<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 2000
REGISTRATION NO. 333-95951
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CLIENTLOGIC CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
DELAWARE 541990 16-1556476
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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TWO AMERICAN CENTER
3102 WEST END AVENUE, SUITE 1000
NASHVILLE, TENNESSEE 37203
(615) 301-7100
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
GENE S. MORPHIS
CHIEF FINANCIAL OFFICER
CLIENTLOGIC CORPORATION
TWO AMERICAN CENTER
3102 WEST END AVENUE, SUITE 1000
NASHVILLE, TENNESSEE 37203
(615) 301-7100
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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Copies to:
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MARY R. KORBY, ESQ. MARC S. ROSENBERG, ESQ.
WEIL, GOTSHAL & MANGES LLP CRAVATH, SWAINE & MOORE
100 CRESCENT COURT WORLDWIDE PLAZA
SUITE 1300 825 EIGHTH AVENUE
DALLAS, TEXAS 75201 NEW YORK, NEW YORK 10019
(214) 746-7700 (212) 474-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this registration statement becomes effective.
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. [ ]
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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. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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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 , 2000
PROSPECTUS
[CLIENTLOGIC LOGO]
13,300,000 SHARES
CLASS A COMMON STOCK
$ PER SHARE
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We are selling 13,300,000 shares of our Class A common stock. The
underwriters named in this prospectus may purchase up to 1,995,000 additional
shares of our Class A common stock to cover over-allotments.
This is an initial public offering of our Class A common stock. We
currently expect the initial public offering price to be between $14.00 and
$16.00 per share. We have applied to have our Class A common stock included for
quotation on the Nasdaq National Market under the symbol "CLGC".
Following this offering, Onex Corporation, our principal stockholder, will
control approximately 98.9% of the combined voting power of our outstanding
Class A and Class B common stock.
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INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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PER SHARE TOTAL
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Public Offering Price $ $
Underwriting Discount $ $
Proceeds to ClientLogic (before expenses) $ $
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The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
, 2000.
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ALOMON SMITH BARNEY ROBERTSON STEPHENS
DEUTSCHE BANC ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
DLJDIRECT INC. TD SECURITIES
, 2000
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DESCRIPTION OF INSIDE FRONT COVER ART
On the left side of the page halfway down the page is the ClientLogic logo.
The ClientLogic logo consists of the name ClientLogic with a globe as the letter
"o" and has the phrase "The service engine of the new economy(sm)" beneath it.
The "e" in economy is surrounded by a red circle.
On the right side of the page, listed from the top of the page to the
bottom are the following phrases, each having a representative icon to its
right:
-- "CUSTOMER RELATIONSHIP MANAGEMENT"
-- "MARKETING SERVICES"
-- "CUSTOMER CONTACT MANAGEMENT"
-- "eFULFILLMENT"
-- "eBUSINESS"
-- "LIST SERVICES"
-- "LOYALTY PROGRAMS"
-- "CUSTOMIZED PROGRAM DEVELOPMENT"
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DESCRIPTION OF GATEWAY ART
On the far left, on the top of the page, is the ClientLogic logo.
Below the ClientLogic logo extending to the bottom of the page begin some
streaming lines which extend to the middle of the page into a globe and then
extends to the right side of the page. There is a larger, translucent globe
behind the smaller globe in the center of the page.
Contained within these lines on the left side of the globe are the
following images:
- a computer screen showing some empty fields
- a woman pointing to something on a page
- a man sitting in front of a computer screen
- a shopping cart
- a man speaking on a cell phone
- part of an email address starting info@we. . .
- two men carrying boxes
- a woman typing on a keyboard
Contained within the streaming lines to the right of the globe are the
following images:
- a series of numbers
- a woman talking into a headset
- American and British currency
- a barcode
- a forklift operator in a warehouse
- a woman signing for a box
- a computer screen showing some icons
Below the streaming lines, to the right of the globe, extending to the end
of the page is the following:
"ClientLogic is an international provider of integrated marketing,
customer contact management and fulfillment services focused on e-commerce
and technology companies. We help our clients acquire and retain customers
and maximize the profitability of their customer relationships."
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Special Note About Forward-Looking Statements............... 20
Use of Proceeds............................................. 21
Dividend Policy............................................. 22
Dilution.................................................... 23
Capitalization.............................................. 24
Selected Historical Financial Data.......................... 25
Unaudited Pro Forma Consolidated Balance Sheet and Statement
of Operations............................................. 26
Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 30
Business.................................................... 39
Management.................................................. 50
Security Ownership of Certain Beneficial Owners............. 61
Certain Relationships and Related Party Transactions........ 65
Description of Capital Stock................................ 70
Shares Eligible for Future Sale............................. 75
United States Federal Tax Considerations for Non-United
States Holders............................................ 77
Underwriting................................................ 79
Legal Matters............................................... 81
Experts..................................................... 82
Additional Information...................................... 82
Index to Financial Statements............................... F-1
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Until , 2000, all dealers that buy, sell or trade the Class A
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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PROSPECTUS SUMMARY
This summary only highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including the
information under "Risk Factors" and the financial statements and the related
notes included in this prospectus, before making an investment decision.
OUR COMPANY
ClientLogic is an international provider of marketing, customer contact
management and fulfillment services focused on electronic commerce and
technology companies. We are able to integrate these services for our clients,
allowing them to manage their customer relationships through a single service
provider. Our services, which we refer to collectively as customer relationship
management services, include:
- Marketing services. We create customized marketing programs which help
our Internet-based clients profile and target new customers and increase
the loyalty of existing customers. Our marketing services include
developing, maintaining and providing access to customer information
databases and analyzing this information to identify and address specific
needs of our clients' customers. For the year ended December 31, 1999, we
derived approximately 6.9% of our revenues from marketing services.
- Customer contact management services. We provide customer service and
technical support to our clients' customers 24 hours a day, seven days a
week through e-mail, online chat, fax, phone and mail. Our ability to
communicate with our clients' customers through multiple channels enables
us to more effectively respond to their inquiries and needs. In 1999,
approximately 86% of our customer contact was conducted by telephone and
in December 1999 approximately 82% of our customer contact was conducted
by telephone. For the year ended December 31, 1999, we derived
approximately 73.7% of our revenues from customer contact management
services.
- Fulfillment services. We conduct our clients' order and payment
processing, warehousing, inventory management, picking, packing, shipping
and returns processing activities. Through these services we distribute
our clients' products to their customers efficiently and cost
effectively. For the year ended December 31, 1999, we derived
approximately 19.4% of our revenues from fulfillment services.
We believe that the breadth of our services and our ability to integrate
these services for our clients are competitive advantages for our company. By
outsourcing to us, our clients can avoid the complexity and costs associated
with coordinating these services from multiple suppliers or providing these
services in-house. Additionally, our proprietary marketing software allows us to
collect and analyze valuable customer information generated by our customer
contact management and fulfillment operations. This gives us the ability to help
clients better design their marketing programs, develop their products, improve
the effectiveness of their Web sites and further enhance their customers'
satisfaction. Our range of services assist our clients in acquiring and
retaining customers and in maximizing the profitability of customer
relationships.
Our company was formed in September 1998 and we have acquired six separate
businesses since that time with the most recent acquisition completed in
December 1999. During our limited history, we have incurred substantial costs to
complete and integrate acquisitions, to create and introduce our services and to
grow and develop our business. As a result, we incurred net losses of
approximately $5.3 million in 1998 and approximately $61.1 million in 1999 and
we had an accumulated deficit of approximately $66.4 million at December 31,
1999. We expect to incur losses for the next several years as we continue to
integrate our businesses and implement our growth strategies.
1
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OUR OPPORTUNITY
We believe that, to date, companies have directed most of their
Internet-related investments to creating online storefronts and to advertising
with the objective of creating brand awareness and achieving market leadership.
As electronic commerce, or e-commerce, evolves, we believe companies will need
to focus on acquiring customers more efficiently and converting Web site visits
into lasting and profitable customer relationships. To do so, and as part of
developing successful e-commerce strategies, we believe that companies must
establish sophisticated customer relationship management systems.
We believe that a large number of e-commerce companies are failing to
perform customer relationship management functions adequately or are failing to
integrate these functions to create a viable customer relationship management
program. Jupiter Communications estimated that, as of September 1999, 44% of
e-commerce Web sites lacked real-time integrated call center support, 46% lacked
real-time integrated inventory management systems and 41% lacked real-time
integrated fulfillment systems. In the fourth quarter of 1999, high order
volume, combined with insufficient customer service support and product
fulfillment capabilities, resulted in a number of e-commerce companies being
unable to meet delivery deadlines, provide responsive customer service or
maintain satisfactory inventory levels.
Faced with the growing costs and operational complexities of developing
comprehensive customer relationship management services, many e-commerce
companies are seeking to outsource these critical business functions.
Outsourcing allows these companies to focus on their core competencies and to
take advantage of the expertise, flexibility and efficiencies of an outsourced
provider.
OUR COMPETITIVE ADVANTAGE
We believe the following key factors position us to take advantage of this
opportunity:
- Integrated Service Offerings. We are able to integrate and customize our
marketing, customer contact management and fulfillment services for our
clients, allowing them to manage the interaction with their customers
through a single service provider. By taking advantage of our integrated
services, our clients do not need to expend significant management time
and capital resources to coordinate these services from multiple
providers or to design, build and manage in-house customer relationship
management capabilities.
- Technology and Systems. We have developed high quality technology systems
designed to allow us to rapidly deploy our integrated service offerings
and to offer customized services in response to the evolving needs of our
clients. Our proprietary database technology provides a flexible system
for tracking relationships between a customer and the factors affecting
its buying decisions.
- Business Processes. We have designed our organizational structure and
business processes to allow us to effectively respond to our clients'
needs, efficiently expand our business globally and consistently achieve
a high level of service across the markets that we serve.
- International Presence. We have 33 service facilities located throughout
North America and Europe. Nineteen of our North American facilities are
in the United States and one is in Canada. Four of our international
facilities are in Germany, three facilities are in the United Kingdom and
one facility is in each of Austria, France, Ireland, the Netherlands,
Norway and Switzerland. The diverse locations of our facilities make it
possible for us to efficiently serve our clients in both North America
and Europe.
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OUR STRATEGY
Our objective is to be the leading global provider of integrated customer
relationship management services to e-commerce and technology companies. To
achieve this objective we plan to:
- Capitalize on the rapid growth of the Internet;
- Extend our global presence;
- Expand our relationships with existing clients;
- Attract new e-commerce clients; and
- Enhance our service offerings.
However, we operate in a highly competitive market, facing competition from
in-house customer relationship management programs and other companies who
provide customer relationship management services. This competition may
adversely affect our ability to attract new e-commerce and technology clients.
In 1999, our ten largest clients accounted for approximately 44.1% of our
revenues.
OUR PRINCIPAL STOCKHOLDER
Onex Corporation is our principal stockholder and, following this offering,
will control approximately 98.9% of the voting power of our company. Onex is a
diversified North American company based in Toronto, Canada, with a history of
investing in outsourcing companies. In 1999, Onex had consolidated revenues of
approximately CDN $14.9 billion. Onex is a public company and its shares are
traded on the Toronto Stock Exchange under the symbol "OCX". You can review
Onex's public documents at one of the Securities and Exchange Commission's
public reference rooms or by visiting the Commission's Internet site at
www.sec.gov. You can also find more information about Onex on their Web site at
www.onexcorp.com. Information contained in Onex's public documents and on Onex's
Web site does not constitute a part of this prospectus and is not incorporated
by reference in this prospectus.
OUR PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at Two American Center, 3102
West End Avenue, Suite 1000, Nashville, Tennessee 37203 and our telephone number
is (615) 301-7100.
3
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THE OFFERING
Class A common stock offered........ 13,300,000 shares
Common stock to be outstanding after
the offering:
Class A........................... 19,251,285 shares
Class B........................... 66,451,221 shares
Total..................... 85,702,506 shares
Recapitalization.................... On March 1, 2000, we amended and
restated our certificate of
incorporation to convert each
outstanding share of our common stock
into one share of a new class of common
stock designated Class A common stock
and to create another class of common
stock designated Class B common stock.
The amended and restated certificate of
incorporation provided that, until March
15, 2000, each holder of the new Class A
common stock had the option to convert
all, but not less than all, of its
shares into the same number of shares of
Class B common stock. Only Onex elected
to convert their Class A shares into
shares of Class B common stock. The
purpose of this recapitalization was to
provide our company the flexibility to
raise capital by selling shares of Class
A common stock, including in this
offering, while allowing our current
stockholders, primarily Onex, to retain
voting control over our company.
Voting rights; conversion........... Our Class A common stock and Class B
common stock have identical rights
except for voting and conversion rights.
The holders of Class A common stock are
entitled to one vote per share and the
holders of Class B common stock are
entitled to 25 votes per share. Holders
of Class A common stock have no
conversion rights. Holders of shares of
Class B common stock may convert some or
all of their shares into the same number
of shares of Class A common stock at any
time. In addition, shares of Class B
common stock will automatically convert
into the same number of shares of Class
A common stock upon the occurrence of
any of the following:
- if transferred to anyone except to
Onex or any affiliate, director,
officer or employee of Onex or to any
purchaser of all of the outstanding
Class A and Class B common stock, the
shares of Class B common stock
transferred will automatically convert
into shares of Class A common stock;
- if any holder of Class B common stock
who is an affiliate of Onex ceases to
be an affiliate of Onex, the shares of
Class B common stock held by that
former affiliate will automatically
convert into shares of Class A common
stock;
4
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- if Onex and its affiliates
collectively cease to have the right,
in all cases, to exercise or direct
the voting rights of the Class B
common stock held by them, their Class
B common stock will automatically
convert into shares of Class A common
stock; and
- if at any time the number of
outstanding shares of Class B common
stock represents less than 5% of the
total number of outstanding shares of
Class A and Class B common stock, all
of the outstanding shares of Class B
common stock will automatically
convert into shares of Class A common
stock.
Use of proceeds..................... We intend to use the proceeds of this
offering to repay existing indebtedness,
expand our business domestically and
internationally, fund other general
corporate expenditures, and potentially
make strategic investments and
acquisitions.
Nasdaq National Market symbol....... CLGC
Unless we indicate otherwise, all information contained in this prospectus:
- gives effect to a .642857-to-1 reverse split of our common stock which
occurred on March 27, 2000;
- is based on 5,951,285 shares of our Class A common stock outstanding as
of March 31, 2000;
- is based on 66,451,221 shares of our Class B common stock outstanding as
of March 31, 2000;
- excludes 5,831,121 shares of Class A common stock subject to options and
warrants and 167,146 shares of Class A common stock subject to our
deferred compensation plan, in each case outstanding as of March 31,
2000; the weighted average exercise price of the options and warrants as
of March 31, 2000 is $3.15 per share;
- excludes 1,963,321 shares of Class A common stock issuable in exchange
for shares of exchangeable preferred stock of one of our subsidiaries at
our option or the option of the holders;
- excludes approximately 770,000 options to purchase shares of Class A
common stock at an exercise price not less than the initial public
offering price to be granted prior to this offering under our stock
option plan to approximately 650 employees;
- assumes no exercise of the underwriters' option to purchase up to
1,995,000 shares of Class A common stock to cover over-allotments;
- assumes an initial public offering price of $15.00 per Class A common
share, the midpoint of the initial public offering price range; and
- presents financial information for ClientLogic on a consolidated basis.
5
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RISK FACTORS
You should consider carefully the following risk factors and all other
information contained in this prospectus before you decide whether to purchase
our Class A common stock. Investing in our Class A common stock is speculative
and involves significant risk. Any of the following risks, as well as other
risks and uncertainties that we have not yet identified or that we currently
believe are immaterial, could impair our business, financial condition and
operating results, could cause the trading price of our Class A common stock to
decline and could result in a partial or total loss of your investment.
RISKS RELATING TO OUR BUSINESS
OPERATING RISKS
WE HAVE A HISTORY OF LOSSES, WE EXPECT LOSSES IN THE FUTURE AND WE CANNOT ASSURE
YOU THAT WE WILL BECOME PROFITABLE.
We had net losses of $5.3 million in 1998 and $61.1 million in 1999. In
addition, after giving pro forma effect to all of our material acquisitions in
1999, our net loss for 1999 would have been $75.0 million. We have incurred
substantial costs to develop and grow our business, to complete and integrate
acquisitions, to create and introduce our services and to operate these
services. For example, we recorded a total of $193.3 million for goodwill and
other intangible assets in 1998 and 1999 in connection with acquisitions. We are
amortizing this goodwill over five years from the date of each acquisition,
which will adversely affect our results of operations for such periods. If we
record additional goodwill or other intangible assets, the amount of our annual
amortization charges could increase. If we incur significant losses, we may not
be able to demonstrate an ability to recover the amount of our goodwill and
other intangible assets. If this occurs, we may have to write off our goodwill
in a one-time noncash charge, which could be significant and would likely harm
our operating results.
We expect to incur significant operating expenses and capital expenditures
during the next several years to implement our growth strategies. We expect to
incur losses for the next several years as we continue to incur these expenses,
and these losses may increase from current levels. If our revenues do not
increase substantially or if our expenses exceed our expectations, we may never
become profitable. Even if we do achieve profitability, we may not sustain
profitability on a quarterly or annual basis in the future.
OUR EXPERIENCE TO DATE HAS CONSISTED PRIMARILY OF OFFERING CUSTOMER CONTACT
MANAGEMENT AND FULFILLMENT SERVICES, AND WE MAY NOT SUCCEED IN OUR EFFORTS TO
OFFER INTEGRATED MARKETING AND OTHER SERVICES PRINCIPALLY TO E-COMMERCE
COMPANIES OVER A VARIETY OF COMMUNICATIONS CHANNELS.
In 1999, a majority of our revenues were derived from companies that either
did not sell goods or services over the Internet or that retained us to provide
services unrelated to their e-commerce activities. Because we do not have a
longer history of working with companies focusing on the Internet, we cannot
assure you that we will be able to meet the needs of these types of businesses.
In addition, we have only recently begun to offer the advanced relational
database and other advanced marketing services that we believe are critical to
our efforts to increase our revenues. These advanced marketing services, which
we acquired as part of our December 1999 acquisition of MarketVision, Inc., did
not generate significant revenues for us in 1999. Similarly, during 1999
approximately 86% of our customer contact was conducted by the telephone. If we
are not able to efficiently handle increased customer demand for other means of
communication, such as e-mail and online chat, we may not be successful in
growing our business.
OUR LIMITED HISTORY OF COMBINED OPERATIONS MAKES EVALUATION OF OUR BUSINESS AND
FINANCIAL FORECASTING DIFFICULT.
We have acquired six businesses, including our predecessor, since September
1998. We completed the most recent acquisition in December 1999. Our limited
history of combined operations makes it difficult to evaluate our business and
our prospects. As a result, forecasts of our future revenues, expenses and
operating results may not be as accurate as they would be if we had a longer
history of operations.
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Because of our limited operating history and the emerging nature of the
e-commerce industry, it may be difficult to accurately forecast our results.
WE MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF FLUCTUATIONS IN OUR QUARTERLY
REVENUES AND
OPERATING RESULTS, WHICH WOULD CAUSE OUR STOCK PRICE TO DECLINE.
Our revenues and operating results may vary significantly from quarter to
quarter and our results in some quarters may be below market expectations. If
this happens, the price of our Class A common stock may decline.
In addition to changes in general economic and market conditions, our
quarterly revenues and results of operations may fluctuate for reasons we may or
may not control, including:
- Changes in demand for our services. Factors which may affect the demand
for our services include seasonality, the level of acceptance of
outsourced customer relationship management services, the loss of
existing clients, our ability to satisfy clients' requirements and
competition.
- Increases in our operating, administrative and other expenses. Factors
which may result in increases in our expenses include possible
acquisitions of businesses, facilities and equipment, enhancements to our
systems and technology, expansion into new markets and increased costs to
retain qualified employees.
- The growth of e-commerce and usage of the Internet. Factors which may
affect the growth of e-commerce and usage of the Internet include
government regulation and taxation, privacy concerns, the performance and
reliability of the Internet and security concerns.
Each of the factors identified above may also affect the long-term viability of
our company and are discussed in greater detail elsewhere in these risk factors.
The sales cycle for our services is variable and the length of time between
our initial contact with a client and the signing of a contract to provide our
services may take several months and has taken as long as six months. To
successfully market our services, we typically must educate our potential
clients on the types and benefits of our services, which can require significant
time and resources. In addition, our clients often must complete thorough
internal and external pricing analyses and operating comparisons, competitive
evaluations and internal approval processes before purchasing our services. Once
a client contracts to purchase our services, the time required to implement the
customized services and integrate the client with our systems may take longer
than we plan. Delays in executing client contracts or implementing services for
our clients may adversely affect our revenues and reputation and cause our
operating results to fluctuate.
In addition, we may have to make contingent payments in connection with our
recent acquisitions or future acquisitions based upon whether the acquired
company achieves target levels of revenues or earnings. These payments may cause
our operating results to fluctuate.
THE DEMAND FOR SOME OF OUR SERVICES IS SEASONAL, WHICH MAY ALSO CAUSE OUR
QUARTERLY OPERATING RESULTS TO FLUCTUATE.
We expect to experience seasonal fluctuations of revenues and expenses
which may contribute to fluctuations in our quarterly operating results. Our
clients include technology companies whose computer hardware and software sales
traditionally peak in the fourth quarter. Also, our catalog and e-commerce
fulfillment activities increase during the Christmas season. As a result, we
typically generate higher revenues and expenses in the last three months of the
year. If we are unable to process large volumes of transactions in periods of
higher demand or are unable to process large volumes in a cost-effective manner,
we could lose revenue opportunities that we may not recover in periods of lower
demand.
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IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES, OUR BUSINESS MAY
BE HARMED.
We are continuing to work to integrate the six businesses we have acquired
since September 1998. Integrating the different services, facilities,
management, personnel, technology and cultures of these acquired businesses
represents a significant challenge and diverts our management's attention and
our resources from other business concerns. In addition, we are currently in the
process of integrating our technology infrastructure to include all of our
European facilities. We have incurred significant costs to integrate our
acquired businesses and expect to incur significant costs to complete this
integration. If we are unsuccessful in integrating these acquired companies or
our technology, our business and financial results could be materially adversely
affected.
Our growth strategies include the potential acquisition of complimentary
businesses, facilities or services. To the extent we complete future
acquisitions, we will face the same integration challenges discussed above. In
addition, we may enter into strategic relationships with providers of services
complimentary with our own, such as website and/or software developers, to
enhance our service offerings. Integrating the services and technologies of
these providers with our own will also present significant challenges. We cannot
assure you that we will be able to complete or successfully integrate future
acquisitions or strategic relationships.
IF DEMAND FOR OUTSOURCED OR INTEGRATED CUSTOMER RELATIONSHIP MANAGEMENT SERVICES
DOES NOT GROW AS WE EXPECT, OUR BUSINESS COULD BE HARMED.
The growth of our business depends on the acceptance by e-commerce and
technology companies of outsourced customer relationship management services. If
the market for outsourced customer relationship management services fails to
grow, or grows more slowly than we anticipate, our business could be materially
adversely affected. Because many companies may choose not to outsource their
customer relationship activities for various reasons, our services may not
achieve broad market acceptance. Therefore, we cannot estimate the size or
growth rate of the potential market for our services. Companies that have
invested substantial resources to manage customer relationships in-house may be
reluctant or slow to accept outsourced services which may replace, limit or
compete with their existing systems. Other companies may resist outsourcing for
various reasons, including:
- risks or perceived risks of allowing third-party service providers access
to their proprietary information;
- a desire to retain control over some or all points of contact with their
customers;
- concerns relating to warehousing large amounts of inventory with a third
party; and
- concerns over the level and quality of services that may be provided by a
third party.
If a significant number of e-commerce and technology companies conclude
that the disadvantages of outsourcing their customer relationship activities
outweigh the advantages, our business and prospects could be harmed.
Further, companies that decide to outsource their customer relationship
management services may choose to use multiple providers rather than a single
integrated provider. A majority of our clients are currently utilizing services
from only one of our customer relationship management service offerings. If our
existing clients do not expand the types of services they receive from us, or if
future clients do not purchase our fully integrated services, our business could
be adversely affected.
CONTROLLING AND MANAGING OUR CLIENTS' INFORMATION AND PROPERTY EXPOSES US TO
ADDITIONAL BUSINESS RISKS.
As part of our marketing services, we manage a broad range of our clients'
confidential customer and operational information. As part of our fulfillment
services, we store and manage our clients' inventory. If our clients'
information or property is misused, damaged or lost, or perceived to be misused,
it could
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expose us to liability and could have a material impact on our ability to
continue to do business with those clients or attract new business.
IF WE FAIL TO PROPERLY MANAGE OUR GROWTH, OUR BUSINESS COULD BE ADVERSELY
AFFECTED.
Our business has grown at a rapid pace and we intend to continue the
expansion of our operations for the foreseeable future. Our growth has placed
significant demands on our management, personnel, systems and resources.
Additional growth will further strain these resources. In order to manage our
growth effectively, we must continue to invest in our systems and facilities and
continue to expand, train and manage our work force. We also must continue to
improve and coordinate our managerial, operational and financial controls and
our reporting systems and other procedures. If we do not manage the growth of
our business effectively, our results of operations and financial condition
could be materially adversely affected.
OUR REVENUES ARE DEPENDENT UPON OUR CLIENTS' BUSINESSES AND PRODUCT SALES; WE
FACE CREDIT RISKS FROM START-UP COMPANIES.
Our revenues will fluctuate with the volume of transactions and the level
of sales of our clients' products and services. We generally dedicate a
substantial amount of resources to each of our clients. If we dedicate our
resources to clients whose businesses do not generate significant transactions
or product sales, our business will be adversely affected. In addition, our
revenues are based in part on the success of new, or start-up, Internet
companies with limited experience and resources and with largely untested
business plans. For example, two of our five largest customers did not exist two
years ago. We cannot assure you that these clients' businesses will succeed or
will generate revenues sufficient to cover the expenses and resources we must
incur to implement their customer relationship management services. In addition,
start-up companies often pose significant credit risks for the companies that do
business with them. If a significant number of our start-up clients are not
successful, our business could be adversely affected as a result of
uncollectible accounts receivable and unrecovered costs, expenses and resources
which we could have directed to more successful clients or potential clients.
OUR CLIENT CONTRACTS ARE TERMINABLE ON SHORT NOTICE.
Our agreements to provide services for our clients, including the contracts
with some of our largest clients, typically are terminable upon short notice. Of
our client contracts with our 20 largest U.S. and 20 largest international
clients, which together represented approximately 58% of our 1999 revenues, 35
of those contracts are terminable upon notice of 90 days or less, including 19
which are terminable upon 30 days notice. These clients may choose to
discontinue our services at any time and for any reason. Termination of our
services by one or more large clients or by a significant number of smaller
clients could materially adversely affect our business, results of operations
and prospects.
THE LOSS OF ONE OR MORE OF OUR TOP CLIENTS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
In 1999, our largest client, Microsoft Corporation, accounted for
approximately 9.9% of our revenues and our ten largest clients accounted for
approximately 44.1% of our revenues. We provide marketing, customer contact and
fulfillment services to Microsoft Corporation. Of our ten largest clients,
including Microsoft Corporation, we provide marketing services to two of these
clients, fulfillment services to six of these clients and customer contact
management services to nine of these clients. We cannot be certain that our
current clients will continue to do business with us, that business from
existing clients will continue at the same levels as previous periods or that we
will be able to do significant amounts of business with other new or existing
clients. If we lose one or more of our top clients, our revenues may decrease
significantly and quickly.
WE MAY NOT BE ABLE TO SATISFY THE REQUIREMENTS OF OUR CLIENTS AND OUR BUSINESS
AND REPUTATION MAY SUFFER AS A RESULT.
We target e-commerce and technology companies as our potential clients.
Most e-commerce companies have unique and sophisticated requirements for their
customer relationship management
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operations and many e-commerce companies are growing, or expect to grow,
rapidly. In addition, some of these companies have existing technology
infrastructures and business processes which we must integrate with our service
offerings, business processes and technology to provide our customized services.
If we experience difficulties meeting client requirements or implementing our
customized services, our business could be adversely affected.
If one or more of our clients grow more rapidly than we expect, we may be
unable to expand our services, facilities and other resources to necessary
levels, do so in a cost-effective manner or maintain adequate service quality.
For example, during the 1999 holiday season, the shipping volume of one of our
fulfillment centers increased significantly, primarily as a result of unexpected
higher orders relating to one client. The processing and shipping volume at this
fulfillment center increased from approximately 15,000 items a day during
November to approximately 20,000 items a day in December. While we were able to
meet this increased demand, we had to expend considerable time and expense,
including overtime and reallocation of personnel, to do so. As a result of
problems associated with this volume increase, we agreed to terminate the
customer's contract and we recorded an aggregate $1.9 million in reserves
against its obligations to us. As a result, we did not profit from the services
we provided at that center during that period. We may be unable to meet the
requirements of potential clients or the changing needs of existing clients
profitably or at all. As a result, we could lose potential and existing clients
and our reputation for providing customized services may suffer.
WE FACE COMPETITION FROM MANY SOURCES THAT COULD ADVERSELY AFFECT OUR BUSINESS.
The market for our services is very competitive and subject to rapid
technological advances. We expect the intensity of competition to continue to
increase in the future as existing competitors enhance and expand their service
offerings and as new participants enter the market. Our failure to maintain and
enhance our competitive position would limit our ability to maintain or increase
our market share, which could adversely affect our business and prospects.
Increased competition also may result in price reductions, reduced gross margins
and loss of market share.
We currently face competition for our services from in-house operations and
from third-party providers such as Doubleclick, Epiphany, ASD Systems, PFS Web
and Sykes Enterprises. Many third party providers offer one or more of the same
services we do, and we face competition from many different sources depending
upon the type and range of services needed by a potential client. Our
competitors include companies that offer a single service, such as call centers,
public warehouses, database management and marketing campaign management, as
well as companies that offer multiple services. Some of these competitors have
greater capabilities and more experience than we do with respect to the service
or services that they provide. Our competitors also may develop and promote
their services more effectively than we do.
Many of our competitors have greater financial, personnel, capacity and
other resources than we have. As a result, our competitors may be in a stronger
position to respond quickly to potential acquisitions and other market
opportunities, new or emerging technologies, and changes in client requirements.
Competitors with greater financial resources may be able to offer lower prices,
additional services or other incentives that we cannot match or do not offer.
For example, some of our distribution and fulfillment competitors purchase and
retain title to their clients' inventories while we generally do not. Therefore,
we may be at a competitive disadvantage with respect to existing and potential
clients who desire a third party to assume their inventory risks. We cannot be
certain that we will be able to compete successfully against existing or other
competitors in the future.
WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED EMPLOYEES, WHICH MAY HARM OUR
BUSINESS.
Our business and financial results depend in part on our ability to attract
and retain highly skilled technical, managerial and other employees. Our
industry is very labor-intensive and has experienced high personnel turnover. If
our employee turnover rate increases significantly, our recruiting and training
costs could rise and our operating efficiency and productivity could decline.
Individuals with the experience and
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technical qualifications that we generally require are in short supply. As a
result, competition to hire qualified employees is intense. To attract and
retain qualified employees, we may need to pay higher compensation than we
currently pay or expect to pay. We have from time to time experienced, and we
expect to continue to experience, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications.
We may not be able to hire or retain necessary personnel to implement our
growth strategies. In addition, new clients or expanded services for existing
clients may require us to accelerate the recruiting, hiring and training of
qualified employees. We cannot assure you that we will be able to continue to
hire, train and retain sufficient qualified personnel to meet our anticipated
growth.
Our clients often experience both expected and unexpected surges in demand,
such as upon the introduction of a new product release, following a special
advertising campaign or during periods of seasonal high demand. In order to
respond to these surges in demand, we must employ a large number of skilled
temporary employees. If we are unable to obtain the services of qualified
temporary employees during periods of high demand, on short notice and in
adequate numbers, we might fail to meet the requirements of our clients on a
timely basis. Any such failure could result in the loss of one or more of our
clients or could damage our reputation.
RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS MAY DECREASE OUR REVENUES AND
INCREASE OUR COSTS.
In 1999, we generated approximately 19% of our revenues from international
operations. In addition, after giving pro forma effect to all of the material
acquisitions we completed during 1999, we would have generated approximately 30%
of our 1999 pro forma revenues from international operations.
We currently conduct international operations in Canada, Austria, France,
Germany, Ireland, the Netherlands, Norway, Switzerland and the United Kingdom.
Our operations in these countries present additional challenges which may result
in increased operational difficulties, lower revenues, higher costs and reduced
profitability compared to our operations in the United States. For example,
Germany and Canada have higher income tax rates than the United States, which
may result in lower profits from our operations in these countries. Also,
products sold over the Internet in countries located in Europe as well as Canada
generally are subject to the same value-added taxes as products sold through
traditional channels while sales over the Internet in the United States may be
exempt from sales taxes where the purchaser and seller are located in different
states. The applicability of value-added taxes to Internet sales may result in
slower growth of e-commerce in these countries compared to the growth of
e-commerce in the United States, which may adversely affect our operations in
these countries. In addition, the European Union has adopted a directive
limiting the collection, storage, transfer and use of personal data. This
directive could adversely affect our marketing services by limiting our ability
to collect personal information over the Internet with respect to customers in
countries who are members of the European Union. As a result, we may experience
lower demand for our marketing services in these countries. In Ireland and the
United Kingdom we employ multilingual personnel to service our clients'
customers. In these countries we face a limited supply of skilled, multilingual
personnel, which may increase our costs and adversely affect our ability to
staff our international operations.
As part of our business strategy, we intend to increase our global presence
by following our clients' expansion into new international markets and by
acquiring new facilities to grow our international client base, particularly in
regions where Internet usage is predicted to grow, such as Asia and Latin
America. As we implement this strategy, we expect to face challenges similar to
those described above and we may face additional risks including:
- reduced protection for intellectual property and proprietary rights;
- potential problems enforcing or collecting contractual obligations;
- legal uncertainty regarding foreign laws, tariffs and trade barriers;
- differing technology standards and limited access to the Internet; and
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- political and economic instability.
Any one or more of these factors may materially adversely affect our
business in a number of ways, such as increased costs, operational difficulties
and reductions in revenue. We cannot assure you that we will be successful in
maintaining our revenues from international operations at existing levels or
expanding into additional international markets.
CURRENCY FLUCTUATIONS AND EXCHANGE CONTROL REGULATIONS MAY ADVERSELY AFFECT OUR
BUSINESS.
Our reporting currency is the United States dollar. Our customers outside
the United States, however, are generally billed in local currencies. Our
accounts receivable from these customers and our other international assets will
decline in value if the local currencies depreciate relative to the United
States dollar. To date, we have not tried to reduce our exposure to exchange
rate fluctuations by using hedging transactions. We may seek to enter hedging
transactions in the future but we may be unable to enter into hedging
transactions successfully or at all. In addition, our currency exchange losses
may be magnified if we become subject to exchange control regulations
restricting our ability to convert local currencies into United States dollars.
OUR CASH FLOW FROM OPERATIONS IS NOT SUFFICIENT TO FUND OUR CURRENT OPERATIONS
AND WE WILL REQUIRE EXTERNAL SOURCES OF FINANCING TO FUND THE GROWTH OF OUR
BUSINESS.
We expect to incur losses for the next several years and our cash flow from
operations will not be sufficient to fund ongoing operations and the expansion
of our business. We will rely on our existing $40 million revolving facility and
the proceeds of this offering remaining after repayment of our indebtedness to
fund our operations and our growth strategies. If these sources of funds are not
sufficient, we will need to obtain additional financing. For example, if we
pursue acquisitions or similar investments, we will likely require additional
financing. If we need additional financing, we cannot be certain that it will be
available on favorable terms, if at all. The terms of our revolving credit
facility may limit our ability to obtain additional financing. In addition, our
existing stockholders have registration rights that could interfere with our
ability to issue more common stock to raise needed capital. If we need funds and
cannot raise them on acceptable terms, we may not be able to:
- develop or enhance our services;
- respond to clients and competition;
- fund our growth strategies; or
- take advantage of future opportunities.
TECHNOLOGY RISKS
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND TO COMPETE WE MUST
CONTINUALLY ENHANCE OUR COMPUTER AND TECHNOLOGY SYSTEMS TO COMPLY WITH EVOLVING
STANDARDS.
To remain competitive, we must continue to enhance and improve the
responsiveness, reliability and features of our services and underlying computer
systems. Our industry is characterized by rapid technological advances, changes
in user requirements and preferences, frequent new products and services
embodying new technologies and the emergence of new industry standards and
practices that could render our technology and systems obsolete. Our success
will depend, in part, on our ability to license or internally develop leading
technologies to enhance our existing services and develop new services. We must
continue to address the increasingly sophisticated and varied needs of our
clients and respond to technological advances and emerging industry standards on
a cost-effective and timely basis. If we are unable to license or internally
develop technology to adapt to changing market conditions, client requirements
or emerging industry standards, our business could be adversely affected.
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OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A SYSTEMS OR EQUIPMENT FAILURE,
WHETHER OUR OWN OR OF OUR CLIENTS.
Our operations are dependent upon our ability to protect our fulfillment
centers, customer contact management centers, computer and telecommunications
equipment, software and other systems against damage and failures. Damage or
failures could result from fire, power loss, equipment malfunctions, system
failures, problems with Internet access or usage, natural disasters and other
causes. If our business is interrupted by natural disasters, accidents or the
intentional acts of others, our business could be materially adversely affected.
In addition, in the event of widespread damage or failures, our disaster
recovery and contingency plans and insurance coverage may not be sufficient.
Any system or equipment failures we experience could also harm our clients'
businesses. In that event, our relationship with these clients may be damaged,
we may lose these clients, our ability to attract new clients may be adversely
affected and we could be exposed to liability.
Interruptions also could result from the intentional acts of others, like
so-called hackers. If non-authorized parties penetrate our systems, or if
computer viruses infect our systems, our computers could fail or our proprietary
information could be misappropriated.
If our clients suffer similar interruptions in their operations, due to the
reasons discussed above or others, our business could be adversely affected.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS, OUR BUSINESS MAY BE HARMED.
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect the
proprietary rights in our software and systems. However, we will not be able to
protect our intellectual property if we are unable to enforce our rights or if
we do not detect unauthorized use of our intellectual property. In addition,
these legal protections only provide us with limited protection. Litigation to
enforce our rights could be expensive, would divert management resources and may
not be adequate to protect our business.
We have not filed any United States patent applications with respect to our
proprietary technology, nor do we have any patent applications pending. As a
result, we currently do not have patented technology that would preclude or
inhibit competitors from entering our market. Moreover, we have not patented our
technology abroad, nor do we currently have any international patent
applications pending. As of the date of this prospectus, we have not secured
registration on any of our service marks in the United States or Europe,
although we have filed applications to register three service marks in both the
United States and the European Union. We cannot be certain that future patents,
registered trademarks or registered service marks, if any, will be granted or
that any future patent, trademark or service mark will not be challenged,
invalidated or circumvented. Also, we cannot assure you that rights granted
under any future patents, trademarks or service marks will actually provide a
competitive advantage to us.
The steps we have taken to protect our technology and intellectual
property, such as confidentiality agreements and access controls, may be
inadequate. Our competitors may independently develop technologies that are
substantially equivalent or superior to ours or may jointly develop these
technologies under agreements giving them rights to exploit those technologies.
IF OTHERS CLAIM THAT WE ARE INFRINGING ON THEIR INTELLECTUAL PROPERTY, WE COULD
INCUR SIGNIFICANT EXPENSES OR BE PREVENTED FROM PROVIDING OUR SERVICES.
We cannot assure you that others will not claim that our proprietary or
licensed systems and software are infringing on their intellectual property
rights or that we do not in fact infringe on those intellectual property rights.
We have not conducted a search for existing intellectual property registrations
and we may be unaware of intellectual property rights of others that may cover
some of our technology.
If someone claimed that our proprietary or licensed systems and software
infringed on their intellectual property rights, any resulting litigation could
be costly and time consuming and would divert
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the attention of management and key personnel from other business issues. The
complexity of the technology involved and the uncertainty of intellectual
property litigation increase these risks. Claims of intellectual property
infringement also might require us to enter into costly royalty or license
agreements. However, we may be unable to obtain royalty or license agreements on
terms acceptable to us or at all. We also may be subject to significant damages
or an injunction against use of our proprietary or licensed systems. A
successful claim of patent or other intellectual property infringement against
us could materially adversely effect our business and financial condition.
A BREACH OF OUR SECURITY MEASURES COULD REDUCE DEMAND FOR OUR SERVICES.
The continued growth of e-commerce is dependent upon the secure
transmission of confidential information over public networks. A party who is
able to circumvent our security measures could misappropriate proprietary
information, such as credit card numbers, or interrupt our operations. Any
compromise or elimination of our security could disrupt our operations, damage
our reputation, expose us to litigation and liability and reduce demand for our
services. We may need to expend significant capital and other resources to
continue to protect against security breaches or to address any problem they may
cause.
RISKS RELATED TO THE INTERNET
OUR GROWTH LARGELY DEPENDS ON WIDESPREAD ACCEPTANCE OF THE INTERNET AND THE
RELIABILITY OF THE INTERNET.
Use of the Internet by businesses and consumers is at an early stage of
development and market acceptance of the Internet as a medium for commerce is
subject to a high level of uncertainty. The growth projections for
Internet-related activities included in this prospectus are only estimates by
industry analysts and may not prove to be accurate. Because clients for our
customer relationship management services presently include companies conducting
business over the Internet and because we intend to target these types of
businesses to be our clients in the future, if usage of the Internet does not
continue to grow, or grows at a rate significantly lower than current trends,
our business prospects will be harmed. The continued use of the Internet depends
on many factors that are outside our control. These factors include the
following:
- the Internet infrastructure may be unable to support the demands placed
on it;
- the performance and reliability of the Internet may decline as usage
grows;
- use of the Internet may decline if security and authentication concerns
regarding transmission of confidential information over the Internet and
attempts by unauthorized users, or hackers, to penetrate online security
systems grow; and
- use of the Internet may decline if the ability to gather information
about Internet users without their knowledge or consent results in
increased concerns about privacy protection.
The recent growth in Internet usage has caused frequent interruptions and
delays in accessing the Internet and transmitting data over the Internet.
Interruptions and delays in Internet access and usage will harm our clients'
operations and could adversely affect our business and results of operations.
Our growth depends in part on improvements being made to the entire Internet
infrastructure to alleviate overloading and congestion and to provide for
reliable access to and usage of the Internet.
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GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADVERSELY AFFECT OUR
BUSINESS AND COULD LIMIT THE GROWTH OF THE INTERNET.
The current legal and regulatory environment that pertains to the Internet
is uncertain and may change. As usage of the Internet and the development of
e-commerce evolves, we expect that federal, state and foreign governments will
adopt laws or regulations covering issues such as:
- user privacy;
- sales, value-added and other taxes;
- pricing;
- characteristics and quality of products and services;
- consumer protection; and
- cross-border commerce.
The adoption or modification of such laws or regulations could inhibit the
growth of Internet use and decrease the acceptance of the Internet as a
communications and commercial medium, which could materially adversely affect
our business and results of operations.
If enacted, laws or regulations applicable to user privacy and the
solicitation, collection or processing of personal and consumer information
could directly impact our business. The effectiveness of our marketing services
is dependent on the use of customer data collected from various sources,
including information collected on Web sites, as well as other data derived from
customer registrations, billings, purchase transactions and surveys. Our
collection and use of this data for customer profiling may raise privacy and
security concerns. Because of privacy concerns, some Internet commentators,
consumer advocates and governmental agencies have suggested legislation to limit
the use of customer data and customer profiling technologies. The European Union
and some European countries already have adopted restrictions on the use of
customer data. If other countries, regions or states adopt legislation or other
restrictions on the use of customer data or customer profiling technologies, or
if existing legislation or restrictions become more stringent, our marketing
services will be less useful to our clients and our results of operations may be
adversely affected.
