutions.
ENABLE consists of four phases that we refer to as ENvision, Architect,
Build and Launch, and Evolve.
ENvision. In the ENvision phase, we explore the client's business from the
perspective of its various constituencies, including its customers, employees,
vendors and other affected parties. We determine the business models that
competitors could pursue and design appropriate countermeasures. We also
consider the impact of emerging technologies and identify existing assets of
the client that are relevant to its Internet strategy.
After creating a portfolio of Internet initiatives for our clients, we work
with them to prioritize these initiatives on the basis of both quantitative
and qualitative metrics. These metrics include organizational readiness for
adoption of new technologies or a new business model, value creation
potential, complexity of implementation and resource requirements. We believe
prioritization of Internet initiatives enables our clients to maximize the
value of their Internet strategy by pursuing their initiatives in a logical
sequence. We further believe that this prioritization is essential to the
development of a long-term business strategy that will enable the client to
respond quickly and cost effectively in the evolving Internet economy.
Architect. In the Architect phase, we start to implement the client
strategy by preparing a blueprint to guide the construction of a new Internet
business model or solution. We begin by designing the functional aspects of
the Internet solution and creating the structural and technical design for the
application. We provide the client with a clear understanding of how the
Internet strategy will work, the resources needed to implement and manage the
strategy and the time required to launch the new business model or solution.
We specifically design technology architectures to be highly scalable, secure
and flexible so that solutions may ultimately extend to new devices and
technologies.
Build and Launch. In the Build and Launch phase, we implement the Internet
solution or new business model. Our services in the Build portion of this
phase include application development, systems integration, quality assurance
testing and initial launch in a test environment. Our services in the Launch
portion of this phase include development of marketing activities, design and
creation of customer service and technical support infrastructures,
implementation of training programs, and establishment of tracking mechanisms
to evaluate performance of the Internet solution or new business model.
Evolve. Following the Build and Launch phase, a client's success will
depend, in part, upon its ability to continually adapt its business model to
the changing requirements of the Internet economy. To help them succeed, our
methodology includes a post-Build and Launch phase that we call Evolve. In the
Evolve phase, we reexamine the prioritization of the Internet initiatives
developed during the ENvision phase, evaluate knowledge gained from the
Architect and Build and Launch phases of the engagement and examine the
applicability to the client of knowledge that we have developed in other
client engagements. We believe that the Evolve phase is central to fostering
long-term client relationships.
ZEFER Competencies
Our ENABLE delivery model integrates our competencies in the following four
areas:
Business Strategy. Our business strategy consultants have backgrounds in
both Internet and management consulting. We believe that this combination
brings our clients fresh perspectives as well as seasoned industry expertise.
These consultants develop strategies on an iterative basis with our clients to
address the full spectrum of the client's business strategy. They identify
initiatives for the client's Internet business model, position the business in
existing and new markets and establish financial metrics to measure the
success of the model.
Experience Design. Our experience design consultants have backgrounds in
visual design, cognitive engineering and website architecture. These skillsets
enable our consultants to design Internet solutions that provide compelling
user experiences while accomplishing the business objectives of our clients.
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Technology. Our team of technology experts is experienced at developing and
integrating complex Internet applications. These professionals include
technical architects, programmers, integration specialists, security experts
and planning and testing experts. Our technology consultants have significant
expertise in advanced networked services. These services enable users to access
information from multiple devices, including wireline connected PCs or mobile
wireless phones. Our technology consultants also have experience in integrating
Internet applications with existing computing architectures.
Program Management. Our program management professionals bring skills in the
management of large, complex client projects to our client engagements. These
professionals possess expertise in requirements management, project planning
and tracking, communications and risk management. As the scale of Internet
projects in the third wave increases, project managers play an increasingly
important role in the rapid delivery of high quality solutions.
Representative Client Engagements
The following case studies describe client engagements that are
representative of the range of strategy-led Internet professional services that
we provide to our clients. The client engagements described below represent an
aggregate of 10% of our revenues for the period from our inception (March 18,
1999) to June 30, 2000, with average revenues per engagement for the same
period of approximately $1.4 million. We have recognized revenues for the
period from our inception to the date of this prospectus of at least $450,000
from each of these clients.
Siemens is one of the world's largest electrical
engineering and electronics companies, operating in over
[LOGO OF SIEMENS] 190 countries with over 50,000 product families and 1
million products.
Siemens (North America) engaged us to help determine how its businesses
could benefit by teaming up to tackle the challenges posed by e-business.
Traditionally, Siemens business units operated independently and were not
convinced that they should coordinate their approaches to e-business.
Rather than taking a typical analytical approach, we worked with Siemens to
create and facilitate an e-business council. This council represents most of
the Siemens companies in North America. The council's mission is to determine
if and how the business units can create shared e-business technology
capabilities. With our guidance, this approach achieved a high level of cross-
functional and cross-company collaboration that produced a vision for how
Siemens' businesses might develop and implement shared e-business capabilities.
The council recommended creating an e-business incubator environment, located
at ZEFER, in which a joint team of Siemens and ZEFER professionals are creating
a shared technology architecture to support piloting e-business capabilities.
Based on our success to date, Siemens selected the e-business incubator
program as a global lead project for its e-business. Already, this program has
defined and received approval for the global e-business technical architecture,
established an e-business incubator space that has begun the process of
cultural change at Siemens, and engaged several Siemens business units to
design and implement shared e-business technology.
Citizens Financial Group is a $30 billion financial
services company.
[LOGO OF CITIZENS BANK]
Citizens Financial Group engaged us to develop Internet solutions and
technologies to change the way it conducts business. The Internet represents a
large opportunity to the traditional banking industry as it becomes a more
accepted medium for transactions. Citizens wanted to capitalize on the Internet
opportunity and steer its business into the digital economy. Rather than
execute a single implementation for a business line, we helped Citizens develop
a strategy to implement Internet solutions throughout the business.
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We first worked with Citizens to identify Citizens' assets that could be
leveraged into the digital economy. We are currently working with Citizens' e-
business unit in the development of business plans to expand Citizens' current
offering. One of the first businesses to be launched is a small business
solution center which will integrate a banking account with a comprehensive set
of services, such as payroll and purchasing, geared toward the small business
owner.
We are also working with Citizens as it invests in a variety of financial-
service focused e-businesses. Citizens plans to accelerate the growth of these
e-businesses by providing coordinated access to the retail, commercial and
small business customer base of New England's second largest financial
institution. We then plan to help integrate these businesses into Citizens'
online platform.
In April 2000, we and Citizens entered into a three-year engagement valued
at up to approximately $12 million, subject to various early termination rights
at Citizens' option.
Publicaciones Semana is a Colombian publisher of multiple
information and entertainment magazines.
[LOGO OF SEMANA.COM]
Semana engaged us to help them analyze the fundamental business
ramifications of taking an information-based company online. The Internet
represents both an opportunity and a challenge to print-based publishing firms
such as Semana as the publishing industry becomes increasingly electronically
based. Other key aspects of this engagement included the need to address the
low level of penetration of the Internet in Latin America and to understand
local culture.
We developed a portfolio of strategic options for Semana after conducting a
comprehensive analysis to understand the needs of the end user and a detailed
process diagnosis to see where Semana could streamline or eliminate production
steps. For Semana's core media properties, we recommended and implemented a
comprehensive editorial process by which edits can be made via the web. This
editorial process is linked to Semana's internal computer systems such that the
transition from the old system to the new is seamless. We concurrently
identified an opportunity to take advantage of the Semana brand in new areas of
Internet business, including the introduction of the online magazine,
Semana.com. We also worked with Semana to acquire, build and extend a portal
search engine business based in Colombia, LaCiudad.com.
We worked with Semana to launch LaCiudad.com and Semana.com in 20 weeks. We
are now working with Semana to further enhance the sites' capabilities and
begin a strategy to build a portfolio of Latin American Internet properties.
The Children's Place is a specialty retailer of high
quality, value-priced apparel and accessories for
children with over 280 stores in the United States.
[LOGO OF THE CHILDREN'S PLACE]
In July 1999, The Children's Place approached us with a twofold objective:
(1) create an overarching Internet vision and strategy and (2) develop and
launch the company's first e-commerce initiative, childrensplace.com, in time
for the holiday buying season. We began the engagement with an intensive
strategic planning and blueprinting phase in which we developed a staged e-
commerce strategy that would allow for a first phase launch in 16 weeks.
In the first phase launch, we integrated several vendor applications and a
technical architecture that we custom designed for The Children's Place. These
applications include such features as a mix-and-match capability that allows
the user to construct outfits, a magnifying feature that rolls a view enhancer
over the clothes and a gift registry. Additionally, the site uses dHTML
technology, thereby keeping the site easy to use.
Childrensplace.com enabled The Children's Place to reach a new customer base
outside of its traditional store-based customers in the eastern United States.
The site has received positive customer feedback and recently was featured on a
national television news program.
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After the initial launch, we collaborated with The Children's Place to
change the site's look and feel to reflect the spring 2000 transition fashion
line. Because we had designed the site to be scalable and adaptive, we were
able to implement the release of an entirely refreshed site only weeks after
the initial launch. Part of the longer-term Internet strategy that we have
developed with The Children's Place is to evolve childrensplace.com into a
destination site for children.
[LOGO OF 3PLEX.COM] 3PLex.com is a business-to-business vertical exchange
focused on the transportation industry.
3PLex.com engaged us to help build its business and develop its online
exchange for the transportation industry. The Internet provides an opportunity
for third-party logistics companies (3PLs) to work more effectively with
shippers and carriers to increase capacity utilization, reduce transaction
costs and improve the quality of service. To capitalize on this opportunity,
3PLex.com needed to develop a differentiated strategy and get to market quickly
while building a scalable organization.
We began the engagement with a strategic analysis of the industry,
competitors and target market segments in order to understand 3PLs' current
business processes and where those processes could be improved or streamlined.
As a result of the analysis, we and 3PLex.com jointly defined a comprehensive
suite of applications aimed at automating business processes of 3PLs, expanding
their market reach and enhancing customer satisfaction. We also worked with
3PLex.com to evaluate vendor applications and development options as we created
the technical blueprints necessary to build and launch its online exchange. We
also helped 3PLex.com develop other components of its business, including
developing a corporate identity, hiring employees, assisting with customer
acquisition and raising capital.
We continue to work with 3PLex.com to develop the exchange and enhance the
value 3PLex.com offers its customers.
Zuellig Pharma is a healthcare product distributor and
healthcare information delivery company in the Asia
[LOGO OF Pacific region. Zuellig Pharma provides exclusive
ZUELLIG PHARMA] distribution and information-based services for the
largest pharmaceutical manufacturers in the world and to
leading hospitals, pharmacies and clinics in 22 Asian
countries.
Zuellig Pharma engaged us to develop an Internet-based strategy to secure
its position in the market and provide a foundation for future Internet
initiatives. We helped Zuellig Pharma define a strategy to better service its
suppliers by providing real-time access to sales and supply chain information
about the thousands of products Zuellig Pharma distributes in the region. In
just 16 weeks, we designed a system that allows Zuellig Pharma's internal
computer network to tie into the internal computer networks of its suppliers
over the Internet. This type of system is called an "extranet."
We helped design Zuellig Pharma's business-to-business extranet with the
technical architecture needed to support a complex structure. The technical
architecture supports integration with the client's existing computer systems
to facilitate future enhancements or extensions. The web site functionality
permits a faster flow of information to users by incorporating a mechanism for
analyzing data in a secure fashion. This approach provides increased
flexibility and functionality by allowing users access to various levels of
online tools and catalog views based on their security level.
The site delivers a combination of real-time and historical sales
information to both the pharmaceutical manufacturers that supply Zuellig Pharma
and the company's sales teams and country managers. The site is designed with
multicurrency and multilingual functionality to accommodate Zuellig Pharma's
multinational operations.
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Sales and Marketing
Our marketing strategy is to build the ZEFER brand in order to solidify our
presence in the competitive market for Internet professional services. Our
strategic marketing programs include advertising in major publications, direct
mailings, Internet campaigns, speaking engagements and other sponsored
marketing events, including executive seminars with The Wall Street Journal
Interactive. We have also retained an outside public relations and advertising
firm to assist us with our marketing efforts. Our marketing efforts include the
use of such phrases as "from digital vision to business results."
Our direct field marketing and sales organization sells and promotes our
services. In addition, our senior consultants and members of our management,
many of whom are well recognized in the Internet and strategic consulting
industries, frequently participate in establishing contacts with potential
clients and securing client engagements. Many of our sales leads are also
generated by our marketing initiatives or are the result of referrals from the
parties with whom we have alliances.
Clients
Representative clients from which we have recognized at least $300,000 of
revenue include:
<TABLE>
<S> <C>
3PLex.com Hillenbrand
Accompany Industries
Barclays Houston Cellular
Citibank Intergenerational
Citizens Financial Planning, an
Group affiliate of
ebDirect Scudder Kemper
Ez2get.com Investments
Federated Investors Publicaciones Semana
Gillette Siemens
Global Companies SimplyHealth.com
Gordon Brothers The Children's Place
</TABLE> Group Winebid.com
Zuellig Pharma
During each of 1999 and the six months ended June 30, 2000, no client
represented more than 10% of our revenues. Most of our clients are located in
the United States, although we have performed engagements for international
clients.
Knowledge Management
Our knowledge management system, which we call ZEFER 360(degrees), is an
internally developed software application that encompasses the Internet, our
internal intranet and extranets with clients and parties with whom we have
alliances. ZEFER 360(degrees) affords our employees, clients and vendors
customized access to our research, knowledge, expertise and tools.
ZEFER 360(degrees) improves productivity by:
. supporting knowledge capture and transfer;
. promoting experience sharing by accumulating and storing knowledge
gained from past and current projects, internal and external databases
and contact information from consultants with specific expertise;
. facilitating training with resource materials, handouts and training
sessions that can be carried live for remote users; and
. facilitating internal and external relationship building and innovation.
We have a dedicated knowledge management team to support and continually
develop ZEFER 360(degrees).
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Talent, Career Development and Culture
Talent. We dedicate significant resources to identifying and recruiting
students from top educational institutions and professionals from other
businesses. Our corporate human resources staff focuses on executive,
managerial, business and technical recruiting, as well as college and MBA
recruiting, to identify professionals with the background and experience
required to provide our service offerings. Our corporate staff in turn
supports dedicated regional recruiters who manage the local recruiting
process.
We hold onsite evening recruiting events, called "Z nights," on a regular
basis to allow candidates to experience our culture and to meet future co-
workers. We have established relationships with selected search firms,
agencies and contract recruiters who supplement our in-house recruiting
efforts. Approximately one-third of our employees are referred to us by
existing employees, whom we reward with cash incentives and special prizes.
Career Development. We believe that challenging work and continuing
education are critical to retaining talented employees. All new employees
participate in the ZEFER Acceleration Program, which is an intensive, week-
long orientation program that provides experience in our culture, values,
management practices and philosophy. We also regularly offer professional
development courses and a formal skills-based curriculum. We are constructing
an innovation and training center in Boston. We expect to complete this center
in the fourth quarter of 2000.
Culture. We work in multi-disciplinary teams and support a culturally and
demographically diverse workplace. We respect individual expression, freedom
of thought and action. While we are passionate about our work, we value the
other components of our lives and respect personal and professional balance.
We are committed to exceeding the expectations of our clients and ourselves
through the quality of our work, our focus on client service and our
investment in the professional development of our people.
Competition
We compete in the new and emerging Internet professional services market.
This market is highly competitive. Many of our competitors have longer
operating histories, better name recognition, larger client bases and greater
financial, technical, marketing and public relations resources than we.
Because the Internet professional services market has relatively low barriers
to entry, we believe competition will intensify as the market evolves.
Our principal competitors include:
. Internet-focused professional service firms, such as Proxicom,
Razorfish, Scient and Viant;
. strategic management consulting companies, such as Andersen Consulting,
Booz-Allen & Hamilton, Boston Consulting Group and McKinsey & Company;
. traditional IT service and systems integration firms, such as the Big
Five accounting firms, Cambridge Technology Partners, Computer Sciences
Corporation, IBM and Sapient; and
. internal IT departments of our prospective clients.
We believe that the key competitive factors are integrated and
multidisciplinary business strategy, experience design and technology skills,
company reputation for Internet expertise, strategic insight and
implementation excellence, strategic project management and large-scale
program management capabilities and an ability to provide services in a timely
and cost-effective manner. We believe that we compete successfully with
respect to each of these competitive factors.
Proprietary Rights
We have developed processes, skillsets, technologies, software and
methodologies, including our ENABLE methodology, that we consider to be
proprietary. We have tried to protect our proprietary rights through reliance
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on a combination of trade secret, copyright and trademark laws. In particular,
we require our employees to sign a confidentiality and invention assignment
agreement upon employment with us which provides that they must maintain the
confidentiality of our intellectual property and that any intellectual property
that they create while employed by us belongs to us.
We are in the process of registering the trademark "ZEFER" with the United
States Patent and Trademark Office. We intend to make such other state and
federal filings as we believe are appropriate to protect our intellectual
property rights.
Employees
As of August 18, 2000, we had a total of 762 employees, including 559
billable employees. None of our employees is represented by a labor union. We
consider our employee relations to be good.
Facilities
Our principal executive offices are located in an 18,600 square foot leased
facility in Boston, Massachusetts. The lease for this facility expires in
August 2004. We also lease an additional 70,800 square feet of office space in
Boston under multiple leases. These leases expire at various times through
December 2005. We also lease an aggregate of approximately 145,000 square feet
of office space in Chicago, New York, Pittsburgh, San Francisco and London. We
believe that our facilities are satisfactory for our current needs.
Legal Proceedings
From time to time we may be involved in litigation that arises in the normal
course of business operations. As of the date of this prospectus, we are not
involved in any material litigation.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their respective ages and positions
as of July 31, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
William A. Seibel............. 49 Chairman of the Board, President and Chief
Executive Officer
Gerard E. Dube................ 46 Executive Vice President, Client and Market
Development
Sean W. Mullaney.............. 39 Executive Vice President for Enterprise
Development, General Counsel, Secretary and
Assistant Treasurer
James H. Slamp................ 46 Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
Martha L. Stephens............ 41 Executive Vice President for People
Anthony K. Tjan............... 29 Executive Vice President and Director
Francis J. Torbey............. 43 Executive Vice President of Unified
Services
Thomas J. Waite............... 43 Executive Vice President of Business
Strategy and Strategic Marketing
Philip A. Canfield+........... 32 Director
Masood Jabbar*................ 50 Director
Catherine Viscardi Johnston+.. 47 Director
David A. Lubin+*.............. 50 Vice Chairman of the Board of Directors
Richard L. Nolan*............. 60 Director
Bruce V. Rauner............... 44 Director
</TABLE>
---------------------
* Member of Audit Committee
+ Member of Compensation Committee
William A. Seibel has served as our President and Chief Executive Officer
and a Director since March 1999 and as Chairman of the Board since January
2000. Mr. Seibel was part of the original management team with Cambridge
Technology Partners, an international management consulting and systems
integration company, serving in various capacities from 1991 through March
1999, most recently as Executive Vice President of the Americas. Previously,
Mr. Seibel held various senior executive positions with Index Technologies, an
information technology services firm, and Dun & Bradstreet Software, Inc., a
software company. As our chief executive officer, Mr. Seibel was elected to the
board of directors pursuant to the stockholders agreement.
Gerard E. Dube has served as our Executive Vice President, Client and Market
Development since August 1999. From April 1994 through July 1999, Mr. Dube was
with Computer Sciences Corporation, an information technology services company,
most recently serving as President, Integrated Business Services.
Sean W. Mullaney joined us in March 1999 as our Executive Vice President for
Enterprise Development, General Counsel, Secretary and Assistant Treasurer.
From February 1998 through February 1999, Mr. Mullaney was Vice President of
Mergers and Acquisitions for Renaissance Worldwide, Inc., an information
technology services firm. Mr. Mullaney was an attorney for Ropes & Gray, a
Boston law firm, specializing in mergers and acquisitions and securities law,
from 1993 through January 1998.
James H. Slamp has served as our Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary since September 1999. From 1995
through August 1999, Mr. Slamp was Corporate Controller of Diamond Technology
Partners, Incorporated, a management and e-commerce consulting firm. Prior to
working at Diamond, Mr. Slamp was Corporate Controller of Ivex Packaging
Corporation, a manufacturer of paper and plastic products, from 1990 through
1995. Mr. Slamp is a certified public accountant formerly associated with
PricewaterhouseCoopers LLP.
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<PAGE>
Martha L. Stephens has served as our Executive Vice President for People
since March 1999. Ms. Stephens founded the Green Leaf Consulting Group, Inc., a
consulting firm, in March 1997 and served as its President until February 1999.
Ms. Stephens also worked at International Data Group, Inc., an information
technology services group, where she served in several capacities from October
1987 to March 1997, most recently serving as the Corporate Vice President of
Human Resources. Ms. Stephens has also been an adjunct faculty member at
Bentley College since 1994 and taught classes at Babson College from 1997 to
1999.
Anthony K. Tjan has served as our Executive Vice President and a director
since May 1999. In March 1998, Mr. Tjan co-founded Original ZEFER and served as
its Chief Executive Officer until April 1999. From June 1994 through June 1996,
Mr. Tjan was a consultant with McKinsey & Company, a global strategic
management consulting firm. Prior to working at McKinsey & Company, Mr. Tjan
worked on the external staff of the World Economic Forum Foundation, an
international think tank, in Geneva, Switzerland on various projects from June
1992 through January 1995. Mr. Tjan also serves on the Board of Advisors for
several Internet companies, including Accompany, Foodline.com, Mexico.com and
Netyear. Mr. Tjan was elected to the board of directors as the nominee of Mr.
Seibel pursuant to the stockholders agreement.
Francis J. Torbey has served as our Executive Vice President of Unified
Services since March 1999. From June 1996 through February 1999, Mr. Torbey
served as the Senior Vice President, Application Development with Infinium
Software, an enterprise software company. Prior to joining Infinium, he was a
vice president at Landmark Systems Corporation, a software company, from
January 1993.
Thomas J. Waite has served as our Executive Vice President of Business
Strategy and Strategic Marketing since September 1999. Mr. Waite co-founded
Waite & Company, a strategic management consulting firm, in 1995 and served as
its Managing Partner. Prior to founding Waite & Company, he was Senior Vice
President of Innovation and Marketing for CSC Index, an information technology
services firm, from 1986 through 1995. Previously, he was with McKinsey &
Company.
Philip A. Canfield has been on our board of directors since April 1999. He
has been a principal at GTCR Golder Rauner, L.L.C., a private equity and
venture capital firm, since 1997 and was an associate from 1992 until 1997.
Mr. Canfield is also a director of Brience, Inc., AETEA Information Technology,
Inc., VISTA Information Technologies, Inc., AppNet, Inc., FutureNext
Consulting, Inc., Vanteon, Inc. and netASPx, Inc. Mr. Canfield was elected to
the board of directors as a nominee of GTCR pursuant to the stockholders
agreement.
Masood Jabbar has been on our board of directors since December 1999. Mr.
Jabbar has held various positions at Sun Microsystems, Inc. since 1986, most
recently serving as the President of the Computer Systems Group. Mr. Jabbar was
elected to the board of directors as an independent director chosen jointly by
GTCR and Mr. Seibel pursuant to the stockholders agreement.
Catherine Viscardi Johnston has been on our board of directors since
February 2000. Since November 1999, Ms. Johnston has engaged in private
investing activities. Ms. Johnston served in a variety of positions with Conde
Nast Publications, a magazine publisher, from 1977 through 1993, and again from
March 1995 through November 1999, most recently serving as Publisher of
Mademoiselle and, since December 1996, as Executive Vice President. She also
serves on the Board of Directors of the Ad Council and on the Board of Trustees
of Manhattanville College. Ms. Johnston was elected to the board of directors
as an independent director chosen jointly by GTCR and Mr. Seibel pursuant to
the stockholders agreement.
David A. Lubin has been on our board of directors since June 1999 and has
served as our Vice Chairman of the board of directors since April 2000. Since
January 1999, Mr. Lubin has engaged in private investing activities. From
August 1997 through December 1998, Mr. Lubin served as the Managing Director of
Renaissance Worldwide, Inc. From December 1993 through August 1997, Mr. Lubin
served as the Treasurer and Co-Chairman of Renaissance Solutions, Inc., a
strategy consulting firm. Mr. Lubin was elected to the board of directors as an
independent director chosen jointly by GTCR and Mr. Seibel pursuant to the
stockholders agreement.
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<PAGE>
Richard L. Nolan has served as a member of our board of directors since June
1999. Mr. Nolan has served as the William Barclay Harding Professor of
Management of Technology at the Harvard Business School since 1991. Mr. Nolan
was elected to the board of directors as an independent director chosen jointly
by GTCR and Mr. Seibel pursuant to the stockholders agreement.
Bruce V. Rauner has served as a member of our board of directors since
February 2000. Mr. Rauner is the managing principal of GTCR and has been a
principal of GTCR since 1981. Mr. Rauner is also a director of AnswerThink
Consulting Group, Inc., AppNet, Inc., Coinmach Laundry Corporation, divine
interVentures, Inc., Polymer Group, Inc., Province Healthcare, Inc. and U.S.
Aggregates. Mr. Rauner was elected to the board of directors as a nominee of
GTCR pursuant to the stockholders agreement.
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
The board of directors is divided into three classes, each of whose members
serves for a staggered three-year term. Messrs. Nolan and Tjan serve in the
class whose term expires in 2001, Messrs. Jabbar, Lubin and Rauner serve in the
class whose term expires in 2002 and Messrs. Canfield and Seibel and Ms.
Johnston serve in the class whose term expires in 2003. At each annual meeting
of stockholders, a class of directors will be elected for a three-year term to
succeed the directors of the same class whose terms are then expiring.
The employment agreement that we entered into with Mr. Tjan on April 30,
1999 provides that we shall cause Mr. Tjan to be elected as a director of our
company. The stockholders agreement discussed in "Certain Relationships and
Related Transactions" below provides that, until the consummation of this
offering, each party to that agreement will vote all shares of our capital
stock held by such party to elect the following persons to our board of
directors: Mr. Seibel and one of our executives designated by the chief
executive officer, three representatives of GTCR and four independent persons
chosen jointly by GTCR and the chief excutive officer. Mr. Tjan has been
designated by our chief executive officer, Messrs. Rauner and Canfield have
been designated by GTCR, and Messrs. Jabbar, Lubin and Nolan and Ms. Johnston
have been chosen jointly by GTCR and our chief executive officer.
Compensation of Directors
We provide non-employee directors with a per diem of $1,000 for each meeting
of the board of directors or its committees that they attend to reimburse them
for their expenses incurred. Upon his election to the board in June 1999, Mr.
Nolan received a nonstatutory stock option to purchase 30,000 shares of common
stock, which is now exercisable for 40,000 shares of common stock as a result
of our stock split effective as of December 1, 1999. Upon his election to the
board in mid-December 1999, Mr. Jabbar received a nonstatutory stock option to
purchase 30,000 shares of common stock. Upon her election to the board in
February 2000, Ms. Johnston received a nonstatutory stock option to purchase
30,000 shares of common stock. In April 2000, we granted a nonstatutory stock
option to Mr. Lubin to purchase 50,000 shares of common stock. The options
granted to these non-employee directors, which have a weighted average exercise
price of $7.07 per share, vest over a four-year period in equal annual
installments. All directors are eligible to receive additional grants of
options under our stock incentive plans. Messrs. Jabbar and Lubin have also
invested in our common stock as described in "Certain Relationships and Related
Transactions--Additional Equity Purchases by Management."
Board Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Jabbar, Lubin and Nolan. The audit
committee makes recommendations to the board of
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directors regarding the selection of independent accountants, reviews the
results and scope of the audit and other services provided by our independent
accountants and reviews and evaluates our audit and control functions. The
compensation committee consists of Messrs. Canfield and Lubin and Ms. Johnston.
The compensation committee administers our stock plans and makes decisions
concerning salaries and incentive compensation for our employees.
Innovation Advisory Board
We have established an Innovation Advisory Board to enhance the development
of intellectual capital for our service offering. Members have agreed to devote
up to 12 days per year to develop intellectual capital, participate in
educational forums and mentor our innovation team leaders. We compensate some
Innovation Advisory Board members for their services with cash, stock options
or both, which we determine on an individual basis. The current members of the
Innovation Advisory Board are:
Pamela Alexander is President and Chief Executive Officer for Alexander
Ogilvy Public Relations Worldwide. Ms. Alexander is a member of numerous
technology industry organizations and associations, including the editorial
board of Red Herring Communications and the board of directors of the
Technology Network, a bipartisan public policy and political advocacy
organization addressing the interests of the technology industry.
Ian O. Angell, Ph.D. is Professor of Information Systems at the London
School of Economics. He is a lecturer and author on the subject of information
systems and their effect on social, economic and organizational issues whose
work includes the book Information Systems Management: Opportunities and Risks
and The New Barbarian Manifesto: How to Survive the Information Age.
Peter Block is an author and consultant whose work centers on ways to bring
service and accountability to organizations and communities. He is the author
of Flawless Consulting: A Guide to Getting Your Expertise Used, The Empowered
Manager: Positive Political Skills at Work and Stewardship: Choosing Service
Over Self Interest. Mr. Block has joined with the Association for Quality and
Participation to create The School for Managing & Leading Change, a program
designed for the public and private sector to learn how to redesign the
workplace.
Miles Braffett is Vice President and Chief Information Officer of BMG
Entertainment and is responsible for worldwide information systems and
technology (IS&T). Prior to this position, Mr. Braffett served as Vice
President IS&T, North America.
Jean Camp, Ph.D. is Assistant Professor of Public Policy at the John F.
Kennedy School of Government at Harvard University. Her research interests are
based on the interdisciplinary study of policy, law and computer science. She
has been published in technical, business and policy forums and recently
published the book Trust and Risk in Internet Commerce.
Jay Chiat co-founded Chiat/Day in 1962 and grew the business into an
advertising agency whose clients included Apple, Nike and Energizer.
Advertising Age named Chiat/Day Agency of the Year in 1980 and 1988, and Agency
of the Decade in 1989. Mr. Chiat has been Chairman of ScreamingMedia, an
Internet company that distributes custom-filtered content to web sites, since
1998.
Clayton Christensen, D.B.A. is a Professor of Business Administration at the
Harvard Business School with a joint appointment in Technology and Operations
Management and General Management. Mr. Christensen is an award-winning
researcher and writer who focuses on developing organizational capabilities and
finding markets for new technologies. Mr. Christensen is the author of The
Innovator's Dilemma: When New Technologies Cause Great Firms to Fail.
Eric K. Clemons, Ph.D. is Professor of Operations, Information Management
and Management at The Wharton School, where he has been a researcher and
educator since 1976 in the areas of information
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<PAGE>
technology and business strategy. He works with major corporations to study
impacts of information technology on the future of their firms and industries
and is the author of many papers in these fields.
Jeffrey Dunn has served as Chief Operating Officer of Nickelodeon since
1996. Prior to joining Nickelodeon in 1993, Mr. Dunn served in a variety of
marketing and general management positions for Arthur D. Little, Bank of Boston
and Time magazine.
Christopher Gopal, Ph.D. was partner and head of Ernst & Young LLP's global
and national supply chain services. He was also Vice President of Worldwide
Operations at Dell Computer. Dr. Gopal is the author of three books, the latest
being Super Charging Supply Chains, and several articles dealing with
information management, e-commerce and supply chain management. He is currently
the Chief Information Officer at Telseon, Inc., a communications company.
Clive Holtham, Ph.D. is Bull Information Systems Professor of Information
Management and head of the Department of Management Systems and Information at
the City University Business School of London. He has served as an expert
advisor to the European Parliament and authored Executive Information Systems
and Decision Support. Dr. Holtham has also authored numerous white papers and
research studies in the areas of application of information management,
flexible learning infrastructure and applied knowledge management.
Rolf Jensen is Director of the Copenhagen Institute for Future Studies,
where he lectures and orchestrates strategic scenarios. Mr. Jensen is a speaker
at international conferences and other seminars, including McKinsey & Company
and the Stockholm Business School, and he recently published The Dream Society:
From Information to Imagination.
Robert Johansen, Ph.D. has been the President of the Institute for the
Future since 1996. He was one of the first social scientists to explore the
human and organizational impacts of new communications and computing
innovations. He is the principal author of Teleconferencing and Beyond:
Communications in the Office of the Future and a frequent speaker on topics
relating to emerging information technologies and their potential advantages
and disadvantages to users.
Moshe Rubinstein, Ph.D. is a professor at the University of California at
Los Angeles School of Engineering and Applied Science, director of the "A-B-C"
Corporate Network at the Anderson School at UCLA and faculty director of the
Creativity and Innovation in the Organization Program. Dr. Rubinstein is a
Fulbright Hays Fellow and has written eight books, including Patterns of
Problem Solving and Tools for Thinking and Problem Solving, as well as over 100
articles. His latest book is The Minding Organization, which he co-authored.
Bo Saxberg, M.D., Ph.D. is Vice President, Business Development at eJNJ,
LLC, a newly established operating company under Johnson & Johnson. Previously,
he served as Vice President, Advanced Communications at Johnson & Johnson,
where he led efforts in medical informatics and focused on new business
opportunities related to the management of information to health care delivery.
Prior to joining Johnson & Johnson in 1995, Dr. Saxberg was Director of
Information Sciences at Eli Lilly. There he led the development of Eli Lilly's
Internet home page and interactive health models and other applications of
medical informatics.
Don Schultz, Ph.D. is Professor of Integrated Marketing Communications at
Northwestern University, where he has been a professor since 1977. He has
consulted, lectured and held seminars throughout the world on integrated
marketing communication, marketing, advertising, sales promotion and
communication management. His articles have appeared in numerous marketing and
advertising publications and he is author or co-author of seven books,
including Integrated Marketing Communications, Strategic Advertising Campaigns,
Essentials of Advertising Strategy and Strategic Newspaper Marketing. He was
the founding editor of the Journal of Direct Marketing.
