<PAGE>
As filed with the Securities and Exchange Commission on March 28, 2000
Registration No. 333-94283
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
AMENDMENT NO. 3
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 (IRS Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
-------------
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:
DAVID E. REDLICK, ESQ. WILLIAM J. WHELAN III, ESQ.
JAMES R. BURKE, ESQ. Cravath, Swaine & Moore
Hale and Dorr LLP Worldwide Plaza
60 State Street 825 Eighth Avenue
Boston, Massachusetts 02109 New York, New York 10019
Telephone: (617) 526-6000 Telephone: (212) 474-1000
Telecopy: (617) 526-5000 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. [_]
-------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<CAPTION>
Title of each
class of Proposed Proposed Amount of
securities to Amount to be maximum offering maximum aggregate registration
be registered registered(1) price per unit offering price(2) fee(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
par value
$0.001 per
share....... 5,175,000 shares $13.00 $67,275,000 $17,761
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) Includes 675,000 shares that the underwriters have an option to purchase
from the registrant to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(a) under the Securities Act of 1933 solely
for purposes of calculating the registration fee.
(3) The registrant previously paid a filing fee of $18,216.
-------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 MARCH 28, 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
$11.00 and $13.00 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 62.8% of our common stock after this offering. These funds have
appointed three 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 and approximately $2.8 million of
the net proceeds to repay a portion of our outstanding indebtedness to GTCR
Capital Partners, L.P., another affiliate of 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 5.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions 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
First Union Securities, Inc.
Robertson Stephens
The date of this prospectus is , 2000.
<PAGE>
from
digital vision.....
[ZEFER LOGO APPEARS HERE]
<PAGE>
ZEFER provides Internet consulting and implementation services to both
established companies and dot-com startups to help them create and execute
strategies and new business models for the digital economy.
Foodline.com
[FOODLINE.COM WEBSITE SCREEN IMAGE]
An online restaurant
reservation system.
www.foodline.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........................ 5
Use of Proceeds..................... 12
Dividend Policy..................... 13
Capitalization...................... 14
Dilution............................ 15
Selected Pro Forma Financial Data... 16
Selected Historical Financial Data.. 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 18
Business............................ 25
Management.......................... 35
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Certain Relationships and Related
Transactions...................... 47
Principal Stockholders............. 51
Description of Capital Stock....... 52
Shares Eligible for Future Sale.... 54
U.S. Federal Tax Considerations for
Non-United States Holders......... 56
Underwriting....................... 60
Notice to Canadian Residents....... 62
Legal Matters...................... 63
Experts............................ 63
Where You Can Find More
Information....................... 64
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 to dot-com and traditional
companies to enable them 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.
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,
1
<PAGE>
continuing to serve cutting edge dot-com 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.
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 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 78.6% of
our capital stock. The funds controlled by GTCR will hold approximately 62.8%
of our capital stock. Additionally, three 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.. 48,097,157 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 4,627,111 shares subject to outstanding options as of
December 31, 1999 under our 1999 Incentive Plan and 1999 Stock Option Plan at a
weighted average exercise price of $1.41 per share and 39,555 additional shares
available for issuance under these plans as of such date. In February 2000, our
board of directors approved an amendment to our 1999 Incentive Plan increasing
the shares available for issuance under the plan by 20,000,000.
Unless otherwise indicated, all information in this prospectus:
. assumes that the underwriters will not exercise their over-allotment
option;
. reflects the issuance during the first quarter of 2000 of an aggregate
of 15,262.6610 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 $15,262,661, and the issuance during the first quarter of 2000 of an
aggregate of 1,792.5376 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;
. 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 March 31, 2000, for 3,632,222 shares of
common stock at an exchange rate based on an assumed initial public
offering price of $12.00 per share, the mid-point of the range on the
cover of this prospectus; and
. assumes the conversion upon the closing of this offering of a $2.0
million promissory note issued to Renaissance Worldwide, Inc. into
208,333 shares of common stock, which is based on a conversion rate
equal to 80% of the assumed initial public offering price.
2
<PAGE>
Summary Financial Data
The following pro forma statement of operations data presents the 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.
<TABLE>
<CAPTION>
Pro Forma
------------------------------------------------------------
Year Ended Three Months Ended
------------- ----------------------------------------------
December 31, March 31, June 30, September 30, December 31,
1999 1999 1999 1999 1999
------------- --------- -------- ------------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 33,084 $ 3,957 $ 5,612 $ 10,212 $ 13,303
Loss from operations.... (48,228) (7,236) (9,190) (10,380) (21,422)
Net loss................ (46,082) (7,975) (8,514) (7,073) (22,520)
Basic and diluted net
loss per share......... $ (1.53) $ (0.27) $ (0.28) $ (0.23) $ (0.74)
Weighted average
shares................. 30,212 29,693 29,917 30,311 30,450
</TABLE>
The following historical statement of operations data presents 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.
<TABLE>
<CAPTION>
Historical
------------------------------------------------------------------
Divisions of
Renaissance Original ZEFER Registrant
----------------------- ---------------------------- ------------
Five
Months Period from Period from
Years Ended Ended Inception to Four Months Inception to
December 31, May 28, December 31, Ended April 30, December 31,
1997 1998 1999 1998 1999 1999
------ ------- ------- ------------ --------------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $9,539 $13,798 $ 3,886 $ 621 $ 491 $ 25,277
Income (loss) from
operations............. 2,654 (3,763) (4,718) (562) (2,262) (34,656)
Net income (loss)....... 1,295 (4,194) (5,043) (555) (2,280) (31,150)
Basic and diluted net
income (loss) per
share.................. $ (1.16)
Weighted average
shares................. 26,793
</TABLE>
3
<PAGE>
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 first quarter of 2000 of an aggregate of
17,055.1986 shares of class A preferred stock to existing holders of
class A preferred stock and GTCR Capital Partners, an affiliate of GTCR,
for $15.3 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 March 31, 2000, for 3,632,222 shares of common stock at
an exchange rate based on an assumed initial public offering price of
$12.00 per share;
. the incurrence in the first quarter of 2000 of an additional $7.4
million of subordinated indebtedness payable to GTCR Capital Partners;
and
. the conversion upon the closing of this offering of a $2.0 million
promissory note issued to Renaissance Worldwide, Inc. into 208,333
shares of common stock.
The pro forma as adjusted information reflects:
. receipt of estimated net proceeds of $48.4 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;
. 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; and
. the application of a portion of the net proceeds to repay $2.8 million
of outstanding subordinated indebtedness that we owe to GTCR Capital
Partners.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------
Pro
Pro Forma As
Actual Forma Adjusted
-------- ------- --------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................... $ 1,271 $23,904 $50,118
Working capital (deficit)........................... (23,377) (744) 25,470
Total assets........................................ 51,290 73,923 100,137
Lines of credit..................................... 19,566 19,566 150
Other debt, including current portion............... 2,980 980 980
Subordinated debt payable to GTCR................... 11,119 18,490 15,700
Redeemable preferred stock.......................... 25,803 -- --
Total stockholders' equity (deficit)................ (24,670) 19,125 67,545
</TABLE>
The amounts shown in the above table as subordinated debt payable to GTCR
exclude an original issue discount of $1.7 million related to such debt that we
are also obligated to pay.
If the net proceeds from this offering are greater than $48.4 million as a
result of the exercise by the underwriters of their over-allotment option, we
will apply one-half of such additional net proceeds to repay additional
outstanding subordinated indebtedness that we owe to GTCR Capital Partners. See
"Use of Proceeds."
4
<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 a
number of 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 operating 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 pro forma net loss of $46.1 million for the year
ended December 31, 1999. 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
5
<PAGE>
integration firms and internal IT departments of our prospective clients. 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 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 in 1999 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, making 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 481 at December 31, 1999. 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 a number of 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;
6
<PAGE>
. inability to retain the acquired company's customers; and
. the amortization of goodwill, which may adversely affect our reported
results of operations.
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. 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.
7
<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 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. 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 will 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 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
8
<PAGE>
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. As of March 1, 2000, there
was $20.2 million of outstanding indebtedness under the loan agreement. We
expect the outstanding indebtedness under the loan agreement will be
approximately $17.4 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 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 $18.3 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
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 78.6% 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.
9
<PAGE>
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 $11.12 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
51.0% of the aggregate price paid by all purchasers of our stock but will own
only approximately 9.3% of our common stock outstanding after this offering.
See "Dilution."
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 43,597,157 shares
outstanding at the time of this offering:
. 4,527,843 shares may be sold 90 days after the effective date of this
offering; and
. 32,979,366 additional shares may be sold upon the expiration of 180-day
lock-up agreements.
Existing stockholders holding an aggregate of 35,019,414 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.
Securities issued in reliance on Rule 701, such as shares of our common
stock acquired pursuant to the exercise of certain options granted under our
stock plans, are also restricted securities. Beginning 90 days after the date
of this prospectus, 381,920 shares issuable upon the exercise of vested stock
options may be sold under Rule 701 by stockholders other than our affiliates.
After this offering, we intend to register approximately 25,166,666 shares
of our common stock that we have issued or may issue under our stock plans.
Once we register these shares, they can be freely sold in the public market
upon issuance, subject to the "lock-up" agreements described above and the
restrictions imposed on our affiliates under Rule 144.
10
<PAGE>
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 35,019,414 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.
11
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 4,500,000 shares of
common stock will be approximately $48.4 million, assuming an initial public
offering price of $12.00 per share and after deducting estimated underwriting
discounts and our estimated offering expenses. If the underwriters' over-
allotment option is exercised in full, we estimate that our net proceeds will
be approximately $56.0 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 8.75% as of March 1, 2000. This indebtedness is guaranteed by
GTCR and is due on demand. The GTCR Funds will own approximately 62.8% of our
common stock following this offering.
We also expect to use a portion of the net proceeds from this offering to
repay approximately $2.8 million of a total of $20.2 million of outstanding
subordinated indebtedness that we owed to GTCR Capital Partners as of March 1,
2000. We incurred $12.8 million of this indebtedness in November 1999 to fund
operating losses and repurchase shares of stock held by the GTCR Funds. We
incurred an additional $7.4 million of this indebtedness during the first
quarter of 2000 to fund operations. This indebtedness bears interest at a rate
of 12.0% per annum and matures upon the first anniversary of the closing date
of this offering. This indebtedness includes $1.7 million of unamortized
original issue discount.
We expect to use the remaining $26.2 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.
If the net proceeds from this offering are greater than $48.4 million as a
result of the exercise by the underwriters of their over-allotment option, we
will use one half of such additional net proceeds to repay additional
outstanding subordinated indebtedness that we owe to GTCR Capital Partners.
Pending use of the net proceeds, we intend to invest these proceeds in
short-term, investment grade, interest-bearing instruments.
12
<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.
13
<PAGE>
CAPITALIZATION
The following table sets forth our actual, pro forma and pro forma as
adjusted capitalization as of December 31, 1999. The pro forma information
reflects:
. the issuance during the first quarter of 2000 of an aggregate of
17,055.1986 shares of class A preferred stock to existing holders of
class A preferred stock and GTCR Capital Partners for proceeds of $15.3
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 March 31, 2000, for 3,632,222 shares of common stock at
an exchange rate based on an assumed initial public offering price of
$12.00 per share;
. the incurrence in the first quarter of 2000 of an additional $7.4 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 preferred stock and authorizes
200,000,000 shares of common stock and 5,000,000 shares of undesignated
preferred stock; and
. the conversion upon the closing of this offering of a $2.0 million
promissory note issued to Renaissance Worldwide, Inc. into 208,333
shares of common stock.
The pro forma as adjusted information reflects:
. receipt of estimated net proceeds of $48.4 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;
. 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; and
. the application of a portion of the net proceeds to repay $2.8 million
of outstanding subordinated indebtedness owed to GTCR Capital Partners.
The share numbers exclude 4,627,111 shares of common stock issuable upon
exercise of stock options outstanding as of December 31, 1999 at a weighted
average exercise price of $1.41 per share and 39,555 shares of common stock
available for issuance under our 1999 Incentive Plan and 1999 Stock Option Plan
as of December 31, 1999. The amounts shown in the following table as
subordinated debt payable to GTCR exclude an original issue discount of $1.7
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."
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except
share and per share data)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 1,271 $23,904 $50,118
======== ======= =======
Lines of credit................................ $ 19,566 $19,566 $ 150
Other debt, including current portion.......... 2,980 980 980
Subordinated debt payable to GTCR.............. 11,119 18,490 15,700
Class A redeemable preferred stock, $0.01 par
value per share; 96,632 shares authorized;
24,814 shares outstanding, actual; no shares
outstanding, pro forma and pro forma as
adjusted...................................... 25,803 -- --
Stockholders' equity (deficit):
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;
39,854,268 shares outstanding, actual;
200,000,000 shares authorized, pro forma and
pro forma as adjusted; 43,694,823 shares
outstanding, pro forma; 48,194,823 shares
outstanding, pro forma as adjusted........... 40 44 48
Additional paid-in-capital.................... 14,692 60,275 108,691
Subscriptions receivable...................... (1,138) (1,138) (1,138)
Deferred compensation......................... (7,114) (7,114) (7,114)
Accumulated deficit........................... (31,150) (32,942) (32,942)
-------- ------- -------
Total stockholders' equity (deficit)....... (24,670) 19,125 67,545
-------- ------- -------
Total capitalization..................... $ 34,798 $58,161 $84,375
======== ======= =======
</TABLE>
14
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of December 31,
1999 was approximately $(5.9) million, or $(0.14) 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 December 31, 1999, assuming (a) the issuance
during the first quarter of 2000 of an aggregate of 17,055.1986 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 March 31,
2000, for 3,632,222 shares of common stock at an exchange rate based on an
assumed initial public offering price of $12.00 per share and (c) the
conversion of a $2.0 million promissory note issued to Renaissance Worldwide,
Inc. into 208,333 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, and $2.8 million of
outstanding subordinated indebtedness owed to GTCR Capital Partners, our pro
forma net tangible book value as of December 31, 1999 would have been
approximately $42.5 million, or $0.88 per share. This represents an immediate
increase in pro forma net tangible book value of $1.02 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$11.12 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 per share................. $12.00
Pro forma net tangible book value per share as of December 31,
1999......................................................... $(0.14)
Increase in pro forma net tangible book value per share
attributable to new investors................................ 1.02
------
Pro forma net tangible book value per share after this
offering....................................................... 0.88
------
Dilution per share to new investors............................. $11.12
======
</TABLE>
The following table sets forth on a pro forma basis as of December 31, 1999
the difference between the number of shares of common stock purchased from us,
assuming the issuance of 3,840,555 shares of common stock in exchange for the
shares of class A preferred stock and upon conversion of 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........... 43,694,823 90.7% $ 51,902,249 49.0% $ 1.19
New investors................... 4,500,000 9.3 54,000,000 51.0 12.00
---------- ----- ------------ -----
Total......................... 48,194,823 100.0% $105,902,249 100.0%
========== ===== ============ =====
</TABLE>
As of December 31, 1999, there were options outstanding to purchase a total
of 4,627,111 shares of common stock at a weighted average exercise price of
$1.41 per share under our stock plans. To the extent any of these stock options
are exercised, there will be additional dilution to new investors.
15
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
The following pro forma 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 tables present 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.
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Three Months Ended Year Ended
------------------------------------------------ ------------
March 31, June 30, September 30, December 31, December 31,
1999 1999 1999 1999 1999
--------- -------- ------------- ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 3,957 $ 5,612 $ 10,212 $ 13,303 $ 33,084
Operating expenses:
Cost of services...... 4,000 4,528 6,110 8,514 23,152
Hiring and training... 193 246 1,337 3,989 5,765
Research and
innovation........... 30 98 406 1,298 1,832
Sales and marketing... 778 971 1,636 4,922 8,307
General and
administrative....... 2,300 4,959 6,070 10,289 23,618
Depreciation and
amortization......... 3,892 4,000 4,799 5,281 17,972
Compensation expense.. -- -- 234 432 666
------- -------- -------- -------- --------
Total operating
expenses........... 11,193 14,802 20,592 34,725 81,312
------- -------- -------- -------- --------
Loss from operations.... (7,236) (9,190) (10,380) (21,422) (48,228)
Interest and other
expense, net........... (739) (1,088) (689) (1,098) (3,614)
------- -------- -------- -------- --------
Loss before taxes....... (7,975) (10,278) (11,069) (22,520) (51,842)
Benefit from income
taxes.................. -- 1,764 3,996 -- 5,760
------- -------- -------- -------- --------
Net loss................ $(7,975) $ (8,514) $ (7,073) $(22,520) $(46,082)
======= ======== ======== ======== ========
Net loss per share...... $ (0.27) $ (0.28) $ (0.23) $ (0.74) $ (1.53)
======= ======== ======== ======== ========
Weighted average
shares................. 29,693 29,917 30,311 30,450 30,212
======= ======== ======== ======== ========
Operating Expenses as a
Percentage of Revenues:
Cost of services........ 101.1 % 80.7 % 59.8 % 64.0 % 70.0 %
Hiring and training..... 4.9 4.4 13.1 30.0 17.4
Research and
innovation............. 0.8 1.7 4.0 9.8 5.5
Sales and marketing..... 19.7 17.3 16.0 37.0 25.1
General and
administrative......... 58.1 88.4 59.4 77.3 71.4
Depreciation and
amortization........... 98.4 71.3 47.0 39.7 54.3
Compensation expense.... -- -- 2.3 3.2 2.0
------- -------- -------- -------- --------
Total operating
expenses........... 282.9 % 263.8 % 201.6 % 261.0 % 245.8 %
======= ======== ======== ======== ========
</TABLE>
16
<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. 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
-------------------------- ---------------------------- ------------
Five
Months Period from Period from
Years Ended Ended Inception to Four Months Inception to
December 31, May 28, December 31, Ended April 30, December 31,
1997 1998 1999 1998 1999 1999
------- ------- -------- ------------ --------------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 9,539 $13,798 $ 3,886 $ 621 $ 491 $ 25,277
Operating Expenses:
Cost of services....... $ 4,461 $10,056 4,780 469 589 15,736
Hiring and training.... -- 196 160 7 10 5,542
Research and
innovation............ -- -- -- -- -- 1,832
Sales and marketing.... 592 4,126 1,013 140 125 7,056
General and
administrative........ 1,635 2,843 2,461 511 1,973 18,420
Depreciation and
amortization.......... 197 340 190 55 56 10,681
Compensation
expense(1)............ -- -- -- -- -- 666
------- ------- -------- ------ ------- ---------
Total operating
expenses............. 6,885 17,561 8,604 1,182 2,753 59,933
Income (loss) from
operations............. 2,654 (3,763) (4,718) (561) (2,262) (34,656)
Interest income......... 4 -- -- 12 7 43
Interest and other
expense................ (38) (432) (325) (5) (26) (2,297)
Provision for (benefit
from) income taxes..... 1,326 -- -- -- -- (5,760)
------- ------- -------- ------ ------- ---------
Net income (loss)....... $ 1,294 $(4,195) $ (5,043) $ (554) $(2,281) $ (31,150)
======= ======= ======== ====== ======= =========
Basic and diluted net
income (loss) per
share.................. $ (1.16)
=========
Weighted average
shares................. 26,793
=========
(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
above are exclusive of stock-based compensation expense of
$165, $9, $24, $277 and $191, respectively. These amounts are
included in the compensation expense line item. See Note 11 to
the financial statements.