IF INTERNET SALES BECOME SUBJECT TO SALES AND OTHER TAXES, PURCHASING ON THE
INTERNET MAY DECREASE AND OUR BUSINESS MAY BE HARMED.
Companies that conduct business over the Internet may be subject to state
sales taxes for shipments of goods to or services performed in some states. In
addition, products sold over the Internet from companies located in Europe
generally are subject to the same value-added taxes as other products sold in
Europe. These taxes may discourage customers from purchasing goods and services
on the Internet. In addition, if other states or foreign countries successfully
assert that companies should collect sales, value-added or other taxes on the
sale of products made over the Internet, use of the Internet as a sales channel
may decrease. Although the U.S. Congress recently placed a three-year moratorium
on state and local taxes on Internet access and discriminatory taxes on
e-commerce, existing state and local laws were exempted from the moratorium. In
addition, once the moratorium expires, new or additional federal and state taxes
may be imposed on e-commerce. If sales and other taxes result in decreased
purchasing on the Internet or cause e-commerce to grow more slowly than we
anticipate, our business and results of operations could be adversely affected.
IF DATABASE ACCESS BECOMES STANDARDIZED, DEMAND FOR OUR MARKETING SERVICES WILL
BE REDUCED.
In providing our marketing services, we collect and integrate data from a
variety of sources. Adoption of uniform standards across various database and
analytic software programs could minimize the importance of our data collection
and integration services. This, in turn, could adversely affect the
competitiveness and market acceptance of our marketing services. If large
numbers of our clients or potential clients adopt a single standard, demand for
our marketing services would decrease and we could lose existing clients.
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RISKS RELATING TO ONEX'S CONTROL OF OUR COMPANY
ONEX CORPORATION WILL BE ABLE TO CONTROL OUR MANAGEMENT AND CORPORATE AFFAIRS
AND OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE OUTCOME OF CORPORATE
MATTERS.
After the completion of this offering, Onex Corporation will own, through
its subsidiaries, 66,451,221 shares of our outstanding Class B common stock,
representing approximately 77.5% of the total number of shares of our
outstanding Class A and Class B common stock. As a result of its ownership of
Class B common stock, Onex will control approximately 98.9% of the votes in any
matter submitted to our stockholders after this offering. As long as Onex
retains this control, Onex will continue to be able to elect our entire board of
directors, to remove any director, including the chairman of our board, with
cause and generally to determine the outcome of all corporate actions requiring
stockholder approval. As a result, Onex will be in a position to control all
matters affecting our company, including:
- any decisions about our corporate direction and policies;
- future issuances of our common stock or other securities;
- our incurrence of debt;
- amendments to our certificate of incorporation and bylaws;
- payment of dividends on our common stock; and
- decisions about acquisitions, sales of our assets, mergers or similar
transactions, including decisions involving a change of control.
Because of Onex's control of our company, potential investors will be
unable to affect or change the management or the direction of our company. As a
result, some investors may be unwilling to purchase our Class A common stock. If
the demand for our Class A common stock is reduced because of Onex's control of
our company, the price of our Class A common stock could be depressed.
CONTRACTS ENTERED INTO WITH AN AFFILIATE OF ONEX MAY CONFLICT WITH THE INTERESTS
OF OUR OTHER STOCKHOLDERS.
We have entered into two contracts with Onex Service Partners. An affiliate
of Onex is a general partner of Onex Service Partners. Under these contracts we
pay Onex Service Partners fees for management, financial and other advisory
services. One of these contracts entitles Onex Service Partners to receive a fee
in connection with each acquisition or similar transaction that we complete.
Because Onex can control decisions to pursue acquisitions and other
transactions, these contracts may present a conflict of interest between Onex
and our other stockholders.
ONEX'S RELATIONSHIPS WITH THOMAS O. HARBISON, THE CHAIRMAN OF OUR BOARD OF
DIRECTORS, MAY CONFLICT WITH THE INTERESTS OF OUR STOCKHOLDERS.
Thomas O. Harbison, the chairman of our board of directors, is a party to a
contract with Onex Service Partners which provides that Mr. Harbison will
receive a salary of $360,000 annually from Onex Service Partners for his
services to that partnership, including serving on its behalf as chairman of our
board of directors. Mr. Harbison also performs other services for Onex Service
Partners which are unrelated to our company. We do not pay Mr. Harbison any
compensation. Mr. Harbison also has an agreement with Onex Corporation which
entitles him to receive cash or Class A common stock if and when Onex realizes
specified performance targets on its equity investment in our company. In
addition, an affiliate of Mr. Harbison is a general partner of Onex Service
Partners and, therefore, Mr. Harbison will indirectly benefit from the payments
to Onex Service Partners under the management agreements between our company and
Onex Service Partners. As a result of these relationships, Mr. Harbison's
interests are closely aligned with those of Onex and, as a result, may conflict
with the interests of our other stockholders.
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RISKS RELATED TO THIS OFFERING AND THE TRADING MARKET FOR OUR CLASS A COMMON
STOCK
FUTURE SALES OF OUR CLASS A COMMON STOCK COULD ADVERSELY AFFECT ITS MARKET
PRICE.
Sales of a substantial number of shares of our Class A common stock in the
public market after this offering could cause the market price for our Class A
common stock to decline. Sales of Class A common stock by our existing
stockholders, or the possibility that these sales may occur, also could make it
more difficult for us to sell our Class A common stock or other equity
securities in the future.
Onex owns 66,451,221 shares of our Class B common stock. Onex has the right
to require us to file registration statements covering the shares of Class A
common stock it would receive upon conversion of its shares of Class B common
stock. In addition, the holders of exchangeable preferred shares will have the
right to require us to file registration statements covering the shares of Class
A common stock they would receive upon conversion of their exchangeable
preferred shares. All of our existing stockholders, including Onex, have rights
to include their shares in registration statements that we may file for our
company and other stockholders. As of March 31, 2000, our Class A stockholders
owned 5,951,285 shares of our Class A common stock and the exchangeable
preferred shares were convertible into 1,963,321 shares of Class A common stock.
Upon registration of our existing stockholders' shares and the shares underlying
the exchangeable preferred shares, those shares will become freely tradeable and
our stockholders, including Onex, will be able to sell their shares without
regard to the volume or holding period limitations contained in Rule 144 under
the Securities Act of 1933. By exercising their registration rights and selling
a large number of shares, these stockholders could cause the price our Class A
common stock to fall.
After this offering, we will have 19,251,285 outstanding shares of Class A
common stock, assuming no exercise of the underwriters' over-allotment option,
and 66,451,221 outstanding shares of Class B common stock. Up to 5,831,121
additional shares of our Class A common stock may be issued upon the exercise of
outstanding options and warrants to acquire our Class A common stock at an
average weighted exercise price of $3.15. In addition, up to 1,963,321 shares of
our Class A common stock may be issued upon conversion of shares of exchangeable
preferred stock of one of our subsidiaries which are exchangeable at our option
or the option of the holder into our common stock. All of the shares of Class A
common stock sold in this offering will be freely tradable immediately after
this offering, except for shares purchased by affiliates, which will be subject
to Rule 144. Holders of our currently outstanding Class A and Class B common
stock may sell their shares after this offering subject to the expiration of
lock-up periods and holding periods required under Rule 144. Pursuant to our
amended and restated certificate of incorporation, shares of our Class B common
stock must be converted into shares of Class A common stock upon any transfer to
a person other than Onex or any affiliate, director, officer or employee of Onex
or other than a transfer to any purchaser of all of the outstanding Class A and
Class B common stock.
Approximately 59,820,750 shares of our outstanding Class A and Class B
common stock will become available for sale, subject to volume limitations,
following the expiration of lock-up agreements that prohibit the sale of these
shares for 180 days after the date of this prospectus. As discussed below, these
lock-up agreements may be waived by Salomon Smith Barney Inc. on behalf of the
underwriters prior to the expiration of 180 days after the offering. The
remaining shares of our outstanding Class A and Class B common stock will become
available for sale, subject to volume limitations, at various later dates upon
the expiration of one year holding periods required by Rule 144.
While Salomon Smith Barney may waive the lock-up restrictions prior to the
expiration of the lock-up periods, Salomon Smith Barney has informed us that it
has no current intentions of releasing any shares subject to the lock-up
agreements. Any determination by Salomon Smith Barney to release any shares
subject to the lock-up agreements would be based on a number of factors at the
time of determination, including the market price of the Class A common stock,
the liquidity of the trading market for the Class A common stock, general market
conditions, the number of shares proposed to be sold and the timing, purpose and
terms of the proposed sale.
While we have no current intention to issue more shares of our Class A
common stock, other than pursuant to the exercise of options, warrants and other
rights to acquire our Class A common stock, we
17
<PAGE> 23
may seek to issue additional shares in the future to raise capital or to
complete acquisitions of complimentary businesses. Future sales of Class A
common stock by us may dilute your investment and may cause the market price of
our Class A common stock to decline.
OUR CLASS A COMMON STOCK MAY NOT TRADE ACTIVELY, MAKING IT DIFFICULT FOR YOU TO
SELL YOUR STOCK.
This is our initial public offering, which means our Class A common stock
currently does not trade in any market. We cannot assure you that after this
offering our Class A common stock will trade actively. An illiquid market for
our Class A common stock may result in price volatility and poor execution of
buy and sell orders for investors. The initial public offering price may bear no
relationship to the price at which the Class A common stock will trade upon
completion of this offering.
Historically, stock prices and trading volumes for newly public companies
have fluctuated widely for a number of reasons, including some reasons that may
be unrelated to their businesses or results of operations. Stock market
volatility could depress the market price of our Class A common stock without
regard to our operating performance. In addition, our operating results may be
below market expectations. If this were to occur, the market price of our Class
A common stock could decrease, perhaps significantly.
WE MAY USE THE PROCEEDS OF THIS OFFERING INEFFECTIVELY OR IN WAYS WITH WHICH YOU
MAY NOT AGREE.
Our management will have significant flexibility in applying the net
proceeds of this offering, including ways with which stockholders may disagree.
If we do not effectively apply the funds we receive, our accumulated deficit may
increase and we may lose significant business opportunities.
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION, OUR AMENDED AND RESTATED
BYLAWS AND DELAWARE LAW MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US,
DESPITE THE POSSIBLE BENEFIT TO OUR STOCKHOLDERS.
In addition to Onex's control of our company and the enhanced voting rights
of our Class B common stock, provisions of our amended and restated certificate
of incorporation, our amended and restated bylaws and Delaware law could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. For example, our amended and restated
certificate of incorporation provides for a classified board of directors,
meaning that only approximately one-third of our directors will be subject to
re-election at each annual stockholder meeting. Our amended and restated
certificate of incorporation also permits our board of directors to issue one or
more series of preferred stock which may have rights and preferences superior to
those of our common stock. The ability to issue preferred stock could have the
effect of delaying or preventing a third party from acquiring us. In addition,
Section 203 of the Delaware General Corporation Law limits future business
combination transactions with stockholders owning 15% or more of our common
stock if our board of directors has not approved those transactions. These
provisions could discourage takeover attempts and could materially adversely
affect the market price of our Class A common stock.
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR CLASS A COMMON STOCK; YOU WILL NOT
RECEIVE FUNDS WITHOUT SELLING YOUR SHARES AND YOU MAY LOSE THE ENTIRE AMOUNT OF
YOUR INVESTMENT.
We have never declared or paid any cash dividends on our capital stock and
do not intend to pay dividends in the foreseeable future. We intend to invest
our future earnings, if any, to fund our growth. In addition, we intend to enter
into an amended revolving credit facility concurrently with the completion of
this offering and we expect that the terms of this facility will limit our
ability to pay dividends. Any payment of future dividends will be at the
discretion of our board of directors and will depend upon, among other things,
our earnings, financial condition, capital requirements, level of indebtedness,
statutory and contractual restrictions applying to the payment of dividends, and
other considerations that our board of directors deems relevant. Further, we are
a holding company with no independent operations and no source of funds to pay
dividends other than dividends we receive from our subsidiaries. Our credit
facility limits the ability of our subsidiaries to pay dividends to us.
Therefore, it is unlikely that you will receive any funds from your investment
in our Class A common stock without selling your shares. We cannot
18
<PAGE> 24
assure you that you will receive a gain on your investment when you sell your
shares or that you will not lose the entire amount of your investment.
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
Investors purchasing our Class A common stock in this offering will incur
immediate and substantial dilution in net tangible book value per share.
Assuming our sale of the 13,300,000 shares of Class A common stock in this
offering at an assumed initial public offering price of $15.00 per share, the
deduction of the underwriting discount and estimated offering expenses and the
application of the estimated net proceeds, our net tangible book value as of
December 31, 1999 would have been $146,634,000, or $1.73 per share of Class A
common stock. This represents an immediate dilution of $13.27 per share to new
investors. To the extent that outstanding options, warrants and other rights to
acquire our common stock are exercised, further dilution will occur.
19
<PAGE> 25
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this prospectus, including in the
sections entitled "Prospectus Summary," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business," that are based
on our management's beliefs and assumptions and on information currently
available to our management. Forward-looking statements include the information
concerning our possible or assumed future results of operations, business
strategies, financing plans, competitive position, potential growth
opportunities, this offering and the effects of competition. Forward-looking
statements include all statements that are not historical facts and can be
identified by the use of forward-looking terminology such as the words
"believes," "expects," "anticipates," "intends," "plans," "estimates" and
similar expressions. You should understand that many important factors,
including those discussed under "Risk Factors," could cause our results to
differ materially from those expressed in forward-looking statements.
This prospectus contains information concerning the Internet market
generally which is forward-looking in nature and is based on a variety of
assumptions regarding the ways in which this market will develop. These
assumptions have been derived from information currently available to us and to
the third party market observers quoted herein, including International Data
Corporation, Forrester Research and Jupiter Communications. They include the
following general underlying expectations:
- no catastrophic failure of the Internet will occur;
- the number of people and businesses online and the total number of hours
spent online will increase significantly over the next five years;
- government regulations will not prohibit or materially adversely affect
our business;
- e-commerce will grow significantly over the next five years; and
- Internet security and privacy concerns will be adequately addressed.
If any one or more of the foregoing assumptions is incorrect, actual market
results may differ from those predicted. While we do not know what impact any
such differences may have on our business, our future business, results of
operations and financial condition and the market price of our shares of Class A
common stock may be materially adversely impacted.
Forward-looking statements involve risks, uncertainties and assumptions.
Actual results may differ materially from those expressed in these
forward-looking statements. You should not put undue reliance on any
forward-looking statements. Except to the extent required under the federal
securities laws and the rules and regulations of the Securities and Exchange
Commission, we do not have any intention or obligation to update forward-looking
statements after we distribute this prospectus.
20
<PAGE> 26
USE OF PROCEEDS
We expect that the net proceeds from our sale of Class A common stock in
this offering will be approximately $183.8 million after deducting estimated
underwriting discounts and our estimated offering expenses, based on an assumed
initial public offering price of $15.00, the midpoint of the initial public
offering price range. If the underwriters' over-allotment option is exercised in
full, we estimate that our net proceeds will be approximately $211.7 million.
We intend to use the net proceeds of this offering as follows:
- approximately $118.5 million to repay our existing indebtedness described
below:
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING ESTIMATED INTEREST RATE
AS OF AMOUNT TO ORIGINAL USE INTEREST RATE AS OF MATURITY OR
TYPE OF FACILITY APRIL 19, 2000 BE REPAID(1) OF PROCEEDS CALCULATION APRIL 19, 2000 EXPIRATION
-------------------- -------------- ------------ --------------------- ------------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Bank indebtedness $ 3,309 $ 3,309 Working capital ING Base Rate 7.50% 2000
+ 1.50%
Revolving credit $39,700 $39,700 Capital expenditures, Prime + 0.00% 9.00% 2003-2006
facility(2) acquisitions and to 2.00% or
working capital LIBOR + 1.00%
to 3.00%
Term credit $60,000 $60,000 Refinance debt Prime + 0.75% 9.44% 2007
facility(2) to 2.25% or
LIBOR + 1.75%
to 3.25%
Subordinated $ 7,000 $ 6,000 Working capital Prime + 3.50% 12.50% 2006
revolving credit to 6.50% or
facility(2)(3) LIBOR + 4.50%
to 7.50%
Subsidiary term loan $ 9,472 $ 9,472 Working capital LIBOR + 1.88% 8.07% 2000
</TABLE>
----------------------
(1) The estimated amount to be repaid is based on our estimate of
outstanding indebtedness on April 30, 2000.
(2) Following repayment, our term credit facility, subordinated revolving
credit facility and subsidiary term loan will terminate. Our
revolving credit facility will remain in effect after the offering.
(3) On March 10, 2000, we entered into a $25 million subordinated
revolving credit facility to fund capital expenditures and working
capital requirements through the closing of this offering. This
facility matures on May 25, 2006, but our ability to repay and
reborrow funds terminates on July 10, 2000 when this facility will
convert to a term loan if not previously repaid and terminated.
- approximately $40.0 million to expand our business both domestically and
internationally; and
- approximately $25.3 million for general corporate purposes.
Although we do not currently have any commitments to enter into strategic
relationships or make acquisitions, we may use a portion of the proceeds of this
offering to do so.
21
<PAGE> 27
DIVIDEND POLICY
We do not anticipate paying cash dividends on our Class A common stock in
the foreseeable future because we expect to retain our future earnings, if any,
for use in the operation and expansion of our business. Also, we anticipate
that, after this offering, our revolving credit facility will likely restrict
our ability to pay dividends. Any payment of future dividends will be at the
discretion of our board of directors and will depend upon, among other things,
our earnings, financial condition, capital requirements, level of indebtedness,
statutory and contractual restrictions applying to the payment of dividends, and
other considerations that our board of directors deems relevant. Finally, we are
a holding company with no independent operations. Since we have no other source
of revenue, we can pay dividends only if and to the extent that we receive
dividends from our subsidiaries. These subsidiaries may be restricted from
paying any dividends to us by contractual limitations and capital surplus
requirements under the laws of their jurisdiction of incorporation. Under our
senior revolving credit facility, our wholly owned subsidiaries are not
restricted from paying dividends to us. However, no subsidiary which is not
wholly owned may pay a dividend to us if the dividend would result in a default
under our facility or would exceed, together with other dividends by that
subsidiary since January 1, 1999, 50% of the consolidated net income of that
subsidiary since January 1, 1999.
22
<PAGE> 28
DILUTION
Purchasers of our Class A common stock offered by this prospectus will
suffer an immediate and substantial dilution in net tangible book value per
share. Our net tangible book value as of December 31, 1999 was approximately
$(37,166,000), or $(0.52) per share of our common stock. Net tangible book value
per share is determined by dividing the amount of our total tangible assets less
total liabilities, excluding subsidiary preferred stock and subsidiary
exchangeable preferred stock, by the number of shares of our common stock
outstanding as of December 31, 1999. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of Class A common stock in this offering and the net tangible book
value per share of common stock immediately after this offering. Assuming our
sale of the 13,300,000 shares of Class A common stock offered in this offering
at an assumed initial public offering price of $15.00 per share, the deduction
of underwriting discounts and commissions and estimated offering expenses and
the application of the estimated net proceeds, our net tangible book value as of
December 31, 1999 would have been $146,634,000, or $1.73 per share of common
stock. This represents an immediate increase in net tangible book value of $2.25
per share to existing stockholders and an immediate dilution of $13.27 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $15.00
Net tangible book value per share at December 31, 1999.... $(0.52)
Increase in net tangible book value per share attributable
to new investors....................................... 2.25
------
Net tangible book value per share after the offering...... 1.73
------
Dilution per share to new investors....................... $13.27
======
</TABLE>
The following table summarizes, on an as adjusted basis as of December 31,
1999, the total number of shares of Class A and Class B common stock purchased
from us, the total consideration paid to us for our common stock, and the
average price per share paid by existing stockholders and the new investors
purchasing shares of Class A common stock in this offering at an assumed initial
offering price of $15.00 per share.
<TABLE>
<CAPTION>
CLASS A AND CLASS B COMMON STOCK
-------------------------------------------------------------------
TOTAL CONSIDERATION
SHARES PURCHASED --------------------------------------
-------------------------- AVERAGE PRICE
NUMBER OF SHARES PERCENT AMOUNT PERCENT PER SHARE
---------------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 71,364,400 84.3% $163,608,000 45.1% $ 2.29
New investors.................... 13,300,000 15.7% 199,500,000 54.9% $ 15.00
----------- ------- ------------ ------
Total.................. 84,664,400 100.0% $363,108,000 100.0%
=========== ======= ============ ======
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares of common stock held by existing stockholders will be reduced to 82.4%
of the total number of shares of common stock outstanding after this offering
and the number of shares of Class A common stock held by new investors will be
increased to 15,295,000, or 17.6% of the total number of shares of common stock
outstanding after this offering.
To the extent any options, warrants and other rights to acquire our common
stock are exercised, your stock will be further diluted.
23
<PAGE> 29
CAPITALIZATION
The following table sets forth our cash and cash equivalents, long-term
debt and capitalization as of December 31, 1999 on an actual basis and on an as
adjusted basis to give effect to:
- this offering, including the application of the estimated net proceeds of
this offering;
- the conversion of our existing common stock into Class A common stock in
connection with our recapitalization; and
- Onex's conversion of its Class A common shares into Class B common shares
and no conversion by any other Class A stockholder.
You should read the information provided below together with the financial
statements and the related notes beginning on page F-1 of this prospectus and
the information under "Selected Financial Data," "Unaudited Pro Forma Financial
Information" and "Management's Discussion and Analysis of Results of Operations
and Financial Condition."
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------
ACTUAL AS ADJUSTED
---------- -------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C>
Cash and cash equivalents................................... $ 10,090 $ 97,288
======== ========
Bank indebtedness........................................... $ 3,324 $ --
Long-term debt, including current portion:
Revolving credit facility.............................. 23,400 --
Term credit facility................................... 60,000 --
Term loans............................................. 15,128 5,250
Other.................................................. 3,127 3,127
-------- --------
Total long-term debt, including current portion... 101,655 8,377
Capital lease obligations, including current portion........ 7,996 7,996
Subsidiary preferred stock.................................. 5,058 5,058
Subsidiary exchangeable preferred stock..................... 3,054 3,054
Stockholder's equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized on an actual basis; 20,000,000 shares
authorized on as adjusted basis; none issued or
outstanding on an actual or as adjusted basis........ -- --
Common stock, $.01 par value:
Common stock: 150,000,000 shares authorized;
71,364,400 issued and outstanding on an actual
basis; none issued and outstanding on an as
adjusted basis.................................... 714 --
Class A: 225,000,000 shares authorized; none issued
or outstanding on an actual basis; 18,213,179
issued and outstanding on as adjusted basis....... -- 182
Class B: 130,000,000 shares authorized; none issued
and outstanding on an actual basis; 66,451,221
issued and outstanding on an as adjusted basis.... -- 665
Common stock issuable.................................. 7,438 7,438
Additional paid-in capital............................. 162,894 362,261
Accumulated deficit.................................... (66,395) (67,795)
Accumulated other comprehensive loss................... (666) (666)
Unearned compensation.................................. (4,923) (4,923)
-------- --------
Total stockholders' equity........................ 99,062 297,162
-------- --------
Total capitalization.............................. $220,149 $321,647
======== ========
</TABLE>
Our accumulated deficit on an as adjusted basis reflects an estimated
charge of approximately $1.4 million from the write-off of unamortized deferred
financing costs associated with the repayment of our debt.
24
<PAGE> 30
SELECTED HISTORICAL FINANCIAL DATA
You should read this selected historical financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes presented in this
prospectus. The selected historical financial data as at and for the period from
inception to December 31, 1996 is derived from the audited financial statements
of North Direct Response Inc., our predecessor company, which are not presented
in this prospectus. The selected historical financial data as at and for year
ended December 31, 1997 and as at and for the period ended April 27, 1998 is
derived from audited financial statements of North Direct Response which are
presented in this prospectus. The selected historical financial data as at and
for the period ended December 31, 1998 represents the combined results of
operations derived from our audited consolidated financial statements as at and
for the period from September 25, 1998 to December 31, 1998 and the audited
financial statements of North Direct Response Inc. for the period April 28, 1998
to December 17, 1998. This combined financial data is presented in this
prospectus. The selected historical financial data as at and for the year ended
December 31, 1999 is derived from our audited consolidated financial statements
which are presented in this prospectus.
<TABLE>
<CAPTION>
CLIENTLOGIC CORPORATION PREDECESSOR COMPANY
--------------------------- -----------------------------------------
COMBINED PERIOD
PERIOD FROM FROM PERIOD FROM
APRIL 28, JANUARY 1, INCEPTION
CONSOLIDATED 1998 1998 (OCTOBER 9,
YEAR ENDED THROUGH THROUGH YEAR ENDED 1996) TO
DECEMBER 31, DECEMBER 31, APRIL 27, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues................................ $177,791 $ 27,283 $ 1,633 $2,617 $ --
Cost and expenses
Cost of services...................... 99,478 16,353 962 1,426 --
Selling, general and administrative
expenses............................ 75,823 9,452 786 1,451 29
Depreciation expense.................. 11,063 1,900 145 329 2
Amortization expense.................. 23,829 3,937 2 4 --
Impairment of intangible assets....... 22,273 -- -- -- --
Loss on write-off of capital assets... 2,968 -- -- -- --
Gain on sale of investment.............. (3,395) -- -- -- --
-------- -------- ------- ------ ------
Operating loss.......................... (54,248) (4,359) (262) (593) (31)
Interest expense, net................... 6,480 921 68 142 1
-------- -------- ------- ------ ------
Loss before income taxes................ (60,728) (5,280) (330) (735) (32)
Income taxes............................ 322 65 -- -- --
-------- -------- ------- ------ ------
Net loss................................ $(61,050) $ (5,345) $ (330) $ (735) $ (32)
======== ======== ======= ====== ======
Basic loss per share.................... $ (1.02) $ (0.28) $ (0.03) $(0.08) $(0.00)
======== ======== ======= ====== ======
Weighted average number of shares
outstanding (in thousands)............ 60,040 19,330 10,309 9,372 7,114
BALANCE SHEET DATA (AT END OF PERIOD)
Working capital......................... $ (1,727) $ 4,948 $ 589 $ 880 $ 361
Total assets............................ 292,726 111,185 3,645 3,966 370
Long-term debt, including current
portion............................... 101,655 31,925 1,748 895 --
Subsidiary preferred stock.............. 5,058 -- -- -- --
Subsidiary exchangeable preferred stock... 3,054 3,054 -- -- --
Stockholders' equity.................... 99,062 56,085 538 866 371
</TABLE>
25
<PAGE> 31
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS
BASIS OF PRESENTATION
The following unaudited pro forma consolidated balance sheet and statement
of operations is based on our audited consolidated balance sheet and statement
of operations for the year ended December 31, 1999 and gives effect to:
- our acquisition of LCS Industries, Inc. completed on January 27, 1999 for
an aggregate purchase price of approximately $69.3 million;
- our acquisition of Cordena Call Management B.V. completed on October 7,
1999 for an aggregate purchase price of approximately $29.1 million;
- our acquisition of MarketVision, Inc. completed on December 6, 1999 for
an aggregate purchase price of approximately $25.0 million; and
- our distribution of all of the stock of the parent company of
InsLogic.com Corporation, our subsidiary which holds the assets we
acquired from Canadian Access, as a dividend to our existing stockholders
and to the holders of shares of one of our subsidiaries which are
exchangeable for our common stock. This distribution will be at
historical cost, thereby creating no gain or loss.
The amounts shown on the unaudited pro forma consolidated statement of
operations under the column headings LCS, Cordena and MarketVision represent the
historical results of operations of the relevant company for the period from
January 1, 1999 through the date of purchase. We accounted for each of these
acquisitions using the purchase method of accounting. The unaudited pro forma
consolidated statement of operations gives effect to these acquisitions as if
each of them had been completed on January 1, 1999. The Cordena results of
operations were translated from Dutch guilders to U.S. dollars using the average
exchange rate during the year ended December 31, 1999 of $0.504.
We have not given pro forma effect to our acquisition of Groupe Adverbe
International S.A. in October 1999 because this acquisition did not have a
material effect on our results of operations as determined by criteria set by
the Securities and Exchange Commission. However, the results of operations of
this company are included from the date of their acquisition in our audited
consolidated financial statements for the year ended December 31, 1999.
The pro forma adjustments are based on estimates, available information and
certain assumptions by our management. The pro forma financial data may not
represent what our financial position and results of operations would actually
have been if these transactions in fact had occurred on January 1, 1999 and are
not necessarily representative of our financial position and results of
operations for any future period. You should read this unaudited pro forma
consolidated balance sheet and statement of operations together with the other
financial statements and related notes and the risk factors included in this
prospectus.
26
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CLIENTLOGIC ADJUSTMENTS TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 10,090 $(2,656)(1) $ 7,434
Accounts receivable, net................................. 59,428 59,428
Accounts receivable and other current assets -- related
party................................................. 1,237 -- 1,237
Prepaids and other current assets........................ 16,649 (96)(1) 16,553
-------- ------- --------
Total current assets............................. 87,404 (2,752) 84,652
Capital assets............................................. 52,982 (3,128)(1) 49,854
Other noncurrent assets.................................... 6,521 (949)(1) 5,572
Goodwill................................................... 144,340 -- 144,340
Debt issue costs........................................... 1,479 -- 1,479
-------- ------- --------
Total assets..................................... $292,726 $(6,829) $285,897
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank indebtedness........................................ $ 3,324 $ -- $ 3,324
Accounts payable......................................... 36,013 (88)(1) 35,925
Accrued liabilities and other............................ 35,051 (58)(1) 34,993
Current installments of long term debt................... 9,954 -- 9,954
Current installments of long-term debt to related
party................................................. 2,063 -- 2,063
Current portion of capital lease obligations............. 2,726 -- 2,726
-------- ------- --------
Total current liabilities........................ 89,131 (146) 88,985
Long-term debt............................................. 23,579 -- 23,579
Long-term debt to related party............................ 66,059 -- 66,059
Capital lease obligations.................................. 5,270 -- 5,270
Other noncurrent liabilities............................... 1,513 -- 1,513
-------- ------- --------
Total liabilities................................ 185,552 (146) 185,406
-------- ------- --------
Subsidiary preferred stock................................. 5,058 (5,058)(1) --
Subsidiary exchangeable preferred stock.................... 3,054 -- 3,054
Stockholders' equity:
Common stock............................................. 714 -- 714
Common stock issuable.................................... 7,438 -- 7,438
Additional paid-in-capital............................... 162,894 (1,625)(1) 161,269
Accumulated deficit...................................... (66,395) -- (66,395)
Accumulated other comprehensive loss..................... (666) -- (666)
Unearned compensation.................................... (4,923) -- (4,923)
-------- ------- --------
Stockholders' equity................................ 99,062 (1,625) 97,437
-------- ------- --------
Total liabilities and stockholders' equity....... $292,726 $(6,829) $285,897
======== ======= ========
</TABLE>
27
<PAGE> 33
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CLIENTLOGIC LCS CORDENA MARKETVISION ADJUSTMENTS TOTAL
----------- ------- ------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues..................... $177,791 $ 4,722 $31,477 $3,352 $ -- $217,342
Costs and expenses
Cost of services........... 99,478 2,041 22,034(2) 1,253 -- 124,806
Selling, general and
administrative
expenses................ 75,823 2,008 11,038 1,641 (906)(1) 89,604
Depreciation expense....... 11,063 189 1,161 183 (107)(1) 12,489
Amortization expense....... 23,829 24 4,060 226 (12)(1) 33,904
6,071(3)
(294)(4)
Impairment of intangible
assets.................. 22,273 -- -- -- -- 22,273
Loss on write-off of
capital assets.......... 2,968 -- -- -- -- 2,968
Gain on sale of investment... (3,395) -- -- -- -- (3,395)
-------- ------- ------- ------ ------- --------
Operating gain (loss)........ (54,248) 460 (6,816) 49 (4,752) (65,307)
Interest expense, net........ 6,480 19 859 80 49(1) 7,487
Transaction expenses(5)...... -- 2,052 -- -- -- 2,052
Other, net................... -- (124) -- (4) -- (128)
-------- ------- ------- ------ ------- --------
Loss before income taxes..... (60,728) (1,487) (7,675) (27) (4,801) (74,718)
Income taxes................. 322 138 46 -- (184)(6) 322
-------- ------- ------- ------ ------- --------
Net loss..................... $(61,050) $(1,625) $(7,721) $ (27) $(4,617) $(75,040)
======== ======= ======= ====== ======= ========
Basic loss per share......... $ (1.02) $ (1.10)
======== ========
Weighted average number of
shares used in computing
basic loss per share (in
thousands)................. 60,040 68,250
======== ========
</TABLE>
Dilutive earnings per share has not been presented as all potentially
convertible shares are antidilutive.
28
<PAGE> 34
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AND STATEMENT OF OPERATIONS
(IN THOUSANDS)
(1) The pro forma adjustments reflect the InsLogic balances included in our
December 31, 1999 consolidated balance sheet and statement of operations for
the year ended December 31, 1999. The distribution of all of the stock as a
dividend has been recorded to additional paid-in-capital as we have an
accumulated deficit at December 31, 1999.
(2) Certain amounts have been reclassified for consistency with the ClientLogic
basis of presentation.
(3) The pro forma adjustment to amortization expense reflects a full year of pro
forma amortization of our goodwill related to each of the acquisitions, net
of:
- amortization expense related to the acquisition of the acquired companies
included in our consolidated financial statements for the year ended
December 31, 1999; and
- amortization expense included in each of the acquired companies'
financial statements from January 1, 1999 through the relevant date of
acquisition.
<TABLE>
<CAPTION>
AMORTIZATION EXPENSE
----------------------------------------------------------------------------------------
RELATED TO
RELEVANT ACQUISITION
-------------------------------------
INCLUDED IN PERIOD FROM JANUARY 1, 1999 UNTIL
PRO FORMA CLIENTLOGIC RELEVANT ACQUISITION DATE
YEAR ENDED 1999 CONSOLIDATED ----------------------------------- PRO FORMA
DECEMBER 31, 1999 FINANCIALS LCS CORDENA MARKETVISION ADJUSTMENT
----------------- ----------------- ------- -------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
LCS(a)............... $ 6,567 $(6,019) $(24) $ -- $ -- $ 524
Cordena(b)........... 8,540 (2,135) -- (4,060) -- 2,345
MarketVision(c)...... 3,740 (312) -- -- (226) 3,202
------- ------- ---- ------- ----- -------
$18,847 $(8,466) $(24) $(4,060) $(226) $ 6,071
======= ======= ==== ======= ===== =======
</TABLE>
-------------------------
(a) The excess of purchase price over the fair value of net assets
acquired in the LCS acquisition was $56,145. Of this amount, $1,650
was assigned to the value of a contract with a key customer, $21,659
was allocated to business process methodologies and $32,836 was
allocated to goodwill. Goodwill relating to our acquisition of LCS
is amortized over five years and resulted in monthly amortization of
$547 per month.
(b) Goodwill relating to our acquisition of Cordena is amortized over
five years. The goodwill amount of $42,701 results in monthly
amortization of $712 per month.
(c) The excess of purchase price over the fair value of the net assets
acquired in the MarketVision acquisition was $23,677. Of this
amount, $4,975 was allocated to software development cost and is
amortized over five years resulting in monthly amortization of $83.
The balance of $18,702 was attributed to goodwill and is amortized
over five years, resulting in monthly amortization of $312.
(4) The remaining $(294) of adjustment to amortization expense reflects the
impact of the differences between U.S. GAAP and Dutch GAAP relating to
Cordena prior to its acquisition by us. Under Dutch GAAP, acquisitions may
be recorded at the beginning of the year in which the company acquires
economic control, which is defined as the ability to exercise influence over
the acquired company. For U.S. GAAP purposes, the purchase is recorded on
the effective date of the acquisition. This adjustment reduces amortization
expense to conform with U.S. GAAP and reflects the elimination of
amortization expense from the beginning of the year through the effective
date of the acquisition.
(5) LCS incurred nonrecurring transaction expenses of $2,052 during January 1999
in connection with the sale of LCS to us.
(6) The pro forma adjustment to income taxes of $(184) relates to the reversal
of estimated income taxes from January 1, 1999 through the relevant date of
acquisition of LCS and Cordena.
29
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
You should read the following discussion and analysis of our results of
operations and financial condition together with the financial statements and
the related notes beginning on page F-1 of this prospectus.
OVERVIEW
We are an international provider of marketing, customer contact management
and fulfillment services to e-commerce and technology companies. We are able to
integrate these services for our clients, allowing them to manage their customer
relationships through a single service provider. We offer a range of services to
assist our clients in acquiring and retaining customers and in maximizing the
profitability of customer relationships.
Our predecessor, North Direct Response, Inc., a provider of outsourced
customer contact management services located in Toronto, Ontario, Canada, began
operating in October 1996. In April 1998, Onex Corporation formed a Canadian
company, which we refer to as the successor company, to acquire the majority of
the shares of North Direct Response. Onex formed our company in September 1998.
In October 1998 we acquired Upgrade Corporation of America (d/b/a SOFTBANK
Services Group), a provider of outsourced customer contact management and
fulfillment services. In December 1998, Onex contributed the successor company
to our company. We accounted for the combination of the successor company to our
company at historical cost without revaluing either entity since both our
company and the successor company were under the common control of Onex. In
January 1999, we acquired LCS Industries, Inc., a provider of outsourced
list-based marketing services and fulfillment. In October 1999, we acquired
Cordena Call Management B.V. and Groupe Adverbe International S.A. Cordena
provides customer contact management and fulfillment services in six European
countries. Adverbe is an outsourced provider of customer contact management
services in France. In December 1999, we acquired MarketVision, Inc., a provider
of marketing services, including relational database management services and
software. All acquired companies now operate as our subsidiaries.
In March 1999, we acquired a portion of the assets of Canadian Access
Insurance Services Inc., a provider of outsourced customer relationship services
to the insurance marketplace. In September 1999, we formed a subsidiary,
InsLogic.com Corporation, to perform our insurance related services. We have
declared a dividend to distribute the shares of InsLogic's parent company to our
existing stockholders of record on March 15, 2000 in a taxable spin-off. We
expect this distribution will create taxable income to our company that will be
offset by a portion of our tax loss carryforwards. InsLogic's operations are
insignificant to our financial results.
Revenues. We generate revenues principally through our marketing, customer
contact management and fulfillment services. Revenues for marketing services
related to list management are reported net of the cost we incurred to obtain
the list, if any. Our other marketing services revenues are charged on a per
project or per software license sold basis or under the terms of database
maintenance and analysis arrangements. Revenues for our customer contact
management and fulfillment services are reported net of freight,
telecommunications and other expenses that are reimbursed by our clients. Our
customer contact management and fulfillment services are generally charged on a
per transaction basis, such as per minute, per employee or per item.
Revenues are generally recognized at the time services are provided. The
majority of our clients are billed on a monthly basis. We price our services
based on a variety of factors including the complexity of the service, the
amount of required systems customization or the length of contract. The majority
of our client contracts can be cancelled within 90 days. For the year ended
December 31, 1999, our largest client, on the basis of revenues, accounted for
approximately 9.9% of our revenues and our ten largest clients, on the basis of
revenues, accounted for approximately 44.1% of our revenues. In 1999
approximately 6.9% of our revenues were derived from marketing services,
approximately 73.7% from customer contact management services and approximately
19.4% from fulfillment services.
30
<PAGE> 36
Cost of Services. Our cost of services consist primarily of salaries and
benefits for personnel directly associated with delivering or managing our
marketing, customer contact management or fulfillment operations. Additional
items include costs of materials used in fulfillment, such as packaging
materials.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses are comprised primarily of expenses related to
facilities, information technology and professional services; compensation and
related expenses for sales and marketing, finance, human resources and
information technology personnel; and provision for bad debt.
Depreciation and Amortization Expense. We calculate and record depreciation
for capital assets over lives ranging from three to fifteen years and for
software development costs over three to five years. We amortize goodwill over
five years.
Income Taxes. We record income tax expense in accordance with local
requirements in countries where we have taxable earnings. At December 31, 1999,
we had approximately $22.2 million of U.S. federal net operating loss tax
carryforwards which will begin to expire in 2006. We have additional loss
carryforwards for our European operations. We have recorded a substantial
valuation allowance against our deferred tax asset.
ACQUISITIONS
We made several acquisitions during 1998 and 1999. These acquisitions are
summarized as follows:
- In October 1998, we acquired SOFTBANK Services Group for approximately
$73.3 million in cash, including the assumption of approximately $17.9
million of existing indebtedness. In addition, we contributed $6.7
million in cash to provide for working capital needs. We financed the
cash component of the consideration and the working capital contribution
by selling approximately $50.0 million of our capital stock principally
to Onex and by incurring approximately $30.0 million of term debt. This
acquisition created approximately $57.5 million of goodwill.
- In January 1999, we acquired LCS for approximately $69.3 million in cash,
including the assumption of approximately $28.5 million of existing
indebtedness. We financed the cash component of the consideration by
selling approximately $35.0 million of our capital stock principally to
Onex and by incurring approximately $34.3 million of term debt. This
acquisition created approximately $32.8 million of goodwill and
approximately $23.3 million of other intangible assets. In 1999, as a
result of the loss of a significant customer of LCS, we wrote down the
remaining balance of approximately $22.3 million relating to other
intangible assets.
- In October 1999, we acquired Cordena and Adverbe for an aggregate of
approximately $40.9 million in cash and stock, including the assumption
of approximately $31.2 million of existing indebtedness. In addition, we
contributed $6.3 million in cash to provide for working capital needs. We
financed the cash component of the consideration and the working capital
contribution by selling approximately $35.0 million of our capital stock
principally to Onex and the stock component of the consideration by
issuing approximately $7.0 million of our capital stock and approximately
$5.2 million of options and warrants to the shareholders of the acquired
companies. These acquisitions created approximately $53.6 million of
goodwill. In addition, some of the sellers may receive a contingent
payment of approximately $1.8 million in cash.
- In December 1999, we acquired MarketVision for approximately $25.0
million in cash and stock, including the assumption of approximately $1.2
million of existing indebtedness. We financed the cash component of the
consideration by selling approximately $12.0 million of our capital stock
principally to Onex, by incurring approximately $5.3 million in
subordinated term debt and by utilizing approximately $0.3 million of
cash on hand and the stock component of the consideration by issuing
approximately $7.4 million of our existing common stock in January 2000
to the shareholders of MarketVision. This acquisition created
approximately $18.7 million of goodwill. In addition, the sellers may
receive a contingent payment of approximately $0.8 million in cash based
on meeting specific revenue targets.
31
<PAGE> 37
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage of
our consolidated revenue represented by selected items in our income statement.
Results for the year ended December 31, 1999 present our consolidated
information. Results for the period from April 28 to December 31, 1998 present,
on a combined basis, the successor company from its date of formation by Onex
and SSG from the date of acquisition by us. Results for the period from January
1 to April 27, 1998 present North Direct Response as the predecessor company, as
do results for 1997.
<TABLE>
<CAPTION>
CLIENTLOGIC CORPORATION PREDECESSOR COMPANY
--------------------------------------- -----------------------------------
RESULTS FOR RESULTS FOR
RESULTS FOR THE COMBINED PERIOD THE PERIOD FROM RESULTS FOR
THE YEAR ENDED FROM APRIL 28 TO JANUARY 1 TO THE YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 APRIL 27, 1998 DECEMBER 31, 1997
----------------- ------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Revenues........................ 100.0% 100.0% 100.0% 100.0%
Cost and expenses
Cost of services.............. 56.0 59.9 58.9 54.5
Selling, general and
administrative expenses.... 42.7 34.6 48.1 55.4
Depreciation expense.......... 6.2 7.0 8.9 12.6
Amortization expense.......... 13.4 14.5 0.1 0.2
Impairment of intangible
assets..................... 12.5 -- -- --
Loss on write-off of capital
assets..................... 1.6 -- -- --
Gain on sale of investment...... (1.9) -- -- --
----- ----- ----- -----
Operating loss.................. (30.5)% (16.0)% (16.0)% (22.7)%
Interest expense, net........... 3.6 3.4 4.2 5.4
Loss before income taxes........ (34.1) (19.4) (20.2) (28.1)
Income taxes.................... 0.2 0.2 -- --
----- ----- ----- -----
Net loss........................ (34.3)% (19.6)% (20.2)% (28.1)%
===== ===== ===== =====
</TABLE>
IN LIGHT OF THE EVOLVING NATURE OF OUR BUSINESS, OUR LIMITED OPERATING
HISTORY AND OUR MATERIAL ACQUISITION HISTORY, WE BELIEVE THAT PERIOD-TO-PERIOD
COMPARISONS OF OUR RESULTS ARE NOT MEANINGFUL AND SHOULD NOT BE RELIED UPON AS
INDICATIONS OF FUTURE PERFORMANCE.