Michael Shamos, Ph.D. is Co-Director of the Institute for eCommerce at
Carnegie Mellon University, and is the principal systems scientist for the
School of Computer Science. He has received numerous awards and
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co-authored Computational Geometry: An Introduction. He has been a member of
the editorial board for Journal of Electronic Commerce Technology and
Pittsburgh Journal of Technology, Law and Policy and has held president
positions for Unus, Inc., a database publishing software company, and Lexeme
Corporation, a software language translation products company.
James Short, Ph.D. is a Visiting Associate Professor at the Sloan School of
Management at the Massachusetts Institute of Technology and a Belfer Fellow at
the John F. Kennedy School of Government at Harvard University. Dr. Short is on
leave from the London Business School, where he is Associate Professor of
Strategy and Information Management. He founded the London Business School's
i:Lab digital research laboratory. His research and teaching deal with new
digital ventures and technology-enabled strategy.
Robert Tien, M.D., M.P.H. is a founder and Chairman of the Board of
Electronic Business International. He is Vice President of the International
Scientific Advisory Board for the American Academy of Anti-Aging Medicine and
serves on the board of directors of Orchid BioSciences, Inc. He has several
academic and hospital appointments, including a tenured Professorship at Duke
University Medical Center, where he was Director of Neuroradiology and Director
of Neuro-MR from 1991-1996. He has authored or co-authored more than 160
papers.
Hal Tovin is President and Chief Executive Officer of Citizens e-Business
and a member of Citizens' Executive Committee. Mr. Tovin directs Citizens' web
evolution, on-line banking growth and the development and implementation of
strategic alliances for the Internet. Prior to his current assignment, Mr.
Tovin was Group Executive Vice President, Chief Marketing Officer and Director
of Convenience Banking.
Hal Varian, Ph.D. is the Dean of the School of Information Management and
Systems at the University of California at Berkeley and also holds joint
appointments in the Haas School of Business and the Department of Economics.
Dr. Varian has published numerous papers in economic theory, econometrics,
industrial organization, public finance and the economics of information
technology, and has received several awards and honors. He is the author of the
recent book Information Rules: A Strategic Guide to the Network Economy.
Arnold Wasserman is a design management consultant specializing in
innovation strategy for corporations in the U.S., Europe and Asia. He has held
positions of Vice President of Corporate Industrial Design/Human Factors at
NCR, Xerox and Unisys Corporation. Mr. Wasserman is the former Dean of the
Pratt Institute's School of Design. Mr. Wasserman writes regularly on design,
strategy, management and innovation and he has received numerous awards for his
designs of business equipment and consumer products.
45
<PAGE>
Executive Compensation
The following table sets forth the total compensation paid or accrued for
the year ended December 31, 1999 to our Chairman of the Board, President and
Chief Executive Officer and four other most highly compensated executive
officers at year end. We refer to all of these officers collectively as our
Named Executive Officers. The amounts in the "Bonus" column represent bonuses
for services performed during 1999. The $4,212 in "All Other Compensation"
represents the payment of a term life insurance premium. Please see "--Senior
Management Agreements."
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation
-----------------
All Other
Name and Principal Position Salary Bonus Compensation
--------------------------- -------- -------- ------------
<S> <C> <C> <C>
William A. Seibel............................... $267,921 $267,500 $4,212
Chairman of the Board, President
and Chief Executive Officer
Sean W. Mullaney................................ 152,300 48,125 --
Executive Vice President for Enterprise
Development
and General Counsel
Martha L. Stephens.............................. 143,000 58,333 --
Executive Vice President for People
Anthony K. Tjan................................. 143,300 66,500 --
Executive Vice President
Francis J. Torbey............................... 143,100 58,333 --
Chief Technology Officer
and Executive Vice President of Unified
Services
</TABLE>
In March 2000, we granted incentive stock options to Mr. Mullaney, Ms.
Stephens, Mr. Tjan and Mr. Torbey to purchase 30,000, 10,000, 30,000 and
100,000 shares of our common stock, respectively. These options have an
exercise price of $11.00 per share and vest over a four-year period in equal
annual installments. In April 2000, we granted an incentive stock option to Mr.
Seibel to purchase 50,000 shares of our common stock. This option has an
exercise price of $11.00 per share and vests over a four-year period in equal
annual installments.
Benefit Plans
1999 Incentive Plan. Our 1999 Incentive Plan was adopted by our board of
directors and approved by our stockholders in June 1999. In January 2000, we
increased the shares available for issuance under the 1999 Incentive Plan to
22,666,666.
This incentive plan provides for the grant of options intended to qualify as
incentive stock options, or ISOs, under Section 422 of the Internal Revenue
Code, nonstatutory stock options, restricted stock awards and other stock and
non-stock based awards.
Officers, employees and other persons who provide services to us are
eligible to receive awards under the this incentive plan. No participant may
receive any award for more than 1,000,000 shares in any calendar year.
Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. The board of
directors or an appointed committee 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, which in no event may be less than the par value of the
underlying stock.
46
<PAGE>
The board of directors has directed the compensation committee to administer
this incentive plan. The board of directors has the authority to adopt, amend
and repeal the administrative rules, guidelines and practices relating to the
plan and to interpret its provisions. Subject to any applicable limitations
contained in this incentive plan, the compensation committee:
. determines eligibility for and selects the recipients of awards;
. determines, modifies and waives the terms and conditions of any award;
. prescribes forms, rules and procedures, which it may modify or waive;
. interprets the plan; and
. otherwise does all things necessary to carry out the purposes of the
plan.
In the event of mergers, liquidations or other acquisition events described
in the plan, our board of directors may do any or all of the following:
. cause any or all outstanding awards to be exercisable;
. vest all awards;
. accelerate all deferrals;
. make a cash payment to settle the award; or
. provide for the assumption or substitution of all awards with that of
the acquiring or surviving entity.
No ISOs may be granted under this incentive plan after May 21, 2009, but the
vesting and effectiveness of ISOs previously granted may extend beyond that
date. The compensation committee may at any time amend, suspend or terminate
this incentive plan, except that no such amendment will, without the approval
of our stockholders, effectuate a change for which stockholder approval is
required in order for this incentive plan to continue to qualify under Section
422 of the Internal Revenue Code and for awards to be eligible for the
performance-based exception under Section 162(m) of the Internal Revenue Code.
1999 Stock Option Plan. Our 1999 Stock Option Plan was adopted by our board
of directors and approved by our stockholders in June 1999. Up to 2,000,000
shares of common stock, subject to adjustment in the event of stock splits and
other similar events, may be issued pursuant to awards granted under this
option plan. Employees, consultants and advisers of businesses that we acquire
are eligible to receive nonstatutory stock options under this option plan.
Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. The board of
directors or an appointed committee 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, which in no event may be less than the par value of the
underlying stock.
The board of directors has directed the compensation committee to administer
this option plan. The board of directors has the authority to adopt, amend and
repeal the administrative rules, guidelines and practices relating to the plan
and to interpret its provisions. Subject to any applicable limitations
contained in this option plan, this compensation committee:
. selects the recipients of options;
. determines the number of shares of stock subject to each option;
. determines the terms and conditions of each option;
. adopts, amends and rescinds rules and regulations for the administration
of the plan; and
. interprets the plan, decides any questions and settles all controversies
and disputes that may arise in connection with the plan.
47
<PAGE>
In the event of a merger, liquidation or other acquisition event, our board
of directors may do any or all of the following:
. cause any or all outstanding options to be exercisable immediately prior
to the consummation of such transaction;
. make a cash payment to settle the option; or
. provide for the assumption or substitution of all options by the
acquiring or surviving entity.
No award may be granted under this option plan after June 2009, but the
vesting and effectiveness of options previously granted may extend beyond that
date. Our board of directors may at any time amend, suspend or terminate the
option plan.
2000 Employee Stock Purchase Plan. Our 2000 Employee Stock Purchase Plan was
adopted by our board of directors and approved by our stockholders in March
2000. The board subsequently amended the purchase plan in July and August 2000.
The purchase plan authorizes the issuance of up to a total of 500,000 shares of
our common stock to participating employees.
Employees who are customarily employed for more than five months per year,
including our directors who are employees and employees of any participating
subsidiaries, 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. As of June 30, 2000, approximately 711 of our employees would
have been eligible to participate in the purchase plan.
On the first day of a designated payroll deduction period, or "offering
period," we will grant to each eligible employee participating in the purchase
plan an option to purchase shares of our common stock as follows: the employee
may authorize between 1% to 10% of his or her base pay to be deducted by us
from his or her base pay during the offering period. On the last day of the
offering period, the employee is deemed to have exercised the option, at the
option exercise price, to the extent of accumulated payroll deductions. Under
the terms of the purchase plan, the option price is an amount equal to 85% of
the per share closing price of our common stock on either the day before the
first day of the offering period or the last day of the offering period,
whichever is lower. In no event may an employee purchase under the purchase
plan in any year a number of shares which exceeds the number of shares
determined by dividing $25,000 by the closing market price of a share of common
stock on the commencement date of the offering period.
The offering periods under the purchase plan will be approximately twelve
months in length and staggered on a quarterly basis. The board of directors may
change the duration of the offering periods.
An employee who is not a participant on the last day of the offering period
is not entitled to exercise any option and the employee's accumulated payroll
deductions will be refunded. An employee's rights under the purchase plan
terminate upon voluntary withdrawal from the purchase plan at any time, or when
the employee ceases employment for any reason.
401(K) Plan. In June 1999, we adopted an employee savings and retirement
plan qualified under Section 401 of the Internal Revenue Code and covering all
of our employees. Pursuant to the 401(k) plan, employees may elect to reduce
their current compensation by up to the statutorily prescribed annual limit and
have the amount of such reduction contributed to the 401(k) plan.
Senior Management Agreements
William A. Seibel. On March 23, 1999, we entered into a senior management
agreement with Mr. Seibel which provides for his employment as President and
Chief Executive Officer. Under the terms of this agreement, Mr. Seibel's
employment will continue until he resigns or we terminate his employment.
48
<PAGE>
Mr. Seibel receives a base salary of $390,000 per year and he is eligible to
receive an annual performance bonus of up to 50% of his base salary. The board
of directors may increase Mr. Seibel's base salary in its discretion based upon
our achievement of specified objectives. Mr. Seibel received a one-time special
bonus of $80,000 when he joined us. We also provide Mr. Seibel with medical
insurance benefits, a $2,000,000 term life insurance policy and other benefits
generally made available to our senior management.
Mr. Seibel's senior management agreement contains provisions requiring him
to protect the confidentiality of our proprietary and confidential information.
In addition, Mr. Seibel is prohibited during the term of his employment and for
a period of two years after from competing with us, soliciting any of our
employees or interfering with any of our business relationships. If Mr.
Seibel's employment is terminated by us without cause or by him for good
reason, he will be entitled to receive his base salary and medical insurance
benefits as severance for a period of two years thereafter.
In connection with the execution of his senior management agreement, Mr.
Seibel purchased 3,040,000 shares of restricted common stock from us on March
23, 1999, for which he paid a total of $380,000, $1,900 in cash and $378,100 in
the form of a recourse promissory note. Mr. Seibel's senior management
agreement provides us with rights to purchase all of his restricted stock if
his employment with us terminates for any reason. If we do not exercise our
purchase right, some of the other members of our management team have the right
to purchase these shares. These purchase rights will terminate upon the
consummation of this offering with respect to stock that has vested on the date
that the purchase right is triggered.
Mr. Seibel's restricted stock vests on a daily basis over five years, so as
to vest in full on March 23, 2004. Upon the consummation of this offering, Mr.
Seibel's restricted stock shall immediately vest as to an aggregate of 33% of
such stock, additional shares of restricted stock shall vest on a daily basis
so that an additional 7% of Mr. Seibel's restricted stock will be vested on
March 23, 2001, and thereafter the remaining 60% of such stock shall vest on a
daily basis so as to be fully vested on March 23, 2004. Mr. Seibel's stock will
vest in full in the event of a change in control or sale of our company. The
purchase price for Mr. Seibel's vested shares is the fair market value of the
stock on the date of repurchase. The purchase price for Mr. Seibel's unvested
shares is the original purchase price paid by Mr. Seibel.
The promissory note issued by Mr. Seibel to purchase the restricted stock
bears interest at a rate of 5% per year, compounded annually, and is not
repayable until the fifth anniversary of the date the note was issued, at which
time it is repayable in full as to both principal and accrued interest. Mr.
Seibel must make prepayments on the note when we raise additional equity
funding from GTCR. In the event Mr. Seibel receives any cash dividend on the
restricted stock or proceeds from the sale of the restricted stock, such
proceeds must be applied to principal outstanding and unpaid accrued interest
on his notes. In the event of the sale of our company, Mr. Seibel must repay
the entire principal amount then outstanding and all accrued interest on his
note. We have the right to offset any amounts owed to us by Mr. Seibel against
any amounts payable to him by us pursuant to his senior management agreement.
Additionally, Mr. Seibel's senior management agreement limits Mr. Seibel's
ability to transfer this restricted stock, except to members of Mr. Seibel's
family group, sales that may be made if the price of our stock satisfies
certain performance requirements and sales that may be made in conjunction with
sales of our stock made by the GTCR Funds.
Other Senior Executive Officers. We have also entered into senior management
or employment agreements with the other named executive officers. These
agreements and the associated restricted stock arrangements are substantially
similar to those of Mr. Seibel, except that these agreements:
. did not provide for a signing bonus or the $2,000,000 life insurance
policy;
. provide that the rights of repurchase will terminate only upon changes
in control described in these agreements;
. provide that the restricted stock will vest 20% per year, with the first
vesting having occurred on March 31, 2000, so as to vest in full on
March 31, 2004;
49
<PAGE>
. provide that upon the consummation of this offering, the restricted
stock will continue to vest at the same rate, but on a quarterly basis;
. provide that in the event we terminate the executive's employment
without cause or if the executive resigns for good reason, if such
termination occurs on or prior to the first anniversary of the
commencement of such executive's employment, that number of shares of
restricted stock that would have vested within 18 months of such
termination shall vest immediately, and if such termination occurs after
the first anniversary, that number of shares of restricted stock that
would have vested within 12 months of such termination shall vest
immediately; and
. prohibit the executive from competing with us, soliciting any of our
employees or interfering with any of our business relationships for a
period of one year after the termination of employment, which period is
reduced to six months if the executive's employment is terminated
without cause within two years of a change in control of our company.
Additional differences are described below.
Under a senior management agreement entered with us on August 19, 1999, Mr.
Dube receives a base salary of $300,000 per year, is eligible to receive an
annual performance bonus of up to 66.67% of base salary, has a severance period
of six months, and purchased 800,000 shares of restricted common stock for
which he paid $21,400 in cash and $80,600 in the form of a recourse promissory
note. As of June 30, 2000, $36,062 of the promissory note remains outstanding.
The period of Mr. Dube's noncompetition, nonsolicitation and noninterference
covenant is six months.
Under a senior management agreement entered with us on May 21, 1999, Mr.
Mullaney receives a base salary of $180,000. Mr. Mullaney is eligible to
receive an annual performance bonus of up to 35% of base salary, has a
severance period of six months, and purchased 420,000 shares of restricted
common stock for which he paid $4,600 in cash and $47,900 in the form of a
recourse promissory note. As of June 30, 2000, $18,561 of the promissory note
remained outstanding. Additionally, Mr. Mullaney received a special one-time
bonus of $50,000 in April 2000.
Under a senior management agreement entered with us on August, 25, 1999, Mr.
Slamp receives a base salary of $200,000. Mr. Slamp is eligible to receive an
annual performance bonus of up to 35% of base salary, has a severance period of
six months, and purchased 400,000 shares of restricted common stock for which
he paid $27,200 in cash and $74,800 in the form of a recourse promissory note.
As of June 30, 2000, $36,062 of the promissory note remains outstanding. We
also provided Mr. Slamp with a one-time special moving expense reimbursement of
$70,800 when he joined us.
Under a senior management agreement entered with us on May 21, 1999, Ms.
Stephens receives a base salary of $207,000 per year. Ms. Stephens is eligible
to receive an annual performance bonus of up to 35% of base salary, has a
severance period of six months, and purchased 420,000 shares of restricted
common stock for which she paid $4,600 in cash and $47,900 in the form of a
recourse promissory note. As of June 30, 2000, $18,561 of the promissory note
remained outstanding.
Under an employment agreement entered with us on April 30, 1999, Mr. Tjan
began to receive a base salary of $165,000 per year in May 1999, which was
increased to $190,000 in October 1999. Mr. Tjan is eligible to receive an
annual performance bonus of up to 35% of base salary and has a severance period
of two years. The period of Mr. Tjan's noncompetition, nonsolicitation and
noninterference covenant is one year. In addition, Mr. Tjan received 844,800
shares of restricted common stock from us in connection with a Section 351
reorganization of Original ZEFER for the purpose of continuing the business of
Original ZEFER, and therefore did not execute a promissory note in connection
with his acquisition of these shares. We have the right to repurchase only Mr.
Tjan's shares of restricted stock that have not vested. Mr. Tjan's restricted
stock vests as to 20% of the shares on the first anniversary of April 30, 1999,
40% on the second anniversary, 70% on the third anniversary and will be fully
vested on the fourth anniversary. The vesting of the shares of
50
<PAGE>
restricted stock that were to vest on April 30, 2000 was accelerated to permit
Mr. Tjan to make some transfers of stock to friends and family members of his.
If Mr. Tjan terminates his employment voluntarily, the repurchase price will be
$0.125 per share, the fair market value of the shares on April 30, 1999. In the
event that Mr. Tjan is terminated by us without cause, the repurchase price
will be the fair market value of such shares as of the date of termination. See
"Certain Relationships and Related Transactions--Original ZEFER."
Under a senior management agreement entered with us on May 21, 1999, Mr.
Torbey receives a base salary of $220,000 per year. Mr. Torbey is eligible to
receive an annual performance bonus of up to 35% of base salary, has a
severance period of six months, and purchased 440,000 shares of restricted
common stock for which he paid $4,800 in cash and $50,200 in the form of a
recourse promissory note. As of June 30, 2000, $19,445 of the promissory note
remained outstanding.
Under a senior management agreement entered with us on September 13, 1999,
Mr. Waite receives a base salary of $225,000. Mr. Waite is eligible to receive
an annual performance bonus of up to 35% of base salary and has a severance
period of six months. The period of Mr. Waite's noncompetition, nonsolicitation
and noninterference covenant is six months. In addition, Mr. Waite received
263,200 shares of restricted common stock from us in connection with our
acquisition of Waite & Company, and therefore did not execute a promissory note
in connection with his acquisition of these shares. We have the right to
repurchase only Mr. Waite's shares of restricted stock that have not vested at
a price equal to $0.285 per share. Mr. Waite's restricted stock vests as to 30%
on the first anniversary of March 31, 1999, 60% on the second anniversary, 73%
on the third anniversary, 86% on the fourth anniversary and will be fully
vested on the fifth anniversary. If Mr. Waite is terminated by us without cause
or if Mr. Waite resigns for good reason, all of the restricted shares shall be
automatically released from our rights of repurchase. See "Certain
Relationships and Related Transactions--Waite & Company."
Please refer to "Certain Relationships and Related Transactions--Additional
Equity Purchases by Executives and Directors" for a description of additional
equity investments that each of the above executives has made in us.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1999, Messrs. Canfield, Lubin and
Nolan served as members of our compensation committee. During that fiscal year,
none of our executive officers or employees served as a director or as a member
of the compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
51
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GTCR Golder Rauner, L.L.C.
Immediately prior to this offering, the GTCR Funds will beneficially own
70.6% of our common stock and 97.6% of our class A preferred stock. All of the
class A preferred stock held by the GTCR Funds will be exchanged into common
stock in connection with this offering. After this offering, based on the
assumptions described in the "Prospectus Summary," the GTCR Funds will
beneficially own 64.4% of our common stock. Messrs. Rauner and Canfield, two of
our directors, are managing principal and principal of GTCR, respectively.
Securities Purchase Agreement. On March 23, 1999, we entered into a
securities purchase agreement with the GTCR Funds pursuant to which the GTCR
Funds agreed to provide our company with up to $65.3 million in cash equity
financing. Pursuant to this agreement, the GTCR Funds have purchased an
aggregate of 26,640,000 shares of our common stock for a purchase price of
$0.125 per share, or $3.3 million in the aggregate, and an aggregate of
52,784.0310 shares of our class A preferred stock for a purchase price of
$1,000 per share, or $52.8 million in the aggregate. Based on an assumed
initial public offering price of $10.00 per share, the common stock purchased
by the GTCR Funds would have a value of $266.4 million and the common stock
that we will issue to the GTCR Funds in exchange for the class A preferred
stock expected to be held by the GTCR Funds at the closing of this offering
would have a value of $56.4 million.
Under the terms of the agreement, all future sales of equity to the GTCR
Funds must be in the form of class A preferred stock at a purchase price of
$1,000 per share. We and GTCR have agreed that upon the completion of this
offering, we will terminate this agreement and we will exchange shares of our
common stock for all class A preferred stock held by the GTCR Funds, including
related accrued and unpaid dividends. This exchange rate is based on an assumed
initial public offering price of $10.00 per share. For additional information
about the exchange of the class A preferred stock, please refer to "Exchange of
Class A Preferred Stock" below.
Loan Agreement. On November 24, 1999, we entered into a loan agreement with
GTCR Capital Partners, an affiliate of GTCR. The loan agreement provides for up
to $32.2 million of borrowings by us, of which we borrowed $12.8 million on
November 24, 1999 to fund operations. We incurred an additional $14.2 million
of indebtedness through August 2000. Principal and unpaid accrued interest are
repayable in full on the first anniversary of the closing date of this
offering. GTCR Capital Partners will have no obligation to make additional
loans to us under the loan agreement after the consummation of this offering.
Borrowings under this loan agreement bear interest at 12% per annum and are
secured by substantially all of our assets. Interest is payable quarterly in
arrears. During the period from November 24, 1999 through June 30, 2000, we
paid GTCR Capital Partners $1.3 million, representing all interest that had
accrued under this loan.
Concurrently with the execution of the loan agreement, we repurchased from
the GTCR Funds 1,650,450 shares of common stock for a purchase price of $0.125
per share, or $206,300 in the aggregate, and 1,499 shares of class A preferred
stock for a purchase price of $1,000 per share, or $1,499,000 in the aggregate.
We also issued GTCR Capital Partners, the lender, a warrant to purchase
1,650,450 shares of common stock and a warrant to purchase 1,499 shares of
class A preferred stock, each at a purchase price of $0.01 per share. GTCR
Capital Partners exercised both warrants in full in November 1999 for an
aggregate purchase price of $16,500. Additionally, as we made additional
borrowings under the loan agreement, we issued to GTCR Capital Partners
warrants to purchase up to an additional 3,444.0852 shares of class A preferred
stock at a price of $0.01 per share, all of which have been exercised for an
aggregate purchase price of $34.44. Based on an initial public offering price
of $10.00 per share, the common stock that will be held by GTCR Capital
Partners upon the closing of this offering in connection with the exercise of
all of the warrants described in this paragraph would have a value of $21.4
million.
52
<PAGE>
Guarantee. GTCR has also guaranteed all of our borrowings under a $20.0
million line of credit with Harris Bank and Trust Company. We intend to repay
the outstanding borrowings under the Harris Bank line with net proceeds of this
offering and the guarantee will be terminated. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Professional Services Agreement. On March 23, 1999, we entered into a
professional services agreement with GTCR pursuant to which GTCR provides us
with financial and management consulting services. We pay GTCR an annual
management fee of $150,000 for these services, payable in equal monthly
installments, upon the achievement of financial targets set forth in the
agreement that have not been met. In the event we engage in any equity or debt
financing, other than this offering and the other GTCR financing arrangements,
we must pay GTCR a placement fee equal to 1% of the aggregate gross proceeds of
such financing. This agreement will terminate upon the consummation of this
offering.
Additional Equity Purchases by Executives and Directors
We have entered into agreements with some of our executives and directors
whereby the executives and directors have agreed to invest in our stock on a
proportionate basis at any time that the GTCR Funds make an investment in us.
Since our inception in March 1999, the following executive officers and
directors have made the following equity investments pursuant to these
agreements:
<TABLE>
<CAPTION>
Pro
Forma
Aggregate Purchase Average Per Value
Name Security Shares Price Share Price (1)
---- -------- ------ ------------------ ----------- --------
<S> <C> <C> <C> <C> <C>
William A. Seibel(2).... Common 95,817 $11,978 $0.125 $958,170
A Preferred 190 190,000 1,000 190,000
Gerard E. Dube.......... Common 82,256 23,443 0.285 822,560
A Preferred 163 163,000 1,000 163,000
Sean W. Mullaney(3)..... Common 54,837 6,855 0.125 548,370
A Preferred 109 109,000 1,000 109,000
James H. Slamp.......... Common 27,418 7,814 0.285 274,180
A Preferred 54 54,000 1,000 54,000
Martha L. Stephens...... Common 27,418 3,427 0.125 274,180
A Preferred 54 54,000 1,000 54,000
Francis J. Torbey....... Common 27,418 3,427 0.125 274,180
A Preferred 54 54,000 1,000 54,000
Thomas J. Waite......... Common 38,160 10,876 0.285 381,600
A Preferred 76 76,000 1,000 76,000
David A. Lubin.......... Common 47,771 5,971 0.125 477,710
A Preferred 95 95,000 1,000 95,000
Richard L. Nolan........ Common 27,418 3,427 0.125 274,180
A Preferred 54 54,000 1,000 54,000
</TABLE>
--------
(1) Calculations are based on an initial public offering price of $10.00 per
share.
(2) Carol Boudreau, Mr. Seibel's wife, is the purchaser of record of these
shares. Ms. Boudreau purchased 78 shares of class A preferred stock
listed above with $0.78 in cash and $77,999.22 in the form of a secured
promissory note guaranteed by Mr. Seibel. This note was repaid in full in
June 2000. Mr. Seibel beneficially owns a total of 3,140,230 shares of
our common stock and less than 1% of our class A preferred stock, all of
which will be exchanged into common stock in connection with this
offering. After this offering, Mr. Seibel will beneficially own 6.2% of
our common stock.
(3) An investment partnership in which Mr. Mullaney exercises voting and
investment control is the purchaser of record of these shares.
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<PAGE>
The above investments are in addition to the restricted stock purchases
described under "Management--Senior Management Agreements." All of the above
shares of stock are fully vested. Except as otherwise noted, all of the above
purchases were financed by interest free loans made by us to the executives,
which have been paid in full.
Mr. Jabbar purchased 100,000 shares of common stock from us in December 1999
for which he paid $10.00 per share, or an aggregate of $1,000,000, in cash.
Based on an assumed initial public offering price of $10.00 per share, the
common stock purchased by Mr. Jabbar would have a value of $1.0 million.
Mr. Lubin purchased 400,000 shares of common stock from us in May 1999 for
which he paid $0.125 per share, or an aggregate of $50,000, $4,400 in cash and
$45,600 in the form of a recourse promissory note. Based on an initial public
offering price of $10.00 per share, the common stock purchased by Mr. Lubin
would have a value of $4.0 million. We entered into a stock restriction
agreement with Mr. Lubin providing us with the right to repurchase unvested
shares of restricted stock if Mr. Lubin's relationship with us ceases at a
price equal to $0.125 per share. Mr. Lubin's restricted stock vests on a daily
basis over five years, so as to vest in full on May 21, 2004. Upon the
consummation of this offering, Mr. Lubin's restricted stock shall immediately
vest as to an aggregate of 33% of such stock, additional shares of restricted
stock shall vest on a daily basis so that an additional 7% of Mr. Lubin's
restricted stock will be vested on May 21, 2001, and thereafter the remaining
60% of such stock shall vest on a daily basis so as to be fully vested on May
21, 2004. In the event that Mr. Lubin is not reelected to our board of
directors upon the expiration of his current term, the vesting of Mr. Lubin's
restricted stock will accelerate by one year, unless he is removed as a
director for cause. Mr. Lubin's stock will vest in full in the event of a
change in control or sale of our company.
Exchange of Class A Preferred Stock
Upon the consummation of this offering, all of the holders of our class A
preferred stock have agreed with us to exchange all shares of class A preferred
stock held by them, including related accrued and unpaid dividends, for that
number of shares of common stock determined by dividing the class A preferred
liquidation value by the initial public offering price. An aggregate of
57,584.1162 shares of class A preferred stock would be exchanged for an
aggregate of 6,125,106 shares of common stock, based on an assumed initial
public offering price of $10.00 per share and a liquidation value for all class
A preferred stock, including accrued and unpaid dividends of $3,667,081 as of
September 30, 2000. Based on an assumed initial public offering price of
$10.00 per share, the common stock exchanged for the class A preferred stock
would have a value of $61.3 million.
Original ZEFER
In April 1999, we consummated a reorganization under Section 351 of the
Internal Revenue Code for the purpose of continuing the business of Original
ZEFER. The stockholders of Original ZEFER received an aggregate of $7,100,000
in cash and 3,456,000 shares of common stock in connection with the
reorganization. Anthony K. Tjan, our Executive Vice President and one of our
directors, was the President and Chief Executive Officer and a principal
stockholder of Original ZEFER. Mr. Tjan received $2.4 million in cash and
844,800 shares of our restricted common stock in connection with the
transaction. Based on an assumed initial public offering price of $10.00 per
share, the common stock received by the stockholders of Original ZEFER and
Mr. Tjan would have a value of $34.6 million and $8.4 million, respectively.
Concurrently, Mr. Tjan was elected to our board of directors. The shares of
common stock issued to Mr. Tjan are subject to our right, which expires
incrementally over a four-year period, to repurchase these shares if Mr. Tjan
ceases to be employed by us. Additionally, Mr. Tjan has agreed to a
noncompetition, nonsolicitation and noninterference covenant of two years from
the closing of the reorganization. For more information on our rights to
repurchase these shares, please see the description of Mr. Tjan's senior
management agreement under "Management--Senior Management Agreements" above.
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Waite & Company
In September 1999, we acquired Waite & Company, Inc., a Boston,
Massachusetts-based strategic marketing and management consulting firm. The
stockholders of Waite & Company, Inc. received an aggregate of $8,034,100 in
cash and 400,000 shares of common stock in connection with the acquisition.
Thomas J. Waite, our Executive Vice President of Business Strategy and
Strategic Marketing, was the President and a principal shareholder of Waite &
Company, Inc. Mr. Waite received $5.3 million in cash and 263,200 shares of our
restricted common stock in connection with the transaction. Based on an assumed
initial public offering price of $10.00 per share, the common stock received by
the stockholders of Waite & Company, Inc. and Mr. Waite would have a value of
$4.0 million and $2.6 million, respectively. The shares issued to Mr. Waite are
subject to our right, which expires incrementally over a five-year period, to
purchase these shares at a price equal to their fair market value at the time
of the acquisition if Mr. Waite ceases to be employed by us. Additionally, Mr.
Waite has agreed to a noncompetition, nonsolicitation and noninterference
covenant of one year from the closing of that transaction, and has agreed that
in the event of the termination of his employment with us, he will not perform
work for our customers for a period of eighteen months from the closing of the
acquisition. For more information on our right to purchase these shares, please
see the description of Mr. Waite's senior management agreement under
"Management--Senior Management Agreements" above.
The acquisition prices of the above entities were determined by arms' length
negotiation.
Stockholders Agreement
We have entered into to a stockholders agreement with GTCR, Mr. Seibel, Mr.
Dube, Mr. Mullaney, Mr. Slamp, Ms. Stephens, Mr. Tjan, Mr. Torbey, Mr. Waite,
Mr. Jabbar, Mr. Lubin and Mr. Nolan. Each party to the stockholders agreement
has agreed to vote all shares held by such party to elect the following persons
to our board of directors: Mr. Seibel and one executive of the company
designated by our chief executive officer, three representatives of GTCR, and
four independent persons chosen jointly by GTCR and the chief executive
officer. The voting provisions terminate upon the consummation of this
offering. In general, the stockholders agreement also provides that each
stockholder has the right to participate in specified types of sales of our
stock made by GTCR, and that we and each stockholder have a right of first
refusal in shares of stock being transferred by a stockholder. Additionally,
the parties to the stockholders agreement have agreed to approve and to take
actions with respect to changes in control of our company. Also, the parties
have agreed to take actions in connection with this offering that may be
requested by our board of directors or the managing underwriter. Upon the
completion of this offering, this agreement will terminate.
Employment Agreements
We have entered into employment agreements with all of our executive
officers. See "Management--Senior Management Agreements."
Director Compensation
Please see "Management--Compensation of Directors" for a discussion of
options granted to three of our non-employee directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of July 31, 2000, after giving effect to the
assumptions described in the "Prospectus Summary," and as adjusted to reflect
the sale of the shares of common stock in this offering, by:
. each person we know to own beneficially more than 5% of our common
stock;
. each of our directors and Named Executive Officers; and
. all directors and executive officers as a group.
Unless otherwise indicated, each person named in the table has sole voting
power and investment power, or shares such power with his or her spouse, with
respect to all shares of capital stock listed as owned by such person. See
"Certain Relationships and Related Transactions."
<TABLE>
<CAPTION>
Percentage of Shares
Outstanding
Number of Shares ------------------------------
Name of Beneficial Owner Beneficially Owned Before Offering After Offering
------------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
GTCR Funds (1)........... 32,620,709 70.6% 64.4%
William A. Seibel (2)..... 3,140,230 6.8 6.2
Gerard E. Dube............ 899,513 1.9 1.8
Sean W. Mullaney.......... 479,065 1.0 *
James H. Slamp............ 428,538 * *
Martha L. Stephens........ 441,181 1.0 *
Anthony K. Tjan........... 818,926 1.8 1.6
Francis J. Torbey......... 473,181 1.0 *
Thomas J. Waite........... 309,404 * *
Philip A. Canfield (1)
(3)...................... 32,620,709 70.6 64.4
Masood Jabbar............. 100,000 * *
Catherine Viscardi
Johnston................. -- -- --
David A. Lubin ........... 457,903 1.0 *
Richard L. Nolan (4) ..... 43,181 * *
Bruce V. Rauner (1) (3)... 32,620,709 70.6 64.4
All executive officers and
directors as a group
(14 persons) (3) (4)..... 40,211,831 87.1% 79.3%
</TABLE>
---------------------
* Less than 1%.