Balance Sheet Data (at
end of period):
Cash and cash
equivalents............ $ 102 $ 312 $ 57 $ 539 $ 143 $ 1,271
Working capital
(deficit).............. 653 1,482 (2,653) 386 (994) (23,377)
Total assets............ 4,719 7,946 6,549 1,026 1,136 51,290
Lines of credit......... -- 1,734 1,748 -- -- 19,566
Other debt, including
current portion........ 806 341 298 -- -- 2,980
Subordinated debt
payable to GTCR........ -- -- -- -- -- 11,119
Redeemable preferred
stock.................. -- -- -- 1,200 1,200 25,803
Total stockholders'
equity (deficit)....... 1,955 2,599 (1,667) (609) (1,928) (24,670)
</TABLE>
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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 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 $0.3 million for the three months
ended March 31, 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 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.
18
<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 12,000 square foot innovation and training facility.
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, speaking engagements 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.
19
<PAGE>
Historical Results of Operations
ZEFER
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. Costs 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
has been amortized as compensation expense during 1999. The deferred
compensation of $7.7 million excludes $0.2 million of compensation expense
related to unrestricted stock issued to management. Deferred compensation
represents the difference between the exercise price of stock options granted
and 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' equity and is being amortized over the vesting
period of the applicable options and restricted common stock, which is
typically four years. The amortization of deferred compensation is recorded as
stock-based compensation and the impact over the vesting period will be as
follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000................................................. $3,656
2001................................................. 1,930
2002................................................. 1,046
2003................................................. 456
2004................................................. 26
------
$7,114
======
</TABLE>
Interest and Other Expenses and Benefit from Income Taxes. Interest and
other expenses 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.
20
<PAGE>
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. Costs 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 $1.5 million to $2.0
million for the period ended April 30, 1999 from $0.5 million for the period
from inception to December 31, 1998, reflecting our investment in the
infrastructure required to rapidly scale our business.
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. Costs 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 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.
21
<PAGE>
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.
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 December 31, 1999, we had raised $29.2 million of
capital from the sale of common and preferred stock, and we raised an
additional $15.3 million from the sale of preferred stock during the first
quarter of 2000. As of December 31, 1999, we had $1.3 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 (8.75% at March 1, 2000). All borrowings under this line are
guaranteed by GTCR. As of December 31, 1999, 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 February 29, 2000, $629,000 was outstanding under this
line.
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, is payable on May 14, 2000. The remaining unpaid
principal and interest on the notes is due on May 14, 2001.
As part of the consideration for our acquisition of the divisions of
Renaissance the Company 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 (5.9% at March 1, 2000) plus 2.0% per annum and
interest is
22
<PAGE>
payable quarterly through May 2002. Principal is payable in eight quarterly
installments commencing May 2000. At the option of Renaissance, the principal
amount outstanding under the Renaissance note is convertible to common stock of
the Company at the conversion price equal to 80% of the IPO price. Renaissance
has exercised this option.
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
first quarter of 2000, we borrowed an additional $7.4 million to fund
operations. As of March 1, 2000, $20.2 million of indebtedness, which includes
$1.7 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. We intend to repay
$2.8 million of the outstanding indebtedness under the loan with a portion of
the net proceeds 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.
In addition, to the extent the net proceeds from this offering or any
subsequent public equity offerings that we make are greater than $48.4 million
but less than or equal to $76.0 million, we are required to use one half of
such additional net proceeds to repay the loan. To the extent such net proceeds
are greater than $76.0 million, we are first required to apply such net
proceeds to repay the remaining $3.6 million balance of 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.
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 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 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. We expect that capital expenditures will continue to increase to
the extent 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.
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.
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<PAGE>
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.
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 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 requires costs associated with
internal use software to be charged to operations as incurred until
capitalization criteria set forth in SOP 98-1 are met. SOP 98-1 became
effective January 1, 1999. The adoption of this statement did not have a
material impact on our financial position or results of operations.
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 December 31,
1999. Borrowings on the line bear interest at the prime lending rate, which was
8.5% at December 31, 1999. 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.
24
<PAGE>
BUSINESS
Overview
We provide consulting and software application development and
implementation services to dot-com and traditional companies to enable them 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 new dot-coms to rapidly develop and deploy an online business, and
enable traditional businesses to redefine their business models and build on
their existing assets.
As of December 31, 1999, we had 312 billable professionals and during 1999
we entered into engagements with approximately 90 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 market for
Internet services worldwide will grow from $7.8 billion in 1998 to $78.6
billion in 2003, representing a compound annual growth rate of 59%.
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 159 million in 1998 to
510 million in 2003, while worldwide e-commerce revenues will increase from
approximately $50 billion to more than $1.3 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 and even after initial
deployment. 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 dot-
com and 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. During the period from our inception
through December 31, 1999, we spent $1.8 million on research and innovation. We
did not make any research and innovation expenditures during 1997 and 1998.
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 last nine months of 1999,
we hired an average of approximately 20 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 by the second quarter of
2000.
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<PAGE>
. 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.
Serve Cutting-edge Dot-com Clients. We plan to continue to perform a
significant portion of our engagements for dot-com clients, some of which we
expect will become the leading businesses of the future. We believe that our
traditional clients value the experience that we gain from working with dot-com
clients. We also increase our internal intellectual capital by working with our
dot-com clients, which often are on the cutting edge of strategic and
technological innovations in the Internet arena. In addition, a strong client
base of dot-com businesses allows us to attract and retain talented
professionals who are eager to work with the latest technologies and business
models.
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.
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 financial services, healthcare and
pharmaceuticals, technology, consumer packaged goods and retail, and media and
entertainment. 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.
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 executives of both dot-com
companies and traditional businesses. 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.
Expand Alliances. We have selectively established alliances with software
and hardware vendors, including BroadVision, 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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<PAGE>
. 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.
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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.
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 expertise in
the latest Internet technologies, including programming languages such as EJB,
XML and Microsoft DCOM. They also have significant 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 21% of our revenues for the period from our inception to December
31, 1999, with average revenues per engagement in 1999 of approximately
$887,000. We have recognized revenues for the period from our inception to the
date of this prospectus of at least $250,000 from each of these clients.
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.
foodline.com is a privately held telephone and online
restaurant guide and reservation network.
[LOGO OF FOODLINE]
foodline.com engaged us in early 1999 to assist it in developing its
Internet business. foodline's objective was to build on its existing electronic
restaurant guide by adding an online restaurant reservation system.
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We began this engagement by conducting a strategic study and analysis of
foodline's Internet vision and business model with the goal of helping it to
rapidly deploy a technically scalable and robust solution. We addressed the
strategic components and technical underpinnings that foodline's reservation
site would need, including a business model with multiple revenue streams and a
scalable information architecture.
We worked with foodline to develop and implement a solution that permits end
users to log onto foodline.com to research dining options according to their
preferences and seating availability. This application also confirms
reservation times online. Credit card processing is incorporated into the site
to guarantee reservations.
The scalable nature of this solution has allowed foodline to quickly expand
to new cities. After initial implementation in Boston, foodline introduced the
solution to New York, San Francisco and Philadelphia with relatively little
incremental cost. Anthony K. Tjan, our Executive Vice President and a member of
our board of directors, sits on the board of advisors of foodline. Mr. Tjan is
not compensated for his services on the board of advisors.
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.
After the initial launch, we collaborated with The Children's Place to
change the site's look and feel to reflect the upcoming 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.
Zuellig Pharma is a healthcare product distributor and
healthcare information delivery company in the Asia
Pacific region. Zuellig Pharma provides exclusive
distribution and information-based services for the
largest pharmaceutical manufacturers in the world and to
leading hospitals, pharmacies and clinics in 22 Asian
countries.
[LOGO OF ZUELLIG PHARMA]
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
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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.
Greenlight.com is an online automobile
retailer.
[LOGO OF GREENLIGHT.COM/TM/]
Greenlight.com engaged us to assist it in building a dot-com business that
would use the Internet to transform the entire car buying experience, from
model selection to delivery.
In just 10 weeks, we developed Greenlight.com's website in such a way as to
provide a satisfying customer car buying experience while maintaining a
technological infrastructure able to adapt to the aggressive growth targets
established by Greenlight.com. We designed a personalized area called My
Showroom that allows users to compare specific models in which they are
interested. My Showroom saves that information so that users may return to
check on price updates or to edit the vehicle configuration. In addition to
creating Greenlight's consumer website, we also developed a comprehensive
system to help account managers track customer orders, manage dealer
relationships, create vehicle options packages and edit pricing. We continue to
work with Greenlight.com to refine its business model and the functionality of
the site.
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 to both dot-com and traditional businesses. 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
During the period from inception (March 18, 1999) through December 31, 1999,
we derived approximately 69% of our revenues from services performed for
traditional businesses and approximately 31% from dot-com businesses. During
1999, 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.
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Our clients listed below have worked with our multidisciplinary teams and
reflect our mix of traditional and dot-com clients. During the period from our
inception to the date of this prospectus, we recognized revenues of at least
$250,000 from each of these clients.
<TABLE>
<S> <C>
Accompany IONA Technologies
Barclays MoveCentral
ebDirect Neopost Online
enTotal.com Publicaciones Semana
Federated Investors Siemens
foodline.com SimplyHealth.com
Gillette The Children's Place
Gordon Brothers Winebid.com
Group Zuellig Pharma
Greenlight.com
Houston Cellular
</TABLE>
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).
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 a 12,000
square foot innovation and training center in Boston. We expect to complete
this center by the second 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
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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 Booz-Allen &
Hamilton, Boston Consulting Group, Andersen Consulting 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
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 December 31, 1999, we had a total of 481 employees, including 312
billable employees in our competencies of business strategy, experience design,
technology and program management. 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. The leases of this additional space expire at various times through
December 2005. We also lease an aggregate of 142,600 square feet of office
space in Chicago, New York, Pittsburgh and San Francisco. 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 December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
William A. Seibel............. 48 Chairman of the Board, President and Chief
Executive Officer
Gerard E. Dube................ 45 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................ 45 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............. 42 Chief Technology Officer and Executive Vice
President of Unified Services
Thomas J. Waite............... 42 Executive Vice President of Business
Strategy and Strategic Marketing
Philip A. Canfield+........... 31 Director
Masood Jabbar*................ 50 Director
Catherine Viscardi Johnston+.. 46 Director
David A. Lubin+*.............. 49 Director
Timothy P. McAdam............. 31 Director
Richard L. Nolan*............. 58 Director
Bruce V. Rauner............... 43 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 described in "Certain
Relationships and Related Transactions--Stockholders Agreement" below.
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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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 described in "Certain
Relationships and Related Transactions--Stockholders Agreement" below.
Francis J. Torbey has served as our Chief Technology Officer and 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 AETEA Information Technology, Inc., VISTA
Information Technologies, Inc., AppNet, Inc., FutureNext Consulting, Inc.,
Metamor Software Solutions, Inc. and netASPx, Inc. Mr. Canfield was elected to
the board of directors as a nominee of GTCR pursuant to the stockholders
agreement described in "Certain Relationships and Related Transactions--
Stockholders Agreement" below.
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 pursuant to the
stockholders agreement described in "Certain Relationships and Related
Transactions--Stockholders Agreement" below.
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 pursuant to the stockholders agreement described in
"Certain Relationships and Related Transactions--Stockholders Agreement" below.
David A. Lubin has been on our board of directors since June 1999. 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 pursuant to the stockholders agreement described in
"Certain Relationships and Related Transactions--Stockholders Agreement" below.
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Timothy P. McAdam has been on our board of directors since April 1999. He
has been a vice president at GTCR since 1998 and was an associate from 1996 to
1998. Mr. McAdam worked as an analyst at Merrill Lynch, Pierce, Fenner & Smith
Incorporated, an investment bank, from 1990 through 1991 and as an associate at
TA Associates, a venture capital firm, from 1991 through 1994. He is a director
of International Computer Graphics and U.S. Fleet Services. Mr. McAdam was
elected to the board of directors as a nominee of GTCR pursuant to the
stockholders agreement described in "Certain Relationships and Related
Transactions--Stockholders Agreement" below.
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 pursuant to
the stockholders agreement described in "Certain Relationships and Related
Transactions--Stockholders Agreement" below.
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 described in "Certain Relationships
and Related Transactions--Stockholders Agreement" below.
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. Seibel and Tjan and Ms.
Johnston serve in the class whose term expires in 2001, Messrs. Canfield,
McAdam and Rauner serve in the class whose term expires in 2002 and Messrs.
Jabbar, Lubin and Nolan 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, Canfield and McAdam
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. The options granted
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to these non-employee directors, which have a weighted average exercise price
of $5.10 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 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
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.
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 Chief Executive Officer 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.
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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 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. Mr. Gopal is the author of three books and several
articles dealing with information management, e-commerce and supply chain
management. Mr. Gopal is currently the Vice President, Information and Services
at Cmetric, Inc., a communications company.
Clive Holtham 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. Mr. 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. Mr. 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, Ph.D. is Vice President, Advanced Communications at Johnson &
Johnson, where he leads efforts in medical informatics and focuses on current
and future new business opportunities related to the management of information
to health care delivery. Prior to joining Johnson & Johnson in 1995, Mr.
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.
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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 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.
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.
Mr. 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.
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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 nonstatutory 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.
Benefit Plans
1999 Stock Incentive Plan. Our 1999 Stock Incentive Plan was adopted by our
board of directors and approved by our stockholders in June 1999. In February
2000, our board of directors approved an amendment to our incentive plan
increasing the shares available for issuance under the 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.
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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.
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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 February
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 December 31, 1999, approximately 480 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 who has elected to participate
in the purchase plan an option to purchase shares of our common stock as
follows: the employee may authorize between 1% to 10% of his or her base pay to
be deducted by us 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
first day 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
average market price of a share of common stock on the commencement date of the
offering period.
The first offering period under the purchase plan will be one year long. The
board of directors will choose the timing and length of subsequent 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.
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Mr. Seibel's initial base salary was $325,000 per year and was increased to
$375,000 per year in October 1999. Mr. Seibel 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.
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 to occur on March 31, 2000, so as to vest in full on March 31,
2004;
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<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;
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. 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 $165,000 per year, 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.
Additionally, Mr. Mullaney is entitled to receive a bonus of $50,000 in 2000.
Under a senior management agreement entered with us on August 25, 1999, Mr.
Slamp receives a base salary of $175,000 per year, 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.
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 began to receive a base salary of $170,000 per year in May 1999, which
was increased to $200,000 per year in October 1999. 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.
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. 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 began to receive a base salary of $160,000 per year in May 1999, which
was increased to $200,000 per year in October 1999. 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.
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<PAGE>
Under a senior management agreement entered with us on September 13, 1999,
Mr. Waite receives a base salary of $225,000 per year, 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, Inc."
Please refer to "Certain Relationships and Related Transactions--Additional
Equity Purchases by Management" 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.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GTCR Golder Rauner, L.L.C.
Immediately, prior to this offering, the GTCR Funds will beneficially own
69.2% 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 62.8% of our common stock. Messrs. Rauner, Canfield and
McAdam, three of our directors, are managing principal, principal and vice
president 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
39,074.661 shares of our class A preferred stock for a purchase price of $1,000
per share, or $39.1 million in the aggregate. Based on an assumed initial
public offering price of $12 per share, the common stock purchased by the GTCR
Funds would have a value of $319.2 million and our common stock that we will
issue to the GTCR Funds in exchange for the class A preferred stock held by the
GTCR Funds would have a value of $39.1 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 $12.00 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 have incurred an additional $7.4
million of indebtedness through the date of this prospectus. 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. As of March 1, 2000, approximately $295,000 in unpaid
interest had accrued under the loan.