CLIENTLOGIC CORPORATION
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE PERIOD FROM APRIL 28, 1998 TO
DECEMBER 31, 1998
Revenues. Our revenues were approximately $177.8 million for the year ended
December 31, 1999, an increase of approximately $150.5 million over our revenues
for the period from April 28, 1998 to December 31, 1998, as a result of:
- the LCS acquisition in January 1999 which contributed approximately $51.5
million;
- the acquisitions of Cordena and Adverbe in October 1999 which together
contributed approximately $11.0 million;
- revenues of approximately $78.4 million from our ten largest clients for
the year ended December 31, 1999 as compared to revenues of approximately
$14.8 million from these same clients for and during the period from
April 28, 1998 to December 31, 1998; and
- revenues of approximately $105.0 million for a full year of operations of
SOFTBANK Services Group as compared to approximately $20.4 million for
the period from April 28, 1998 to December 31, 1998.
32
<PAGE> 38
Cost of Services. Our cost of services was approximately $99.5 million for
the year ended December 31, 1999, an increase of approximately $83.1 million
over our cost of services for the period from April 28, 1998 to December 31,
1998. This increase resulted primarily from:
- the LCS acquisition in January 1999 which contributed approximately $24.2
million;
- the acquisitions of Cordena and Adverbe in October 1999 which together
contributed approximately $7.0 million; and
- cost of services of approximately $61.4 million for a full year of
operations of SOFTBANK Services Group as compared to approximately $11.7
million for the period from April 28, 1998 to December 31, 1998.
As a percentage of revenues, cost of services decreased approximately 3.9%,
primarily due to the effect of the acquisition of LCS, which had a relatively
lower cost of service associated with marketing and fulfillment services.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses of approximately $75.8 million are comprised of $42.0
million of labor and employee related expenses, $14.4 million of facility
expenses, $6.7 million of office and computer expenses, $3.1 million of
professional service expenses and $9.6 million of other selling, general and
administrative expenses. This represents an increase over the results for the
period April 28, 1998 to December 31, 1998 of $36.5 million in labor and
employee related expense, $9.8 million in facility expenses, $5.7 million in
office and computer expenses, $2.9 million in professional service expenses and
$11.4 million in other selling, general and administrative expenses, for a total
increase of $66.3 million. These increases are primarily due to the following:
- selling, general and administrative expenses of approximately $43.6
million for a full year of operations of SOFTBANK Services Group as
compared to approximately $6.9 million for the period from April 28, 1998
to December 31, 1998. This increase is comprised of increases of $21.6
million in labor and employee related expenses, $4.1 million in facility
expenses, $3.2 million in office and computer expenses, $2.3 million in
professional service expenses and $5.5 million in other selling, general
and administrative expenses.
- selling, general and administrative expenses of approximately $26.9
million attributable to the acquisitions of LCS, Cordena, Adverbe and
MarketVision included in our consolidated results since each of their
acquisition dates. This increase is comprised of $13.6 million in labor
and employee related expenses, $5.6 million in facility expenses, $2.5
million in office and computer expenses, $0.6 million in professional
service expenses and $4.6 million in other selling, general and
administrative expenses.
As a percentage of revenue, selling, general and administrative expenses
increased approximately 8.1% primarily as a result of hiring executive officers
and marketing personnel, additional spending for marketing our services,
expanding an existing fulfillment facility and opening four additional customer
contact management facilities and our headquarters in Nashville, Tennessee.
Depreciation Expense. Our depreciation expense was approximately $11.1
million for the year ended December 31, 1999, an increase of approximately $9.2
million over our depreciation expense for the period from April 28, 1998 to
December 31, 1998. This increase resulted primarily from the following:
- capital spending of approximately $26.0 million as compared to
approximately $2.8 million for the period from April 28, 1998 to December
31, 1998;
- depreciation expense of approximately $7.3 million from our ownership of
the assets of SOFTBANK Services Group for a full year as compared to
approximately $1.5 million for the period from April 28, 1998 to December
31, 1998; and
- depreciation expense of approximately $2.9 million from our ownership of
the assets of LCS, Cordena, Adverbe and MarketVision from each of their
acquisition dates.
33
<PAGE> 39
Amortization Expense. Our amortization expense was approximately $23.8
million for the year ended December 31, 1999, an increase of approximately $19.8
million over our amortization expense for the period from April 28, 1998 to
December 31, 1998. This increase resulted primarily from the following:
- amortization expense of approximately $11.5 million due to the inclusion
of goodwill amortization relating to our acquisition of SOFTBANK Services
Group for a full year as compared to approximately $2.9 million for the
period from April 28, 1998 to December 31, 1998; and
- amortization expense of approximately $10.0 million from the goodwill and
other intangible asset amortization relating to our acquisitions of LCS,
Cordena, Adverbe and MarketVision.
Impairment of Intangible Assets. We recorded a nonrecurring noncash charge
of approximately $22.3 million for the year ended December 31, 1999. This charge
reflects the writedown of other intangibles associated with our acquisition of
LCS due to the loss in August 1999 of a significant customer.
Loss on write-off of capital assets. We recorded a loss on the write-off of
capital assets of approximately $3.0 million during the year ended December 31,
1999.
Gain on sale of investment. We recorded a gain on sale of investment of
approximately $3.4 million during the year ended December 31, 1999. This gain
was realized on the sale of an equity interest received from a service provided
to one of our customers.
Interest Expense, net. Our net interest expense was approximately $6.5
million for the year ended December 31, 1999, an increase of approximately $5.6
million over our net interest expense for the period from April 28, 1998 to
December 31, 1998. This increase was a result of an increase in our debt and
capital leases.
Income Taxes. Our income taxes of $0.3 million represented current state,
local and foreign taxes of approximately $1.4 million and a deferred tax benefit
of approximately $1.1 million relating to the reduction of the valuation
allowance on deferred tax assets for certain U.S. operating loss carryforwards.
PREDECESSOR COMPANY
PERIOD FROM JANUARY 1, 1998 TO APRIL 27, 1998 COMPARED TO YEAR ENDED DECEMBER
31, 1997
Revenues. Our revenues were approximately $1.6 million for the period from
January 1, 1998 to April 27, 1998, a decrease of approximately $1.0 million from
our revenues for the year ended December 31, 1997. This decrease primarily
results from comparing a full year of revenues to a partial year of revenues.
Cost of Services. Our cost of services was approximately $1.0 million for
the period from January 1, 1998 to April 27, 1998, a decrease of approximately
$0.5 million from our cost of services from the year ended December 31, 1997.
This decrease is the result of comparing a full year of cost of services to a
partial year of cost of services. As a percentage of revenues, costs of services
increased to approximately 58.9% for the period ending April 27, 1998 from
approximately 54.5% for the year ended December 31, 1999. This increase
primarily results from initial expenses incurred in connection with providing
services to a new customer.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses were approximately $0.8 million for the period from
January 1, 1998 to April 27, 1998, a decrease of approximately $0.7 million from
our selling, general and administrative expenses for the year ended December 31,
1997. This decrease primarily results from comparing a full year of selling,
general and administrative expense to a partial year. As a percentage of
revenues, selling, general and administrative expenses decreased to
approximately 48.1% for the period ending April 27, 1998 from approximately
55.4% for the period ending December 31, 1997. This decrease was a result of our
revenues growing faster than our selling, general and administrative expense.
34
<PAGE> 40
Depreciation Expense. Our depreciation expense was approximately $0.1
million for the period from January 1, 1998 to April 27, 1998, a decrease of
approximately $0.2 million from our depreciation expense for the year ended
December 31, 1997. This decrease is the result of comparing a full year of
depreciation expense to a partial year of depreciation expense.
Amortization Expense. Amortization expense was not material in either
period.
Interest Expense, net. Net interest expense was not material in either
period.
Income Taxes. Income taxes were not material in either period.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations, capital expenditures and acquisitions
primarily through the issuance of our capital stock, borrowings under our
revolving credit facility and term loans and capital lease arrangements.
At December 31, 1999, our outstanding debt primarily consisted of:
- $23.4 million under our $40 million revolving credit facility;
- $3.3 million under our $4.6 million bank overdraft line;
- $60.0 million under our term credit facility;
- $9.8 million under our Cordena term loan; and
- $8.4 million of other interest bearing debt.
We will use a portion of the proceeds from this offering to repay the
outstanding indebtedness under our revolving credit facility, bank overdraft
line, term credit facility, and Cordena term loan. If this indebtedness had been
repaid on January 1, 1999, our net interest expense for the year ended December
31, 1999 would have been decreased by approximately $5.9 million. We will use a
portion of the proceeds of this offering to repay and terminate our $25 million
subordinated revolving credit facility which we entered on March 10, 2000 to
fund capital expenditures and working capital requirements through the closing
of this offering. We will retain our $40 million credit facility after
completion of the offering.
Our revolving credit facility will be available after the offering for
general corporate purposes. This facility will require us to maintain financial
ratios and will impose restrictions on us that limit, among other things, our
ability to pay dividends. Our revolving credit facility is secured by:
- substantially all of our North American assets;
- 100% of the capital stock that we own in each of our domestic
subsidiaries; and
- 65% of the capital stock that we own in each of our foreign subsidiaries.
We believe that our cash and cash equivalents, in addition to the funds
available under our revolving credit facility will be sufficient to fund our
operations and various repayment obligations under debt and lease agreements for
at least 12 months without our using proceeds from this offering for those
purposes.
CLIENTLOGIC CORPORATION
During the year ended December 31, 1999, net cash used in our operating
activities of $3.3 million was a result of a net loss of $61.1 million, a $3.4
million gain on the sale of an investment and an increase of $5.0 million in
working capital, offset by depreciation and amortization of $34.9 million, bad
debt expense of $2.3 million, a $3.0 million loss on write-off of assets, and
noncash charges of $3.7 million relating to a non-cash stock compensation charge
and $22.3 million relating to the write-down of intangible assets. During the
period from April 28, 1998 to December 31, 1998, net cash used in our operating
35
<PAGE> 41
activities of $4.3 million was a result of a net loss of $5.3 million, an
increase of $5.3 million in working capital including foreign currency
adjustments, offset by depreciation and amortization expense of $5.8 million,
bad debt expense of $0.2 million and a noncash stock compensation charge of $0.3
million.
Our investing activities during the year ended December 31, 1999 consisted
primarily of capital expenditures of $26.0 million, net of lease financing
arrangements, and the acquisitions of LCS, assets of Canadian Access, Cordena,
Adverbe and MarketVision for $115.3 million. Our capital expenditures consisted
primarily of building and upgrading customer contact management centers. From
April 28, 1998 to December 31, 1998 we incurred capital expenditures of $2.8
million, net of lease financing arrangements, and acquired SOFTBANK Services
Group and the successor company for $57.2 million.
Our cash flows from our financing activities, during the year ended
December 31, 1999, included cash investments by our stockholders of $87.0
million primarily to fund our acquisitions and $5.3 million of subsidiary
preferred stock. We also used net borrowings of $56.9 million to fund operating
activities, capital expenditures and acquisitions, and paid debt issue costs of
$1.6 million. From April 28, 1998 to December 31, 1998 we received proceeds from
the sale of our capital stock of $62.1 million principally used to fund the
acquisition of SOFTBANK Services Group. We also used net borrowings of $7.9
million to fund operating activities, capital expenditures and acquisitions.
PREDECESSOR COMPANY
From January 1, 1998 to April 27, 1998, our net cash from operating
activities was $0.1 million as a result of a net loss of $0.3 million, offset by
a decrease of $0.3 million in working capital requirements and by depreciation
and amortization of $0.1 million. During the year ended December 31, 1997, net
cash used in our operating activities of $1.3 million was a result of a net loss
of $0.7 million, and an increase of $0.9 million in working capital
requirements, offset by depreciation and amortization of $0.3 million.
Investing activities were immaterial during the period from January 1, 1998
to April 27, 1998, with no individual item over $0.1 million. Our investing
activities during the year ended December 31, 1997 consisted primarily of
capital expenditures of $2.1 million, net of lease financing arrangements.
From January 1, 1998 to April 27, 1998, financing activities were
immaterial. During the year ended December 31, 1997, we received proceeds from
the sale of our capital stock of $1.3 million principally used to fund capital
expenditures. We also used net borrowings of $1.9 million to fund working
capital requirements and capital expenditures.
SEASONALITY
Seasonal influences have historically affected our operations, with higher
sales typically realized in the fourth quarter. Our clients include technology
companies whose computer hardware and software sales traditionally peak in
fourth quarter, resulting in increases in our fulfillment and customer support
activities for those clients. Also, our catalog and e-commerce fulfillment
activities increase during the Christmas season.
MARKET RISK
As a result of our financing and international operating activities, we are
exposed to market risk from changes in interest rates and foreign currency
exchange rates that may adversely affect our financial position and results of
operations. We seek to minimize the risks from interest rate and foreign
currency exchange rate fluctuations through our normal operating and financing
activities. We do not use derivative financial instruments for trading or other
speculative purposes, nor have we entered into any derivative instruments for
hedging purposes during the respective financial statement periods or at the
respective balance sheet dates.
Our exposure to market risk for changes in foreign currency exchange rates
arises from investments in and intercompany balances with foreign subsidiaries,
and accounts receivable and payable. Our exposure is with respect to several
currencies, principally the UK pound, Irish punt, Dutch guilder, German mark,
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Canadian dollar, French franc and the euro; none of these would be considered
hyper-inflationary environments. We attempt to have all such exposures hedged,
where practical, by purchasing goods and services in local currencies and by
using local currency borrowings, thereby creating natural hedges.
Our exposure to market risk for changes in interest rates relates primarily
to our debt obligations which have variable interest rates tied mainly to the
U.S. prime rate and the London Interbank Offered Rate, or LIBOR. At year-end
1999, we had adjustable rate debt totaling $96.9 million. If interest rates were
to increase three percentage points from our weighted average interest rate at
year-end of 9.63%, our net interest expense would have increased $2.9 million.
The above discussion and the estimated amounts generated from the
sensitivity analysis referred to above include forward-looking statements of
market risk which assume that certain adverse market conditions may occur.
Actual future market conditions may differ materially from such assumptions.
Accordingly, the forward-looking statements should not be considered projections
by us of future events or losses.
YEAR 2000
As of the date of this prospectus, we have not experienced any significant
Year 2000 problems relating to our computer systems and business operations.
Since certain computer programs do not execute daily and may not have been used
before the date of this prospectus and devices with embedded computer chips may
not have been tested or used for their intended purpose, risk of device failure
continues.
It is likely that we have computer programs that will not execute until a
quarter-end or the year-end 2000, so risks of program failures exist until such
times. Therefore, while the results of our Year 2000 plans have proven
satisfactory to date, we cannot assure you that all aspects of the Year 2000
issues are entirely resolved.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants, or
the AICPA, issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." This Statement of
Position, or SOP, requires entities to capitalize costs related to internal-use
software once certain criteria have been met. We implemented SOP 98-1 during our
fiscal year ended December 31, 1999 with no material impact on our financial
position, results of operations or cash flows.
In April 1998, the AICPA issued SOP 98-5. "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires entities to expense all start-up costs
related to new operations as incurred. In addition, all start-up costs that were
capitalized in the past must be written off upon adoption of SOP 98-5. We
adopted SOP 98-5 during our fiscal year ended December 31, 1999 with no material
impact on our financial position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. We expect that the adoption of SFAS No. 133 will have no material
impact on our financial position, results of operations or cash flows. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities Deferral of the Effective Date of FASB Statement No. 133,"
which deferred the required date of adoption of SFAS No. 133 for one year, to
fiscal years beginning after June 15, 2000.
In January 1999, we adopted SFAS No. 130 "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." Under this statement, the term "comprehensive income"
is used to describe the total net earnings plus other comprehensive income or
loss. For our company, other comprehensive loss includes currency translation
adjustments on foreign subsidiaries.
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EXCHANGEABLE SHARES
As part of the contribution of the successor company to our company, we
exchanged the 3,085,099 minority shares held in a subsidiary of the successor
company for 3,054,055 exchangeable preferred shares of the subsidiary. The
exchangeable preferred shares are exchangeable into 1,963,321 shares of our
common stock. The shares are exchangeable at the option of the holder or of our
subsidiary at any time. At March 31, 2000, no exchanges had occurred.
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BUSINESS
OUR SERVICES
ClientLogic is an international provider of marketing, customer contact
management and fulfillment services focused on e-commerce and technology
companies. We are able to integrate these services for our clients, allowing
them to manage their customer relationships through a single service provider.
Our services, which we refer to collectively as customer relationship management
services, include:
- Marketing services. We create customized marketing programs which help
our Internet-based clients profile and target new customers and increase
the loyalty of existing customers. Our marketing services include
developing, maintaining and providing access to customer information
databases, analyzing this information to identify and address specific
needs of our clients' customers and providing expertise in developing
marketing programs.
- Customer contact management services. We provide customer service and
technical support to our clients' customers 24 hours a day, seven days a
week through e-mail, online chat, fax, phone and mail. Our ability to
communicate with our clients' customers through multiple channels enables
us to more effectively respond to their inquiries and needs.
- Fulfillment services. We conduct our clients' order and payment
processing, warehousing, inventory management, picking, packing, shipping
and returns processing activities. Through these services we distribute
our clients' products to their customers efficiently and cost
effectively.
We believe that the breadth of our services and our ability to integrate
these services for our clients are competitive advantages for our company. These
solutions help our clients to market their products more effectively and enhance
customer loyalty by providing a high level of service at the point of initial
customer contact and throughout the customer relationship. Moreover, we collect
valuable information at each point of contact with our clients' customers and
analyze this data using our proprietary database technology. This analysis
provides us insight into customer buying patterns, product design preferences,
specific customer support requirements and demographic data. Our clients can use
this information to better design their marketing programs, develop their
products, improve the effectiveness of their Web sites and further enhance their
customers' satisfaction. Our range of services assist our clients in acquiring
and retaining customers and in maximizing the profitability of customer
relationships.
Our clients include e-commerce companies and established companies seeking
to expand or develop their Internet operations. Our services are designed to
accommodate the requirements of e-commerce and are made available to our clients
24 hours a day, seven days a week, in 11 languages through 33 facilities located
in 10 countries.
OUR OPPORTUNITY
The Internet is rapidly becoming a powerful communications medium, creating
opportunities for both emerging e-commerce and other companies to bypass
traditional marketing and distribution channels and to serve customers in ways
not previously possible. According to International Data Corporation, or IDC,
the number of Internet users is expected to increase from approximately 142
million in 1998 to approximately 500 million by 2003. IDC further predicts that
the amount of worldwide business-to-business and business-to-consumer commerce
conducted over the Web will increase from approximately $50 billion in 1998 to
approximately $1.3 trillion in 2003. The United States has been the primary
country driving the development of the Internet and is one of the most advanced
countries in the acceptance of e-commerce. However, IDC predicts that over the
next several years Western Europe will experience substantial Internet growth,
with e-commerce spending estimated to increase from approximately $5.6 billion
in 1998 to approximately $430 billion in 2002.
We believe that, to date, companies have directed most of their
Internet-related investments to creating online storefronts and to advertising
with the objective of creating brand awareness and achieving market leadership.
As e-commerce evolves, we believe companies will need to focus on acquiring
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customers more efficiently and converting Web site visits into lasting and
profitable customer relationships. To do so, and as part of developing
successful e-commerce strategies, we believe that companies must establish
sophisticated customer relationship management capabilities to:
- develop and execute effective marketing analysis and programs;
- develop facilities and an operational infrastructure that can satisfy
rapidly increasing volume requirements;
- accept and process customer orders and inquiries 24 hours a day, seven
days a week;
- efficiently and courteously respond to customer inquiries by e-mail,
online chat, fax or phone;
- execute billing and payment functions such as secure credit card
processing, sales and other tax calculations, data verification and fraud
detection;
- pick, pack and ship customer orders promptly and accurately; and
- process product returns and customer refunds.
We believe that a large number of e-commerce companies are either failing
to perform customer relationship management functions adequately or are failing
to integrate these functions to create a viable customer relationship management
program. For example, Jupiter Communications estimated that, as of September
1999, 44% of e-commerce Web sites lacked real-time integrated call center
support, 46% lacked real-time integrated inventory management systems and 41%
lacked real-time integrated fulfillment systems. In the fourth quarter of 1999,
high order volume, combined with insufficient customer service support and
product fulfillment capabilities, resulted in a number of e-commerce companies
being unable to meet delivery deadlines, provide responsive customer service or
maintain satisfactory inventory levels.
Faced with the growing cost and operational complexities of developing
comprehensive customer relationship management services, many e-commerce
companies are seeking to outsource these critical business functions. According
to Forrester Research, U.S. corporate spending on outsourced e-commerce
services, including Internet strategy, marketing, design and technical
implementation, is expected to increase from $10.6 billion in 1999 to $64.8
billion in 2003. By outsourcing critical business functions, companies can
establish their e-commerce businesses with reduced upfront expenses, gain a
considerable time to market advantage and access marketing, customer contact and
fulfillment services capable of expanding as their businesses grow.
OUR COMPETITIVE ADVANTAGE
We believe the following attributes of our customer relationship management
services position us to take advantage of this opportunity:
Integrated Service Offerings. We are able to integrate and customize
our marketing, customer contact management and fulfillment services for our
clients, allowing them to manage the interaction with their customers
through a single service provider. We accomplish this integration by
combining our proprietary business processes with both proprietary and
licensed technology and by serving clients through process teams composed
of professionals from each of our three service areas. We have designed
this approach to ensure that we incorporate the necessary services into the
design and implementation of every client program. The integration of our
services allows us to collect data at each point of customer contact and
store this data in a unified database which both our clients and our
employees can access.
By taking advantage of our integrated services, our clients do not
need to expend significant management time and capital resources to
coordinate these services from multiple providers or to design, build and
manage in-house customer relationship management capabilities. During 1999,
we generated a majority of our revenues from clients for whom we performed
more than one of our customer relationship management services.
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Technology and Systems. We have designed our technology and systems to
interface seamlessly with our clients' information systems. We have also
designed our technology and systems to support the rapid deployment of our
integrated service offerings to a growing client base located in diverse
geographical areas and to change the level and combination of services in
response to the evolving needs of our clients. Our proprietary database
technology provides a flexible system for tracking relationships between a
customer and the factors that affect its buying decisions.
Business Processes. We operate under a set of formalized internal
processes and disciplines developed to enable us to expand our business
globally and maintain a consistently high level of service across the
markets that we serve. Our processes measure performance levels to promote
the satisfaction of our clients, their customers and our employees.
International Presence. We have 33 service facilities located
throughout North America and Europe. Nineteen of our North American
facilities are in the United States and one is in Canada. Four of our
international facilities are in Germany, three facilities are in the United
Kingdom and one facility is in each of Austria, France, Ireland, the
Netherlands, Norway and Switzerland. Our U.S. and Canadian facilities share
a common technology infrastructure and customer information database. We
are in the process of converting our international facilities to share
these common systems and database. We have the ability to communicate with
our clients' customers in 11 languages. We believe our geographic presence
positions us to service companies that desire consistent, high quality
customer relationship management services in North America and Europe.
OUR STRATEGY
Our objective is to be the leading global provider of integrated customer
relationship management services to e-commerce and technology companies. To
achieve this objective, we plan to:
Capitalize on the Rapid Growth of the Internet. We have designed our
business processes, systems and infrastructure to expand and adapt with the
rapid growth of Internet access, usage and commerce. We will continue to
invest in the expansion of our operations in order to profitably manage
anticipated demand while maintaining our high quality services.
Extend Our Global Presence. The U.S. has been a leader in Internet
usage; however, according to IDC, Europe, Asia, and Latin America are
projected to have higher user growth rates over the next three years. We
plan to position our company to serve clients across these regions. We are
increasing the size and number of our facilities in Europe so that we can
continue to assist U.S. companies expand their e-commerce activities
abroad, as well as to continue to serve and grow our European client base.
We have recently agreed with one of our existing U.S. clients to provide
our services for them in France and Germany and in the Pacific Rim, a
region in which we do not currently conduct operations. We will also assist
non-U.S. companies to compete in North America.
Expand Our Relationships with Existing Clients. We believe that
existing clients will represent a large portion of our anticipated growth.
As our existing clients grow in size and expand into new geographic
regions, we expect them to require more of the current services we provide
them. We plan to work with our clients to anticipate their growth
requirements and to position our company to increase our services to timely
meet those requirements. Also, we plan to continue our marketing efforts to
clients who are not utilizing our full suite of services in order to expand
the range of services they are currently using.
Attract New E-Commerce Clients. We will continue to direct our sales
and marketing efforts toward companies developing Internet-based
strategies, whether they are emerging e-commerce or established companies.
We will offer these companies our integrated services so they can increase
speed to market, reduce capital outlays and improve the quality of services
delivered to their customers.
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Enhance Our Service Offerings. We will enhance our integrated customer
relationship management offering by selectively expanding the services we
provide to our clients. These services may include consulting services
related to the implementation and execution of Web-based strategies.
OUR SERVICES
Marketing Services
Our marketing services are part of our complete customer relationship
management offerings and are built around our proprietary software. We focus our
marketing services on the following key objectives of our clients:
- acquiring new customers cost effectively;
- identifying the most desirable customers;
- encouraging customer loyalty; and
- increasing the profitability of customer relationships.
We can integrate our marketing services with our fulfillment and customer
contact management services to facilitate data collection and increase the speed
at which we can implement new marketing programs.
We believe our customer relationship management software is valuable to our
clients because it allows us to track the numerous evolving relationships
between our clients' customers and the factors that affect their buying
decisions. The flexible nature of our data architecture allows us to update the
relationships we track without extensive reprogramming. We can then perform
sophisticated analyses to identify, among other things, the attributes of our
clients' most profitable customers and the factors that influence their buying
decisions. With this knowledge, we are better equipped to design marketing
programs to retain the most profitable customers and to attract new customers
with similar attributes. These programs often can be implemented quickly and
efficiently through the integration of marketing services with our fulfillment
and customer contact management services.
The Internet has made it possible for companies to develop a deeper
understanding of their customers; however, we believe traditional methods of
analyzing customer behavior generally do not make sufficient use of the
information available. Traditional methods are designed to track historical
transactions and lack the flexibility required to track evolving relationships.
For this reason, we believe our customer relationship management software is
particularly well suited to e-commerce. We have recently begun to implement our
relational database services and have not yet generated significant revenues
from these services. However, we expect that our marketing services, integrated
with our other service offerings, will benefit our clients as they develop or
expand their Internet-based operations.
We design our marketing services for each clients' particular needs
according to their stage of development, the sophistication of their systems,
and their particular competitive environments. Our specific services include:
- Customer acquisition programs, which include developing and analyzing
databases of prospective customer information, implementing customer
acquisition strategies and managing e-mail and direct mail list
strategies;
- Member-based communications, which include opt-in communication
strategies to enable customers to receive information and offers on
topics they are interested in; continuity programs, where a customer may
enroll to receive products or services at periodic intervals; and loyalty
programs, where customers are rewarded for their continued patronage in
the form of discounts or other valuable goods and services; and
- Building relationship management infrastructure, which includes designing
and building core marketing databases, integrating them into our clients'
operations and performing sophisticated statistical analyses.
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For the year ended December 31, 1999, we derived approximately 6.9% of our
revenues from marketing services.
Customer Contact Management Services
We have designed our customer contact management services to foster lasting
and profitable relationships between our clients and their customers. We
communicate with customers over a variety of channels, including e-mail, online
chat, fax, phone and mail, and coordinate these communications through a unified
database that our clients and our employees can access. We feel this
coordination of communication channels allows us to more effectively respond to
customer inquiries and needs.
We offer customer service, technical support, order processing, payment
processing, and marketing program response processing through a network of 24
customer contact centers in the U.S., Canada and Europe. Through these centers,
we responded to an average of 125,000 customer inquiries each day during
December 1999. In 1999, approximately 86% of our customer contact was conducted
by telephone and in December 1999 approximately 82% of our customer contact was
conducted by telephone. While we expect that voice-based communications will
continue to be an important channel for customer contact management services, we
believe that electronic communications channels will become increasingly
important in our contact with customers. In 1999, we responded to approximately
1 million e-mails.
Our customer contact management employees receive both initial and ongoing
training to provide troubleshooting assistance and information on products,
services and customer orders. We also provide multiple back-end services
including real-time credit card validation and secure processing, tax
calculations, address verification, fraud detection, return authorizations and
customer credits.
For the year ended December 31, 1999, we derived approximately 73.7% of our
revenues from customer contact management services.
Fulfillment Services
Our fulfillment services provide the means by which the products sold by
our clients reach their customers. We provide these services through two
fulfillment centers in the United States and four fulfillment centers in Europe.
We receive client inventory in our fulfillment centers, verify shipment
accuracy, unpack, inspect for damage and stock for shipment. We manage our
clients' inventory by auditing and forecasting inventory levels and identifying
obsolete or damaged inventory. While we maintain and manage inventory on behalf
of our clients, we typically do not take ownership of inventory.
On behalf of our clients, we pick, pack, label and ship their customer
orders and can provide customized packaging, gift wrapping, inserts and
promotional literature for distribution with customer orders. Based upon our
clients' needs, we use a variety of shipping and delivery options, including
next day service. In addition, we offer product return services for our clients,
including receiving and disposing of returned products.
For the year ended December 31, 1999, we derived approximately 19.4% of our
revenues from fulfillment services.
CUSTOMER OPERATIONS PERFORMANCE CENTER CERTIFICATION
We believe our COPC certifications are a competitive advantage in
attracting clients. Customer Operations Performance Center, Inc., or COPC, is an
internationally recognized organization providing certification for outsourced
services and facilities performing these services.
The COPC standard for certification is a comprehensive operations
performance standard that specifies operational measurements of 32 critical
function areas. The COPC standard requires third party customer service
providers to measure both end-user and outsourcer satisfaction, but it does not
define a minimum level of satisfaction (e.g., 95% satisfied) third party
customer service providers must obtain. The
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COPC standard was developed in 1996 by individuals from Microsoft Corporation,
Novell, Dell, Compaq, American Express, L.L. Bean and other customer-focused
companies concerned with the level of service quality provided to customers by
third party customer service providers. We are unaware of any other
certifications applicable to third party customer service providers. You can
also find more information about COPC on their Web site at www.copc.com.
Information contained on COPC's Web site does not constitute a part of this
prospectus and is not incorporated by reference in this prospectus.
In 1999, COPC recertified our facilities in Buffalo, New York; Columbus,
Ohio and Las Vegas, Nevada and granted conditional certification to our
facilities in Dublin, Ireland and Toronto, Ontario. In addition, we have applied
for certification of our Watford, England facility and will apply for
certification of our Albuquerque, New Mexico; Oak Ridge, Tennessee; Davie,
Florida; and Dover, Delaware facilities this year and our Paris, France; Almelo,
Netherlands; Exeter, England; and Huntington, West Virginia facilities in 2001.
To date, none of our facilities that have applied for COPC certification have
failed to obtain certification.
OUR CLIENTS
We direct substantially all of our sales and marketing efforts towards
e-commerce companies and companies seeking to increase their Internet
operations. We target clients who plan to grow globally, understand the
importance of an integrated service offering that is designed to expand with
their business and demonstrate the potential for a long term relationship with
us. Our clients include leading software providers, Internet service providers,
Internet-based retailers, computer and peripheral original equipment
manufacturers and online investment brokerages. A majority of our 1999 revenues
were derived from e-commerce and technology companies. For the year ended
December 31, 1999, our ten largest clients contributed approximately 44.1% of
our revenue and our largest client, Microsoft Corporation, contributed
approximately 9.9% of our revenue.
SALES AND MARKETING
We use a variety of sales channels to market our services to companies
pursuing Internet-based strategies. We currently employ a direct sales force of
32 sales representatives who cover individual clients in North America and
Europe. We maintain close contact with our clients through 17 regional sales
offices across North America and eight countries in Europe. In addition to our
direct sales effort, we also promote our company through relationships with web
developers, systems integrators and other business process outsourcing
companies.
We conduct a comprehensive marketing program to support our sales efforts
and to actively promote the ClientLogic brand. We participate in a variety of
Internet, marketing, customer relationship management and financial industry
conferences and encourage our officers and employees to pursue speaking
engagements at these conferences. In addition, we host an annual customer
relationship management conference for current and prospective clients.
TECHNOLOGY
Our information technology systems are an important part of our ability to
provide high quality customer relationship management services. We have designed
our systems to improve our clients' speed to market, the consistency of our
services and the reliability of our systems and to scale cost effectively, as
follows:
- Speed to market. We use common business applications, meaning that
computer code written once can be used repeatedly for multiple
applications and across multiple communications channels. This improves
our clients' speed to market by reducing the time we spend in designing
new and adjusting our existing customer relationship management services.
- Consistent levels of service. By using databases that are shared among
our North American fulfillment, customer contact and marketing services
systems, we are able to track all contacts in
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real time. We are in the process of enabling our international facilities
to share these common databases.
- Systems reliability. The reliability of our systems is achieved by using
industry standard hardware and software in addition to a series of
redundant design features.
- Scalability. Our technology systems are designed to be expandable,
allowing us to cost effectively increase our computing power to meet the
growing needs of our clients.
We use licensed software for our contact management, inventory management,
warehouse management and e-mail management and our proprietary software for
order management and marketing services applications.
We deploy industry standard hardware and an open architecture that includes
Windows NT for our desktops, Hewlett-Packard/HP UX and Sun Microsystems/Solaris
for our servers, Oracle, Informix, and SQL Server for our databases and a frame
relay network to connect facilities and data centers.
We currently have five data centers, each of which has redundant power
sources, uninterruptable power systems and security over access to our systems
and facilities. Each data center also has access to all of the software
applications used across all of our service offerings, providing for both
redundancy and increases in capacity. We manage our technology infrastructure
from centralized operating centers that are manned by skilled technicians 24
hours a day, seven days a week.
As of December 31, 1999, we employed 225 employees in our technical
services organization. We plan to increase our technical services organization
by up to an additional 60 employees by the end of 2000.
COMPETITION
We operate in an industry characterized by intense competition. Many of our
competitors offer one or more of the same services we provide. However, we are
unaware of any other company which provides comprehensive integrated customer
relationship management services allowing clients to outsource their marketing,
customer contact and fulfillment functions to a single provider.
Primary competitors for our marketing services include Acxiom, Doubleclick,
E.piphany and Harte-Hanks. With respect to our marketing services, we compete on
the basis of:
- quality and comprehensiveness of the information provided;
- flexibility to assemble and analyze information based on numerous
factors;
- ability to prepare customized reports in understandable and useful
formats; and
- capability to process analyses in a timely manner.
Primary competitors for our customer contact management services include
ASD Systems, OrderTrust, PFSweb, Startek and Sykes Enterprises. With respect to
our customer contact management services, we compete on the basis of:
- ability to provide efficient and reliable 24-hour customer
communications;
- quality of customer service;
- quality of information technology;
- capability to hire and train employees to meet cyclical and growth
demand; and
- quality of back-end services such as payment processing and verification,
reporting, and product return management.
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Primary competitors for our fulfillment services include ASD Systems,
Fingerhut, OrderTrust and PFSweb. With respect to our fulfillment services, we
compete on the basis of:
- the ability to coordinate manufacturers, transportation providers and
other suppliers;
- inventory management;
- number, location and reach of fulfillment centers; and
- flexibility to meet seasonal and other changes in demand for products.
We believe that we presently compete favorably with respect to each of the
services we provide, as well as with respect to other general factors such as
pricing. However, the market for our services is still changing and we expect to
face further competition from new market entrants and consolidation from
existing providers in the future, some of which may have greater resources or
may offer more diverse services than us.
FACILITIES
We currently operate 24 customer contact management centers, six
fulfillment centers, six marketing centers and five administration centers in
the United States, Canada, Austria, the United Kingdom, France, Germany,
Ireland, The Netherlands, Norway and Switzerland. We offer multiple services at
three of these facilities. Our facilities cover approximately 1.56 million
square feet, of which our fulfillment centers represent approximately 763,730
square feet and our customer contact management centers represent approximately
699,091 square feet. We lease all of our facilities and we believe our
facilities and equipment are in good condition and are well maintained. Our
employees at these locations are able to communicate with clients and their
customers in 11 languages. Our worldwide headquarters are located in Nashville,
Tennessee.
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Set forth below is the location, principal function and size for our
principal facilities as of December 31, 1999:
<TABLE>
<CAPTION>
AGGREGATE
LOCATION PRINCIPAL FUNCTION SQUARE FT.
- -------- ------------------ ----------
<S> <C> <C>
U.S.
Albuquerque, NM......................... Customer Contact 57,478
Buffalo, NY............................. Customer Contact 138,678
Clifton, NJ............................. Customer Contact 78,645
Columbus, OH............................ Fulfillment 202,496
Denver, CO.............................. Marketing 13,168
Dover, DE............................... Customer Contact and Fulfillment 472,472
Huntington, WV.......................... Customer Contact 33,000
Las Vegas, NV........................... Customer Contact 50,536
Nashville, TN........................... Corporate Headquarters 19,453
Oak Ridge, TN........................... Customer Contact 50,000
Weehawken, NJ........................... Marketing 18,113
CANADA
Toronto, ON............................. Customer Contact 43,404
EUROPE
Salzburg, Austria....................... Customer Contact 7,191
Paris, France........................... Customer Contact 24,854
Duisburg, Germany....................... Customer Contact 13,724
Dusseldorf, Germany..................... Customer Contact 11,520
Dublin, Ireland......................... Customer Contact and Fulfillment 49,500
Almelo, Netherlands..................... Customer Contact and Fulfillment 142,085
Oslo, Norway............................ Customer Contact 12,583
Exeter, United Kingdom.................. Customer Contact and Fulfillment 59,486
Watford, United Kingdom................. Customer Contact 10,000
</TABLE>
In addition to the facilities listed above, at December 31, 1999, we
maintained additional facilities in Dallas, Texas; Davie, Florida; Fairlawn, New
Jersey; Katonah, New York; Concord, California; Doylestown, Pennsylvania;
Oberhausen, Germany; Nordhorn, Germany; The Hague, Netherlands and St. Gallen,
Switzerland. We also have several small sales and marketing offices located
throughout North America and Europe, all of which are leased.
EMPLOYEES
As of December 31, 1999, we employed approximately 7,129 people, which
include 5,489 customer support personnel at our customer contact centers, 286
fulfillment personnel at our fulfillment centers and 213 marketing services
personnel. We have 5,477 full-time and 1,652 part-time and temporary personnel.
We have approximately 5,616 employees in North America and 1,513 employees in
Europe. None of our employees is subject to a collective bargaining agreement.
We consider our relations with our employees to be good.
GOVERNMENT REGULATION AND LEGAL ENVIRONMENT
General. There are an increasing number of laws and regulations pertaining
to the Internet. In addition, a number of legislative and regulatory proposals
are under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, user privacy, taxation and quality of products and services. Moreover,
whether existing laws governing issues such as intellectual property ownership
and infringement, copyright, trademark, trade secret, employment and personal
privacy are applicable to the Internet is uncertain and developing. Any new
legislation or regulation, or the
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application or interpretation of existing laws, may decrease the growth in the
use of the Internet, which could in turn decrease the demand for our services,
increase our cost of doing business or otherwise have a material adverse effect
on our business, results of operations and financial condition.
Privacy Concerns. The United States Federal Trade Commission, or FTC, is
considering adopting regulations regarding the collection and use of personal
identifying information obtained from individuals when accessing Web sites, with
particular emphasis on access by minors. These regulations may include
requirements that companies establish procedures to, among other things:
- give adequate notice to consumers regarding information collection and
disclosure practices;
- provide consumers with the ability to have personal identifying
information deleted from a company's database;
- provide consumers with access to their personal information and with the
ability to rectify inaccurate information;
- clearly identify affiliations or a lack of affiliations with third
parties that may collect information or sponsor activities on a company's
Web site; and
- obtain express parental consent prior to collecting and using personal
identifying information obtained about children under 13 years of age.
In addition, Representative Bruce Vento, of the United States House of
Representatives, has introduced legislation that would:
- prohibit an interactive computer service from disclosing to a third party
any personal identifying information provided by a subscriber without the
subscriber's consent;
- prohibit an interactive computer service from knowingly disclosing to a
third party any personal identifying information provided by a subscriber
that the interactive computer service has knowingly falsified;
- require, at a subscriber's request, an interactive computer service to:
(1) provide the subscriber's personal identifying information maintained
by the service and (2) permit the subscriber to verify and correct the
information and prohibits charging a fee for the correction of the
information;
- grant the FTC the authority to: (1) investigate whether a service has
been or is engaged in any act or practice prohibited by this legislation
and (2) if so, issue a cease and desist order if an interactive computer
service were in violation of specified provisions of the Federal Trade
Commission Act; and
- grant subscribers aggrieved by a violation of this legislation a right to
obtain relief in a civil action.
Our business model is in part based upon our ability to obtain information
about consumers and to use this information for our marketing services. If new
laws or regulations are adopted that limit or eliminate our ability to use this
information, our business, results of operations and financial condition could
be materially adversely affected. Even in the absence of new legislation or
regulations, the FTC has begun investigations into the privacy practices of
companies that collect information on the Internet. The FTC's regulatory and
enforcement efforts alone may adversely affect the ability to collect
demographic and personal information, which similarly could have an adverse
effect on our ability to provide our marketing services.
It is also possible that "cookies," or information keyed to a specific
server, file pathway or directory location that is stored on a user's hard
drive, possibly without the user's knowledge, which are used to track
demographic information and to target advertising, may become subject to laws
limiting or prohibiting their use. A number of Internet commentators, advocates
and governmental bodies in the United States and other countries have urged the
passage of laws limiting or abolishing the use of cookies. Limitations on or
elimination of our use of cookies could limit the effectiveness of our data
collection
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<PAGE> 54
processes, which could have a material adverse effect on our business, results
of operations and financial condition.
The European Union has adopted a directive that imposes restrictions on the
collection, storage, transfer and use of personal data. Under the directive, EU
citizens are guaranteed rights to access their data, rights to know where the
data originated, rights to have inaccurate data rectified, rights to recourse in
the event of unlawful processing and rights to withhold permission to use their
data for direct marketing. The directive could, among other things, affect our
ability to collect information over the Internet from individuals in EU member
countries, and may impose restrictions that are more stringent than current
Internet privacy standard in the United States. In particular, our facilities
located in EU countries will not be allowed to send personal information to
countries that do not maintain adequate standards of privacy. The directive does
not, however, define what standards of privacy are adequate. As a result, the
directive may adversely affect our activities because we engage in data
collection from users in EU member countries.
Internet Taxation. A number of legislative proposals have been made at the
United States federal, state and local level, and by certain European
governments, that would impose additional taxes on the sale of goods and
services over the Internet and certain states have taken measures to tax
Internet-related activities. Although the United States Congress recently placed
a three-year moratorium on state and local taxes on Internet access and
discriminatory taxes on electronic commerce, existing state or local laws were
expressly excepted from this moratorium. Further, once this moratorium is
lifted, some type of federal and/or state taxes may be imposed upon Internet
commerce. This legislation, or other attempts at regulating commerce over the
Internet, may substantially impede the growth of commerce on the Internet and,
as a result, materially adversely affect our opportunity to derive financial
benefit from those activities.