(1) The address of each of the GTCR Funds and Messrs. Rauner and Canfield is
6100 Sears Tower, Chicago, Illinois 60606.
(2) Includes 100,230 shares of common stock held by Mr. Seibel's wife. Mr.
Seibel's address is c/o ZEFER Corp., 711 Atlantic Avenue, Boston,
Massachusetts 02111.
(3) Includes 32,620,709 shares of common stock held by GTCR. Mr. Rauner is
Managing Principal of GTCR and Mr. Canfield is a Principal of GTCR. Each
of them may be deemed to share investment and voting control over the
shares of our common stock held, directly or indirectly, by GTCR. Each of
Messrs. Rauner and Canfield disclaims beneficial ownership of the shares
held by GTCR.
(4) Includes 10,000 shares of common stock issuable upon exercise of options
that are exercisable within 60 days of July 31, 2000.
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DESCRIPTION OF CAPITAL STOCK
After this offering, our authorized capital stock will consist of
200,000,000 shares of common stock, $.001 par value per share and 5,000,000
shares of preferred stock, $0.01 par value per share, all of which remain
undesignated. As of August 22, 2000, after giving effect to the assumptions
described in the "Prospectus Summary" but without giving effect to this
offering, there were 46,175,463 shares of common stock outstanding held by 230
stockholders of record.
The following description reflects the filing, immediately upon the closing
of this offering, of our amended and restated certificate of incorporation and
the adoption of our amended and restated by-laws.
Common Stock
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. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends as may be declared by our board of directors,
subject to any preferential dividend rights of outstanding preferred stock.
Upon our liquidation, dissolution or winding up, the holders of common stock
are entitled to receive proportionately our net assets available after the
payment of all debts and other liabilities and subject to the prior rights of
any outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. Our outstanding shares of common
stock are and the shares offered by us in this offering will be, when issued
and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of 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 we may designate and issue in the future.
Undesignated Preferred Stock
Under the terms of our certificate of incorporation, our board of directors
is authorized to issue shares of preferred stock in one or more series without
stockholder approval. Our board of directors has the discretion to determine
the rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or could discourage a third party from seeking to
acquire, a majority of our outstanding voting stock. We have no present plans
to issue any shares of preferred stock.
Delaware Law and Charter and By-Law Provisions
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 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. In general, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within the prior three years did own, 15% or more of the corporation's voting
stock.
Our certificate of incorporation divides our board of directors into three
classes with staggered three-year terms. In addition, our certificate of
incorporation provides that directors may be removed only for cause by the
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affirmative vote of the holders of a majority of our shares of capital stock
entitled to vote. Under our certificate of incorporation, any vacancy on our
board of directors, including a vacancy resulting from an enlargement of our
board of directors, may only be filled by vote of a majority of our directors
then in office. The classification of our board of directors and the
limitations on the removal of directors and filling of vacancies could make it
more difficult for a third party to acquire, or discourage a third party from
seeking to acquire, control of our company. See "Management."
Our by-laws provide that stockholders must follow an advance notification
procedure for stockholder nominations of candidates for the board of directors
and for other stockholder business to be conducted at stockholder meetings. Our
by-laws further provide that special meetings of the stockholders may only be
called by our Chairman of the Board, President or the board of directors. These
provisions could have the effect of delaying until the next stockholder meeting
stockholder actions which are favored by the holders of a majority of our
outstanding voting securities.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our certificate of incorporation and by-laws
require the affirmative vote of the holders of at least two-thirds of the
shares of our capital stock issued and outstanding and entitled to vote to
amend or repeal any of the provisions described in the prior two paragraphs.
Our certificate of incorporation contains provisions permitted under the
General Corporation Law of Delaware relating to the liability of directors. The
provisions eliminate a director's liability for monetary damages for a breach
of fiduciary duty, except in limited circumstances involving wrongful acts,
such as the breach of a director's duty of loyalty or acts or omissions that
involve intentional misconduct or a knowing violation of law. Further, our
certificate of incorporation contains provisions to indemnify our directors and
officers to the fullest extent permitted by the General Corporation Law of
Delaware. We believe that these provisions will assist us in attracting and
retaining qualified individuals to serve as directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our securities.
After we complete this offering, there will be 50,675,463 shares of our common
stock outstanding, assuming no exercise of outstanding options or warrants to
purchase common stock. Of these outstanding shares, the 4,500,000 shares sold
in this offering will be freely tradeable without restriction or further
registration under the Securities Act of 1933, except that any shares purchased
by our "affiliates," as that term is defined in Rule 144 under the Securities
Act, may generally only be sold in compliance with the limitations of Rule 144
described below.
Sales of Restricted Shares
The remaining 46,175,463 shares of common stock outstanding after this
offering are deemed "restricted securities" under Rule 144. Of these
securities, 43,773,846 shares may be sold pursuant to Rule 144 upon expiration
of the 180-day lock-up agreements described in the following paragraph.
Stockholders holding an aggregate of 45,820,756 shares of our common stock
have agreed that, for a period of 180 days after the date of this prospectus,
they will not dispose of any shares of our common stock, or any shares
convertible into or exchangeable for shares of our common stock, without the
prior written consent of Credit Suisse First Boston Corporation acting on
behalf of the representatives of the underwriters.
In general, under Rule 144 a stockholder, including one of our affiliates,
who has beneficially owned his or her restricted securities for at least one
year is entitled to sell, within any three-month period commencing 90 days
after the date of this prospectus, a number of shares that does not exceed the
greater of 1% of the then outstanding shares of our common stock or the average
weekly trading volume in our common stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided requirements concerning availability of public information, manner of
sale and notice of sale are satisfied. In addition, a stockholder that is not
one of our affiliates at any time during the three months preceding a sale and
who has beneficially owned the shares proposed to be sold for at least two
years is entitled to sell the shares immediately under Rule 144(k) without
compliance with the above described requirements under Rule 144.
Stock Options
We intend to file registration statements on Form S-8 under the Securities
Act to register an aggregate of 25,166,666 shares of common stock issuable
under the incentive plan, the option plan and the purchase plan promptly
following the date of this prospectus. As of June 30, 2000, 7,772,162 shares
were subject to outstanding options, of which 410,648 shares had vested. Shares
issued upon the exercise of stock options after the effective date of the Form
S-8 registration statements will be eligible for resale in the public market
without restriction, subject to Rule 144 limitations applicable to affiliates
and lock-up restrictions.
Registration Rights
After this offering, the holders of 40,731,167 shares of common stock will
be entitled to rights with respect to the registration of those shares under
the Securities Act of 1933. Under the terms of the agreement between us and the
holders of those registrable shares, the holders of a majority of those shares
may at any time require us to file a registration statement under the
Securities Act with respect to shares of common stock owned by them having an
aggregate offering price of at least $5.0 million and we are required to use
our reasonable best efforts to effect that registration. Also, if we propose to
register any of our securities under the Securities Act, other than demand
registrations, registrations on Form S-8 or in connection with our initial
public offering, those holders are entitled to notice of and to include shares
of common stock in the registration. All of these registration rights are
subject to various conditions and limitations, among them rights of the
underwriters of an offering to limit the number of shares included in a
registration and our right not to effect a requested registration within 90
days after the effective date of a previous registration on a Form S-1 or
within 90 days after the effective date of a registration which included all
shares requested by holders of registrable shares. We will bear all of the
expenses incurred in connection with all exercises of these registration
rights.
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Effect of Sales of Shares
Prior to this offering, there has been no public market for our common stock
and no prediction can be made as to the effect, if any, that market sales of
shares of common stock or the availability of shares for sale will have on the
market price of our common stock prevailing from time to time. Nevertheless,
sales of significant numbers of shares of our common stock in the public market
could adversely affect the market price of the common stock and could impair
our future ability to raise capital through an offering of our equity
securities.
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U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of common
stock by a non-U.S. holder. As used in this prospectus, a non-U.S. holder is
defined as a holder that for United States federal income tax purposes is an
individual or entity other than:
. a citizen or individual resident of the United States;
. a corporation or partnership created or organized in or under the laws
of the United States or of any political subdivision thereof, other than
a partnership treated as foreign under U.S. Treasury regulations;
. an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
. a trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust.
An individual may, subject to a number of exceptions, be deemed to be a
resident alien, as opposed to a nonresident alien, by virtue of being present
in the United States for at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three-year period ending in the current
calendar year, counting for such purposes all of the days present in the
current year, one-third of the days present in the immediately preceding year
and one-sixth of the days present in the second preceding year. Resident aliens
are subject to U.S. federal tax as if they were U.S. citizens.
This discussion does not address all aspects of United States federal income
and estate taxes that may be relevant to non-U.S. holders in light of their
personal circumstances, including the fact that in the case of a non-U.S.
holder that is a partnership, the U.S. tax consequences of holding and
disposing of shares of common stock may be affected by determinations made at
the partner level, or that may be relevant to non-U.S. holders which may be
subject to special treatment under United States federal income tax laws such
as insurance companies, tax-exempt organizations, financial institutions,
dealers in securities and holders of securities held as part of a "straddle,"
"hedge" or "conversion transaction." This discussion also does not address U.S.
state or local or foreign tax consequences. Furthermore, this discussion is
based on provisions of the Internal Revenue Code of 1986, existing and proposed
regulations promulgated thereunder and administrative and judicial
interpretations thereof, all as of the date hereof, and all of which are
subject to change, possibly with retroactive effect. The following summary is
included herein for general information. Accordingly, investors are urged to
consult their tax advisers regarding the United States federal, state, local
and non-U.S. income and other tax consequences of acquiring, holding and
disposing of shares of common stock.
Dividends
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. In the event, however, that dividends are paid on shares of
our common stock, dividends paid to a non-U.S. holder of common stock generally
will be subject to withholding of United States federal income tax at a 30%
rate, or such lower rate as may be provided by an applicable income tax treaty.
Non-U.S. holders should consult their tax advisers regarding their entitlement
to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, are generally
subject to U.S. federal income tax on a net income basis at regular graduated
rates, but are not generally subject to the 30% withholding tax if the non-U.S.
holder complies with applicable certification and disclosure requirements. Any
such U.S. trade or business income received by a non-U.S. holder that is a
corporation may also be subject to an additional "branch profits tax" at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
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Under currently applicable U.S. Treasury regulations, dividends paid to an
address in a foreign country are presumed, absent actual knowledge to the
contrary, to be paid to a resident of such country for purposes of the
withholding discussed above and for purposes of determining the applicability
of a tax treaty rate. Under U.S. Treasury regulations generally effective for
payments made after December 31, 2000, however, a non-U.S. holder of our common
stock who wishes to claim the benefit of an applicable treaty rate generally
will be required to satisfy applicable certification and other requirements. In
addition, under these regulations, in the case of our common stock held by a
foreign partnership, the certification requirement will generally be applied to
the partners of the partnership and the partnership will be required to provide
specified information, including a United States taxpayer identification
number. The regulations generally effective for payments made after December
31, 2000 also provide look-through rules for tiered partnerships. Further, the
Internal Revenue Service may issue regulations under which a foreign trustee or
foreign executor of a U.S. or foreign trust or estate, depending on the
circumstances, will be required to furnish the appropriate withholding
certificate on behalf of the beneficiaries, grantor trust or estate, as the
case may be.
A non-U.S. holder of our common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for a refund with the
Internal Revenue Service.
The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 also provide special rules for dividend payments made to
foreign intermediaries, U.S. 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 United States, the applicable income tax treaty
jurisdiction, or both. In addition, in specified circumstances, income tax
benefits may be denied to non-U.S. holders receiving income derived through a
partnership, or otherwise fiscally transparent entity.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of our common stock unless:
. the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S.
holder;
. the non-U.S. holder is an individual who holds our common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the United States for 183 or more days in the
taxable year of the sale or other disposition and meets other
requirements;
. the non-U.S. holder is subject to tax under the provisions of the U.S.
tax law applicable to some United States expatriates; or
. we are or have been a "U.S. real property holding corporation" for
federal income tax purposes at any time during the shorter of the five-
year period preceding such disposition or the period that the non-U.S.
holder held our common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property
interests plus its other assets used or held for use in a trade or business. We
believe that we have not been, are not currently, and do not anticipate
becoming, a "U.S. real property holding corporation" for U.S. federal income
tax purposes. The tax with respect to stock in a "U.S. real property holding
corporation" does not apply to a non-U.S. holder whose holdings, direct and
indirect, at all times during the applicable period, constituted 5% or less of
our common stock, provided that our common stock was regularly traded on an
established securities market.
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If a non-U.S. holder who is an individual is subject to tax on gain which is
U.S. trade or business income, such individual generally will be taxed on the
net gain derived from a sale of common stock under regular graduated United
States federal income tax rates. If an individual non-U.S. holder is subject to
tax because such individual holds our common stock as a capital asset, is
present in the United States for 183 or more days in the taxable year of the
sale or other disposition and meets other requirements, such individual
generally will be subject to a flat 30% tax on the gain derived from a sale,
which may be offset by United States capital losses, notwithstanding the fact
that such individual is not considered a resident alien of the United States.
Thus, individual non-U.S. holders who have spent, or expect to spend, more than
a de minimis period of time in the United States in the taxable year in which
they contemplate a sale of common stock are urged to consult their tax advisers
prior to the sale concerning the U.S. tax consequences of such sale.
If a non-U.S. holder that is a foreign corporation is subject to tax on gain
which is U.S. trade or business income, it generally will be taxed on its net
gain under regular graduated United States federal income tax rates and, in
addition, will be subject to the branch profits tax equal to 30% of its
"effectively connected earnings and profits," within the meaning of the
Internal Revenue Code for the taxable year, as adjusted for specific items,
unless it qualifies for a lower rate under an applicable tax treaty.
Federal Estate Tax
Common stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident, as defined for United
States federal estate tax purposes, at the time of death will be included in
the individual's gross estate for United States federal estate tax purposes,
unless an applicable estate tax or other treaty provides otherwise and,
therefore, may be subject to United States federal estate tax.
Information Reporting and Backup Withholding Tax
Under U.S. Treasury regulations, we must report annually to the Internal
Revenue Service and to each non-U.S. holder the amount of dividends paid to
such holder and the tax withheld with respect to such dividends. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the non-U.S. holder is
a resident under the provisions of an applicable income tax treaty or
agreement.
Currently, United States backup withholding, which generally is a
withholding tax imposed at the rate of 31% on payments to persons that fail to
furnish specified information under the United States information reporting
requirements, generally will not apply:
. to dividends paid to non-U.S. holders that are subject to the 30%
withholding discussed above, or that are not so subject because a tax
treaty applies that reduces or eliminates such 30% withholding; or
. before January 1, 2001, to dividends paid to a non-U.S. holder at an
address outside of the United States unless the payor has actual
knowledge that the payee is a U.S. holder.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of our common
stock to beneficial owners that are not "exempt recipients" and that fail to
provide identifying information in the manner required.
The payment of the proceeds of the disposition of our common stock by a
holder to or through the U.S. office of a broker or through a non-U.S. branch
of a U.S. broker generally will be subject to information reporting and backup
withholding at a rate of 31% unless the holder either certifies its status as a
non-U.S. holder under penalties of perjury or otherwise establishes an
exemption. The payment of the proceeds of the disposition by a non-U.S. holder
of common stock to or through a non-U.S. office of a non-U.S. broker will not
be subject to backup withholding or information reporting unless the non-U.S.
broker has particular types of U.S. relationships. In the case of the payment
of proceeds from the disposition of our common stock effected by a foreign
office of a broker that is a U.S. person or a U.S. related person, existing
regulations require
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information reporting on the payment unless the broker receives a statement
from the owner, signed under penalty of perjury, certifying its non-U.S. status
or the broker has documentary evidence in its files as to the non-U.S. holder's
foreign status and the broker has no actual knowledge to the contrary. For this
purpose, a U.S. related person is defined as:
. a "controlled foreign corporation" for U.S. federal income tax purposes;
or
. a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker
has been in existence, is derived from activities that are effectively
connected with the conduct of a U.S. trade or business.
The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 alter the foregoing rules. Among other things, such
regulations provide presumptions under which a non-U.S. holder is subject to
backup withholding at the rate of 31% and information reporting unless we
receive certification from the holder of non-U.S. status. Depending on the
circumstances, this certification will need to be provided:
. directly by the non-U.S. holder;
. in the case of a non-U.S. holder that is treated as a partnership or
other fiscally transparent entity, by the partners, stockholders or
other beneficiaries of such entity; or
. by qualified financial institutions or other qualified entities on
behalf of the non-U.S. holder.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be refunded or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the Internal Revenue Service.
64
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation and Deutsche Bank
Securities Inc. are acting as representatives, the following respective numbers
of shares of our common stock:
<TABLE>
<CAPTION>
Number
Underwriters of Shares
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation...........................
Deutsche Bank Securities Inc.....................................
---------
Total.......................................................... 4,500,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 675,000 additional shares of our common stock at the initial
public offering price less the underwriting discounts and commissions. The
option may be exercised only to cover any over-allotments of the common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The compensation we will pay to the underwriters will consist solely of the
underwriting discount, which is equal to the public offering price per share of
common stock less the amount the underwriters pay to us per share of common
stock. The underwriters have not received and will not receive from us any
other item of compensation or expense in connection with this offering
considered by the National Association of Securities Dealers, Inc. to be
underwriting compensation under its rules of fair practice. The underwriting
fee will be determined based upon our negotiations with the underwriters at the
time the initial public offering price of our common stock is determined. The
following table summarizes the compensation and estimated expenses we will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
over-allotment over-allotment over-allotment over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and
commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $0.56 $0.48 $2,500,000 $2,500,000
</TABLE>
65
<PAGE>
We are required to pay all expenses in connection with this offering. The
following table, which is replicated in Part II of the registration statement
of which this prospectus is a part, sets forth the various expenses, all of
which will be borne by us, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fees, the NASD filing fees and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
SEC registration fees......................................... $ 33,245
NASD filing fees.............................................. 13,593
Nasdaq National Market listing fee............................ 95,000
Blue Sky and similar fees and expenses........................ 5,000
Transfer Agent and Registrar fees............................. 10,000
Accounting fees and expenses.................................. 1,000,000
Legal fees and expenses....................................... 600,000
Director and officer liability insurance...................... 400,000
Printing and mailing expenses................................. 250,000
Miscellaneous................................................. 93,162
----------
Total..................................................... $2,500,000
==========
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the common stock being offered.
We, our officers and directors and stockholders holding an aggregate of
45,847,540 shares of our common stock have agreed not to dispose of any
additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock without the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus. However, we may issue shares of common
stock pursuant to the exercise of employee stock options, employee stock
purchases pursuant to the terms of the employee stock purchase plan or the
issuance of shares pursuant to the exercise of any outstanding warrants. It is
possible that Credit Suisse First Boston Corporation will release these lock-up
agreements prior to their scheduled expiration dates. See "Risk Factors--Risks
Relating to This Offering--Substantial sales of our common stock could cause
our stock price to decline."
The underwriters have reserved for sale, at the initial public offering
price, up to approximately 450,000 shares of common stock for our employees,
directors, customers, vendors and friends and family members of these
individuals. The number of shares of common stock available for sale to the
general public in the offering will be reduced to the extent these persons
purchase these reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares. Although shares of common stock purchased in our directed share
program will not generally be subject to lock-up restrictions, we will
determine on a case-by-case basis whether to impose restrictions on particular
purchasers.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "ZEFR".
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters, and does not reflect the market price for the
common stock following the offering. The principal factors considered in
determining the public offering price will be:
. the information included in this prospectus and otherwise available to
the representatives;
66
<PAGE>
. market conditions for initial public offerings;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. our prospects for future earnings;
. the present state of our development and our current financial
condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of and the demand for, publicly traded common
stock of generally comparable companies.
The initial offering price may not correspond to the price at which our
common stock will trade in the public market subsequent to this offering, and
an active trading market for our common stock may not develop or continue after
this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the shares of common stock originally sold
by such syndicate member are purchased in a stabilizing transaction or a
syndicate covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make Internet distributions on the
same basis as other allocations.
67
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representation of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (1) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws; (2) where
required by law, that such purchaser is purchasing as principal and not as
agent; and (3) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission of rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under
the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. Cravath, Swaine &
Moore, New York, New York, has represented the underwriters.
68
<PAGE>
EXPERTS
The financial statements of a) ZEFER Corp. as of December 31, 1999 and for
the period from inception (March 18, 1999) to December 31, 1999, b) the
financial statements of Original ZEFER as of December 31, 1998 and April 30,
1999 and for the period from inception (March 19, 1998) to December 31, 1998
and four months ended April 30, 1999, c) the financial statements of Spyplane,
LLC as of December 31, 1998 and for the period from inception (May 7, 1998) to
December 31, 1998, d) the financial statements of the Divisions of Renaissance
as of December 31, 1998 and May 31, 1999 and for the year ended December 31,
1998 and for the five months ended May 31, 1999, included in the registration
statement of which this prospectus forms a part have been audited by Arthur
Andersen LLP independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
The pro forma combined financial statements for the year ended December 31,
1999 included in this prospectus have been reviewed by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving such report.
The financial statements of Neoglyphics Media Corporation as of December 31,
1997 and for the year ended December 31, 1997, included in the registration
statement of which this prospectus forms a part have been audited by Katch,
Tyson & Company, independent public accountants, as indicated in their report
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission for the stock we are offering by this prospectus. This
prospectus does not include all of the information contained in the
registration statement. You should refer to the registration statement and its
exhibits for additional information. Whenever we make reference in this
prospectus to any of our contracts, agreements or other documents, the
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. When we complete this offering, we will also be
required to file annual, quarterly and special reports, proxy statements and
other information with the SEC. You can read our SEC filings, including the
registration statement, over the Internet at the SEC's website at
http://www.sec.gov. You may also read and copy any document we file with the
SEC at its public reference facilities at
. 450 Fifth Street, N.W., Washington, D.C. 20549;
. Seven World Trade Center, Suite 1300, New York, New York 10048; and
. Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511.
You may also obtain copies of the documents at prescribed rates by writing
to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference facilities. You should
rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. We are offering to sell shares of common stock and seeking
offers to buy shares of common stock only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or any sale of the common stock.
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
ZEFER CORP.:
<S> <C>
Reports of Independent Public Accountants................................ F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Redeemable Preferred Stock and Stockholders' Deficit....... F-5
Statements of Cash Flows................................................. F-7
Notes to Financial Statements............................................ F-8
SPYPLANE, LLC:
Report of Independent Public Accountants................................. F-27
Balance Sheets........................................................... F-28
Statements of Income..................................................... F-29
Statements of Members' Equity............................................ F-29
Statements of Cash Flows................................................. F-30
Notes to Financial Statements............................................ F-31
THE DIVISIONS OF RENAISSANCE:
Report of Independent Public Accountants................................. F-34
Combined Balance Sheets.................................................. F-35
Combined Statements of Operations and Parent Company Equity (Deficit).... F-36
Combined Statements of Cash Flows........................................ F-37
Notes to Combined Financial Statements................................... F-38
NEOGLYPHICS MEDIA CORPORATION:
Report of Independent Accountants........................................ F-42
Statement of Financial Position.......................................... F-43
Statement of Income...................................................... F-44
Statement of Cash Flows.................................................. F-45
Notes to Financial Statements............................................ F-46
WAITE & COMPANY, INC.:
Report of Independent Public Accountants................................. F-53
Balance Sheets........................................................... F-54
Statements of Operations................................................. F-55
Statements of Stockholders' Equity....................................... F-55
Statements of Cash Flows................................................. F-56
Notes to Financial Statements............................................ F-57
INDEX TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
ZEFER CORP.:
Review Report of Independent Public Accounts............................. F-60
Overview................................................................. F-61
Pro Forma Combined Condensed Statement of Operations for the Year Ended
December 31, 1999....................................................... F-63
Notes to Pro Forma Combined Condensed Financial Statements............... F-64
</TABLE>
F-1
<PAGE>
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
To ZEFER Corp.:
We have audited the accompanying balance sheet of ZEFER Corp. (a Delaware
Corporation) as of December 31, 1999, and the related statements of operations,
redeemable preferred stock and stockholders' deficit and cash flows for the
period from inception (March 18, 1999) through December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ZEFER Corp. as of December
31, 1999, and the results of its operations and its cash flows for the period
from inception (March 18, 1999) through December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 31, 2000
To ZEFER Corp.:
We have audited the accompanying balance sheets of ZEFER Corp. (a Delaware
Corporation herein referred to as Original ZEFER) as of December 31, 1998 and
April 30, 1999, and the related statements of operations, redeemable
convertible preferred stock and stockholders' deficit and cash flows for the
period from inception (March 19, 1998) through December 31, 1998 and for the
four months ended April 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ZEFER Corp. as of December
31, 1998 and April 30, 1999, and the results of its operations and its cash
flows for the period from inception (March 19, 1998) through December 31, 1998
and for the four months ended April 30, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
October 15, 1999
F-2
<PAGE>
ZEFER CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
Original ZEFER The Company
----------------------- --------------------------------------
Pro Forma
December 31, April 30, December 31, June 30, June 30,
1998 1999 1999 2000 2000
------------ ---------- ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 538,917 $ 143,490 $ 1,271,105 $ 3,001,328 $ 3,001,328
Accounts receivable, net................................... 121,993 577,505 7,093,223 16,174,460 16,174,460
Unbilled receivables....................................... -- -- 3,311,605 2,146,016 2,146,016
Prepaid expenses and other current assets.................. 6,510 -- 1,497,668 2,321,428 2,321,428
---------- ---------- ----------- ----------- -----------
Total current assets..................................... 667,420 720,995 13,173,601 23,643,232 23,643,232
Property and Equipment, net (Note 2)........................ 342,518 391,292 8,590,549 20,103,801 20,103,801
Goodwill, net............................................... -- -- 9,275,715 7,943,500 7,943,500
Other Intangible Assets, net................................ -- -- 15,782,639 9,867,472 9,867,472
Other Assets................................................ 16,500 23,563 4,467,300 6,779,189 6,779,189
---------- ---------- ----------- ----------- -----------
$1,026,438 $1,135,850 $51,289,804 $68,337,194 $68,337,194
========== ========== =========== =========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Lines of credit............................................ $ -- $ -- $19,566,122 $19,416,122 $19,416,122
Accounts payable........................................... 121,897 215,249 5,149,890 5,833,409 5,833,409
Accrued expenses........................................... 29,125 1,014,860 9,780,919 20,170,096 20,170,096
Deferred revenue........................................... 46,805 344,763 720,960 3,808,903 3,808,903
Current portion of notes payable........................... -- -- 930,000 2,050,000 2,050,000
Current portion of capital lease obligations............... 83,582 139,792 260,536 255,834 255,834
---------- ---------- ----------- ----------- -----------
Total current liabilities................................ 281,409 1,714,664 36,408,427 51,534,364 51,534,364
Other Long-term Liabilities................................. -- -- 142,020 3,639,750 3,639,750
Notes Payable, net of current portion....................... -- -- 2,050,000 750,000 750,000
Capital Lease Obligations, net of current portion........... 153,551 148,785 436,937 291,742 291,742
Subordinated Debt Payable to Majority Stockholder (Note 9).. -- -- 11,119,385 21,475,162 21,475,162
Commitments and Contingencies (Note 10)..................... -- -- -- -- --
Class A Redeemable Preferred Stock (Note 11)................ -- -- 25,803,156 50,943,794 --
Redeemable Convertible Preferred Stock (Note 13)............ 1,200,000 1,200,000 -- -- --
Stockholders' Deficit:
Class B Convertible Preferred Stock (Note 11).............. -- -- -- 2,000,000 --
Common stock (Notes 11 and 13)............................. 474 571 39,854 39,855 45,149
Additional paid-in capital................................. -- 1,122,659 14,691,642 14,546,891 67,485,391
Treasury stock............................................. -- -- -- (33,061) (33,061)
Subscriptions receivable................................... -- -- (1,137,943) (768,337) (768,337)
Deferred compensation...................................... -- -- (7,113,759) (4,924,504) (4,924,504)
Accumulated deficit........................................ (608,996) (3,050,829) (31,149,915) (71,158,462) (71,158,462)
---------- ---------- ----------- ----------- -----------
Total stockholders' deficit.............................. (608,522) (1,927,599) (24,670,121) (60,297,618) (9,353,824)
-------------------------------------------------- ---------- ---------- ----------- ----------- -----------
$1,026,438 $1,135,850 $51,289,804 $68,337,194 $68,337,194
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ZEFER CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Original ZEFER The Company
---------------------------- ----------------------------------------
Period from
Period from Period from Inception
Inception Inception (March 18,
(March 19, (March 18, 1999) Six Months
1998) through Four Months 1999) through through Ended
December 31, Ended December 31, June 30, June 30,
1998 April 30, 1999 1999 1999 2000
------------- -------------- ------------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 620,733 $ 491,141 $ 25,276,935 $ 2,571,537 $ 45,090,673
Operating Expenses:
Cost of services....... 469,147 589,140 15,736,322 1,633,766 26,969,135
Hiring and training.... 7,441 9,958 5,541,716 217,204 9,557,001
Research and innova-
tion.................. -- -- 1,832,039 127,965 3,664,495
Sales and marketing.... 140,310 124,540 7,055,712 523,353 7,597,986
General and administra-
tive.................. 510,749 1,012,172 18,420,098 2,302,487 18,158,372
Depreciation and amor-
tization.............. 54,706 55,839 10,681,725 1,496,870 10,843,532
Stock-based compensa-
tion(1)............... -- 961,317 665,683 -- 2,033,504
--------- ----------- ------------ ----------- ------------
Total operating ex-
penses.............. 1,182,353 2,752,966 59,933,295 6,301,645 78,824,025
--------- ----------- ------------ ----------- ------------
Loss from opera-
tions............... (561,620) (2,261,825) (34,656,360) (3,730,108) (33,733,352)
Interest Income......... 11,502 6,858 43,475 6,409 156,914
Interest and Other Ex-
pense.................. (5,058) (25,510) (2,297,430) (584,852) (6,432,109)
--------- ----------- ------------ ----------- ------------
Loss before income
taxes............... (555,176) (2,280,477) (36,910,315) (4,308,551) (40,008,547)
Benefit from Income Tax-
es..................... -- -- 5,760,400 1,763,967 --
--------- ----------- ------------ ----------- ------------
Net loss............. $(555,176) $(2,280,477) $(31,149,915) $(2,544,584) $(40,008,547)
========= =========== ============ =========== ============
Basic and Diluted Net
Loss Per Share......... $ (1.16) $ (0.13) $ (1.27)
============ =========== ============
Basic and Diluted
Weighted Average Shares
Outstanding............ 26,793,270 19,175,908 31,479,086
============ =========== ============
Pro Forma Basic and Di-
luted Net Loss Per
Share (Note 1(r))...... $ (1.06) $ (0.12) $ (1.08)
============ =========== ============
Pro Forma Basic and Di-
luted Weighted Average
Shares Outstanding
(Note 1(r))............ 28,347,924 19,865,011 35,445,983
============ =========== ============
Cost of services....... $ -- $ 847,250 $ 164,784 $ -- $ 767,792
Hiring and training.... -- -- 8,570 -- 23,188
Research and
innovation............ -- -- 23,750 -- 64,280
Sales and marketing.... -- -- 277,580 -- 457,303
General and
administrative........ -- 114,067 190,999 -- 720,941
--------- ----------- ------------ ----------- ------------
Total stock-based
compensation........ $ -- $ 961,317 $ 665,683 $ -- $ 2,033,504
========= =========== ============ =========== ============
</TABLE>
--------
(1) The following summarizes the departmental allocation of stock-based
compensation:
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ZEFER CORP.
STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Class B
Convertible
Redeemable Preferred
Preferred Stock Stock Common Stock Treasury Stock
--------------------- ---------------- ------------------ Additional --------------
Number Redemption Number Number Par Paid-in Number Subscriptions
of Shares Value of Shares Amount of Shares Value Capital of Shares Cost Receivable
--------- ----------- --------- ------ ---------- ------- ---------- --------- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
Inception,
March 19, 1998
(Original ZEFER).. -- $ -- -- $-- -- $ -- $ -- -- $-- $ --
Sale of common
stock to
Founders........ -- -- -- -- 47,400 474 -- -- -- --
Sale of Series A
redeemable
convertible
preferred stock,
net of issuance
costs of
$53,820......... 12,000 1,200,000 -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
------ ----------- --- --- ---------- ------- ---------- --- --- -----------
Balance at
December 31,
1998 (Original
ZEFER).......... 12,000 1,200,000 -- -- 47,400 474 -- -- -- --
Stock dividend
paid to
investor........ -- -- -- -- 1,391 14 161,342 -- -- --
Stock issuance
to employee..... -- -- -- -- 8,310 83 961,317 -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
------ ----------- --- --- ---------- ------- ---------- --- --- -----------
Balance at April
30, 1999
(Original
ZEFER).......... 12,000 $ 1,200,000 -- $-- 57,101 $ 571 $1,122,659 -- $-- $ --
====== =========== === === ========== ======= ========== === === ===========
Balance at
Inception,
March 18, 1999
(the Company)... -- $ -- -- $-- -- $ -- $ -- -- $-- $ --
Private
placement of
common stock.... -- -- -- -- 26,640,000 26,640 3,303,360 -- -- --
Private
placement of
redeemable
preferred
stock........... 24,195 24,195,000 -- -- -- -- -- -- -- --
Issuance of
common stock and
redeemable
preferred stock
to management... 619 619,000 -- -- 8,677,144 8,677 3,609,428 -- -- (1,675,525)
Issuance of
common stock for
professional
services........ -- -- -- -- 81,124 81 10,060 -- -- --
Issuance of
common stock for
acquisitions
(Note 4)........ -- -- -- -- 4,456,000 4,456 1,002,544 -- -- --
Beneficial
conversion
feature of
Renaissance Note
(see Note
8(b))........... -- -- -- -- -- -- 400,000 -- -- --
Accretion of
dividends on
redeemable
preferred
stock........... -- 989,156 -- -- -- -- -- -- -- --
Repayment of
subscriptions
receivable...... -- -- -- -- -- -- -- -- -- 537,582
Deferred
compensation on
stock options... -- -- -- -- -- -- 6,450,917 -- -- --
Cancellation of
stock options... -- -- -- -- -- -- (84,667) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
------ ----------- --- --- ---------- ------- ---------- --- --- -----------
<CAPTION>
Total
Deferred Accumulated Stockholders'
Compensation Deficit Deficit
------------- ------------- --------------
<S> <C> <C> <C>
Balance at
Inception,
March 19, 1998
(Original ZEFER).. $ -- $ -- $ --
Sale of common
stock to
Founders........ -- -- 474
Sale of Series A
redeemable
convertible
preferred stock,
net of issuance
costs of
$53,820......... -- (53,820) (53,820)
Net loss........ -- (555,176) (555,176)
------------- ------------- --------------
Balance at
December 31,
1998 (Original
ZEFER).......... -- (608,996) (608,522)
Stock dividend
paid to
investor........ -- (161,356) --
Stock issuance
to employee..... -- -- 961,400
Net loss........ -- (2,280,477) (2,280,477)
------------- ------------- --------------
Balance at April
30, 1999
(Original
ZEFER).......... $ -- $ (3,050,829) $ (1,927,599)
============= ============= ==============
Balance at
Inception,
March 18, 1999
(the Company)... $ -- $ -- $ --
Private
placement of
common stock.... -- -- 3,330,000
Private
placement of
redeemable
preferred
stock........... -- -- --
Issuance of
common stock and
redeemable
preferred stock
to management... (1,254,711) -- 687,869
Issuance of
common stock for
professional
services........ -- -- 10,141
Issuance of
common stock for
acquisitions
(Note 4)........ -- -- 1,007,000
Beneficial
conversion
feature of
Renaissance Note
(see Note
8(b))........... -- -- 400,000
Accretion of
dividends on
redeemable
preferred
stock........... -- -- --
Repayment of
subscriptions
receivable...... -- -- 537,582
Deferred
compensation on
stock options... (6,450,917) -- --
Cancellation of
stock options... 84,667 -- --
Amortization of
deferred
compensation.... 507,202 -- 507,202
Net loss........ -- (31,149,915) (31,149,915)
------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ZEFER CORP.
STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT--(Continued)
<TABLE>
<CAPTION>
Redeemable
Preferred Class B Convertible
Stock Preferred Stock Common Stock Treasury Stock
---------------------- --------------------- ------------------- -------------------
Number Additional
Number Redemption of Number Par Paid-in Number
of Shares Value Shares Amount of Shares Value Capital of Shares Cost
--------- ------------ -------- ----------- ---------- -------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1999
(the Company)... 24,814 $ 25,803,156 -- $ -- 39,854,268 $ 39,854 $ 14,691,642 -- --
Private
placement of
redeemable
preferred
stock........... 20,564 20,564,034 -- -- -- -- -- -- --
Exercise of
preferred stock
warrants........ 2,477 2,477,326 -- -- -- -- -- -- --
Issuance of
redeemable
preferred stock
to management... 530 530,000 -- -- -- -- -- -- --
Private
placement of
convertible
preferred
stock........... -- -- 200,000 2,000,000 -- -- -- -- --
Accretion of
dividends on
redeemable
preferred
stock........... -- 1,569,278 -- -- -- -- -- -- --
Issuance of
common stock for
professional
services........ -- -- -- -- 1,000 1 10,999 -- --
Repurchase of
treasury stock.. -- -- -- -- -- -- -- (258,666) (33,061)
Deferred
compensation on
stock options... -- -- -- -- -- -- 352,000 -- --
Cancellation of
stock options
and restricted
common stock.... -- -- -- -- -- -- (507,750) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- --
Repayment of
subscriptions
receivable...... -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
------- ------------ -------- ----------- ---------- -------- ------------ -------- --------
Balance at June
30, 2000--
unaudited (the
Company)........ 48,385 50,943,794 200,000 2,000,000 39,855,268 39,855 14,546,891 (258,666) (33,061)
Exchange of
Class A
redeemable
preferred stock
for common
stock........... (48,385) (50,943,794) -- -- 5,094,379 5,094 50,938,700 -- --
Conversion of
Class B
convertible
preferred stock
to common
stock........... -- -- (200,000) (2,000,000) 200,000 200 1,999,800 -- --
------- ------------ -------- ----------- ---------- -------- ------------ -------- --------
Pro forma
Balance at June
30, 2000--
unaudited (the
Company)........ -- $ -- -- $ -- 45,149,647 $ 45,149 $ 67,485,391 (258,666) $(33,061)
======= ============ ======== =========== ========== ======== ============ ======== ========
<CAPTION>
Total
Subscriptions Deferred Accumulated Stockholders'
Receivable Compensation Deficit Deficit
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1999
(the Company)... $ (1,137,943) $ (7,113,759) $ (31,149,915) $ (24,670,121)
Private
placement of
redeemable
preferred
stock........... -- -- -- --
Exercise of
preferred stock
warrants........ -- -- -- --
Issuance of
redeemable
preferred stock
to management... (530,000) -- -- (530,000)
Private
placement of
convertible
preferred
stock........... -- -- -- 2,000,000
Accretion of
dividends on
redeemable
preferred
stock........... -- -- -- --
Issuance of
common stock for
professional
services........ -- -- -- 11,000
Repurchase of
treasury stock.. 13,061 -- -- (20,000)
Deferred
compensation on
stock options... -- (352,000) -- --
Cancellation of
stock options
and restricted
common stock.... -- 507,750 -- --
Amortization of
deferred
compensation.... -- 2,033,505 -- 2,033,505
Repayment of
subscriptions
receivable...... 886,545 -- -- 886,545
Net loss........ -- -- (40,008,547) (40,008,547)
-------------- ------------- -------------- --------------
Balance at June
30, 2000--
unaudited (the
Company)........ (768,337) (4,924,504) (71,158,462) (60,297,618)
Exchange of
Class A
redeemable
preferred stock
for common
stock........... -- -- -- 50,943,794
Conversion of
Class B
convertible
preferred stock
to common
stock........... -- -- -- --
-------------- ------------- -------------- --------------
Pro forma
Balance at June
30, 2000--
unaudited (the
Company)........ $ (768,337) $ (4,924,504) $ (71,158,462) $ (9,353,824)
============== ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ZEFER CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Original ZEFER The Company
---------------------------- -----------------------------------------
Period from
Period from Inception Period from
Inception (March 18, Inception
(March 19, 1999) (March 18,
1998) through Four Months through 1999) through Six Months
December 31, Ended December 31, June 30, Ended
1998 April 30, 1999 1999 1999 June 30, 2000
------------- -------------- ------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (555,177) $(2,280,477) $(31,149,915) $(2,544,584) $(40,008,547)
Adjustments to
reconcile net loss to
net cash used in
operating activities--
Depreciation and
amortization......... 54,706 55,839 10,681,725 1,496,870 10,843,532
Stock-based
compensation......... -- 961,317 665,683 -- 2,033,504
Deferred tax benefit.. -- -- (5,760,400) (1,763,967) --
Deferred rent......... -- -- 142,020 -- 511,594
Noncash interest
expense.............. -- -- 1,424,663 557,836 4,216,414
Common stock issued
for services......... -- -- 10,141 10,141 11,000
Gain on sale of
property and
equipment............ 6,282 -- -- -- --
Changes in current
assets and
liabilities,
excluding effects of
acquisition--
Accounts receivable
and unbilled
receivables......... (121,993) (455,512) (3,430,390) 1,386,951 (7,915,648)
Prepaid expenses and
other current
assets.............. (6,510) 6,510 (1,367,204) (1,748,576) (823,760)
Accounts payable..... 121,897 93,339 4,644,053 1,234,963 683,519
Accrued expenses..... 29,125 985,735 5,475,533 725,636 10,389,177
Deferred revenue..... 46,805 297,958 263,578 475,692 6,074,079
---------- ----------- ------------ ----------- ------------
Net cash used in
operating
activities.......... (424,865) (335,291) (18,542,533) (169,038) (13,985,136)
---------- ----------- ------------ ----------- ------------
Cash flows from
investing activities:
Cash paid for
acquisitions, net of
cash acquired......... -- -- (26,268,090) (18,202,583) --
Purchases of property
and equipment......... (124,311) (2,556) (8,959,944) (373,187) (15,109,401)
Proceeds from sales of
property and
equipment............. 81,848 -- -- -- --
Increase in other
assets................ (16,500) (7,063) (4,467,300) (73,256) (2,311,889)
---------- ----------- ------------ ----------- ------------
Net cash used in
investing
activities.......... (58,963) (9,619) (39,695,334) (18,649,026) (17,421,290)
---------- ----------- ------------ ----------- ------------
Cash flows from
financing activities:
Net borrowings
(repayment) on line of
credit................ -- -- 19,366,122 150,000 (150,000)
Net borrowings on
subordinated debt..... -- -- 11,083,878 -- 10,185,967
Proceeds from issuance
of redeemable
preferred stock....... 1,146,181 -- 24,195,000 17,695,000 20,564,034
Proceeds for issuance
of convertible
preferred stock....... -- -- -- -- 2,000,000
Proceeds from issuance
of common stock....... 474 97 4,433,389 3,330,000 --
Principal payments on
capital lease
obligations........... (35,780) (50,614) (106,999) -- (149,897)
Purchase of equipment
under financing
agreement............. (88,130) -- -- -- --
Purchase of treasury
stock................. -- -- -- -- (20,000)
Repayments on notes
payable............... -- -- -- -- (180,000)
Repayment of
subscriptions
receivable............ -- -- 537,582 5,264 886,545
---------- ----------- ------------ ----------- ------------
Net cash provided by
(used in) financing
activities.......... 1,022,745 (50,517) 59,508,972 21,180,264 33,136,649
---------- ----------- ------------ ----------- ------------
Increase (decrease) in
cash and cash
equivalents............ 538,917 (395,427) 1,271,105 2,362,200 1,730,223
Cash and cash
equivalents, beginning
of period.............. -- 538,917 -- -- 1,271,105
---------- ----------- ------------ ----------- ------------
Cash and cash
equivalents, end of
period................. $ 538,917 $ 143,490 $ 1,271,105 $ 2,362,200 $ 3,001,328
========== =========== ============ =========== ============
Supplemental cash flow
information:
Cash paid for
interest............. $ 5,058 $ 25,210 $ 457,879 $ 15,700 $ 2,225,202
========== =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS
(Including data applicable to unaudited periods)
(1) The Company and Summary of Significant Accounting Policies
ZEFER Corp. (the Company) was incorporated in Delaware on March 18, 1999 and
is a strategy-led Internet consulting and implementation firm. The Company
derives revenues primarily from providing Internet consulting and
implementation services. The Company expects that revenues will be driven
primarily by the number, scope and pricing of client engagements along with the
capacity to deliver such engagements. The operating results will be determined
primarily by headcount, utilization of billable consultants and level of
selling, general and administrative and other operating expenditures.
The accompanying financial statements include the financial statements of a
predecessor company also named ZEFER Corp. (Original ZEFER). The Company was
formed for the purpose of continuing the business of Original ZEFER, which was
incorporated in Delaware on March 19, 1998 as an Internet professional services
firm. On April 30, 1999, the Company effected a reorganization whereby all of
the outstanding capital stock of Original ZEFER was exchanged for 3,456,000
shares of Company common stock valued at $432,000 and $7.1 million in cash. In
accordance with Accounting Principles Board (APB) Opinion No. 16, Accounting
for Business Combinations, this transaction has been accounted for using the
purchase method of accounting (see Note 4). For purposes of continuity of
operations, the accompanying financial statements include the results of
operations of Original ZEFER from inception (March 19, 1998) through the date
of its reorganization (April 30, 1999) and the results of operations of the
Company from inception (March 18, 1999) through December 31, 1999. The results
of operations of the Company for the period from inception (March 18, 1999)
through April 30, 1999 were not significant.
The Company is subject to risks common to rapidly growing technology
companies, including limited operating history, integration of acquisitions,
dependence on key personnel, rapid technological change, competition from
substitute services and larger companies, the need for continued market
acceptance of the Company's services, and the ability to fund the Company's
growth strategy.
The accompanying financial statements reflect the application of the
accounting policies as described below and elsewhere in these notes to
financial statements. Unless otherwise noted, references in these notes to
financial statements of the Company relate to both the Company and Original
ZEFER.
(a) Unaudited Interim Financial Information--The financial information as of
June 30, 2000 and for the period from inception (March 18, 1999) through June
30, 1999 and for the six months ended June 30, 2000 is unaudited but includes
all adjustments, consisting only of normal recurring adjustments, that
management considers necessary for a fair presentation of the Company's
operating results and cash flows for such periods. Results for the six months
ended June 30, 2000 are not necessarily indicative of the results to be
expected for the full fiscal year 2000 or for any future period.
(b) Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(c) Revenue Recognition--Revenue is derived from professional service
agreements. Due to the significant production and customization element of its
professional service arrangements, the Company recognizes revenue in accordance
with Accounting Research Bulletin No. 45, Long-term Construction-type
Contracts, using the relevant guidance in Statement of Position (SOP) No. 81-1,
Accounting for Performance of Construction-type and Certain Production-type
Contracts. Revenues pursuant to time and materials contracts
F-8
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
are generally recognized as services are performed. Revenues pursuant to fixed-
fee contracts are generally recognized as services are rendered and are
determined based on the percentage-of-completion method of accounting (based on
the ratio of costs incurred to total estimated project costs). Contracts
generally extend over a three-to-six-month period. The cumulative impact of any
revisions in estimates of the percent complete is reflected in the period in
which the changes become known. Revenues exclude reimbursable expenses charged
to and collected from clients.
Provisions for estimated losses on uncompleted contracts are made on a
contract-by-contract basis and are recognized in the period in which such
losses become probable and can be reasonably estimated. As of December 31, 1999
and June 30, 2000, the Company had a provision for estimated losses of
approximately $374,000 and $391,000, respectively, related to uncompleted
contracts.
(d) Cost of Services--Cost of revenues consists primarily of compensation
and benefits of employees engaged in the delivery of professional services and
non-reimbursable expenses related to client projects.
(e) Cash and Cash Equivalents--All highly liquid investments purchased with
an original maturity of 90 days or less are considered to be cash equivalents.
The Company invests excess cash primarily in money market accounts, U.S.
Treasury securities, certificates of deposit and short-term commercial paper
which are subject to minimal credit and market risks.
(f) Unbilled Receivables and Deferred Revenue--Unbilled accounts receivable
represent amounts recognized as revenue in advance of the scheduled billing for
such services. Billings received in advance of services are classified as
deferred revenue.
(g) Concentration of Credit Risk and Significant Customers--Financial
instruments that potentially subject the Company to a concentration of credit
risk consist of cash and cash equivalents and accounts receivable. Cash and
cash equivalents are deposited with high-credit quality financial institutions.
The Company's accounts receivable are derived from revenue earned from clients
located predominantly in the United States. The Company performs ongoing credit
evaluations of its clients' financial condition and maintains reserves for
potential credit losses based on the expected collectibility of total accounts
receivable. To date, the Company has not experienced any material credit
losses.
For the period from inception through December 31, 1999 and the six months
ended June 30, 2000, the Company did not have any one customer who accounted
for greater than 10% of total revenues. For the period from inception through
December 31, 1998, the Company recorded revenues from three customers who
individually represented 58%, 19% and 11% of total revenues. For the four
months ended April 30, 1999, the Company recorded revenues from four customers
who individually represented 30%, 20%, 17% and 15% of total revenues.
At June 30, 2000, the Company had one customer who represented 12% of total
accounts receivable. At December 31, 1999, the Company did not have any one
customer who represented greater than 10% of total accounts receivable. At
December 31, 1998, the Company had accounts receivable from four customers who
individually represented 44%, 22%, 14% and 12% of total accounts receivable. At
April 30, 1999, the Company had accounts receivable from four customers who
individually represented 28%, 26%, 23% and 16% of total accounts receivable.
(h) Prepaid Expenses and Other Current Assets--Prepaid expenses and other
current assets consist of prepaid rent, recruiting costs and employee
receivables at December 31, 1999 and June 30, 2000.
F-9
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
(i) Fair Value of Financial Instruments--The financial instruments of the
Company, including cash and cash equivalents, accounts receivable, accounts
payable, line-of-credit obligations, notes payable and subordinated debt are
carried at cost, which approximates their fair value. The estimates have been
determined through information obtained from market sources and management
estimates.
(j) Property and Equipment, Net--Property and equipment are stated at cost
less accumulated depreciation. The Company provides for depreciation and
amortization by charges to operations using the straight-line method, which
allocates the cost of property and equipment over their estimated useful lives
of two to three years for computer equipment and software, three to five years
for furniture and fixtures and the lesser of the useful life or the life of the
related lease for equipment under capital lease and leasehold improvements.
(k) Goodwill and Other Intangible Assets, Net--Goodwill and other intangible
assets associated with acquisitions (see Note 4) and with the reorganization of
Original ZEFER (see Note 1) consist of the following at December 31, 1999 and
June 30, 2000:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
<S> <C> <C>
Goodwill:
Goodwill........................................ $ 10,657,721 $10,657,721
Less--Accumulated amortization.................. 1,382,006 2,714,221
------------ -----------
$ 9,275,715 $ 7,943,500
============ ===========
Other Intangible Assets:
Assembled workforce............................. $ 8,001,000 $ 8,001,000
Noncompetition agreements....................... 14,500,000 14,500,000
------------ -----------
22,501,000 22,501,000
Less--Accumulated amortization.................. 6,718,361 12,633,528
------------ -----------
$ 15,782,639 $9,867,472
============ ===========
</TABLE>
(l) Long-Lived Assets--The Company reviews its long-lived assets, including
goodwill and other intangible assets, for impairment as changes in events and
circumstances indicate the carrying amount of an asset may not be recoverable.
In assessing whether there has been an impairment of goodwill and other
intangible assets, the Company first reviews several qualitative factors
related to the acquired businesses, including turnover of the acquired
workforce and a comparison of budgeted revenues versus actual revenues of the
acquired businesses. If the Company's assessment of these qualitative factors
indicates the possibility of an impairment, the Company then measures such
impairment using the undiscounted future cash flows of the related asset or
group of assets. If the sum of the undiscounted future cash flows is less than
the carrying amount of the asset or group of assets, the Company will recognize
an impairment loss equal to the excess carrying amount. Based upon its review
of qualitative factors, management believes that, as of December 31, 1999 and
June 30, 2000, none of the Company's long-lived assets have been impaired.
(m) Other Long-term Assets--Other long-term assets consist primarily of
security deposits for the Company's facilities, deferred offering costs related
to the initial public offering and long-term investments.
(n) Other Long-term Liabilities--Other long-term liabilities consist of
deferred rent at December 31, 1999. At June 30, 2000, other long-term
liabilities consist of deferred rent and the long-term portion of deferred
revenue.
F-10
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
(o) Stock Compensation--The Company accounts for employee stock compensation
arrangements in accordance with provisions of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and complies with the disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. Under APB Opinion No. 25, compensation expense is
based on the difference, if any, on the date of grant between the fair value of
the Company's common stock and the exercise price of the stock option.
(p) Income Taxes--The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes, which requires the recognition of
taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized
in the financial statements or tax returns. The measurement of current and
deferred tax liabilities and assets is based on provisions of the enacted tax
law; the effects of future changes in tax laws or rates are not anticipated.
(q) Net Loss per Share--In accordance with SFAS No. 128, Earnings per Share,
basic and diluted net loss per share is computed by dividing the net loss
available to common stockholders for the period by the weighted average number
of shares of common stock outstanding during the period. The calculation of
basic and diluted weighted average shares outstanding excludes unvested
restricted common stock issued to management and in connection with
acquisitions (see Note 11(f)). For periods in which a net loss has been
incurred, the calculation of diluted net loss per share excludes potential
common stock as their effect is antidilutive. Potential common stock is
composed of (i) incremental shares of common stock issuable upon the exercise
of stock options and warrants and upon the exchange or conversion of preferred
stock and convertible promissory notes and (ii) unvested restricted common
stock subject to repurchase by the Company. For the periods indicated below,
the calculation of diluted weighted average shares outstanding excludes the
following potential common stock:
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(March 18, 1999) (March 18, 1999) Six Months
through through Ended
December 31, 1999 June 30, 1999 June 30, 2000
----------------- ---------------- --------------
<S> <C> <C> <C>
Outstanding stock
options................ 4,627,111 1,676,150 7,772,162
Unvested restricted
common stock........... 9,314,467 7,610,800 7,168,190
Class B Preferred
Stock.................. -- -- 200,000
Convertible promissory
notes.................. 250,000 250,000 250,000
---------- --------- ----------
14,191,578 9,536,950 15,390,352
========== ========= ==========
</TABLE>
In accordance with the Securities and Exchange Commission's (SEC) Staff
Accounting Bulletin (SAB) No. 98, Earnings per Share in an Initial Public
Offering, the Company determined that there were no nominal issuances of common
stock prior to the Company's initial public offering (IPO).
(r) Pro Forma Net Loss per Share (Unaudited)--On March 27, 2000, the Company
entered into an exchange agreement with all holders of Class A redeemable
preferred stock (the Class A Preferred Stock) whereby, upon the closing of the
IPO, all shares of Class A Preferred Stock then outstanding will be exchanged
for common stock. The Class A Preferred Stock will be exchanged for common
stock at a ratio equal to the total outstanding balance of Class A Preferred
Stock, including accrued but unpaid dividends, divided by the IPO price per
share. Additionally, the Company's Class B Preferred Stock is mandatorily
convertible into common stock upon a qualified IPO, as defined. Therefore, the
Company's historical capital structure at December 31, 1999 and June 30, 2000
is not indicative of its capital structure upon the closing of the IPO.
Accordingly, pro forma net loss per share is presented for the periods
indicated below assuming (i) the net loss before the accretion of preferred
stock dividends, discount and offering costs, (ii) the exchange of all shares
of Class A Preferred Stock then outstanding into common stock using the as-
converted method from the
F-11
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
respective dates of issuance based on an assumed IPO price of $10.00 per share,
but excluding shares of common stock to be issued in the IPO and (iii) the
conversion of each share of Class B Preferred Stock then outstanding into one
share of common stock using the as-converted method from the date of issuance.
A reconciliation of the numerators and denominators used in computing
historical and pro forma net loss per share is as follows:
<TABLE>
<CAPTION>
Period from Period from
Inception Inception Six Months
(March 18, 1999) (March 18, 1999) Ended
through through June
December 31, 1999 June 30, 1999 30, 2000
----------------- ---------------- ------------
<S> <C> <C> <C>
Net loss................ $(31,149,915) $(2,544,584) $(40,008,547)
Class A Preferred Stock
dividends.............. 989,156 157,839 1,569,278
------------ ----------- ------------
Pro forma net loss...... $(30,160,759) $(2,386,745) $(38,439,269)
============ =========== ============
Weighted average shares
outstanding............ 26,793,270 19,175,908 31,479,086
Exchange of Class A
Preferred Stock........ 1,554,654 689,103 3,928,435
Conversion of Class B
Preferred Stock........ -- -- 38,462
------------ ----------- ------------
Pro forma weighed
average shares
outstanding............ 28,347,924 19,865,011 35,445,983
============ =========== ============
</TABLE>
(s) Pro Forma Balance Sheet (Unaudited)--As discussed above, immediately
prior to the closing of the IPO, all shares of Class A Preferred Stock and
Class B Preferred Stock will be exchanged or converted for common stock. This
exchange and conversion has been reflected in the unaudited pro forma balance
sheet as of June 30, 2000.
(t) Software Development Costs--SFAS No. 86, Accounting for the Costs of
Computer Software To Be Sold, Leased or Otherwise Marketed, requires the
capitalization of certain computer software development costs incurred after
technological feasibility is established. The Company believes that once
technological feasibility of a software product has been established, the
additional development costs incurred to bring the product to a commercially
acceptable level are not significant. To date, the Company has not incurred or
capitalized any software development costs.
(u) Internal-Use Computer Software--In accordance with SOP 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use, the
Company capitalizes costs related to software and implementation in connection
with its internal-use software systems.
(v) Comprehensive Income--Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. The only component of
comprehensive income (loss) of the Company for the period from inception is net
loss. Therefore, comprehensive loss is the same as the reported net loss for
all periods presented.
(w) Disclosures About Segments of an Enterprise and Related Information--
Operating segments are defined as components of an enterprise about which
separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The Company's chief decision
making group consists of the chief executive officer and the chief financial
officer. Based on the criteria established by SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, the Company has one
reportable operating segment, the results of which are disclosed in the
accompanying financial statements. Substantially all of the operations and
assets of the Company have been derived from and are located in the United
States.
F-12
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
Revenues by country in total and as a percentage of total revenues are as
follows for the period from inception through December 31, 1998, the four
months ended April 30, 1999, the period from inception through December 31,
1999, the period from inception through June 30, 1999 and the six months ended
June 30, 2000, respectively.
<TABLE>
<CAPTION>
Original ZEFER The Company
--------------------------------------- -------------------------------------------------------------------
December 31, 1998 April 30, 1999 December 31, 1999 June 30, 1999 June 30, 2000
------------------- ------------------- ---------------------- --------------------- ----------------------
Percent of Percent of Percent of Percent of Percent of
Country Revenue Revenue Revenue Revenue Revenue Revenue Revenue Revenue Revenue Revenue
------- -------- ---------- -------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States... $585,996 94% $491,141 100% $24,101,682 95% $2,571,537 100% $42,835,570 95%
Other........... 34,737 6 -- -- 1,175,253 5 -- -- 2,255,103 5
-------- --- -------- --- ----------- --- ---------- --- ----------- ---
$620,733 100% $491,141 100% $25,276,935 100% $2,571,537 100% $45,090,673 100%
======== === ======== === =========== === ========== === =========== ===
</TABLE>
(x) Recent Accounting Pronouncements--In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities. SFAS No. 133, as amended by SFAS No. 137 and 138, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not expect such
adoption to have an impact on the Company's results of operations, financial
position or cash flows.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation--An Interpretation of APB Opinion No.
25 (Interpretation 44). Interpretation No. 44 clarifies the application of APB
No. 25 in certain situations, as defined. Interpretation 44 is effective July
1, 2000 but is retroactive for certain events that occurred after December 15,
1998. The Company does not expect that the adoption of Interpretation 44 will
materially affect its results of operations.
The SEC issued SAB No. 101, Revenue Recognition, in December 1999. The
Company is required to adopt this new accounting guidance through a cumulative
charge to operations, in accordance with APB No. 20, "Accounting Changes,"
during the fourth quarter of 2000. The Company believes that the adoption of
the guidance provided in SAB No. 101 will not have a material impact on future
operating results.
(y) Stock Splits--On June 15, 1999, the Company declared a three-for-one
stock split. On November 30, 1999, the Company declared an additional four-for-
three stock split and increased the authorized number of shares of common stock
to 100,000,000. All share and per share amounts in the accompanying financial
statements and notes have been retroactively adjusted in all periods presented
to reflect these stock splits.
F-13
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
(z) Supplemental Disclosure of Non-Cash Investing and Financing Activities--
The following table summarizes the supplemental disclosures of the Company's
non-cash investing and financing activities for the periods ended on the dates
indicated below.
<TABLE>
<CAPTION>
Original ZEFER The Company
---------------------------- ---------------------------------------------
Period From Period From
Inception Inception Period From
(March 19, 1998) Four Months (March 18, 1999) Inception Six Months
through Ended through (March 18, 1999) Ended
December 31, April 30, December 31, through June 30, June 30,
1998 1999 1999 1999 2000
---------------- ----------- ---------------- ---------------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Acquisition of fixed
assets under capital
leases................. $267,344 $ 102,057 $ 224,371 $ 160,200 $ --
======== ========== ============ =========== ==========
Proceeds from issuance
of stock to employees
and payment of dividend
to investor............ $ -- $1,122,659 $ -- $ -- $ --
======== ========== ============ =========== ==========
Deferred compensation
related to issuance of
common stock to
management and stock
options to employees
and Advisory Board
members, net of
cancellations.......... $ -- $ -- $ 7,620,961 $ -- $(155,750)
======== ========== ============ =========== ==========
Issuance of common and
preferred stock to
management for
subscriptions
receivable............. $ -- $ -- $ 1,128,525 $ 885,657 $ --
======== ========== ============ =========== ==========
Accretion of dividends
on redeemable preferred
stock.................. $ -- $ -- $ 989,156 $ 157,839 $1,569,278
======== ========== ============ =========== ==========
On April 30, 1999, the
Company reorganized
Original ZEFER, as
follows--
Fair value of assets
acquired............. $ -- $ -- $ 12,382,047 $12,382,047 $ --
Cash paid for
reorganization....... -- -- (7,225,000) (7,225,000) --
Common stock issued... -- -- (432,000) (432,000) --
-------- ---------- ------------ ----------- ----------
Liabilities assumed... $ -- $ -- $ 4,725,047 $ 4,725,047 $ --
======== ========== ============ =========== ==========
On May 14, 1999, the
Company acquired
Spyplane, as follows--
Fair value of assets
acquired............. $ -- $ -- $ 2,709,107 $ 2,709,107 $ --
Cash paid for
acquisition.......... -- -- (1,100,000) (1,100,000) --
Promissory note
issued............... -- -- (980,000) (980,000) --
Common stock issued... -- -- (25,000) (25,000) --
-------- ---------- ------------ ----------- ----------
Liabilities assumed... $ -- $ -- $ 604,107 $ 604,107 $ --
======== ========== ============ =========== ==========
On May 28, 1999, the
Company acquired the
Divisions of
Renaissance, as
follows--
Fair value of assets
acquired............. $ -- $ -- $ 14,104,748 $14,104,748 $ --
Cash paid for
acquisition.......... -- -- (10,160,000) (10,160,000) --
Promissory notes
issued............... -- -- (1,600,000) (1,600,000) --
Beneficial conversion
feature.............. -- -- (400,000) (400,000) --
Common stock issued... -- -- (50,000) (50,000) --
-------- ---------- ------------ ----------- ----------
Liabilities assumed... $ -- $ -- $ 1,894,748 $ 1,894,748 $ --
======== ========== ============ =========== ==========
On September 13, 1999,
the Company acquired
Waite, as follows--
Fair value of assets
acquired............. $ -- $ -- $ 13,335,964 $ -- $ --
Cash paid for
acquisition.......... -- -- (8,109,052) -- --
Common stock issued... -- -- (500,000) -- --
-------- ---------- ------------ ----------- ----------
Liabilities assumed... $ -- $ -- $ 4,726,912 $ -- $ --
======== ========== ============ =========== ==========
</TABLE>
F-14
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
(2) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Original ZEFER The Company
----------------------- ------------------------
December 31, April 30, December 31, June 30,
1998 1999 1999 2000
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Computer equipment and
software................. $ 11,632 $ 13,606 $ 7,932,515 $15,482,107
Equipment under capital
leases................... 236,195 338,252 591,380 591,380
Furniture and fixtures.... 36,718 36,401 1,204,309 1,996,437
Leasehold improvements.... 112,679 113,578 1,282,678 7,408,890
Construction in progress.. -- -- 161,025 802,494
-------- ---------- ----------- -----------
397,224 501,837 11,171,907 26,281,308
Less--Accumulated
depreciation and
amortization............. 54,706 110,545 2,581,358 6,177,507
-------- ---------- ----------- -----------
$342,518 $ 391,292 $ 8,590,549 $20,103,801
======== ========== =========== ===========
(3) Accrued Expenses
Accrued expenses consist of the following:
<CAPTION>
Original ZEFER The Company
----------------------- ------------------------
December 31, April 30, December 31, June 30,
1998 1999 1999 2000
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Employee costs............ $ -- $ 96,687 $ 5,056,724 $13,006,776
Loss contracts............ -- 369,547 373,685 391,326
Professional fees and
transaction costs........ 9,000 41,500 997,662 2,021,880
Software license fees..... -- -- 1,022,042 732,000
Other..................... 20,125 507,126 2,330,806 4,018,114
-------- ---------- ----------- -----------
$ 29,125 $1,014,860 $ 9,780,919 $20,170,096
======== ========== =========== ===========
</TABLE>
(4) Acquisitions
(a) Spyplane, LLC--On May 14, 1999, the Company acquired all of the LLC
units of Spyplane, LLC (Spyplane), for $2,005,000 plus acquisition costs of
approximately $100,000. The total consideration consisted of 200,000 shares of
restricted common stock, valued at $25,000, a promissory note in the amount of
$980,000 and $1,000,000 in cash.
(b) Divisions of Renaissance--On May 28, 1999, the Company acquired certain
assets and assumed certain liabilities of two divisions of Renaissance
Worldwide, Inc. (Renaissance): Customer Management Solutions, Inc. (CMS) and
Neoglyphics Media Corporation (NMC) (collectively, the Divisions of
Renaissance). The total consideration of $12,210,000 consisted of 400,000
shares of the Company's unrestricted common stock, valued at $50,000, a
promissory note in the amount of $2,000,000 (Note 8(b)), $10,000,000 in cash,
and acquisition costs of approximately $160,000.
(c) Waite & Company, Inc.--On September 13, 1999, the Company acquired all
of the common stock of Waite & Company, Inc. (Waite), for approximately
$8,534,000 plus acquisition costs of approximately $75,000. The total
consideration consisted of 400,000 shares of restricted common stock, valued at
$500,000, and approximately $8,034,000 in cash.