We intend to repay $2.8 million of the oustanding indebtedness under the
loan agreement with a portion of the net proceeds of this offering. To the
extent net proceeds from this offering or any subsequent public equity
offerings that we make are greater than $48.4 million but less than or equal to
$76.0 million, we are required to use one half of such additional net proceeds
to repay the loan. To the extent such net proceeds are greater than $76.0
million, we are first required to apply such net proceeds to repay the
remaining $3.6 million balance of the loan. See "Use of Proceeds."
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 1,792.5376 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 $17.93. Based on an initial public
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<PAGE>
offering price of $12 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 $23.1 million.
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 Management
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>
Aggregate Purchase Average Per Pro Forma
Name Security Shares Price Share Price Value (1)
---- -------- ------ ------------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
William A. Seibel(2).... Common 95,817 $ 11,978 $0.125 $1,149,804
A Preferred 141 141,000 1,000 141,000
Gerard E. Dube.......... Common 82,256 23,443 0.285 987,072
A Preferred 121 121,000 1,000 121,000
Sean W. Mullaney(3)..... Common 54,837 6,855 0.125 658,044
A Preferred 80 80,000 1,000 80,000
James H. Slamp.......... Common 27,418 7,814 0.285 329,016
A Preferred 40 40,000 1,000 40,000
Martha L. Stephens...... Common 27,418 3,427 0.125 329,016
A Preferred 40 40,000 1,000 40,000
Francis J. Torbey....... Common 27,418 3,427 0.125 329,016
A Preferred 40 40,000 1,000 40,000
Thomas J. Waite......... Common 38,160 10,876 0.285 457,920
A Preferred 56 56,000 1,000 56,000
David A. Lubin.......... Common 47,771 5,971 0.125 573,252
A Preferred 70 70,000 1,000 70,000
Richard L. Nolan........ Common 27,418 3,427 0.125 329,016
A Preferred 40 40,000 1,000 40,000
</TABLE>
- --------
(1) Calculations are based on an initial public offering price of $12 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. This note bears interest at a rate of 10% compounded
annually, and is repayable on June 1, 2000. Mr. Seibel beneficially owns
a total of 3,148,042 shares of our common stock and less than 1% of our
class A preferred stock, all of which will be exchanged into common stock
or redeemed in connection with this offering. After this offering, Mr.
Seibel will beneficially own 6.5% of our common stock.
(3) An investment partnership in which Mr. Mullaney exercises voting and
investment control is the purchaser 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 $12 per share, the common
stock purchased by Mr. Jabbar would have a value of $1.2 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 $12 per share, the common stock purchased by Mr. Lubin would
have a value of $4.8 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 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. Forty percent of Mr. Lubin's
then unvested shares of restricted stock will vest in the event that Mr. Seibel
is no longer serving as our President and Chief Executive Officer and Mr. Lubin
ceases to serve as a director, unless he is removed 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
41,869.1986 shares of class A preferred stock would be exchanged for an
aggregate of 3,632,222 shares of common stock, based on an assumed initial
public offering price of $12 per share and a liquidation value for all class A
preferred stock, including accrued and unpaid dividends of $1,718,500 as of
March 31, 2000. Based on an assumed initial public offering price of $12 per
share, the common stock exchanged for the class A preferred stock would have a
value of $43.6 million. In the event that the net proceeds to us from this
offering exceed $79.6 million, we are required to apply all the additional net
proceeds received by us to redeem on a pro rata basis shares of common stock
that are received by the holders of class A preferred stock in connection with
the exchange at a price per share equal to the initial public offering price.
The holders of such common stock must surrender their shares for redemption in
this event.
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
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<PAGE>
offering price of $12 per share, the common stock received by the stockholders
of Original ZEFER and Mr. Tjan would have a value of $41.5 million and $10.1
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.
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 $12 per share, the common stock received by
the stockholders of Waite & Company, Inc. and Mr. Waite would have a value of
$14.4 million and $3.2 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. All of the above
restrictions on transfer shall terminate upon the consummation of this
offering. 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.
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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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 10, 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)........... 30,185,624 69.2% 62.8%
William A. Seibel (2)..... 3,148,042 7.2 6.5
Gerard E. Dube............ 892,636 2.0 1.9
Sean W. Mullaney.......... 481,773 1.1 1.0
James H. Slamp............ 430,848 1.0 *
Martha L. Stephens........ 450,883 1.0 *
Anthony K. Tjan........... 844,800 1.9 1.8
Francis J. Torbey......... 470,883 1.1 1.0
Thomas J. Waite........... 306,163 * *
Philip A. Canfield (1)
(3)...................... 30,185,624 69.2 62.8
Masood Jabbar............. 100,000 * *
Catherine Viscardi
Johnston................. -- -- --
David A. Lubin ........... 453,837 1.0 1.0
Timothy P. McAdam (1)
(3)...................... 30,185,624 69.2 62.8
Richard L. Nolan ......... 30,883 * *
Bruce V. Rauner (1) (3)... 30,185,624 69.2 62.8
All executive officers and
directors as a group
(15 persons) (3)......... 37,796,372 86.7% 78.6%
</TABLE>
- ---------------------
* Less than 1%.
(1) The address of each of the GTCR Funds and Messrs. Canfield, McAdam and
Rauner is 6100 Sears Tower, Chicago, Illinois 60606.
(2) Includes 108,042 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 30,185,624 shares of common stock held by GTCR. Messrs. Canfield
and Rauner are Principals and Mr. McAdam is a Vice President of GTCR and
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. Canfield, McAdam and Rauner disclaims beneficial ownership of the
shares held by GTCR.
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<PAGE>
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. After giving effect to this offering, we will have outstanding
48,097,157 shares of common stock.
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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<PAGE>
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 48,097,157 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 43,597,157 shares of common stock outstanding after this
offering are deemed "restricted securities" under Rule 144. Of these
securities,
. 4,527,843 shares may be sold 90 days after the effective date of this
offering; and
. 32,979,366 additional shares may be sold upon expiration of the 180-day
lock-up agreements described below.
Stockholders holding an aggregate of 43,594,785 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. However, the GTCR Funds will
be released from these lock-up restrictions as to 4,527,843 shares of common
stock 90 days after the date of this prospectus.
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.
Securities issued in reliance on Rule 701, such as shares of our common
stock acquired pursuant to the exercise of certain options granted under our
stock plans, are also restricted securities. Beginning 90 days after the date
of this prospectus, 381,920 shares issuable upon the exercise of vested stock
options may be sold under Rule 701 by stockholders other than our affiliates
subject only to the manner of sale provisions of Rule 144 without compliance
with its one-year holding period requirement.
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. 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 35,019,414 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
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<PAGE>
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.
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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<PAGE>
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.
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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, First Union Securities,
Inc. and FleetBoston Robertson Stephens 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...........................
First Union Securities, Inc. ....................................
FleetBoston Robertson Stephens 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.. $0.40 $0.35 $1,800,000 $1,800,000
</TABLE>
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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 fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 18,216
NASD filing fee............................................... 7,400
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.................................. 750,000
Legal fees and expenses....................................... 350,000
Director and officer liability insurance...................... 400,000
Printing and mailing expenses................................. 150,000
Miscellaneous................................................. 14,384
----------
Total..................................................... $1,800,000
==========
</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
43,594,785 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, provided that the GTCR Funds will be
released from these lock-up restrictions as to 4,527,843 shares of common stock
90 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 Suise First Boston Corporation will release these lock-up
agreements prior to their scheduled expiration dates. See "Risk Factors--
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;
. market conditions for initial public offerings;
. the history and the prospects for the industry in which we will compete;
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. 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.
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."
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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.
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.
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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.
64
<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' Equity
(Deficit)............................................................... F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
SPYPLANE, LLC:
Report of Independent Public Accountants................................. F-25
Balance Sheets........................................................... F-26
Statements of Income..................................................... F-27
Statements of Members' Equity............................................ F-27
Statements of Cash Flows................................................. F-28
Notes to Financial Statements............................................ F-29
THE DIVISIONS OF RENAISSANCE:
Report of Independent Public Accountants................................. F-32
Combined Balance Sheets.................................................. F-33
Combined Statements of Operations and Parent Company Equity (Deficit).... F-34
Combined Statements of Cash Flows........................................ F-35
Notes to Combined Financial Statements................................... F-36
NEOGLYPHICS MEDIA CORPORATION:
Report of Independent Accountants........................................ F-40
Statement of Financial Position.......................................... F-41
Statement of Income...................................................... F-42
Statement of Cash Flows.................................................. F-43
Notes to Financial Statements............................................ F-44
WAITE & COMPANY, INC.:
Report of Independent Public Accountants................................. F-51
Balance Sheets........................................................... F-52
Statements of Operations................................................. F-53
Statements of Stockholders' Equity....................................... F-53
Statements of Cash Flows................................................. F-54
Notes to Financial Statements............................................ F-55
INDEX TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
ZEFER CORP.:
Review Report of Independent Public Accounts............................. F-58
Overview................................................................. F-59
Pro Forma Combined Condensed Statement of Operations for the Year Ended
December 31, 1999....................................................... F-61
Notes to Pro Forma Combined Condensed Financial Statements............... F-62
</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 (except for the matters discussed in Notes 1, 11 and 16, as to
which the date is March 27, 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, December 31,
1998 1999 1999 1999
------------ ---------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equiva-
lents................. $ 538,917 $ 143,490 $ 1,271,105 $ 1,271,105
Accounts receivable,
net................... 121,993 577,505 7,093,223 7,093,223
Unbilled receivables... -- -- 3,311,605 3,311,605
Prepaid expenses and
other current assets.. 6,510 -- 1,497,668 1,497,668
---------- ---------- ----------- -----------
Total current as-
sets................ 667,420 720,995 13,173,601 13,173,601
Property and Equipment,
net (Note 2)........... 342,518 391,292 8,590,549 8,590,549
Goodwill, net........... -- -- 9,275,715 9,275,715
Other Intangible Assets,
net.................... -- -- 15,782,639 15,782,639
Other Assets............ 16,500 23,563 4,467,300 4,467,300
---------- ---------- ----------- -----------
$1,026,438 $1,135,850 $51,289,804 $51,289,804
========== ========== =========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Lines of credit........ $ -- $ -- $19,566,122 $19,566,122
Accounts payable....... 121,897 215,249 5,149,890 5,149,890
Accrued expenses....... 29,125 1,014,860 9,922,939 9,922,939
Deferred revenue....... 46,805 344,763 720,960 720,960
Current portion of
notes payable......... -- -- 930,000 930,000
Current portion of cap-
ital lease obliga-
tions................. 83,582 139,792 260,536 260,536
---------- ---------- ----------- -----------
Total current liabil-
ities............... 281,409 1,714,664 36,550,447 36,550,447
Notes Payable, net of
current portion........ -- -- 2,050,000 2,050,000
Capital Lease
Obligations, net of
current portion........ 153,551 148,785 436,937 436,937
Subordinated Debt
Payable to Majority
Stockholder (Note 9)... -- -- 11,119,385 11,119,385
Commitments and Contin-
gencies (Note 10)
Redeemable Preferred
Stock (Note 11)........ -- -- 25,803,156 --
Redeemable Convertible
Preferred Stock
(Note 13).............. 1,200,000 1,200,000 -- --
Stockholders' Deficit:
Common stock (Notes 11
and 13)............... 474 571 39,854 42,004
Additional paid-in cap-
ital.................. -- 1,122,659 14,691,642 40,492,648
Subscriptions receiv-
able.................. -- -- (1,137,943) (1,137,943)
Deferred compensation.. -- -- (7,113,759) (7,113,759)
Accumulated deficit.... (608,996) (3,050,829) (31,149,915) (31,149,915)
---------- ---------- ----------- -----------
Total stockholders'
equity (deficit).... (608,522) (1,927,599) (24,670,121) 1,133,035
---------- ---------- ----------- -----------
$1,026,438 $1,135,850 $51,289,804 $51,289,804
========== ========== =========== ===========
</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
Inception Inception
(March 19, (March 18,
1998) through Four Months 1999) through
December 31, Ended December 31,
1998 April 30, 1999 1999
------------- -------------- -------------
<S> <C> <C> <C>
Revenues........................... $ 620,733 $ 491,141 $ 25,276,935
Operating Expenses:
Cost of services.................. 469,147 589,140 15,736,322
Hiring and training............... 7,441 9,958 5,541,716
Research and innovation........... -- -- 1,832,039
Sales and marketing............... 140,310 124,540 7,055,712
General and administrative........ 510,749 1,973,489 18,420,098
Depreciation and amortization..... 54,706 55,839 10,681,725
Compensation expense(1)........... -- -- 665,683
--------- ----------- ------------
Total operating expenses........ 1,182,353 2,752,966 59,933,295
--------- ----------- ------------
Loss from operations............ (561,620) (2,261,825) (34,656,360)
Interest Income.................... 11,502 6,858 43,475
Interest and Other Expense......... (5,058) (25,510) (2,297,430)
--------- ----------- ------------
Loss Before Income Taxes........ (555,176) (2,280,477) (36,910,315)
Benefit from Income Taxes.......... -- -- 5,760,400
--------- ----------- ------------
Net loss........................ $(555,176) $(2,280,477) $(31,149,915)
========= =========== ============
Basic and Diluted Net Loss Per
Share............................. $ (1.16)
============
Basic and Diluted Weighted Average
Shares Outstanding................ 26,793,270
============
Pro Forma Basic and Diluted Net
Loss Per Share.................... $ (1.04)
============
Pro Forma Basic and Diluted
Weighted Average Shares
Outstanding....................... 28,943,533
============
- --------
(1) The following summarizes the departmental allocation of stock-based
compensation:
Cost of services.................. $ -- $ -- $ 164,784
Hiring and training............... -- -- 8,570
Research and innovation........... -- -- 23,750
Sales and marketing............... -- -- 277,580
General and administrative........ -- -- 190,999
--------- ----------- ------------
Total compensation expense...... $ -- $ -- $ 665,683
========= =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ZEFER CORP.
STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Redeemable
Preferred Stock Common Stock
--------------------- --------------------
Additional Total
Number of Redemption Number of Paid-in Subscriptions Deferred Accumulated Stockholders'
Shares Value Shares Par Value Capital Receivable Compensation Deficit Deficit
--------- ----------- ---------- --------- ----------- ------------- ------------ ------------ -------------
<S> <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 -- -- -- -- 474
Sale of Series A
redeemable
convertible
preferred
stock, net of
issuance costs
of $53,819..... 12,000 1,200,000 -- -- -- -- -- (53,819) (53,819)
Net loss........ -- -- -- -- -- -- -- (555,177) (555,177)
------- ----------- ---------- ------- ----------- ----------- ------------ ------------ -----------
Balance at
December 31,
1998 (Original
ZEFER)......... 12,000 1,200,000 47,400 474 -- -- -- (608,996) (608,522)
Stock dividend
paid to
Investor....... -- -- 1,391 14 161,342 -- -- (161,356) --
Stock issuance
to employee.... -- -- 8,310 83 961,317 -- -- -- 961,400
Net loss........ -- -- -- -- -- -- -- (2,280,477) (2,280,477)
------- ----------- ---------- ------- ----------- ----------- ------------ ------------ -----------
Balance at April
30, 1999
(Original
ZEFER)......... 12,000 $ 1,200,000 57,101 $ 571 $ 1,122,659 $ -- $ -- $ (3,050,829) $(1,927,599)
======= =========== ========== ======= =========== =========== ============ ============ ===========
Balance at
Inception,
March 18, 1999
(the Company).. -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Private
placement of
common stock... -- -- 26,640,000 26,640 3,303,360 -- -- -- 3,330,000
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) (1,254,711) -- 687,869
Issuance of
common stock
for
professional
services....... -- -- 81,124 81 10,060 -- -- -- 10,141
Issuance of
common stock
for
acquisitions
(Note 4)....... -- -- 4,456,000 4,456 1,002,544 -- -- -- 1,007,000
Beneficial
conversion
feature of
Renaissance
Note (see Note
8(b)).......... -- -- -- -- 400,000 -- -- -- 400,000
Accretion of
dividends on
redeemable
preferred
stock.......... -- 989,156 -- -- -- -- -- -- --
Repayment of
subscriptions
receivable..... -- -- -- -- -- 537,582 -- -- 537,582
Deferred
compensation on
stock options.. -- -- -- -- 6,450,917 -- (6,450,917) -- --
Cancellation of
stock options.. -- -- -- -- (84,667) -- 84,667 -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 507,202 -- 507,202
Net loss........ -- -- -- -- -- -- -- (31,149,915) (31,149,915)
------- ----------- ---------- ------- ----------- ----------- ------------ ------------ -----------
Balance at
December 31,
1999 (the
Company)....... 24,814 25,803,156 39,854,268 39,854 14,691,642 (1,137,943) (7,113,759) (31,149,915) (24,670,121)
Exchange of
Class A
redeemable
preferred stock
for common
stock (24,814) (25,803,156) 2,150,263 2,150 25,801,006 -- -- -- 25,803,156
------- ----------- ---------- ------- ----------- ----------- ------------ ------------ -----------
Pro forma
Balance at
December 31,
1999--unaudited
(the Company).. -- $ -- 42,004,531 $42,004 $40,492,648 $(1,137,943) $ (7,113,759) $(31,149,915) $ 1,133,035
======= =========== ========== ======= =========== =========== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ZEFER CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Original ZEFER The Company
---------------------------- -------------
Period from Period from
Inception Inception
(March 19, (March 18,
1998) through Four Months 1999) through
December 31, Ended December 31,
1998 April 30, 1999 1999
------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................... $ (555,177) $(2,280,477) $(31,149,915)
Adjustments to reconcile net loss
to net cash used in operating
activities--
Depreciation and amortization..... 54,706 55,839 10,681,725
Stock-based compensation.......... -- 961,317 665,683
Deferred tax benefit.............. -- -- (5,760,400)
Noncash interest expense.......... -- -- 1,424,663
Common stock issued for services.. -- -- 10,141
Gain on sale of property and
equipment........................ 6,282 -- --
Changes in current assets and
liabilities--
Accounts receivable and unbilled
receivables..................... (121,993) (455,512) (3,430,390)
Prepaid expenses and other
current assets.................. (6,510) 6,510 (1,367,204)
Accounts payable................. 121,897 93,339 4,644,053
Accrued expenses................. 29,125 985,735 5,475,533
Deferred revenue................. 46,805 297,958 263,578
---------- ----------- ------------
Net cash used in operating
activities...................... (424,865) (335,291) (18,542,533)
---------- ----------- ------------
Cash flows from investing
activities:
Cash paid for acquisitions, net of
cash acquired..................... -- -- (26,268,090)
Purchases of property and
equipment......................... (124,311) (2,556) (8,959,944)
Proceeds from sales of property and
equipment......................... 81,848 -- --
Increase in other assets........... (16,500) (7,063) (4,467,300)
---------- ----------- ------------
Net cash used in investing
activities...................... (58,963) (9,619) (39,695,334)
---------- ----------- ------------
Cash flows from financing
activities:
Net borrowings on line of credit... -- -- 19,366,122
Net borrowings on subordinated debt -- -- 11,083,878
Proceeds from issuance of
redeemable preferred stock........ 1,146,181 -- 24,195,000
Proceeds from issuance of common
stock............................. 474 97 4,433,389
Principal payments on capital lease
obligations....................... (35,780) (50,614) (106,999)
Purchase of equipment under
financing agreement............... (88,130) -- --
Repayment of subscriptions
receivable........................ -- -- 537,582
---------- ----------- ------------
Net cash provided by (used in)
financing activities............ 1,022,745 (50,517) 59,508,972
---------- ----------- ------------
Increase (decrease) in cash and cash
equivalents........................ 538,917 (395,427) 1,271,105
Cash and cash equivalents, beginning
of period.......................... -- 538,917 --
---------- ----------- ------------
Cash and cash equivalents, end of
period............................. $ 538,917 $ 143,490 $ 1,271,105
========== =========== ============
Supplemental cash flow information:
Cash paid for interest............ $ 5,058 $ 25,210 $ 457,879
========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(1) The Company and Summary of Significant Accounting Policies
ZEFER Corp. (the Company) was incorporated in Delaware on March 18, 1999 and
is an Internet consulting and implementation firm. Since its inception, the
Company has grown its business principally through certain strategic
acquisitions (see Note 4).
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, and the need for continued market
acceptance of the Company's services.
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) 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.
(b) Revenue Recognition--Revenue is derived from professional service
agreements. Due to the significant production and customization element of our
professional service arrangements, we recognize 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 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, the Company had a provision for estimated losses of approximately
$374,000 related to uncompleted contracts.
F-7
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(c) Cost of Revenues--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.
(d) 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.
(e) 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.
(f) 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, 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 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.
(g) Prepaids and Other Current Assets--Prepaid expenses and other current
assets consist of prepaid rent, recruiting costs, contract costs and employee
receivables at December 31, 1999.
(h) 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 because of the short-term
nature of these instruments.
(i) Property and Equipment--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 life of the related lease for equipment
under capital lease and leasehold improvements.
F-8
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(j) 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:
<TABLE>
<S> <C>
Goodwill:
Goodwill..................................................... $10,657,721
Less--Accumulated amortization............................... 1,382,006
-----------
$ 9,275,715
===========
Other Intangible Assets:
Assembled workforce.......................................... $ 8,001,000
Noncompetition agreements.................................... 14,500,000
-----------
22,501,000
Less--Accumulated amortization............................... 6,718,361
-----------
$15,782,639
===========
</TABLE>
(k) 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 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 the review
of qualitative factors, management believes that, as of December 31, 1999, none
of the Company's long-lived assets have been impaired.
(l) Other Long-term Assets--Other long-term assets consist of security
deposits for the Company's facilities at December 31, 1999.
(m) 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 stock and the exercise price.
(n) 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.
(o) 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 for the period from
inception through December 31, 1999 excludes 9,314,467 shares of unvested
restricted common stock issued to management and in connection with
F-9
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
acquisitions (see Note 11(d)). 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 (ii) unvested restricted common stock subject to repurchase by the
Company. For the period from inception through December 31, 1999, the
calculation of diluted weighted average shares outstanding excludes the
following potential common stock:
<TABLE>
<S> <C>
Exercise of outstanding stock options........................ 4,627,111
Unvested restricted common stock............................. 9,314,467
----------
13,941,578
==========
</TABLE>
In accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin 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).
(p) 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.
(q) 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. As of December 31, 1999, the Company
had not capitalized any internal-use computer-software costs.
(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. Therefore, the Company's historical capital structure at December 31,
1999 is not indicative of its capital structure upon the closing of the IPO.
Accordingly, pro forma net loss per share is presented for the period from
inception through December 31, 1999 assuming (i) the net loss before the
accretion of preferred stock dividends, discount and offering costs and (ii)
the exchange of 24,814 shares of Class A Preferred Stock into common stock
using the as-converted method based on an assumed IPO price of $12.00 per
share, but excluding shares of common stock to be issued in the IPO. A
reconciliation of the numerators and denominators used in computing historical
and pro forma net loss per share is as follows:
<TABLE>
<S> <C>
Net loss................................................. $(31,149,915)
Class A Preferred Stock dividends........................ 989,156
------------
Pro forma net loss....................................... $(30,160,759)
============
Weighted average shares outstanding...................... 26,793,270
Exchange of Class A Preferred Stock...................... 2,150,263
------------
Pro forma weighed average shares outstanding............. 28,943,533
============
</TABLE>
F-10
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(s) Pro Forma Balance Sheet (Unaudited)--As discussed above, immediately
prior to the closing of the IPO, all shares of Class A Preferred Stock will be
exchanged for common stock at the IPO price per share. This exchange has been
reflected in the unaudited pro forma balance sheet as of December 31, 1999.
(t) 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 loss for all
periods presented.
(u) Disclosures About Segments of an Enterprise and Related Information--
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The Company's chief decision
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.
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 and the period from inception through December 31,
1999, respectively:
<TABLE>
<CAPTION>
Original ZEFER The Company
--------------------------------------- ----------------------
December 31, 1998 April 30, 1999 December 31, 1999
------------------- ------------------- ----------------------
Percent of Percent of Percent of
Country Revenue Revenue Revenue Revenue Revenue Revenue
------- -------- ---------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Canada.................. $ 34,737 6% $ -- -- $ -- --
United States........... 585,996 94 491,141 100% 24,101,682 95%
Other................... -- -- -- -- 1,175,253 5
-------- --- -------- --- ----------- ---
$620,733 100% $491,141 100% $25,276,935 100%
======== === ======== === =========== ===
</TABLE>
(v) 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, 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 that such adoption to
have an impact on the Company's results of operations, financial position or
cash flows.
(w) 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-11
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(w) 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
----------------------- ------------
December 31, April 30, December 31,
1998 1999 1999
------------ ---------- ------------
<S> <C> <C> <C>
Acquisition of fixed assets under capital
leases.................................. $267,344 $ 102,057 $ 224,371
======== ========== ============
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.................... $ -- $ -- $ 7,620,961
======== ========== ============
On April 30, 1999, the Company
reorganized Original ZEFER, as follows--
Fair value of assets acquired.......... $ -- $ -- $ 12,382,047
Cash paid for reorganization........... -- -- (7,225,000)
Common stock issued.................... -- -- (432,000)
-------- ---------- ------------
Liabilities assumed.................... $ -- $ -- $ 4,725,047
======== ========== ============
On May 14, 1999, the Company acquired
Spyplane, as follows--
Fair value of assets acquired.......... $ -- $ -- $ 2,709,107
Cash paid for acquisition.............. -- -- (1,100,000)
Promissory note issued................. -- -- (980,000)
Common stock issued.................... -- -- (25,000)
-------- ---------- ------------
Liabilities assumed.................... $ -- $ -- $ 604,107
======== ========== ============
On May 28, 1999, the Company acquired the
Divisions of Renaissance, as follows--
Fair value of assets acquired.......... $ -- $ -- $ 14,104,748
Cash paid for acquisition.............. -- -- (10,160,000)
Promissory notes issued................ -- -- (1,600,000)
Beneficial conversion feature.......... -- -- (400,000)
Common stock issued.................... -- -- (50,000)
-------- ---------- ------------
Liabilities assumed.................... $ -- $ -- $ 1,894,748
======== ========== ============
On September 13, 1999, the Company ac-
quired 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-12
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(2) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Original ZEFER The Company
---------------------- ------------
December 31, April 30, December 31,
1998 1999 1999
------------ --------- ------------
<S> <C> <C> <C>
Computer equipment and software........ $ 11,632 $ 13,606 $7,932,515
Equipment under capital leases......... 236,195 338,252 591,380
Furniture and fixtures................. 36,718 36,401 1,204,309
Leasehold improvements................. 112,679 113,578 1,282,678
Construction in progress............... -- -- 161,025
-------- -------- ----------
397,224 501,837 11,171,907
Less--Accumulated depreciation and am-
ortization............................ 54,706 110,545 2,581,358
-------- -------- ----------
$342,518 $391,292 $8,590,549
======== ======== ==========
</TABLE>
(3) Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
Original ZEFER The Company
----------------------- ------------
December 31, April 30, December 31,
1998 1999 1999
------------ ---------- ------------
<S> <C> <C> <C>
Accrued employee costs................ $ -- $ 96,687 $5,056,724
Accrued loss contracts................ -- 369,547 373,685
Professional fees and transaction
costs................................ 9,000 41,500 997,662
Software license fees................. -- -- 1,022,042
Other................................. 20,125 507,126 2,472,826
------- ---------- ----------
$29,125 $1,014,860 $9,922,939
======= ========== ==========
</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, $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-13
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(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. Through December 31, 1999, the Company has
recorded accumulated amortization related to its goodwill and other intangible
assets of approximately $8,100,000.
(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>
F-14
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(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 97.5%
of the outstanding redeemable preferred stock and 66.8% of the outstanding
common stock of the Company (see Note 11(c)) and with whom the Company has a
subordinated debt agreement (see Note 9). Under the terms of the 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 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 December 31, 1999, 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 beginning in 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 $36.3
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 non-deductible intangible assets (exclusive of
goodwill), with a corresponding increase in goodwill. The Company has
recognized in the statement of operations the tax benefit of a portion of the
current period net operating losses as an offset to this deferred tax
liability.
F-15
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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>
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 (8.5%
at December 31, 1999) and interest is payable monthly. All borrowings under the
Demand Line are guaranteed by GTCR. At December 31, 1999, 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. The Revolving Line expires
on March 15, 2000 and all outstanding borrowings thereunder are payable on that
date. There were no borrowings outstanding under the Revolving Line at December
31, 1998 or April 30, 1999.
F-16
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 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 was in receipt of a
waiver from the bank. At December 31, 1999, the Company had $150,000
outstanding under 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 are payable over 36 months, and
interest accrues at a rate of 11%. At December 31, 1998, April 30, 1999 and
December 31, 1999, the Company had $237,133, $288,577 and $414,536,
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 $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 is payable on May 14, 2000. Also on
May 14, 2000, the Company shall pay an aggregate of $180,000 of the outstanding
principal amount. All 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 (5.8%
at December 31, 1999) plus 2.0% per annum and interest is payable quarterly for
the period extending from August 1999 through May 2002. Principal is payable in
eight quarterly installments commencing May 2000. 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--Future maturities of the principal obligation under
the Spyplane and Renaissance Notes are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
2000............................................................ $ 930,000
2001............................................................ 1,800,000
2002............................................................ 250,000
----------
$2,980,000
==========
</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 borrowed $12,789,175 on
November 24, 1999 to fund operations. The Company, at its discretion, may make
additional borrowings from time to time.
F-17
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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. Upon a change in control, as defined,
or upon an IPO, the Company is required to repay all unpaid principal and
interest. 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 Statement of Stockholder's Deficit the net effect of
the purchase of the treasury stock and the respective sale of stock upon
exercise of the warrants, and 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 we make additional borrowings under the loan
agreement.
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 are effective for the quarter ending June 30,
2000 and include a minimum required level of pre-corporate EBITDA and a minimum
required level of fixed charge coverage.
(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>
F-18
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(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 December 31, 1999, the Company has
authorized a total of 96,632 shares of Class A Preferred Stock, of which 24,814
shares have been issued at a per share price of $1,000. As discussed in Note
16(c), 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 have the option to force 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.
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.
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) 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 over a period of four to five years from the issuance
date until vesting is complete (see Note 11(d)).
(c) 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
F-19
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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 (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 94,170 shares of Class A Preferred Stock at a price of $1,000 per
share. Through December 31, 1999, GTCR has provided equity financing in the
amount of $27,525,000, consisting of 26,640,000 shares of common stock and
24,195 shares of Class A Preferred Stock.
In connection with the GTCR Investment, the Company entered into a
management services agreement described in Note 5 above and on November 24,
1999, the Company consummated a subordinated debt financing with GTCR,
described in Note 9 above.
(d) Restricted Common Stock--At various dates from the period of 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.
As consideration for the restricted common stock issued to management, the
employees paid cash and executed 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 proceeds
from the sale or transfer of the restricted common stock. Additionally, the
employees are required to make mandatory prepayments equal to the unpaid
principal balance multiplied by a percentage calculated as the amount of GTCR
Investment made to date divided by the total GTCR commitment of $97,500,000.
(e) Sales to Management--During the period from inception (March 18, 1999)
through December 31, 1999, the Company sold 683,488 shares of unrestricted
common stock to management at prices ranging from $0.13 to $0.29 per share and
619 shares of unrestricted Class A Preferred Stock at a price of $1,000 per
share for total proceeds of $730,844. 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 $627,456, which has
been classified as subscriptions receivable in the accompanying financial
statements.
(f) 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 of
Directors 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. Also during 1999, the Company granted stock options to
employees at prices below the then-current fair
F-20
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
market value, resulting in deferred compensation of $6,450,917 that will be
charged to operations over the vesting term of the underlying options.
(12) Stock Options
(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 2,666,666 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.
The following table summarizes stock option activity under the Company's
Option Plan and the Incentive Plan through December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Range of Average
Exercise Exercise
Options Prices price
--------- ------------ --------
<S> <C> <C> <C>
Granted..................................... 5,089,226 $0.75-$10.00 $1.36
Exercised................................... -- -- --
Canceled.................................... (462,115) $0.75-$ 2.25 0.78
--------- ------------ -----
Outstanding, December 31, 1999.............. 4,627,111 $0.75-$10.00 $1.41
========= ============ =====
Exercisable, December 31, 1999.............. -- $ -- $ --
========= ============ =====
</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. 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
Shares Value Price
--------- -------- --------
<S> <C> <C> <C>
Exercise price equals fair value................. 2,053,126 $0.17 $0.75
Exercise price greater than fair value........... 2,000 6.31 10.00
Exercise price less than fair value.............. 3,034,100 3.00 3.00
--------- ----- -----
5,089,226 $1.84 $1.36
========= ===== =====
</TABLE>
There were no options issued to non-employees during 1999. The following
table summarizes information regarding the Company's stock options outstanding
and exercisable at December 31, 1999:
F-21
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
<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 3,475,815 9.6 $0.79 -- $ --
$ 2.25-$ 3.75 897,630 9.9 2.79 -- --
$ 5.00-$10.00 253,666 9.9 5.04 -- --
--------- ----- --------- ----------
4,627,111 $1.41 -- $ --
========= ===== ========= ==========
</TABLE>
(b) 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 and the period from inception through December 31, 1999,
respectively, would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Original ZEFER The Company
------------------------ ------------
December 31, April 30, December 31,
1998 1999 1999
------------ ----------- ------------
<S> <C> <C> <C>
Net loss--
As reported...................... $(555,177) $(2,280,477) $(31,149,915)
========= =========== ============
Pro forma........................ $(555,631) $(2,280,931) $(31,533,098)
========= =========== ============
Basic and diluted net loss per
share--
As reported...................... $ (1.16)
============
Pro forma........................ $ (1.18)
============
</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,
1998 1999 1999
------------ --------- ------------
<S> <C> <C> <C>
Risk-free interest rates................. 5.6% 5.6% 6.1%
Expected lives (in years)................ 5.0 5.0 5.0
Dividend yield........................... -- -- --
Expected volatility...................... -- -- 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 and 9,322,806, 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 preceding paragraph, the above results
may not be representative of future periods.