LEGAL MATTERS
From time to time we may be involved in litigation arising in the normal
course of our business operations. As of the date of this prospectus, we are not
a party to any litigation we believe could reasonably be expected to have a
material adverse effect on our business or results of operations.
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<PAGE> 55
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning our current directors and
executive officers. The ages listed below are as of January 31, 2000.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Thomas O. Harbison....... 56 Chairman of the Board of Directors
Mark R. Briggs........... 43 President, Chief Executive Officer and Chief Operating
Officer, Director
Gene S. Morphis.......... 51 Chief Financial Officer and Secretary
Jules T. Kortenhorst..... 38 Chief of International Operations, Director
Joanne G. Biltekoff...... 51 Chief Administrative Officer
Julie M. Casteel......... 38 Chief Client Management Officer
Robert B. Fetter......... 43 Chief Marketing Officer
Steven M. Kawalick....... 48 General Counsel
Jeffrey J. Michel........ 52 Chief Technology Officer
Lee O. Waters............ 41 Chief Solution Delivery Officer
Thomas P. Dea............ 35 Director
Seth M. Mersky........... 40 Director
</TABLE>
Thomas O. Harbison has served as Chairman of the Board of ClientLogic since
June 1999. Mr. Harbison has served as a director of ClientLogic since September
1998 and served as our Chief Executive Officer from September 1998 through June
1999. Mr. Harbison also serves as the Managing Director of Onex Service
Partners. Before joining ClientLogic, Mr. Harbison served as President of
CustomerSolutions, a division of Electronic Data Systems, from November 1996
through February 1998. From September 1995 to October 1996, Mr. Harbison served
as President of EDS' Media Strategic Business unit. In addition, Mr. Harbison
served as a director and as Chief Executive Officer of Neodata Corporation, of
which Mr. Harbison was a founder, from February 1983 through June 1993.
Mark R. Briggs has served as Chief Executive Officer of ClientLogic since
June 1999. Mr. Briggs has been a director of ClientLogic since September 1998
and has served as President and Chief Operating Officer of ClientLogic since
September 1998. Mr. Briggs served as President and Chief Executive Officer of
SOFTBANK Services Group from January 1997 to September 1998 when ClientLogic
acquired SOFTBANK Services Group. Mr. Briggs also serves on the board of
directors of En Pointe Technologies, Inc., a national provider of information
technology products and services, and its Internet focused subsidiary,
FirstSource.com. From March 1990 through December 1996, Mr. Briggs held several
positions with Intelligent Electronics Inc., including Vice President, Chief
Financial Officer and President of Intelligent Electronics' Corporate Service
and Franchise Divisions and Chief Executive Officer of Intelligent Electronics'
Reseller Network Division.
Gene S. Morphis has served as Chief Financial Officer of ClientLogic since
August 1999 and served as Senior Vice President of ClientLogic from May 1999 to
August 1999. Before joining ClientLogic, Mr. Morphis served as Senior Vice
President and Chief Financial Officer of Modus Media International, Inc. from
December 1997 through April 1999. From April 1995 to December 1997, Mr. Morphis
served as Senior Vice President and Chief Financial Officer of Stream
International Inc. Prior to joining Stream International, Inc., Mr. Morphis
served as Executive Vice President and Chief Financial Officer of CVS
Corporation from 1992 to April 1995.
Jules T. Kortenhorst has served as a director and as Chief of International
Operations of ClientLogic since October 1999, when ClientLogic acquired Cordena.
Mr. Kortenhorst served as President and Chief Executive Officer of Cordena from
November 1997 through October 1999. Prior to joining Cordena, Mr. Kortenhorst
served as Chief Operating Officer of Staff Leasing L.P. from August 1994 through
July 1996. From 1986 to 1994, Mr. Kortenhorst was employed by Royal Dutch Shell
in various international
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<PAGE> 56
positions. Mr. Kortenhorst has served as the Chairman of the Board of Panta
Electronics S.A.R.L. since January 1998. Mr. Kortenhorst also serves as a
director of the American University, a nonprofit corporation with locations in
the U.S. and Bulgaria.
Joanne G. Biltekoff has served as ClientLogic's Chief Administrative
Officer since September 1998 and currently oversees ClientLogic's
administrative, facilities, quality initiatives and human resources departments.
Prior to joining ClientLogic, Ms. Biltekoff served as Executive Vice President
of Administration for SOFTBANK Services Group from August 1993 through September
1998 when ClientLogic acquired SOFTBANK Services Group. Prior to her employment
with SOFTBANK Services Group, Ms. Biltekoff served as Executive Vice President
of Elan, Inc.
Julie M. Casteel has served as ClientLogic's Chief Client Management
Officer since October 1998. Prior to joining ClientLogic, Ms. Casteel served as
Vice President of Strategic Sales for Centrobe, an Electronic Data Systems
company, from November 1997 through September 1998. From February 1991 through
October 1997, Ms. Casteel served as Vice President of Strategic Sales for
Neodata Corporation. Ms. Casteel has also been a board member of the Society of
Consumer Affairs Professionals since April 1997.
Robert A. Fetter has served as ClientLogic's Chief Marketing Officer since
April 1999. Prior to joining ClientLogic, Mr. Fetter served as President and
Chief Executive Officer of Prime Response Americas, a subsidiary of Prime
Response Group, Inc. from October 1997 through March 1999. From January 1995
through September 1997, Mr. Fetter served as President of dbINTELLECT
Technologies, a division of Electronic Data Systems.
Steven M. Kawalick has served as General Counsel of ClientLogic since
October 1998. Mr. Kawalick also served as Chief Financial Officer for
ClientLogic's European operations from November 1998 through July 1999 and as
General Counsel and Vice President - Special Projects of SOFTBANK Services Group
from April 1998 through September 1998. Prior to joining SOFTBANK Services
Group, Mr. Kawalick served as General Counsel of Intelligent Electronics from
April 1997 through January 1998. Mr. Kawalick also served as Corporate Counsel
and Assistant Secretary of Intelligent Electronics from September 1994 through
April 1997.
Jeffrey J. Michel has served as the Chief Technology Officer of ClientLogic
since June 1999. Prior to joining ClientLogic, Mr. Michel served as President of
AIMS, the outsourcing unit of Alliance Data Systems, Inc. from August 1998
through May 1999. Mr. Michel served as Chief Information Officer of Alliance
Data Systems from April 1996 through July 1998. Mr. Michel also served as Chief
Information Officer of Electronic Payment Service, Inc. from September 1993
through February 1996.
Lee O. Waters joined ClientLogic in October 1998 as ClientLogic's Chief
Solution Delivery Officer. Prior to joining ClientLogic, Mr. Waters served as
Executive Vice President of SOFTBANK Services Group from September 1997 to
September 1998 where he was responsible for all client process teams. Prior to
that time, Mr. Waters served as Executive Vice President of the Inbound
Teleservices Division of West Teleservices Corporation from 1994 through August
1997. Mr. Waters also served in a variety of sales management and administrative
positions at FedEx Corporation from 1985 through 1994 where he last held the
position of Regional Manager in FedEx Logistics Services.
Thomas P. Dea has served as a director of ClientLogic since September 1998
and was a director of our predecessor company, North Direct Response, Inc., from
April 1998 until September 1998. Mr. Dea served as Secretary of ClientLogic from
September 1998 through April 1999 and served as Vice President of ClientLogic
from January 1999 through January 2000. Mr. Dea is also a Vice President of Onex
and a director of Lantic Sugar Limited. Mr. Dea was a Principal at Onex from
January 1997 through December 1999 and an Associate at Onex from June 1995
through December 1996. Prior to joining Onex, Mr. Dea worked as an Associate at
CIBC Wood Gundy Capital, now CIBC Capital Partners, from August 1993 to June
1995.
Seth M. Mersky has served as a director of ClientLogic since September
1998. Mr. Mersky served as Vice President of ClientLogic from December 1998 to
January 2000. Mr. Mersky also served as Chairman
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<PAGE> 57
of the Board of ClientLogic from September 1998 through June 1999. He was also
Chairman of the Board of our predecessor company, North Direct Response, Inc.,
from April 1998 until September 1998. Mr. Mersky has been a Vice President of
Onex since April 1997. He also serves as the Chairman of the Board of Rogers
Sugar Limited and Lantic Sugar Limited, positions he has held since September
1997. Prior to joining Onex, Mr. Mersky was a Senior Vice President of The Bank
of Nova Scotia from May 1993 to April 1997.
COMPOSITION OF OUR BOARD OF DIRECTORS
Our board of directors is divided into three classes serving staggered
terms. Directors in each class serve for three year terms. Each year, the
directors of one class will stand for election as their terms of office expire.
The Class I directors have terms of office expiring in 2001; the Class II
directors have terms of office expiring in 2002; and the Class III directors
have terms of office expiring in 2003.
We currently have five directors, including our Chairman of the Board. Our
board of directors is evaluating candidates to be elected as independent
directors. To be an independent director, an individual must satisfy the
qualifications specified by the NASD in its Marketplace Rules. Under these
rules, an independent director is a person other than an officer or employee of
our company or our subsidiaries or any other individual having a relationship
which, in the opinion of our board of directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities of a
director. We anticipate that our board of directors will elect three independent
directors prior to or concurrently with the completion of this offering. The
independent directors will serve as a Class I directors. Thomas O. Harbison, our
Chairman of the Board, Mark R. Briggs and Jules T. Kortenhorst serve as our
Class II directors. Thomas P. Dea and Seth M. Mersky serve as our Class III
directors.
COMMITTEES OF OUR BOARD OF DIRECTORS
Our board of directors has appointed an audit committee and a compensation
committee.
Audit Committee. The members of our audit committee are Messrs. Harbison,
Dea and Mersky. After this offering, the members of our audit committee will be
our three independent directors. The functions of the audit committee include:
- reviewing the adequacy of our system of internal accounting controls;
- reviewing the results of our independent accountant's annual audit;
- determining the duties and responsibilities of the internal audit staff;
- reviewing the scope and results of our internal auditing procedures;
- reviewing the audit reports submitted by both our independent accountants
and our internal audit staff; and
- annually recommending independent accountants.
Compensation Committee. The members of our compensation committee are
Messrs. Briggs, Harbison and Mersky. After this offering, the members of our
compensation committee will be Mr. Mersky and two of our independent directors.
The functions of the compensation committee include:
- reviewing our general compensation strategy;
- reviewing and approving compensation for our executive officers;
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<PAGE> 58
- reviewing the terms of employment agreements for our executive officers;
and
- administering our compensation and benefit plans, including our stock
option plan and deferred compensation plan.
In addition, our compensation committee will have a sub-committee composed of
two of our independent directors. The function of this sub-committee will be to
review and approve incentive compensation for our executive officers in
accordance with Section 162(m) of the Internal Revenue Code.
COMPENSATION OF DIRECTORS
We expect that our independent directors will receive an annual fee for
their services. We have not yet determined the amount of this fee. Other than
our independent directors, our directors do not receive compensation for their
services as directors. We reimburse all of our directors for their reasonable
out-of-pocket expenses in connection with their travel to and attendance at the
meetings of the board of directors or board committees.
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation Table. The following table provides information
regarding the compensation paid in 1999 to our Chief Executive Officer and each
of our four other most highly compensated executive officers serving in that
capacity on December 31, 1999.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------------------------------------
SECURITIES
BONUS OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) $(1) COMPENSATION($) OPTIONS(#)(2) COMPENSATION($)
- --------------------------- --------- ------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Thomas O. Harbison...................... 360,000 -- -- -- 50,753(4)
Chairman of the Board of Directors and
former Chief Executive
Officer(3)
Mark R. Briggs.......................... 250,004 -- 100,000(5) 643,683(6) 68,014(7)
President, Chief Executive Officer and
Chief Operating Officer
Gene S. Morphis......................... 242,307(9) 100,000 -- 42,919(10) 66,304(11)
Chief Financial Officer and
Secretary(8)
Joanne G. Biltekoff..................... 160,000 -- -- 25,715 677(12)
Chief Administrative Officer
Lee O. Waters........................... 207,077 -- -- 25,715 65,000(13)
Chief Solution Delivery Officer
</TABLE>
- ---------------
(1) Bonuses earned in 1999 will be paid in 2000.
(2) Unless otherwise indicated, these figures reflect the number of shares of
Class A common stock that each named executive may acquire upon the
exercise of options granted under our stock option plan. See "-- Benefit
Plans -- Stock Option Plan."
(3) Mr. Harbison's salary for 1999 was paid by Onex Service Partners, an
affiliate of Onex, pursuant to his employment agreement with that
partnership. The employment agreement provides that Mr. Harbison will
receive an annual salary of $360,000 for his services to Onex Service
Partners, including serving as the Chief Executive Officer and as a
director or other executive officer of ClientLogic on behalf of Onex
Service Partners. Mr. Harbison served as our Chief Executive Officer from
September 1998 through June 1999 and has served as our Chairman of the
Board since June 1999.
(4) Represents a car allowance of $18,785 and life insurance premiums in the
amount of $31,968 paid by Onex Service Partners during 1999.
(5) Represents $100,000 of Mr. Briggs' base salary for 1999 which Mr. Briggs
elected to defer in accordance with our deferred compensation plan. Mr.
Briggs' employment agreement provides that
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<PAGE> 59
Mr. Briggs may defer up to $100,000 of his salary during each of the first
two years of his employment to purchase phantom stock units under our
deferred compensation plan at a price of $1.56 per unit. Therefore, Mr.
Briggs acquired 64,103 phantom stock units in 1999. Under our deferred
compensation plan, each phantom stock unit will become available for
distribution upon the occurrence of events specified in the deferred
compensation plan. Upon distribution, each phantom stock unit will be
converted into cash in an amount equal to the market value of one share of
our Class A common stock at the time of conversion or one share of Class A
common stock, as determined by our compensation committee. See "-- Benefit
Plans -- Deferred Compensation Plan." We expect that Mr. Briggs' phantom
stock units will become available for distribution upon the completion of
this offering.
(6) Represents shares of Class A common stock that Mr. Briggs may acquire upon
the exercise of options granted by ClientLogic under our stock option plan.
(7) Includes $5,717 we paid to Mr. Briggs as reimbursement for expenses in
connection with Mr. Briggs' relocation to Nashville, Tennessee, $60,000 of
life insurance premiums we paid on Mr. Briggs' behalf and $2,297 of
matching amounts we contributed to our 401(k) plan.
(8) Mr. Morphis commenced his employment with ClientLogic in April 1999.
(9) From April through September of 1999, Mr. Morphis was paid $184,615 by Onex
Service Partners for his services to ClientLogic. From October through
December of 1999, Mr. Morphis was paid $57,692 by our company.
(10) Represents the number of shares of Class A common stock that Mr. Morphis
may acquire upon the exercise of an option granted under a contingent
securities purchase agreement between Mr. Morphis and ClientLogic. See
"-- Employment Agreements -- Gene S. Morphis Employment Agreement".
(11) Represents reimbursement for expenses in connection with Mr. Morphis'
relocation to Nashville, Tennessee.
(12) Represents $677 of matching amounts we contributed to our 401(k) plan.
(13) Represents reimbursement for expenses in connection with Mr. Waters'
relocation to Nashville, Tennessee.
Option Grants During 1999. The following table summarizes option grants
made with respect to our common stock during 1999 to the executive officers
named in the summary compensation table above:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
% OF ASSUMED ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS STOCK PRICE APPRECIATION
SECURITIES GRANTED TO EXERCISE FOR OPTION TERM(2)
UNDERLYING EMPLOYEES IN PRICE ------------------------------
OPTIONS(1) 1999 ($/SHARE) EXPIRATION DATE 5%($) 10%($)
------------- --------------- --------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas O. Harbison... -- -- -- -- -- --
Mark R. Briggs....... 375,000(3) 14.94 1.87 January 27, 2009 441,012 1,117,612
1,844(3) 0.07 2.33 March 19, 2009 2,702 6,848
223,124(3) 8.89 3.50 October 7, 2009 491,125 1,244,608
43,715(3) 1.74 7.78 December 6, 2009 213,889 542,036
Gene S. Morphis...... 42,919(4) 1.71 2.33 June 1, 2000 62,890 159,376
Joanne G.
Biltekoff.......... 25,715 1.02 5.44 November 22, 2009 87,976 222,948
Lee O. Waters........ 25,715 1.02 5.44 November 22, 2009 87,976 222,948
</TABLE>
- ---------------
(1) Unless otherwise indicated, these figures reflect the number of shares of
Class A common stock that each named executive may acquire upon the exercise
of options granted under our stock option plan. See " -- Benefit
Plans -- Stock Option Plan." Unless otherwise indicated, options granted
under our stock option plan vest at a rate of 25% over 4 years.
(2) Amounts represent hypothetical gains that could be achieved for the listed
options if exercised immediately prior to the expiration date. The 5% and
10% assumed annual rates of compounded stock price appreciation are required
by rules of the Commission and do not represent our estimates or projections
of the future prices of our Class A common stock. These amounts represent
assumed rates
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<PAGE> 60
of appreciation in the value of our Class A common stock from the deemed
fair market value for accounting purposes on the date of grant. Actual
gains, if any, over stock option exercise prices are dependent on the future
performance of our Class A common stock and overall stock market conditions.
The potential values reflected in this table may not be achieved. All
amounts have been rounded to the nearest whole dollar.
(3) Represents an aggregate of 643,683 shares of Class A common stock that Mr.
Briggs may acquire upon the exercise of options granted under our stock
option plan. These options vest 25% on the second anniversary of the date of
grant and 75% on the third anniversary of the date of grant. However, the
vesting of these options will accelerate upon the completion of this
offering. These options are not exercisable unless and until Onex realizes a
15% compounded annual internal rate of return on its equity investment in
our company, after expenses.
(4) Represents the number of shares of Class A common stock that Mr. Morphis may
acquire upon the exercise of an option granted by ClientLogic under Mr.
Morphis' contingent securities purchase agreement. These options will vest
and become exercisable upon payment of Mr. Morphis' 1999 bonus. As of the
date of this prospectus, we have not yet paid Mr. Morphis' 1999 bonus. See
"-- Employment Agreements -- Gene S. Morphis Employment Agreement."
Option Exercises During 1999 and Year End Option Values. The following
table sets forth information about the number and value of unexercised options
held at December 31, 1999 by each of our executive officers named in the summary
compensation table above. None of these executive officers exercised options
during the year ended December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas O. Harbison......................... -- -- -- --
Mark R. Briggs(2).......................... -- 1,479,398 -- $19,060,671
Gene S. Morphis(3)......................... -- 42,919 -- $ 543,784
Joanne G. Biltekoff........................ 28,929 112,501 $366,530 $ 1,345,414
Lee O. Waters.............................. 28,929 112,501 $366,530 $ 1,345,414
</TABLE>
- ---------------
(1) Based upon an assumed value of $15.00 per share, the midpoint of the initial
public offering price range.
(2) These options will vest upon the completion of this offering but are not
exercisable until Onex realizes a 15% compounded annual internal rate of
return on its equity investment in our company, after expenses.
(3) Represents the number of shares of Class A common stock that Mr. Morphis may
acquire upon the exercise of an option granted by ClientLogic under Mr.
Morphis' contingent securities purchase agreement. These options will vest
and become exercisable upon payment of Mr. Morphis' 1999 bonus. As of the
date of this prospectus, we have not yet paid Mr. Morphis' 1999 bonus. See
"-- Employment Agreements -- Gene S. Morphis Employment Agreement."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors created our compensation committee in August 1999.
Prior to the creation of the compensation committee, compensation decisions were
made by the entire board of directors of ClientLogic. Messrs. Briggs and
Harbison each served as both an executive officer and a director between January
and August 1999 and, during such time, participated in deliberations of the
board of directors concerning compensation of executive officers. However, Mr.
Harbison's salary is paid by Onex Service Partners and not by our company. In
addition, neither Mr. Mersky nor Mr. Dea has received any compensation from our
company for their services as executive officers.
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<PAGE> 61
From the time of the creation of our compensation committee in August 1999
to the end of our 1999 fiscal year, Messrs. Harbison, Briggs and Mersky were the
members of the compensation committee. Mr. Harbison has served as our Chairman
of the Board since June 1999 and served as our Chief Executive Officer from
September 1998 to June 1999. Mr. Briggs has served as our Chief Executive
Officer since June 1999 and has served as our President and Chief Operating
Officer since September 1998. Mr. Mersky served as a Vice President of our
company from December 1998 to January 2000 and served as our Chairman of the
Board from September 1998 to June 1999. Mr. Mersky received no compensation from
our company for his services as Vice President or Chairman of the Board.
Messrs. Harbison, Dea and Mersky are affiliates of Onex Service Partners
which is a party to a Monitoring and Oversight Agreement and a Financial
Advisory Agreement with our company pursuant to which we pay fees to Onex
Service Partners in exchange for management, financial and other advisory
services. See "Certain Relationships and Related Party
Transactions -- Monitoring and Oversight Agreement" and "-- Financial Advisory
Agreement." In addition, each of Messrs. Harbison, Briggs, Dea and Mersky is a
party to an indemnification agreement with our company with respect to his
service as a director of our company. See "Certain Relationships and Related
Party Transactions -- Director Indemnity Agreements."
No executive officer of our company serves on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of our board of directors or compensation committee.
EMPLOYMENT AGREEMENTS
Thomas O. Harbison Employment Agreement with Onex Service Partners
On August 13, 1998, Onex Service Partners entered into an employment
agreement with Mr. Harbison. Onex Service Partners is a general partnership
whose general partners are OMI Partnership Holdings Ltd., an affiliate of Onex,
and the Harbison Family Limited Partnership. Mr. Harbison's employment agreement
provides that, in addition to his services to Onex Service Partners, Mr.
Harbison shall serve, on Onex Service Partner's behalf, as the Chief Executive
Officer or as a director or other executive officer of our company. Mr. Harbison
served as our Chief Executive Officer from September 1998 through June 1999 and
has served as our Chairman of the Board since June 1999.
The employment agreement has an initial term of two years from the date of
the agreement and extends automatically for one year terms unless terminated by
Onex Service Partners or Mr. Harbison by three months notice prior to the end of
the initial term or any subsequent one-year term.
The employment agreement provides that Mr. Harbison shall receive an annual
base salary of $360,000, which may be increased, but not decreased, after the
first year as determined by the general partner of Onex Service Partners. The
employment agreement does not specifically provide for a bonus for Mr. Harbison,
but the partnership has discretion to pay Mr. Harbison a bonus based on his
contribution to the partnership and any other criteria which the partnership
considers relevant. The employment agreement also provides that Mr. Harbison is
entitled to a car allowance of $1,500 per month, payment of life insurance
premiums of $30,000 per year and to benefits typically provided to senior
executives in our industry. Our company is not the beneficiary under Mr.
Harbison's life insurance policy.
The employment agreement also provides that if Mr. Harbison's employment is
terminated for cause or due to his disability, Mr. Harbison will receive his
base salary through the date of termination. The employment agreement terminates
on Mr. Harbison's death and his legal representatives shall be entitled to
receive Mr. Harbison's base salary for 45 days after his death. If he is
terminated for any reason other than for cause or disability, Mr. Harbison will
be entitled to receive his base salary for the remaining term of the agreement.
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<PAGE> 62
Mark R. Briggs Employment Agreement
On September 30, 1998, we entered into an employment agreement with Mr.
Briggs. This agreement provides that Mr. Briggs will serve as our President
through December 31, 2001, unless terminated earlier as provided in his
employment agreement.
The compensation provided to Mr. Briggs under his employment agreement
includes an annual base salary of $300,000, subject to upward adjustment at the
sole discretion of our board of directors. Mr. Briggs' current base salary is
$350,000. In addition, Mr. Briggs is entitled to the same benefits as are
generally provided to our senior executives as long as Mr. Briggs' employment
agreement is in force. The employment agreement provides that the board of
directors will determine Mr. Briggs' bonus for the year ended December 31, 1999
based upon whether we achieve specific levels of earnings before interest,
income taxes, depreciation and amortization. For periods after 1999, the board
of directors is required to establish bonus targets for Mr. Briggs consistent
with industry practices for similarly situated executives.
Mr. Briggs is entitled to the following additional benefits under his
employment agreement:
- deferral of up to $100,000 of Mr. Briggs' compensation in each of the
first two years following September 30, 1998 through the purchase of
phantom stock units, at a price of $1.56 per unit, in accordance with our
deferred compensation plan;
- payment of up to $60,000 in annual premiums, from September 1998 through
September 2001, to maintain Mr. Briggs' $1 million split-dollar life
insurance policy; and
- reimbursement for Mr. Briggs' reasonable business expenses, in accordance
with our then-existing policies.
Mr. Briggs' employment agreement provides that, in the event that we issue
to Onex any number of shares of Class A or Class B common stock during the term
of Mr. Briggs' employment agreement in connection with the acquisition of an
unaffiliated company or business over which Mr. Briggs will have direct control,
we must grant to Mr. Briggs options to purchase shares of Class A common stock
equal to two percent (2%) of the aggregate number of additional shares of Class
A or Class B common stock so issued. The options will have an exercise price
equal to the price per share of Class A or Class B common stock paid for the
additional shares to which the options relate, as determined by the board of
directors. These options vest 25% on the second anniversary of the date of grant
and 75% on the third anniversary of the date of grant and are not exercisable
unless and until Onex realizes a 15% compounded annual internal rate of return
on its equity investment in our company, after expenses. If Mr. Briggs'
employment is terminated for cause, he forfeits these options, whether or not
the options have vested at the time of his termination.
Mr. Briggs' employment agreement also provides that if Mr. Briggs'
employment is terminated without cause or Mr. Briggs resigns for good reason,
Mr. Briggs will continue to receive his then-current base salary and benefits,
including the premium payments on his split-dollar life insurance policy, for a
period of one year following termination, as well as any accrued but unpaid base
salary and any additional payments to which he is entitled under the terms of
the benefit plans or programs in which he participates at the time. We may
terminate Mr. Briggs' employment upon his death or permanent disability and no
further compensation will be payable, except that he or his estate, heirs or
beneficiaries, as applicable, will receive any accrued but unpaid base salary
and any additional payments to which he is entitled under the terms of the
benefit plans or programs in which he participated at the time of termination.
Mr. Briggs' employment agreement also provides that he will not compete with or
solicit employees from our company for a period of one year from the date of his
termination or three years from the date of termination if he has vested options
to purchase our common stock.
Gene S. Morphis Employment Agreement
We have entered into an employment agreement with Mr. Morphis, effective as
of April 1, 1999. Mr. Morphis' employment agreement provides that Mr. Morphis
will serve as our Chief Financial Officer
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<PAGE> 63
through April 1, 2001, unless earlier terminated. The term of Mr. Morphis'
employment agreement will be automatically extended for 12 additional months
unless we or Mr. Morphis give the other party written notice of termination at
least 12 months prior to the end of the initial term of the agreement.
The compensation provided to Mr. Morphis under his employment agreement
includes an annual base salary of $250,000, subject to upward adjustment at the
sole discretion of board of directors. Mr. Morphis is entitled to receive
benefits as are generally provided to our senior executives as long as Mr.
Morphis' employment agreement is in force. The employment agreement provides
that Mr. Morphis' is eligible to receive a bonus for the year ended December 31,
1999 based upon whether we achieve specified levels of our earnings before
interest, income taxes, depreciation and amortization. In addition, the
employment agreement provides that the compensation committee of our board of
directors has the discretion to grant an annual bonus up to $100,000 to Mr.
Morphis. For periods after 1999, our board of directors will establish bonus
targets for Mr. Morphis consistent with industry practices for similarly
situated executives. Mr. Morphis' employment agreement also provides that he
will not compete with or solicit employees from our company for a period of one
year after termination and, if he has vested options one year after termination,
for a period of three years. Mr. Morphis is entitled to reimbursement for his
reasonable business expenses, in accordance with our then-existing policies, in
carrying out his duties and responsibilities.
Mr. Morphis' employment agreement also provides that if Mr. Morphis'
employment is terminated without cause or in anticipation of a change of
control, or Mr. Morphis resigns for good reason or within 90 days after a change
of control, Mr. Morphis shall continue to receive his then-current base salary
and benefits for a period of one year following such termination, any accrued
but unpaid base salary, any additional payments to which he is entitled under
the terms of the benefit plans or programs in which he participates at such time
and an additional amount representing a portion of his annual bonus for the year
in which he was terminated, prorated to the date of termination. We may
terminate Mr. Morphis' employment upon his death or permanent disability and no
further compensation will be payable, except that he or his estate, heirs or
beneficiaries, as applicable, will receive any accrued but unpaid base salary
and any additional payments to which he is entitled under the terms of the
benefit plans or programs in which he participated at the time of termination.
In connection with Mr. Morphis' employment agreement, we entered into a
contingent securities purchase agreement with Mr. Morphis. This agreement
granted an option to Mr. Morphis to purchase shares of our Class A common stock
from us at a purchase price of $2.33 per share. The number of shares that Mr.
Morphis can purchase is based upon Mr. Morphis' 1999 bonus and will be equal to
the amount of Mr. Morphis' 1999 bonus divided by $2.33. The maximum number of
shares which Mr. Morphis may purchase pursuant to the option is limited to
150,000 shares. Our compensation committee has determined that Mr. Morphis will
receive a bonus of $100,000 for 1999. Therefore, the number of shares subject to
Mr. Morphis' option will be 42,919.
The contingent securities purchase agreement provides that the option shall
expire on June 1, 2000. The option will vest and become exercisable upon payment
of Mr. Morphis' 1999 bonus. As of the date of this prospectus, we have not yet
paid Mr. Morphis' 1999 bonus.
Lee O. Waters Employment Agreement
On August 25, 1997, SOFTBANK Services Group entered into an employment
agreement with Mr. Waters, effective as of September 1, 1997. We acquired
SOFTBANK in September 1998 and assumed this agreement. Mr. Waters' employment
agreement provides that his employment is an "at will" arrangement without a
specific term. Pursuant to his employment agreement, we may change Mr. Waters'
position responsibilities, title, position location, compensation and benefits
from time to time. Mr. Waters currently serves as our Chief Solution Delivery
Officer.
Mr. Waters' current annual base salary is $250,000, which may adjusted at
the sole discretion of our board of directors, and benefits as are generally
provided to our executive officers. In addition, Mr. Waters
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<PAGE> 64
is entitled to bonus in 1999 up to $40,000. Mr. Waters' employment agreement
also provides that he will not compete with our company for one year following
the termination of his employment.
BENEFIT PLANS
Stock Option Plan
We adopted the ClientLogic 1998 Stock Option Plan in September 1998 which
we amended most recently on March 1, 2000. The plan provides that we may issue
incentive, non-qualified and performance-based stock options to any of our key
employees, key employees of our affiliates and persons that provide bona fide
consulting, advisory or other services for our company. A total of 10,197,000
shares of Class A common stock have been reserved for issuance under the stock
option plan. As of March 31, 2000, options to purchase up to an aggregate of
4,696,749 shares of Class A common stock are outstanding. In addition, we expect
to grant approximately 770,000 options to purchase shares of Class A common
stock at an exercise price not less than the initial public offering price to
approximately 650 employees prior to this offering. The plan provides that we
may grant a maximum of 5,142,850 options to any key employee or eligible non
employee.
The stock option plan provides that it is to be administered by a committee
of our board of directors. Our entire board of directors may act as the
committee if it chooses to do so. The committee has the authority to grant any
participant one or more stock options and to establish the terms and conditions
of his or her options, with limitations specified in the stock option plan. For
example, the per-share exercise price of each incentive option granted under the
plan must not be less than 100% of the fair market value of the Class A common
stock as determined by the board of directors on the date the option is granted,
and no incentive stock option may be exercisable after ten years from the date
of grant. If a change of control occurs, the committee, in its discretion, may
take the actions it deems appropriate regarding outstanding awards, including,
without limitation, accelerating the exercisability or vesting of the awards.
The stock option plan will terminate on September 30, 2008, unless terminated
earlier by our board of directors.
Deferred Compensation Plan
We adopted the ClientLogic deferred compensation plan in October 1998. The
plan provides that participants may elect to defer all or part of their
compensation in amounts and for periods approved by the compensation committee
of our board of directors. Plan participants must be officers, directors, other
management employees, or other highly compensated employees or consultants of
our company or a parent or subsidiary company.
The compensation committee may in its sole discretion designate the persons
who are eligible to participate in the plan and to establish the terms,
conditions, restrictions and limitations of each participant's elective
deferrals under the plan, with limitations specified in the deferred
compensation plan.
We maintain a separate deferral account for each plan participant
reflecting:
- the amounts of compensation deferred by the participant;
- the hypothetical investment gains or losses on these amounts; and
- any expenses attributable to such amounts.
Unless otherwise provided in the plan or agreed in writing by the
compensation committee and a participant, all compensation deferred by a
participant under the plan, and all other amounts credited to a deferral
account, are converted into and deemed to be invested in phantom stock units on
the day compensation or any other amount would have otherwise been paid. The
value of the phantom stock units is based on the fair market value of a share of
Class A common stock, as determined in accordance with the terms of the deferred
compensation plan. A total of 3,214,285 shares of Class A common stock may be
subject to phantom stock units under the plan. As of March 31, 2000, 167,146
shares of Class A common stock were subject to phantom stock units under the
plan representing compensation deferrals totaling $260,000.
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<PAGE> 65
The vested portion of a participant's deferral account is available for
distribution to the participant, or upon his or her death or total and permanent
disability, to his or her beneficiaries or legal guardian, as of the earliest to
occur of the following distribution events:
- the date we or our affiliates terminate the participant's employment;
- the date of the participant's resignation with good reason;
- the second anniversary of the participant's resignation without good
reason; or
- if we complete this offering, the date or dates following the offering
elected in writing by the participant.
Distributions made under the deferred compensation plan may be made in
cash, shares of Class A common stock, or any combination thereof, as determined
in the sole discretion of the compensation committee. Distributions in cash will
be paid in an amount per phantom stock unit equal to the fair market value of
one share of our Class A common stock on the date of distribution. Distributions
in shares of Class A common stock will equal one share of Class A common stock
for each phantom stock unit.
If a change in control occurs, the compensation committee, in its sole
discretion, may take the actions it deems appropriate regarding outstanding
deferral accounts, including accelerating the distribution of the vested portion
of any or all deferral accounts. The compensation committee may terminate the
deferred compensation plan at any time, without the consent of any participant,
unless termination would materially impair the rights or benefits of the
participants.
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<PAGE> 66
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table provides information with respect to the beneficial
ownership of our Class A common stock as of March 31, 2000 and as adjusted to
reflect the sale of our Class A common stock in this offering, for:
- each person who beneficially owns more than 5% of our Class A common
stock;
- each of our directors, including our chairman of the board;
- our Chief Executive Officer and each of our other executive officers
named in the summary compensation table included under the heading
"Management" above; and
- all of our directors and executive officers as a group.
On March 1, 2000, we filed an amendment to our certificate of incorporation
to convert each outstanding share of our common stock into one share of Class A
common stock. Until March 15, 2000, each holder of the new Class A common stock
had the option to convert all, but not less than all, of its shares into the
same number of shares of Class B common stock. Only Onex Corporation elected to
convert its shares of Class A common stock into shares of Class B common stock.
Each share of Class B common stock is entitled to 25 votes per share while each
share of our Class A common stock is entitled to one vote per share. For a
description of the rights of our Class A and Class B common stock, see
"Description of Capital Stock -- Common Stock".
As of March 31, 2000, Onex and its affiliates owned of record and
beneficially 100% of our Class B common stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES OF CLASS A COMMON
CLASS A STOCK BENEFICIALLY
COMMON OWNED
STOCK ------------------- PERCENT OF
BENEFICIALLY BEFORE AFTER TOTAL VOTING POWER
OWNED(1) OFFERING OFFERING AFTER THE OFFERING
------------ -------- -------- ------------------
<S> <C> <C> <C> <C>
5% STOCKHOLDERS:
Gerald W. Schwartz(2)....................... 66,451,221 91.78% 77.54% 98.85%
161 Bay Street, 49th Floor
P.O. Box 700
Toronto, Ontario MSJ 2S1
Onex Corporation(2)......................... 66,451,221 91.78 77.54 98.85
161 Bay Street, 49th Floor
P.O. Box 700
Toronto, Ontario MSJ 2S1
Onex Holding Property Management Ltd.(2).... 66,451,221 91.78 77.54 98.85
c/o Nachurs Alpine Solutions
421 Leader Street
Marion, Ohio 43302
Edward Schwartz(3).......................... 3,019,540 46.82 15.29 *
18 Banigan Drive
Toronto, Ontario M4H IE9
Peter A. Berczi(4).......................... 1,217,184 17.39 6.00 *
350 Burnham Thorpe Road West
Suite 603
Mississauga, Ontario L5B 3JI
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES OF CLASS A COMMON
CLASS A STOCK BENEFICIALLY
COMMON OWNED
STOCK ------------------- PERCENT OF
BENEFICIALLY BEFORE AFTER TOTAL VOTING POWER
OWNED(1) OFFERING OFFERING AFTER THE OFFERING
------------ -------- -------- ------------------
<S> <C> <C> <C> <C>
Bruce Simpson(5)............................ 653,571 9.90% 3.28% *
350 Burnham Thorpe Road West
Suite 603
Mississauga, Ontario L5B 3JI
William Rella(6)............................ 376,221 6.25 1.95 *
120 Brighton Road
Clifton, New Jersey 07012
Joseph L. Temple............................ 321,429 5.34 1.66 *
c/o Clientlogic Corporation
10065 East Harvard, Suite 750
Denver, Colorado 80231
S. Dianne Thompson.......................... 321,429 5.34 1.66 *
c/o Clientlogic Corporation
10065 East Harvard, Suite 750
Denver, Colorado 80231
OFFICERS AND DIRECTORS:
Thomas O. Harbison(7)....................... -- -- -- --
Mark R. Briggs(8)........................... 128,572 2.16 * *
Gene S. Morphis(9).......................... 42,919 *
Jules T. Kortenhorst(10).................... 1,234,703 18.44 6.18 *
Joanne G. Biltekoff(11)..................... 40,358 * * *
Lee O. Waters(12)........................... 32,739 * * *
Thomas P. Dea(13)........................... -- -- -- --
Seth M. Mersky(14).......................... -- -- -- --
All executive officers and directors as a
group (12 persons)(15).................... 1,625,707 23.97 8.10 *
</TABLE>
- ---------------
* Represents less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of common stock and options and warrants that are
currently exercisable within 60 days of March 23, 2000 are deemed to be
outstanding and to be beneficially owned by the person holding the options
or warrants for the purpose of computing the percentage ownership of the
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Represents 66,451,221 shares of Class A common stock issuable upon
conversion, on a one for one basis, of Class B common stock held of record
by Onex Holding Property Management Ltd., which may be attributed to Onex,
its indirect parent, and Gerald W. Schwartz. Mr. Schwartz is the
controlling stockholder of Onex and serves as its Chairman of the Board,
President and Chief Executive Officer. Accordingly, Mr. Schwartz may be
deemed to be the beneficial owner of Class A common stock beneficially held
by Onex Holding Property Management Ltd. Mr. Schwartz disclaims beneficial
ownership of the Class A Common Stock not owned of record by him.
(3) Includes 498,355 shares of our common stock issuable in exchange for
exchangeable preferred stock of one of our subsidiaries.
(4) Includes 175,007 shares of Class A common stock that Mr. Berczi may acquire
upon exercise of options and 875,034 shares of our common stock issuable in
exchange for exchangeable preferred stock of one of our subsidiaries.
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<PAGE> 68
(5) Includes 63,639 shares of Class A common stock that Mr. Simpson may acquire
upon exercise of options and 589,932 shares of our common stock issuable in
exchange for exchangeable preferred stock of one of our subsidiaries.
(6) Includes 71,070 options to purchase shares of Class A common stock granted
under Mr. Rella's employment agreement.
(7) Excludes 235,332 shares of Class A common stock in which Mr. Harbison has
an indirect interest through Onex ClientLogic Holdings LLC. Onex, Onex
ClientLogic Holdings LLC and Mr. Schwartz share beneficial ownership of
these shares. Mr. Harbison disclaims beneficial ownership of these shares.
In addition, Mr. Harbison is eligible to receive additional cash or Class A
common stock, determinable in the sole discretion of Onex, in the event
Onex realizes a 15% compounded annual internal rate of return on its equity
investment in our company, after expenses.
(8) These figures do not include 1,479,398 shares of Class A common stock that
Mr. Briggs may acquire upon the exercise of options granted under the stock
option plan. These options will vest upon the completion of this offering
but are not exercisable unless and until Onex realizes a 15% compounded
annual internal rate of return on its equity investment in our company,
after expenses. These figures do not include 96,429 phantom stock units
held by Mr. Briggs under our deferred compensation plan. The deferred
compensation plan provides that each phantom stock unit will become
available for distribution upon the occurrence of specified events. Upon
distribution, each phantom stock unit will be converted into cash in an
amount equal to the market value of one share of our Class A common stock
at the time of conversion or one share of Class A common stock, as
determined by our compensation committee. We expect that Mr. Briggs'
phantom stock units will become available for distribution upon completion
of this offering. See "Management -- Benefit Plans -- Deferred Compensation
Plan." In addition, Mr. Briggs is eligible to receive additional cash or
shares of Class A common stock, determinable in the sole discretion of
Onex, in the event Onex realizes a 15% compounded annual internal rate of
return on its equity investment in our company, after expenses.
(9) Includes 42,919 shares of Class A common stock, which Mr. Morphis may
acquire upon the exercise of an option we granted under Mr. Morphis'
contingent securities purchase agreement. Excludes 14,243 shares of Class A
common stock through which Mr. Morphis has an indirect interest through an
interest in Onex ClientLogic Holdings LLC. Onex, Onex ClientLogic Holding
LLC and Mr. Schwartz share beneficial ownership of these shares. Mr.
Morphis disclaims beneficial ownership of these shares. In addition, Mr.
Morphis is eligible to receive additional cash or stock, determinable in
the sole discretion of Onex, in the event Onex realizes a 15% compounded
annual internal rate of return on its equity investment in our company,
after expenses.
(10) Includes 393,041 shares of Class A common stock held of record by Mr.
Kortenhorst and 737,176 options and warrants to acquire shares of Class A
common stock. Also includes 98,416 shares of Class A common stock and 6,070
options and warrants to acquire shares of Class A common stock held of
record by affiliates of Mr. Kortenhorst.
(11) Excludes 35,358 shares of Class A common stock that Ms. Biltekoff is
eligible to receive upon a distribution under our deferred compensation
plan. We expect that the phantom stock units held by Ms. Biltekoff will
become available for distribution upon completion of this offering. The
deferred compensation plan provides that, upon a distribution, Ms.
Biltekoff will receive cash, Class A common stock or a combination of cash
and Class A common stock as determined by the compensation committee of the
board of directors. See "Management -- Benefit Plans -- Deferred
Compensation Plan". In addition, Ms. Biltekoff is eligible to receive
additional cash or shares of Class A common stock, determinable in the sole
discretion of Onex, in the event Onex realizes a 15% compounded annual
internal rate of return on its equity investment in our company, after
expenses.
(12) Includes 28,929 shares of Class A common stock that Mr. Waters may acquire
upon the exercise of options granted under our stock option plan. In
addition, Mr. Waters is eligible to receive additional
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<PAGE> 69
cash or Class A common stock, determinable in the sole discretion of Onex,
in the event Onex realizes a 15% compounded annual internal rate of return
on its equity investment in our company, after expenses.
(13) Excludes 144,113 shares of Class A common stock in which Mr. Dea has an
indirect interest through Onex ClientLogic Holdings LLC. Onex, Onex
ClientLogic Holding LLC and Mr. Schwartz share beneficial ownership of
these shares. Mr. Dea disclaims beneficial ownership of these shares. In
addition, Mr. Dea is eligible to receive additional cash or Class A common
stock, determinable in the sole discretion of Onex, in the event Onex
realizes a 15% compounded annual internal rate of return on its equity
investment in our company, after expenses.