F-15
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
(d) Allocation of Purchase Consideration--All of the 1999 acquisitions,
including the reorganization of Original ZEFER, have been accounted for using
the purchase method of accounting in accordance with APB Opinion No. 16,
Business Combinations and, accordingly, the purchase price has been allocated
to the tangible assets acquired and liabilities assumed and, with the advice of
independent valuation experts, to the identifiable intangible assets. The
results of operations of the acquired entities are included in those of the
Company beginning on the respective dates of acquisition. The Company allocated
total consideration from the 1999 acquisitions and from the reorganization of
Original ZEFER to the fair value of the assets acquired and liabilities assumed
on the dates of acquisition as follows:
<TABLE>
<CAPTION>
Original Divisions of
ZEFER Spyplane Renaissance Waite
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Current assets.......... $ 744,558 $ 375,155 $ 4,754,576 $ 1,556,264
Property and equipment.. 391,292 49,537 1,206,133 295,630
Goodwill................ 4,092,197 702,415 1,626,039 4,237,070
Assembled workforce..... 894,000 362,000 5,018,000 1,727,000
Noncompetition agree-
ments.................. 6,260,000 1,220,000 1,500,000 5,520,000
Current liabilities..... (1,714,662) (604,107) (1,894,748) (1,565,730)
Noncurrent liabilities.. (3,010,385) -- -- (3,161,182)
----------- ---------- ----------- -----------
$ 7,657,000 $2,105,000 $12,210,000 $ 8,609,052
=========== ========== =========== ===========
</TABLE>
The noncurrent liabilities referred to in the above table include noncurrent
portions of assumed capital lease obligations and long-term deferred tax
liabilities in the amount of $5,760,400 for the income tax effect of basis
differences on the nondeductible intangible assets (see Note 6). Assembled
workforce is being amortized over a period of 36 months; noncompetition
agreements are being amortized over periods of 12 to 24 months. The purchase
price in excess of identified tangible and intangible assets acquired and
liabilities assumed was allocated to goodwill. As a result of the early stage
of development of the Internet and electronic commerce, the dynamics of this
rapidly evolving industry and the expectation of increasing competition, the
recorded goodwill is being amortized on a straight-line basis over four years,
the estimated period of its benefit.
(e) Pro Forma Disclosures (Unaudited)--The following unaudited pro forma
consolidated amounts for the period from inception through December 31, 1999
give effect to the 1999 acquisitions and the reorganization of Original ZEFER
as if they had all occurred on the Company's date of inception (March 18,
1999), by consolidating the results of operations of the 1999 acquired entities
with the pre-acquisition results of the Company for the period from inception
through December 31, 1999. The pro forma amounts do not purport to be
indicative of the results of operations that would have been achieved had the
transactions been in effect as of the inception of the Company and should not
be construed as being representative of future results of operations.
<TABLE>
<S> <C>
Revenues.................................................... $33,084,042
Net loss.................................................... (46,082,307)
Basic and diluted net loss per share........................ (1.53)
</TABLE>
(5) Related Party Professional Services Agreement
Effective March 23, 1999, the Company entered into a professional services
agreement with GTCR Golder Rauner, L.L.C. (GTCR), a stockholder that owns 97.6%
of the outstanding redeemable preferred stock and 67.3% of the outstanding
common stock of the Company as of June 30, 2000 (see Note 11(d)) and with whom
the Company has a subordinated debt agreement (see Note 9). Under the terms of
the professional services agreement, GTCR will provide financial and management
consulting to the Company. At the time of any equity or debt financing of the
Company other than the purchase of stock or issuance of debt by GTCR or other
GTCR financings, the Company shall pay to GTCR a placement fee equal to 1% of
the gross amount of
F-16
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
such financing (including the committed amount of any revolving credit
facility). In addition to the placement fee, the Company shall pay GTCR an
annual management fee of $150,000, payable in equal monthly installments,
provided, however, that such management fee shall not commence until the
Company determines (i) that its earnings before interest, taxes, depreciation
and amortization (EBITDA) for the previous 30 days has been sufficient to cover
the payment of such management fee together with any increases in the annual
base salary of the Company's executives as required by such executives'
respective management agreements and (ii) that its pro forma projections for
the next 12 months show that the Company's EBITDA is likely to continue to be
sufficient to cover such management fee together with such increases in annual
base salary. For the period from inception to June 30, 2000, no amounts have
been payable under the management fee arrangement. This management fee
agreement terminates upon the consummation of an IPO and no amounts become
payable upon an IPO or other event that terminates the agreement.
(6) Income Taxes
At December 31, 1999, the Company had approximately $26.7 million of federal
and state net operating loss carryforwards available to offset future taxable
income, which expire in varying amounts through 2019. Under the Tax Reform Act
of 1986, the amounts of and benefits from net operating loss carryforwards may
be impaired or limited in certain circumstances. Events which cause limitations
in the amount of net operating losses that the Company may utilize in any one
year include, but are not limited to, a cumulative ownership change of more
than 50%, over a three-year period, as defined.
At December 31, 1998 and April 30, 1999, Original ZEFER had net operating
loss carryforwards for federal and state income tax purposes of approximately
$555,000 and $2,208,000, respectively. These carryforwards expire through 2018
and are subject to review and possible adjustment by the Internal Revenue
Service. Upon the acquisition of Original ZEFER by the Company, Original
ZEFER's net operating loss carryforward was acquired by the Company. Under
Section 382 of the Internal Revenue Code, the amount that may be utilized by
the Company to offset future taxable income on an annual basis is limited to
approximately $400,000 per year.
For the period from inception through December 31, 1999, the Company
incurred losses before benefit from income taxes of approximately $36.9
million, which is the primary component of the Company's deferred tax asset at
December 31, 1999. In connection with the stock acquisitions discussed in Note
4, the Company established a deferred tax liability for the income tax effect
of basis differences on the nondeductible intangible assets (exclusive of
goodwill), with a corresponding increase in goodwill. The Company has
recognized in the statements of operations the tax benefit of a portion of the
1999 net operating losses as an offset to this deferred tax liability.
The approximate income tax effect of each type of temporary difference and
carryforward of Original ZEFER and the Company is as follows:
<TABLE>
<CAPTION>
Original ZEFER The Company
---------------------- ------------
December 31, April 30, December 31,
1998 1999 1999
------------ --------- ------------
<S> <C> <C> <C>
Deferred tax assets (liabilities)--
Net operating loss carryforwards.... $ 222,000 $ 883,000 $10,939,000
Intangible assets--Temporary differ-
ences.............................. -- -- 948,000
Nondeductible accruals and re-
serves............................. -- -- 906,000
Less--Valuation allowance........... (222,000) (883,000) (7,751,000)
--------- --------- -----------
-- -- 5,042,000
Intangible assets--Basis differences.. -- -- (5,042,000)
--------- --------- -----------
Net deferred tax asset............ $ -- $ -- $ --
========= ========= ===========
</TABLE>
F-17
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
The Company has provided a valuation reserve against its deferred tax asset,
because of the uncertainty surrounding the realizability of this asset.
A reconciliation of the federal statutory rate to the effective tax rate for
the period from inception through December 31, 1998, the four months ended
April 30, 1999 and the period from inception through December 31, 1999, is as
follows:
<TABLE>
<CAPTION>
Original ZEFER The Company
---------------------- ------------
December 31, April 30, December 31,
1998 1999 1999
------------ --------- ------------
<S> <C> <C> <C>
Federal statutory rate.................. (34)% (34)% (34)%
State taxes, net of federal benefit..... (6) (6) (5)
Nondeductible amortization.............. -- -- 4
Increase in valuation allowance......... 40 40 21
Reduction in deferred tax liability..... -- -- (2)
--- --- ---
Effective rate........................ --% --% (16)%
=== === ===
</TABLE>
(7) Lines of Credit
(a) Unsecured Demand Line of Credit--In July 1999, the Company entered into
a $20,000,000 unsecured demand line of credit (the Demand Line) with a bank.
Borrowings on the Demand Line accrue interest at the prime lending rate (9.5%
at June 30, 2000) and interest is payable monthly. All borrowings under the
Demand Line are guaranteed by GTCR. At June 30, 2000, the Company had
$19,416,122 outstanding under the Demand Line.
(b) Revolving Line of Credit--In December 1998, Original ZEFER obtained a
revolving line of credit facility (the Revolving Line) from a bank which
provides for borrowings up to $200,000. Borrowings were limited to 80% of
eligible accounts receivable, as defined, and bear interest at the prime
lending rate plus 0.5% and interest is payable monthly. Original ZEFER was
required to comply with certain restrictive covenants under this agreement,
including minimum levels of working capital and tangible net worth, and the
line was collateralized by all assets, as defined. There were no borrowings
outstanding under the Revolving Line at December 31, 1998 or April 30, 1999.
In connection with the acquisition of Original ZEFER by the Company, the
Company assumed the Revolving Line. At December 31, 1999, the Company was not
in compliance with either of its financial covenants and subsequently received
a waiver from the bank. At December 31, 1999, the Company had $150,000
outstanding under the Revolving Line. In February 2000, the Company repaid all
amounts then outstanding and terminated the Revolving Line.
(c) Equipment Lease Line of Credit--In June 1998, Original ZEFER entered
into a $250,000 equipment lease line of credit (the Equipment Line) designated
for the acquisition of computer and office equipment. In January 1999, the
Equipment Line was amended to allow for an additional $500,000 in borrowings by
January 2000. In connection with the acquisition of Original ZEFER by the
Company, the Company assumed Original ZEFER's obligations under the Equipment
Line, as amended. Principal and interest at an imputed rate of 11% are payable
over 36 months. At December 31, 1998, April 30, 1999, December 31, 1999 and
June 30, 2000, the Company had $237,133, $288,577, $414,536 and $320,526,
respectively, outstanding under the Equipment Line, which is included in
capital lease obligations in the accompanying financial statements.
(8) Notes payable
(a) Spyplane Notes--As part of the consideration for the acquisition of
Spyplane (Note 4(a)), the Company issued to the former members of Spyplane
promissory notes in the aggregate principal amount of
F-18
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
$980,000 (the Spyplane Notes). The Spyplane Notes bear interest at a rate of 8%
per year. One half of the interest accruing on the Spyplane Notes was paid on
May 14, 2000. Also on May 14, 2000, the Company paid an aggregate of $180,000
of the outstanding principal amount. The remaining unpaid principal and
interest on the Spyplane Notes will be payable on May 14, 2001.
(b) Renaissance Note--As part of the consideration for the acquisitions of
the Divisions of Renaissance (Note 4(b)), the Company issued to Renaissance a
promissory note in the principal amount of $2,000,000 (the Renaissance Note).
The Renaissance Note bears interest at a rate equal to the 30-day LIBOR (6.6%
at June 30, 2000) plus 2.0% per annum and interest is payable quarterly for the
period extending from August 1999 through May 2002. The Renaissance Note is
subordinate to any senior indebtedness, as defined.
At the option of Renaissance, the principal amount outstanding under the
Renaissance Note is convertible to common stock of the Company at a conversion
price equal to 80% of the per share price to the public of the Company's common
stock in an IPO. The Company has valued this beneficial conversion feature at
$400,000, which has been recorded as additional interest expense in the
accompanying statement of operations.
(c) Future Maturities--At June 30, 2000 the future maturities of the
principal obligation under the Spyplane and Renaissance Notes are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
2000............................................................ $ 750,000
2001............................................................ 1,800,000
2002............................................................ 250,000
----------
$2,800,000
==========
</TABLE>
(9) Subordinated Debt Financing
On November 24, 1999, the Company entered into a loan agreement with GTCR,
the majority investor in the Company. The loan agreement provides for up to
$32,196,296 of borrowings, of which the Company has borrowed $22,975,142
through June 30, 2000 to fund operations. The Company, at its discretion, may
make additional borrowings from time to time.
Borrowings under the loan agreement bear interest at 12% per annum and
interest is payable quarterly in arrears beginning December 31, 1999. The loan
agreement matures on November 24, 2004. In addition, should the Company dispose
of any assets or subsidiaries for net proceeds in excess of $100,000, the
Company is required to prepay the loans in an amount equal to such net
proceeds. Borrowings are secured by substantially all assets of the Company.
Concurrent with the loan agreement, the Company repurchased from GTCR
1,650,405 shares of common stock at the issuance price of $0.125 per share and
1,499 shares of redeemable preferred stock at the issuance price of $1,000 per
share. Simultaneously, the Company issued to GTCR, the lender, a warrant to
purchase 1,650,405 shares of common stock and a warrant to purchase 1,499
shares of redeemable preferred stock, each at an exercise price of $.001 per
share. GTCR exercised both warrants in full at the time of the transaction. The
Company has recorded the value of this beneficial exercise price (approximately
$1,705,000) as an original issuance discount on the subordinated debt financing
and has presented in the accompanying statements of redeemable preferred stock
and stockholders' deficit the net effect of the purchase of the treasury stock
and the subsequent sale of stock upon exercise of the warrants. The Company is
amortizing this discount as additional interest expense over the term of the
loan agreement. Additionally, the Company agreed to issue GTCR warrants to
purchase up to an additional 4,720 shares of Class A Preferred Stock as
additional borrowings are made under the loan agreement.
F-19
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
Under the loan agreement, the Company must maintain compliance with certain
negative covenants and financial covenants. The negative covenants include
limits on indebtedness, certain investments, capital expenditures and lease
payments. The financial covenants include a minimum required level of pre-
corporate EBITDA and a minimum required level of fixed charge coverage. At June
30, 2000, the Company was not in compliance with certain covenants that were
subsequently waived by GTCR.
(10) Commitments and Contingencies
(a) Leases--Future minimum lease payments under noncancelable operating and
capital leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- -----------
<S> <C> <C>
Twelve Months Ending December 31,
2000................................................ $342,226 $ 4,305,020
2001................................................ 269,024 4,991,220
2002................................................ 111,126 5,115,460
2003................................................ 71,992 5,207,318
2004................................................ 25,057 5,117,120
Thereafter.......................................... -- 2,438,609
-------- -----------
Total minimum lease payments...................... 819,425 $27,174,747
===========
Less--Amount representing interest.................... 121,952
--------
Present value of capital lease obligations........ 697,473
Less--Current portion................................. 260,536
--------
Capital lease obligations, net of current
portion.......................................... $436,937
========
</TABLE>
(b) Contingencies--From time to time, the Company may have certain
contingent liabilities that arise in the ordinary course of its business
activities. The Company accrues contingent liabilities when it is probable that
future expenditures will be made and such expenditures can be reasonable
estimated. In the opinion of management, there are no pending claims of which
the outcome is expected to result in a material adverse effect in the financial
position or results of operations of the Company.
(11) Capital Stock
(a) Redeemable Preferred Stock--As of June 30, 2000, the Company has
authorized a total of 96,632 shares of Class A redeemable preferred stock
(Class A Preferred Stock), of which 48,385 shares have been issued at a per
share price of $1,000. As discussed in Note 1(r), on March 27, 2000, the
Company entered into an exchange agreement with the holders of Class A
Preferred Stock whereby all shares of Class A Preferred Stock outstanding
immediately prior to the IPO will be exchanged for common stock. Prior to the
execution of this exchange agreement, the Class A Preferred Stock was entitled
to the following rights and preferences:
Redemption--The Company shall have the option to redeem, subject to
certain conditions, all or any portion of the Class A Preferred Stock
outstanding before an IPO or change in control, as defined. Upon the
occurrence of an IPO, the holders of a majority of the Class A Preferred
Stock can request redemption of the Class A Preferred Stock with the
proceeds from the offering. Upon a change in control, as defined, the Class
A Preferred Stock is redeemable at the option of the holder.
F-20
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
Dividends--The holders of Class A Preferred Stock are entitled to
receive cumulative dividends when and if declared by the Board of Directors
(the Board) of the Company. Dividends accrue from the date of the share
issuance at a daily compounded rate of 8% of the liquidation value ($1,000
per share) and are cumulative. Dividends are payable upon redemption of the
Class A Preferred Stock or liquidation of the Company. Due to the fact that
the Class A Preferred Stock is non-convertible, non-voting and redeemable
at the option of the holder upon the closing of an IPO or change in
control, the 8% dividend has been recorded as interest expense rather than
a reduction of stockholders' equity in the accompanying financial
statements. During the period from inception through June 30, 2000, the
Company recorded $2,558,434 of preferred stock dividends.
Voting Rights--Except under certain defined conditions and otherwise
required by applicable law, the Class A preferred stockholders shall have
no voting rights, provided that each holder of Class A Preferred Stock
shall be entitled to notice of all stockholders meetings.
Liquidation--In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, as defined, the holders of the
Class A Preferred Stock then outstanding will be entitled to $1,000 per
share plus all dividends that have accrued and any other dividends declared
but unpaid. Amounts remaining after payment to the Class A preferred
stockholders, if any, will be shared among all stockholders.
(b) Class B Convertible Preferred Stock--In May 2000, the Company authorized
and issued in a private placement 200,000 shares of Class B convertible
preferred stock (Class B Preferred Stock) at $10.00 per share for gross
proceeds of $2,000,000. The Class B Preferred Stock is entitled to the
following rights and preferences:
Redemption--In the event that any shares of capital stock are redeemed,
other than the redemption of Class A Preferred Stock in an IPO, the holders
of the Class B Preferred Stock can request redemption on terms similar with
the shares of capital stock redeemed by the Company. In the event of a
change in ownership, the holders of a majority of the Class B Preferred
Stock can request redemption at a price per share equal to the liquidation
value.
Conversion--Each share of Class B Preferred Stock is convertible into
one share of common stock, subject to certain adjustments. The conversion
price is adjusted in the event that the Company issues common stock at a
per share price below $10.00, excluding those shares of common stock
issuable upon the conversion or exchange of options or warrants outstanding
on May 26, 2000, or issued to GTCR. In the event of an IPO in which gross
proceeds exceed $20.0 million, all outstanding shares of Class B Preferred
Stock are mandatorily convertible.
Voting--Each share of Class B Preferred Stock is entitled to a number of
votes equal to the number of shares of common stock into which the Class B
Preferred Stock is then convertible.
Liquidation--In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the Company, as defined, the holders of the
Class B Preferred Stock then outstanding will be entitled to $10.00 per
share.
(c) Common Stock--The Company's Certificate of Incorporation, as amended,
authorizes the Company to issue up to 100,000,000 shares of $.001 par value
common stock. A portion of the shares issued are subject to the right of
repurchase by the Company at the original purchase price prior to vesting,
which generally occurs
F-21
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
over a period of four to five years from the issuance date until vesting is
complete (see Note 11(f)). As of June 30, 2000, the Company has reserved for
issuance the following shares of common stock:
<TABLE>
<S> <C>
1999 Stock Option Plan.......................................... 2,000,000
1999 Incentive Plan............................................. 22,666,666
Employee Stock Purchase Plan.................................... 500,000
----------
25,166,666
==========
</TABLE>
In addition, the Company has reserved an undefined number of shares of
common stock for the exchange of Class A Preferred Stock, the conversion of
Class B Preferred Stock and the conversion of the Renaissance Note, as the
number of shares to be issued is dependent upon future events.
(d) GTCR Investment--On March 23, 1999, the Company entered into a stock
purchase agreement with GTCR, as amended whereby GTCR would provide up to
$97,500,000 in equity financing to fund acquisitions and internal growth (the
GTCR Investment). The equity to be issued to GTCR is a combination of common
stock and Class A Preferred Stock. On November 24, 1999 this agreement was
amended to provide up to $65.3 million in cash equity financing and $32.2
million of subordinated debt financing (see Note 9). The Company is not
required to issue, and GTCR is not required to purchase, all of the shares of
common and preferred stock contemplated in the stock purchase agreement. Under
the agreement, upon the approval of the Board and at the request of GTCR, GTCR
may purchase up to 26,640,000 shares of common stock at a price of $0.13 per
share and up to 61,970 shares of Class A Preferred Stock at a price of $1,000
per share. Through June 30, 2000, GTCR has provided equity financing of
approximately $48,089,000, consisting of 26,640,000 shares of common stock and
44,759 shares of Class A Preferred Stock.
(e) Class A Preferred Stock Warrants--During the six months ended June 30,
2000, the Company issued 20,564 shares of Class A Preferred Stock to GTCR at
$1,000 per share for gross proceeds of approximately $20,564,000. In addition,
the Company issued warrants to purchase 2,477 shares of Class A preferred stock
at an exercise price of $.001 per share. The Company valued the warrants and
recorded interest expense of approximately $2,477,000.
(f) Restricted Common Stock--At various dates during the period from
inception (March 18, 1999) through December 31, 1999, the Company entered into
restricted common stock agreements with members of management and senior
management under which a total of 7,893,667 shares of common stock were issued
at prices ranging from $0.13 to $5.00 per share. In connection with the
reorganization of Original ZEFER and the acquisitions described in Note 4 to
the financial statements, the Company also issued as part of the purchase
consideration a total of 1,420,800 shares of restricted common stock. The
restricted common stock vests on various dates over a period of four to five
years; vesting accelerates partially upon an IPO and fully upon the sale or
liquidation of the Company, as defined. If an employee terminates employment
prior to vesting, the Company has the option to repurchase the unvested portion
of common stock at its original purchase price. During the six months ended
June 30, 2000, 258,666 shares were repurchased at cost which has been reflected
in the accompanying financial statements as treasury stock.
As consideration for the restricted common stock issued to management, the
employees paid cash and executed full recourse promissory notes payable to the
Company in the aggregate amount of $945,670 (the Subscription Notes), which
have been classified as subscriptions receivable in the accompanying financial
statements. The Subscription Notes bear interest at 5% per annum and all unpaid
principal and interest are due upon the fifth anniversary date. The
Subscription Notes are payable in full should the employee receive any
F-22
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
proceeds from the sale or transfer of the restricted common stock.
Additionally, the employees are required to make mandatory prepayments equal to
the total value of the equity purchased multiplied by a percentage calculated
as the amount of GTCR Investment made to date divided by the total GTCR
commitment of $97,500,000.
(g) Sales to Management--During the period from inception (March 18, 1999)
through June 30, 2000, the Company sold 683,488 shares of unrestricted common
stock to management at prices ranging from $0.13 to $0.29 per share and 1,149
shares of unrestricted Class A Preferred Stock at a price of $1,000 per share
for total proceeds of $1,260,844. As consideration for the unrestricted common
and preferred stock, the employees paid $103,388 in cash and issued promissory
notes payable to the Company in the amount of $1,157,456, which has been
classified as subscriptions receivable in the accompanying financial
statements.
(h) Deferred Compensation--In cases where options are granted or stock is
issued at a price below fair market value, the Company calculates compensation
as the difference between the fair market value, as determined by the Board
and/or an appraisal by an independent third party, and the exercise or issuance
price. The Company recognizes compensation expense over the vesting term of the
related instrument.
In connection with the issuance of restricted common stock to management
during 1999, the Company issued 1,327,667 shares at prices below the then
current fair market value, resulting in deferred compensation of $1,254,711
that will be charged to operations over the vesting term of the related
restricted common stock. During 1999, the Company granted stock options to
employees at prices below the then-current fair market value, resulting in
deferred compensation of $6,450,917 that will be charged to operations over the
vesting term of the underlying options. During the six months ended June 30,
2000, the Company granted stock options to employees and Advisory Board members
at prices below the then-current fair market value, resulting in deferred
compensation of $352,000.
(12) Stock Plans
(a) Equity Incentive Plans--In June 1999, the Company adopted the 1999 Stock
Option Plan (the Option Plan), which provides for granting up to 2,000,000
shares of common stock to employees, consultants and advisors of businesses or
entities that the Company acquires who, in the opinion of the Board, are in a
position to make a significant contribution to the success of the Company and
its subsidiaries. Options granted pursuant to the Option Plan will be non
qualified options.
In June 1999, the Company adopted the 1999 Incentive Plan (the Incentive
Plan). The Incentive Plan may be administered by the Board or by an option
committee, as defined (in either case, the Administrator), to grant incentive
stock options, nonqualified stock options, restricted stock, unrestricted
stock, convertible securities, performance awards and cash performance awards.
The Company has reserved a total of 22,666,666 shares of common stock for
future grant under the Incentive Plan. No more than $1,000,000 may be paid to
any individual with respect to any cash performance award and the maximum
number of shares of stock subject to other awards that may be delivered to any
person in any calendar year shall be 1,000,000 shares.
F-23
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
The following table summarizes stock option activity under the Company's
Option Plan and the Incentive Plan through June 30, 2000:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options price
--------- --------
<S> <C> <C>
Granted.................................................. 5,089,226 $1.36
Exercised................................................ -- --
Canceled................................................. (462,115) 0.78
--------- -----
Outstanding, December 31, 1999........................... 4,627,111 1.41
Granted.................................................. 3,702,441 10.99
Exercised................................................ -- --
Canceled................................................. (557,390) 3.22
--------- -----
Outstanding, June 30, 2000............................... 7,772,162 $5.88
========= =====
Exercisable, December 31, 1999........................... -- $ --
========= =====
Exercisable, June 30, 2000 .............................. 410,648 $2.03
========= =====
</TABLE>
The following table summarizes the weighted average grant date fair value
and weighted average exercise price of options granted during the period from
inception through December 31, 1999 and for the six months ended June 30, 2000.
For purposes of the table below, the weighted average grant date fair value was
computed using the Black-Scholes option pricing model.
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Fair Exercise
Year Ended December 31, 1999 Shares Value Price
---------------------------- --------- -------- --------
<S> <C> <C> <C>
Exercise price equals fair value................. 2,000 $6.31 $10.00
Exercise price greater than fair value........... 2,053,126 0.17 0.75
Exercise price less than fair value.............. 3,034,100 3.00 3.00
--------- ----- ------
5,089,226 $1.84 $ 1.36
========= ===== ======
<CAPTION>
Six Months Ended June 30, 2000
------------------------------
<S> <C> <C> <C>
Exercise price equals fair value................. 3,698,441 6.95 $11.00
Exercise price greater than fair value........... -- -- --
Exercise price less than fair value.............. 4,000 10.33 1.00
--------- ----- ------
3,702,441 $6.95 $10.99
========= ===== ======
</TABLE>
The following table summarizes information regarding the Company's stock
options outstanding and exercisable at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------ ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Number Life Price Number Price
-------- --------- ----------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.75-$ 1.50 3,106,666 9.1 $ 0.80 337,813 $ 0.75
$ 2.25-$ 3.75 805,799 9.4 2.84 25,335 2.25
$ 5.00-$ 7.75 281,666 9.4 5.48 -- --
$10.00-$11.00 3,578,031 9.7 11.00 47,500 11.00
--------- ------ ---------- --------
7,772,162 $ 5.88 410,648 $ 2.03
========= ====== ========== ========
</TABLE>
F-24
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
(b) Employee Stock Purchase Plan--In March 2000, the Company adopted the
2000 Employee Stock Purchase Plan (the Purchase Plan), which provides for the
issuance of up to 500,000 shares of common stock to participating employees at
a purchase price equal to 85% of the per share closing price of the common
stock on the first or last day of the offering period, as defined, whichever is
lower. Participating employees may contribute up to 10% of their salary to the
Purchase Plan.
(c) Fair Value Disclosures--The Company applies the measurement principles
of APB Opinion No. 25 in accounting for issuances of employee stock options and
SFAS No. 123 for all other stock options. Had compensation expense for employee
stock options granted been determined based on the fair value at the date of
grant as prescribed by SFAS No. 123, the net loss and net loss per share for
the period from inception through December 31, 1998, the four months ended
April 30, 1999, the period from inception through December 31, 1999, the period
from inception through June 30, 1999 and the six months ended June 30, 2000,
respectively, would have been increased to the pro forma amounts indicated
below.
<TABLE>
<CAPTION>
Original ZEFER The Company
------------------------ ---------------------------------------
December 31, April 30, December 31, June 30, June 30,
1998 1999 1999 1999 2000
------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net loss--
As reported........... $(555,176) $(2,280,477) $(31,149,915) $(2,544,584) $(40,008,547)
========= =========== ============ =========== ============
Pro forma............. $(555,631) $(2,280,931) $(31,533,098) $(2,545,194) $(43,169,725)
========= =========== ============ =========== ============
Basic and diluted net
loss per share--
As reported........... $ (1.16) $ (0.13) $ (1.27)
============ =========== ============
Pro forma............. $ (1.18) $ (0.13) $ (1.37)
============ =========== ============
</TABLE>
For the periods indicated above, the Company calculated the minimum fair
value of each option grant on the date of grant using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
Original ZEFER The Company
---------------------- ------------------------------
December 31, April 30, December 31, June 30, June 30,
1998 1999 1999 1999 2000
------------ --------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Risk-free interest
rates.................. 5.6% 5.6% 6.1% 6.1% 6.4%
Expected lives (in
years)................. 5.0 5.0 5.0 5.0 5.0
Dividend yield.......... -- -- -- -- --
Expected volatility..... -- -- 70.0% 70.0% 70.0%
</TABLE>
Based on these assumptions, the minimum fair value of options calculated
using the Black-Scholes option pricing model, granted in the periods indicated
above was $2,272, $0, $9,322,806, $52,891 and $25,701,856, respectively. No
options were granted by Original ZEFER in the four months ended April 30, 1999.
Because the determination of fair value of all options granted after such times
as the Company becomes a public entity will include an expected volatility
factor in addition to the factors described in the above table, the above
results may not be representative of future periods.
(13) Authorized Capital Stock--Original ZEFER
(a) Redeemable Convertible Preferred Stock--Original ZEFER had authorized a
total of 20,000 shares of redeemable convertible preferred stock, of which
12,000 shares were designated Series A and 8,000 shares
F-25
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including data applicable to unaudited periods)
were designated Series B. At December 31, 1998 and April 30, 1999, 12,000
shares of Series A were issued and outstanding with an aggregate liquidation
value of $1,200,000, and no shares of Series B were issued or outstanding. The
Series A was convertible to Class B common stock of Original ZEFER on a one-
for-one basis and had voting rights. The Series A was entitled to receive
quarterly dividends of $1.50 per share, whether or not declared by the Board.
The Series A was redeemable on or before March 25, 2003.
(b) Common Stock--Original ZEFER had authorized 168,000 shares of $.01 par
value common stock, of which 47,400 and 57,501 shares were issued and
outstanding at December 31, 1998 and April 30, 1999, respectively. All shares
of Original ZEFER common stock were subject to stock restriction agreements
whereby Original ZEFER could repurchase unvested shares of common stock for the
original purchase price of $.01 per share in the event of termination of
employment by the holder. At December 31, 1998 and April 30, 1999, 31,300
shares of common stock were vested.
In connection with the acquisition of Original ZEFER by the Company on April
30, 1999, all outstanding shares of Series A redeemable convertible preferred
stock and common stock were exchanged for the purchase consideration described
in Note 1 to the financial statements.
(14) Employee Benefit Plans
The Company has a 401(k) savings plan (the Savings Plan) that qualifies as a
defined contribution arrangement under Section 401(a), 401(k) and 501(a) of the
Internal Revenue Code. Under the Savings Plan, participating employees may
defer a percentage (not to exceed 25%) of their eligible pretax earnings up to
the Internal Revenue Service's annual contribution limit. All employees on the
U.S. payroll of the Company are eligible to participate in the Savings Plan.
The Company will determine its contributions, if any, based on its current
profits and/or retained earnings; however, no contributions have been made
since the inception of the Savings Plan.
(15) Valuation and Qualifying Accounts
A rollforward of the Company's allowance for doubtful accounts is as
follows:
<TABLE>
<CAPTION>
Balance at Balance at
Beginning of End of
Period Additions Deductions Period
------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
Period from inception through
December 31, 1998
(Original ZEFER)............ $ -- $ -- $ -- $ --
======== ======== ========= ========
Four months ended April 30,
1999 (Original ZEFER)....... $ -- $ -- $ -- $ --
======== ======== ========= ========
Period from inception through
December 31, 1999 (the Com-
pany)....................... $ -- $312,199 $ (31,962) $280,237
======== ======== ========= ========
Six months ended June 30,
2000........................ $280,237 $257,494 $(167,467) $370,264
======== ======== ========= ========
</TABLE>
(16) Other Events
(a) Subordinated Debt Financing--On July 10, 2000, August 2, 2000 and August
9, 2000, the Company borrowed an additional $3,975,000 of subordinated debt
under its agreement with GTCR. See Note 9 for the terms of the subordinated
debt.
(b) Issuance of Class A Preferred Stock with Warrants--On July 10, 2000,
August 2, 2000 and August 9, 2000, the Company issued to GTCR and management an
additional 8,232 shares of Class A Preferred Stock at $1,000 per share for
gross proceeds of approximately $8,232,000. In addition, the Company issued to
GTCR warrants to purchase 967 shares of Class A Preferred Stock at an exercise
price of $.001 per share. The Company valued the warrants at approximately
$967,000 and will record this amount as interest expense during the quarter
ended September 30, 2000. See Note 11 for the Class A Preferred Stock rights
and preferences.
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Spyplane, LLC:
We have audited the accompanying balance sheet of Spyplane, LLC (a
California limited liability company) as of December 31, 1998, and the related
statements of income, members' equity and cash flows for the period from
inception (May 7, 1998) to December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Spyplane, LLC as of
December 31, 1998, and the results of its operations and its cash flows for the
period from inception (May 7, 1998) to December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
October 4, 1999
F-27
<PAGE>
SPYPLANE, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash................................................. $33,859 $ 48,787
Accounts receivable.................................. 15,650 258,530
------- --------
Total current assets............................... 49,509 307,317
Property and Equipment, Net
Computer equipment................................... 42,938 53,486
Furniture and fixtures............................... 9,664 9,664
------- --------
52,602 63,150
Less--Accumulated depreciation....................... 4,868 11,087
------- --------
47,734 52,063
------- --------
$97,243 $359,380
======= ========
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts payable..................................... $13,847 $ 11,174
Accrued compensation................................. 9,975 --
Accrued accounts payable............................. -- 7,107
Accrued revenue reserve.............................. -- 20,000
Unearned revenue..................................... 8,566 --
------- --------
Total current liabilities.......................... 32,388 38,281
Members' Equity........................................ 64,855 321,099
------- --------
$97,243 $359,380
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
SPYPLANE, LLC
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Period from
Inception
(May 7, 1998) Three Months
to Ended
December 31, March 31,
1998 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Revenues............................................. $314,675 $375,159
Operating Expenses:
Cost of services................................... 66,006 46,627
Sales and marketing................................ 8,437 5,452
General and administrative......................... 28,657 23,955
Depreciation and amortization...................... 4,868 6,219
-------- --------
Total operating expenses......................... 107,968 82,253
-------- --------
Income from operations........................... 206,707 292,906
Interest Expense..................................... 76 307
-------- --------
Net income....................................... $206,631 $292,599
======== ========
</TABLE>
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
Members'
Equity
---------
<S> <C>
Balance, May 7, 1998 (inception)..................................... $ --
Net income......................................................... 206,631
Members' draw...................................................... (141,776)
---------
Balance, December 31, 1998........................................... 64,855
Net income......................................................... 292,599
Members' draw...................................................... (36,355)
---------
Balance, March 31, 1999 (unaudited).................................. $ 321,099
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
SPYPLANE, LLC
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Period from
Inception
(May 7, 1998) Three Months
to Ended
December 31, March 31,
1998 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income......................................... $206,631 $292,599
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation expense.............................. 4,868 6,219
Changes in current assets and liabilities--
Accounts receivable.............................. (15,650) (242,880)
Accounts payable................................. 13,847 (2,673)
Accrued expenses................................. 9,975 17,132
Unearned revenue................................. 8,566 (8,566)
-------- --------
Net cash provided by operating activities....... 228,237 61,831
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment................ (52,602) (10,548)
-------- --------
Cash Flows from Financing Activities:
Members' draw...................................... (141,776) (36,355)
-------- --------
Net Increase In Cash................................ 33,859 14,928
Cash, Beginning of Period........................... -- 33,859
-------- --------
Cash, End of Period................................. $ 33,859 $ 48,787
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest............................. $ 148 $ 316
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
SPYPLANE, LLC
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)
(1) Operations and Sale of the Company
Spyplane, LLC (Spyplane) began operations as a California limited liability
company during May 1998. Spyplane offers integrated Internet services,
including brand creation and Web site development, to its clients.