F-22
<PAGE>
ZEFER CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(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 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 of Directors. 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 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 Compa-
ny).......................... $ -- $312,199 $(31,962) $280,237
==== ======== ======== ========
</TABLE>
(16) Subsequent Events
(a) Subordinated Debt Financing--Subsequent to year end the Company borrowed
an additional $7,370,339 of subordinated debt under its agreement with GTCR.
See Note 9 for the terms of the subordinated debt.
F-23
<PAGE>
(b) Issuance of Class A Preferred Stock with Warrants--Subsequent to year
end the Company issued an additional 15,263 shares of Class A Preferred Stock
at $1,000 per share for gross proceeds of approximately $15,263,000. In
addition, the Company issued a warrant to purchase 1,793 shares of Class A
preferred stock at an exercise price of $.001 per share. The Company valued the
warrant and recorded interest expense of approximately $1,793,000. See Note 11
for the Class A rights and preferences.
(c) Class A Redeemable Preferred Stock Exchange Agreement--On March 27,
2000, the Company entered into an exchange agreement with all Class A Preferred
stockholders, including GTCR, whereby, upon the closing of the IPO, all shares
of Class A Preferred Stock then outstanding will be exchanged for common stock.
The exchange ratio will be equal to the total outstanding balance of Class A
Preferred Stock, including accrued but unpaid dividends, divided by the IPO
price per share.
F-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Neogplyphics 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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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>
F-49
<PAGE>
NEOGLYPHICS MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
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>
(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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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).
F-59
<PAGE>
ZEFER CORP.
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 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-60
<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 1,973,489 2,461,115 118,502 584,600 60,121 (/5/) 23,617,925
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 -- -- -- -- -- 665,683
------------ ----------- ----------- -------- ---------- ----------- ------------
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-61
<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-62
<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-63
<PAGE>
Innovation Advisory Board
Our Innovation Advisory Board enhances the
development of intellectual capital for our service
offering. The current members of our Innovation
Advisory Board are:
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.
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, Advanced Communications,
Johnson & Johnson.
Don Schultz
Professor of Integrated Marketing Communications,
Northwestern University.
Michael Shamos
Co-Director,
Carnegie Mellon Institute for eCommerce.
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 fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 18,216
NASD filing fee............................................... 7,400
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.................................. 750,000
Legal fees and expenses....................................... 350,000
Director and officer liability insurance...................... 400,000
Printing and mailing expenses................................. 150,000
Miscellaneous................................................. 14,384
----------
Total..................................................... $1,800,000
==========
</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.
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 February 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
39,074.6610 shares of our class A preferred stock at a price of $1,000
per share for an aggregate purchase price of $39,074,661 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 February 2000, we issued an aggregate of
1,002 shares of our class A preferred stock at a price per share of
$1,000 for an aggregate purchase price of $1,002,000 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 February 2000, we issued an aggregate
of 1,792.5376 shares of our class A preferred stock at a price of $0.01
per share for an aggregate purchase price of $17.93 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.
(b) Stock option grants to employees.
From inception (March 18, 1999) through December 31, 1999, we issued
options under our 1999 stock option plan and 1999 incentive plan to
purchase an aggregate of 5,089,226 shares of common stock at a weighted
average exercise price of $1.32 per share. None of these options have
been exercised.
II-3
<PAGE>
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+ 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.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
Exhibit
No. Description
------- -----------
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 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.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
Exhibit
No. Description
------- -----------
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.
10.41+ Stock Restriction Agreement between the Registrant and David Lubin
dated May 21, 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 entered into by the Registrant, GTCR
Capital Partners, L.P. and certain stockholders named therein on March
27, 2000.
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.
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-7).
24.1+ Power of Attorney for Ms. Johnston and Mr. Rauner (included on page
II-10).
27 Amended Financial Data Schedule.
</TABLE>
- ---------------------
+Previously filed.
** Superseding exhibit.
II-6
<PAGE>
(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, 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-7
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, we have duly
caused this Amendment No. 3 to the Registration Statement to be signed on our
behalf by the undersigned, thereunto duly authorized, in Boston, Massachusetts,
on this 27th day of March, 2000.
ZEFER CORP.
/s/ William A. Seibel
By: _________________________________
William A. Seibel
Chairman of the Board, President
and Chief Executive Officer
II-8
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William A. Seibel Chairman of the Board, March 27, 2000
______________________________________ President, Chief
William A. Seibel Executive Officer and
Director
* Executive Vice President, March 27, 2000
______________________________________ Chief Financial Officer
James H. Slamp and Treasurer (Principal
Financial and Accounting
Officer)
* Director March 27, 2000
______________________________________
Philip A. Canfield
* Director March 27, 2000
______________________________________
Masood Jabbar
* Director March 27, 2000
______________________________________
David A. Lubin
* Director March 27, 2000
______________________________________
Timothy P. McAdam
* Director March 27, 2000
______________________________________
Richard L. Nolan
* Director March 27, 2000
______________________________________
Anthony K. Tjan
* Director March 27, 2000
______________________________________
Catherine Viscardi Johnston
* Director March 27, 2000
______________________________________
Bruce V. Rauner
*By: /s/ William A. Seibel
______________________________________
Attorney-in-Fact
</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+ 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 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.
10.41+ Stock Restriction Agreement between the Registrant and David Lubin
dated May 21, 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 entered into by the Registrant, GTCR
Capital Partners, L.P. and certain stockholders named therein on March
27, 2000.
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.
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-7).
24.1+ Power of Attorney for Ms. Johnston and Mr. Rauner (included on page
II-10).
27 Amended Financial Data Schedule.
</TABLE>
- ---------------------
+Previously filed.
** Superseding exhibit.
<PAGE>
Exhibit 3.3
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ZEFER CORP.
ZEFER Corp. (the "Corporation"), a corporation organized and existing under
and by virtue of the General Corporation Law of Delaware, does hereby certify as
follows:
1. The Corporation filed its original Certificate of Incorporation with the
Secretary of State of the State of Delaware (the "Delaware Secretary") on March
10, 1999 under the name ZC Acquisition Corp. The Corporation's original
Certificate of Incorporation was amended and restated as follows: (i) by a
Certificate of Restated Certificate of Incorporation before Payment of Capital
filed with the Delaware Secretary on March 23, 1999; (ii) by a Certificate of
Amendment to Restated Certificate of Incorporation filed with the Delaware
Secretary on April 29, 1999; (iii) by a Certificate of Amendment of Certificate
of Incorporation filed with the Delaware Secretary on May 5, 1999; (iv) by a
Certificate of Amendment of Certificate of Incorporation filed with the Delaware
Secretary on June 15, 1999; (v) by a Certificate of Amendment of Certificate of
Incorporation filed with the Delaware Secretary on December 1, 1999 and (vi) by
a Certificate of Merger filed with the Delaware Secretary on December 28, 1999.
2. By a unanimous written action of the Board of Directors of the
Corporation, a resolution was duly adopted, pursuant to Sections 141(f), 242 and
245 of the General Corporation Law of Delaware, setting forth an Amended and
Restated Certificate of Incorporation of the Corporation and declaring said
Amended and Restated Certificate of Incorporation advisable. The stockholders of
the Corporation duly approved said proposed Amended and Restated Certificate of
Incorporation by written consent in accordance with Sections 228, 242 and 245 of
the General Corporation Law of Delaware. The resolution setting forth the
Amended and Restated Certificate of Incorporation is as follows:
RESOLVED: That the Certificate of Incorporation of the Corporation, as amended
- -------- to date, be and hereby is amended and restated in its entirety so
that the same shall read as follows:
FIRST. The name of the Corporation is:
ZEFER Corp.
SECOND. The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
<PAGE>
THIRD. The nature of the business or purposes to be conducted or promoted
by the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware.
FOURTH. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 205,000,000 shares, consisting of
(i) 200,000,000 shares of Common Stock, $.001 par value per share ("Common
Stock"), and (ii) 5,000,000 shares of Preferred Stock, $.01 par value per share
("Preferred Stock").
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions thereof in
respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
------------
1. General. The voting, dividend and liquidation rights of the holders of
-------
the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2. Voting. The holders of the Common Stock shall have voting rights at all
------
meetings of stockholders, each such holder being entitled to one vote for each
share thereof held by such holder. There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.
3. Dividends. Dividends may be declared and paid on the Common Stock from
---------
funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
-----------
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
---------------
Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different
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<PAGE>
series of Preferred Stock shall not be construed to constitute different classes
of shares for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issuance of the shares thereof, to determine and fix such voting powers,
full or limited, or no voting powers, and such designations, preferences and
relative participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, including without limitation thereof,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be stated and expressed in such resolutions, all to the
full extent now or hereafter permitted by the General Corporation Law of
Delaware. Without limiting the generality of the foregoing, the resolutions
providing for issuance of any series of Preferred Stock may provide that such
series shall be superior or rank equally or be junior to the Preferred Stock of
any other series to the extent permitted by law. Except as otherwise provided in
this Certificate of Incorporation, no vote of the holders of the Preferred Stock
or Common Stock shall be a prerequisite to the designation or issuance of any
shares of any series of the Preferred Stock authorized by and complying with the
conditions of this Certificate of Incorporation, the right to have such vote
being expressly waived by all present and future holders of the capital stock of
the Corporation.
FIFTH. Except as otherwise provided herein, the Corporation reserves the
right to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, in the manner now or hereafter prescribed by
statute and this Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
SIXTH. In furtherance and not in limitation of the powers conferred upon it
by the laws of the State of Delaware, the Board of Directors shall have the
power to adopt, amend, alter or repeal the Corporation's By-Laws. The
affirmative vote of a majority of the directors present at any regular or
special meeting of the Board of Directors at which a quorum is present shall be
required to adopt, amend, alter or repeal the Corporation's By-Laws. The
Corporation's By-Laws also may be adopted, amended, altered or repealed by the
affirmative vote of the holders of at least sixty-six and two-thirds percent (66
2/3%) of the votes which all the stockholders would be entitled to cast in any
annual election of directors or class of directors. Notwithstanding any other
provisions of law, this Certificate of Incorporation or the By-Laws of the
Corporation, and notwithstanding the fact that a lesser percentage may be
specified by law, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the votes which all the stockholders would be
entitled to cast in any annual election of directors or class of directors shall
be required to amend or repeal, or to adopt any provision inconsistent with,
this Article SIXTH.
SEVENTH. Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability. No amendment to or repeal of this provision shall apply to or have
any
-3-
<PAGE>
effect on the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
EIGHTH. 1. Actions, Suits and Proceedings Other than by or in the Right of
---------------------------------------------------------------
the Corporation. The Corporation shall indemnify each person who was or is a
- ---------------
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer, partner, employee or trustee
of, or in a similar capacity with, another corporation, partnership, joint
venture, trust or other enterprise (including any employee benefit plan) (all
such persons being referred to hereafter as an "Indemnitee"), or by reason of
any action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or on his behalf in
connection with such action, suit or proceeding and any appeal therefrom, if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
---- ----------
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
2. Actions or Suits by or in the Right of the Corporation. The Corporation
------------------------------------------------------
shall indemnify any Indemnitee who was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was, or has agreed to become, a director or officer of the
Corporation, or is or was serving, or has agreed to serve, at the request of the
Corporation, as a director, officer, partner, employee or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and, to the extent permitted by law,
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such action, suit or proceeding and any appeal
therefrom, if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware shall
determine upon application that, despite the adjudication of such liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses (including attorneys' fees)
which the Court of Chancery of Delaware shall deem proper.
3. Indemnification for Expenses of Successful Party. Notwithstanding the
------------------------------------------------
other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or
-4-
<PAGE>
otherwise, in defense of any action, suit or proceeding referred to in Sections
1 and 2 of this Article EIGHTH, or in defense of any claim, issue or matter
therein, or on appeal from any such action, suit or proceeding, he shall be
indemnified against all expenses (including attorneys' fees) actually and
reasonably incurred by him or on his behalf in connection therewith. Without
limiting the foregoing, if any action, suit or proceeding is disposed of, on the
merits or otherwise (including a disposition without prejudice), without (i) the
disposition being adverse to the Indemnitee, (ii) an adjudication that the
Indemnitee was liable to the Corporation, (iii) a plea of guilty or nolo
----
contendere by the Indemnitee, (iv) an adjudication that the Indemnitee did not
- ----------
act in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Corporation, and (v) with respect to any criminal
proceeding, an adjudication that the Indemnitee had reasonable cause to believe
his conduct was unlawful, the Indemnitee shall be considered for the purposes
hereof to have been wholly successful with respect thereto.
4. Notification and Defense of Claim. As a condition precedent to his
---------------------------------
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such action,
suit, proceeding or investigation, other than as provided below in this Section
4. The Indemnitee shall have the right to employ his own counsel in connection
with such action, suit, proceeding or investigation, but the fees and expenses
of such counsel incurred after notice from the Corporation of its assumption of
the defense thereof shall be at the expense of the Indemnitee unless (i) the
employment of counsel by the Indemnitee has been authorized by the Corporation,
(ii) counsel to the Indemnitee shall have reasonably concluded that there may be
a conflict of interest or position on any significant issue between the
Corporation and the Indemnitee in the conduct of the defense of such action,
suit, proceeding or investigation or (iii) the Corporation shall not in fact
have employed counsel to assume the defense of such action, suit, proceeding or
investigation, in each of which cases the fees and expenses of counsel for the
Indemnitee shall be at the expense of the Corporation, except as otherwise
expressly provided by this Article. The Corporation shall not be entitled,
without the consent of the Indemnitee, to assume the defense of any claim
brought by or in the right of the Corporation or as to which counsel for the
Indemnitee shall have reasonably made the conclusion provided for in clause (ii)
above. The Corporation shall not be required to indemnify the Indemnitee under
this Article for any amounts paid in settlement of any action, suit, proceeding
or investigation effected without its written consent. The Corporation shall not
settle any action, suit, proceeding or investigation in any manner which would
impose any penalty or limitation on the Indemnitee without the Indemnitee's
written consent. Neither the Corporation nor the Indemnitee will unreasonably
withhold or delay its consent to any proposed settlement.
5. Advance of Expenses. Subject to the provisions of Section 6 of this
-------------------
Article EIGHTH, in the event that the Corporation does not assume the defense
pursuant to Section 4 of
-5-
<PAGE>
this Article EIGHTH of any action, suit, proceeding or investigation of which
the Corporation receives notice under this Article, any expenses (including
attorneys' fees) incurred by an Indemnitee in defending a civil or criminal
action, suit, proceeding or investigation or any appeal therefrom shall be paid
by the Corporation in advance of the final disposition of such matter; provided,
--------
however, that the payment of such expenses incurred by the Indemnitee in advance
- -------
of the final disposition of such matter shall be made only upon receipt of an
undertaking by or on behalf of the Indemnitee to repay all amounts so advanced
in the event that it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified by the Corporation as authorized in this Article; and
further provided that no such advancement of expenses shall be made if it is
determined (in the manner described in Section 6) that (i) the Indemnitee did
not act in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, or (ii) with respect to any
criminal action or proceeding, the Indemnitee had reasonable cause to believe
his conduct was unlawful. Such undertaking shall be accepted without reference
to the financial ability of the Indemnitee to make such repayment.
6. Procedure for Indemnification. In order to obtain indemnification or
-----------------------------
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article EIGHTH,
the Indemnitee shall submit to the Corporation a written request, including in
such request such documentation and information as is reasonably available to
the Indemnitee and is reasonably necessary to determine whether and to what
extent the Indemnitee is entitled to indemnification or advancement of expenses.
Any such advancement of expenses shall be made promptly, and in any event within
60 days after receipt by the Corporation of the written request of the
Indemnitee, unless with respect to requests under Section 1, 2 or 5 of this
Article EIGHTH the Corporation determines within such 60-day period that the
Indemnitee did not meet the applicable standard of conduct set forth in Section
1, 2 or 5 of this Article EIGHTH, as the case may be. Any such indemnification,
unless ordered by a court, shall be made with respect to requests under Section
1 or 2 only as authorized in the specific case upon a determination by the
Corporation that the indemnification of the Indemnitee is proper because the
Indemnitee has met the applicable standard of conduct set forth in Section 1 or
2, as the case may be. Such determination shall be made in each instance (a) by
a majority vote of the directors of the Corporation consisting of persons who
are not at that time parties to the action, suit or proceeding in question
("disinterested directors"), whether or not a quorum, (b) by a majority vote of
a committee of disinterested directors designated by majority vote of
disinterested directors, whether or not a quorum, (c), if there are no
disinterested directors, or if disinterested directors so direct, by independent
legal counsel (who may, to the extent permitted by law, be regular legal counsel
to the Corporation) in a written opinion, or (d) by the stockholders of the
Corporation.
7. Remedies. The right to indemnification or advances as granted by this
--------
Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction. Neither the failure of the Corporation to have made a
determination prior to the commencement of such action that indemnification is
proper in the circumstances because the Indemnitee has met the applicable
standard of conduct, nor an actual determination by the Corporation pursuant to
Section 6 of this Article EIGHTH that the Indemnitee has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that the Indemnitee has not met the applicable
-6-
<PAGE>
standard of conduct. The Indemnitee's expenses (including attorneys' fees)
incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such proceeding shall also be
indemnified by the Corporation.