(14) Excludes 188,150 shares of Class A common stock in which Mr. Mersky has an
indirect interest through Onex ClientLogic Holdings LLC. Onex, Onex
ClientLogic Holdings LLC and Mr. Schwartz share beneficial ownership of
these shares. Mr. Mersky disclaims beneficial ownership of these shares. In
addition, Mr. Mersky is eligible to receive additional cash or Class A
common stock, determinable in the sole discretion of Onex, in the event
Onex realizes a 15% compounded annual internal rate of return on its equity
investment in our company, after expenses.
(15) Includes 829,559 shares which may be acquired upon the exercise of options,
warrants and other rights to acquire our Class A common stock.
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<PAGE> 70
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Monitoring and Oversight Agreement. We have entered into a ten-year
monitoring and oversight agreement with Onex Service Partners, effective as of
January 1, 1999. Onex Service Partners is an affiliate of Onex and Thomas O.
Harbison, the chairman of our board of directors. Under the monitoring and
oversight agreement, we receive monitoring and oversight services and are
required to pay Onex Service Partners an annual fee of $600,000, payable
quarterly. Seth M. Mersky, Thomas P. Dea and Thomas O. Harbison, directors of
our company, are each directors of Onex Service Partners. Onex Service Partners
is also entitled to reimbursement for any expenses incurred by it in connection
with rendering services allocable to Onex Service Partners under the monitoring
and oversight agreement. In addition, we have agreed to indemnify Onex Service
Partners, its affiliates, and each of their respective directors, officers,
controlling persons, agents and employees from and against all claims,
liabilities, losses, damages, expenses and fees related to the services rendered
by Onex Service Partners under the monitoring and oversight agreement and not
resulting primarily from the bad faith, gross negligence, or willful misconduct
of Onex Service Partners. Our subsidiaries are also parties to this agreement.
For the year ended December 31, 1999, we owe Onex Service Partners $600,000
under this agreement.
Financial Advisory Agreement. We also entered into a ten-year financial
advisory agreement with Onex Service Partners on May 1, 1999. Under the
financial advisory agreement, Onex Service Partners is entitled to receive a fee
equal to 1.5% of the transaction value for each transaction in which we or any
of our subsidiaries are involved. For transactions during the year ended
December 31, 1999, we paid Onex Service Partners aggregate fees of approximately
$1,776,390 under this agreement. The term "transaction value" means the total
value of the transaction, including the aggregate amount of the funds required
to complete the transaction, excluding any fees payable under the financial
advisory agreement, and including the amount of any indebtedness and preferred
stock assumed, net of cash. The term "transaction" means any proposal by a third
party for a tender offer, acquisition, sale, merger, exchange offer,
recapitalization, restructuring or other similar transaction directly involving
us or any of our subsidiaries. In addition, we have agreed to indemnify Onex
Service Partners, its affiliates, and each of their directors, officers,
controlling persons, agents and employees from and against all claims,
liabilities, losses, damages, expenses and fees related to the services rendered
by Onex Service Partners under the financial advisory agreement and not
resulting primarily from the bad faith, gross negligence, or willful misconduct
of Onex Service Partners. Our subsidiaries are also parties to this agreement.
Financing Provided by Onex. We and our domestic subsidiaries are currently
parties to an amended and restated credit agreement dated as of May 25, 1999,
among Onex ClientLogic Finance LLC, an indirect subsidiary of Onex, as the
lender, and Toronto Dominion (Texas), Inc., as the agent. The credit agreement
relates to a $60 million term loan from Onex ClientLogic Finance to us. The
following is a description of the material terms of the credit agreement and is
subject to, and qualified in its entirety by reference to, the full text of the
credit agreement, a copy of which has been filed with the Securities and
Exchange Commission as an exhibit to the Registration Statement of which this
prospectus forms a part.
The credit agreement provides for a term loan of $60 million. At December
31, 1999 we had $60 million of outstanding borrowings under the agreement. The
principal of the loan must be repaid as follows:
<TABLE>
<CAPTION>
SCHEDULED PRINCIPAL REPAYMENT DATE AMOUNT
- ---------------------------------- -----------
<S> <C>
May 25, 2003............................................ $ 500,000
May 25, 2004............................................ $17,000,000
May 25, 2005............................................ $17,000,000
May 25, 2006............................................ $25,500,000
</TABLE>
We must repay the loan in full on May 25, 2006. We cannot reborrow any
amounts that we have repaid.
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<PAGE> 71
We pay interest on borrowings at a rate equal to:
- the higher of the federal funds rate plus 1.5% or Toronto Dominion's
prime commercial lending rate, or
- the annual London interbank offered rate for dollar deposits having
comparable interest periods and loan amounts, divided by one minus the
average maximum rate at which reserves are required to be maintained by
the Federal Reserve System for Eurocurrency liabilities;
plus additional annual interest ranging from 0.75% to 3.25% depending on
the ratio of our total debt to cash flow at the time of borrowing. As of
March 7, 2000, the interest rate under the credit agreement was 9.19%.
During the year ended December 31, 1999, we paid $92,000 in interest under
our credit agreement.
Our domestic subsidiaries guarantee our obligations under the credit
agreement and secure the guarantee by granting Toronto Dominion a first-priority
perfected security interest to substantially all of their assets. Additionally,
we have granted Toronto Dominion a first-priority perfected security interest in
substantially all of our assets and have pledged the capital stock of our
domestic subsidiaries. Each of our domestic subsidiaries other than ClientLogic
International, Inc. has pledged the capital stock of its subsidiaries to Toronto
Dominion. However, not more than 65% of the capital stock of any of our indirect
subsidiaries that are not organized under the laws of the United States has been
pledged to secure our obligations under the credit agreement.
The credit agreement contains customary restrictive covenants, which, among
other things and with some exceptions, limit our ability to incur additional
indebtedness, enter into transactions with affiliates, pay dividends,
consolidate, merge or sell assets, issue additional stock, make capital
expenditures or enter new lines of business. The credit agreement also limits
our ability to make additional acquisitions in excess of $15.0 million on an
individual basis. We are also required to maintain specified financial ratios
and to comply with financial tests, such as maximum total debt to cash flow,
minimum cash flow to debt service and minimum cash flow to interest expense
ratios. Additionally, we are restricted in the amount of capital expenditures we
may make on an annual basis. We are also required to make mandatory prepayments
on the loans on the occurrence of specified events, including the generation of
excess cash flow and the sale of material assets.
The credit agreement contains customary events of default, including
defaults in the payment of principal or interest when due and in the performance
of covenants and other specified defaults, including payment defaults under
other debt agreements, bankruptcy or similar proceedings. We intend to repay all
of the borrowings under this credit agreement with the proceeds of this
offering.
Funding of Acquisitions. In January 1999, Onex ClientLogic Holdings LLC
funded our acquisition of LCS by providing cash in the amount of $25,000,000 for
13,392,854 shares of common stock and an unsecured promissory note for
$10,000,000. We repaid the promissory note in October 1999 by issuing to Onex
4,065,400 shares of common stock and paying to Onex $2,411,252. The purchase
price per share of common stock was $1.87, which our board of directors
determined to be the fair market value.
In October 1999, Onex ClientLogic Holdings LLC funded our acquisition of
Cordena and Adverbe by providing us with cash in the amount of $34,594,559 for
9,884,158 shares of common stock. The purchase price per share was $3.50, which
the board of directors determined to be fair market value.
In December 1999, Onex ClientLogic Holdings LLC funded our acquisition of
MarketVision by providing us with cash in the amount of $11,929,335 for
1,533,771 shares of common stock. The purchase price per share was $7.78, which
the board of directors determined to be fair market value.
Loans for Relocation. In October 1999, we made two loans to Lee O. Waters
in connection with his relocation to Nashville, Tennessee. The first loan has a
principal amount of $65,000.00, an annual interest rate of 8% and is payable
upon the sale of Mr. Waters' residence in Williamsville, New York, or April 11,
2000, whichever occurs first. The second loan has a principal amount of
$374,270.57, an annual interest
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rate of 8% and is payable on or before February 28, 2000. Both loans are secured
by the shares of Class A common stock owned or acquired by Mr. Waters. On
February 1, 2000, Mr. Waters repaid the second loan in full.
Loan Commitment to Mr. Kortenhorst. In connection with our acquisition of
Cordena, we entered into a letter agreement with Mr. Kortenhorst. Under the
agreement, we agreed to loan Mr. Kortenhorst up to NLG 1,000,000 if the bonus
Mr. Kortenhorst is eligible to receive under the Cordena purchase agreement is
less than NLG 1,000,000. The loan accrues interest annually at our cost of
borrowing and is due and payable on December 31, 2001. The loan is also due and
payable upon Mr. Kortenhorst's termination for cause or if he voluntarily
terminates his employment.
Director Indemnity Agreements. We entered into indemnification agreements
in January 1999 with Mark R. Briggs, Thomas P. Dea, Thomas O. Harbison and Seth
M. Mersky in connection with their service as directors and/or executive
officers of our company and of our subsidiaries. The indemnification agreements
provide that we and our subsidiaries will indemnify Messrs. Briggs, Dea,
Harbison and Mersky for any losses they incur in connection with any proceedings
against them in their capacity as an officer or director to the fullest extent
permitted under the General Corporation Law of the State of Delaware. In the
indemnification agreements, the term "losses" means all liabilities, losses and
claims, including judgments, fines, penalties, and amounts to be paid in
settlement, incurred in connection with any proceeding. The term "proceeding"
means a threatened, pending or completed action, suit, arbitration, mediation,
alternate dispute resolution mechanism, investigation, administrative hearing or
other proceeding, whether civil, criminal, administrative or investigative.
Stockholders Agreement. In October 1998, we entered into a stockholders
agreement with each of our stockholders. The stockholders agreement contains
provisions concerning:
- the grant to an affiliate of Onex of a proxy to vote on behalf of all
stockholders for all material matters;
- contractual preemptive rights;
- limitations on transfer of our common stock;
- registration rights;
- Onex's option to purchase an unaccredited stockholder's shares in some
circumstances; and
- confidentiality, noncompetition and nonsolicitation.
By its terms, all provisions of the stockholders agreement other than
registration rights will terminate upon the completion of this offering. The
registration rights provisions of the stockholders agreement will be replaced,
effective upon completion of this offering, by the registration rights agreement
described below.
Registration Rights Agreement. The registration rights agreement will be
effective upon completion of this offering and will amend and restate the
registration rights provisions of the stockholders agreement. The registration
rights agreement will grant to Onex the ability to make three requests for
registration of its Class A or Class B common stock on a Form S-1 registration
statement and unlimited requests for registration on a Form S-3 registration
statement. Our other existing Class A stockholders will be allowed to
participate pro rata in any of these registrations. Also, if we offer any new
equity shares under a registration statement filed with the Commission, other
than registrations relating to employee plans or for the purpose of
acquisitions, our existing Class A stockholders will be allowed to participate
pro rata except where inclusion of their shares would materially affect the
offering.
Contribution of Canadian Access to InsLogic.com Holding Corporation. In
March 1999, our wholly-owned subsidiary, ClientLogic Operating Corporation,
acquired a portion of the assets of Canadian Access Insurance Services, Inc., a
provider of outsourced customer relationship services to the insurance
marketplace. In September 1999, we formed a subsidiary, InsLogic.com Holding
Corporation, which we refer to as InsLogic, to serve as the holding company of a
new subsidiary, InsLogic.com Corporation. InsLogic.com Corporation was formed to
hold the assets acquired from Canadian Access. ClientLogic
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Operating transferred the assets acquired from Canadian Access to InsLogic.com
Corporation under a contribution agreement. In connection with that transfer, we
entered into the following agreements:
- Contribution Agreement. In September of 1999, ClientLogic Operating
entered into a contribution agreement with InsLogic and InsLogic.com
Corporation. Under the contribution agreement, Clientlogic Operating
contributed the acquired assets and liabilities of Canadian Access in
return for 50,000,000 shares of InsLogic common stock.
- Transition Services Agreement. Effective as of September 1999,
ClientLogic Operating entered into a transitional services agreement with
InsLogic.com Corporation. Under the transition services agreement, we
agreed to provide payroll and benefits, use of facilities and
professional services from our legal and accounting departments until the
later of August 31, 2000 or until we no longer own a majority of
InsLogic's common stock on a fully diluted basis. We provide these
services to InsLogic.com Corporation at cost plus specified percentages
depending on the services provided. As of February 29, 2000, we have not
received any fees under this agreement, but we have received
approximately $1.8 million in reimbursements of costs incurred by us in
providing personnel and services under this agreement.
- Master Service Agreement. Effective as of September 1999, ClientLogic
Operating entered into a master service agreement with InsLogic.com
Corporation. Under the master service agreement, ClientLogic Operating
agreed to provide call center and related services to InsLogic.com
Corporation for three years. We provide these services at cost plus
specified percentages based upon the services provided. As of March 1,
2000 we have not provided any services or received any fees under this
agreement.
- Non-competition Agreement. In December 1999, we entered into a
noncompetition agreement with InsLogic and InsLogic.com Corporation.
Under the noncompetition agreement, we agreed not to compete with
InsLogic or InsLogic.com Corporation in the insurance services business
and InsLogic and InsLogic.com Corporation agreed not to compete in the
customer service, sales, support and fulfillment services business. The
noncompetition agreement expires in December 2002.
Spin-Off of InsLogic and its Subsidiaries. We have declared a dividend of
the shares of common stock of InsLogic to our existing stockholders of record as
of March 15, 2000, except for a small percentage which we contributed to one of
our indirect subsidiaries for distribution to holders of shares of that
subsidiary's stock which are exchangeable at the option of the holders into
shares of our common stock. We will pay the remaining shares of InsLogic as a
dividend to our existing stockholders, pro rata based on the number of shares
held by each stockholder. None of the purchasers of Class A common stock in this
offering will have rights to the dividend of InsLogic shares. After our payment
of this dividend, we will no longer have any ownership interest in InsLogic or
any of its subsidiaries. However, the agreements between us and InsLogic will
remain in effect.
We have estimated the fair market value of InsLogic to be approximately
$28,700,000 based on information InsLogic has provided to us. Based on this
estimate, we expect to realize a tax gain of approximately $27,100,000 as a
result of the distribution, but we expect this gain to be fully offset by
operating losses and loss carryforwards.
Registration Rights Granted to Holders of Exchangeable Preferred Shares. We
expect to grant to the holders of all of the exchangeable preferred shares,
Messrs. Peter Berczi, Edward Schwartz and Bruce Simpson, the right to demand
registration of 1,963,321 shares of Class A common stock, issuable upon the
conversion of their exchangeable preferred shares in one of our subsidiaries.
Messrs. Berczi, Schwartz and Simpson will be able to make a demand upon our
company to register their shares of Class A common stock upon our eligibility to
file a registration statement on Form S-3. In addition, Messrs. Berczi, Schwartz
and Simpson will have rights to include their shares of Class A common stock
underlying the exchangeable preferred shares in any registration statement we
may file that include shares of Class A common stock held by Onex.
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MarketVision Transaction. In connection with our acquisition of
MarketVision, we issued a promissory note and a contingent promissory note to
each of Joseph L. Temple and S. Dianne Thompson, who each beneficially own more
than 5% of our Class A common stock. The promissory notes have the following
terms:
- $2,625,000 in principal amount;
- 8.25% interest, payable quarterly;
- 10.25% interest on past due amounts; and
- principal payable in five equal annual installments, commencing on
December 6, 2000.
Mr. Temple and Ms. Thompson may elect to receive their principal payments
in Class A common stock or cash. If Mr. Temple or Ms. Thompson elects to receive
his or her principal payment in Class A common stock, the number of shares of
Class A common stock received shall be based on the fair market value as
determined by the board of directors on the date of payment.
The contingent promissory notes have the following terms:
- $375,000 principal amount;
- 8.30% interest on unpaid principal amounts payable quarterly in arrears
if the conditions described below are met;
- 10.30% interest on any past due amounts;
- one half of the principal amount and accrued interest is payable by April
15, 2001 if MarketVision achieves its revenue goals for 2001; and
- one half of the principal amount and accrued interest is payable by April
15, 2002 if MarketVision achieves its revenue goals for 2002.
Payments of any amounts under the contingent promissory notes may be made
only in cash.
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DESCRIPTION OF CAPITAL STOCK
The following description of our common stock, preferred stock, amended and
restated certificate of incorporation and amended and restated bylaws are
summaries thereof and are qualified by reference to our amended and restated
certificate of incorporation and our amended and restated bylaws, copies of
which have been filed with the Securities and Exchange Commission as exhibits to
the Registration Statement of which this prospectus forms a part.
We are authorized to issue up to 225,000,000 shares of Class A common
stock, par value $.01 per share, 130,000,000 shares of Class B common stock, par
value $.01 per share, and 20,000,000 shares of preferred stock, par value $.01
per share.
COMMON STOCK
As of March 23, 2000, we had 5,951,285 shares of Class A common stock
outstanding held of record by 201 stockholders and 66,451,221 shares of Class B
common stock outstanding held by Onex. Based upon the number of shares
outstanding as of that date and giving effect to the issuance of an aggregate of
13,300,000 shares of Class A common stock in this offering, there will be
19,251,285 shares of Class A common stock and 66,451,221 shares of Class B
common stock outstanding upon the closing of this offering.
All of the issued and outstanding shares of Class A and Class B common
stock and the shares of Class A common stock to be issued in this offering are
or will be fully paid and nonassessable. Except as described below, shares of
Class A common stock and Class B common stock will generally have identical
rights. In addition, under our amended and restated certificate of
incorporation, holders of Class A common stock have no preemptive or other
subscription rights to purchase shares of our stock, nor are they entitled to
the benefits of any redemption or sinking fund provisions.
Voting Rights. The holders of Class A common stock and Class B common stock
are entitled to notice of and to attend all meetings of our stockholders and to
vote at all meetings together as a single class, except on matters where the
holders of a class are entitled to vote separately under law or pursuant to our
amended and restated certificate of incorporation. The holders of Class A common
stock are entitled to one vote per share on all matters to be voted on by
stockholders generally, including the election of directors. The holders of
Class B common stock is entitled to 25 votes per share on all matters to be
voted on by stockholders generally, including the election of directors. The
holders of Class B common stock are entitled to one vote per share when voting
on a matter for which they are entitled to vote as a separate class. There are
no cumulative voting rights. Accordingly, holders of a majority of the total
votes entitled to vote in an election of directors will be able to elect all of
the directors standing for election. See "Risk Factors -- Onex Corporation will
be able to control our management and corporate affairs and other stockholders
will be unable to affect the outcome of corporate matters."
Liquidation Preferences. If we are liquidated, dissolved or wound up, the
holders of Class A common stock and Class B common stock will be entitled to
receive distributions only after satisfaction of all of our liabilities and the
prior rights of any outstanding class of our preferred stock. If we are
liquidated, dissolved or wound up, our assets legally available after
satisfaction of all of our liabilities and the prior rights of our preferred
stock shall be distributed to the holders of Class A common stock and Class B
common stock pro rata on a per share basis.
Conversion Rights/Mandatory Conversion. Holders of Class A common stock
have no rights to convert into Class B common stock. Holders of Class B common
stock may convert each share into one share of Class A common stock at any time.
In addition, shares of Class B common stock will
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automatically convert into the same number of shares of Class A common stock
upon the occurrence of any of the following:
- if transferred to anyone except to Onex or any affiliate, director,
officer or employee of Onex or to any purchaser of all of the outstanding
Class A and Class B common stock, the shares of Class B common stock
transferred will automatically convert into shares of Class A common
stock;
- if any holder of Class B common stock who is an affiliate of Onex ceases
to be an affiliate of Onex, the shares of Class B common stock held by
that former affiliate will automatically convert into shares of Class A
common stock;
- if Onex and its affiliates collectively cease to have the right, in all
cases, to exercise or direct the voting rights of the Class B common
stock held by them, their Class B common stock will automatically convert
into shares of Class A common stock; and
- if at any time the number of outstanding shares of Class B common stock
represents less than 5% of the total number of outstanding shares of
Class A and Class B common stock, all of the outstanding shares of Class
B common stock will automatically convert into shares of Class A common
stock.
Dividends. The Class A and Class B shares are entitled to share equally on
a per share basis in any dividends declared by our board of directors, subject
to any preferential dividend rights of any outstanding preferred stock.
Dividends consisting of shares of Class A common stock and Class B common stock
may be paid only as follows:
- Class A shares may be paid only to holders of Class A common stock and
Class B shares may be paid only to holders of Class B common stock; and
- the number of shares of Class B common stock paid as a dividend on each
outstanding share of Class B common stock must be equal to the number of
shares of Class A common stock paid as a dividend on each share of Class
A common stock.
Modification, Subdivision and Consolidation. Any change to the provisions
in our amended and restated certificate of incorporation relating to the Class A
common stock or the Class B common stock requires the separate affirmative vote
of two-thirds of the votes cast by the holders of the class affected by such
change, voting as a separate class. We may not subdivide or consolidate the
shares of Class A common stock or the shares of Class B common stock without at
the same time proportionately subdividing or consolidating the shares of the
other class.
SPECIAL PROVISIONS IN OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND
AMENDED AND RESTATED BYLAWS AND VARIOUS PROVISIONS OF DELAWARE LAW WHICH MAY
HAVE ANTI-TAKEOVER EFFECTS
Our amended and restated certificate of incorporation and amended and
restated bylaws include certain provisions that could deter an attempt to take
over our company. The provisions are intended to enhance the likelihood of
continuity and stability in the composition of, and policies formulated by, our
board.
Blank Check Preferred Stock. Our amended and restated certificate of
incorporation provides that our board of directors may authorize the issuance of
up to 20,000,000 shares of preferred stock in one or more series and may
designate the dividend rate, voting rights and other rights, preferences and
restrictions of each such series. We have no present intention to issue any
preferred stock. However, we could issue a series of preferred stock that could,
depending on the terms of such series, either impede or facilitate the
completion of a merger, tender offer or other takeover attempt. Although the
board of directors is required to make any determination to issue such stock
based on its judgment as to the best interests of the stockholders of the
company, the board of directors could act in a manner that would discourage an
acquisition attempt or other transaction that some, or a majority, of the
stockholders might believe to be in
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their best interests or in which stockholders might receive a premium for their
stock over the then market price. The board of directors does not intend to seek
stockholder approval prior to any issuance of such preferred stock, unless
otherwise required by law or stock exchange rules.
Classified Board of Directors. Our amended and restated certificate of
incorporation provides for a board of directors divided into three classes of
directors serving staggered three-year terms. The classification of directors
has the effect of making it more difficult for stockholders to change the
composition of the board of directors in a relatively short period of time. At
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the board of directors.
Director Vacancies; Removal of Directors. Our amended and restated bylaws
provide that our board of directors, acting by majority vote of the directors
then in office, may fill any newly created directorships or vacancies on the
board of directors. Moreover, under the General Corporation Law of the State of
Delaware, in the case of a corporation having a classified board, stockholders
may remove a director only for cause. This provision, when coupled with the
provision of the bylaws authorizing the board of directors to fill vacant
directorships, will preclude a stockholder from removing incumbent directors
without cause and simultaneously gaining control of the board of directors by
filling the vacancies created by such removal with its own nominees.
Special Meetings. Our amended and restated bylaws provide that special
meetings of our stockholders may be called by a majority of the board of
directors or any holder or holders of at least 50% of the total voting power of
our outstanding Class A and Class B common stock.
Advance Notice Requirements for Stockholder Proposals and Director
Nominees. Our amended and restated bylaws establish an advance notice procedure
with regard to business proposed to be submitted by a stockholder at any annual
or special meeting of stockholders, including the nomination of candidates for
election as directors. The procedure provides that a notice of proposed
stockholder business must be timely given in writing to the secretary of our
company prior to the meeting. To be timely, a stockholder notice relating to an
annual meeting must be received at our principal executive offices not less than
60 days nor more than 90 days before the first anniversary of the prior year's
annual meeting; provided that if the date of the annual meeting is more than 30
days before or more than 60 days after the first anniversary of the prior year's
annual meeting, a stockholder notice must be delivered not earlier than 90 days
prior to the annual meeting and not later than the later of the 60th day prior
to the annual meeting or the 10th day following the day on which we first
publicly announce the date of the annual meeting. In addition, if our board of
directors determines that directors will be elected at a special meeting, a
stockholder must give written notice of any nominations to be brought before the
special meeting no earlier than the 90th day prior to the special meeting and
not later than the later of the 60th day prior to the special meeting or the
10th day following the day on which we first publicly announce the date of the
special meeting.
Notice to our company from a stockholder who proposes to nominate a person
at a meeting for election as a director must contain all information relating to
that person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act, including that person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected.
The chairman of a meeting of stockholders may determine that a person was
not nominated in accordance with the nomination procedure, in which case that
person's nomination will be disregarded. If the chairman of a meeting of
stockholders determines that other business was not properly brought before that
meeting in accordance with the bylaw procedures, such business will not be
conducted at the meeting. Nothing in the nomination procedure or the business
procedure will preclude discussion by any stockholder of any nomination or
business properly made or brought before the annual or any other meeting in
accordance with the above-mentioned procedures.
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Delaware Takeover Statute. Section 203 of the Delaware corporation law
prohibits persons deemed "interested stockholders" from engaging in a "business
combination" with a Delaware corporation for three years following the date
these persons become interested stockholders. Interested stockholders generally
include:
- persons who are the beneficial owners of 15% or more of our outstanding
voting stock; and
- persons who are our affiliates or associates and who hold 15% or more of
our outstanding voting stock at any time within three years before the
date on which such person's status as an interested stockholder is
determined.
Subject to certain exceptions, a "business combination" includes, among other
things:
- mergers and consolidations;
- the sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets having an aggregate market value equal to 10% or
more of either the aggregate market value of all assets of the
corporation determined on a consolidated basis or the aggregate market
value of all our outstanding stock;
- transactions that result in our issuance or transfer of any of our stock
to the interested stockholder, except pursuant to certain exercises,
exchanges, conversions, distributions or offers to purchase with respect
to securities outstanding prior to the time that the interested
stockholder became such and that, generally, do not increase the
interested stockholder's proportionate share of any class or series of
our stock;
- any transaction involving us that has the effect of increasing the
proportionate share of our stock of any class or series, or securities
convertible into the stock of any class or series, that is owned directly
or indirectly by the interested stockholder; or
- any receipt by the interested stockholder of the benefit (except
proportionately as a stockholder) of any loans, advances, guarantees,
pledges or other financial benefits which we provided.
Section 203 does not apply to a business combination if:
- before a person becomes an interested stockholder, our board approves the
transaction in which the interested stockholder became an interested
stockholder or approves the business combination;
- upon consummation of the transaction that resulted in the interested
stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of our voting stock outstanding at the time
the transaction commences (other than certain excluded shares); or
- following a transaction in which the person became an interested
stockholder, the business combination is approved by our board and
authorized at a regular or special meeting of stockholders (and not by
written consent) by the affirmative vote of the holders of at least two-
thirds of our outstanding voting stock not owned by the interested
stockholder.
These provisions of Delaware law and our amended and restated certificate
of incorporation and bylaws could have the effect of discouraging others from
attempting hostile takeovers and, as a consequence, they may also inhibit
temporary fluctuations in the market price of our common stock that often result
from actual or rumored hostile takeover attempts. Such provisions may also have
the effect of preventing changes in our management. It is possible that these
provisions could make it more difficult to accomplish transactions which
stockholders may otherwise deem to be in their best interests.
LIMITATIONS ON DIRECTOR LIABILITY
Our amended and restated certificate of incorporation also contains
provisions permitted under the General Corporation Law of the State of Delaware
regarding liability of directors. These provisions eliminate the personal
liability of our directors to us and our stockholders for monetary damages for
any breach of their fiduciary duties in their capacity as directors, except for
any breach of the duty of loyalty, for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, for
liability under Section 174 of the General Corporation Law of the State of
Delaware (regarding
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certain unlawful dividends, stock repurchases or stock redemptions), or for any
transaction from which the director derived an improper personal benefit. These
provisions do not eliminate a director's duty of care and do not affect the
availability of equitable remedies such as an action to enjoin or rescind a
transaction involving a breach of fiduciary duty. In addition, these provisions
do not apply to claims against a director for violation of certain laws,
including the federal securities laws. Our amended and restated certificate of
incorporation further provides that we must indemnify our directors and
officers, and may indemnify any employee or agent of the company, to the fullest
extent permitted by Delaware law. We believe these provisions will assist us in
attracting and retaining qualified individuals to serve as directors and
officers.
We have also entered into indemnification agreements with Mark R. Briggs,
Thomas P. Dea, Thomas O. Harbison and Seth M. Mersky which further limit their
potential liability as directors of our company. For a description of these
agreements, see "Certain Relationships and Related Party
Transactions -- Director Indemnity Agreements."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American
Securities Transfer & Trust, Inc.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 19,251,285 shares of Class A
common stock issued and outstanding, assuming no exercise of the underwriters'
over-allotment option, and 66,451,221 shares of Class B common stock issued and
outstanding. Of these shares, the 13,300,000 shares of Class A common stock sold
in this offering, plus any shares issued upon exercise of the underwriters'
over-allotment option, will be freely transferable without restriction in the
public market, except to the extent that our affiliates acquired any of these
shares. Resales of shares acquired by affiliates are subject to restrictions
under Rule 144 under the Securities Act. The shares of our outstanding Class A
common stock were issued in reliance on exemptions from the registration
requirements of the Securities Act, and these shares are "restricted" securities
under Rule 144. The number of "restricted" shares available for sale in the
public market is limited by the restrictions under Rule 144.
LOCK-UP AGREEMENTS
Our directors, members of senior management and holders of substantially
all of our Class A common stock have agreed pursuant to lock-up agreements not
to sell or otherwise dispose of their shares of Class A common stock, for a
period of 180 days after the date of this prospectus without the prior written
consent of Salomon Smith Barney.
Salomon Smith Barney has informed us that it has no current intentions of
releasing any shares subject to the lock-up agreements. Any determination by
Salomon Smith Barney to release any shares subject to the lock-up agreements
would be based on a number of factors at the time of determination, including
the market price of the common stock, the liquidity of the trading market for
the common stock, general market conditions, the number of shares proposed to be
sold and the timing, purpose and terms of the proposed sale.
RULE 144
In general, under Rule 144, as currently in effect, a person who has
beneficially owned our common stock for at least one year is entitled to sell a
number of shares within any three month period that does not exceed the greater
of:
- 1% of the then outstanding shares of the class of common stock; or
- the average weekly trading volume of the Class A common stock on the
Nasdaq National Market during the four calendar weeks preceding the
filing of notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
A stockholder who is deemed not to have been an affiliate for at least
three months prior to the date of sale and who has beneficially owned the shares
to be sold for at least two years would be entitled to sell the shares under
Rule 144 without regard to the volume, manner of sale and other limitations
described above.
Approximately 59,820,750 shares of our outstanding Class A common stock
will become available for sale, subject to the volume limitations of Rule 144,
after the expiration of the lock-up period. The remaining shares of our
outstanding Class A common stock will become available for sale, subject to the
volume limitations of Rule 144, at various times after the expiration of the
lock-up period and upon expiration of one-year holding periods required by Rule
144.
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RULE 701
In general, under Rule 701 of the Securities Act, as currently in effect,
each of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory share plan or other written agreement is eligible
to resell such shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with restrictions, including the
holding period, contained in Rule 144.
CLASS B COMMON STOCK
Each share of our Class B common stock is convertible at any time into
shares of our Class A common stock. In addition, shares of Class B common stock
will automatically convert into shares of Class A common stock upon transfer to
a person other than Onex or its affiliates. Shares of Class B common stock will
also convert to shares of Class A common stock upon other occurrences described
under "Description of Capital Stock -- Common Stock."
EXCHANGEABLE SHARES
In connection with our acquisition of North Direct Response during 1998,
one of our subsidiaries issued exchangeable preferred shares in exchange for
minority shares of an affiliate of North Direct Response. These exchangeable
preferred shares may be converted at our option or the option of the holders
into 1,963,321 shares of our common stock.
REGISTRATION RIGHTS
Onex has the right to require us to file registration statements covering
the shares of Class A common stock it would receive upon conversion of its Class
B common stock and Onex and all of our existing holders of our Class A common
stock, including the holders of exchangeable preferred shares, have rights to
include their shares in registration statements we may file for our company or
for other stockholders.
In addition, we expect to grant to Messrs. Peter A. Berczi, Edward Schwartz
and Bruce Simpson the right to demand registration of their 1,963,321 shares of
Class A common stock issuable upon conversion of their exchangeable preferred
shares in one of our subsidiaries. Messrs. Berczi, Schwartz and Simpson will be
able to make a demand upon our eligibility to file registration statements on
Form S-3. Messrs. Berczi, Schwartz and Simpson will also have rights to include
their shares of Class A common stock underlying the exchangeable preferred
shares in any registration statement we may file that include shares of Class A
common stock held by Onex.
If these holders exercise their right to have their shares registered, they
could sell their shares immediately without regard to the holding periods or
volume limitations under Rule 144.
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UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of the material U.S. federal income
and estate tax consequences of the ownership and disposition of our Class A
common stock applicable to Non-U.S. Holders.
A "Non-U.S. Holder" is generally an individual, corporation, estate or
trust other than:
- an individual who is a citizen or resident of the United States for U.S.
federal income tax purposes;
- a corporation created or organized in the United States or under the laws
of the United States or of any subdivision thereof;
- an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of source; and
- a trust subject to the primary supervision of a court within the United
States and the control of one or more U.S. persons.
The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, and
administrative and judicial interpretations as of the date of this prospectus,
all of which are subject to change, possibly with retroactive effect. The
following summary is for general information and applies only to Non-U.S.
Holders that hold our Class A common stock as a capital asset. In addition, this
discussion does not apply to persons holding our shares through a partnership or
other pass-through entity. If you are a Non-U.S. Holder, you should consult a
tax advisor about the U.S. federal tax consequences, in your particular
circumstances (for example, if you are a former citizen or resident of the
United States), of holding and disposing of our Class A common stock, as well as
any tax consequences under the laws of any U.S. state or local or non-U.S.
taxing jurisdiction.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Class A common stock generally will
be subject to withholding of U.S. federal income tax at a 30% rate or a lower
rate that an applicable income tax treaty may specify. Non-U.S. Holders should
consult their tax advisors on 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 U.S. 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 files the appropriate
IRS form with withholding agent. Any U.S. trade or business income received by a
Non-U.S. Holder that is a corporation may, under specific circumstances, be
subject to an additional "branch profits tax" at a 30% rate or a lower rate that
an applicable income tax treaty may specify.
Dividends paid prior to January 1, 2001 to an address in a foreign country
are presumed, absent actual knowledge to the contrary, to be paid to a resident
of that country for purposes of the withholding discussed above and for purposes
of determining the applicability of an income tax treaty rate. For dividends
paid after December 31, 2000, a Non-U.S. Holder of Class A common stock that
claims the benefit of an income tax treaty rate generally will be required to
satisfy applicable certification and other requirements.
A Non-U.S. Holder of Class A common stock that is eligible for a reduced
rate of U.S. withholding tax under an income tax treaty may obtain a refund or
credit of any excess amounts withheld by filing an appropriate claim for a
refund with the IRS.
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DISPOSITION OF CLASS A 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 Class A common stock unless:
- the gain is effectively connected with a U.S. trade or business, in which
case the branch profits tax may also apply to a corporate Non-U.S.
Holder;
- the Non-U.S. Holder is an individual who is present in the United States
for 183 or more days in the taxable year of the disposition and meets
other requirements;
- the Non-U.S. Holder is subject to U.S. tax under provisions applicable to
certain U.S. expatriates (including certain former citizens or residents
of the United States); or
- we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the
five-year period ending on the date of disposition and the Non-U.S.
Holder's holding period for the Class A common stock.
The tax relating to stock in a "U.S. real property holding corporation"
does not apply to a Non-U.S. Holder whose holdings, actual and constructive, at
all times during the applicable period, amount to 5% or less of the Class A
common stock, provided that the Class A common stock is regularly traded on an
established securities market. 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 and its other assets used or held for use in a
trade or business. We believe that we have not been, are not, and do not
anticipate becoming, a "U.S. real property holding corporation" for U.S. federal
income tax purposes.
FEDERAL ESTATE TAXES
Class A common stock owned or treated as owned by an individual who is a
Non-U.S. Holder at the time of death will be included in the individual's gross
estate for U.S. federal estate tax purposes and may be subject to U.S. federal
estate tax, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Under specific circumstances, the IRS requires information reporting and
backup withholding at a rate of 31% on specific payments on Class A common
stock. Under currently applicable law, Non-U.S. Holders of Class A common stock
generally will be exempt from information reporting and backup withholding on
dividends paid prior to January 1, 2001, to an address outside the U.S. For
dividends paid after December 31, 2000, however, a Non-U.S. Holder of Class A
common stock that fails to certify its Non-U.S. Holder status under applicable
Treasury regulations may be subject to information reporting backup withholding
at a rate of 31% on payments of dividends.
With respect to the payment of proceeds upon the disposition of Class A
common stock, under current law, Non-U.S. Holder's are not subject to backup
withholding and will generally not be subject to information reporting but may
be required to comply with certification or identification requirements to prove
their exemption. For proceeds paid after December 31, 2000, backup withholding
may apply in any circumstance in which information reporting would apply.
Non-U.S. Holders should consult their own tax advisors on the application
of information withholding and backup withholding to them in their particular
circumstances (including, upon their disposition of Class A common stock).
Backup withholding is not an additional tax. 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, if the
holder provides the required information to the IRS.
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<PAGE> 84
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and we have agreed to sell to such underwriter, the number of shares
set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---- ----------
<S> <C>
Salomon Smith Barney Inc. ..................................
FleetBoston Robertson Stephens Inc. ........................
Deutsche Bank Securities Inc. ..............................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Thomas Weisel Partners LLC..................................
DLJdirect Inc. .............................................
TD Securities (USA) Inc. ...................................
E*OFFERING Corp.............................................
----------
Total............................................. 13,300,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of particular legal matters by counsel and to other conditions. The
underwriters are obligated to purchase all the shares (other than those covered
by the over-allotment option described below) if they purchase any of the
shares.
The underwriters, for whom Salomon Smith Barney Inc., FleetBoston Robertson
Stephens Inc., Deutsche Bank Securities Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, Thomas Weisel Partners LLC and TD Securities (USA) Inc.
are acting as representatives, propose to offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to certain dealers at the public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share on sales to certain other dealers. If all of the shares are not sold at
the initial offering price, the representatives may change the public offering
price and the other selling terms. The representatives have advised us that the
underwriters do not intend to confirm any sales to any accounts over which they
exercise discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 1,995,000 additional shares of
Class A common stock at the public offering price less the underwriting
discount. The underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with this offering. To the
extent such option is exercised, each underwriter will be obligated, subject to
certain conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
At our request, the underwriters will reserve up to 10.0% of the shares of
our Class A common stock to be sold in this offering, at the initial public
offering price, to our directors, officers and employees, as well as to clients,
vendors and individuals associated with officers, directors and Onex. This
directed share program will be administered by Salomon Smith Barney Inc. and TD
Securities (USA) Inc. The number of shares of Class A common stock available for
sale to the general public will be reduced to the extent these individuals
purchase reserved shares. Any reserved shares which are not so purchased will be
offered by the underwriters to the general public on the same basis as the other
shares offered by this prospectus. We have agreed to indemnify the underwriters
against certain liabilities and expenses, including liabilities under the
Securities Act of 1933 in connection with sales of the directed shares.
We, our officers and directors, and holders of substantially all of our
existing outstanding shares of our Class A and Class B common stock have agreed
that, for a period of 180 days from the date of this prospectus, we will not,
without the prior written consent of Salomon Smith Barney Inc., dispose of or
hedge any shares of our Class A common stock or any securities convertible into
or exchangeable for our
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<PAGE> 85
Class A common stock. Salomon Smith Barney Inc. in its sole discretion may
release any of the securities subject to these lock-up agreements at any time
without notice.
Prior to this offering, there has been no public market for our Class A
common stock. Consequently, the initial public offering price for the shares was
determined by negotiations among us and the representatives. Among the factors
considered in determining the initial public offering price were our record of
operations, our current financial condition, our future prospects, our markets,
the economic conditions in and future prospects for the industry in which we
compete, our management, and currently prevailing general conditions in the
equity securities markets, including current market valuations of publicly
traded companies considered comparable to us. There can be no assurance,
however, that the prices at which the shares will sell in the public market
after this offering will not be lower than the price at which they are sold by
the underwriters or that an active trading market in the Class A common stock
will develop and continue after this offering.
We have applied to have our Class A common stock included for quotation on
the Nasdaq National Market under the symbol "CLGC".
The following table shows the underwriting discount that we will pay to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares of Class A common stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of Class A common stock in the
open market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of Class A common stock in excess of the number of shares to be purchased
by the underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the Class A common stock in
the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of Class A common stock made for the purpose of preventing or
retarding a decline in the market price of the Class A common stock while the
offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of the Class A common stock to
be higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.
We estimate that our total expenses of this offering, excluding the
underwriting discount, will be $2.2 million.
An electronic prospectus is being made available on Web sites maintained by
DLJdirect Inc., E*OFFERING Corp. and E*TRADE Securities, Inc. Other than the
prospectus in electronic format, any information on these Web sites relating to
this offering is not part of this prospectus and has not been approved or
endorsed by us or any underwriter and should not be relied upon by prospective
investors.
DLJdirect will make all allocations of securities distributed in this
offering through the use of the Internet. Approximately two to three weeks prior
to the scheduled offering date, DLJdirect will post on its Web site
(www.dljdirect.com) a brief description of the offering which contains only the
information
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<PAGE> 86
permitted under Rule 134 of the Securities Act. At this time, DLJdirect will
also send an e-mail to all DLJdirect account holders with $100,000 or more in
assets in their accounts advising them of the offering. These account holders
will have access to the preliminary prospectus by links on the DLJdirect Web
site. DLJdirect will allocate the shares it has underwritten based on its
judgment of what is in the best interest of the issuer, considering the
following criteria with respect to the account holders expressing an interest in
the offering: asset level of the account, investment objectives of the account
holder, trading history of the account, tenure of the account at DLJdirect and
post-offering activity in previous offerings.
E*OFFERING Corp. will allocate for distribution by E*TRADE Securities, Inc.
a portion of the shares that E*OFFERING Corp. receives in this offering. Copies
of the prospectus in electronic format will be made available on Internet
websites maintained by E*OFFERING Corp. and E*TRADE Securities, Inc. Customers
of E*TRADE Securities, Inc. who complete and pass an online eligibility profile
may place conditional offers to purchase shares in this offering through E*TRADE
Securities, Inc.'s Internet website.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners LLC has been named as a lead or co-manager on 110
filed public offerings of equity securities, of which 79 have been completed,
and has acted as a syndicate member in an additional 54 public offerings of
equity securities. Thomas Weisel Partners LLC does not have any material
relationship with us or any of our officers, directors or other controlling
persons, except with respect to its contractual relationship with us pursuant to
the underwriting agreement entered into in connection with this offering.
Because TD Securities (USA) Inc. is an affiliate of Toronto Dominion Bank,
who will receive approximately $103.2 million of the proceeds of this offering
to repay our senior credit facilities and our subordinated revolving credit
facility, TD Securities may be deemed to have a "conflict of interest" under
Rule 2710(c)(8) of the Conduct Rules of the National Association of Securities
Dealers. When an NASD member with a "conflict of interest" participates as an
underwriter in a public offering, the public offering price per share can be no
higher than that recommended by a "qualified independent underwriter" meeting
specified standards. In accordance with this rule, Salomon Smith Barney Inc. has
assumed the responsibilities of acting as a qualified independent underwriter.
In its role as a qualified independent underwriter, Salomon Smith Barney has
performed a due diligence investigation and participated in the preparation of
this prospectus and the registration statement of which this prospectus is a
part. Salomon Smith Barney will receive no compensation for acting in this
capacity; however, we have agreed to indemnify Salomon Smith Barney for acting
as a qualified independent underwriter against certain liabilities under the
Securities Act.