Spyplane is subject to risks common to rapidly growing, technology-based
companies, including limited operating history, dependence on key personnel,
rapid technological change, competition from substitute services and larger
companies and the need for continued market acceptance of Spyplane's services.
On May 14, 1999, ZEFER Corp., Inc. (ZEFER) purchased all of the LLC Units of
Spyplane from the unit holders for $2,005,000 (the Acquisition) plus
acquisition costs of approximately $100,000. The Acquisition was accounted for
using the purchase method of accounting in accordance with the requirement of
Accounting Principles Board (APB) Opinion No. 16, Business Combinations, and,
accordingly, Spyplane's results of operations are included in those of ZEFER
beginning on May 14, 1999. The total consideration consisted of 200,000 shares
of ZEFER common stock, a promissory note in the amount of $980,000 and $1.0
million in cash.
(2) Summary of Significant Accounting Policies
(a) Interim Financial Statements The accompanying balance sheet as of March
31, 1999 and the statements of operations, cash flows and members' equity for
the three months ended March 31, 1999 are unaudited, but, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of results for the interim
period. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted, although Spyplane believes that the disclosures
included are adequate to make the information presented not misleading. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the year.
(b) Management 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.
(c) Revenue Recognition Spyplane's revenues are derived from professional
services that are generally provided to clients on a fixed-fee basis. Revenues
from branding and Web site design, development and implementation contracts are
recognized primarily on the percentage-of-completion method. Contracts
generally extend over a two-to-four month period. The cumulative impact of any
revision in estimates of the percent complete is reflected in the period in
which the changes become known. When the revised estimates indicate a loss,
such loss is currently provided for in its entirety. Revenues exclude
reimbursed expenses charged to and collected from clients. Unearned revenue
relates to advanced service billings.
(d) Depreciation Spyplane provides for depreciation by charging to
operations amounts that allocate the cost of property and equipment over their
estimated useful lives using the straight-line method, using an estimated
useful life of 2 years for computers and equipment and five years for furniture
and fixtures.
(e) Income Taxes Spyplane is treated as a limited liability company for
federal and state income tax purposes, whereby the membership owners are taxed
on their proportionate share of Spyplane's income. As a result, Spyplane does
not need to provide for federal or state income taxes.
F-31
<PAGE>
SPYPLANE, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
(f) Concentration of Credit Risk Statement of Financial Accounting Standards
(SFAS) No. 105, Disclosure of Information About Financial Instruments with Off-
Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Spyplane has no significant off-balance-sheet risk or credit
risk concentrations. Financial instruments that subject Spyplane to credit risk
consist primarily of accounts receivable. Spyplane has not experienced any
significant losses related to its accounts receivable. During the period from
inception to December 31, 1998 and the three months ended March 31, 1999, the
Company had four significant customers representing 79% and 89% of the
revenues, respectively. As of the December 31, 1999 and March 31, 1999, these
same customers had balances representing 98% and 99% of accounts receivable,
respectively.
(g) Financial Instruments Financial instruments consist primarily of cash,
accounts receivable and accounts payable. The estimated fair value of these
instruments approximates their carrying value at December 31, 1998 and March
31, 1999 because of the short-term nature of these instruments.
(h) Long-lived Assets Spyplane's long-lived assets consist primarily of
property and equipment. Spyplane has assessed the realizability of these assets
and believes that there is no material impairment of these assets to date.
(i) Comprehensive Income Comprehensive income represents net income plus the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. The only component of
comprehensive income for the period from inception to December 31, 1998 and for
the three months ended March 31, 1999 is net income.
(j) New Accounting Standards In June 1998, 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 effective for all fiscal quarters beginning with the quarter ending
September 30, 2000. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. The Company will adopt SFAS No.
133 in its quarter ending September 30, 2000, and does not expect such adoption
will have an impact on the Company's results of operations, financial position
or cash flows.
(3) Commitments
Spyplane leases its facility under an operating lease agreement that expires
on November 29, 2000. Future minimum rental payments due under this agreement
are approximately as follows:
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
Year Ending December 31,
1999............................................................... $ 71,200
2000............................................................... 105,600
--------
Total future minimum lease payments.............................. $176,800
========
</TABLE>
Total rental expense included in the accompanying statements of income was
approximately $18,400 for the period from inception to December 31, 1998 and
$5,400 for the unaudited three months ended March 31, 1999.
F-32
<PAGE>
SPYPLANE, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
(4) Members' Equity
At December 31, 1998, Spyplane's membership consisted of two members,
Gregory Hipwell and Jason Zada. Each member owned a 50% share of Spyplane.
Income is allocated to each of the two members equally, based on the operating
agreement. Total members' draw was $141,776 for the period from inception to
December 31, 1998 and $36, 355 for the unaudited three months ended March 31,
1999.
(5) Line of Credit
On March 18, 1999, Spyplane established a line-of-credit agreement with a
bank in the amount of $10,000. Spyplane has not borrowed against the line of
credit through October 4, 1999.
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Divisions of Renaissance:
We have audited the accompanying combined balance sheets of Neoglyphics
Media Corporation (an Illinois corporation) and Customer Management Solutions
(a division of Renaissance Worldwide, a Massachusetts corporation),
collectively the Company, as of December 31, 1998 and May 28, 1999, and the
related combined statements of operations and parent company equity (deficit)
and cash flows for the three months ended March 31, 1998, the nine-months ended
December 31, 1998, and the five months ended May 28, 1999. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and May 28, 1999, and the results of its operations and cash
flows for the three months ended March 28, 1998, the nine months ended December
31, 1998, and the five months ended May 28, 1999, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
November 19, 1999
F-34
<PAGE>
DIVISIONS OF RENAISSANCE
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, May 28,
1998 1999
------------ ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 311,564 $ 56,773
Accounts receivable, net of allowance for doubtful
accounts of $112,000 and $114,000 at December 31,
1998 and May 28, 1999, respectively................ 6,208,444 4,525,283
Due from related parties............................ -- 531,637
Prepaid expenses and other current assets........... 57,078 186,416
---------- ----------
Total current assets.............................. 6,577,086 5,300,109
Property and Equipment:
Computer equipment and software..................... 1,494,238 1,542,664
Office furniture and equipment...................... 137,845 164,323
Leasehold improvements.............................. 211,550 211,550
---------- ----------
1,843,633 1,918,537
Less-Accumulated depreciation....................... 522,739 712,404
---------- ----------
1,320,894 1,206,133
Other Assets.......................................... 47,975 42,877
---------- ----------
$7,945,955 $6,549,119
========== ==========
LIABILITIES AND PARENT COMPANY EQUITY (DEFICIT)
Current Liabilities:
Line of credit...................................... $1,734,489 $1,747,558
Current portion of long-term debt................... 89,085 35,143
Accounts payable.................................... -- 39,138
Due to related party................................ 759,683 4,053,001
Accrued expenses.................................... 2,462,702 2,023,636
Deferred revenue.................................... 49,476 55,073
---------- ----------
Total current liabilities......................... 5,095,435 7,953,549
Long-term Debt, net of current portion................ 251,558 262,755
Commitments (Note 6)
Parent Company Equity (Deficit) (Note 7).............. 2,598,962 (1,667,185)
---------- ----------
$7,945,955 $6,549,119
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-35
<PAGE>
DIVISIONS OF RENAISSANCE
COMBINED STATEMENTS OF OPERATIONS AND PARENT COMPANY EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Three Months Nine Months Five Months
Ended Ended Ended
March 31, December 31, May 28,
1998 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Revenues.............................. $2,348,418 $11,449,911 $ 3,886,424
Operating Expenses:
Cost of services.................... 1,437,832 8,618,164 4,781,116
Hiring and training................. 13,410 182,266 160,165
Selling and marketing............... 409,758 3,715,967 1,012,552
General and administrative.......... 1,412,543 1,771,100 2,650,780
---------- ----------- -----------
Total operating expenses.......... 3,273,543 14,287,497 8,604,613
---------- ----------- -----------
Loss from operations.............. (925,125) (2,837,586) (4,718,189)
Interest Expense...................... 8,070 129,640 86,474
Other Expense......................... -- 293,824 238,054
---------- ----------- -----------
Net loss.......................... $ (933,195) $(3,261,050) $(5,042,717)
========== =========== ===========
Parent Company Equity, beginning of
period............................... $1,995,057 $ 1,339,000 $ 2,598,962
Net Loss.............................. (933,195) (3,261,050) (5,042,717)
Net Transfers from Parent............. 277,138 4,521,012 776,570
---------- ----------- -----------
Parent Company Equity (Deficit), end
of period............................ $1,339,000 $ 2,598,962 $(1,667,185)
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-36
<PAGE>
DIVISIONS OF RENAISSANCE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Nine Months Five Months
Ended Ended Ended
March 31, December 31, May 28,
1998 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss............................... $(933,195) $(3,261,050) $(5,042,717)
Adjustments to reconcile net income to
net cash used in operating activities--
Depreciation and amortization......... 106,936 233,617 189,665
Changes in operating assets and
liabilities--
Accounts receivable.................. 193,197 (3,241,444) 1,683,161
Due from related parties............. 23,811 -- (531,637)
Prepaid expenses and other current
assets.............................. 60,142 (38,078) (129,338)
Due to related party................. (93,100) 759,683 3,293,318
Accounts payable..................... (103,609) (118,000) 39,138
Accrued expenses..................... 212,495 1,816,702 (439,066)
Deferred revenue..................... (10,434) 49,476 5,597
Deferred income taxes................ (257,679) (497,698) --
--------- ----------- -----------
Net cash used in operating
activities......................... (801,436) (4,296,792) (931,879)
--------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment.... (265,071) (141,511) (74,904)
Decrease in other assets............... 88,461 3,025 5,098
--------- ----------- -----------
Net cash used in operating
activities......................... (176,610) (138,486) (69,806)
--------- ----------- -----------
Cash Flow from Financing Activities:
Net borrowings (payments) on debt...... 295,214 30,643 (42,745)
Net borrowings on line of credit....... 304,000 730,489 13,069
Contributions by parent................ 277,138 4,521,012 776,570
--------- ----------- -----------
Net cash provided by financing
activities......................... 876,352 5,282,144 746,894
--------- ----------- -----------
Net (Decrease) Increase in Cash and Cash
Equivalents............................ (101,694) 311,564 (254,791)
Cash and Cash Equivalents, beginning of
period................................. 101,694 -- 311,564
--------- ----------- -----------
Cash and Cash Equivalents, end of
period................................. $ -- $ 311,564 $ 56,773
========= =========== ===========
Supplemental Disclosures of Cash Flow
Information:
Cash paid for interest................. $ 34,428 $ 103,282 $ 86,474
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-37
<PAGE>
DIVISIONS OF RENAISSANCE
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) Operations and Sale of the Company
On May 28, 1999, ZEFER Corp. (ZEFER) completed its acquisition of the
Internet development and applications business of Renaissance Worldwide, Inc.,
a Massachusetts corporation (Renaissance). The acquired businesses consist of
Neogplyphics Media Corporation (NMC) and Customer Management Solutions (CMS),
collectively, the Divisions of Renaissance or the Company.
NMC was organized under the laws of the state of Illinois in February 1995,
and is an Internet development and applications company which develops Web
sites under contractual agreements with various customers located primarily in
the United States. CMS was organized as an operating division of Renaissance in
March of 1998, and is an Internet development and applications company that
develops Web-based front-office systems for various customers located primarily
in the United States.
In May 1999, ZEFER acquired certain net assets of the Company for
approximately $12.3 million. The consideration consisted of $10 million of
cash, 100,000 shares of ZEFER common stock valued at $50,000, a promissory note
of $2 million, plus acquisition costs of approximately $160,000. The
acquisition was accounted for using the purchase method of accounting, in
accordance with APB Opinion No. 16. The purchase price was allocated based on
the estimated fair market value of assets and liabilities assumed on the date
of acquisition.
The accompanying combined financial statements reflect a carveout of the
Company from the consolidated financial statements of Renaissance. Prior to the
acquisition by ZEFER, the Divisions of Renaissance were operated as separate
divisions. The statements of operations for the Company reflects allocations of
the cost of shared facilities and certain administrative costs. Such costs and
expenses have been allocated to the Company based on actual usage or other
methods that approximate actual usage. Management believes that the allocation
methods are reasonable. The financial information included herein may not
necessarily reflect the financial position, results of operations or cash flows
of the Company in the future, nor what the financial position, results of
operations or cash flows would have been had it been a separate, stand-alone
company throughout the periods covered.
(2) Summary of Significant Accounting Policies
The accompanying combined financial statements reflect the application of
certain significant accounting policies, as described in this note and
elsewhere in the notes to combined financial statements.
(a) Management 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 periods. Actual results could differ from those estimates.
(b) Cash and Cash Equivalents Cash equivalents are stated at cost, which
approximates fair market value. The Company considers highly liquid investments
with original maturities of 90 days or less to be cash equivalents. As of
December 31, 1998 and May 28, 1999, cash equivalents consisted of money market
accounts and commercial paper that are readily convertible to cash.
(c) Fair Value of Financial Instruments Financial instruments consist
principally of cash and cash equivalents, accounts receivable, and accounts
payable, line of credit and long-term debt and obligations. The estimated fair
value of these instruments approximates their carrying value.
F-38
<PAGE>
DIVISIONS OF RENAISSANCE
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(d) Revenue Recognition Revenues are derived from professional services,
which are provided to clients on a time and materials or fixed-fee basis.
Revenues pursuant to time and materials contracts are generally recognized as
services are performed. Revenues pursuant to fixed-fee contracts to provide
services are recognized using the percentage-of-completion method (based on the
ratio of costs included to total estimated project costs). Contracts generally
extend over a three-to-six-month period. The cumulative impact of any revision
in estimates of the percent complete is reflected in the period in which
changes become known. When the revised estimates indicate a loss, such loss is
currently provided for in its entirety. Revenues exclude reimbursed expenses
charged to and collected from clients. Deferred revenue relates to advanced
service billings.
(e) Due from (to) Related Party Due from (to) related parties consists of
amounts due from (to) Renaissance and other divisions within Renaissance.
(f) Property and Equipment Depreciation is provided for using the straight-
line method, by charges to operations in amounts estimated to allocate the cost
of property and equipment over their estimated useful life of 3-5 years for
computer equipment and software, 5-10 years for office furniture and equipment
and the life of the lease for leasehold improvements.
(g) Long-Lived Assets The Company evaluates the realizability of its long-
lived assets based on profitability and cash flow expectations for the related
asset. Management believes that, as of each of the balance sheet dates
presented, none of the Company's long-lived assets was impaired.
(h) Concentration of Credit Risk The Company has no significant off-balance
sheet concentration of credit risks such as foreign exchange contracts, options
contracts or other foreign hedging arrangements. Financial instruments that
potentially expose the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, accounts receivable, due from (to)
related parties, and long-term debt. Concentrated credit risk with respect to
accounts receivable is limited to certain customers to whom the Company makes
substantial sales. During the three months ended March 31, 1998, the nine
months ended December 31, 1998 and the five months ended May 28, 1999, the
Company had three, four and two customers representing 45%, 56% and 22% of the
revenues, respectively. As of December 31, 1998 and May 28, 1999, these same
customers had balances representing 53% and 19% of accounts receivable,
respectively.
(i) Earnings per Share SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. As the Company does not have any common stock
or potential common stock during the periods presented, as the Company is
funded through investments by parent, the Company has not disclosed earnings
per share.
(j) Comprehensive Income SFAS No. 130, Reporting Comprehensive Income,
establishes standards for reporting comprehensive income and its components in
the financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. The only component of
comprehensive income (loss) of the Company for the periods presented is net
income (loss).
(k) Disclosure About Segment of an Enterprise and Related Information The
Company views its operations and business as principally one segment, Web site
design. Through May 28, 1999, substantially all of the Company's operations and
assets have been derived from and are located in the U.S.
(l) New Accounting Standards In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments
F-39
<PAGE>
DIVISIONS OF RENAISSANCE
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. Pursuant to SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133, SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 is
not expected to have a material impact on the Company's financial statements.
(3) Income Taxes
For the periods presented, the results of the Company were included in the
consolidated tax return of Renaissance. The Company's policy is to record
income taxes as if it were a separate company. Accordingly, no tax benefit has
been recorded for the net losses because of uncertainty of future realization.
A full valuation allowance was recorded against the Company's net operating
loss carryforwards.
(4) Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, May 28,
1998 1999
------------ ----------
<S> <C> <C>
Salaries and related costs.......................... $1,467,045 $ 980,358
Professional and consulting fees.................... 687,734 611,945
Other............................................... 307,923 213,240
---------- ----------
$2,462,702 $1,805,543
========== ==========
</TABLE>
(5) Long-term Debt
(a) Line of Credit The Company had a line-of-credit agreement with a bank
for $2,000,000 dated December 31, 1998, which was collateralized by a
promissory note and security agreement covering substantially all assets of the
Company. The note bore interest at prime (7.75% at May 28, 1999) plus 1%. The
note matured on June 30, 1999. As of December 31, 1998 and May 28, 1999, loans
of $1,734,489 and $1,747,558 were outstanding on this line of credit,
respectively. This loan was repaid in full by Renaissance in June 1999.
(b) Installment Note Payable The Company also had an installment note
payable agreement with a bank pursuant to which they could borrow up to
$300,000. Monthly installments of principal and interest are based on the
amount drawn with a maximum monthly payment of $6,301. Final payment is due
June 30, 2000. The note is collateralized by substantially all assets of NMC
and bears interest at prime (8.75% at May 28, 1999) plus 1%. As of December 31,
1998 and May 28, 1999, a principal balance of $283,222 and $262,755 was
outstanding on this note. This note was repaid in full by Renaissance in June
1999.
(6) Commitments
The Company leases its office facility and equipment under noncancelable
operating leases that expire at various dates through December 31, 2002. Future
minimum lease payments are approximately $74,000 as of May 28, 1999, and extend
through 2002.
Rent expense included in the accompanying statements of operations was
approximately $89,000, $411,000 and $243,000 for the three months ended March
31, 1998, the nine months ended December 31, 1998 and the five months ended May
28, 1999, respectively.
F-40
<PAGE>
DIVISIONS OF RENAISSANCE
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(7) Parent Company Equity (Deficit)
The financial statements of the Company have been derived from the
consolidated financial statements of Renaissance. Parent Company equity
represents the net assets (liabilities) of the Company.
(8) 401(k) Plan
Effective January 1997, NMC established a deferred compensation plan under
Section 401(k) of the Internal Revenue Code, covering substantially all
employees. Under the plan, employees may elect to defer up to 15% of their
salary, subject to the Internal Revenue Code limits. NMC may make a matching
contribution, as well as a discretionary contribution. As of July 1, 1998 all
contributions under the plan were ceased, in conjunction with the acquisition
of NMC by Renaissance. NMC did not elect to make any matching contributions or
discretionary contribution under the plan for fiscal 1998.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Neoglyphics Media Corporation:
We have audited the accompanying statement of financial position of
Neoglyphics Media Corporation as of December 31, 1997, and the related
statements of income and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Neoglyphics Media
Corporation at December 31, 1997, and the results of its operation and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
As described in Note 2 to the financial statements, the Company changed its
method of recognizing revenue under fixed-fee contracts.
Katch, Tyson & Company
Northfield, Illinois
March 12, 1998
F-42
<PAGE>
NEOGLYPHICS MEDIA CORPORATION
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
----
<S> <C>
ASSETS
Current Assets:
Cash (Note 1)...................................................... $ 101,694
Accounts Receivable (Notes 3 and 5)................................ 2,655,542
Less--Allowance for Doubtful Account (Note 1)...................... 56,881
----------
2,598,661
Costs and estimated earnings in excess of billings on uncompleted
contracts (Notes 1 and 6)......................................... 561,536
Due from affiliate (Note 4)........................................ 17,456
Due from officer................................................... 6,355
Prepaid expenses................................................... 79,142
----------
Total current assets.............................................. 3,364,844
Properties (Note 1):
Computer equipment................................................. 889,913
Office furniture and equipment..................................... 258,655
Vehicle............................................................ 28,701
----------
Total............................................................. 1,177,269
Less--Accumulated depreciation..................................... 182,186
----------
Undepreciated cost................................................ 995,083
Unamortized computer software...................................... 138,054
Unamortized leasehold improvements................................. 81,728
----------
Total Properties.................................................. 1,214,865
Other Assets:
Deposits........................................................... 43,854
Unamortized software development costs (Notes 1 and 7)............. 52,531
Intangible assets (Note 1)......................................... 43,076
----------
Total other assets................................................ 139,461
----------
Total assets (Note 8)............................................. $4,719,170
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable--Bank (Note 8)........................................ $ 700,000
Current maturities of long-term indebtedness (Notes 10 and 11)..... 13,386
Note payable--Officer (Note 9)..................................... 93,100
Accounts payable................................................... 221,609
Accrued payroll and expenses (Notes 9 and 11)...................... 433,505
Billing in excess of costs and estimated earnings on uncompleted
contracts (Notes 1 and 6)......................................... 10,434
Accrued income taxes (Note 1)...................................... 200,978
Deferred income taxes (Notes 1 and 12)............................. 1,038,869
----------
Total current liabilities......................................... 2,711,881
Long-Term Indebtedness:
Obligation under capital lease (Notes 10 and 11)................... 1,400
Deferred income taxes (Notes 1 and 12)............................. 50,832
----------
Total long-term indebtedness...................................... 52,232
----------
Total liabilities................................................. 2,764,113
Stockholders' Equity:
Common stock--
Authorized--18,000,000 shares
Issued and outstanding--16,888,500 shares, no par value (Notes 1
and 14)........................................................... 26,885
Additional paid in capital......................................... 34,874
Retained earnings:
Balance--Beginning of year (2)..................................... 598,610
Add--Net income for the year (exhibit b)........................... 1,294,688
Balance--End of year.............................................. 1,893,298
----------
Total stockholders' equity........................................ 1,955,057
----------
Total liabilities and stockholders' equity........................ $4,719,170
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
NEOGLYPHICS MEDIA CORPORATION
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Net Sales (Notes 1, 2 and 3)........................................ $9,539,217
Direct Costs........................................................ 4,461,044
----------
Gross profit.................................................... 5,078,173
Operating Expenses:
Selling........................................................... 592,900
General and administrative........................................ 1,831,050
----------
Total operating expenses........................................ 2,423,950
----------
Net income from operations...................................... 2,654,223
Other (Income) Expense:
Interest expense.................................................. 38,640
Miscellaneous income.............................................. (4,658)
----------
Total other (income) expense.................................... 33,982
----------
Net income before provision for income taxes.................... 2,620,241
Provision for Income Taxes (Note 1):
Current income taxes.............................................. 235,852
Deferred income taxes (Note 12)................................... 1,089,701
----------
Total provision for income taxes................................ 1,325,553
----------
Net income (Exhibit A).......................................... $1,294,688
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
NEOGLYPHICS MEDIA CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Cash flows from operating activities:
Net income....................................................... $ 1,294,688
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 196,636
Change in provision for bad debts............................... 21,737
Deferred income taxes........................................... 1,089,701
Tax provision on the exercise of stock options.................. 34,874
(Increase) decrease in assets:
Accounts receivable............................................ (1,336,168)
Due from affiliate............................................. 5,020
Due from officer............................................... (6,355)
Costs and estimated earnings in excess of billings on
uncompleted contracts......................................... (561,536)
Prepaid expenses............................................... (76,294)
Deposits....................................................... (26,366)
Increase (decrease) in liabilities:
Accounts payable............................................... 112,118
Accrued payroll and expenses................................... 51,652
Accrued income taxes........................................... 200,978
Billings in excess of costs and estimated earnings on
uncompleted contracts......................................... (94,322)
-----------
Total adjustments............................................. (388,325)
-----------
Net cash provided by operating activities..................... 906,363
Cash flows from investing activities:
Purchase of properties and computer software..................... (887,013)
Software development costs....................................... (55,621)
Trademarks costs................................................. (12,465)
-----------
Net cash (used in) operating activities....................... 955,099
Cash flow from financing activities:
Proceeds from issuance of long-term debt......................... 5,850
Net borrowing (payments) on line of credit....................... 268,000
Principal payments on long-term debt............................. (90,607)
Cash proceeds from exercise of stock options..................... 6,885
-----------
Net cash provided by financing activities..................... 190,128
-----------
Net increase in cash and cash equivalents..................... 141,392
Cash and Cash Equivalents--Beginning of period.................... (39,698)
-----------
Cash and Cash Equivalents--end of period.......................... $ 101,694
===========
Supplemental disclosures of cash flow information:
Cash paid during the year for--Interest.......................... $ 27,068
===========
</TABLE>
Disclosure of Accounting Policy:
For purposes of the statements of cash flows, the company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents.
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
NEOGLYPHICS MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(1) Summary of Significant Accounting Policies
(a) Nature of Operations The Company, which began operations in February,
1995, develops websites under contractual agreements with various clients
located primarily in the United States.
(b) 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 amount of revenue and
expenses during the reported period. Actual results could differ from those
estimates.
(c) Cash Equivalents The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
(d) Allowance for Doubtful Accounts The Company maintains reserves for
potential credit losses, and such losses have been within management's
expectations.
(e) Properties Properties, which are stated at cost, are being depreciated
or amortized over the estimated useful lives of the assets on the straight-line
method. Estimated useful lives of properties are as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Computer equipment................................................... 5
Office furniture and equipment....................................... 5-10
Vehicle.............................................................. 5
Computer software.................................................... 3
Leasehold improvements............................................... 5
</TABLE>
Due to inherent technological change in the computer industry, the period
over which computer equipment and software is being depreciated and amortized
may have to be accelerated. Depreciation and amortization of properties amounts
to $189,611 for the year ended December 31, 1997.
(f) Intangibles Intangible assets are being amortized over the estimated
useful lives of the assets on the straight-line method. Estimated useful lives
of intangibles range from five to ten years. Amortization of intangibles
amounts to $3,935 for the year ended December 31, 1997.
(g) Computer Software Development Costs In accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," the Company is required to
capitalize certain software development and production costs once technological
feasibility has been achieved. Costs prior to technological feasibility is
achieved, and subsequent to the product release, are charged to operations as
incurred. Capitalized computer software development costs are reported at the
lower of unamortized cost or net realizable value. Upon initial product
release, these costs are amortized based on the straight-line method over the
estimated useful life, not to exceed three years. Fully amortized computer
software costs are removed from the financial records.
(h) Revenue Recognition Revenue from fixed-fee contracts are recognized on
the percentage-of-completion method measured by the percentage of labor hours
incurred to date, to total labor hours for each contract, as estimated by
management. This method is used because management considers total labor hours
to be the best available measure of progress on contracts. Because of the
inherent uncertainties in estimating hours, it is possible that the Company's
estimates of costs and revenue may be revised prior to contract completion.
Changes in estimated profitability and job performance may result in revisions
to costs and income, which are recognized in the period in which the revisions
are determined. If estimated total costs for a contract indicate a loss, the
Company provides currently for the total anticipated loss on the contract.
F-46
<PAGE>
NEOGLYPHICS MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
Contract costs include all direct labor and those indirect costs related to
contract performance. The asset, "Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts," represents revenue recognized in excess of
amounts billed. The liability, "Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts," represents billings in excess of revenue
recognized.
(i) Income Taxes Effective January 1, 1997, the Company terminated its
election to be taxed as a small business corporation. Accordingly, on that
date, the Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred taxes have resulted from temporary
differences between reporting income for financial reporting purposes and for
income tax purposes.
The Company reports income on the cash basis for income tax purposes and,
accordingly, pays taxes based on when income is received and expenses are paid.
The Company depreciates its properties on the straight-line method, capitalizes
software developments cost, recognizes revenue using the percentage of
completion on fixed contracts, and provides for bad debts at the time of sale
for financial reporting purposes. Differences arise as the Company depreciates
its properties on accelerated methods, expenses all software development costs,
recognizes revenue when collected, and expenses bad debts as they occur, for
income tax purposes.
(j) Stock Options The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation," but applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its plans.
(k) Research and Development Costs Research and development costs are
charged to operations when incurred and are included in operating expenses. The
amount charged in 1997 was $40,007.
(2) Change of Accounting Principle
During 1997, the Company adopted the percentage of completion method for
recognizing revenue under fixed-fee contracts. The Company believes this method
accurately reflects periodic results of operations. The effect of this change
is to increase net income for 1997 by $393,515. Retained earnings has been
decreased by $104,756 for the effect of retroactive application of the new
method.
(3) Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. Sales are not concentrated
geographically, however, three customers accounted for 44% of total sales for
the year ended December 31, 1997, and four customers accounted for 71% of the
accounts receivable balance at December 31, 1997.
(4) Related Party Transactions
The Company is affiliated, through common ownership, with Financial
Coordinated Services Inc. The only material transactions with its affiliate
during the year ended December 31, 1997 were short-term advances of $90,375.
F-47
<PAGE>
NEOGLYPHICS MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
(5) Accounts Receivable
Accounts receivable are summarized as follows:
<TABLE>
<S> <C>
Completed Contracts............................................. $ 360,018
Contracts in Progress........................................... 2,287,580
Server Fees..................................................... 7,944
----------
Total......................................................... $2,655,542
==========
</TABLE>
(6) Costs and Estimated Earnings on Uncompleted Contracts
Uncompleted contracts are summarized as follows:
<TABLE>
<S> <C>
Cost incurred..................................................... $380,501
Estimated Earnings................................................ 616,986
--------
Subtotal........................................................ 997,487
Less--Billings to date............................................ 446,385
--------
Total........................................................... $551,102
========
</TABLE>
This amount is included on the balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts........................................ $561,536
Billings in excess of costs and estimated earnings on
uncompleted contracts........................................ (10,434)
--------
Total....................................................... $551,102
========
</TABLE>
(7) Computer Software Development Costs
Computer software development coats were as follows for the year ended
December 31, 1997.
<TABLE>
<S> <C>
Unamortized balance--Beginning of year............................ $ --
Current year additions............................................ 55,621
-------
Net capitalized costs........................................... 55,621
Less--Amortization................................................ 3,090
Adjustments to carrying value..................................... --
-------
Net capitalized computer software development costs............. $52,531
=======
</TABLE>
In management's opinion, the net realizable value of future sales exceeds
the carrying value of unamortized computer software development costs;
therefore, no adjustment to carrying value is required.
Due to inherent technological change in the computer software development
industry, the period over which such capitalized computer software development
costs is being amortized may have to be accelerated.
(8) Note Payable--Bank
The Company has a line-of-credit agreement with American National Bank and
Trust Company of Chicago for $1,500,000 dated December 12, 1997, which is
collateralized by a promissory note and security agreement covering
substantially all assets of the Company. The note bears interest at one point
above the bank's base rate, which was 8.5% at December 31, 1997. The note
matures on June 30, 1998.
F-48
<PAGE>
NEOGLYPHICS MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
The Company also has an installment note agreement with American National
Bank and Trust Company of Chicago for an amount up to $300,000. Monthly
installments of principal and interest are based on the amount drawn with a
maximum monthly payment of $6,301. Final payment is due June 30, 2000. The note
is collateralized by substantially all assets of the Company and bears interest
at one point above the bank's base rate, which was at 8.5% at December 31,
1997. No indebtedness exists on the installment note of December 31, 1997.
(9) Note Payable--Officer
The note payable, unsecured, is due on demand. Interest is accrued at an
annual rate of 9% of the outstanding balance. Unpaid interest at December 31,
1997 amounts to $11,308 on this note.
(10) Long-Term Indebtedness
As of December 31, 1997, the long-term indebtedness consists of the
following:
<TABLE>
<S> <C>
A note payable, secured by a vehicle, payable in monthly
installments of $904, including interest at an annual rate of
8.5%. The note matures on December 31, 1998...................... $10,390
Obligation under capital lease (Note 11).......................... 4,396
-------
Total........................................................... 14,786
Less--Current Maturities of Long-Term Indebtedness................ 13,386
-------
Long-Term Indebtedness.......................................... $ 1,400
=======
</TABLE>
As of December 31, 1997, long-term indebtedness of $1,400 is to be
liquidated in the year ended December 31, 1999.
(11) Commitments and Contingencies
(a) Capitalized Lease Obligation The Company has financed the purchase of
certain equipment through a leasing arrangement. For financial reporting
purposes, the asset and liability under this lease is capitalized at the lower
of the present value of the minimum lease payments or the fair value of the
asset. The interest rate on the capitalized lease is 16.47% and is imputed
based on the lower of the Company's incremental borrowing rate at the inception
of the lease or the lessor's implicit rate of return. The lease, which is
noncancelable, expires in June, 1999.
The following is a schedule, by years, of future minimum lease payments
under this capital lease, together with the present value of the total minimum
lease payments, as of December 31, 1997:
<TABLE>
<S> <C>
1998............................................................... $3,500
1999............................................................... 1,458
------
Total minimum lease payments..................................... 4,958
Less--Amount representing interest................................. 562
------
Present value of total minimum lease payments.................... $4,396
======
Current portion.................................................... 2,996
Noncurrent portion................................................. 1,400
------
Total (Note 10).................................................. $4,396
======
</TABLE>
F-49
<PAGE>
NEOGLYPHICS MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
(b) Operating Leases The Company leases its office facilities under
noncancelable operating leases which expire at various dates through the year
2002. The future minimum rental payments required under these leases which have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998.............................................................. $324,507
1999.............................................................. 68,696
2000.............................................................. 43,968
2001.............................................................. 45,720
2002.............................................................. 47,556
--------
Total........................................................... $530,447
========
</TABLE>
The Company sublets some of its office space to a related party (Note 4) on
a month-to-month basis.