8. Limitations. Notwithstanding anything to the contrary in this Article,
-----------
except as set forth in Section 7 of the Article EIGHTH, the Corporation shall
not indemnify an Indemnitee in connection with a proceeding (or part thereof)
initiated by the Indemnitee unless the initiation thereof was approved by the
Board of Directors of the Corporation. Notwithstanding anything to the contrary
in this Article, the Corporation shall not indemnify an Indemnitee to the extent
such Indemnitee is reimbursed from the proceeds of insurance, and in the event
the Corporation makes any indemnification payments to an Indemnitee and such
Indemnitee is subsequently reimbursed from the proceeds of insurance, such
Indemnitee shall promptly refund such indemnification payments to the
Corporation to the extent of such insurance reimbursement.
9. Subsequent Amendment. No amendment, termination or repeal of this
--------------------
Article or of the relevant provisions of the General Corporation Law of Delaware
or any other applicable laws shall affect or diminish in any way the rights of
any Indemnitee to indemnification under the provisions hereof with respect to
any action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the final adoption of such
amendment, termination or repeal.
10. Other Rights. The indemnification and advancement of expenses provided
------------
by this Article shall not be deemed exclusive of any other rights to which an
Indemnitee seeking indemnification or advancement of expenses may be entitled
under any law (common or statutory), agreement or vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in any other capacity while holding office for the Corporation,
and shall continue as to an Indemnitee who has ceased to be a director or
officer, and shall inure to the benefit of the estate, heirs, executors and
administrators of the Indemnitee. Nothing contained in this Article shall be
deemed to prohibit, and the Corporation is specifically authorized to enter
into, agreements with officers and directors providing indemnification rights
and procedures different from those set forth in this Article. In addition, the
Corporation may, to the extent authorized from time to time by its Board of
Directors, grant indemnification rights to other employees or agents of the
Corporation or other persons serving the Corporation and such rights may be
equivalent to, or greater or less than, those set forth in this Article.
11. Partial Indemnification. If an Indemnitee is entitled under any
-----------------------
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
12. Insurance. The Corporation may purchase and maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another
-7-
<PAGE>
corporation, partnership, joint venture, trust or other enterprise (including
any employee benefit plan) against any expense, liability or loss incurred by
him in any such capacity, or arising out of his status as such, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the General Corporation Law of Delaware.
13. Merger or Consolidation. If the Corporation is merged into or
-----------------------
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
14. Savings Clause. If this Article or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
15. Definitions. Terms used herein and defined in Section 145(h) and
-----------
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).
16. Subsequent Legislation. If the General Corporation Law of Delaware is
----------------------
amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the Corporation shall indemnify such persons to
the fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
NINTH. This Article is inserted for the management of the business and for
the conduct of the affairs of the Corporation.
1. Number of Directors; Election of Directors. The number of directors of
------------------------------------------
the Corporation shall not be less than three. The exact number of directors
within the limitations specified in the preceding sentence shall be determined
from time to time by, or in the manner provided in, the By-Laws of the
Corporation. Election of directors need not be by written ballot, except as and
to the extent provided in the By-Laws of the Corporation.
2. Classes of Directors. The Board of Directors shall be and is divided
--------------------
into three classes: Class I, Class II and Class III. No one class shall have
more than one director more than any other class. If a fraction is contained in
the quotient arrived at by dividing the authorized number of directors by three,
then, if such fraction is one-third, the extra director shall be a member of
Class I, and if such fraction is two-thirds, one of the extra directors shall be
a member of Class I and one of the extra directors shall be a member of Class
II, unless otherwise provided by resolution of the Board of Directors.
-8-
<PAGE>
3. Terms of Office. Each director shall serve for a term ending on the
---------------
date of the third annual meeting following the annual meeting at which such
director was elected; provided, that each initial director in Class I shall
serve for a term expiring at the Corporation's annual meeting of stockholders
held in 2001; each initial director in Class II shall serve for a term expiring
at the Corporation's annual meeting of stockholders held in 2002; and each
initial director in Class III shall serve for a term expiring at the
Corporation's annual meeting of stockholders held in 2003; provided further,
that the term of each director shall continue until the election and
qualification of his successor and be subject to his earlier death, resignation
or removal.
4. Allocation of Directors Among Classes in the Event of Increases or
------------------------------------------------------------------
Decreases in the Authorized Number of Directors. In the event of any increase or
- -----------------------------------------------
decrease in the authorized number of directors, (i) each director then serving
as such shall nevertheless continue as a director of the class of which he is a
member until the expiration of his current term, subject to his earlier death,
resignation or removal and (ii) the newly created or eliminated directorships
resulting from such increase or decrease shall be apportioned by the Board of
Directors among the three classes of directors in accordance with the provisions
of Section 2 of this Article NINTH. To the extent possible, consistent with the
provisions of Section 2 of this Article NINTH, any newly created directorships
shall be added to those classes whose terms of office are to expire at the
latest dates following such allocation, and any newly eliminated directorships
shall be subtracted from those classes whose terms of offices are to expire at
the earliest dates following such allocation, unless otherwise provided from
time to time by resolution of the Board of Directors.
5. Quorum. A majority of the directors at any time in office shall
------
constitute a quorum for the transaction of business. In the event one or more of
the directors shall be disqualified to vote at any meeting, then the required
quorum shall be reduced by one for each director so disqualified, provided that
in no case shall less than one-third of the number of directors fixed pursuant
to Section 1 of this Article NINTH constitute a quorum. If at any meeting of the
Board of Directors there shall be less than such a quorum, a majority of the
directors present may adjourn the meeting from time to time without further
notice other than announcement at the meeting, until a quorum shall be present.
6. Action at Meeting. Every act or decision done or made by a majority of
-----------------
the directors present at a meeting duly held at which a quorum is present shall
be regarded as the act of the Board of Directors unless a greater number is
required by law, by this Certificate of Incorporation, or by the By-Laws of the
Corporation.
7. Removal. Directors of the Corporation may be removed only for cause by
-------
the affirmative vote of the holders of at least a majority of the votes which
all the stockholders would be entitled to cast in any annual election of
directors or class of directors.
8. Vacancies. Any vacancy in the Board of Directors, however occurring,
---------
including a vacancy resulting from an enlargement of the Board, shall be filled
only by vote of a majority of the directors then in office, although less than a
quorum, or by a sole remaining director. A
-9-
<PAGE>
director elected to fill a vacancy shall be elected to hold office until the
next election of the class for which such director shall have been chosen,
subject to the election and qualification of his successor and to his earlier
death, resignation or removal.
9. Stockholder Nominations and Introduction of Business, Etc. Advance
---------------------------------------------------------
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided by the By-Laws of the Corporation.
10. Amendments to Article. Notwithstanding any other provisions of law,
---------------------
this Certificate of Incorporation or the By-Laws of the Corporation, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least sixty-six and two-thirds percent (66
2/3%) of the votes which all the stockholders would be entitled to cast in any
annual election of directors or class of directors shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Article NINTH.
TENTH. Special meetings of stockholders for any purpose or purposes may be
called at any time by the Board of Directors, the Chairman of the Board or the
President, but such special meetings may not be called by any other person or
persons. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting. Notwithstanding any other provision of law, this Certificate of
Incorporation or the By-Laws of the Corporation, and notwithstanding the fact
that a lesser percentage may be specified by law, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the votes
which all the stockholders would be entitled to cast in any annual election of
directors or class of directors shall be required to amend or repeal, or to
adopt any provision inconsistent with, this Article TENTH.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by its duly authorized officer this
_____ day of ___________, 2000.
ZEFER CORP.
By:___________________________________
Name: William A. Seibel
Title: President
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<PAGE>
EXHIBIT 5
HALE AND DORR LLP
COUNSELLORS AT LAW
WWW.HALEDORR.COM
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
617-526-6000 * FAX 617-526-5000
March 27, 2000
ZEFER Corp.
711 Atlantic Avenue
Boston, Massachusetts 02111
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (File No. 333-94283) (the "Registration Statement") filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of an aggregate of 5,175,000 shares of Common Stock, $.001 par value per share
(the "Shares"), of ZEFER Corp., a Delaware corporation (the "Company"), of which
(i) 4,500,000 Shares will be issued and sold by the Company; and (ii) the
remaining 675,000 Shares are issuable upon exercise of an over-allotment option
granted by the Company.
The Shares are to be sold by the Company pursuant to an underwriting
agreement (the "Underwriting Agreement") to be entered into by and among the
Company and Credit Suisse First Boston Corporation, First Union Securities, Inc.
and FleetBoston Robertson Stephens Inc., as representatives of the several
underwriters named in the Underwriting Agreement, the form of which will be
filed as Exhibit 1 to the Registration Statement.
We are acting as counsel for the Company in connection with the sale by the
Company of the Shares. We have examined signed copies of the Registration
Statement as filed with the Commission. We have also examined and relied upon
the Underwriting Agreement, minutes of meetings of the stockholders and the
Board of Directors of the Company as provided to us by the Company, stock record
books of the Company as provided to us by the Company, the Certificate of
Incorporation and By-Laws of the Company, each as restated and/or amended to
date, and such other documents as we have deemed necessary for purposes of
rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.
<PAGE>
ZEFER Corp.
March 27, 2000
Page 2
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of the Commonwealth of Massachusetts, the Delaware
General Corporation Law and the federal laws of the United States of America.
Based upon and subject to the foregoing, we are of the opinion that the
Shares to be issued and sold by the Company have been duly authorized for
issuance and, when such Shares are issued and paid for in accordance with the
terms and conditions of the Underwriting Agreement, such Shares will be validly
issued, fully paid and nonassessable.
It is understood that this opinion is to be used in connection with the
offer and sale of the Shares while the Registration Statement is in effect.
Please note that we are opining as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. This opinion
is based upon currently existing statutes, rules, regulations and judicial
decisions.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters." In
giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ Hale and Dorr LLP
------------------------
HALE AND DORR LLP
<PAGE>
EXHIBIT 10.48
RECAPITALIZATION AGREEMENT
THIS RECAPITALIZATION AGREEMENT (this "Agreement") is made as of
March 27, 2000 by and among ZEFER Corp., a Delaware corporation (the
"Company"), GTCR Capital Partners, L.P., a Delaware limited partnership ("GTCR
Capital"), GTCR Fund VI, L.P., a Delaware limited partnership ("GTCR Fund VI"),
GTCR VI Executive Fund, L.P., a Delaware limited partnership ("Executive Fund"),
GTCR Associates VI, a Delaware general partnership ("Associates Fund" and,
together with GTCR Capital, GTCR Fund VI and the Executive Fund, the "GTCR
Investors"), and the other stockholders of the Company set forth on the
signature pages hereto (together with the GTCR Investors, the "Stockholders").
Except as otherwise indicated herein, capitalized terms used herein are defined
in Section 6 hereof.
Each Stockholder owns the number of shares of the Company's Class A
Preferred Stock, par value $.01 per share (the "Class A Preferred") set forth
opposite such Stockholder's name on the Schedule of Stockholders attached
hereto.
Section 4B of Part B of Article Four of the Company's Restated Certificate
of Incorporation, as amended through the date hereof (the "Certificate"),
provides that the Company shall, at the request of the holders of a majority of
the Class A Preferred, apply the net cash proceeds from any public offering of
equity securities to redeem the outstanding shares of Class A Preferred at a
price equal to the liquidation value thereof plus accrued and unpaid dividends
thereon.
The Company has filed a Registration Statement on Form S-1 (File No.
333-94283) (the "Registration Statement") with the Securities and Exchange
Commission relating to an initial public offering (the "Initial Public
Offering") of the Company's common stock, par value $0.001 per share (the
"Common Stock"), under the Securities Act. The Stockholders desire that the
Company redeem the shares of Class A Preferred with the net proceeds of the
Initial Public Offering after payment of underwriting discounts and reasonable
out-of-pocket fees and expenses incurred in connection therewith (the "Net
Proceeds"). However, the Company desires to use a portion of the Net Proceeds to
fully repay the GTCR Indebtedness and the Harris Indebtedness (collectively, the
"Indebtedness"), and to maintain a portion of the Net Proceeds for working
capital and other general corporate purposes. As a result, if the Company
receives Net Proceeds less than the amounts set forth in this Agreement, there
may not be any Net Proceeds remaining to redeem outstanding shares of Class A
Preferred.
As such, the Stockholders and the Company desire to enter into an agreement
pursuant to which the Net Proceeds will be applied in the following order and
manner: (i) first, the Net Proceeds will be used to fully repay the Harris
Indebtedness; (ii) second, an additional amount of Net Proceeds, if any, not to
exceed $23,400,000 shall be retained by the Company for working capital and
other general corporate purposes; (iii) third, an additional amount of Net
Proceeds, if any, not to exceed $33,200,000 in the aggregate shall be divided
evenly with (a) one-half of such amount applied to repay the GTCR Indebtedness
and (b) the other half of such amount retained by the Company for working
capital and
<PAGE>
other general corporate purposes; (iv) fourth, an additional amount
of Net Proceeds, if any, shall be applied to repay the remaining GTCR
Indebtedness; and (v) fifth, the remaining Net Proceeds, if any (the "Excess Net
Proceeds"), will be used by the Company to redeem shares of Class A Preferred;
provided that to the extent that the Excess Net Proceeds are not sufficient to
redeem all shares of Class A Preferred, the remaining shares of Class A
Preferred shall be exchanged for shares of Common Stock (the "Exchange Shares").
In addition, to the extent the underwriters of the Initial Public Offering
exercise their over-allotment option, the Excess Net Proceeds resulting from
such exercise, if any, will be used by the Company to redeem Exchange Shares
from the Stockholders on a pro rata basis according to the number of Exchange
Shares received by each Stockholder at a redemption price per share equal to the
initial offering price for a share of Common Stock in the Initial Public
Offering.
The parties hereto agree as follows:
Section 1. Application of Net Proceeds; Redemption; Exchange; and Closing.
1A. Application of Net Proceeds; Redemption. At the Closing (as defined in
Section 1C below), the Company shall apply the Net Proceeds as follows: (i)
first, the Net Proceeds shall be used to fully repay the Harris Indebtedness;
(ii) second, an additional amount of Net Proceeds, if any, not to exceed
$23,400,000 shall be retained by the Company for working capital and other
general corporate purposes; (iii) third, an additional amount of Net Proceeds,
if any, not to exceed $33,200,000 in the aggregate shall be divided evenly with
(a) one-half of such amount applied to repay the GTCR Indebtedness and (b) the
other half of such amount retained by the Company for working capital and other
general corporate purposes; (iv) fourth, an additional amount of Net Proceeds,
if any, shall be applied to repay the remaining GTCR Indebtedness; and (v)
fifth, the Excess Net Proceeds, if any, shall be used to redeem shares of Class
A Preferred from each Stockholder on a pro rata basis according to the aggregate
liquidation value and accrued and unpaid dividends of the Class A Preferred held
by such Stockholder. The redemption price for each share of Class A Preferred
shall equal the liquidation value thereof plus accrued and unpaid dividends
thereon. The redemption of the Class A Preferred pursuant to this Section 1A is
referred to herein as the "Redemption." At the Closing, each Stockholder shall
tender to the Company the shares of Class A Preferred held by such Stockholder
that are being redeemed pursuant to the Redemption duly endorsed for transfer to
the Company. As described below in Section 1B, each Stockholder shall have the
right to receive Exchange Shares in exchange for any shares of Class A Preferred
not so redeemed.
1B. Exchange of the Remaining Shares of Class A Preferred Stock. At the
Closing, each Stockholder will exchange, in accordance with this Section 1B, all
shares of Class A Preferred held by such Stockholder that have not been redeemed
pursuant to Section 1A for Exchange Shares. At the Closing, the Company shall
issue to each Stockholder a number of shares
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<PAGE>
of Common Stock equal to (i) the aggregate liquidation value of the shares of
Class A Preferred, if any, held by such Stockholder after giving effect to the
Redemption, plus the aggregate value of all accrued and unpaid dividends on such
shares of Class A Preferred, divided by (ii) the initial offering price of a
share of Common Stock in the Initial Public Offering. At the Closing, each
Stockholder shall deliver to the Company certificates representing all shares of
Class A Preferred, if any, held by such Stockholder after giving effect to the
Redemption, duly endorsed for transfer to the Company. If a fractional share of
Exchange Shares would be issuable to a Stockholder pursuant to this Section 1B,
the Company shall deliver to such Stockholder cash in lieu of such fractional
share in an amount equal to the percentage of a share represented by such
fractional interest multiplied by the initial offering price of a share of
Common Stock in the Initial Public Offering.