The representatives have performed certain investment banking and advisory
services for us from time to time for which they have received customary fees
and expenses. The representatives may, from time to time, engage in transactions
with and perform services for us in the ordinary course of their business.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of any of those liabilities.
LEGAL MATTERS
The validity of the shares of Class A common stock offered by this
prospectus will be passed upon for us by Weil, Gotshal & Manges LLP, Dallas,
Texas and New York, New York. Certain legal matters in connection with the
offering will be passed upon for the underwriters by Cravath, Swaine & Moore,
New York, New York.
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EXPERTS
The financial statements of ClientLogic Corporation at December 31, 1999
and 1998 and for the year ended December 31, 1999 and for the period from April
28, 1998 through December 31, 1998 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of North Direct Response, Inc., the predecessor
company, at April 27, 1998 and for the period from January 1, 1998 through April
27, 1998 and for the year ended December 31, 1997 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The combined financial statements of Upgrade Corporation of America and
Subsidiary (d/b/a SOFTBANK Services Group) and The Ivy Group Limited at December
31, 1997 and 1996 and for the years ended December 31, 1997 and 1996 included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
The consolidated balance sheets of LCS Industries, Inc. and subsidiaries as
of September 30, 1997 and 1998 and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended September 30, 1998 included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report included
herein and is included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of Cordena Call Management B.V. at
December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and
1996 included in this prospectus have been so included in reliance on the report
of PricewaterhouseCoopers N.V., independent accountants, given on authority of
said firm as experts in accounting and auditing.
The financial statements of MarketVision, Inc. at December 31, 1998 and for
the year ended December 31, 1998 included in this prospectus have been so
included in reliance on the report of Terry & Stephenson, P.C., independent
accountants, given on authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed a Registration Statement on Form S-1 with the Commission
regarding this offering. This prospectus, which is part of the registration
statement, does not contain all of the information included in the registration
statement, and you should refer to the registration statement and its exhibits
to read that information. References in this prospectus to any of our contracts
or other documents are not necessarily complete, and you should refer to the
exhibits attached to the registration statement for copies of the actual
contract or document. You may read and copy the registration statement, the
related exhibits and the other material we file with the Commission at the
Commission's public reference room in Washington, D.C. and at the Commission's
regional offices in Chicago, Illinois and New York, New York. You can also
request copies of those documents, upon payment of a duplicating fee, by writing
to the Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The Commission also
maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file with the
Commission. The site's address is www.sec.gov. You may also request a copy of
these filings, at no cost, by writing or telephoning us as follows: One American
Center, 3100 West End Avenue, Suite 150, Nashville, Tennessee 37203, Attention:
Chief Financial Officer or (615) 301-7100.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CLIENTLOGIC CORPORATION
Report of Independent Accountants........................... F-3
Balance Sheets as at December 31, 1999 and 1998 and
Predecessor Company Balance Sheet as at April 27, 1998.... F-5
Statement of Operations for the year ended December 31,
1999, Statement of Operations for the period April 28,
1998 through December 31, 1998 and Predecessor Company
Statement of Operations for the period January 1, 1998
through April 27, 1998 and the year ended December 31,
1997...................................................... F-6
Statement of Stockholders' Equity for the year ended
December 31, 1999, Statement of Stockholders' Equity for
the period April 28, 1998 through December 31 1998, and
Predecessor Company Statement of Stockholders' Equity for
the period January 1, 1998 through April 27, 1998 and the
year ended December 31, 1997.............................. F-7
Statement of Cash Flows for the year ended December 31,
1999, Statement of Cash Flows for the period April 28,
1998 through December 31, 1998 and Predecessor Company
Statement of Cash Flows for the period January 1, 1998
through April 27, 1998 and for the year ended December 31,
1997...................................................... F-8
Notes to Financial Statements............................... F-9
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
Report of Independent Accountants........................... F-31
Combined Balance Sheets as at December 31, 1997 and 1996.... F-32
Combined Statement of Operations for the years ended
December 31, 1997 and 1996................................ F-33
Combined Statement of Stockholders' Deficit for the years
ended December 31, 1997 and 1996.......................... F-34
Combined Statement of Cash Flows for the years ended
December 31, 1997 and 1996................................ F-35
Notes to Combined Financial Statements...................... F-36
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
Combined Balance Sheets as at September 30, 1998 (unaudited)
and December 31, 1997..................................... F-45
Combined Statement of Operations for the period January 1,
1998 through September 30, 1998 (unaudited) and the period
January 1, 1997 through September 30, 1997 (unaudited).... F-46
Combined Statement of Stockholders' Deficit for the period
January 1, 1998 through September 30, 1998 (unaudited) and
the period January 1, 1997 through September 30, 1997
(unaudited)............................................... F-47
Combined Statement of Cash Flows for the period January 1,
1998 through September 30, 1998 (unaudited) and the period
January 1, 1997 through September 30, 1997 (unaudited).... F-48
Notes to Combined Financial Statements (unaudited).......... F-49
LCS INDUSTRIES, INC.
Independent Auditor's Report................................ F-51
Consolidated Balance Sheet as at September 30, 1998 and
1997...................................................... F-52
Consolidated Statements of Income for the years ended
September 30, 1998, 1997 and 1996......................... F-53
Consolidated Statements of Changes in Stockholders' Equity
for the years ended September 30, 1998, 1997 and 1996..... F-54
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996......................... F-55
Notes to Consolidated Financial Statements.................. F-57
</TABLE>
F-1
<PAGE> 89
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
LCS INDUSTRIES, INC.
Consolidated Balance Sheets as at December 31, 1998
(unaudited) and September 30, 1998........................ F-70
Consolidated Statements of Income and Retained Earnings for
the period October 1, 1998 through December 31, 1998
(unaudited) and the period October 1, 1997 through
December 31, 1997 (unaudited)............................. F-71
Consolidated Statements of Cash Flows for the period October
1, 1998 through December 31, 1998 (unaudited) and the
period October 1, 1997 through December 31, 1997
(unaudited)............................................... F-72
Notes to Consolidated Financial Statements (unaudited)...... F-73
CORDENA CALL MANAGEMENT B.V., THE HAGUE
Independent Auditor's Report................................ F-76
Consolidated Balance Sheets as at December 31, 1998 and
1997...................................................... F-77
Consolidated Statement of Income for the years ended
December 31, 1998, 1997 and 1996.......................... F-78
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-79
Notes to Consolidated Financial Statements.................. F-80
CORDENA CALL MANAGEMENT B.V., THE HAGUE
Consolidated Balance Sheets as at September 30, 1999
(unaudited) and December 31, 1998......................... F-91
Consolidated Statement of Income for the period January 1,
1999 through September 30, 1999 (unaudited) and the period
January 1, 1998 through September 30, 1998 (unaudited).... F-92
Consolidated Statement of Cash Flows for the period January
1, 1999 through September 30, 1999 (unaudited) and the
period January 1, 1998 through September 30, 1998
(unaudited)............................................... F-93
Notes to Consolidated Financial Statements (unaudited)...... F-95
MARKETVISION, INC.
Independent Auditor's Report................................ F-100
Balance Sheet as at December 31, 1998....................... F-101
Statement of Income and Retained Earnings for the year ended
December 31, 1998......................................... F-102
Statement of Cash Flows for the year ended December 31,
1998...................................................... F-103
Notes to Financial Statements............................... F-104
MARKETVISION, INC.
Balance Sheets as at November 30, 1999 (unaudited) and
December 31, 1998......................................... F-109
Statements of Income and Retained Earnings for the period
January 1, 1999 through November 30, 1999 (unaudited) and
the period January 1, 1998 through November 30, 1998
(unaudited)............................................... F-110
Statements of Cash Flows for the period January 1, 1999
through November 30, 1999 (unaudited) and the period
January 1, 1998 through November 30, 1998 (unaudited)..... F-111
Notes to Financial Statements (unaudited)................... F-112
</TABLE>
F-2
<PAGE> 90
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of ClientLogic Corporation
In our opinion, the accompanying balance sheets at December 31, 1999 and
1998 and related statements of operations and comprehensive loss, of
stockholders' equity and of cash flows for the year ended December 31, 1999 and
the period from April 28, 1998 through December 31, 1998 present fairly, in all
material respects, the financial position of ClientLogic Corporation and its
subsidiaries at December 31, 1999 and 1998 and the results of their operations
and cash flows for the year ended December 31, 1999 and the period from April
28, 1998 through December 31, 1998 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 23, the accompanying financial statements have been
revised to reflect a change in market value of the Company's common stock issued
or issuable during the year ended December 31, 1999 as consideration in purchase
business combinations, to reflect a change in market value of the Company's
stock options issued to employees during the year ended December 31, 1999 and to
reflect the market value of stock options issued in connection with a purchase
business combination as an increase to stockholders' equity rather than as a
current liability, as previously reported.
/s/ PRICEWATERHOUSE COOPERS LLP
PricewaterhouseCoopers LLP
Buffalo, New York
January 29, 2000
except as to Note 20, for
which the date is
March 27, 2000, and as to
Note 23, for which the
date is April 19, 2000
F-3
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of North Direct Response, Inc.
("Predecessor Company")
In our opinion, the accompanying balance sheet at April 27, 1998 and the
related statements of operations and comprehensive loss, of stockholders' equity
and of cash flows for the period from January 1, 1998 through April 27, 1998 and
the year ended December 31, 1997 present fairly, in all material respects, the
financial position of North Direct Response, Inc. at April 27, 1998 and the
results of its operations and cash flows for the period from January 1, 1998
through April 27, 1998 and the year ended December 31, 1997 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSE COOPERS LLP
PricewaterhouseCoopers LLP
Buffalo, New York
January 29, 2000
F-4
<PAGE> 92
CLIENTLOGIC CORPORATION
BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
PREDECESSOR
COMPANY
CLIENTLOGIC
CORPORATION
--------------------
-----------
DECEMBER 31,
--------------------
APRIL 27,
1999 1998 1998
--------- -------- -----------
(REVISED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 10,090 $ 5,584 $ --
Accounts receivable, less allowance for doubtful accounts
of $2,478, $280 and $0, respectively................... 59,428 15,614 1,344
Accounts receivable and other current assets -- related
party.................................................. 1,237 -- --
Prepaids and other current assets......................... 16,649 1,791 66
-------- -------- ------
Total current assets.............................. 87,404 22,989 1,410
Capital assets.............................................. 52,982 22,964 2,208
Other noncurrent assets..................................... 6,521 1,066 27
Goodwill.................................................... 144,340 64,166 --
Debt issue costs............................................ 1,479 -- --
-------- -------- ------
Total assets...................................... $292,726 $111,185 $3,645
======== ======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank indebtedness......................................... $ 3,324 $ 343 $ 404
Accounts payable.......................................... 36,013 9,607 184
Accrued liabilities and other............................. 35,051 6,905 100
Current installments of long-term debt.................... 9,954 71 --
Current installments of long-term debt to related party... 2,063 -- --
Current portion of capital lease obligations.............. 2,726 1,115 133
-------- -------- ------
Total current liabilities......................... 89,131 18,041 821
Long-term debt.............................................. 23,579 1,854 --
Long-term debt to related party............................. 66,059 30,000 1,748
Capital lease obligations................................... 5,270 1,588 363
Other noncurrent liabilities................................ 1,513 563 175
-------- -------- ------
Total liabilities................................. 185,552 52,046 3,107
-------- -------- ------
Subsidiary preferred stock.................................. 5,058 -- --
Subsidiary exchangeable preferred stock..................... 3,054 3,054 --
Stockholders' equity:
Common stock.............................................. 714 395 --
Common stock issuable..................................... 7,438 -- --
Additional paid-in capital................................ 162,894 61,897 1,666
Accumulated deficit....................................... (66,395) (5,345) (1,095)
Accumulated other comprehensive loss...................... (666) (862) (33)
Unearned compensation..................................... (4,923) -- --
-------- -------- ------
Total stockholders' equity........................ 99,062 56,085 538
-------- -------- ------
Total liabilities and stockholders' equity........ $292,726 $111,185 $3,645
======== ======== ======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 93
CLIENTLOGIC CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
CLIENTLOGIC CORPORATION
-------------------------------------
PREDECESSOR COMPANY
-----------------------------------
COMBINED
PERIOD FROM
APRIL 28, 1998 PERIOD FROM
JANUARY 1, 1998
CONSOLIDATED THROUGH THROUGH
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 APRIL 27, 1998 YEAR ENDED
DECEMBER 31, 1997
----------------- ----------------- --------------- -----------------
(REVISED)
<S> <C> <C> <C> <C>
Revenues...................... $177,791 $27,283 $ 1,633 $2,617
Costs and expenses
Cost of services............ 99,478 16,353 962 1,426
Selling, general and
administrative
expenses................. 75,823 9,452 786 1,451
Depreciation expense........ 11,063 1,900 145 329
Amortization expense........ 23,829 3,937 2 4
Impairment of intangible
assets................... 22,273 -- -- --
Loss on write-off of capital
assets................... 2,968 -- -- --
Gain on sale of investment.... (3,395) -- -- --
-------- ------- ------- ------
Operating loss................ (54,248) (4,359) (262) (593)
Interest expense, net......... 6,480 921 68 142
-------- ------- ------- ------
Loss before income taxes...... (60,728) (5,280) (330) (735)
Income taxes.................. 322 65 -- --
-------- ------- ------- ------
Net loss...................... $(61,050) $(5,345) $ (330) $ (735)
======== ======= ======= ======
Other comprehensive income
(loss), net of tax:
Foreign currency transaction
adjustment............... 196 (862) 2 (35)
-------- ------- ------- ------
Comprehensive loss............ $(60,854) $(6,207) $ (328) $ (770)
======== ======= ======= ======
Basic loss per share.......... $ (1.02) $ (0.28) $ (0.03) $(0.08)
======== ======= ======= ======
Weighted average number of
shares outstanding (in
thousands).................. 60,040 19,330 10,309 9,372
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 94
CLIENTLOGIC CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL OTHER
NUMBER OF PAR COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE
SHARES VALUE ISSUABLE CAPITAL DEFICIT INCOME (LOSS)
----------- ------ ------------ ---------- ----------- -------------
(REVISED) (REVISED) (REVISED)
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
BALANCE DECEMBER 31, 1996.................. 7,113,396 $ -- $ -- $ 403 $ (30) $ --
----------- ------ ------ -------- -------- -----
Issued for cash.......................... 3,195,904 -- -- 1,263 -- --
Net loss for the year.................... -- -- -- -- (735) --
Other comprehensive loss for the year.... -- -- -- -- -- (35)
----------- ------ ------ -------- -------- -----
BALANCE DECEMBER 31, 1997.................. 10,309,300 -- -- 1,666 (765) (35)
=========== ====== ====== ======== ======== =====
Net loss for the period.................. -- -- -- -- (330) --
Other comprehensive income for the
period................................. -- -- -- -- -- 2
----------- ------ ------ -------- -------- -----
BALANCE APRIL 27, 1998..................... 10,309,300 $ -- $ -- $ 1,666 $ (1,095) $ (33)
=========== ====== ====== ======== ======== =====
- ---------------------------------------------------------------------------------------------------------------------------
SUCCESSOR COMPANY
BALANCE APRIL 28, 1998..................... -- $ -- $ -- $ -- $ -- $ --
----------- ------ ------ -------- -------- -----
Issued for cash.......................... 7,409,606 -- 12,142 -- --
Net loss for the period..................
April 28, 1998 - December 17, 1998..... -- -- -- -- (1,831) --
Other comprehensive loss for the period
April 28, 1998 - December 17, 1998..... -- -- -- -- -- (721)
Conversion of shares and transfer to
ClientLogic Corporation on December 17,
1998................................... (7,409,606) -- (12,142) 1,831 721
----------- ------ ------ -------- -------- -----
BALANCE DECEMBER 17, 1998.................. -- $ -- $ -- $ -- $ -- $ --
=========== ====== ====== ======== ======== =====
CLIENTLOGIC CORPORATION
BALANCE SEPTEMBER 25, 1998................. -- $ -- $ -- $ -- $ -- $ --
----------- ------ ------ -------- -------- -----
Issued for cash in financing of SSG
acquisition............................ 32,142,851 321 -- 49,679 -- --
Conversion of shares of Successor Company
and transfer to ClientLogic Corporation
on December 17, 1998................... 7,335,045 74 -- 12,068 (1,831) (721)
Net loss for the period
September 25, 1998 - December 31,
1998................................... -- -- -- -- (3,514) --
Other comprehensive loss for the period
September 25, 1998 - December 31,
1998................................... -- -- -- -- -- (141)
Stock option grants...................... -- -- -- 150 -- --
----------- ------ ------ -------- -------- -----
BALANCE DECEMBER 31, 1998.................. 39,477,896 $ 395 $ -- $ 61,897 $ (5,345) $(862)
----------- ------ ------ -------- -------- -----
......................................... -- -- --
Issued for cash in financing of LCS
acquisition............................ 18,749,997 187 -- 34,813 -- --
Issued for cash.......................... 358,151 4 -- 678 -- --
Issued for cash and as purchase
consideration in financing of
Cordena/Adverbe acquisitions........... 11,219,102 112 -- 46,949 -- --
Issued for cash in financing of
MarketVision acquisition............... 1,542,858 15 -- 11,985 -- --
Purchase consideration relating to
MarketVision acquisition to be
issued................................. -- -- 7,438 -- -- --
Stock option exercises................... 16,396 1 -- 36 -- --
Stock option grants...................... -- -- -- 6,536 -- --
Net loss for the year.................... -- -- -- -- (61,050) --
Other comprehensive income for the
year................................... -- -- -- -- -- 196
Unearned compensation on stock option
grants................................. -- -- -- -- -- --
----------- ------ ------ -------- -------- -----
BALANCE DECEMBER 31, 1999.................. 71,364,400 $ 714 $7,438 $162,894 $(66,395) $(666)
=========== ====== ====== ======== ======== =====
<CAPTION>
UNEARNED
COMPENSATION TOTAL
------------- ---------
(REVISED) (REVISED)
<S> <C> <C>
PREDECESSOR COMPANY
BALANCE DECEMBER 31, 1996.................. $ -- $ 373
------- --------
Issued for cash.......................... -- 1,263
Net loss for the year.................... -- (735)
Other comprehensive loss for the year.... -- (35)
------- --------
BALANCE DECEMBER 31, 1997.................. -- 866
======= ========
Net loss for the period.................. -- (330)
Other comprehensive income for the
period................................. -- 2
------- --------
BALANCE APRIL 27, 1998..................... $ -- $ 538
======= ========
- -------------------------------------------
SUCCESSOR COMPANY
BALANCE APRIL 28, 1998..................... $ -- $ --
------- --------
Issued for cash.......................... -- 12,142
Net loss for the period.................. --
April 28, 1998 - December 17, 1998..... -- (1,831)
Other comprehensive loss for the period
April 28, 1998 - December 17, 1998..... -- (721)
Conversion of shares and transfer to
ClientLogic Corporation on December 17,
1998................................... -- (9,590)
------- --------
BALANCE DECEMBER 17, 1998.................. $ -- $ --
======= ========
CLIENTLOGIC CORPORATION
BALANCE SEPTEMBER 25, 1998................. $ -- $ --
------- --------
Issued for cash in financing of SSG
acquisition............................ -- 50,000
Conversion of shares of Successor Company
and transfer to ClientLogic Corporation
on December 17, 1998................... -- 9,590
Net loss for the period
September 25, 1998 - December 31,
1998................................... -- (3,514)
Other comprehensive loss for the period
September 25, 1998 - December 31,
1998................................... -- (141)
Stock option grants...................... -- 150
------- --------
BALANCE DECEMBER 31, 1998.................. $ -- $ 56,085
------- --------
......................................... --
Issued for cash in financing of LCS
acquisition............................ -- 35,000
Issued for cash.......................... -- 682
Issued for cash and as purchase
consideration in financing of
Cordena/Adverbe acquisitions........... -- 47,061
Issued for cash in financing of
MarketVision acquisition............... -- 12,000
Purchase consideration relating to
MarketVision acquisition to be
issued................................. -- 7,438
Stock option exercises................... -- 37
Stock option grants...................... -- 6,536
Net loss for the year.................... -- (61,050)
Other comprehensive income for the
year................................... -- 196
Unearned compensation on stock option
grants................................. (4,923) (4,923)
------- --------
BALANCE DECEMBER 31, 1999.................. $(4,923) $ 99,062
======= ========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 95
CLIENTLOGIC CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
CLIENTLOGIC CORPORATION
-------------------------------------
PREDECESSOR COMPANY
--------------------------------------
COMBINED
PERIOD FROM
CONSOLIDATED APRIL 28, 1998 TO PERIOD FROM
YEAR ENDED JANUARY 1, 1998 TO
DECEMBER 31, 1999 DECEMBER 31, 1998 APRIL 27, 1998 YEAR ENDED
DECEMBER 31, 1997
----------------- ----------------- ------------------ -----------------
(REVISED)
<S> <C> <C> <C> <C>
Net cash relating to operating
activities:
Net loss.............................. $ (61,050) $ (5,345) $(330) $ (735)
Adjustments to reconcile net loss to
net cash relating to operating
activities:
Depreciation expense................ 11,063 1,900 145 329
Amortization expense................ 23,829 3,937 2 4
Bad debt expense.................... 2,305 206 -- --
Impairment of intangible assets..... 22,273 -- -- --
Non-cash stock compensation
expenses.......................... 3,729 285 -- --
Gain on sale of investment.......... (3,395) -- -- --
Loss on write-off of capital
assets............................ 2,968 -- -- --
Cumulative translation adjustment... 196 (862) 2 (35)
Minority share of loss.............. (205) -- -- --
Increase (decrease) in cash due to
changes in working capital:
Accounts receivable............... (13,104) (4,123) 231 (1,578)
Accounts receivable and other
current assets-related party.... (1,237) -- -- --
Prepaids and other current
assets.......................... (7,778) (150) 4 92
Accounts payable.................. 2,285 863 30 545
Accrued liabilities and other..... 14,791 (685) 22 100
Other............................. -- (347) -- --
--------- -------- ----- -------
Net cash relating to operating
activities.................... (3,330) (4,321) 106 (1,278)
--------- -------- ----- -------
Net cash relating to investing
activities:
Acquisition of operating companies,
net of cash acquired................ (115,340) (57,246) -- --
Purchase of capital assets............ (26,055) (2,845) (76) (2,098)
Proceeds from sale of investment...... 3,395 -- -- --
Other................................. (557) -- -- --
--------- -------- ----- -------
Net cash relating to investing
activities.................... (138,557) (60,091) (76) (2,098)
--------- -------- ----- -------
Net cash relating to financing
activities:
Proceeds from the issuance of stock... 86,987 62,142 -- 1,263
Proceeds from the issuance of
subsidiary preferred stock.......... 5,263 -- -- --
Repayment of long-term debt and
capital lease obligation............ (71,437) (34,541) (30) --
Repayment of long-term debt and
capital lease obligations-related
party............................... (30,000) (1,748) -- --
Issuance of long-term debt............ 90,208 14,185 -- 174
Issuance of long-term debt-related
party............................... 68,122 30,000 -- 1,748
Payment of debt issue costs........... (1,580) -- -- --
Other................................. (1,170) (42) -- --
--------- -------- ----- -------
Net cash relating to financing
activities.................... 146,393 69,996 (30) 3,185
--------- -------- ----- -------
Net increase (decrease) in cash......... 4,506 5,584 -- (191)
Cash at beginning of period............. 5,584 -- -- 191
--------- -------- ----- -------
Cash at end of period................... $ 10,090 $ 5,584 $ -- $ --
========= ======== ===== =======
Cash paid during the year for:
Interest.............................. $ 6,713 $ 953 $ 62 $ 136
Taxes................................. $ 366 $ 1 $ -- $ --
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 96
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. OVERVIEW, ORGANIZATION AND NATURE OF BUSINESS
ClientLogic Corporation ("ClientLogic" or the "Company") is an
international provider of marketing, customer contact management and fulfillment
services to the electronic commerce, or e-commerce marketplace. The Company
enables clients to build lasting customer relationships by managing every aspect
of the customer experience. The Company does this by offering an integrated
suite of services that include order and payment processing, customer care,
technical support, client inventory, warehousing and fulfillment. The Company
also provides a full range of marketing and database solutions designed to
assist clients in acquiring, retaining and expanding customer relationships. We
design each of our service offerings to accommodate the unique requirements of
Internet-based commerce, making these services available to clients and their
customers, 24 hours per day, 7 days per week.
Onex Corporation ("Onex") formed a Canadian company ("Successor Company")
on April 28, 1998 to acquire the majority of the shares of North Direct
Response, Inc. ("NDR" or "Predecessor Company"). For the period April 28, 1998
through December 17, 1998, the operations of the Successor Company principally
include the operations of their operating subsidiary, NDR. NDR provided customer
contact management services principally in Canada to telecommunications and
technology companies. Subsequent to its acquisition of the Successor Company,
Onex formed ClientLogic on September 25, 1998 to conduct all its business
activities associated with providing customer contact management services. Both
the Successor Company and ClientLogic operated as stand-alone entities. On
October 1, 1998, ClientLogic acquired Upgrade Corporation of America, d/b/a
SOFTBANK Services Group, and The Ivy Group (collectively, "SSG"), a customer
contact management and fulfillment services company offering services primarily
in the United States and on a limited basis in Europe.
Subsequently, on December 17, 1998, the Successor Company was contributed
to ClientLogic. In connection, 7,409,606 outstanding shares of the Successor
Company owned by Onex were exchanged for 7,335,045 newly issued shares of voting
common stock, $0.01 par value, of ClientLogic. In addition, the 3,085,099
minority interest shares held in a subsidiary of the Successor Company were
exchanged for 3,054,055 exchangeable preferred shares of the subsidiary. These
exchangeable preferred shares are referred to as the "NDR Minority Interest".
Pursuant to the charter and a related support agreement, (collectively, the
"Agreement"), the NDR Minority Interest has the right to exchange their shares
for 1,963,321 ClientLogic shares, plus any dividends declared on the ClientLogic
shares. NDR Minority Interest shareholders have no voting rights or other rights
of redemption. The outstanding NDR Minority Interest shares were reclassified
from minority interest liability of the subsidiary of the Successor Company to
ClientLogic mezzanine equity at the fair value of the exchangeable preferred
shares of approximately $1.56. The excess of the fair value over the minority
interest liability was recorded as goodwill. In connection with the SSG
acquisition, the NDR Minority Interest shareholders also purchased 1,774,285
newly issued ClientLogic common stock for cash at approximately $1.56 per share.
The contribution of the Successor Company to ClientLogic was accounted for
at historical cost and the entities were not revalued given that both entities
were under Onex common control. For the period of Onex ownership from April 28,
1998 to December 17, 1998, the balance sheet and statements of operations and
cash flows represent the results of the combined accounts of the merged entities
at their historical costs. For the period prior to Onex ownership for the year
ended December 31, 1997 and for the period January 1, 1998 to April 27, 1998,
the balance sheet and statements of operations and cash flows represent the
results of the Predecessor Company.
F-9
<PAGE> 97
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES
a) Principles of consolidation
The consolidated financial statements of the Company for the year
ended December 31, 1999 include the financial statements of its
wholly-owned operating subsidiaries including NDR, SSG and 1999
acquisitions of LCS Industries, Inc. ("LCS"), Cordena Call Management B.V.
("Cordena"), Groupe Adverbe International S.A. ("Adverbe") and MarketVision
Inc. ("MarketVision"). All significant intercompany balances and
transactions have been eliminated on consolidation.
The financial statements of the Company for the period from April 28,
1998 to December 31, 1998 include the financial results of the Successor
Company for the period April 28, 1998 through December 17, 1998, the date
the Successor Company was contributed to the Company, with the financial
results of the Company for the period September 25, 1998 through December
31, 1998.
b) Cash and cash equivalents
Cash and cash equivalents consist of highly liquid investments, such
as term deposits, money market instruments and commercial paper carried
with original maturities of three months or less.
c) Customer remittances payable
Cash collected on behalf of clients from their customers in connection
with the sale of products is remitted to the clients monthly. Such
remittances are not considered revenues of the Company and, as such, are
not reflected in the Company's financial statements. Amounts received but
not yet remitted are accumulated as customer remittances payable and are
classified in the balance sheet as accounts payable.
d) List accounts receivable and accounts payable
Accounts receivable from list marketing activities are recorded at the
gross amount including both the Company's revenue and the amount due to the
list owner. The offsetting liability for the amount due to the list owner
is recorded as accounts payable.
e) Capital assets
Capital assets are carried at cost and depreciated over their
estimated useful lives on a straight-line basis. Estimated useful lives for
the principal asset categories are as follows:
<TABLE>
<S> <C>
Building and improvements............................. Up to 10 years or term of lease
Computer software..................................... 3 to 5 years
Property and equipment................................ 3 to 15 years
Furniture and fixtures................................ 5 to 15 years
</TABLE>
Maintenance and repairs are charged to operations as incurred;
significant betterments are capitalized.
Internal use software costs incurred during the application
development stage are capitalized as incurred. Those costs related to the
development of internal use software, other than those incurred during the
application development stage, are expensed as incurred. Capitalized
internal use software costs are amortized using the straight-line method
over the remaining estimate economic life of the software.
Software production costs for computer software that is to be used as
an integral part of a product or process is not capitalized until both (a)
technological feasibility has been established for
F-10
<PAGE> 98
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the software and (b) all research and development activities for the other
components of the product or process have been completed. Amortization of
these computer software costs commences immediately following technological
feasibility and is computed using the straight-line method over the
remaining economic life of the product.
f) Goodwill
Goodwill represents the excess of cost over the net book value of
assets acquired through acquisitions. Goodwill is presented net of
accumulated amortization and is amortized on a straight-line basis over a
period of five years.
g) Impairment
The Company reviews long-lived assets for impairment on a regular
basis or whenever events or changes in circumstances indicate that the
carrying amount of the long-lived asset may not be recoverable. If the
projected future cash flows the long-lived asset is expected to generate,
undiscounted and without interest charges, is less than the carrying amount
of the long-lived asset, the Company recognizes an impairment loss for an
amount equal to the excess of the carrying amount over the fair value of
the long-lived asset.
The Company assesses the recoverability of enterprise level goodwill
by determining whether the unamortized goodwill balance can be recovered
through undiscounted projected future net cash flows of the acquired
operation. The amount of enterprise level goodwill impairment, if any, is
measured based on discounted projected future net cash flows.
h) Debt issue costs
Costs related to the acquisition of long term debt are amortized over
the life of the related debt instrument. Amortization of debt issue costs
amounted to $132 during the year ended December 31, 1999. This amount is
recorded as interest expense in the accompanying statement of operations.
i) Revenue recognition
The Company generates revenue principally through its marketing,
customer contact management, and fulfillment services.
Marketing services. The Company's marketing services include
developing, maintaining and providing access to customer information
databases and analyzing this information to identify and address specific
needs of our clients' customers. Revenue for these services are charged
under the terms of database maintenance and analysis arrangements, or per
project or per software license sold. Additionally, the Company performs
list management and list brokerage services, providing a variety of
individual, business and e-mail names and addresses, which the Company
normally obtains from list owners, such as catalog marketers. These
services are typically charged per thousand names provided. Revenue in the
accompanying statement of operations represents the Company's brokerage fee
or management fee and is recognized net of the cost payable to the
underlying list owner, if any.
Customer contact management services. The Company provides customer
service and technical support to our clients' customers through e-mail,
online chat, phone and mail. These services are generally charged by the
minute or per employee, or on a per item basis for each transaction
processed. Revenue is reported net of any telecommunications costs
reimbursed directly by our clients.
Fulfillment services. The Company conducts order and payment
processing, warehousing, inventory management, picking, packing and
shipping and returns processing for our clients. The Company generally
charges for these services per transaction, such as per order processed or
per item returned. Revenue is reported net of any freight costs that are
directly reimbursed by our clients. The
F-11
<PAGE> 99
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company typically does not take title or ownership of any physical goods as
part of its fulfillment services, normally operating only on a
fee-for-service basis.
Software licenses. Software arrangements range from those that provide
a license for a single software product to those, that in addition to the
delivery of software or a software system, require significant production,
modification or customization of the software. Revenue from the sale of a
software license is recognized upon acceptance of the software by the
customer. If an arrangement to deliver software or a software system,
either alone or together with other products or services, requires
significant production, modification or customization of software, the
entire arrangement is recognized to revenue based on time and material
costs incurred. If an arrangement does not require significant production,
modification or customization of software, the Company recognizes revenue
when all the following criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable
and collectibility is probable. Software maintenance is optional for the
customer and entitles the customer to upgrades and repairs. Maintenance fee
revenue is recognized over the term of the maintenance agreements. The
Company provides post-contract customer support on a limited basis.
Post-contract customer support revenue is recognized based on time and
material costs incurred.
j) Income taxes
The Company follows the asset and liability approach to account for
income taxes. This approach requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of operating loss
and tax credit carryforwards, and temporary differences between the
carrying amounts and the tax bases of assets and liabilities. No provision
has been made for United States income taxes applicable to undistributed
earnings of foreign subsidiaries as it is the intention of the Company to
indefinitely reinvest those earnings in the operations of those entities.
k) Loss per share
Loss per share amounts reflect the 1997 adoption of Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share."
Basic loss per share is calculated based on net income less preferred stock
dividend requirements, if any, divided by the weighted average number of
common shares outstanding during the period. Diluted earnings per share
assumes exercise of all contingently issuable shares into common shares at
the beginning of the period or date of issuance, unless the contingently
issuable shares are antidilutive. The following table discloses, by type of
potentially dilutive security, the number of additional common shares that
could potentially dilute earnings per share in the future that were not
included in the computation of diluted earnings per share because to do so
would have been antidilutive for the periods presented:
<TABLE>
<CAPTION>
CLIENTLOGIC CORPORATION PREDECESSOR COMPANY
-------------------------------------- -------------------------------
COMBINED PERIOD PERIOD FROM
YEAR ENDED FROM APRIL 28, 1998 TO JANUARY 1, 1998 YEAR ENDED
DECEMBER 31, DECEMBER 31, TO APRIL 27, DECEMBER 31,
1999 1998 1998 1997
------------ ---------------------- --------------- ------------
(REVISED)
<S> <C> <C> <C> <C>
Stock options.............. 2,540,475 90,100 97,236 --
Convertible securities..... -- -- -- --
Phantom stock units...... 151,072 86,786 -- --
Convertible debt......... 337,404 -- -- --
Subsidiary exchangeable
preferred shares...... 1,963,321 1,963,321 -- --
</TABLE>
F-12
<PAGE> 100
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Convertible securities include phantom stock units provided under the
Company's deferred compensation plan, convertible debt to the former
shareholders of MarketVision, and subsidiary exchangeable preferred shares.
l) Foreign currency translation
The accounts of the Company's foreign operations are translated into
U.S. dollars using the current rate method. Assets and liabilities are
translated at the year-end exchange rate and revenue and expenses are
translated at average exchange rates. Gains and losses arising from the
translation of the financial statements of foreign operations are deferred
in a "Comprehensive Income" account included as a separate component of
stockholders' equity.
The functional currency of the Company is the U.S. dollar although
certain subsidiaries operate under local currency and convert to U.S.
dollars for reporting purposes. These currencies include the Canadian
dollar, Euro, French franc, U.K. pounds sterling, and Irish punts.
m) Use of estimates
The preparation of financial statements 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 amount of revenues and
expenses during the reporting period. These items would include
determination of the market value of common shares, costs expected to be
incurred during restructuring, impairment assessments and allowance for
doubtful accounts. Actual results could differ from those estimates.
n) Comparative amounts
Certain amounts presented in the prior year have been reclassified to
conform to the presentation adopted in the current year.
3. ACQUISITIONS (REVISED)
With the exception of NDR, the Company completed certain acquisitions
during 1999 and 1998 which were accounted for as purchases. The results of
operations of the entities acquired are included in the Company's financial
statements from their respective dates of acquisition.
1999 ACQUISITIONS
a) LCS Industries, Inc.
In January 1999, the Company acquired LCS, headquartered in Clifton,
New Jersey. LCS is a provider of marketing services, including e-mail and
mailing lists, order and payment processing, catalog fulfillment and
continuity programs. The total purchase price of $69,300 was financed with
$35,000 cash on hand and $34,300 of indebtedness. In connection with the
acquisition, the Company also acquired the former shareholders' interest in
subsidiaries of LCS for $3,534. This amount is to be paid to the former
shareholders in cash and through the issuance of 144,643 shares of the
Company's common stock. The cash payments are to be made during 2000 and
2001. The issuance of common stock was made in January 2000. The unpaid
balance as of December 31, 1999 is recorded as other current liabilities in
accrued liabilities and other.
b) Cordena Call Management B.V.
In October 1999, the Company acquired Cordena, headquartered in The
Hague, Netherlands. Cordena provides integrated customer relationship
management services and fulfillment services in Europe. The total purchase
price of $29,130 was financed with cash of $19,722, the issuance to
F-13
<PAGE> 101
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Cordena management and shareholders of 753,757 shares of the Company's
common stock with a fair value of $4,146, and $5,262 of options and
warrants. In addition, the Company contributed $5,217 in cash to provide
for working capital needs. The entire investment in Cordena amounted to
$34,347. Under the earn-out provisions of the purchase agreement, some of
sellers may earn additional cash consideration to a maximum of $1,822. The
earn-out is based on Cordena achieving certain agreed upon earning targets
for the 12 months ending December 31, 1999 or December 31, 2000. At
December 31, 1999 these targets were not met. This contingent consideration
will be recorded as compensation, if and when earned.
At the acquisition date, the Company agreed to issue 1,146,353 common
shares to the holders of certain options and warrants to purchase shares in
Cordena. The exercise price is equal to the exercise price the holders of
the options and warrants had to purchase shares in Cordena which ranged
from $1.48 to $3.44. The holders of these options and warrants agreed to
accept the shares of the Company's common stock but have yet to exercise
these options and warrants as of December 31, 1999. The holders of these
options and warrants are fully vested and have an exercise period of five
years. The Company has recorded the fair value of these options and
warrants at the date of acquisition of $5,262 as additional
paid-in-capital.
A restructuring reserve of $1,448 was recorded to accrued liabilities
at the date of acquisition. This reserve relates to the closings of five
acquired locations. As a result of these closings, the Company estimates
that it will incur lease termination and exit costs of $428, severance
costs of $925 and related legal costs of $95. The Company's plans are near
finalization and it is expected that the plan will be fully executed by
December 2000. Should actual costs incurred differ from the recorded
reserve, there will be a related adjustment to goodwill. The activities
that will not be continued as a result of the restructuring are not
considered significant to the Company's revenues or results of operations.
c) Groupe Adverbe International S.A.
In October 1999, the Company acquired Adverbe, located in France.
Adverbe provides customer contact management services. The total cost of
this purchase was $11,801, which was financed through $8,985 in cash and
the issuance to Adverbe management of 511,865 shares of the Company's
common stock with a fair value of $2,816. Under earn-out provisions of the
purchase agreement, the sellers may earn additional consideration,
consisting of $1,638 in cash and 46,533 shares in the Company's common
stock with a fair value of $256. The earn-out provisions relate to
achieving certain targets that are based on revenues and net earnings for
the 12 months ending December 31, 1999. At the date of acquisition
approximately $1,894 in contingent consideration was recorded as purchase
price since the threshold amounts were attained.
d) MarketVision, Inc.
In December 1999, the Company acquired MarketVision, located in
Denver, Colorado. MarketVision is a creator of customer relationship
management software systems for technology and Web-based companies. The
total purchase price of $25,033 was financed with cash of $12,345, $5,250
of debt and 642,858 shares of common stock issuable to MarketVision
management with a fair value of $7,438. Under the earn-out provisions of
the purchase agreement, the sellers may earn additional cash consideration
up to a maximum $750. The agreed upon targets are based on revenue
F-14
<PAGE> 102
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
achievements for the years ending 2000 and 2001. This contingent
consideration will be recorded in compensation, if and when earned.
<TABLE>
<CAPTION>
LCS(a) CORDENA(b) ADVERBE(c) MARKETVISION(d)
-------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Cash and cash equivalents............ $ 6,118 $ -- $ 191 $ 43
Accounts receivable.................. 23,420 5,783 1,636 939
Other current assets................. 3,538 3,303 1,402 76
Capital assets....................... 6,528 4,427 569 6,472
Other noncurrent assets.............. 2,063 999 267 35
Goodwill............................. 32,836 42,701 10,857 18,702
Intangible assets.................... 23,309 -- -- --
-------- -------- ------- -------
Total identifiable assets............ 97,812 57,213 14,922 26,267
Liabilities assumed.................. (28,512) (28,083) (3,121) (1,234)
-------- -------- ------- -------
Net assets acquired.................. $ 69,300 $ 29,130 $11,801 $25,033
======== ======== ======= =======
Financed by:
Cash............................... $ 35,000 $ 19,722 $ 8,985 $12,345
Debt............................... 34,300 -- -- 5,250
Issues of shares................... -- 4,146 2,816 7,438
Other.............................. -- 5,262 -- --
-------- -------- ------- -------
$ 69,300 $ 29,130 $11,801 $25,033
======== ======== ======= =======
</TABLE>
1998 ACQUISITIONS
a) NDR
In April 1998, Onex formed the Successor Company to effectively
acquire approximately 84% of the stock of NDR. The total purchase price for
this transaction was $12,142. In December 1998, as part of a
reorganization, the Successor Company was contributed to ClientLogic and
all minority shares were exchanged for exchangeable preferred shares of the
subsidiary convertible into ClientLogic common stock.
b) SOFTBANK Services Group
In October 1998, the Company acquired all the outstanding stock of
SSG, a leading provider of integrated customer relationship management
services to the electronic commerce marketplace. SSG is headquartered in
Buffalo, New York. The total purchase price of $73,253 was financed with
F-15
<PAGE> 103
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$43,253 in cash and $30,000 of indebtedness. In addition, the Company
contributed $6,747 in cash to provide for working capital needs. The entire
investment in SSG amounted to $80,000.
<TABLE>
<CAPTION>
NDR(A) SSG(B)
------- --------
<S> <C> <C>
Accounts receivable......................................... $ 2,753 $ 9,998
Other current assets........................................ 1,007 2,783
Capital assets.............................................. 3,457 19,824
Other non-current assets.................................... 60 998
Goodwill.................................................... 7,424 57,507
------- --------
Total identifiable assets................................... 14,701 91,110
Liabilities assumed......................................... (2,559) (17,857)
------- --------
Net assets acquired......................................... $12,142 $ 73,253
======= ========
Financed by:
Cash...................................................... $ -- $ 43,253
Debt...................................................... -- 30,000
Issues of shares.......................................... 12,142 --
------- --------
$12,142 $ 73,253
======= ========
</TABLE>
The following pro forma consolidated financial information reflects
the impact of material 1999 acquisitions of the Company assuming the
acquisitions had occurred at the beginning of each year and the impact of
material 1998 acquisitions of the Company assuming the acquisitions had
occurred at the beginning of 1998. This pro forma consolidated financial
information has been provided for information purposes only and is not
necessarily indicative of the results of operations or financial condition
that would have been achieved if the acquisition had been completed on the
dates indicated. Included in the 1999 and 1998 pro-forma results is $2,763
and $9,396, respectively, of revenues from the service contract written off
in 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(REVISED) (REVISED)
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $217,342 $177,112
Net loss.................................................... $(75,040) $(20,577)
Basic loss per share........................................ $ (1.10) $ (0.35)
</TABLE>
4. CAPITAL ASSETS
The composition of capital assets as of each period are as follows:
<TABLE>
<CAPTION>
CLIENTLOGIC CORPORATION
DECEMBER 31, 1999
---------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------- ------------ --------
<S> <C> <C> <C>
Building and improvements............................. $ 6,234 $ 1,365 $ 4,869
Computer software..................................... 16,411 1,599 14,812
Property and equipment................................ 35,719 8,050 27,669
Furniture and fixtures................................ 6,550 918 5,632
------- ------- -------
$64,914 $11,932 $52,982
======= ======= =======
</TABLE>
F-16
<PAGE> 104
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CLIENTLOGIC CORPORATION
DECEMBER 31, 1998
---------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------- ------------ --------
<S> <C> <C> <C>
Building and improvements............................. $ 3,916 $ 257 $ 3,659
Computer software..................................... 5,425 15 5,410
Property and equipment................................ 11,590 1,465 10,125
Furniture and fixtures................................ 3,862 92 3,770
------- ------ -------
$24,793 $1,829 $22,964
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
APRIL 27, 1998
--------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------ ------------ --------
<S> <C> <C> <C>
Building and improvements.............................. $ 451 $ 48 $ 403
Property and equipment................................. 1,873 377 1,496
Furniture and fixtures................................. 391 82 309
------ ---- ------
$2,715 $507 $2,208
====== ==== ======
</TABLE>
Capitalized computer software costs in the accompanying balance sheets are
mostly comprised of internal use software acquired direct from vendors or in an
acquisition. To the extent software is acquired in an acquisition, costs
required to further enhance the software following the date technological
feasibility had been established were capitalized.