The leases require the Company to pay for insurance and maintenance of
facilities during the terms of the leases.
Rent expense, on real properties, amounts to $271,668 for the year ended
December 31, 1997.
The Company leases equipment under noncancelable operating leases which
expire in the year 1999. The future minimum rental payments required under
these leases, which have an initial or remaining noncancelable lease terms in
excess of one year as of December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998............................................................... $51,466
1999............................................................... 42,567
-------
Total............................................................ $94,033
=======
</TABLE>
Rent expense, on equipment, including month-to-month rentals, amounts to
$115,636 for the year ended December 31, 1997.
(c) Self-insurance The Company self-insures for health insurance for its
employees. The Company limits its losses through the use of stop-loss policies
from reinsurers. Specific individual losses from claims are limited to $25,000
a year. The Company's aggregate annual loss limitation is determined by
formula. Management believes they have adequately provided for all claims
incurred in the accompanying financial statement.
(d) Product Warranties The Company generally develops websites for customers
under contract, which usually contain unconditional warranties and support for
periods ranging up to one year. At December 31, 1997 a provision of $9,598 is
included in accrued liabilities for estimated warranty claims based on the
Company's experience.
(12) Deferred Income Taxes
As discussed in Note I, the Company terminated its election to be taxed as a
small business corporation effective January 1, 1997. On this date, the
deferred tax liability was approximately $302,475, which has been recorded
through a charge to the deferred tax provision.
F-50
<PAGE>
NEOGLYPHICS MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
(13) Deferred Compensation Plan
Effective January 1, 1997, the Company established a deferred compensation
plan under Section 401 (k) of the Internal Revenue Code, covering substantially
all employees. Under the plan, employees may elect to defer up to 15% of their
salary, subject to the Internal Revenue Code limits. The Company may make a
matching contribution, as well as a discretionary contribution. The Company did
not elect to make any matching contributions or discretionary contribution
under the plan for the year ended December 31, 1997.
(14) Stock Option Plan
Effective September 13, 1996, the Company adopted a stock option plan that
provides for incentive stock options (for key employees) and nonqualified stock
options (for key individuals, including nonemployees). The total number of
shares reserved for issuance pursuant to this plan is 1,800,000.
(a) Incentive Stock Options This part of the plan is intended to qualify
under Section 422 of the Internal Revenue Code. Options to purchase common
stock are granted at not less than the estimated fair market value at the date
of the grant, and are exercisable during a ten-year period. No options have
been granted as of December 31, 1997.
(b) Nonqualified Stock Options As stated in Note 1, the Company has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
No. 123 (SFAS No. 123). If the Company had elected to recognize compensation
cost for the options granted during 1997, consistent with the method prescribed
by SFAS No. 123, net income would have been decreased by $25,023 for the year
ended December 31, 1997.
The weighted-average fair value of the options granted during 1997 was
estimated, using the Black-Scholes option pricing model, using the following
assumptions:
<TABLE>
<S> <C>
Risk-Free interest Rate....................................... 6.00%
Expected Life................................................. 1 to 7 years
Expected Volatility........................................... .01%
Expected Dividend Yield....................................... None
</TABLE>
A summary of option transactions during the year ended December 31, 1997, is
as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
--------- ---------
<S> <C> <C>
Outstanding at January 1, 1997
Granted............................................... 1,652,990 $0.06
Exercised............................................. 688,500 0.01
Canceled.............................................. 4,581 --
--------- -----
Outstanding at December 31, 1997....................... 959,909 $0.10
========= =====
</TABLE>
A summary of options, outstanding as of December 31, 1997, is as follows:
<TABLE>
<CAPTION>
Weighted-
Average Weighted-
Number of Remaining Average
Exercise Shares Contractual Exercise
Price Outstanding Life Price
-------- ----------- ----------- ---------
<S> <C> <C> <C>
.10 959,909 9.41 $0.10
</TABLE>
F-51
<PAGE>
NEOGLYPHICS MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
(15) Subsequent Event
On January 2, 1998, the Company signed a "master lease" agreement with
American National Bank and Trust Company of Chicago for the lease of various
equipment as needed in the future. On January 20, 1998, the Company financed
$95,481 of equipment purchased in December, 1997, through this master lease
agreement. The lease, which is noncancelable, expires January 20, 2000, and
bears interest at one point above the bank's base rate, which was 8.5% on
January 20, 1998. For financial reporting purposes, the asset and liability
under this lease is capitalized at the lower of present value of the minimum
lease payments or the fair value of the asset.
The following is a schedule, by years, of future minimum lease payments
under this capital lease, together with the present value of the total minimum
lease payments, as of January 20, 1998:
<TABLE>
<S> <C>
1998............................................................. $ 47,823
1999............................................................. 52,171
2000............................................................. 5,348
--------
Total minimum lease payments................................... 104,342
Less--Amount representing interest............................... 8,861
--------
Present value of total minimum lease payments.................. $ 95,481
========
Current portion.................................................. 41,110
Noncurrent portion............................................... 54,371
--------
Total.......................................................... $ 95,481
========
</TABLE>
F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Waite & Company, Inc.:
We have audited the accompanying balance sheet of Waite & Company, Inc. (a
Massachusetts corporation) as of December 31, 1998, and the related statements
of operations, stockholders' equity and cash flows for the years ended December
31, 1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Waite & Company, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
October 15, 1999
F-53
<PAGE>
WAITE & COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 438,037 $ 406,537
Accounts receivable, net of allowance of $0 and
$16,000 at December 31, 1998 and June 30, 1999,
respectively....................................... 681,514 989,113
Unbilled accounts receivable........................ 42,500 151,300
Other current assets................................ 30,708 24,104
---------- ----------
Total current assets.............................. 1,192,759 1,571,054
Property and equipment, at cost:
Computer hardware and software...................... 80,385 115,458
Furniture and fixtures.............................. 50,478 174,179
Leasehold improvements.............................. 23,114 91,545
Office equipment.................................... 21,366 21,909
---------- ----------
175,343 403,091
Less--Accumulated depreciation and amortization..... 78,005 111,932
---------- ----------
97,338 291,159
Other assets.......................................... 23,020 19,908
---------- ----------
$1,313,117 $1,882,121
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................... $ 16,720 $ 75,274
Distributions payable............................... 100,000 400,000
Accrued vacation.................................... 57,883 60,024
Accrued bonus....................................... -- 16,457
Unearned revenue.................................... -- 255,407
Current portion of capital lease obligation......... -- 50,725
---------- ----------
Total current liabilities......................... 174,603 857,887
Long-term portion of capital lease obligation......... -- 141,942
---------- ----------
Total liabilities................................. 174,603 999,829
Commitments (Note 5)
Stockholders' equity:
Common stock, no par value--
Authorized--200,000 shares
Issued and outstanding--1,030 shares................ 16,804 16,804
Retained earnings................................... 1,121,710 865,488
---------- ----------
Total stockholders' equity........................ 1,138,514 882,292
---------- ----------
$1,313,117 $1,882,121
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
WAITE & COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended For the Six Months Ended
December 31, June 30,
--------------------- --------------------------
1997 1998 1998 1999
---------- ---------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues....................... $2,591,540 $3,250,500 $ 1,428,000 $ 2,096,241
Operating Expenses:
Cost of services............. 1,324,912 1,686,759 837,802 1,019,395
Hiring and training.......... 5,000 13,605 6,061 51,609
General and administrative... 320,913 417,291 254,314 345,137
Selling and marketing........ 65,053 128,155 72,630 59,681
Depreciation and
amortization................ 32,358 31,783 14,263 33,927
---------- ---------- ------------ ------------
Total operating expenses... 1,748,236 2,277,593 1,185,070 1,509,749
---------- ---------- ------------ ------------
Income from operations..... 843,304 972,907 242,930 586,492
Interest and Other Income...... 15,377 20,723 11,195 22,786
---------- ---------- ------------ ------------
Net income................. $ 858,681 $ 993,630 $ 254,125 $ 609,278
========== ========== ============ ============
</TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------- Total
Number of Retained Stockholders'
Shares No Par Value Earnings Equity
--------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996
(unaudited)................. 1,000 $ 1,000 $ 293,880 $ 294,880
Distributions to
shareholders.............. -- -- (442,681) (442,681)
Issuance of common stock... 30 15,804 -- 15,804
Net income................. -- -- 858,681 858,681
----- ------- ---------- ----------
Balance, December 31, 1997... 1,030 16,804 709,880 726,684
Distributions to
shareholders.............. -- -- (581,800) (581,800)
Net income................. -- -- 993,630 993,630
----- ------- ---------- ----------
Balance, December 31, 1998... 1,030 16,804 1,121,710 1,138,514
Distributions to
shareholders.............. -- -- (865,500) (865,500)
Net income................. -- -- 609,278 609,278
----- ------- ---------- ----------
Balance, June 30, 1999
(unaudited)................. 1,030 $16,804 $ 865,488 $ 882,292
===== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
WAITE & COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six
For the Years Ended Months Ended
December 31, June 30,
-------------------- -----------------------
1997 1998 1998 1999
--------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income..................... $ 858,681 $ 993,630 $254,125 $609,278
Adjustments to reconcile net
income to net cash provided by
operating activities--
Depreciation and
amortization................ 32,358 31,783 14,263 33,927
Provision for uncollectable
accounts receivable......... -- -- -- 16,000
Compensation expense in
connection with the issuance
of common stock............. 15,804 -- -- --
Changes in current assets and
liabilities--
Accounts receivable........ (59,146) (320,753) (9,927) (323,599)
Unbilled accounts
receivable................ -- (42,500) (107,500) (108,800)
Other current assets....... (7,617) (18,330) 796 6,604
Accounts payable........... 4,350 8,579 30,351 59,677
Distributions payable...... 105,866 (39,866) (139,866) 300,000
Accrued expenses........... (4,705) 34,488 84,685 15,654
Unearned revenue........... (51,740) -- -- 255,407
--------- --------- -------- --------
Net cash provided by
operating activities.... 893,851 647,031 126,927 864,148
--------- --------- -------- --------
Cash Flows from Investing
Activities:
Purchases of property and
equipment..................... (40,096) (54,152) (30,514) (24,650)
Increase in other assets....... -- (19,687) -- 3,112
--------- --------- -------- --------
Net cash used in investing
activities................ (40,096) (73,839) (30,514) (21,538)
--------- --------- -------- --------
Cash Flows from Financing
Activities:
Distributions to shareholders.. (442,681) (581,800) (193,800) (865,500)
Principal payments on capital
lease obligation.............. -- -- -- (8,610)
--------- --------- -------- --------
Net cash used in financing
activities................ (442,681) (581,800) (193,800) (874,110)
--------- --------- -------- --------
Increase (Decrease) in Cash...... 411,074 (8,608) (97,387) (31,500)
Cash, Beginning of Period........ 35,571 446,645 446,645 438,037
--------- --------- -------- --------
Cash, End of Period.............. $ 446,645 $ 438,037 $349,258 $406,537
========= ========= ======== ========
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the period for
interest...................... $ -- $ -- $ -- $ 8,905
========= ========= ======== ========
Other transactions--
Assets purchased under
capital lease obligation.... $ -- $ -- $ -- $203,098
========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
WAITE & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Appropriate to Unaudited Period)
(1) Organization and Sale of the Company
Waite & Company, Inc. (the Company), a Massachusetts corporation, was
incorporated in September 1995. The Company is a management consulting firm
that works with chief executives and leadership teams in rapidly evolving
industries to assist in redefining value in their markets. The Company
specializes in the financial service, technology, health care, professional
service, entertainment and communication industries.
The Company is subject to risks common to rapidly growing, technology-based
companies, including limited operating history, dependence on key personnel,
rapid technological change, competition from substitute services and larger
companies, and the need for continued market acceptance of the Company's
services.
On September 13, 1999, ZEFER Corp., (ZEFER) purchased all of the
outstanding common stock of the Company from the owners for approximately
$8,148,000 (the Acquisition) plus acquisition costs of approximately $75,000.
The Acquisition was accounted for using the purchase method of accounting in
accordance with the requirement of Accounting Principles Board (APB) Opinion
No. 16, Business Combinations, and, accordingly, the Company's results of
operations are included in those of ZEFER Corporation beginning on the date of
acquisition. The transaction was financed with $8,034,052 of ZEFER cash,
approximately $75,000 of acquisition costs, and through the issuance of
400,000 shares at $.38 per share or approximately $114,000 of ZEFER Corp.
common stock issued to the owners of the Company.
(2) Summary of Significant Accounting Policies
The accompanying financial statements reflect the application of the
accounting policies described below.
(a) Interim Financial Statements The accompanying balance sheet as of June
30, 1999 and the statements of operations, cash flows, and stockholders'
equity for the six months ended June 30, 1999 and 1998, are unaudited, but, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of results for these
interim periods. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted, although the Company
believes that the disclosures included are adequate to make the information
presented not misleading. The results of operations for the six months ended
June 30, 1999 and 1998 are not necessarily indicative of the results to be
expected for the entire fiscal year or any other interim period.
(b) Management 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.
(c) Revenue Recognition The Company enters into fixed-priced consulting
agreements with its customers. The Company recognizes revenue primarily on the
percentage-of-completion method. Contracts generally extend over a two-to-four
month period. The cumulative impact of any revision in estimates of the
percent complete is reflected in the period in which the changes become known.
When the revised estimates indicate a loss, such loss is currently provided
for in its entirety. Revenues exclude reimbursed expenses charged to and
collected from clients. Unearned revenue relates to advanced service billings.
Unbilled accounts receivable relates to revenues recognized in advance of
service billings.
(d) Long-Lived Assets The Company reviews its long-lived assets for
impairment as events and circumstances indicate the carrying amount of an
asset may not be recoverable. The Company evaluates the
F-57
<PAGE>
WAITE & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Data Appropriate to Unaudited Period)
realizability of its long-lived assets based on profitability and cash flow
expectations for the related asset. Management believes that, as of December
31, 1998 and June 30, 1999, none of the Company's long-lived assets was
impaired.
(e) Depreciation and Amortization The Company provides for depreciation and
amortization by charges to operations on a straight-line basis in amounts
estimated to allocate the cost of the assets over their estimated useful lives
of 3-5 years for computer hardware and software, 7 years for furniture and
fixtures, the life of the lease for leasehold improvements and 7 years for
office equipment.
(f) Concentration of Credit Risk Financial instruments that subject the
Company to credit risk consist primarily of accounts receivable. For the years
ended December 31, 1997 and 1998 and the six months ended June 30, 1998 and
1999 the Company had three, two, two and three significant customers
representing 94%, 65%, 75% and 60% of revenues, respectively. As of December
31, 1997 and 1998 and June 30, 1999, the Company had two, three and three
customers representing 100%, 93% and 82% of the accounts receivable balance,
respectively.
(g) Fair Value of Financial Instruments The Company's financial instruments
consist of accounts receivable and accounts payable. The estimated fair value
of these financial instruments approximates their carrying value at December
31, 1998 and June 30, 1999, because of the short-term nature of these
instruments.
(h) Comprehensive Income The Company adopted SFAS No. 130, Reporting
Comprehensive Income, effective January 1, 1998. SFAS No. 130 establishes
standards for the display of comprehensive income and its components in a full
set of financial statements. Comprehensive income represents net income plus
the change in equity of a business enterprise resulting from transactions and
events and circumstances from nonowner sources. The only component of
comprehensive income for the year ended December 31, 1997 and 1998 and the six
months ended June 30, 1998 and 1999 is net income.
(i) New Accounting Standard In June 1998, 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 effective for
all fiscal quarters beginning with the quarter ending September 30, 2000. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company will adopt SFAS No. 133 in
its quarter ending September, 30, 2000 and does not expect such adoption to
have an impact on the Company's results of operating financial position or cash
flows.
(3) Income Taxes
The Company has elected to be treated as a Subchapter S corporation for
federal and state income tax purposes. Under this election, for federal income
taxes and certain state income taxes, the taxable income of the Company is
reported by the stockholders of the Company on their personal income tax
returns. Accordingly, no provision for income taxes has been made in the
accompanying statement of operations. The Company has accrued for tax
distributions made to shareholders of approximately $40,000 for the period
ending December 31, 1997. All tax distributions made for the period ended
December 31, 1997 and 1998, and for the six months ended June 30, 1998 and
1999, were distributed to shareholders prior to the end of the respective
periods.
The pro forma income tax adjustment represents the adjustment necessary to
provide for federal, additional state and foreign corporate income taxes as if
the election to be treated as an S corporation were not made, and the Company
was subject to federal and state corporate income taxes.
F-58
<PAGE>
WAITE & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Data Appropriate to Unaudited Period)
(4) Stockholders' Equity
The Company has authorized a total of 200,000 shares of common stock with
no par value. As of December 31, 1997 and 1998 and June 30, 1999, the Company
has issued and outstanding 1,030 shares of common stock. During fiscal 1997,
the Company issued 30 shares of common stock to a board member for no cash
consideration. The effect of this transaction is reflected in the statement of
operations for the year ended December 31, 1997.
(5) Commitments
(a) Operating Leases The Company leases its facility under operating leases
that expire through August 2000.
Approximate minimum payments required under operating leases as of December
31, 1998 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
-------------------------
<S> <C>
1999............................................................... $191,000
2000............................................................... 117,000
--------
$308,000
========
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998, and for the
six months ended June 30, 1998 and 1999, was approximately $62,000, $94,000,
$41,000 and $96,000, respectively.
(b) Capital Leases The Company leases certain equipment under capital
leases. Future minimum lease payments under these leases as of June 30 are as
follows:
<TABLE>
<CAPTION>
Years Ending June 30, Amount
--------------------- --------
<S> <C>
2000................................................................ $ 52,545
2001................................................................ 52,545
2002................................................................ 52,545
2003................................................................ 52,545
2004................................................................ 35,030
--------
Total minimum lease payments...................................... 245,210
Less--Amount representing interest capital........................ 52,543
--------
Capital lease obligation.......................................... 192,667
Less--Current portion of capital lease obligation................. 50,725
--------
Total........................................................... $141,942
========
</TABLE>
(6) Employee Benefit Plan
In February 1997, the Company adopted a 401(k) savings plan (the Plan) for
eligible employees. Each participant may elect to contribute up to 15% of his
or her compensation for the plan year, subject to certain Internal Revenue
Service limitations. The Company matches 50% of the first 3% of employee
contributions. For the years ended December 31, 1997 and 1998 and the six
months ended June 30, 1998 and 1999, the Company contributed approximately
$14,000, $16,000, $9,000 and $13,000 to the Plan, respectively. Subsequent to
the acquisition of the Company by Zefer Corp. (see Note 7) the Plan was
terminated.
F-59
<PAGE>
REVIEW REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ZEFER Corp.:
We have reviewed the pro forma adjustments reflecting the transactions
described in the pro forma combined condensed financial statements and the
application of those adjustments to the historical amounts in the accompanying
pro forma combined condensed statement of operations for the year ended
December 31, 1999. The historical condensed financial statements for the year
ended December 31, 1999 have been derived from the historical financial
statements of ZEFER Corp. (the Company) for the period from inception (March
18, 1999) through December 31, 1999, Original ZEFER for the four months ended
April 30, 1999 and the Divisions of Renaissance for the five months ended May
28, 1999. All of such financial statements were audited by us and appear
elsewhere in this registration. The historical condensed financial statements
are also derived from the historical unaudited financial statements of
Spyplane, LLC for the period from January 1, 1999 through May 14, 1999 and
Waite & Co. for the eight months ended August 31, 1999, which appear elsewhere
in this registration statement. Such pro forma adjustments are based on
management's assumptions as described in the notes to pro forma combined
condensed financial statements. Our review was conducted in accordance with
standards established by the American Institute of Certified Public Accountants
and, accordingly, included such procedures as we considered necessary in the
circumstances.
The objective of this pro forma financial information is to show what the
significant effects on the combined condensed historical financial information
might have been had the transactions occurred at an earlier date. However, the
pro forma combined condensed financial statements are not necessarily
indicative of the results of operations or related effects on financial
position that would have been attained had the above-mentioned transactions
actually occurred earlier.
A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion on the
pro forma adjustments or the application of such adjustments to the pro forma
combined condensed statements of operations for the year ended December 31,
1999. Based on our review, however, nothing came to our attention that caused
us to believe that management's assumptions do not provide a reasonable basis
for presenting the significant effects directly attributable to the above
mentioned transactions described in the pro forma combined condensed financial
statement, that the related pro forma adjustments do not give appropriate
effect to those assumptions, or that the pro forma column does not reflect the
proper application of those adjustments to the historical financial statement
amounts in the pro forma combined condensed statement of operations for the
year ended December 31, 1999.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 31, 2000
F-60
<PAGE>
ZEFER CORP.
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
OVERVIEW
ZEFER Corp., (the Company), was incorporated in Delaware on March 18, 1999
and is an Internet consulting and implementation firm. In March 1999, the
Company was funded with $500,000 in cash through the sale of common stock to
GTCR Golder Rauner, L.L.C. (GTCR), which also committed to fund an additional
$97.0 million to fund the Company's acquisitions and operations.
On April 30, 1999, the Company acquired all the stock of Original ZEFER, an
Internet professional services firm. The acquisition was accounted for using
the purchase method of accounting. The Company acquired all the stock of
Original ZEFER for the net purchase price of $7,657,000, including acquisition
costs of approximately $125,000. The total purchase price was allocated as
follows: $1,136,000 of tangible assets, $4,725,000 of assumed liabilities and
$11,246,000 of intangible assets. The purchase price consisted of approximately
$7,100,000 in cash and 3,456,000 shares of the Company's common stock valued at
$.13 per share.
On May 14, 1999, the Company acquired all of the LLC units of Spyplane, LLC
(Spyplane), an integrated provider of internet services, including brand
creation and web site development, formed in California as a limited liability
company in May 1998. The acquisition was accounted for using the purchase
method of accounting. The Company acquired all of the LLC units of Spyplane for
a net purchase price of $2,105,000, including acquisition costs of
approximately $100,000. The total purchase price was allocated as follows:
$425,000 of tangible assets, $604,000 of assumed liabilities and $2,284,000 of
intangible assets. The purchase price consisted of approximately $1,000,000 in
cash, 200,000 shares of the Company's common stock valued at $.13 per share and
a $980,000 subordinated note to the Spyplane founders. The note is due on May
14, 2001 and accrues interest at 8% per year.
On May 28, 1999, the Company acquired the assets of two divisions of
Renaissance Worldwide, Inc. (Renaissance): Customer Management Solutions (CMS)
and Neoglyphics Media Corporation (NEO), which are collectively referred to as
the Divisions of Renaissance. CMS began operations during May 1998 as an
operating division of Renaissance, and is an Internet development and
applications company that develops web-based front-office systems. NEO was
organized in 1995 as an internet development and applications company which
develops web sites under contract with various customers. NEO existed as a
division of Renaissance for the ten months ended December 31, 1998 and for the
period from January 1, 1999 to May 28, 1999. The acquisition was accounted for
using the purchase method of accounting. The net purchase price of $12,210,000,
including acquisition costs of approximately $160,000, was allocated as
follows: $5,961,000 of tangible assets, $1,895,000 of assumed liabilities and
$8,144,000 of intangible assets. The purchase price consisted of $10,000,000 in
cash, 400,000 shares of the Company's common stock valued at $.13 per share and
a $2,000,000 subordinated note to Renaissance. The note bears interest at the
30-day LIBOR rate plus 2% and is payable in quarterly installments of $250,000
beginning in May 2000 and is convertible at the option of the holder into the
Company's common stock at a conversion price equal to 80% of the per share
price to the public of the Company's common stock in an initial public offering
(IPO).
On September 13, 1999, the Company acquired the stock of Waite & Company,
Inc. (Waite), a management consulting firm that works with chief executives and
leadership teams in redefining value in their markets. The acquisition was
accounted for using the purchase method of accounting. ZEFER acquired all of
the stock of Waite for a net purchase price of approximately $8,609,000,
including acquisition costs of approximately $75,000. The total purchase price
was allocated as follows: $1,852,000 of tangible assets, $4,727,000 of assumed
liabilities and $11,484,000 of intangible assets. The purchase price consisted
of approximately $8,034,000 in cash and 400,000 shares of the Company's common
stock valued at $1.25 per
F-61
<PAGE>
ZEFER CORP.
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
share. Waite was incorporated in 1995. In connection with the acquisition,
several employees of Waite signed employment agreements with the Company. Those
agreements provide for certain non-compete arrangements with the employees for
12 months whereby the founders can not compete with the Company's customers.
Also, there is an extended 18-month period whereby the founders are limited to
the extent that they can compete in the market place.
The following unaudited pro forma combined condensed financial statements
have been prepared in accordance with generally accepted accounting principles
and give effect to the transactions described above. The unaudited pro forma
combined condensed statement of operations for the year ended December 31, 1999
combines the historical statements of operations of (i) the Company for the
period from inception (March 18, 1999) through December 31, 1999, (ii) Original
ZEFER for the period from January 1, 1999 through its date of acquisition
(April 30, 1999), (iii) Spyplane for the period from January 1, 1999 through
its date of acquisition (May 14, 1999), (iv) the Divisions of Renaissance for
the period from January 1, 1999 through its date of acquisition (May 28, 1999)
and (v) Waite for the period from January 1, 1999 through its date of
acquisition (September 13, 1999). The results of operations of Original ZEFER,
Spyplane, the Divisions of Renaissance and Waite for the periods subsequent to
their respective dates of acquisition have been included in the results of
operations of the Company. The unaudited pro forma combined condensed
statements of operations assume that the acquisitions were consummated on
January 1, 1999 and include pro forma adjustments to reflect annual amounts of
amortization, compensation and interest expense, as described in the notes to
pro forma combined condensed statements of operations. The unaudited pro forma
combined condensed statements of operations do not purport to be indicative of
the results which would have been reported had the acquisitions been
consummated at this date, nor do they purport to be indicative of the results
of operations which may be expected in the future. These unaudited pro forma
combined condensed financial statements should be read in conjunction with the
audited financial statements and notes thereto of the Company, Original ZEFER,
the Divisions of Renaissance, Spyplane and Waite.
F-62
<PAGE>
ZEFER CORP.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Original Divisions of Pro Forma Combined
The Company ZEFER Renaissance Spyplane Waite Adjustments Company
------------ ----------- ------------ -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $ 25,276,935 $ 491,141 $ 3,886,424 $523,653 $2,905,889 $ -- $ 33,084,042
OPERATING EXPENSES:
Cost of services....... 15,736,322 589,140 4,781,116 420,089 1,540,315 84,938 (/5/) 23,151,920
Hiring and training.... 5,541,716 9,958 160,165 -- 53,578 -- 5,765,417
Research and
innovation............ 1,832,039 -- -- -- -- -- 1,832,039
Sales and marketing.... 7,055,712 124,540 1,012,552 29,502 84,680 -- 8,306,986
General and
administrative........ 18,420,098 1,012,172 2,461,115 118,502 584,600 60,121 (/5/) 22,656,608
Depreciation and
amortization.......... 10,681,725 55,839 189,665 11,728 43,163 6,990,262 (/1/) 17,972,382
Compensation expense... 665,683 961,317 -- -- -- -- 1,627,000
------------ ----------- ----------- -------- ---------- ----------- ------------
Total operating
expenses............. 59,933,295 2,752,966 8,604,613 579,821 2,306,336 7,135,321 81,312,352
------------ ----------- ----------- -------- ---------- ----------- ------------
Income (loss) from
operations........... (34,656,360) (2,261,825) (4,718,189) (56,168) 599,553 (7,135,321) (48,228,310)
INTEREST AND OTHER
INCOME (EXPENSE), NET.. (2,253,955) (18,652) (324,528) (431) 18,082 (1,034,913)A (3,614,397)
------------ ----------- ----------- -------- ---------- ----------- ------------
Income (loss) before
taxes................ (36,910,315) (2,280,477) (5,042,717) (56,599) 617,635 (8,170,234) (51,842,707)
BENEFIT FROM INCOME
TAXES.................. 5,760,400 -- -- -- -- -- 5,760,400
------------ ----------- ----------- -------- ---------- ----------- ------------
Net income (loss)..... $(31,149,915) $(2,280,477) $(5,042,717) $(56,599) $ 617,635 $(8,170,234) $(46,082,307)
============ =========== =========== ======== ========== =========== ============
PRO FORMA NET LOSS PER
SHARE:
Net loss per common and
common equivalent
share................. $ (1.16) $ (1.53)
============ ============
Shares used to compute
pro forma net loss per
share (Note 4)........ 26,793,270 30,211,932
============ ============
</TABLE>
A Includes the following:--
<TABLE>
<S> <C>
Interest expense on assumed borrowings(2)......................... $521,640
Interest expense on assumed issuance of class A preferred
stock(3)......................................................... 513,273
----------
$1,034,913
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-63
<PAGE>
ZEFER CORP.
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(Unaudited)
The accompanying unaudited pro forma combined condensed statement of
operations has been prepared by combining the historical results of the
Company, Original ZEFER, Spyplane, the Divisions of Renaissance, and Waite for
the year ended December 31, 1999 and reflects the following pro forma
adjustments:
(1) Record twelve months of amortization of goodwill and other identified
intangible assets of $1,773,683 related to the acquisition of Original ZEFER,
$410,401 related to the acquisition of Spyplane, $1,248,543 related to the
acquisition of the Divisions of Renaissance and $3,557,635 related to the
acquisition of Waite.
(2) Record interest expense of $28,997 related to assumed additional
borrowings of $980,000 in the form of a subordinated note to finance the
acquisition of Spyplane at an interest rate of 8% per year, interest expense of
$60,011 related to assumed additional borrowings of $2,000,000 in the form of a
subordinated note to finance the acquisition of the Divisions of Renaissance at
an assumed interest rate of 7.4% per year and interest expense of $432,632
related to the line of credit borrowings of $8,034,000 with an interest rate of
8% to supply the cash to fund the purchase of Waite.
(3) Record the interest expense of $116,533 for the accretion of 4,370
shares of Class A Preferred Stock issued to GTCR at an 8% dividend rate to fund
the purchase of Original ZEFER, interest expense of $31,808 for the accretion
of 1,075 shares of Class A Preferred Stock issued to GTCR at an 8% dividend
rate to fund the purchase of Spyplane and interest expense of $364,932 for the
accretion of 11,250 shares of Class A Preferred Stock issued to GTCR at an 8%
dividend rate to fund the purchase of the Divisions of Renaissance.
(4) Pro forma weighted average common shares outstanding for the year ended
December 31, 1999 reflects the incremental effect of shares we issued in
connection with the acquisitions we made in 1999 and shares of common stock we
issued to GTCR in order to fund such acquisitions as if these shares had been
issued as of January 1, 1999, as follows:
<TABLE>
<S> <C>
Historical weighted average shares outstanding.................... 26,793,270
Incremental weighted average shares outstanding:
Funding provided by GTCR......................................... 2,960,000
Original ZEFER................................................... 350,620
Spyplane......................................................... --
Divisions of Renaissance......................................... 93,286
Waite............................................................ 14,756
----------
Pro forma weighted average shares outstanding..................... 30,211,932
==========
</TABLE>
The calculation of pro forma basic and diluted weighted average shares
outstanding excludes 9,314,467 shares of unvested restricted common stock
issued in connection with the acquisitions made in 1999. The calculation of pro
forma diluted weighted average shares outstanding also excludes 4,627,111
shares of potential common stock issuable upon the exercise of outstanding
stock options. The shares of Class A redeemable preferred stock that will be
exchanged for common stock upon the Company's initial public offering have been
excluded from the calculation of pro forma weighted average common shares
outstanding.
F-64
<PAGE>
ZEFER CORP.
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999--(Continued)
(Unaudited)
(5) Record pro forma effect of salaries to be received under senior
management agreements in connection with acquisitions we made in 1999 as if the
senior management agreements had been entered into as of January 1, 1999, as
follows:
<TABLE>
<CAPTION>
Cost of General and
Services Administrative Total
-------- -------------- --------
<S> <C> <C> <C>
Total due under management agreements..... $395,000 $256,668 $651,668
Less--Salaries included in historical
statements............................... 310,062 196,547 506,609
-------- -------- --------
Pro forma salaries adjustment............. $ 84,938 $ 60,121 $145,059
======== ======== ========
</TABLE>
F-65
<PAGE>
Innovation Advisory Board
Pamela Alexander
President and Chief Executive Officer,
Alexander Ogilvy Public Relations Worldwide.
Ian Angell
Professor of Information Systems,
London School of Economics.
Peter Block
Author,
Flawless Consulting; The Empowered Manager:
Positive Political Skills at Work;
Stewardship: Choosing Service Over Self-Interest
Miles Braffett
Vice President and Chief Information Officer,
BMG Entertainment.
Jean Camp
Assistant Professor of Public Policy,
John F. Kennedy School of Government at Harvard University.
Jay Chiat
Co-Founder, Chiat/Day.
Clayton Christensen
Professor of Business Administration,
Harvard Business School.
Eric Clemons
Professor of Operations, Information Management
and Management, The Wharton School.
Jeffrey Dunn
Chief Operating Officer, Nickelodeon.
Chris Gopal
Former Partner and Head of Global Supply Chain Services,
Ernst & Young.
Clive Holtham
Head of Department of Management Systems
and Information, City University of London.
Rolf Jensen
Director,
Copenhagen Institute for Future Studies.
Robert Johansen
President, Institute for the Future.
Moshe Rubinstein
Professor, School of Engineering and Applied
Sciences, UCLA.
Bo Saxberg
Vice President, Business Development,
eJNJ, LLC.
Don Schultz
Professor of Integrated Marketing Communications,
Northwestern University.
Michael Shamos
Co-Director,
Carnegie Mellon Institute for eCommerce.
James Short
Associate Professor of Strategy and Information
Management, London Business School.
Robert Tien
Chairman, Electronic Business International.