1C. The Closing. The closing of the transactions contemplated by this
Section 1 (the "Closing") shall take place concurrently with the consummation of
the Initial Public Offering and at the same location. As of the Closing, all
shares of outstanding Class A Preferred shall automatically be canceled and
retired and cease to exist, and each holder of a certificate representing any
such shares shall cease to have any rights with respect thereto, except the
right to receive the Recapitalization Consideration therefor upon the surrender
of such certificate in the manner provided in this Section 1C. At the Closing
and thereafter, upon presentment and delivery by each such Stockholder to the
Company of the certificates representing the shares of Class A Preferred held by
such Stockholder duly endorsed for transfer to the Company, the Company (i)
shall pay to each Stockholder, by wire transfer of immediately available funds
to an account or accounts designated by such Stockholder, the aggregate
redemption price for such Stockholder's shares of Class A Preferred being
redeemed, (ii) shall deliver, or cause the Company's transfer agent to deliver,
to each Stockholder stock certificates evidencing the Exchange Shares to be
issued by the Company to each such Stockholder, registered in each such
Stockholder's name or its nominee's name, and (iii) shall deliver to each
Stockholder cash for any fractional shares of Exchange Stock to which such
Stockholder would otherwise be entitled (collectively, the "Recapitalization
Consideration"). Until surrendered as contemplated in this Section 1C, each
certificate representing Class A Preferred shall be deemed at any time after the
Closing to represent only the right to receive the Recapitalization
Consideration. Each certificate for Exchange Shares shall be imprinted with a
legend in substantially the following form:
The shares represented by this certificate have not been registered under
the Securities Act of 1933 (the "Act") or applicable state securities law
and may not be sold or transferred unless (i) a registration statement
covering such shares is effective under the Act or (ii) the transaction is
exempt from registration under the Act and an opinion reasonably
satisfactory to the Company to such effect has been rendered by counsel.
Section 2. Application of Over-Allotment Proceeds; Redemption; and Closing.
2A. Application of Over-Allotment Proceeds; Redemption of Exchange Shares.
Notwithstanding anything to the contrary in Section 1 above, to the extent that
the underwriters of the Initial Public Offering exercise their over-allotment
option from time to time, and to the extent that any of the Net Proceeds of such
exercise constitute Excess Net Proceeds, the Company shall,
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<PAGE>
upon receipt of the Excess Net Proceeds resulting from such exercise(s), use
such Excess Net Proceeds of such exercise to redeem a number of Exchange Shares
equal to (i) the amount of Excess Net Proceeds received by the Company from such
exercise, divided by (ii) the initial public offering price for a share of
Common Stock in the Initial Public Offering (each an "Exchange Share
Redemption"). At each Exchange Share Redemption, each Stockholder will present
and deliver certificates representing all Exchange Shares being redeemed from
such Stockholder, duly endorsed for transfer to the Company. In connection with
each Exchange Share Redemption, the Company shall redeem such Exchange Shares
from the Stockholders on a pro rata basis according to the number of Exchange
Shares received by each Stockholder pursuant to Section 1B above, in each case
at a redemption price per share equal to the initial offering price for a share
of Common Stock in the Initial Public Offering.
2B. The Closing of Exchange Share Redemptions. The closing of each Exchange
Share Redemption shall take place concurrently with and at the same location as
the Company's issuance of Common Stock in connection with the underwriters'
related exercise of their over-allotment option. As of such closing, all
Exchange Shares to be redeemed in connection with such Exchange Share Redemption
shall automatically be canceled and retired and cease to exist, and each holder
of a certificate representing any such Exchange Shares shall cease to have any
rights with respect to such Exchange Shares, except the right to receive the
Exchange Share Redemption Consideration therefor upon the surrender of such
certificate in the manner provided in this Section 2B. At such closing and
thereafter, upon presentment and delivery by each such Stockholder to the
Company of the certificate(s) representing such Exchange Shares held by such
Stockholder duly endorsed for transfer to the Company, the Company shall (i) pay
to such Stockholder, by wire transfer of immediately available funds to an
account or accounts designated by such Stockholder, the redemption price for
each Exchange Share being redeemed from such Stockholder and (ii) deliver, or
cause the Company's transfer agent to deliver, to each Stockholder a new stock
certificate evidencing the remaining Exchange Shares that are not being redeemed
at such Exchange Share Redemption, if any, held by such Stockholder, registered
in such Stockholder's name or its nominee's name (collectively, the "Exchange
Share Redemption Consideration").
Section 3. Conditions of Each Stockholder's Obligation at the Closing. The
obligation of each Stockholder to deliver its shares of Class A Preferred for
redemption and exchange hereunder at the Closing is subject to the satisfaction
as of the Closing of the following conditions:
3A. Representations and Warranties. The representations and warranties
contained in Section 5 hereof shall be true and correct in all material
respects at and as of the Closing as though then made, except to the extent
of changes caused by the transactions expressly contemplated herein.
3B. Initial Public Offering. The Company shall consummate the Initial
Public offering concurrently with the transactions contemplated hereby.
3C. Amendment of Certificate of Incorporation; Termination of Purchase
Agreement. The Company shall have adopted, and the stockholders of the
Company shall have approved, the amended and restated certificate of
incorporation in the form of Exhibit A
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<PAGE>
attached hereto (the "Restated Certificate"), and the Restated Certificate
shall be filed with the Secretary of State of the State of Delaware
immediately after the Closing without having been further amended or
modified. In addition, the Company shall have terminated that certain
Purchase Agreement, dated as of March 23, 1999, as amended (the "Purchase
Agreement"), by and among the Company and GTCR Fund VI, Executive Fund and
Associates Fund.
3D. Securities Law Compliance. The Company shall have made all filings
under all applicable federal and state securities laws necessary to
consummate the issuance of the Common Stock pursuant to this Agreement in
compliance with such laws.
3E. Issuance of Capital Stock. From the date hereof until the Closing
Date, the Company shall not have issued any additional shares of its
capital stock other than in connection with (i) the exercise of options
granted pursuant to a plan approved by the Board of Directors and
stockholders of the Company and/or (ii) the Initial Public Offering.
3F. Release of Guaranty. The Company shall have obtained a full and
unconditional release of the GTCR Guaranty.
3G. Closing Documents. The Company shall have delivered to each
Stockholder the following documents, which shall be in form and substance
reasonably satisfactory to the holders of a majority of the shares of Class
A Preferred:
(a) A certificate of an authorized officer of the Company stating
that the conditions specified in Sections 3A through 3F,
inclusive, have been satisfied.
(b) Certified copies of (i) the resolutions adopted by the Company's
board of directors authorizing the execution, delivery and
performance of this Agreement and all other agreements
contemplated hereby, the filing of the Restated Certificate, the
issuance of the Exchange Shares and the consummation of all other
transactions contemplated by this Agreement, and (ii) the
resolutions duly adopted by the Company's stockholders adopting
the Restated Certificate.
(c) Certified copies of the Company's certificate of incorporation
and the Company's bylaws, each as in effect at the Closing.
3H. Waiver. Any condition specified in this Section 3 may be waived on
behalf of all Stockholders if consented to by the holders of a majority of
the shares of Class A Preferred held by all Stockholders.
Section 4. Conditions of the Company's Obligation at the Closing. The
obligation of the Company to consummate the redemption and exchange hereunder at
the Closing is subject to the satisfaction as of the Closing of the following
conditions:
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<PAGE>
4A. Representations and Warranties. The representations and warranties
contained in Section 6 hereof shall be true and correct in all material
respects at and as of the Closing as though then made, except to the extent
of changes caused by the transactions expressly contemplated herein.
4B. Initial Public Offering. The Company shall consummate the Initial
Public offering concurrently with the transactions contemplated hereby.
4C. Waiver. Any condition specified in this Section 4 may be waived by
the Company.
Section 5. Representations and Warranties of the Company. As a material
inducement to the Stockholders to enter into this Agreement and to perform their
obligations hereunder, the Company hereby represents and warrants that:
5A. Organization and Corporate Power. The Company is a corporation
duly organized, validly existing and in good standing under the laws of
Delaware and is qualified to do business in every jurisdiction in which the
failure to so qualify has had or would reasonably be expected to have a
material adverse effect on the financial condition, operating results,
assets or operations or business prospects of the Company and its
Subsidiaries taken as a whole.
5B. Authorization, No Breach. The execution, delivery and performance
of this Agreement and all other agreements contemplated hereby to which the
Company is a party have been duly authorized and executed by the Company
and the Restated Certificate has been duly authorized. This Agreement and
all other agreements contemplated hereby to which the Company is a party
each constitutes a valid and binding obligation of the Company, enforceable
in accordance with its terms. Subject to the filing of the Restated
Certificate with the Secretary of State of the State of Delaware, the
execution and delivery by the Company of this Agreement and all other
agreements contemplated hereby to which the Company is a party, the
issuance of the Exchange Shares hereunder, and the fulfillment of and
compliance with the respective terms hereof and thereof by the Company, do
not and shall not (i) conflict with or result in a breach of the terms,
conditions or provisions of, (ii) constitute a default under, (iii) result
in the creation of any lien, security interest, charge or encumbrance upon
the Company's or any Subsidiary's capital stock or assets pursuant to, (iv)
give any third party the right to modify, terminate or accelerate any
obligation under, (v) result in a violation of, or (vi) require any
authorization, consent, approval, exemption or other action by or notice or
declaration to, or filing with, any court or administrative or governmental
body or agency pursuant to, the Restated Certificate or the certificate of
incorporation of any Subsidiary, or any law, statute, rule or regulation to
which the Company or any Subsidiary is subject, or any agreement,
instrument, order, judgment or decree to which the Company or any
Subsidiary is a party or by which their respective property is bound, other
than as expressly contemplated in such agreements described above and other
than those made and obtained.
5C. Capital Stock and Related Matters. As of the date hereof, the
authorized capital stock of the Company consists of 100,000,000 shares of Common
Stock, 39,855,268 of which are issued and outstanding, and 96,632 shares of
Class A Preferred, 41,869.1986 of which are issued and outstanding. As of the
Closing, all of the outstanding shares of the Company's capital stock (including
the Exchange Shares) shall be validly issued, fully paid and non-assessable.
There are no statutory or contractual stockholders preemptive rights or rights
of refusal with respect to the issuance of Exchange Shares hereunder which have
not been waived or terminated. The offer, sale and issuance of the Exchange
Shares hereunder do not require registration under the Securities Act or any
applicable state securities laws.
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<PAGE>
Section 6. Representations and Warranties of the Stockholders. As a
material inducement to the Company to enter into this Agreement and to perform
its obligations hereunder, each Stockholder hereby represents and warrants to
the Company, as to itself only and not jointly and severally, that:
6A. Organization and Corporate Power. Each Stockholder that is not a
natural person is a corporation, partnership, limited partnership, limited
liability company, trust or other entity duly organized, validly existing
and in good standing under the laws of the state of its formation.
6B. Authorization; Enforceability. The execution, delivery and
performance of this Agreement and all other agreements contemplated hereby
to which the Stockholder is a party has been duly authorized and executed
by the Stockholder. This Agreement and all other agreements contemplated
hereby to which the Stockholder is a party each constitutes a valid and
binding obligation of such Stockholder, enforceable in accordance with its
terms.
6C. No Violation. The execution and delivery by the Stockholder of
this Agreement and all other agreements contemplated hereby to which the
Stockholder is a party, and the fulfillment of and compliance with the
respective terms hereof and thereof by the Stockholder, do not and shall
not (a) conflict with, result in a breach of any of the terms, conditions
or provisions of, (b) constitute a default under, (c) result in the
violation of, (d) result in the creation of any lien, security interest,
charge or encumbrance upon such Stockholders' shares of Class A Preferred,
(e) give any third party the right to terminate or to accelerate any
obligation under, or (f) require any authorization, consent, approval,
execution or other action by or notice to or filing with any court or
administrative or governmental body under, the provisions of any formation
or governing documents or the like of the Stockholder (where the
Stockholder is an entity) or any law, statute, regulation, rule, judgment,
order, instrument, decree or other restriction of any government,
governmental agency or court to which the Stockholder is subject or by
which its, his or her property is bound or any agreement to which the
Stockholder is a party.
6D. Ownership. Each Stockholder owns the shares of Class A Preferred
set forth opposite such Stockholder's name on the Schedule of Stockholders
free and clear of any restrictions on transfer, claims, taxes, liens,
charges, encumbrances, pledges, security interests, options, warrants,
rights, contracts, calls, commitments, equities and demands, except for
applicable restrictions on transfer under securities laws. The shares of
Class A Preferred set forth opposite such Stockholder's name on the
Schedule of Stockholders are all of the shares of Class A Preferred owned
by such Stockholder.
Section 7. Definitions. For the purposes of this Agreement, the following
terms have the meanings set forth below:
"Harris Indebtedness" means all outstanding principal and accrued
unpaid interest thereon payable by the Company to Harris Trust and Savings
Bank pursuant to that Unsecured Note made by the Company in favor of Harris
Trust and Savings Bank on July 16, 1999.
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<PAGE>
"GTCR Guaranty" means all obligations of every kind and nature of GTCR
Fund VI pursuant to that certain Guaranty, dated as of July 16, 1999,
executed by GTCR Fund VI in favor of Harris Trust and Savings Bank with
respect to the Harris Indebtedness.
"GTCR Indebtedness" means all outstanding principal and accrued unpaid
interest thereon payable by the Company to GTCR Capital pursuant to that
Promissory note made by the Company in favor of GTCR Capital on November
24, 1999.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Subsidiary" means, with respect to any Person, any corporation,
limited liability company, partnership, association or other business
entity of which (i) if a corporation, a majority of the total voting power
of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by that
Person or one or more of the other Subsidiaries of that Person or a
combination thereof, or (ii) if a limited liability company, partnership,
association or other business entity, a majority of the partnership or
other similar ownership interest thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof,
a Person or Persons shall be deemed to have a majority ownership interest
in a limited liability company, partnership, association or other business
entity if such Person or Persons shall be allocated a majority of limited
liability company, partnership, association or other business entity gains
or losses or shall be or control any managing director or general partner
of such limited liability company, partnership, association or other
business entity.
Section 8. Miscellaneous.
8A. Termination. This Agreement shall terminate upon the earlier of
(i) May 31, 2000, if the Initial Public Offering has not occurred by such
date, and (ii) the delivery of notice by the Company to each Stockholder
that the Initial Public Offering will not be consummated.
8B. Remedies. Any Person having any rights under any provision of this
Agreement shall be entitled to enforce such rights specifically (without
posting a bond or other security), to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
granted by law.
8C. Consent to Amendments. Except as otherwise expressly provided
herein, the provisions of this Agreement may be amended and the Company may
take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company has obtained the
written consent of the holders of a majority of the Class A Preferred (or
the Exchange Shares issued in exchange therefor).
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<PAGE>
8D. Survival of Representations and Warranties. All representations
and warranties contained herein or made in writing by any party in
connection herewith shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby,
regardless of any investigation made by any party or on such party's
behalf.
8E. Successors and Assigns. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto whether so
expressed or not. In addition, and whether or not any express assignment
has been made, the provisions of this Agreement which are for any
Stockholder's benefit as a Stockholder or holder of Class A Preferred or
Exchange Shares are also for the benefit of, and enforceable by, any
subsequent holder of such Class A Preferred or Exchange Shares, as the case
may be. No Stockholder may transfer any shares of Class A Preferred or
Exchange Shares without (i) first obtaining the written agreement of the
transferee to be bound by the provisions of this Agreement and (ii)
providing written notice of such transfer to the Company.
8F. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
8G. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, any one of which need not contain the signatures of
more than one party, but all of which taken together shall constitute one
and the same Agreement.
8H. Descriptive Headings, Interpretation. The descriptive headings of
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. The use of the word "'including" in
this Agreement shall be by way of example rather than by limitation.
8I. Governing Law. The laws of Delaware shall govern all issues
concerning the relative rights of the Company and its stockholders and all
other questions concerning the construction, validity and interpretation of
this Agreement, without giving effect to any choice of law or other
conflict of law provision or rule (whether of the State of Delaware or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
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<PAGE>
8J. Notices. All notices, demands or other communications to be given
or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered
personally to the recipient, sent to the recipient by reputable overnight
courier service (charges prepaid) or telecopied to the recipient. Such
notices, demands and other communications shall be sent to the Company and
each Stockholder at the address indicated next to such party's name on the
signature pages hereto or to such other address or to the attention of such
other person as the recipient party has specified by prior written notice
to the sending party.
8K. Entire Agreement. Except as otherwise expressly set forth herein,
this Agreement embodies the complete agreement among the parties hereto
with respect to the subject matter hereof and supersedes and preempts any
prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter
hereof in any way. Without limiting the foregoing, each of the Company and
each Stockholder hereby waives any rights it may have under the Certificate
with respect to the redemption or conversion of the Class A Preferred and
agrees that this Agreement shall govern such matters.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Recapitalization
Agreement on the date first written above.
Address: ZEFER CORP.
By: /s/ James Slamp
----------------------------
Its:
---------------------------
Address: GTCR FUND VI, L.P.
6100 Sears Tower
Chicago, IL 60606-6402 By: GTCR Partners VI, L.P.
Attention: Philip A. Canfield Its: General Partner
Timothy P. McAdam
Telecopier: 312/382-2201 By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/ Philip A. Canfield
--------------------------------
Name: Philip A. Canfield
Its: Principal
Address: GTCR VI EXECUTIVE FUND, L.P.
6100 Sears Tower
Chicago, IL 60606-6402 By: GTCR Partners VI, L.P.
Attention: Philip A. Canfield Its: General Partner
Timothy P. McAdam
Telecopier: 312/382-2201 By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/ Philip A. Canfield
--------------------------------
Name: Philip A. Canfield
Its: Principal
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<PAGE>
Address: GTCR ASSOCIATES VI
6100 Sears Tower
Chicago, IL 60606-6402 By: GTCR Partners VI, L.P.
Attention: Philip A. Canfield Its: Managing General Partner
Timothy P. McAdam
Telecopier: 312/382-2201 By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/ Philip Canfield
--------------------------------
Name: Philip A. Canfield
Its: Principal
Address: GTCR CAPITAL PARTNERS, L.P.