Amortization of computer software amounted to the following:
<TABLE>
<S> <C>
CLIENTLOGIC CORPORATION
Year ended December 31, 1999................................ $2,112
Combined period from April 28, 1998 to December 31, 1998.... $ 15
</TABLE>
Included in capital assets are the following net book value of capital
leases by period:
<TABLE>
<CAPTION>
CLIENTLOGIC
CORPORATION PREDECESSOR
--------------- COMPANY
DECEMBER 31, -----------
--------------- APRIL 27,
1999 1998 1998
------ ------ -----------
<S> <C> <C> <C>
Property and equipment................................... $8,315 $2,297 $ --
Furniture and fixtures................................... 533 655 235
------ ------ ----
$8,848 $2,952 $235
====== ====== ====
</TABLE>
5. IMPAIRMENT
During 1999, the Company completed a review of intangible assets and
determined that an impairment of the other intangibles associated with the
acquisition of LCS existed.
LCS had developed a specialty service in creating and maintaining
customized marketing databases for domestic and foreign communications
companies. This service was performed under a multi-year contract for one
client. At the time of acquisition, the Company assigned $1,650 to the value of
the contract and $21,659 to the business process methodology involved in
database development. In August 1999 revenues for marketing services were
substantially reduced due to the loss of LCS' sole customer for those services.
As a result of this event, ClientLogic abandoned this activity at LCS. Both the
value
F-17
<PAGE> 105
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
assigned to the contract and all associated severance costs and other related
assets were expensed. The revenues for this service had contributed
approximately $2,462 in 1999 from the time of acquisition until the time the
contract was terminated. The database management services contributed
significant revenues and operating income to LCS prior to its acquisition by
ClientLogic. This resulted in a net $22,273 non-cash charge to reflect the
write-down of intangibles attributable to the LCS acquisition.
6. ACCRUED LIABILITIES AND OTHER
The composition of accrued liabilities and other as of each period are as
follows:
<TABLE>
<CAPTION>
CLIENTLOGIC
CORPORATION PREDECESSOR
------------------ COMPANY
DECEMBER 31, -----------
------------------ APRIL 27,
1999 1998 1998
--------- ------ -----------
(REVISED)
<S> <C> <C> <C>
Accrued expenses............................................ $12,563 $3,026 $100
Accrued salaries and benefits............................... 5,429 1,421 --
Accrued professional fees................................... 3,824 -- --
Accrued income taxes........................................ 2,626 78 --
Other current liabilities................................... 10,609 2,380 --
------- ------ ----
$35,051 $6,905 $100
======= ====== ====
</TABLE>
7. BANK INDEBTEDNESS
Cordena has available an overdraft facility up to a maximum of $4,556. The
facility bears interest at the bank's standard rate plus 1.50% (5.50% at
December 31, 1999) and is secured by shares in its subsidiary companies,
inventory and receivables. At December 31, 1999 $3,324 of the facility had been
used.
The Successor Company and Predecessor Company utilized bank facilities and
demand lines of credit in the aggregate amounts of $3,800 and $520,
respectively, during the period from April 28, 1998 through December 31, 1998
and the period from January 1, 1998 to April 27, 1998, respectively. These lines
bore interest at prime plus 0.25% to 1.75% and were secured by a general
security agreement covering all assets and a general assignment of accounts
receivable. As of December 31, 1998 and April 27, 1998, the Successor Company
and Predecessor Company had $343 and $404, respectively, outstanding on these
facilities.
8. LONG-TERM DEBT TO RELATED PARTIES AND OTHER UNRELATED THIRD PARTIES
<TABLE>
<CAPTION>
CLIENTLOGIC CORPORATION PREDECESSOR
------------------------ COMPANY
DECEMBER 31, -----------
------------------------ APRIL 27,
1999 1998 1998
---------- --------- -----------
<S> <C> <C> <C>
Revolving Credit Facility................................. $ 23,400(a) $ -- $ --
Term Credit Facility...................................... *60,000(b) *30,000(f) --
Term Loans................................................ 9,878(c) -- --
*5,250(d)
Other..................................................... *2,872(e) 1,925(g) *1,748(h)
255
-------- ------- ------
101,655 31,925 1,748
Less: Long-term debt maturing within one year............. 12,017 71 --
-------- ------- ------
$ 89,638 $31,854 $1,748
======== ======= ======
</TABLE>
* debt with related party
F-18
<PAGE> 106
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During May 1999, the Company refinanced and consolidated its existing term
debt from the SSG and LCS acquisitions into one $60,000 term credit facility. It
also replaced its previous $15,000 revolving credit facility with a $40,000
revolving credit facility to fund capital expenditures, future acquisitions and
working capital requirements.
a) The revolving credit facility provides for floating rate advances
and/or Eurodollar advances as selected at the time of the advance up to a
maximum $40,000. A $15,000 component of this facility, which expires on May
25, 2006, is available based on 75% of eligible receivables. At December
31, 1999 the Company had fully utilized this component of this facility.
The remaining $25,000 is reduced by outstanding letters of credit and is
not subject to any borrowing base requirements. At December 31, 1999 there
was an outstanding letter of credit for $300. This component is reduced to
$12,250 in May 2002 and will expire in May 2003. Floating rate advances
bear interest at the bank's base rate plus a premium of 0.00% to 2.00%. The
premium is based on the debt to cash flow ratio at specific times. At
December 31, 1999, the premium was 2.00% on outstanding advances.
Eurodollar advances bear interest at the LIBOR rate plus 1.00% to 3.00%,
based on the same ratios. At December 31, 1999 the premium ranged from
2.50% to 3.00% on outstanding advances. The interest rates applicable at
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
ADVANCE AMOUNT INTEREST RATE
- -------------- -------------
<C> <S> <C>
$4,400 .................................................... 10.50%
4,000 .................................................... 9.50%
9,000 .................................................... 9.00%
6,000 .................................................... 8.69%
-------
$23,400
=======
</TABLE>
The effective interest rate on this facility, after considering
amortization of related debt issue costs, approximated 9.9% during the year
ended December 31, 1999.
The revolving credit facility provides for a quarterly commitment fee,
which is calculated by ratios prescribed in the agreement. The revolving
credit facility is secured by substantially all of the Company's North
American assets. Under the provisions of the agreement, if the Company
either achieves cash flows in excess of certain defined amounts or sells
significant assets, it generally will be required to make early repayments
of this facility.
b) The term credit facility provides for floating rate advances and/or
Eurodollar advances, as selected at the time of borrowing up to a maximum
of $60,000. Floating rate advances bear interest at the bank's base rate
plus a premium of 0.75% to 2.25% on the date of the advance. At December
31, 1999, the premium was 2.25%. Eurodollar advances bear interest at the
LIBOR rate plus a premium of 1.75% to 3.25%. At December 31, 1999, the
premium was 3.25% on any new advances. The lender is a subsidiary of the
Company's parent, Onex Corporation. It is secured by substantially all of
the Company's assets and ranks pari passu with the revolving credit
facility. There is no recourse to Onex on this credit facility. The average
interest rates at December 31, 1999 and 1998 were 9.63% and 8.31%
respectively. The effective interest rate on this facility, after
considering amortization of related debt issue costs, approximated 8.6%
during the year ended December 31, 1999. The facility is payable in four
varying annual installments commencing May 25, 2003. Under the provisions
of the agreement, if the Company achieves cash flows in excess of certain
defined amounts or sells significant assets, it generally will be required
to make early repayments of this facility.
c) A subsidiary of the Company has a term loan of $9,878, bearing
interest at LIBOR plus 1.875% (8.475% at December 31, 1999). The loan is
secured by a pledge of shares in its subsidiary companies, inventory and
receivables and is due during the next fiscal year.
F-19
<PAGE> 107
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
d) A subsidiary of the Company has $5,250 of notes payable to its
former stockholders. The notes bear interest at a rate of 8.3% and are due
in five equal consecutive annual installments of $1,050 commencing in
December 2000. These notes are subordinated to the $60,000 term and the
$40,000 revolving credit facility. The holders of the Notes may elect to be
paid in cash or shares of the Company's stock at each respective payment
date. If the election of the holder is to be paid in shares of the
Company's stock, the number of shares to be issued will be determined by
market value at the date of election.
e) The Company has an obligation of $2,872 to the former shareholders
of a subsidiary of LCS. The obligation, which is recorded at present value,
bears interest at a rate of 8.75%. Payments of $1,013, including principal
and interest, are due in annual installments commencing in January 2000.
f) The $30,000 debt facility in 1998 was with a subsidiary of the
Company's parent, Onex. The facility provided for both floating rate
advances and/or Euro dollar advances, as selected at the time of borrowing.
This facility was secured by substantially all of the Company's assets, and
was paid off in May 1999.
g) Of the other debt at December 31, 1998, $1,628 bore interest at
9.5% and was secured by the assets of the Successor Company. During 1999,
this term loan was paid in full and all security agreements were
terminated.
h) In April 1997, the Predecessor Company signed an agreement with a
minority shareholder for a term loan of $1,748 bearing interest at 9.5%.
This amount was repaid in full at the time of Onex's acquisition of the
Predecessor Company.
The Company is required under the terms of various credit facilities and
term loans to maintain certain financial ratios. The financing arrangements
contain certain restrictive covenants, including limitations or prohibitions on
additional indebtedness, payment of cash dividends, redemption of stock, capital
spending, investments, acquisitions and asset sales. At December 31, 1999 the
Company was in compliance with all the various covenants.
The annual minimum repayment requirements for the next five years are as
follows:
<TABLE>
<S> <C>
2000...................................... $12,017
2001...................................... $ 2,076
2002...................................... $ 2,042
2003...................................... $ 9,950
2004...................................... $18,050
</TABLE>
9. CAPITAL STOCK
Authorized
10,000,000 preferred shares, par value $0.01 per share issuable in series.
The Board of Directors will determine the voting rights, dividend policy and
conversion rights, when and if this class of stock is issued.
150,000,000 common shares, par value $0.01 per share entitled to one vote
per share and to receive dividends as declared.
F-20
<PAGE> 108
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Issued and outstanding
<TABLE>
<CAPTION>
PREDECESSOR
CLIENTLOGIC CORPORATION COMPANY
------------------------ -----------
DECEMBER 31, APRIL 27,
1999 1998 1998
----------- ---------- -----------
<S> <C> <C> <C>
Preferred shares........................................ -- -- --
Common shares........................................... 71,364,400 39,477,896 10,309,300
</TABLE>
Common Stock Issuable
At December 6, 1999, the Company's Board of Directors had approved the
issuance of 642,858 common shares in connection with the acquisition of
MarketVision. These shares have been issued during January 2000.
Options
The Company applies APB No. 25, "Accounting for Stock Issued to Employees"
in accounting for its stock option plans. Accordingly, no compensation expense
is charged to earnings for options that have an exercise price at least equal to
100% of the fair market value of the stock at the date of grant.
The Company may grant non-qualified stock options to officers, employees
and advisers at an exercise price equal to 100% of market price as determined by
the Board of Directors, and incentive stock options to officers and other key
employees at an exercise price not less than 100% of market price as determined
by the Board of Directors, up to an aggregate of 10,197,000 options. Generally,
the options may be exercised in cumulative annual increments of 25% commencing
one year from the date of grant and expire ten years from the date of grant. The
options vest over varying periods, typically four years.
The following table summarizes the option plans' activity in non-qualified
options for the periods indicated:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
PREDECESSOR COMPANY
Balance at January 1, 1997................... -- $ --
--------- -----
Granted.................................... 559,953 0.45
--------- -----
Balance at December 31, 1997................. 559,953 0.45 559,953 $0.45
========= ===== ======= =====
Granted.................................... 40,000 0.87
Forfeited.................................. (37,217) 0.49
--------- -----
Balance at April 27, 1998.................... 562,736 0.46 562,736 0.46
--------- ----- ------- -----
- ------------------------------------------------------------------------------------------
CLIENTLOGIC CORPORATION
Granted.................................... 1,850,833 $1.65
--------- -----
Balance at December 31, 1998................. 1,850,833 1.65 159,097 $0.64
--------- ----- ------- -----
Granted.................................... 1,038,565 3.17
Forfeited.................................. (82,021) 2.30
Exercised.................................. (1,061) 1.28
--------- -----
Balance at December 31, 1999................. 2,806,316 $2.19 263,037 $1.28
========= ===== ======= =====
</TABLE>
F-21
<PAGE> 109
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the option plans' activity in incentive
stock options for the periods indicated:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
CLIENTLOGIC CORPORATION
Balance at September 25, 1998................ -- $ --
Granted.................................... 1,213,661 2.33
Forfeited.................................. (129) 2.33
--------- -----
Balance at December 31, 1998................. 1,213,532 2.33 -- $ --
--------- ----- ------- -----
Granted.................................... 1,429,314 4.11
Forfeited.................................. (413,049) 2.49
Exercised.................................. (15,333) 2.33
--------- -----
Balance at December 31, 1999................. 2,214,464 $3.45 222,315 $2.33
========= ===== ======= =====
</TABLE>
Options outstanding at December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
RANGE OF OPTIONS AVERAGE AVERAGE EXERCISABLE
EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE OPTIONS
- --------------- ----------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
$0.64 - $1.63.............................. 1,464,242 4.5 years $1.46 165,463
$1.87 - $2.72.............................. 2,549,066 9.2 years $2.38 319,889
$3.50 - $5.44.............................. 761,241 9.9 years $4.60 --
$7.78 - $11.67............................. 246,231 9.9 years $8.34 --
</TABLE>
The fair value of the options issued was determined using the Black-Scholes
option consistency pricing model with the following assumptions:
<TABLE>
<CAPTION>
CLIENTLOGIC CORPORATION
------------------------------------- PREDECESSOR COMPANY
COMBINED --------------------------------------
CONSOLIDATED PERIOD FROM PERIOD FROM
YEAR ENDED APRIL 28, 1998 TO JANUARY 1, 1998 TO YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 APRIL 27, 1998 DECEMBER 31, 1997
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Risk-free rate.................. 5.47% 4.41% 5.72% 6.17%
Dividend yield rate............. 0% 0% 0% 0%
Volatility factor of the
expected market price of the
Company's shares.............. 80% 80% 80% 80%
Weighted-average expected
term.......................... 9.5 years 8.67 years 4 years 4 years
Weighted-average fmv equal(1)... $1.7545 $0.5089 $0.2671 $0.1504
Weighted-average fmv
greater(2).................... $6.2274 $0.9532 -- --
Weighted-average fmv less(3).... $2.1548 $0.0412 -- --
</TABLE>
- ---------------
(1) Weighted average fair market value for options with fair market value of the
stock on the date of grant equal to the exercise price.
(2) Weighted average fair market value for options with fair market value of the
stock on the date of grant greater than the exercise price.
(3) Weighted average fair market value for options with fair market value of the
stock on the date of grant less than the exercise price.
F-22
<PAGE> 110
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Had the Company adopted the provisions of SFAS 123, "Accounting for Stock
Based Compensation," expense for options granted would have resulted in the pro
forma net loss and basic loss per share as follows:
<TABLE>
<CAPTION>
BASIC LOSS
NET LOSS PER SHARE
-------- ----------
<S> <C> <C>
CLIENTLOGIC CORPORATION
Year ended December 31, 1999 (revised).................... $61,802 $(1.03)
Combined period from April 28, 1998 to December 31,
1998................................................... $ 5,543 $(0.29)
PREDECESSOR COMPANY
Period from January 1, 1998 to April 27, 1998............. $ 331 $(0.03)
Year ended December 31, 1997.............................. $ 781 $(0.08)
</TABLE>
10. INCOME TAXES
Loss before income taxes consisted of:
<TABLE>
<CAPTION>
CLIENTLOGIC CORPORATION
------------------------------------- PREDECESSOR COMPANY
COMBINED --------------------------------------
CONSOLIDATED PERIOD FROM PERIOD FROM
YEAR ENDED APRIL 28, 1998 TO JANUARY 1, 1998 TO YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 APRIL 27, 1998 DECEMBER 31, 1997
----------------- ----------------- ------------------ -----------------
(REVISED)
<S> <C> <C> <C> <C>
Domestic........................ $(52,193) $(3,426) $ -- $ --
Foreign......................... (8,535) (1,854) (330) (735)
-------- ------- ----- -----
Total................. $(60,728) $(5,280) $(330) $(735)
======== ======= ===== =====
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
CLIENTLOGIC CORPORATION
------------------------------------- PREDECESSOR COMPANY
COMBINED --------------------------------------
CONSOLIDATED PERIOD FROM PERIOD FROM
YEAR ENDED APRIL 28, 1998 TO JANUARY 1, 1998 TO YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 APRIL 27, 1998 DECEMBER 31, 1997
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Current tax provision:
U.S. Federal.................. $ -- $-- $ -- $ --
State and local............... 182 50 -- --
Foreign....................... 1,211 15 -- --
------- --- ----- -----
Total current tax
provision........... 1,393 65 -- --
------- --- ----- -----
Deferred tax provision:
U.S. Federal.................. (1,170) -- -- --
State and local............... 71 -- -- --
Foreign....................... 28 -- -- --
------- --- ----- -----
Total deferred tax
provision........... (1,071) -- -- --
------- --- ----- -----
Total provision for
income.............. $ 322 $65 $ -- $ --
======= === ===== =====
</TABLE>
F-23
<PAGE> 111
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax loss from continuing operations as a result of the following:
<TABLE>
<CAPTION>
CLIENTLOGIC CORPORATION
------------------------------------- PREDECESSOR COMPANY
COMBINED --------------------------------------
CONSOLIDATED PERIOD FROM PERIOD FROM
YEAR ENDED APRIL 28, 1998 TO JANUARY 1, 1998 TO YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 APRIL 27, 1998 DECEMBER 31, 1997
----------------- ----------------- ------------------ -----------------
(REVISED)
<S> <C> <C> <C> <C>
Tax at statutory U.S. tax
rate...................... $(21,255) $(1,848) $(115) $(257)
State and local taxes, less
federal effect............ 164 33 -- --
Amortization of goodwill.... 7,289 1,199 -- --
Write-down of goodwill...... 8,212 -- -- --
Unremitted earnings and tax
rate differences of
foreign subsidiaries...... 153 13 (32) (71)
Valuation allowance......... 5,696 668 147 328
Other....................... 63 -- -- --
-------- ------- ----- -----
$ 322 $ 65 $ -- $ --
======== ======= ===== =====
</TABLE>
Deferred tax assets (liabilities) consisted of the following:
<TABLE>
<CAPTION>
CLIENTLOGIC CORPORATION PREDECESSOR
------------------------ COMPANY
DECEMBER 31, -----------
------------------------ APRIL 27,
1999 1998 1998
----------- ---------- -----------
<S> <C> <C> <C>
Operating loss carryforwards................................ $ 14,516 $ 7,982 $ 298
Accrued liabilities and reserves............................ 2,286 128 --
Other....................................................... 531 495 28
-------- ------- -----
Total deferred tax assets......................... 17,333 8,605 326
-------- ------- -----
Capital assets.............................................. (1,548) -- --
Other....................................................... (323) (78) --
-------- ------- -----
Total deferred tax liabilities.................... (1,871) (78) --
-------- ------- -----
Net deferred tax assets..................................... 15,462 8,527 326
Valuation allowance......................................... (10,628) (8,527) (326)
-------- ------- -----
$ 4,834 $ -- $ --
======== ======= =====
</TABLE>
The current portion of the net deferred tax asset is $3,153 and is recorded
in prepaids and other current assets in the accompanying consolidated balance
sheet. The noncurrent portion of the net deferred tax asset is $1,681 and is
recorded in other noncurrent assets in the accompanying consolidated balance
sheet.
At December 31, 1999 the Company had approximately $22,204 of U.S. federal
operating loss carryforwards of which approximately $12,749 is related to SSG
and subject to certain limitations.
F-24
<PAGE> 112
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The carryforwards expire beginning in 2006. The Company also has foreign
operating loss carryforwards in the following jurisdictions, which begin to
expire at the dates indicted:
<TABLE>
<S> <C> <C>
United Kingdom........................................ $3,540 Indefinite carryforward
Ireland............................................... $1,809 Indefinite carryforward
Canada................................................ $2,479 2003
Germany............................................... $4,526 Indefinite carryforward
Switzerland........................................... $2,361 2001
Norway................................................ $1,327 2007
</TABLE>
The net change in the valuation allowance from 1998 includes the effect of
operating loss carryforwards acquired in the 1999 acquisition of Cordena for
which no benefit has been recognized. The subsequent recognition of these
acquired tax benefits of approximately $2,200 will reduce any goodwill related
to this acquisition remaining at the time the losses are recognized. In
addition, the Company reduced the valuation allowance applied against U.S.
operating loss carryforwards of $10,728 based upon future taxable income
projections including the planned distribution of InsLogic. This resulted in a
reduction to goodwill recorded on the acquisition of SSG of $3,570 and a
deferred tax benefit of $1,170. The subsequent recognition of the remaining
acquired tax benefits (related to SSG's acquisition) of approximately $1,400 at
December 31, 1999 will reduce any goodwill remaining at the time the losses are
recognized. Acquired tax benefits of approximately $410 related to the Company's
1998 acquisition of NDR, when recognized, will also reduce any remaining
goodwill.
The Company has not recorded deferred income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations. Undistributed earnings amounted to approximately $1,468
at December 31, 1999. If earnings of such foreign subsidiaries were not
reinvested, the resulting U.S. tax would be substantially offset by the
utilization of operating loss carryforwards. In addition, foreign withholding
taxes would be imposed on actual distributions.
11. FORMATION OF INSLOGIC AND SUBSIDIARY PREFERRED STOCK
In 1999, the Company purchased certain of the assets and assumed certain of
the liabilities of Canadian Access Corporation, a provider of customer contact
management and software development for the insurance industry principally in
Canada. These purchases were the basis of the formation of InsLogic.com Holding
Corporation ("InsLogic"), a wholly-owned subsidiary of the Company.
During 1999, the subsidiary issued $5,263 in preferred stock. This
preferred stock has no dividend rate, is non-cumulative, and is convertible into
common stock of InsLogic at the option of the holder at an initial conversion
rate of $0.50 per share. The holders of the preferred stock earn dividends if
and when declared by InsLogic, as consistent with common shareholders, but must
be paid dividends prior to common shareholders. Preferred shareholders vote on
an as converted basis at an initial conversion rate of $0.50. At December 31,
1999, the preferred shareholders have the right to elect one of the five
directors of InsLogic. If all the preferred shares were converted to common
shares, the preferred shareholders would own approximately 17% of InsLogic.
Included in the consolidated results of the Company at December 31, 1999
are $6,829 of assets and $146 of liabilities of InsLogic. InsLogic operated at a
net loss of $976 during the year ended December 31, 1999. The minority interest
share of InsLogic losses during the year ended December 31, 1999 was $205. This
amount is recorded as selling, general and administrative expenses in the
accompanying statement of operations.
As of January 2000, the Company adopted a resolution to dividend its
holdings of its investment in InsLogic to its stockholders. As of the date of
this report, the distribution has not been completed,
F-25
<PAGE> 113
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
however, it is expected to occur before the Company's initial public offering.
At the time of this distribution, the shares of InsLogic will be distributed to
existing shareholders at historical cost.
12. EMPLOYEE BENEFITS AND COMPENSATION (REVISED)
The Company sponsors various employee retirement plans. In the United
States, the Company sponsors a 401k savings plan that covers substantially all
U.S. employees. In both Canada and Europe, the Company sponsors similar defined
contribution plans.
<TABLE>
<CAPTION>
CLIENTLOGIC CORPORATION PREDECESSOR COMPANY
------------------------------------- --------------------------------------
COMBINED
CONSOLIDATED PERIOD FROM PERIOD FROM
YEAR ENDED APRIL 28, 1998 TO JANUARY 1, 1998 TO YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 APRIL 27, 1998 DECEMBER 31, 1997
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Expenses relating to Company
sponsored pension plans.... $335 $41 $ -- $ --
</TABLE>
The Company also has certain employment contracts that entitle the
employees to stock compensation in the form of stock options.
The Company employs various stock plans which offer employees stock
options/shares at an exercise price considered below fair value as determined by
the Board of Directors, including a deferred compensation plan that allowed
certain members of management to defer a portion of their salary in return for
shares of phantom stock of the Company. The phantom stock is exercisable at the
election of the holder and payable in cash or common stock of the Company, as at
the election of the holder. Upon exercise, the holder of the phantom stock
receives the number of shares held in the plan at the fair market value of the
common stock of the Company at the exercise date.
APB 25, "Accounting for Stock Issued to Employees," states that for
purposes of compensation expense, a charge equal to the aggregate difference
between the fair value of the underlying common shares and the exercise price
must be included in income. For the period ending December 31, 1999 and the
combined period from April 28, 1998 to December 31, 1998, the Company recorded a
non-cash compensation charge in selling, general and administrative expense of
$3,729 and $285, respectively, related to the above.
13. RELATED PARTY TRANSACTIONS
The Company entered into a ten-year management and oversight agreement
effective as of January 1, 1999 and a financial services agreement as of May 1,
1999 with an affiliate of the Company's parent, Onex. Under the terms of these
agreements, the Company pays an annual management fee of $600 and a fee
associated with any acquisitions calculated at 1.5% of the transaction value. In
1999, the Company expensed management-related fees of $600 and capitalized
acquisition-related fees of $1,776 relating to the above. At December 31, 1999,
the Company had a receivable from this related party of $798. Management
believes that the fees charged were reasonable in relation to the services
provided. The Company had paid this same party $750 in 1998 for similar
services.
The Company had a secured note receivable outstanding from an executive
employee for home relocation of $439 at December 31, 1999. The majority of this
amount is due in early 2000.
F-26
<PAGE> 114
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense on related party debt amounted to the following:
<TABLE>
<S> <C>
CLIENTLOGIC CORPORATION
Year ended December 31, 1999.............................. $4,969
Combined period from April 28 to December 31, 1998........ $ 715
PREDECESSOR COMPANY
Period from January 1 to April 27, 1998................... $ 68
Year ended December 31, 1997.............................. $ 142
</TABLE>
14. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
The carrying amount of cash, short-term investments, accounts receivable,
accounts payable and term loans approximate fair value due to the short-term
nature of these instruments.
The fair value of the Company's long-term debt, including the current
portion thereof, is estimated based on the current trading value, where
available, or with reference to similarly traded instruments with similar terms.
In the opinion of the Company, the carrying amount of these financial
instruments approximates fair value.
15. LEASE COMMITMENTS
The Company leases certain equipment under capital and operating leases
that expire over the next five years. Interest on the capital leases is
calculated at annual rates ranging from 3.44% to 9.87%. Future minimum lease
payments under non-cancelable operating leases, with initial or remaining lease
terms in excess of one year, and future minimum capital lease payments as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
YEAR ENDING DECEMBER 31:
2000...................................................... $3,525 $10,589
2001...................................................... 3,089 8,505
2002...................................................... 1,633 7,264
2003...................................................... 680 7,176
2004...................................................... 371 6,590
Thereafter................................................ -- 24,780
------ -------
Total minimum lease payments...................... 9,298 $64,904
=======
Less: Amount representing interest........................ 1,302
------
Present value of net minimum capital lease payments....... 7,996
Less current installments of obligations under capital
leases................................................. 2,726
------
Long-term obligations under capital leases................ $5,270
======
</TABLE>
F-27
<PAGE> 115
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense under operating leases for the periods indicated amounted to
the following:
<TABLE>
<S> <C>
CLIENTLOGIC CORPORATION
Year ended December 31, 1999.............................. $8,135
Combined period from April 28 to December 31, 1998........ $1,164
PREDECESSOR COMPANY
Period from January 1 to April 27, 1998................... $ 102
Year ended December 31, 1997.............................. $ 123
</TABLE>
16. OTHER
During October 1999, there was a gain of $3,395 realized from the sale of
one of the foreign subsidiary's investments. In addition, during December 1999,
there was a loss of $2,968 from the write-off of certain of the Company's
capital assets.
17. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries may become subject to legal claims arising
in the ordinary course of business. It is management's opinion that the
resolution of known claims should not have a material adverse impact on the
financial position of the Company. There can be no assurance, however, that
unforeseen circumstances will not result in significant costs.
The Company also has a contingent liability with the Irish government that
is related to its continued occupancy of its facilities in Ireland with a
covenant to maintain agreed levels of employment at those facilities.
18. SIGNIFICANT CUSTOMERS AND CONCENTRATED CREDIT RISK
During the year ended December 31, 1999, no single customer accounted for
more than 10% of the Company's revenue. During the combined period April 28,
1998 through December 31, 1998, one customer's revenue accounted for
approximately 18% of the revenue. During the period January 1, 1998 through
April 27, 1998 and the year ended December 31, 1997, no single customer
accounted for more than 10% of the Company's revenue.
Accounts receivable from the aforementioned customer accounted for
approximately $1,340 at December 31, 1998. The Company maintains allowances for
credit losses considered adequate to absorb estimated credit-related losses.
19. SEGMENTED INFORMATION
The Company operates as an integrated business and therefore has no
segmented operational data. The following is a breakdown of financial results by
geographical segment:
<TABLE>
<CAPTION>
UNITED STATES CANADA EUROPE TOTAL
------------- ------- ------- --------
<S> <C> <C> <C> <C>
For the year ended December 31, 1999 (revised)
Revenue.......................................... $144,265 $10,024 $23,502 $177,791
Total assets..................................... $198,591 $14,907 $79,228 $292,726
For the combined period April 28, 1998 through
December 31, 1998
Revenue.......................................... $ 17,440 $ 6,910 $ 2,933 $ 27,283
Total assets..................................... $ 88,877 $15,925 $ 6,383 $111,185
</TABLE>
F-28
<PAGE> 116
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
For the period January 1, 1998 through April 27, 1998 and for the year
ended December 31, 1997, most revenue and total assets of the Predecessor
Company were in Canada.
20. SUBSEQUENT EVENTS
During the holiday season, the shipping volume for one of the Company's
customers grew significantly. In order to meet this increased demand, the
Company had to expend considerable time and effort, including overtime and
reallocating personnel. These costs were expensed during 1999. Despite the best
efforts of the Company, problems were encountered with the related fulfillment
of customer orders. As a result, management estimated the need for a $500
reserve against the customers' accounts receivable balance. The customer's
accounts receivable balance at December 31, 1999 was $2.1 million, which
consisted of $500 in net revenues billed and $1.6 million in freight costs
re-billed to the customer.
During March 2000, the Company reached a settlement with this customer that
provided for $700 to be placed in escrow and paid to the Company following the
return of the customer merchandise. The settlement also provides for the escrow
amount to be reduced for any inventory shrink. Based on the Company's estimate
of costs to return the merchandise and related inventory shrink, an additional
reserve of $1.4 million was recorded in the December 31, 1999 financial records.
In addition to the above, during March 2000, the Company's compensation
committee approved the payment of a $100 bonus to one of its executives based on
1999 performance. The bonus can be paid in cash or used to acquire a number of
common shares equal to the amount of the bonus divided by $2.33. This resulted
in a non-cash stock compensation charge of $567 that was recorded in the
December 31, 1999 financial records.
On March 27, 2000, the Company approved a reverse stock split of 1.0 common
shares to approximately 0.64 common shares. All share and per share amounts for
the year ended December 31, 1999 and the combined period from April 28, 1998 to
December 31, 1998 have been restated to retroactively reflect the reverse stock
split.
21. RECENT ACCOUNTING PRONOUNCEMENTS
In January 1999, the Company adopted SFAS No. 130 "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". Under this statement, the term "comprehensive income"
is used to describe the total net earnings plus other comprehensive income or
loss. For the Company, other comprehensive loss includes currency translation
adjustments on foreign subsidiaries.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities Deferral of the Effective Date of FASB Statement No. 133",
which deferred the required date of adoption of SFAS No. 133 for one year, to
fiscal years beginning after June 15, 2000. At adoption, existing hedging
relationships must be designated anew and documented pursuant to the provisions
of the Statement. The Company expects the adoption of SFAS No. 133 will have no
material impact on its financial position, results of operations or cash flows.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities". SOP 98-5 requires that all start-up costs related to new
operations must be expensed as incurred. In addition, all start-up costs that
were capitalized in the past must be written off when SOP 98-5 is adopted. The
Company adopted SOP 98-5 during its fiscal year ended December 31, 1999 with no
material impact on financial position, results of operations or cash flows.
F-29
<PAGE> 117
CLIENTLOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company adopted SOP 98-1 during fiscal year
ended December 31, 1999 with no material impact on financial position, results
of operations or cash flows.
22. COMBINED PERIOD
The following table presents the results of the operating companies that
comprise the combined statements of operations for the period April 28, 1998
through December 31, 1998 in the financial statements.
<TABLE>
<CAPTION>
CLIENTLOGIC SUCCESSOR
CORPORATION COMPANY
--------------------- -----------------
PERIOD FROM PERIOD FROM
SEPTEMBER 25, 1998 TO APRIL 28, 1998 TO
DECEMBER 31, 1998 DECEMBER 17, 1998 COMBINED
--------------------- ----------------- --------
<S> <C> <C> <C>
Revenue......................................... $20,373 $ 6,910 $27,283
Cost and expenses
Cost of services.............................. 11,728 4,625 16,353
Selling, general and administrative
expenses................................... 6,839 2,613 9,452
Depreciation expense.......................... 1,518 382 1,900
Amortization expense.......................... 2,924 1,013 3,937
------- ------- -------
Operating loss.................................. (2,636) (1,723) (4,359)
Interest expense, net........................... 813 108 921
------- ------- -------
Loss before income taxes........................ (3,449) (1,831) (5,280)
Income taxes.................................... 65 -- 65
------- ------- -------
Net loss........................................ $(3,514) $(1,831) $(5,345)
======= ======= =======
</TABLE>
23. REVISION
The Company's financial statements at December 31, 1999 and for the year
then ended have been revised from amounts previously reported to reflect a
change in market value of the Company's common stock issued or issuable as
consideration in connection with purchase business combinations and to reflect a
change in market value of the Company's stock options issued to employees during
the year ended December 31, 1999. Such revisions also reflect the market value
of options issued in connection with a business combination as an increase in
stockholders' equity rather than as a current liability, as previously reported,
and have resulted in the following changes:
<TABLE>
<CAPTION>
REVISED AS PREVIOUSLY REPORTED
-------- ----------------------
<S> <C> <C>
Goodwill.................................................... $144,340 $137,497
Accrued liabilities and other............................... 35,051 38,170
Common stock issuable....................................... 7,438 5,000
Additional paid-in capital.................................. 162,894 150,305
Accumulated deficit......................................... (66,395) (65,990)
Unearned compensation....................................... (4,923) (263)
Selling, general and administrative expenses................ 75,823 75,688
Amortization expense........................................ 23,829 23,559
Basic loss per share........................................ (1.02) (1.01)
</TABLE>
F-30
<PAGE> 118
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Upgrade Corporation of America and Subsidiary
(d/b/a SOFTBANK Services Group) and The Ivy Group Limited, (both wholly-owned
subsidiaries of SOFTBANK Holdings, Inc.)
In our opinion, the accompanying combined balance sheets at December 31,
1997 and 1996 and related combined statements of operations, stockholders'
deficit and cash flows present fairly, in all material respects, the financial
position of Upgrade Corporation of America and subsidiary, (d/b/a SOFTBANK
Services Group) and The Ivy Group Limited at December 31, 1997 and 1996 and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSE COOPERS, LLP
PricewaterhouseCoopers, LLP
Buffalo, New York
January 21, 2000
F-31
<PAGE> 119
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
COMBINED BALANCE SHEETS
DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,582,357 $ 2,107,841
Inventory................................................. 412,592 114,026
Trade accounts receivable less allowance for doubtful
accounts of $511,864 in 1997, $493,529 in 1996......... 14,821,562 17,722,806
Related party receivables................................. 625,178 2,451,059
Prepayments and other current assets...................... 1,905,217 2,013,367
------------ -----------
19,346,906 24,409,099
------------ -----------
Equipment and improvements, net............................. 20,224,664 20,503,645
Notes receivable............................................ 634,040 --
Other assets................................................ 816,057 1,335,250
------------ -----------
Total assets...................................... $ 41,021,667 $46,247,994
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt......................... $ 480,371 $ 593,570
Current portion of leases................................. 898,002 719,511
Trade accounts payable.................................... 9,999,561 15,011,565
Related party payables.................................... 4,427,561 2,872,368
Accrual................................................... 8,424,841 7,392,538
Other current liabilities................................. 376,345 485,489
------------ -----------
24,606,681 27,075,041
------------ -----------
Long-term debt.............................................. 16,384,486 15,114,864
Long-term lease obligations................................. 1,482,912 1,910,150
Deferred income and other................................... 533,333 100,000
------------ -----------
Total liabilities................................. 43,007,412 44,200,055
------------ -----------
Redeemable preferred shares................................. 10,085,966 5,085,966
Stockholders' deficit:
Common shares............................................. 129,448 127,090
Additional paid-in-capital................................ 6,090,597 6,052,900
Accumulated deficit....................................... (17,979,075) (9,069,646)
Foreign currency translation adjustment................... (312,681) (148,371)
------------ -----------
Total stockholders' deficit....................... (12,071,711) (3,038,027)
------------ -----------
Total liabilities and stockholders' deficit....... $ 41,021,667 $46,247,994
============ ===========
</TABLE>
See accompanying notes to financial statements
F-32
<PAGE> 120
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
COMBINED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenue..................................................... $ 74,630,299 $ 63,334,494
Cost of services............................................ (44,273,371) (33,573,934)
------------ ------------
Gross profit................................................ 30,356,928 29,760,560
Selling, general and administrative expenses................ 37,695,667 34,854,524
Loss on abandonment of software development project......... -- 1,550,000
------------ ------------
Operating loss.............................................. (7,338,739) (6,643,964)
Other (income) expense:
Interest expense and similar charges...................... 1,835,780 1,195,573
Other, net................................................ (232,453) (200,390)
------------ ------------
Loss before income taxes.................................... (8,942,066) (7,639,147)
Income taxes (benefit)...................................... (32,637) 5,908
------------ ------------
Net loss.......................................... $ (8,909,429) $ (7,645,055)
============ ============
</TABLE>
See accompanying notes to financial statements
F-33
<PAGE> 121
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
COMBINED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
CURRENCY TOTAL
COMMON ADDITIONAL ACCUMULATED TRANSLATION STOCKHOLDERS'
STOCK PAID-IN CAPITAL DEFICIT ADJUSTMENT DEFICIT
-------- --------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
SOFTBANK SERVICES GROUP
Balance at December 31,
1995....................... $108,978 $5,519,812 $ (1,599,525) $ (21,081) $ 4,008,184
Net loss..................... -- -- (5,617,814) -- (5,617,814)
Stock options exercised...... 131 19,392 -- -- 19,523
Dividends paid............... -- (190,558) -- -- (190,558)
Foreign currency translation
adjustment................. -- -- -- 70,222 70,222
-------- ---------- ------------ --------- ------------
Balance at December 31,
1996....................... 109,109 5,348,646 (7,217,339) 49,141 (1,710,443)
Net loss..................... -- -- (7,235,424) -- (7,235,424)
Stock options exercised...... 2,358 387,697 -- -- 390,055
Dividends declared........... -- (350,000) -- -- (350,000)
Foreign currency translation
adjustment................. -- -- -- (210,970) (210,970)
-------- ---------- ------------ --------- ------------
Balance at December 31,
1997....................... $111,467 $5,386,343 $(14,452,763) $(161,829) $ (9,116,782)
======== ========== ============ ========= ============
THE IVY GROUP LIMITED
Ivy Group common stock....... $ 17,981 $ 709,477 $ 174,934 $ -- $ 902,392
Net loss..................... -- -- (2,027,241) -- (2,027,241)
Dividends.................... -- (5,223) -- -- (5,223)
Foreign currency translation
adjustment................. -- -- -- (197,512) (197,512)
-------- ---------- ------------ --------- ------------
Balance at December 31,
1996....................... 17,981 704,254 (1,852,307) (197,512) (1,327,584)
Net loss..................... -- -- (1,674,005) -- (1,674,005)
Foreign currency translation
adjustment................. -- -- -- 46,660 46,660
-------- ---------- ------------ --------- ------------
Balance at December 31,
1997....................... $ 17,981 $ 704,254 $ (3,526,312) $(150,852) $ (2,954,929)
======== ========== ============ ========= ============
COMBINED STOCKHOLDERS'
DEFICIT AT DECEMBER 31,
1996....................... $127,090 $6,052,900 $ (9,069,646) $(148,371) $ (3,038,027)
======== ========== ============ ========= ============
COMBINED STOCKHOLDERS'
DEFICIT AT DECEMBER 31,
1997....................... $129,448 $6,090,597 $(17,979,075) $(312,681) $(12,071,711)
======== ========== ============ ========= ============
</TABLE>
See accompanying notes to financial statements
F-34
<PAGE> 122
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Net cash relating to operating activities:
Net loss.................................................. $(8,909,429) $ (7,645,054)
Adjustments to reconcile net loss to net cash relating to
operating activities:
Depreciation and amortization.......................... 5,776,404 4,384,240
Provision for allowance of doubtful accounts........... 18,335 (1,471)
(Gain)loss on disposal of equipment.................... (5,626) 2,616,252
Deferred income........................................ 433,333 --
Translation adjustment................................. (196,206) (101,325)
Increase(decrease) in cash due to changes in:
Inventory.............................................. (298,566) (75,131)
Trade receivables...................................... 2,901,244 (3,547,478)
Related party receivables.............................. 1,825,881 (2,229,819)
Prepaid expenses and other current assets.............. 108,150 (135,841)
Other assets........................................... 519,193 (497,497)
Trade accounts payable................................. (5,012,004) 1,120,308
Related party payables................................. 1,555,193 2,725,840
Accruals............................................... 1,032,303 985,734
Other current liabilities.............................. (109,144) (333,540)
----------- ------------
Net cash provided(used) by operations....................... (360,939) (2,734,782)
Net cash relating to investing activities:
Proceeds from maturities of investment securities......... -- --
Notes receivable.......................................... (634,040) --
Equipment disposal proceeds............................... 52,666 314,631
Additions to equipment.................................... (5,530,793) (10,053,551)
Assets acquired upon acquisition.......................... -- --
----------- ------------
Net cash provided(used) by investing activities............. (6,112,167) (9,738,920)
Net cash relating to financing activities:
Proceeds from issuance of redeemable preferred stock...... -- 5,000,000
Proceeds from long-term advance from affiliate............ 9,250,000 11,940,000
Repayments of long term debt.............................. (2,593,578) (8,725,309)
Dividend paid............................................. (190,558) (1,232,768)
Proceeds from stock options exercised..................... 212,187 19,523
Capital lease repayments.................................. (730,429) (297,506)
----------- ------------
Net cash provided(used) by financing activities............. 5,947,622 6,703,940
----------- ------------
Increase(decrease) in cash.................................. (525,484) (5,769,762)
Cash -- beginning of period................................. 2,107,841 7,877,603
----------- ------------
Cash -- end of period....................................... $ 1,582,357 $ 2,107,841
=========== ============
Supplemental cash flow disclosures:
Interest payments......................................... $ 573,760 $ 989,041
Income taxes.............................................. 38,178 --
Noncash activities:
Conversion of revolving loan to preferred stock........... $ 5,000,000 $ --
Capital lease obligations incurred........................ 495,516 1,979,139
Dividends accrued, not paid............................... 350,000 190,558
</TABLE>
See accompanying notes to financial statements
F-35
<PAGE> 123
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. PRINCIPLES OF COMBINATION
The combined financial statements include the financial statements of
SOFTBANK Services Group consolidated with its wholly-owned subsidiary UCA&L
Limited ("SSG Group") and combined with The Ivy Group Limited ("Ivy Group")
which is consolidated with its wholly owned subsidiaries Professional Support
Center Limited ("PSC") and Avalan Technology Limited ("Avalan") for 1997 and
1996 (collectively referred to as the "Company"). The SSG Group and the Ivy
Group are sister companies under the common control of SOFTBANK Holdings, Inc.
both performing common activities. All significant intercompany balances and
transactions have been eliminated on combination.