Hal Tovin
President and Chief Executive Officer,
Citizens e-Business.
Hal Varian
Dean, School of Information Management and Systems,
University of California at Berkeley.
Arnold Wasserman
Former Dean, Pratt Institute's School of Design.
<PAGE>
[Zefer logo appears here]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses, all of which will be
borne by us, in connection with the sale and distribution of the securities
being registered, other than the underwriting discounts and commissions. All
amounts shown are estimates except for the Securities and Exchange Commission
registration fees, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fees......................................... $ 33,245
NASD filing fees.............................................. 13,593
Nasdaq National Market listing fee............................ 95,000
Blue Sky and similar fees and expenses........................ 5,000
Transfer Agent and Registrar fees............................. 10,000
Accounting fees and expenses.................................. 1,000,000
Legal fees and expenses....................................... 600,000
Director and officer liability insurance...................... 400,000
Printing and mailing expenses................................. 250,000
Miscellaneous................................................. 93,162
----------
Total..................................................... $2,500,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Article SEVENTH of our Certificate of Incorporation provides that none of
our directors shall be personally liable for any monetary damages for any
breach of fiduciary duty as a director, except to the extent that the Delaware
General Corporation Law prohibits the elimination or limitation of liability of
directors for breach of fiduciary duty.
Article EIGHTH of our Certificate of Incorporation provides that each
director and officer:
(a) shall be indemnified by us against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement incurred
in connection with any litigation or other legal proceeding (other than an
action by or in our right brought against him by virtue of his position as
our director or officer if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, our best interests and,
with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful and
(b) shall be indemnified by us against all expenses (including
attorneys' fees) and amounts paid in settlement incurred in connection with
any action by or in our right brought against him by virtue of his position
as our director or officer if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, our best interests, except
that no indemnification shall be made with respect to any matter as to
which such person shall have been adjudged to be liable to us, unless a
court determines that, despite such adjudication but in view of all of the
circumstances, he is entitled to indemnification of such expenses.
Notwithstanding the foregoing, to the extent that a director or officer has
been successful, on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, he is required to be indemnified by
us against all expenses (including attorneys' fees) incurred in connection
therewith. Expenses shall be advanced to a director or officer at his request,
provided that he undertakes to repay the amount advanced if it is ultimately
determined that he is not entitled to indemnification for such expenses.
II-1
<PAGE>
Indemnification is required to be made unless we determine that the
applicable standard of conduct required for indemnification has not been met.
In the event of a determination by us that the director or officer did not meet
the applicable standard of conduct required for indemnification, or if we fail
to make an indemnification payment within 60 days after such payment is claimed
by such person, such person is permitted to petition the court to make an
independent determination as to whether such person is entitled to
indemnification. As a condition precedent to the right of indemnification, the
director or officer must give us notice of the action for which indemnity is
sought and we have the right to participate in such action or assume the
defense thereof.
Article EIGHTH of our Certificate of Incorporation further provides that the
indemnification provided therein is not exclusive and provides that in the
event that the Delaware General Corporation Law is amended to expand the
indemnification permitted to directors or officers we must indemnify those
persons to the fullest extent permitted by such law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent
of the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and, in any criminal proceeding, if such
person had no reasonable cause to believe his conduct was unlawful; provided
that, in the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such
person shall have been adjudged to be liable to the corporation unless and only
to the extent that the adjudicating court determines that such indemnification
is proper under the circumstances.
We have purchased directors and officers insurance providing indemnification
for our directors and officers for certain liabilities, including liabilities
in connection with this offering.
Under Section 7 of the Underwriting Agreement, the underwriters are
obligated, under certain circumstances, to indemnify our directors and officers
against certain liabilities, including liabilities under the Securities Act of
1933. Reference is made to the form of Underwriting Agreement filed as Exhibit
1 hereto.
Item 15. Recent Sales of Unregistered Securities
Certain Sales of Securities. Since our formation we have issued the
following securities that were not registered under the Securities Act of 1933,
as summarized below.
(a) Issuances of capital stock.
1. From March 1999 through August 2000, we issued an aggregate of
26,640,000 shares of our common stock at a price of $0.125 per share
for an aggregate purchase price of $3,330,000 and an aggregate of
52,784.0310 shares of our class A preferred stock at a price of $1,000
per share for an aggregate purchase price of $52,784,031 to GTCR
pursuant to a Purchase Agreement.
2. From March through May 1999, we issued an aggregate of 81,124
shares of our common stock, which is subject to vesting provisions and
a repurchase right, at a price of $0.125 per share to Heidrich &
Struggles in consideration for recruitment services rendered to us.
3. In March 1999, we issued an aggregate of 3,040,000 shares of
common stock, which is subject to vesting provisions and a repurchase
right, at a price of $0.125 per share to William A. Seibel for an
aggregate purchase price of $380,000.
4. In April 1999, we issued an aggregate of 3,437,790 shares of
common stock, which is subject to vesting provisions and a repurchase
right, at a price of $0.125 per share to the former stockholders of
Original ZEFER in connection with the reorganization pursuant to
Section 351(g) of the Internal Revenue Code pursuant to a Share
Exchange Agreement.
II-2
<PAGE>
5. In May 1999, we issued an aggregate of 200,000 shares of common
stock, which is subject to vesting provisions and a repurchase right,
at a price of $0.125 per share to the former members of Spyplane LLC in
connection with the acquisition of all of its outstanding membership
interests pursuant to a Membership Share Purchase Agreement.
6. From May 1999 through August 2000, we issued an aggregate of
1,356 shares of our class A preferred stock at a price per share of
$1,000 for an aggregate purchase price of $1,356,000 to members of our
management team.
7. In May 1999, we issued an aggregate of 3,526,000 shares of common
stock, which is subject to vesting provisions and a repurchase right,
at a price of $0.125 per share to members of our management team for an
aggregate purchase price of $440,750.
8. In May 1999, we issued an aggregate of 537,459 shares of common
stock at a price of $0.125 per share for an aggregate purchase price of
$61,782.
9. In May 1999, we issued an aggregate of 400,000 shares of common
stock at a price of $0.125 per share to Renaissance in connection with
our acquisition of certain of its divisions pursuant to an Asset
Purchase Agreement.
10. In August 1999, we issued an aggregate of 866,666 shares of
common stock, which is subject to vesting provisions and a repurchase
right, at a price of $0.128 per share for an aggregate purchase price
of $110,933.25 to members of our management team.
11. In August and September 1999, we issued an aggregate of 52,000
shares of common stock, which is subject to vesting provisions and a
repurchase right, at a price of $0.285 per share for an aggregate
purchase price of $14,820 to members of our management team.
12. In September 1999, we issued an aggregate of 400,000 shares of
common stock, which is subject to vesting provisions and a repurchase
right, at a price of $0.255 per share for an aggregate purchase price
of $102,000 to members of our management team.
13. In September 1999, we issued an aggregate of 164,229 shares of
common stock at a price of $0.285 per share for an aggregate purchase
price of $46,805.27 to members of our management team.
14. In September 1999, we issued an aggregate of 400,000 shares of
common stock, which is subject to vesting provisions and a repurchase
right, to the former stockholders of Waite & Company in connection with
the acquisition of all of its outstanding stock pursuant to a Stock
Purchase Agreement.
15. In November 1999, we issued an aggregate of 1,650,405 shares of
our common stock at a price of $0.01 per share for an aggregate price
of $16,504.05 and an aggregate of 1,499 shares of our class A preferred
stock at a price of $0.01 per share for an aggregate purchase price of
$14.99 to GTCR Capital Partners, L.P. in connection with a Loan
Agreement.
16. In December 1999, we issued an aggregate of 9,000 shares of
common stock, which is subject to vesting provisions and a repurchase
right, to members of our management team for an aggregate purchase
price of $33,750.
17. In December 1999, we issued an aggregate of 100,000 shares of
common stock to Mr. Masood Jabbar for an aggregate purchase price of
$1,000,000.
18. From January 2000 through August 2000, we issued an aggregate of
3,444.0852 shares of our class A preferred stock at a price of $0.01
per share for an aggregate purchase price of $34.44 to GTCR Capital
Partners, L.P. in connection with a Loan Agreement.
19. In January 2000, we issued 1,000 shares of our common stock at a
price of $11.00 per share for an aggregate purchase price of $11,000 in
connection with recruitment services rendered to us.
20. In May 2000, we issued 200,000 shares of our class B convertible
preferred stock to Citizens Financial Group, Inc. at a price of $10.00
per share for an aggregate purchase price of $2,000,000.
II-3
<PAGE>
(b) Stock option grants to employees.
From inception (March 18, 1999) through March 31, 2000, we issued
options under our 1999 stock option plan and 1999 incentive plan to
purchase an aggregate of 7,708,250 shares of common stock at a weighted
average exercise price of $4.63 per share. None of these options have
been exercised.
No underwriters were involved in any of 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 the options to purchase common stock
described in paragraph (b) above, 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>
<C> <S>
Exhibit
No. Description
------- -----------
1 Form of Underwriting Agreement.
2.1+ Purchase Agreement by and among the Registrant, GTCR Fund VI, L.P.,
GTCR VI Executive Fund, L.P. and GTCR Associates VI dated as of March
23, 1999.
2.2+ First Amendment and Supplement No. 1 dated April 30, 1999 to that
Purchase Agreement dated as of March 23, 1999 by and among the
Registrant, GTCR Fund VI, L.P., GTCR VI Executive Fund, L.P. and GTCR
Associates VI.
2.3+ Second Amendment dated November 24, 1999 to that Purchase Agreement
dated as of March 23, 1999, and Repurchase and Sale Agreement, by and
among the Registrant, GTCR Fund VI, L.P., GTCR VI Executive Fund, L.P.
and GTCR Associates VI.
2.4+ Share Exchange Agreement by and among the Registrant, Original ZEFER
and certain Stockholders of Original ZEFER (as defined therein) dated
as of April 30, 1999.
2.5+ Membership Share Purchase Agreement by and among the Registrant, ZEFER
Corp. Northeast, Spyplane LLC and certain Equityholders of Spyplane
LLC (as defined therein) dated as of May 14, 1999.
2.6+ Asset Purchase Agreement by and among the Registrant, Renaissance
Worldwide, Inc. and Neoglyphics Media Corporation dated as of May 19,
1999.
2.7+ Stock Purchase Agreement by and among the Registrant, Waite & Company
and its Shareholders (as defined therein) dated September 13, 1999.
3.1** Amended and Restated Certificate of Incorporation, as amended.
3.2+ Bylaws, as amended.
3.3** Amended and Restated Certificate of Incorporation, to be effective
upon the closing of this offering.
3.4** Amended and Restated Bylaws, to be effective upon the closing of this
offering.
4+ Specimen certificate for shares of Common Stock, $0.01 par value per
share.
5** Opinion of Hale and Dorr LLP.
10.1+ 1999 Incentive Plan.
10.2+ 1999 Stock Option Plan.
10.3* 2000 Employee Stock Purchase Plan.
10.4+ Senior Management Agreement dated March 23, 1999 entered between the
Registrant and William Seibel.
10.5+ Senior Management Agreement dated August 17, 1999 entered between the
Registrant and Gerard Dube.
10.6+ Senior Management Agreement dated May 21, 1999 entered between the
Registrant and Sean Mullaney.
10.7+ Senior Management Agreement dated August 25, 1999 entered between the
Registrant and James Slamp.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
Exhibit
No. Description
------- -----------
10.8+ Senior Management Agreement dated May 21, 1999 entered between the
Registrant and Martha Stephens.
10.9+ Employment Agreement dated April 30, 1999 entered between the
Registrant and Anthony Tjan.
10.10+ Senior Management Agreement dated May 21, 1999 entered between the
Registrant and Frank Torbey.
10.11+ Senior Management Agreement dated September 13, 1999 entered between
the Registrant and Thomas Waite.
10.12+ Promissory Note made by William Seibel in favor of the Registrant on
March 23, 1999 in the principal amount of $378,100.
10.13+ Promissory Note made by Gerard Dube in favor of the Registrant on
August 17, 1999 in the principal amount of $80,554.50.
10.14+ Promissory Note made by Sean Mullaney in favor of the Registrant on
May 21, 1999 in the principal amount of $47,893.13.
10.15+ Promissory Note made by James Slamp in favor of the Registrant on
August 25, 1999 in the principal amount of $74,804.52.
10.16+ Promissory Note made by Martha Stephens in favor of the Registrant on
May 21, 1999 in the principal amount of $47,893.13.
10.17+ Promissory Note made by Frank Torbey in favor of the Registrant on May
21, 1999 in the principal amount of $50,600.00.
10.18+ Loan Agreement dated November 24, 1999 by and between the Registrant
and GTCR Capital Partners, L.P.
10.19+ Promissory Note made by the Registrant in favor of GTCR Capital
Partners, L.P. on November 24, 1999 in the principal amount of
$32,196,296.
10.20+ Security Agreement dated November 24, 1999 made by the Grantors (as
defined therein) in favor of GTCR Capital Partners, L.P.
10.21+ Pledge Agreement dated November 24, 1999 made the Pledgors (as defined
therein) in favor of GTCR Capital Partners, L.P.
10.22+ Convertible Subordinated Promissory Note made by the Registrant in
favor of Renaissance Worldwide, Inc. on May 28, 1999, as amended, in
the principal amount of $2,000,000.
10.23+ Nonnegotiable Subordinated Promissory Note made by the Registrant in
favor of Jason Zada on May 14, 1999 in the principal amount of
$490,000.
10.24+ Nonnegotiable Subordinated Promissory Note made by the Registrant in
favor of Greg Hipwell on May 14, 1999 in the principal amount of
$490,000.
10.25+ Floating Rate Loan--Procedures Letter Agreement between Harris Trust
and Savings Bank and the Registrant dated July 16, 1999.
10.26+ Unsecured Note made by the Registrant in favor of Harris Trust and
Savings Bank on July 16, 1999 in the principal amount of $20,000,000.
10.27+ Loan and Security Agreement between Silicon Valley Bank and the
Registrant dated December 16, 1998.
10.28+ Warrant Agreement dated November 24, 1999 between GTCR Capital
Partners, L.P. and the Registrant.
10.29+ Class A Preferred Stock Purchase Warrant issued by the Registrant on
November 24, 1999 to GTCR Capital Partners, L.P.
10.30+ Common Stock Purchase Warrant issued by the Registrant on November 24,
1999 to GTCR Capital Partners, L.P.
10.31+ Stockholders Agreement by and among the Registrant, GTCR Fund VI,
L.P., GTCR VI Executive Fund, L.P., GTCR Associates VI and William A.
Seibel dated as of March 23, 1999.
10.32+ Joinder and First Amendment dated November 24, 1999 to Stockholders
Agreement dated as of March 23, 1999 by and among the Registrant, GTCR
Fund VI, L.P. and GTCR Capital Partners, L.P.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
Exhibit
No. Description
------- -----------
10.33+ Registration Agreement by and among the Registrant, GTCR Fund VI,
L.P., GTCR VI Executive Fund, L.P., GTCR Associates VI and William A.
Seibel dated as of March 23, 1999.
10.34+ Joinder and First Amendment dated November 24, 1999 to Registration
Agreement dated as of March 23, 1999 by and among the Registrant, GTCR
Fund VI, L.P. and GTCR Capital Partners, L.P.
10.35+ Professional Services Agreement between the Registrant and GTCR Golder
Rauner, L.L.C. dated as of March 23, 1999.
10.36+ Form of Investment Letter from the Registrant to certain executives of
the Registrant, dated September 10, 1999.
10.37+ Form of Amendment to the Investment Letter dated November 30, 1999
from the Registrant to certain executives of the Registrant.
10.38+ Lease between East Street Associates and the Registrant dated June 17,
1999.
10.39+ Amendment of Lease between East Street Associates and the Registrant
dated July 16, 1999.
10.40+ Amendment of Lease between East Street Associates and the Registrant
dated September 1999.
10.42+ Promissory Note made by David Lubin in favor of the Registrant on May
21, 1999 in the principal amount of $45,612.50.
10.43+ Form of Nonqualified Stock Option Agreement under the 1999 Incentive
Plan and 1999 Stock Option Plan.
10.44+ Nonqualified Stock Option Agreement between the Registrant and Richard
Nolan dated
June 1999.
10.45+ Nonqualified Stock Option Agreement between the Registrant and Masood
Jabbar dated
December 1999.
10.46+ Class A Preferred Stock Purchase Warrant issued by the Registrant on
January 12, 2000 to GTCR Capital Partners, L.P.
10.47+ Class A Preferred Stock Purchase Warrant issued by the Registrant on
January 25, 2000 to GTCR Capital Partners, L.P.
10.48 Recapitalization Agreement dated August 21, 2000 entered into by the
Registrant and certain stockholders of the Registrant named therein.
10.49+ Nonqualified Stock Option Agreement between the Registrant and
Catherine Viscardi Johnston dated February 2000.
10.50+ Class A Preferred Stock Purchase Warrant issued by the Registrant on
February 25, 2000 to GTCR Capital Partners, L.P.
10.51+ Form of Agreement to be Bound by Stockholders Agreement entered into
by the Registrant and certain stockholders of the Registrant.
10.52+ Form of Agreement to be Bound by Registration Agreement entered into
by the Registrant and certain stockholders of the Registrant.
10.53+ First Amendment to Loan Agreement between the Registrant and GTCR
Capital Partners, L.P. dated March 27, 2000.
10.54+ First Amendment to Senior Management Agreement between the Registrant,
William A Seibel and certain stockholders of the Registrant dated
January 10, 2000.
10.55+ Second Amendment to Stockholders Agreement entered into by the
Registrant and certain stockholders of the Registrant dated February
9, 2000.
10.56+ First Amendment to Stock Restriction Agreement entered by and among
the Registrant, David Lubin and certain stockholders of the Registrant
dated March 23, 2000.
10.57** Termination Agreement entered into among the Registrant, GTCR Fund VI,
L.P., GTCR VI Executive Fund, L.P., GTCR Associates VI, GTCR Captial
Partners, L.P. and GTCR Golder Rauner, L.L.C., dated August 9, 2000.
10.58+ Secured Promissory Note made by Carol A. Boudreau in favor of the
Registrant on November 2, 1999 in the amount of $77,999.22.
10.59+ Form of Amendment to Restricted Stock Vesting Schedule to be entered
among the Registrant and certain Executives of the Registrant.
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S>
Exhibit
No. Description
------- -----------
10.60** Class B Convertible Preferred Stock Purchase Agreement between the
Registrant and Citizens Financial Group, Inc. dated as of May 26,
2000.
10.61** Amended and Restated Stockholders Agreement among the Registrant and
certain stockholders of the Registrant dated May 26, 2000.
10.62** Amended and Restated Registration Agreement among the Registrant and
certain stockholders of the Registrant dated May 26, 2000.
10.63** Form of Incentive Stock Option Award and Shareholders Agreement under
the ZEFER Corp. 1999 Incentive Plan.
10.64** Form of Supplement to Purchase Agreement dated as of March 23, 1999
by and among the Registrant, GTCR Fund VI, L.P., GTCR Associates VI
and GTCR VI Executive Fund.
10.65** Class A Preferred Stock Purchase Warrant issued by the Registrant on
May 1, 2000 to GTCR Capital Partners, L.P.
10.66** Class A Preferred Stock Purchase Warrant issued by the Registrant on
June 19, 2000 to GTCR Capital Partners, L.P.
10.67** Class A Preferred Stock Purchase Warrant issued by the Registrant on
July 10, 2000 to GTCR Capital Partners, L.P.
10.68** First Amendment to Convertible Subordinated Promissory Note between
the Registrant and Renaissance Worldwide, Inc. dated as of June 22,
2000.
10.69* Form of Agreement to be bound by Amended and Restated Stockholders
Agreement entered into by the Registrant and certain stockholders of
the Registrant.
10.70** Second Amendment to Loan Agreement between the Registrant and GTCR
Capital Partners dated August 9, 2000.
10.71** Class A Preferred Stock Purchase Warrant issued by the Registrant on
August 2, 2000 to GTCR Capital Partners, L.P.
10.72 Class A Preferred Stock Purchase Warrant issued by the Registrant on
August 9, 2000 to GTCR Capital Partners, L.P.
10.73+++ Master Services Agreement between the Registrant and Citizens
Financial Group, Inc. dated as of April 1, 2000.
21++ Subsidiaries.
23.1** Consent of Hale and Dorr LLP (included in Exhibit 5).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Katch, Tyson & Company.
24** Power of Attorney (included on page II-8).
27** Financial Data Schedule.
</TABLE>
---------------------
*To be filed by amendment.
**Previously filed.
+ Incorporated herein by reference to the Registration Statement on Form S-1,
as amended (File No. 333-94283), of ZEFER Corp.
++Superseding exhibit.
+++ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
(b) Financial Statement Schedules
All schedules have been omitted because they are not required or because the
required information is given in the Registrant's consolidated financial
statements or notes to those statements.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the provisions contained in our Certificate of Incorporation and the laws of
the State of Delaware, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is,
II-7
<PAGE>
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by
a director, officer or controlling person of us 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, we will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
We hereby undertake to provide to the underwriters at the closing specified
in the underwriting agreement certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to each
purchaser.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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 us pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, 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 this offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, we have duly
caused this Amendment No. 2 to Registration Statement to be signed on our
behalf by the undersigned, thereunto duly authorized, in Boston, Massachusetts,
on this 22nd day of August, 2000.
ZEFER CORP.
By:
/s/ William A. Seibel
----------------------------------
William A. Seibel
Chairman of the Board, President
and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to 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/ William A. Seibel Chairman of the Board, August 22, 2000
______________________________________ President, Chief
William A. Seibel Executive Officer and
Director
/s/ James H. Slamp Executive Vice President, August 22, 2000
______________________________________ Chief Financial Officer
James H. Slamp and Treasurer (Principal
Financial and Accounting
Officer)
* Director August 22, 2000
______________________________________
Philip A. Canfield
* Director August 22, 2000
______________________________________
Masood Jabbar
* Director August 22, 2000
______________________________________
David A. Lubin
* Director August 22, 2000
______________________________________
Richard L. Nolan
* Director August 22, 2000
______________________________________
Anthony K. Tjan
* Director August 22, 2000
______________________________________
Catherine Viscardi Johnston
* Director August 22, 2000
______________________________________
Bruce V. Rauner
* /s/ James H. Slamp
______________________________________
Per Power of
Attorney
</TABLE>
II-9
<PAGE>
Exhibit Index
<TABLE>
<C> <S>
Exhibit
No. Description
------- -----------
1 Form of Underwriting Agreement.
2.1+ Purchase Agreement by and among the Registrant, GTCR Fund VI, L.P.,
GTCR VI Executive Fund, L.P. and GTCR Associates VI dated as of March
23, 1999.
2.2+ First Amendment and Supplement No. 1 dated April 30, 1999 to that
Purchase Agreement dated as of March 23, 1999 by and among the
Registrant, GTCR Fund VI, L.P., GTCR VI Executive Fund, L.P. and GTCR
Associates VI.
2.3+ Second Amendment dated November 24, 1999 to that Purchase Agreement
dated as of March 23, 1999, and Repurchase and Sale Agreement, by and
among the Registrant, GTCR Fund VI, L.P., GTCR VI Executive Fund, L.P.
and GTCR Associates VI.
2.4+ Share Exchange Agreement by and among the Registrant, Original ZEFER
and certain Stockholders of Original ZEFER (as defined therein) dated
as of April 30, 1999.
2.5+ Membership Share Purchase Agreement by and among the Registrant, ZEFER
Corp. Northeast, Spyplane LLC and certain Equityholders of Spyplane
LLC (as defined therein) dated as of May 14, 1999.
2.6+ Asset Purchase Agreement by and among the Registrant, Renaissance
Worldwide, Inc. and Neoglyphics Media Corporation dated as of May 19,
1999.
2.7+ Stock Purchase Agreement by and among the Registrant, Waite & Company
and its Shareholders (as defined therein) dated September 13, 1999.
3.1** Amended and Restated Certificate of Incorporation, as amended.
3.2+ Bylaws, as amended.
3.3** Amended and Restated Certificate of Incorporation, to be effective
upon the closing of this offering.
3.4** Amended and Restated Bylaws, to be effective upon the closing of this
offering.
4+ Specimen certificate for shares of Common Stock, $0.01 par value per
share.
5** Opinion of Hale and Dorr LLP.
10.1+ 1999 Incentive Plan.
10.2+ 1999 Stock Option Plan.
10.3* 2000 Employee Stock Purchase Plan.
10.4+ Senior Management Agreement dated March 23, 1999 entered between the
Registrant and William Seibel.
10.5+ Senior Management Agreement dated August 17, 1999 entered between the
Registrant and Gerard Dube.
10.6+ Senior Management Agreement dated May 21, 1999 entered between the
Registrant and Sean Mullaney.
10.7+ Senior Management Agreement dated August 25, 1999 entered between the
Registrant and James Slamp.
10.8+ Senior Management Agreement dated May 21, 1999 entered between the
Registrant and Martha Stephens.
10.9+ Employment Agreement dated April 30, 1999 entered between the
Registrant and Anthony Tjan.
10.10+ Senior Management Agreement dated May 21, 1999 entered between the
Registrant and Frank Torbey.
10.11+ Senior Management Agreement dated September 13, 1999 entered between
the Registrant and Thomas Waite.
10.12+ Promissory Note made by William Seibel in favor of the Registrant on
March 23, 1999 in the principal amount of $378,100.
10.13+ Promissory Note made by Gerard Dube in favor of the Registrant on
August 17, 1999 in the principal amount of $80,554.50.
10.14+ Promissory Note made by Sean Mullaney in favor of the Registrant on
May 21, 1999 in the principal amount of $47,893.13.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
Exhibit
No. Description
------- -----------
10.15+ Promissory Note made by James Slamp in favor of the Registrant on
August 25, 1999 in the principal amount of $74,804.52.
10.16+ Promissory Note made by Martha Stephens in favor of the Registrant on
May 21, 1999 in the principal amount of $47,893.13.
10.17+ Promissory Note made by Frank Torbey in favor of the Registrant on May
21, 1999 in the principal amount of $50,600.00.
10.18+ Loan Agreement dated November 24, 1999 by and between the Registrant
and GTCR Capital Partners, L.P.
10.19+ Promissory Note made by the Registrant in favor of GTCR Capital
Partners, L.P. on November 24, 1999 in the principal amount of
$32,196,296.
10.20+ Security Agreement dated November 24, 1999 made by the Grantors (as
defined therein) in favor of GTCR Capital Partners, L.P.
10.21+ Pledge Agreement dated November 24, 1999 made the Pledgors (as defined
therein) in favor of GTCR Capital Partners, L.P.
10.22+ Convertible Subordinated Promissory Note made by the Registrant in
favor of Renaissance Worldwide, Inc. on May 28, 1999, as amended, in
the principal amount of $2,000,000.
10.23+ Nonnegotiable Subordinated Promissory Note made by the Registrant in
favor of Jason Zada on May 14, 1999 in the principal amount of
$490,000.
10.24+ Nonnegotiable Subordinated Promissory Note made by the Registrant in
favor of Greg Hipwell on May 14, 1999 in the principal amount of
$490,000.
10.25+ Floating Rate Loan--Procedures Letter Agreement between Harris Trust
and Savings Bank and the Registrant dated July 16, 1999.
10.26+ Unsecured Note made by the Registrant in favor of Harris Trust and
Savings Bank on July 16, 1999 in the principal amount of $20,000,000.
10.27+ Loan and Security Agreement between Silicon Valley Bank and the
Registrant dated December 16, 1998.
10.28+ Warrant Agreement dated November 24, 1999 between GTCR Capital
Partners, L.P. and the Registrant.
10.29+ Class A Preferred Stock Purchase Warrant issued by the Registrant on
November 24, 1999 to GTCR Capital Partners, L.P.
10.30+ Common Stock Purchase Warrant issued by the Registrant on November 24,
1999 to GTCR Capital Partners, L.P.
10.31+ Stockholders Agreement by and among the Registrant, GTCR Fund VI,
L.P., GTCR VI Executive Fund, L.P., GTCR Associates VI and William A.
Seibel dated as of March 23, 1999.
10.32+ Joinder and First Amendment dated November 24, 1999 to Stockholders
Agreement dated as of March 23, 1999 by and among the Registrant, GTCR
Fund VI, L.P. and GTCR Capital Partners, L.P.
10.33+ Registration Agreement by and among the Registrant, GTCR Fund VI,
L.P., GTCR VI Executive Fund, L.P., GTCR Associates VI and William A.
Seibel dated as of March 23, 1999.
10.34+ Joinder and First Amendment dated November 24, 1999 to Registration
Agreement dated as of March 23, 1999 by and among the Registrant, GTCR
Fund VI, L.P. and GTCR Capital Partners, L.P.
10.35+ Professional Services Agreement between the Registrant and GTCR Golder
Rauner, L.L.C. dated as of March 23, 1999.
10.36+ Form of Investment Letter from the Registrant to certain executives of
the Registrant, dated September 10, 1999.
10.37+ Form of Amendment to the Investment Letter dated November 30, 1999
from the Registrant to certain executives of the Registrant.
10.38+ Lease between East Street Associates and the Registrant dated June 17,
1999.
10.39+ Amendment of Lease between East Street Associates and the Registrant
dated July 16, 1999.
10.40+ Amendment of Lease between East Street Associates and the Registrant
dated September 1999.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
Exhibit
No. Description
------- -----------
10.42+ Promissory Note made by David Lubin in favor of the Registrant on May
21, 1999 in the principal amount of $45,612.50.
10.43+ Form of Nonqualified Stock Option Agreement under the 1999 Incentive
Plan and 1999 Stock Option Plan.
10.44+ Nonqualified Stock Option Agreement between the Registrant and Richard
Nolan dated
June 1999.
10.45+ Nonqualified Stock Option Agreement between the Registrant and Masood
Jabbar dated
December 1999.
10.46+ Class A Preferred Stock Purchase Warrant issued by the Registrant on
January 12, 2000 to GTCR Capital Partners, L.P.
10.47+ Class A Preferred Stock Purchase Warrant issued by the Registrant on
January 25, 2000 to GTCR Capital Partners, L.P.
10.48 Recapitalization Agreement dated August 21, 2000 entered into by the
Registrant and certain stockholders of the Registrant named therein.
10.49+ Nonqualified Stock Option Agreement between the Registrant and
Catherine Viscardi Johnston dated February 2000.
10.50+ Class A Preferred Stock Purchase Warrant issued by the Registrant on
February 25, 2000 to GTCR Capital Partners, L.P.
10.51+ Form of Agreement to be Bound by Stockholders Agreement entered into
by the Registrant and certain stockholders of the Registrant.
10.52+ Form of Agreement to be Bound by Registration Agreement entered into
by the Registrant and certain stockholders of the Registrant.
10.53+ First Amendment to Loan Agreement between the Registrant and GTCR
Capital Partners, L.P. dated March 27, 2000.
10.54+ First Amendment to Senior Management Agreement between the Registrant,
William A Seibel and certain stockholders of the Registrant dated
January 10, 2000.
10.55+ Second Amendment to Stockholders Agreement entered into by the
Registrant and certain stockholders of the Registrant dated February
9, 2000.
10.56+ First Amendment to Stock Restriction Agreement entered by and among
the Registrant, David Lubin and certain stockholders of the Registrant
dated March 23, 2000.
10.57** Termination Agreement entered into among the Registrant, GTCR Fund VI,
L.P., GTCR VI Executive Fund, L.P., GTCR Associates VI, GTCR Captial
Partners, L.P. and GTCR Golder Rauner, L.L.C., dated August 9, 2000.
10.58+ Secured Promissory Note made by Carol A. Boudreau in favor of the
Registrant on November 2, 1999 in the amount of $77,999.22.
10.59+ Form of Amendment to Restricted Stock Vesting Schedule to be entered
among the Registrant and certain Executives of the Registrant.
10.60** Class B Convertible Preferred Stock Purchase Agreement between the
Registrant and Citizens Financial Group, Inc. dated as of May 26,
2000.
10.61** Amended and Restated Stockholders Agreement among the Registrant and
certain stockholders of the Registrant dated May 26, 2000.
10.62** Amended and Restated Registration Agreement among the Registrant and
certain stockholders of the Registrant dated May 26, 2000.
10.63** Form of Incentive Stock Option Award and Shareholders Agreement under
the ZEFER Corp. 1999 Incentive Plan.
10.64** Form of Supplement to Purchase Agreement dated as of March 23, 1999 by
and among the Registrant, GTCR Fund VI, L.P., GTCR Associates VI and
GTCR VI Executive Fund.
10.65** Class A Preferred Stock Purchase Warrant issued by the Registrant on
May 1, 2000 to GTCR Capital Partners, L.P.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.66** Class A Preferred Stock Purchase Warrant issued by the Registrant on
June 19, 2000 to GTCR Capital Partners, L.P.
10.67** Class A Preferred Stock Purchase Warrant issued by the Registrant on
July 10, 2000 to GTCR Capital Partners, L.P.
10.68** First Amendment to Convertible Subordinated Promissory Note between
the Registrant and Renaissance Worldwide, Inc. dated as of June 22,
2000.
10.69* Form of Agreement to be bound by Amended and Restated Stockholders
Agreement entered into by the Registrant and certain stockholders of
the Registrant.
10.70** Second Amendment to Loan Agreement between the Registrant and GTCR
Capital Partners dated August 9, 2000.
10.71** Class A Preferred Stock Purchase Warrant issued by the Registrant on
August 2, 2000 to GTCR Capital Partners, L.P.
10.72 Class A Preferred Stock Purchase Warrant issued by the Registrant on
August 9, 2000 to GTCR Capital Partners, L.P.
10.73+++ Master Services Agreement between the Registrant and Citizens
Financial Group, Inc. dated as of April 1, 2000.
21++ Subsidiaries.
23.1** Consent of Hale and Dorr LLP (included in Exhibit 5).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Katch, Tyson & Company.
24** Power of Attorney (included on page II-8).
27** Financial Data Schedule.
</TABLE>
---------------------
* To be filed by amendment.
** Previously filed.
+ Incorporated herein by reference to the Registration Statement on Form S-1,
as amended (File No. 333- 94283), of ZEFER Corp.
++ Superseding exhibit.
+++ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