6100 Sears Tower
Chicago, IL 60606-6402 By: GTCR Mezzanine Partners, L.P.
Attention: Philip A. Canfield Its: General Partner
Timothy P. McAdam
Telecopier: 312/382-2201 By: GTCR Partners VI, L.P.
Its: General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/ Philip Canfield
--------------------------------
Name: Philip A. Canfield
Its: Principal
*
___________________________________
Dierdre Aubuchon
*
___________________________________
Richard Barnwell
*
___________________________________
Carol Beaudrau
- 12 -
<PAGE>
*
___________________________________
Edward Chapman
*
___________________________________
Allan Cohen
*
___________________________________
Gerald Dube
*
___________________________________
Richard Fouts
*
___________________________________
Melissa Grossman
*
___________________________________
Camille Huvelle
*
___________________________________
John Kelly
*
___________________________________
David Lubin
*
___________________________________
David Montanarro
*
___________________________________
Sean Mullaney
- 13 -
<PAGE>
*
___________________________________
Richard Nolan
*
___________________________________
Susan Perry
*
___________________________________
Bruce Russell
*
___________________________________
James Slamp
*
___________________________________
Martha Stephens
*
___________________________________
Francis Torby
*
___________________________________
Gustavo Trujillo
*
___________________________________
Thomas Waite
*
___________________________________
Anita Ward
/s/ James Slamp
- --------------------------------------
* By James Slamp, Attorney-in-Fact
- 14 -
<PAGE>
SCHEDULE OF STOCKHOLDERS
================================================================================
Name Shares of Class A Preferred
- --------------------------------------------------------------------------------
GTCR Fund VI, L.P. 37,224.5765
- --------------------------------------------------------------------------------
GTCR VI Executive Fund, L.P. 266.5186
- --------------------------------------------------------------------------------
GTCR Associates VI 84.5659
- --------------------------------------------------------------------------------
GTCR Capital Partners, L.P. 3,291.5376
- --------------------------------------------------------------------------------
Aubuchon, Dierdre 80
- --------------------------------------------------------------------------------
Barnwell, Richard 20
- --------------------------------------------------------------------------------
Beaudrau, Carol 141
- --------------------------------------------------------------------------------
Chapman, Edward 20
- --------------------------------------------------------------------------------
Cohen, Allan 24
- --------------------------------------------------------------------------------
Dube, Gerald 121
- --------------------------------------------------------------------------------
Fouts, Richard 20
- --------------------------------------------------------------------------------
Grossman, Melissa 20
- --------------------------------------------------------------------------------
Huvelle, Camille 10
- --------------------------------------------------------------------------------
Kelly, John 80
- --------------------------------------------------------------------------------
Lubin, David 70
- --------------------------------------------------------------------------------
Montanarro, David 20
- --------------------------------------------------------------------------------
Mullaney, Sean 80
- --------------------------------------------------------------------------------
Nolan, Richard 40
- --------------------------------------------------------------------------------
Perry, Susan 20
- --------------------------------------------------------------------------------
Russell, Bruce 20
- --------------------------------------------------------------------------------
Slamp, James 40
- --------------------------------------------------------------------------------
Stephens, Martha 40
- --------------------------------------------------------------------------------
Torby, Francis 40
- --------------------------------------------------------------------------------
Trujillo, Gustavo 20
- --------------------------------------------------------------------------------
Waite, Thomas 56
- --------------------------------------------------------------------------------
Ward, Anita 20
================================================================================
- 15 -
<PAGE>
EXHIBIT A
[RESTATED CERTIFICATE]
- 16 -
<PAGE>
EXHIBIT 10.53
FIRST AMENDMENT TO
LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made as
---------
of March 27, 2000, by and among between ZEFER Corp., a Delaware corporation (the
"Borrower"), and GTCR Capital Partners, L.P., a Delaware limited partnership
--------
(the "Lender"). Except as otherwise indicated, capitalized terms used herein and
------
not otherwise defined shall have the meanings ascribed to such terms in the Loan
Agreement (as defined below).
WHEREAS, the Borrower and the Lender are parties to that certain Loan
Agreement, dated as of November 24, 1999 (the "Loan Agreement"), pursuant to
--------------
which the Borrower and the Lender have agreed that the Lender shall make Loans
to the Borrower on the terms and conditions set forth therein; and
WHEREAS, the Borrower and the Lender desire to make certain amendments
to the Loan Agreement in accordance with Section 11.3 thereof.
NOW, THEREFORE, in consideration of the foregoing recitals and the
respective agreements set forth herein, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree to amend the Loan Agreement as
follows:
1. Subsection 2.2.3 of the Loan Agreement is hereby amended by adding at
the end thereof the following:
"Notwithstanding the foregoing, the Lender's obligation to make any
additional Loans to the Borrower hereunder shall terminate upon the consummation
of an initial public offering of the Borrower's equity securities."
2. Subsection 3.5.3 of the Loan Agreement is hereby amended by deleting
it in its entirety and by adding the following in its place:
3.5.3. Public Offering. The Borrower shall immediately apply the Net
----------------
Public Offering Proceeds received from the initial public offering of its equity
securities pursuant to an effective registration statement under the Securities
Act in the following order and manner: (i) first, the Net Public Offering
Proceeds shall be used to fully repay the Harris Indebtedness; (ii) second, an
additional amount of Net Public Offering Proceeds not to exceed $23,400,000
shall be retained by the Borrower for working capital and other general
corporate purposes; (iii) third, an additional amount of Net Public Offering
Proceeds not to exceed $33,200,000 in the aggregate shall be divided evenly with
(a) one-half of such amount applied to repay the Loans and (b) the other half of
such amount retained by the Borrower for working capital and other general
corporate purposes; and (iv) fourth, the remaining Net Public Offering Proceeds
will be applied to repay the Loans. All payments on the Loans under this
subsection 3.5.3 will be applied first to accrued and unpaid interest (including
Capitalized Interest) outstanding on the Loans and then to principal. To the
extent the
<PAGE>
Net Public Offering Proceeds from the Borrower's initial public offering of its
equity securities are insufficient to permit the Company to satisfy in full
subsections 3.5.3(i) through 3.5.3(iv), the Net Public Offering Proceeds from
any and all subsequent public offerings of the Borrower's equity securities
shall be applied in the same order and manner taking into account the
application of the Net Public Offering Proceeds from all prior public offerings
of the Borrower's equity securities (i.e., treating all such Net Public Offering
Proceeds as if they were received in connection with a single public offering).
3. The definition of "Maturity Date" in Section 12 of the Loan Agreement
is hereby amended by deleting it in its entirety and by adding the following in
its place:
"Maturity Date" means the earlier of (i) November 24, 2004 and (ii)
-------------
the first anniversary of the closing date of the initial public offering of
the Borrower's equity securities.
4. Section 12 of the Loan Agreement shall be further amended by inserting
into such Section the following definitions:
"Harris Indebtedness" means all outstanding principal and accrued
-------------------
unpaid interest thereon payable by the Borrower to Harris Trust and Savings
Bank pursuant to that Unsecured Note made by the Borrower in favor of
Harris Trust and Savings Bank on July 16, 1999.
"Net Public Offering Proceeds" means the proceeds received by the
----------------------------
Borrower from any public offering of its equity securities pursuant to an
effective registration statement under the Securities Act, net of any
underwriting discounts and commissions and other reasonable and customary
transactions costs, fees and expenses properly attributable to any such
offering and payable by the Borrower to non-Affiliates in connection
therewith.
5. Full Force and Effect. Other than as specifically provided herein,
---------------------
the Loan Agreement, as amended hereby, shall remain in full force and effect,
and is hereby ratified and confirmed in all respects.
6. Amendment. As required by Section 11.3 of the Loan Agreement, the
---------
Borrower and the Lender hereby consent to this Amendment.
7. Counterparts. This Amendment may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
* * * * *
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the
date first written above.
ZEFER CORP.
By: /s/ James Slamp
---------------------------------------
Its:______________________________________
GTCR CAPITAL PARTNERS, L.P.
By: GTCR Mezzanine Partners, L.P.
Its: General Partner
By: GTCR Partners VI, L.P.
Its: General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/ Philip Canfield
---------------------------------
Its: Principal
SIGNATURE PAGE TO FIRST AMENDMENT TO LOAN AGREEMENT
<PAGE>
EXHIBIT 10.55
SECOND AMENDMENT TO STOCKHOLDERS AGREEMENT
This SECOND AMENDMENT TO STOCKHOLDERS AGREEMENT (this "Amendment") is made
this ninth day of February, 2000, by and among ZEFER Corp., a Delaware
corporation (the "Company") and GTCR Fund VI, L.P., a Delaware limited
partnership ("GTCR"). Any capitalized term used in this Amendment which is not
otherwise defined herein shall have the meaning assigned to such term in the
Stockholders Agreement (as defined below).
WHEREAS, the Company and GTCR are parties to that certain Stockholders
Agreement, dated as of March 23, 1999 (as amended and modified from time to
time), by and among the Company, GTCR and certain other stockholders of the
Company (the "Stockholders Agreement");
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and GTCR agree as
follows:
1. Section 1(a)(i) of the Stockholders Agreement in hereby amended and
restated in its entirety to read as follows:
(i) the authorized number of directors on the Company's board of
directors (the "Board") shall be established at nine directors.
2. Section 1(a)(ii) of the Stockholders Agreement in hereby amended and
restated in its entirety to read as follows:
(ii) the following persons shall be elected to the Board:
(A) until the later to occur of (i) such time as GTCR Capital
Partners, L.P. ("GTCR Capital") no longer holds any capital
stock (or securities exercisable or convertible into capital
stock) of the Company and (ii) such time as no Loan
Obligation (as defined in Section 12 of the Loan Agreement)
is outstanding, two representatives designated by GTCR and
one representative designated by GTCR Capital; and
thereafter, three representatives designated by GTCR
(collectively, and regardless of whether designated by GTCR
or GTCR Capital, the "Investor Directors");
(B) William Seibel and one additional Executive of the Company
designated by the Company's chief executive officer (the
"CEO") (each, an "Executive Director" and collectively, the
"Executive Directors"); and
(C) four representatives chosen jointly by GTCR and the CEO (the
"Outside Directors"); provided that no Outside Directors
shall be a member of the Company's management or an employee
or officer of the Company or its subsidiaries; provided
further that if GTCR and the CEO are unable to agree on the
Outside Directors within 10 days after the date specified by
GTCR for electing the Outside Directors, then GTCR, in its
sole discretion, shall designate the Outside Directors;
3. Other than as specifically provided herein, the Stockholders
Agreement, as amended hereby, shall remain in full force and effect,
and is hereby ratified and confirmed in all respects.
4. As required by Section 10 of the Stockholders Agreement, the Company
and GTCR hereby consent to this Amendment.
5. This Amendment may be executed in two or more counterparts, each of
which shall for all purposes be deemed to be an original and all of
which shall constitute the same instrument.
* * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed on the day and year first above written.
ZEFER CORP.
By: /s/ James Slamp
-----------------------------
Its:
-----------------------------
GTCR FUND VI, L.P.
By: GTCR Partners VI, L.P.
Its: General Partner
By: GTCR Golder Rauner, LLC
Its: General Partner
By: /s/ Philip Canfield
-----------------------------
Its: Principal
2
<PAGE>
EXHIBIT 10.56
FIRST AMENDMENT TO STOCK RESTRICTION AGREEMENT
----------------------------------------------
THIS FIRST AMENDMENT TO STOCK RESTRICTION AGREEMENT (this "Amendment")
---------
is made as of March 23, 2000, between ZEFER Corp., a Delaware corporation (the
"Company"), and David Lubin ("Holder"). Except as otherwise indicated herein,
------- ------
capitalized terms used and not otherwise defined herein shall have the meanings
ascribed to such terms in the Purchase Agreement (as defined below).
WHEREAS, the parties to this Amendment are all of the parties to that
certain Stock Restriction Agreement, dated as of March 23, 1999, between the
Company and Holder (the "Stock Restriction Agreement");
---------------------------
WHEREAS, the parties hereto desire to make certain amendments to the
Purchase Agreement in accordance with Section 12(i) thereof; and
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Amendments to Stock Restriction Agreement.
-----------------------------------------
1A. Section 2(a) of the Stock Restriction Agreement shall be amended and
restated in its entirety as follows:
(a) All of the shares of Holder Stock acquired hereunder shall be
subject to vesting in the manner specified in this Section 2. Except as
otherwise provided in Sections 2(b) and 2(c) below, commencing on the day
immediately following the Closing and continuing so long as Holder is still
serving as a director of the Company or any of its Subsidiaries,
the Holder Stock will vest daily on a pro rata basis so that 100% of the
Holder Stock will be vested on the 5th Anniversary of the Closing (the
"Vesting Schedule").
----------------
1B. Section 2(b) of the Stock Restriction Agreement shall be amended and
restated in its entirety as follows:
(b) In the event the Company consummates its initial Public
Offering prior to the 1st Anniversary of the Closing, the Vesting Schedule
shall be modified such that, so long as Holder is still serving as a
director of the Company or any of its Subsidiaries, the shares
of Holder Stock will vest as follows: (i) 33% of the Holder Stock will vest
upon the occurrence of such Public Offering, and (ii) commencing on the day
immediately following such Public Offering, the remaining unvested shares
of Holder Stock will vest daily on a pro rata basis so that 100% of the
Holder Stock will be vested on the 5th Anniversary of the Closing. In the
event the Company consummates its initial Public Offering after the 1st
Anniversary of the Closing but prior to the 2nd Anniversary of the Closing,
the Vesting Schedule shall be modified such that, so long as Holder is
still serving as a director of the Company or any of its Subsidiaries, the
shares of Holder Stock that are unvested immediately prior to such initial
Public Offering will vest as follows: (i) an additional number of shares of
Holder
<PAGE>
Stock will vest upon the occurrence of such Public Offering so that 33% of
the Holder Stock will be vested immediately thereafter, (ii) commencing on
the day immediately following such Public Offering and continuing until the
2nd Anniversary of the Closing, an additional number of shares of Holder
Stock will vest daily on a pro rata basis so that 40% of the Holder Stock
will be vested on the 2nd Anniversary of the Closing, and (iii) commencing
on the day immediately following the 2nd Anniversary of the Closing, the
remaining unvested shares of Holder Stock will vest daily on a pro rata
basis so that100% of the Holder Stock will be vested on the 5th Anniversary
of the Closing.
Section 2. Retroactive Application of Amended and Restated Vesting
-------------------------------------------------------
Schedule. The amendment set forth in Section 1A above shall be applied
- ---------
retroactively so as to cause the Holder Stock to be subject to the amended and
restated Vesting Schedule as of May 21, 1999.
Section 3. Limitations. Except as expressly amended by this
------------
Amendment, all of the terms and provisions of the Stock Restriction Agreement
shall remain in full force and effect. This Amendment supersedes and preempts
any prior understandings, agreements or representations by or between the
parties, written or oral, which may have related to the subject matter hereof in
any way.
* * * *
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Stock Restriction Agreement on the date first written above.
ZEFER Corp.
By: /s/ James Slamp
-----------------------------------
Its: President
/s/ David Lubin
-----------------------------------
David Lubin
Agreed and Accepted:
GTCR FUND VI, L.P.
By: GTCR Partners VI, L.P.
Its: General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/ Philip Canfield
----------------------------------------
Name:
----------------------------------------
Its: Principal
GTCR VI EXECUTIVE FUND, L.P.
By: GTCR Partners VI, L.P.
Its: General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/ Philip Canfield
----------------------------------------
Name:
----------------------------------------
Its: Principal
GTCR ASSOCIATES VI
By: GTCR Partners VI, L.P.
Its: General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/ Philip Canfield
----------------------------------------
Name:
----------------------------------------
Its: Principal
SIGNATURE PAGE TO FIRST AMENDMENT
TO STOCK RESTRICTION AGREEMENT
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 27, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Amendment No. 3 to the
Registration Statement of Zefer Corp on Form S-1 (File No. 333-94283) filed
with the SEC on March 27, 2000 of our report dated March 12, 1998 on
Neoglyphics Media Corporation as of December 31, 1997 and for the year then
ended.
Katch, Tyson & Company
Certified Public Accountants
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS AMENDED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> MAR-18-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,271,105
<SECURITIES> 0
<RECEIVABLES> 10,685,065
<ALLOWANCES> 280,237
<INVENTORY> 0
<CURRENT-ASSETS> 1,497,668
<PP&E> 11,171,907
<DEPRECIATION> 2,581,358
<TOTAL-ASSETS> 51,289,804
<CURRENT-LIABILITIES> 36,550,447
<BONDS> 0
0
25,803,156
<COMMON> 39,854
<OTHER-SE> (24,709,975)
<TOTAL-LIABILITY-AND-EQUITY> 51,289,804
<SALES> 0
<TOTAL-REVENUES> 25,276,935
<CGS> 0
<TOTAL-COSTS> 59,933,295
<OTHER-EXPENSES> 130
<LOSS-PROVISION> 280,237
<INTEREST-EXPENSE> 2,297,300
<INCOME-PRETAX> (36,910,315)
<INCOME-TAX> 5,760,400
<INCOME-CONTINUING> (31,149,915)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,149,915)
<EPS-BASIC> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