2. BUSINESS
The Company provides a range of services including direct to end-user
telesales, customer care, technical support and product fulfillment, primarily
to computer software and hardware manufacturers. The Company holds software
inventory on consignment from the manufacturers and is responsible for packaging
and shipping products to customers. The accompanying combined statements of
operations reflect, as revenues, the sum of fees earned by the Company. Third
party charges include freight, credit card, telephone and other costs for which
the Company is reimbursed by the manufacturers.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Cash Equivalents
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
B. Equipment and Improvements
Furniture, equipment and motor vehicles are stated at cost or
valuation less depreciation. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets.
Estimated useful lives range from four to fifteen years. Leasehold
improvements are amortized on the straight-line method over the shorter of
the lease term or estimated useful life of the asset.
Computer software includes incremental costs incurred in connection
with the development of software for use by the Company. Such costs are
amortized over the estimated useful life at the time the software is placed
in use.
C. Customer Remittances Payable
Cash collected on behalf of the manufacturers from their customers in
connection with software sales is generally remitted to the manufacturers
monthly. Amounts received but not yet remitted are accumulated as customer
remittances payable.
D. Fee Revenue
Telephone fees are recognized as income at a stated rate per minute.
Fulfillment fees are recognized as income upon shipment of the software
product to the customer.
E. Income Taxes
U.S. Federal taxable income of SSG Group is included in the
consolidated U.S. Federal income tax return of SOFTBANK Holdings, Inc., the
majority shareholder. The portion of the consolidated Federal income tax
provision allocated to SSG Group is that which would result if the Company
filed
F-36
<PAGE> 124
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
a Federal income tax return on a stand-alone basis. The Company's foreign
subsidiaries file in various foreign jurisdictions on a stand-alone basis.
The Company follows the asset and liability approach to account for
income taxes. This approach requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
operating loss and tax credit carryforwards, and temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
F. Translation of Foreign Currencies
The Company's assets and liabilities are translated into U.S. dollars
at the rate of exchange in effect at the balance sheet date. Income and
expense items are translated at the average exchange rates prevailing
during the period. Gains and losses resulting from foreign currency
transactions are recognized currently in income and those resulting from
translation of financial statements are accumulated as a separate component
of stockholders' equity.
G. Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximate
their carrying amounts in the balance sheet. Such financial instruments
include cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses, and long-term debt.
H. Concentration of Credit Risk
The Company grants credit to domestic and foreign microcomputer
software manufacturers. Exposure to losses on receivables is principally
dependent on each customer's financial condition. The Company monitors its
exposure to credit losses and maintains allowances for anticipated losses.
I. Use of Estimates
Management has made estimates and assumptions relating to the
reporting of assets and liabilities to prepare these financial statements
in conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
J. Reclassifications
Certain reclassifications have been made to the financial statements
to conform with the current year presentation.
4. RELATED PARTY TRANSACTIONS
UCA&L paid management fees totaling $364,016 to an affiliate in the UK for
shared administrative and executive resources. Also included in accounts
receivable from affiliates at December 31, 1997, is a $465,316 demand note from
an affiliate. The note bears interest at 8% and is unsecured.
Included in notes receivable at December 31, 1997 is a $440,000 note from a
related party. The note bears interest at 7% and is secured by a first priority
security interest in the related party's intellectual property, licenses,
contract rights, patents and trade secrets. SSG Group also has notes receivable
with three former executives of the company totaling $177,872. All three notes
bear interest at 8%, mature by the year 2001, and are secured by common stock in
the company that is owned by each of the former executives.
F-37
<PAGE> 125
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Included in related party payables at December 31, 1997 is $4,427,561
($2,758,372 at December 31, 1996) owed to SOFTBANK Holdings, Inc. Substantially
all of the balance payable relates to interest and dividends due on a revolving
loan agreement, redeemable preferred stock and working capital requirements.
5. EQUIPMENT AND IMPROVEMENTS
Total equipment and leasehold improvements and related accumulated
depreciation consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Furniture and equipment.................................... $20,657,896 $17,917,740
Leasehold improvements..................................... 5,462,385 5,271,435
Computer software.......................................... 6,891,502 4,554,873
Motor vehicles............................................. 263,594 353,140
----------- -----------
33,275,377 28,097,188
Less accumulated depreciation and amortization............. 13,050,713 7,593,543
----------- -----------
Net equipment and improvements............................. $20,224,664 $20,503,645
=========== ===========
</TABLE>
Depreciation and amortization expense amounted to $5,457,170 in 1997 and
$3,879,925 in 1996.
6. BORROWINGS
Total borrowings consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revolving loan............................................. $15,690,000 $11,940,000
Term notes payable to:
Banks.................................................... 799,976 3,199,984
Regional Development Corporation......................... 10,417 135,417
Buffalo Enterprise Development Corporation............... 364,463 433,033
----------- -----------
16,864,856 15,708,434
Less current portion of long-term debt..................... 480,371 593,570
----------- -----------
$16,384,485 $15,114,864
=========== ===========
</TABLE>
SSG Group maintains a $22,000,000 revolving loan agreement with SOFTBANK
Holdings, Inc. The facility bears interest at a rate of SOFTBANK Holdings' cash
investment rate plus .50% (6.47% at December 31, 1997) and is payable October 1,
2001. SOFTBANK Holdings has subordinated $15 million of its revolving loan to
the term note and other credit facilities with a bank as described below.
SSG Group has a $799,976 term note with a bank at December 31, 1997. The
note bears interest at the prime rate plus 3/4% (9.25% at December 31, 1997).
Principal installments of $33,334, plus interest, are due through December 1999.
At December 31, 1996, the Company also had a $2,000,000 term note with another
bank bearing interest at the federal funds rate plus .25%. This note was fully
paid during 1997.
The term note to the Regional Development Corporation (RDC) bears interest
at 6%, is secured by substantially all the assets of SSG Group, is guaranteed by
certain stockholders of SSG Group and matures in January 1998.
F-38
<PAGE> 126
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The term note to the Buffalo Enterprises Development Corporation bears
interest at 2%, is secured by all the assets of the Company and is subordinate
to the lines of credit and the RDC term loan. Monthly principal and interest
payments of $6,384 are due through December 2002.
SSG Group also maintains a $6,500,000 working capital line of credit and a
$3,500,000 capital expenditures line of credit with a bank. The facilities bear
interest at the lower of the bank's prime rate or the Eurodollar rate plus 2%,
and are secured by substantially all assets of the Company. There were no
outstanding borrowings on these facilities at December 31, 1997 and 1996. The
working capital line of credit expires in December 1998. The capital
expenditures line expires in 2001. Availability of funds under the capital
expenditures line is reduced by $750,000 in 1998 and each subsequent year until
expiration.
The debt agreements include certain restrictions concerning capital
expenditures, dividends, and advances to and from affiliates. In addition, SSG
Group is also required to meet certain financial covenants including those
relating to the maintenance of minimum tangible net worth, minimum net working
capital, minimum current ratio, minimum debt-to-equity ratio, and minimum debt
service coverage ratio, each as defined in their respective agreements. SSG
Group failed to meet certain restrictions and financial covenants as required by
the agreements at December 31, 1997; however, SSG Group's lenders have waived
these events of default.
The aggregate maturities of long-term debt for each of the next five years
are as follows: 1998, $480,379; 1999, $471,334; 2000, $72,807; 2001,
$15,764,276; and 2002, $76,059.
There was no long-term debt in The Ivy Group.
7. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under capital and operating leases
that expire over the next five years. Interest on the capital leases is
calculated at annual rates ranging from 6.71% to 12.57%. Future minimum lease
payments under noncancelable operating leases, with initial or remaining lease
terms in excess of one year, and future minimum capital lease payments as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ------------
<S> <C> <C>
Year ending December 31:
1998.................................................... $1,090,794 $(10,000,000)
1999.................................................... 746,771
2000.................................................... 495,304
2001.................................................... 343,375
2002.................................................... 27,071
Thereafter.............................................. --
---------- ------------
Total minimum lease payments.................... $2,703,315 $(10,000,000)
========== ============
Less amount representing interest......................... 322,401
----------
Present value of net minimum capital lease payments....... 2,380,914
Less current installments of obligations under capital
leases.................................................. 898,002
----------
Long-term obligations under capital leases................ $1,482,912
==========
</TABLE>
Rent expense was $5,053,184 in 1997 and $4,206,672 in 1996.
F-39
<PAGE> 127
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The amount of equipment and related accumulated amortization recorded under
capital leases at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Equipment................................................... $3,202,543 $2,612,729
Less accumulated amortization............................... 965,273 256,587
---------- ----------
$2,237,270 $2,356,142
========== ==========
</TABLE>
8. STOCKHOLDERS' EQUITY
Capital stock for SSG Group at December 31, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Common stock, $.01 par value. 15,500,000 shares authorized;
issued and outstanding 11,146,785 and 10,190,939 shares at
December 31, 1997 and 1996, respectively.................. $111,467 $109,109
======== ========
</TABLE>
Capital stock for the Ivy Group at December 31, 1997 and 1996 consists of
the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Common shares, 10,500 shares authorized, issued and
outstanding at December 31, 1997 and 1996................. $17,981 $17,981
======= =======
</TABLE>
9. PREFERRED SHARES
Preferred shares for SSG Group at December 31, 1997 and 1996 consists of
the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Redeemable preferred stock (Series 1), $100 par value.
100,000 and 50,000 shares authorized, issued and
outstanding at December 31, 1997 and 1996, respectively... $10,000,000 $5,000,000
=========== ==========
</TABLE>
During June 1996, SSG Group issued preferred stock in its entirety to
SOFTBANK Holdings, Inc. The stock entitles SOFTBANK Holdings, Inc. to 7%
cumulative annual dividends payable quarterly, and to certain preferences
including preference in the payment of dividends. Beginning on June 1, 2001, the
stock is redeemable, at a price per share equal to $100, plus all accrued and
unpaid dividends thereon. Dividends of $190,558 are accrued at December 31,
1996.
During December 1997, SSG Group issued 50,000 preferred shares to SOFTBANK
Holdings, Inc. SSG Group used the proceeds to retire $5,000,000 of the
outstanding revolving loan with the parent company. The preferred stock entitles
SOFTBANK Holdings, Inc. to 7% cumulative annual dividends payable quarterly, and
to certain preferences including the payment of dividends. Beginning on June l,
2001, the stock is redeemable, at a price per share equal to $100, plus all
accrued and unpaid dividends thereon. At December 31, 1997, SOFTBANK Holdings,
Inc. holds all of the preferred shares issued and outstanding in their entirety.
Dividends of $540,562 are accrued at December 31, 1997.
F-40
<PAGE> 128
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred shares for the Ivy Group at December 31, 1997 and 1996 consist of
the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
2,000 'A' Redeemable Preference Shares, 2,000 shares
authorized, issued and outstanding at December 31, 1997
and 1996.................................................. $ 3,425 $ 3,425
320,000 9% 'A' Redeemable Preference Shares, 320,000 shares
authorized, issued and outstanding at December 31, 1997
and 1996.................................................. 5,480 5,480
14,167 5% 'A' Redeemable Preference Shares, 14,167 shares
authorized, no shares issued or outstanding at December
31, 1997 and 1996......................................... -- --
28,333 8% 'B' Redeemable Preference Shares, 28,333 shares
issued, authorized and outstanding at December 31, 1997
and 1996.................................................. 48,520 48,520
8,333 10% 'B' Redeemable Preference Shares, 8,333 shares
issued, no shares issued or outstanding at December 31,
1997 and 1996............................................. -- --
16,667 10% 'C' Redeemable Preference Shares, 16,667 shares
authorized, issued and outstanding at December 31, 1997
and 1996.................................................. 28,541 28,541
15,000 0% 'C' Redeemable Preference Shares, 15,000 shares
authorized, no shares issued and outstanding at December
31, 1997 and 1996......................................... -- --
------- -------
$85,966 $85,966
======= =======
</TABLE>
The 'B' and 'C' redeemable preference shares are redeemable over three
years in equal tranches starting on April 1, 1996. They are repayable at par
consideration. No shares have been redeemed during 1997 or 1996.
10. STOCK OPTIONS
At December 31, 1997, SSG Group has three stock-based compensation plans,
which are described below. SSG Group applies APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for any of the stock option plans as stock options granted
under these plans have an exercise price equal to 100% of the market price on
the date of grant.
Had compensation cost for SSG Group stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the pro forma effect on
SSG Group 1997 and 1996 net losses is indicated below (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Net loss: As reported....................................... $ 8,909 $7,645
Pro forma......................................... 10,150 7,785
</TABLE>
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions for
1997 and 1996, respectively: risk-free interest rates ranging from 5.64% to
6.78% in 1997 and 1996 expected lives of 9.5 years for both years; and dividend
yield and volatility of 0 percent for both years.
INCENTIVE STOCK OPTION PLANS
SSG Group's incentive stock option plans provide for granting officers and
other key employees stock options to acquire up to an aggregate of 2,060,000
common shares at an exercise price of not less than 100% of the fair market
value of the shares on the date of grant. These options are exercisable at the
rate of 25% per year commencing on the date of grant and expire ten years from
the date of grant.
F-41
<PAGE> 129
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of SSG Group's incentive stock option plans as of
December 31, 1997 and 1996, and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year............ 1,116,787 $1.80 906,384 $1.51
Granted................................... 471,900 2.50 234,500 2.50
Exercised................................. (236,890) 1.65 (13,106) 1.49
Forfeited................................. (419,085) 2.19 (100,991) 1.48
--------- ---------
Outstanding, end of year.................. 932,712 2.00 1,026,787 1.80
========= =========
Options exercisable at year-end........... 384,829 475,814
Weighted-average fair value of options.... $ 1.22 $ 1.07
</TABLE>
The following table summarizes information about incentive stock options
outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- WEIGHTED- -------------------
NUMBER AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING EXERCISABLE AT
EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE DECEMBER 31, 1997
- --------------- ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
$0.25.................................. 10,000 5 years 10,000
0.40.................................. 94,312 6 years 83,204
1.00.................................. 20,000 7 years 15,000
1.80.................................. 307,000 8 years 254,000
2.50.................................. 501,400 9 years 22,625
------- -------
932,712 384,829
======= =======
</TABLE>
NON-QUALIFIED STOCK OPTION PLAN:
SSG Group's Non-Qualified Stock Option Plan provides for granting officers
and employees as well as non-employee directors and advisers to acquire an
aggregate of 650,000 common shares at exercise prices ranging from $.40 to
$2.50. The options may be exercised in cumulative annual increments of 25%
commencing one year after date of grant. A summary of the status of the plan as
of December 31, 1997 and 1996, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year................ 27,905 $0.40 27,905 $0.40
Granted....................................... 551,875 2.47 -- --
Exercised..................................... -- -- -- --
Forfeited..................................... -- -- -- --
------- ------
Outstanding, end of year...................... 579,780 2.37 27,905 0.40
======= ======
Options exercisable at year-end............... 34,780 27,905
Weighted-average fair value of options........ $1.21 $ --
</TABLE>
F-42
<PAGE> 130
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about non-qualified stock
options outstanding at December 31 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- WEIGHTED- -------------------
NUMBER AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING EXERCISABLE AT
EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE DECEMBER 31, 1997
- --------------- ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
0$.40.................................. 27,905 7 years 27,905
1.80.................................. 3,750 9 years --
2.20.................................. 48,125 9 years 6,875
2.50.................................. 500,000 9 years --
------- ------
579,780 34,780
======= ======
</TABLE>
There are no stock option plans within The Ivy Group.
11. 401(k) SAVINGS PLAN
SSG Group sponsors a 401(k) Savings Plan for all employees with more than
one year of service. Participants may elect to defer up to 15% of their annual
compensation. The Company matches 25% of each dollar of employee contributions,
up to the first 4% of compensation deferred by each participant. Such employer
contributions vest over five years. Expense recognized related to the plan was
$80,621 in 1997 and $80,113 in 1996.
12. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Current tax provision
U.S. Federal.............................................. $ -- $ --
State..................................................... -- --
Foreign................................................... (32,637) 5,908
-------- ------
Total current tax provision....................... $(32,637) $5,908
======== ======
</TABLE>
The provision for income taxes differs from the "expected" tax expense
computed by applying the U.S. federal statutory rate of 35% to the loss before
income taxes primarily due to state and foreign taxes and the valuation
allowance.
Deferred income taxes result principally from net operating loss
carryforwards and from temporary differences between the accounting and tax
bases of equipment and improvements and various reserves. The deferred tax
assets and liabilities at December 31, 1997 and 1996 are comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
-------------------- ------------
<S> <C> <C>
Deferred tax assets..................................... $ 7,234,511 $ 3,436,497
Less: Valuation allowance............................... (6,725,511) (3,027,497)
----------- -----------
Net deferred tax assets................................. 509,000 409,000
Deferred tax liabilities................................ (509,000) (409,000)
----------- -----------
Net deferred taxes...................................... $ -- $ --
=========== ===========
</TABLE>
F-43
<PAGE> 131
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the Company has U.S. federal operating loss
carryforwards of approximately $13,475,000 which begin to expire in 2008. The
utilization of the operating loss carryforwards may be limited as a result of
certain ownership changes that occurred during 1995. The Company has operating
loss carryforwards of approximately $334,000 and $3,734,000 in Ireland and the
United Kingdom, respectively, which have an unlimited carryforward period.
13. RELOCATION AND OTHER COSTS
During 1997, SSG Group transferred its Union City, California warehouse
operations to the master distribution center in Grove City, Ohio. In conjunction
with the transfer of these operations, SSG Group incurred one-time costs
totaling $511,000, including a loss on the disposal of certain capital assets
totaling $149,000. SSG Group also incurred $241,000 for severance arrangements
in conjunction with the elimination of certain positions. These amounts are
included in selling, general and administrative costs.
During 1996, SSG Group transferred its Monterey, California call center and
Salinas, California warehouse operations to new facilities in Las Vegas, Nevada,
the Grove City, Ohio, respectively, which were opened in that year. In
conjunction with the transfer of these operations, the Company incurred one-
time costs totaling $2,077,988, including a loss on the disposal of certain
capital assets totaling $1,066,252, and a provision of $394,630 for anticipated
expenses pending completion of the transfer. These amounts are included in
selling, general and administrative costs.
14. ABANDONMENT OF SOFTWARE DEVELOPMENT PROJECT
Included in the SSG Group 1996 results is $1,550,000 of costs associated
with an internal software development project that was abandoned.
F-44
<PAGE> 132
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,205,150 $ 1,582,357
Inventory................................................. 104,602 412,592
Trade accounts receivable less allowance for doubtful
accounts of $287,165 at September 30, 1998 and $511,864
at December 31,
1997................................................... 10,185,846 14,821,562
Related party receivables................................. 1,059,325 625,178
Prepayments and other current assets...................... 1,025,583 1,905,217
------------ ------------
13,580,506 19,346,906
------------ ------------
Equipment and improvements, net............................. 19,827,186 20,224,664
Notes receivable............................................ 1,200,082 634,040
Other assets................................................ 827,949 816,057
------------ ------------
Total assets...................................... $ 35,435,723 $ 41,021,667
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt......................... $ 393,511 $ 480,371
Short-term bank debt...................................... 3,515,995 --
Current portion of leases................................. 641,960 898,002
Trade accounts payable.................................... 7,696,371 9,999,561
Related party payables.................................... 3,690,503 4,427,561
Accruals.................................................. 3,787,038 8,424,841
Other current liabilities................................. 2,376,605 376,345
------------ ------------
22,101,983 24,606,681
------------ ------------
Long-term debt.............................................. 15,931,117 16,384,486
Long-term lease obligations................................. 1,678,957 1,482,912
Deferred income............................................. 317,299 533,333
------------ ------------
Total liabilities................................. 40,029,356 43,007,412
------------ ------------
Redeemable preferred shares................................. 10,085,966 10,085,966
Stockholders' Deficit
Common shares............................................. 381,449 129,448
Additional paid-in capital................................ 10,692,001 6,090,597
Accumulated deficit....................................... (25,272,852) (17,979,075)
Foreign currency translation adjustment................... (480,197) (312,681)
------------ ------------
Total stockholders' deficit....................... (14,679,599) (12,071,711)
------------ ------------
Total liabilities and stockholders' deficit....... $ 35,435,723 $ 41,021,667
============ ============
</TABLE>
F-45
<PAGE> 133
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue..................................................... $ 49,106,982 $ 54,278,402
Cost of services............................................ (30,025,148) (32,498,122)
------------ ------------
Gross profit................................................ 19,081,834 21,780,280
Selling, general and administrative expenses................ 25,242,171 29,312,268
------------ ------------
Operating loss.............................................. (6,160,337) (7,531,988)
Other (income) expense:
Interest expense and similar charges...................... 1,135,887 1,251,579
Other, net................................................ (2,447) (185,274)
------------ ------------
Loss before income taxes.................................... (7,293,777) (8,598,293)
Income taxes................................................ -- 6,172
------------ ------------
Net loss.................................................... $ (7,293,777) $ (8,604,465)
============ ============
</TABLE>
F-46
<PAGE> 134
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
COMBINED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ADDITIONAL CURRENCY TOTAL
COMMON PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
STOCK CAPITAL DEFICIT ADJUSTMENT DEFICIT
----------- ----------- ------------ ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SOFTBANK SERVICES GROUP
Balance at December 31,
1996....................... $109,109 $ 5,348,646 $ (7,217,339) $ 49,141 $ (1,710,443)
Net loss................... -- -- (6,865,625) -- (6,865,625)
Stock options exercised.... 1,895 341,552 -- -- 343,447
Dividends declared......... -- (262,503) -- -- (262,503)
Foreign currency
translation
adjustment.............. -- -- -- (125,788) (125,788)
-------- ----------- ------------ --------- ------------
Balance at September 30,
1997....................... $111,004 $ 5,427,695 $(14,082,964) $ (76,647) $ (8,620,912)
======== =========== ============ ========= ============
Balance at December 31,
1997....................... 111,467 5,386,343 (14,452,763) (161,829) (9,116,782)
Net loss................... -- -- (5,430,972) -- (5,430,972)
Stock options exercised.... 2,352 383,084 -- -- 385,436
Dividends declared......... -- (525,006) -- -- (525,006)
Foreign currency
translation
adjustment.............. -- -- -- 21,418 21,418
-------- ----------- ------------ --------- ------------
Balance at September 30,
1998....................... $113,819 $ 5,244,421 $(19,883,735) $(140,411) $(14,665,906)
======== =========== ============ ========= ============
THE IVY GROUP LIMITED
Balance at December 31,
1996....................... 17,981 704,254 (1,852,307) (197,512) (1,327,584)
Net loss................... -- -- (1,738,840) -- (1,738,840)
Foreign currency
translation
adjustment.............. -- -- -- 80,203 80,203
-------- ----------- ------------ --------- ------------
Balance at September 30,
1997....................... $ 17,981 $ 704,254 $ (3,591,147) $(117,309) $ (2,986,221)
======== =========== ============ ========= ============
Balance at December 31,
1997....................... 17,981 704,254 (3,526,312) (150,852) (2,954,929)
Issuance of common stock... 249,649 4,743,326 -- -- 4,992,975
Net loss................... -- -- (1,862,805) -- (1,862,805)
Foreign currency
translation
adjustment.............. -- -- -- (188,934) (188,934)
-------- ----------- ------------ --------- ------------
Balance at September 30,
1998....................... $267,630 $ 5,447,580 $ (5,389,117) $(339,786) $ (13,693)
======== =========== ============ ========= ============
COMBINED STOCKHOLDERS'
DEFICIT AT SEPTEMBER 30,
1997....................... $128,985 $ 6,131,949 $(17,674,111) $(193,956) $(11,607,133)
======== =========== ============ ========= ============
COMBINED STOCKHOLDERS'
DEFICIT AT SEPTEMBER 30,
1998....................... $381,449 $10,692,001 $(25,272,852) $(480,197) $(14,679,599)
======== =========== ============ ========= ============
</TABLE>
F-47
<PAGE> 135
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
COMBINED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net cash relating to operating activities:
Net loss.................................................. $ (7,293,777) $(8,604,465)
Adjustments to reconcile net loss to net cash relating to
operating activities:
Depreciation........................................... 4,667,841 4,250,844
Provision for allowance of doubtful accounts........... (224,699) (1,456)
(Loss)/profit on disposal of equipment................. (7,251) --
Deferred income........................................ (216,034) 433,333
Translation adjustment................................. (234,675) (160,352)
Increase (decrease) in cash due to changes in:
Inventory.............................................. 307,990 (103,759)
Trade receivables...................................... 4,635,716 (877,734)
Related party receivables.............................. (434,147) 1,750,986
Prepayments and other current assets................... 879,634 (368,811)
Other assets........................................... (11,892) (218,305)
Notes receivable....................................... (566,042) 11,234
Trade accounts payable................................. (2,303,190) (4,684,715)
Related party payables................................. (737,058) 1,580,152
Accruals............................................... (4,637,803) 947,519
Other current liabilities.............................. 2,000,260 (218,674)
------------ -----------
Net cash provided/(used) by operations............ (4,175,127) (6,264,203)
Net cash relating to investing activities:
Equipment disposal proceeds............................... (249,709) 4,077
Additions to equipment.................................... (4,020,654) (2,999,006)
Capital leases............................................ -- (240,023)
------------ -----------
Net cash provided/(used) by investing activities............ (4,270,363) (3,234,952)
Net cash relating to financing activities:
Repayments of long-term debt.............................. 2,981,767 9,004,945
Dividend paid............................................. (525,006) --
Proceeds from stock options exercised..................... 383,084 (262,503)
Proceeds from issuance of stock........................... 4,995,327 343,449
Capital lease repayments.................................. 233,111 (149,541)
------------ -----------
Net cash provided/(used) by financing activities............ 8,068,283 8,936,350
Decrease in cash............................................ (377,207) (562,805)
------------ -----------
Cash -- beginning of period................................. 1,582,357 2,107,841
Cash -- end of period....................................... $ 1,205,150 $ 1,545,036
============ ===========
</TABLE>
F-48
<PAGE> 136
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
1. PRINCIPLES OF COMBINATION
The interim financial data as of September 30, 1998 and for the nine months
ended September 30, 1997 and the nine months ended September 30, 1998 is
unaudited. In the opinion of management, the financial statements reflect all
adjustments, consisting of normal recurring adjustments of the Company, in
accordance with generally accepted accounting principles applicable to interim
periods. The financial statements do not include all of the information and
footnotes required by generally accepted accounting principles. The accompanying
combined unaudited financial statements should be read in conjunction with the
December 31, 1997 combined audited financial statements of SOFTBANK Services
Group and the Ivy Group Limited. Interim results of operations are not
necessarily indicative of results for the full year.
The combined financial statements include the financial statements of
SOFTBANK Services Group consolidated with its wholly-owned subsidiary UCA&L
Limited ("SSG Group") and combined with The Ivy Group Limited ("Ivy Group")
which is consolidated with its wholly owned subsidiaries Professional Support
Centre Limited ("PSC"), and Avalan Inc. ("Avalan"), (collectively referred to as
the "Company"). The SSG Group and the Ivy Group are sister companies under the
common control of SOFTBANK Holdings, Inc. both performing common activities. All
significant intercompany balances and transactions have been eliminated on
combination.
2. BUSINESS
The Company provides a range of services including direct to end-user
telesales, customer care, technical support, product fulfillment, and Internet
commerce, primarily to computer software and hardware manufacturers. The Company
holds software inventory on consignment from the manufacturers and is
responsible for packaging and shipping products to customers. The accompanying
combined statements of operations reflect, as gross revenues, the sum of fees
earned by the Company. Third party charges include freight, credit card,
telephone and other costs for which the Company is reimbursed by the
manufacturers.
3. RELATED PARTY TRANSACTIONS
Included in related party receivables at September 30, 1998 is $1,049,221
in cash advances to an affiliate in the UK. The advances are for working capital
requirements and bear interest at 7%.
Included in notes receivable at September 30, 1998 is a $599,907 note from
a related party. The note bears interest at 9% and is secured by a first
priority security interest in the related party's intellectual property,
licenses, contract rights, patents and trade secrets. The Company also has notes
receivable with four former executives of the Company totaling $537,872. All
four notes bear interest at 8%, mature by the year 2001, and are secured by
common stock in the Company that is owned by each of the former executives.
Included in related party payables at September 30, 1998 is $2,978,014 owed
to SOFTBANK Holdings, Inc. Substantially all of the balance payable relates to
interest and dividends due on a revolving loan agreement and preferred stock.
F-49
<PAGE> 137
SOFTBANK SERVICES GROUP AND THE IVY GROUP LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. BORROWINGS
Total borrowings consist of the following at September 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Revolving loan..................................... $15,690,000 $15,690,000
Line of credit..................................... 3,515,995 --
Term notes payable to:
Banks............................................ 328,510 799,976
Regional Development Corporation................. -- 10,417
Buffalo Enterprise Development Corporation....... 312,118 364,463
----------- -----------
19,846,623 16,864,856
Less current portion of long-term debt............. 3,915,506 480,371
----------- -----------
$15,931,117 $16,384,485
=========== ===========
</TABLE>
The Company maintains a $22,000,000 revolving loan agreement with SOFTBANK
Holdings, Inc. The facility bears interest at a rate of SOFTBANK Holdings' cash
investment rate plus .50% (6.08% at September 30, 1998) and is payable October
1, 2001. SOFTBANK Holdings has subordinated $15 million of its revolving loan to
the term note and other credit facilities with a bank as described in the
paragraph below.
The Company has a $328,510 term note with a bank at September 30, 1998. The
note bears interest at the prime rate plus 3/4%. Principal installments of
$33,334, plus interest, are due through December 1999.
The term note to the Buffalo Enterprises Development Corporation bears
interest at 2%, is secured by all the assets of the Company and is subordinate
to the lines of credit and the RDC term loan. Monthly principal and interest
payments of $6,384 are due through December 2002.
The Company also maintains a $6,500,000 working capital line of credit with
a bank. The facility bears interest at the lower of the bank's prime rate or the
Eurodollar rate plus 2%, and is secured by substantially all assets of the
Company. The Company has $3,200,000 of outstanding borrowings at September 30,
1998. The working capital line of credit expires in December 1998.
The aggregate maturities of long-term debt for each of the next five years
are as follows: 1999, $3,915,506; 2000, $72,807; 2001, $15,782,251; and 2002,
$76,059.
F-50
<PAGE> 138
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders of
LCS Industries, Inc.
Clifton, New Jersey
We have audited the accompanying consolidated balance sheets of LCS
Industries, Inc. and Subsidiaries (the "Company") as of September 30, 1998 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended September 30,
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 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
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of LCS Industries, Inc. and its
Subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Parsippany, NJ
November 3, 1998
(December 17, 1998, as to Note 18)
F-51
<PAGE> 139
LCS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $19,702,803 $14,619,271
Investments -- held-to-maturity........................... 11,479,120 14,410,101
Accounts receivable (less allowance for doubtful accounts:
1998 -- $502,000 and 1997 -- $496,000)................. 22,020,995 23,163,774
Prepaid expenses and other current assets................. 1,623,264 1,460,990
Deferred taxes............................................ 295,000 684,000
----------- -----------
Total current assets.............................. 55,121,182 54,338,136
----------- -----------
Investments -- available for sale, net...................... -- 123,708
Property and equipment, net................................. 6,452,529 7,093,790
Goodwill (net of accumulated amortization:
1998 -- $1,092,553 and 1997 -- $806,204).................. 6,994,628 7,280,977
Other assets................................................ 811,022 672,656
----------- -----------
Total assets...................................... $69,379,361 $69,509,267
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $13,691,193 $14,798,326
Accrued salaries and commissions.......................... 2,311,796 3,127,141
Other accrued expenses.................................... 2,993,400 3,899,876
Income taxes payable...................................... 151,210 290,407
Current portion of long-term debt......................... 1,026,147 1,087,511
Current portion of capital lease obligations.............. -- 211,580
Deferred revenue.......................................... -- 4,124,699
----------- -----------
Total current liabilities................................... 20,173,746 27,539,540
----------- -----------
Long-term debt, net of current portion...................... 2,574,598 3,444,533
Deferred taxes.............................................. 107,000 249,000
Deferred compensation....................................... 313,922 --
Commitments and contingencies
Stockholders' Equity:
Preferred stock $.01 par value; authorized 1,000,000
shares; issued -- none................................. -- --
Common stock $.01 par value; authorized 15,000,000 shares;
issued 1998 -- 5,111,899 shares and 1997 -- 4,854,847
shares................................................. 51,119 48,548
Common stock issuable..................................... 1,071,532 1,490,431
Additional paid-in capital................................ 10,424,048 8,702,971
Retained earnings......................................... 35,368,901 28,245,206
----------- -----------
46,915,600 38,487,156
Less: Treasury stock, at cost; 1998 -- 214,663 shares and
1997 -- 187,766 shares.................................... (705,505) (207,953)
Available-for-sale securities valuation adjustment, net of
deferred income taxes.................................. -- (3,009)
----------- -----------
Total stockholders' equity........................ 46,210,095 38,276,194
----------- -----------
$69,379,361 $69,509,267
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-52
<PAGE> 140
LCS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Net sales............................................ $94,209,365 $100,627,292 $95,570,436
Cost of sales........................................ 65,973,405 69,383,846 66,120,153
----------- ------------ -----------
Gross profit....................................... 28,235,960 31,243,446 29,450,283
Selling and administrative expenses.................. 16,533,318 17,905,852 16,678,548
Other (income) expense:
Dividend and interest income....................... (1,631,706) (1,442,707) (990,108)
Interest expense................................... 332,874 443,642 437,198
Other (income) expense............................. (210,000) 1,914,000 --
----------- ------------ -----------
Income before income taxes........................... 13,211,474 12,422,659 13,324,645
Provision for income taxes........................... 5,376,000 5,436,000 5,487,000
----------- ------------ -----------
Net income........................................... $ 7,835,474 $ 6,986,659 $ 7,837,645
=========== ============ ===========
Per common and common equivalent share:
Basic earnings..................................... $ 1.63 $ 1.51 $ 1.81
=========== ============ ===========
Diluted earnings................................... $ 1.52 $ 1.37 $ 1.53
=========== ============ ===========
Dividends.......................................... $ 0.15 $ 0.14 $ 0.09
=========== ============ ===========
</TABLE>
See notes to consolidated financial statements
F-53
<PAGE> 141
LCS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK --
$.01 PAR VALUE COMMON ADDITIONAL AT COST
-------------------- STOCK PAID-IN RETAINED --------------------
BALANCE SHARES AMOUNT ISSUABLE CAPITAL EARNINGS SHARES AMOUNT
- ------- ---------- ------- ---------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
October 1, 1995................. 4,347,886 $43,479 $2,407,521 $ 5,431,455 $14,451,854 $187,766 $(207,953)
Acquisition of Catalog
Resources, Inc.
Common stock issued......... 34,621 346 (461,538) 461,192 -- -- --
Exercise of stock options..... 216,903 2,169 -- 617,504 -- -- --
Stock dividend -- converted
shares...................... 360 4 -- 251 -- -- --
Stock purchased through
Employee Stock Purchase Plan
and employment agreements... 11,717 117 -- 153,861 -- -- --
Dividends paid................ -- -- -- -- (401,762) -- --
Valuation adjustment, net..... -- -- -- -- -- -- --
Tax benefit of exercise of
stock options............... -- -- -- 559,000 -- -- --
Net income.................... -- -- -- -- 7,837,645 -- --
---------- ------- ---------- ----------- ----------- -------- ---------
September 30, 1996.............. 4,611,487 46,115 1,945,983 7,223,263 21,887,737 187,766 (207,953)
---------- ------- ---------- ----------- ----------- -------- ---------
Acquisition of Catalog
Resources, Inc.
Common stock issued......... 38,762 388 (455,552) 455,164 -- -- --
Exercise of stock options..... 195,675 1,956 -- 517,543 -- -- --
Stock dividend -- converted
shares...................... 318 3 -- 218 -- -- --
Stock purchased through
Employee Stock Purchase Plan
and employment agreements... 8,605 86 -- 106,783 -- -- --
Dividends paid................ -- -- -- -- (629,190) -- --
Valuation adjustment, net..... -- -- -- -- -- -- --
Tax benefit of exercise of
stock options............... -- -- -- 400,000 -- -- --
Net income.................... -- -- -- -- 6,986,659 -- --
---------- ------- ---------- ----------- ----------- -------- ---------
September 30, 1997.............. 4,854,847 48,548 1,490,431 8,702,971 28,245,206 187,766 (207,953)
---------- ------- ---------- ----------- ----------- -------- ---------
Acquisition of Catalog
Resources, Inc.
Common stock issuable
exchanged for long-term
debt...................... -- -- (418,899) (87,351) -- -- --
Exercise of stock options..... 249,600 2,496 -- 938,080 -- -- --
Stock dividend -- converted
shares...................... 716 8 -- 494 -- -- --
Stock purchased through
Employee Stock Purchase Plan
and employment agreements... 6,736 67 -- 89,854 -- -- --
Treasury stock acquired....... -- -- -- -- -- 26,897 (497,552)
Dividends paid................ -- -- -- -- (711,779) -- --
Valuation adjustment, net..... -- -- -- -- -- -- --
Tax benefit of exercise of
stock options............... -- -- -- 780,000 -- -- --
Net income.................... -- -- -- -- 7,835,474 -- --
---------- ------- ---------- ----------- ----------- -------- ---------
September 30, 1998.............. 5,111,899 $51,119 $1,071,532 $10,424,048 $35,368,901 214,663 $(705,505)
========== ======= ========== =========== =========== ======== =========
<CAPTION>
AVAILABLE-FOR-
SALE SECURITIES
VALUATION
BALANCE ADJUSTMENT TOTAL
- ------- ---------------- -----------
<S> <C> <C>
October 1, 1995................. $(78,837) $22,047,519
Acquisition of Catalog
Resources, Inc.
Common stock issued......... -- --
Exercise of stock options..... -- 619,673
Stock dividend -- converted
shares...................... -- 255
Stock purchased through
Employee Stock Purchase Plan
and employment agreements... -- 153,978
Dividends paid................ -- (401,762)
Valuation adjustment, net..... 44,245 44,245
Tax benefit of exercise of
stock options............... -- 559,000
Net income.................... -- 7,837,645
-------- -----------
September 30, 1996.............. (34,592) 30,860,553
-------- -----------
Acquisition of Catalog
Resources, Inc.
Common stock issued......... -- --
Exercise of stock options..... -- 519,499
Stock dividend -- converted
shares...................... -- 221
Stock purchased through
Employee Stock Purchase Plan
and employment agreements... -- 106,869
Dividends paid................ -- (629,190)
Valuation adjustment, net..... 31,583 31,583
Tax benefit of exercise of
stock options............... -- 400,000
Net income.................... -- 6,986,659
-------- -----------
September 30, 1997.............. (3,009) 38,276,194
-------- -----------
Acquisition of Catalog
Resources, Inc.
Common stock issuable
exchanged for long-term
debt...................... -- (506,250)
Exercise of stock options..... -- 940,576
Stock dividend -- converted
shares...................... -- 502
Stock purchased through
Employee Stock Purchase Plan
and employment agreements... -- 89,921
Treasury stock acquired....... -- (497,552)
Dividends paid................ -- (711,779)
Valuation adjustment, net..... 3,009 3,009
Tax benefit of exercise of
stock options............... -- 780,000
Net income.................... -- 7,835,474
-------- -----------
September 30, 1998.............. $ -- $46,210,095
======== ===========
</TABLE>
See notes to consolidated financial statements
F-54
<PAGE> 142
LCS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income.............................................. $ 7,835,474 $ 6,986,659 $ 7,837,645
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 2,610,430 2,504,699 2,321,718
Deferred income taxes................................. 245,000 (220,600) (21,000)
Provision for doubtful accounts receivable............ 134,168 119,000 65,000
Deferred compensation................................. 313,922 -- --
Gain on sale of available-for-sale securities, net.... -- (474) (1,046)
----------- ----------- ------------
Total adjustments................................ 3,303,520 2,402,625 2,364,672
Changes in operating assets and liabilities:
Accounts receivable..................................... 1,008,611 1,236,276 (768,131)
Prepaid expenses and other current assets............... (968,626) (426,921) 295,018
Accounts payable and accrued expenses................... (2,733,740) 2,366,400 347,847
Income taxes payable.................................... 640,725 74,450 215,635
Deferred revenue........................................ (4,124,699) (4,015,068) 4,525,436
Security deposits....................................... (188,701) 12,893 331,262
Other, net.............................................. 51,851 15,244 29,111
----------- ----------- ------------
Total adjustments and changes.................... (3,011,059) 1,665,899 7,340,850
----------- ----------- ------------
Net cash provided by operating activities........ 4,824,415 8,652,558 15,178,495
----------- ----------- ------------
Cash flows from financing activities:
Changes in note payable, long-term debt and capital
leases (including current portion):
Borrowings............................................ -- -- 2,500,000
Repayments............................................ (1,744,343) (1,448,425) (1,251,888)
Dividends paid.......................................... (711,277) (628,969) (401,507)
Exercise of stock options............................... 443,024 919,499 1,178,673
Employee Stock Purchase Plan and employment agreement
proceeds.............................................. 89,921 106,869 153,978
----------- ----------- ------------
Net cash provided by (used in) financing
activities..................................... (1,922,675) (1,051,026) 2,179,256
----------- ----------- ------------
Cash flows from investing activities:
Additions to property and equipment..................... (1,682,820) (1,762,911) (4,362,085)
Net sales (purchases) of investments.................... 3,864,612 (3,113,332) (9,732,515)
----------- ----------- ------------
Net cash provided by (used in) investing
activities..................................... 2,181,792 (4,876,243) (14,094,600)
----------- ----------- ------------
Cash and cash equivalents:
Net increase in cash and cash equivalents............... 5,083,532 2,725,289 3,263,151
Cash and cash equivalents at beginning of period........ 14,619,271 11,893,982 8,630,831
----------- ----------- ------------
Cash and cash equivalents at end of period....... $19,702,803 $14,619,271 $ 11,893,982
=========== =========== ============
Supplemental disclosures of cash flow information: Cash
paid during the period for:
Interest.............................................. $ 263,000 $ 273,000 $ 219,000
Income taxes.......................................... $ 4,210,000 $ 5,337,000 $ 4,261,000
</TABLE>
See notes to consolidated financial statements
F-55
<PAGE> 143
LCS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30
Supplemental disclosures of noncash investing and financing activities:
VALUATION ADJUSTMENT:
For the year ended September 30, 1998, the valuation adjustment
account is no longer required as a result of selling the available-for-sale
securities portfolio to which the valuation adjustment related. For the
years ended September 30, 1997 and 1996, the account was adjusted to
reflect an increase in market values of the available-for-sale securities
portfolio of $31,583 and $44,245, respectively, net of deferred income
taxes.
STOCK DIVIDENDS:
For the years ended September 30, 1998, 1997, and 1996, 716, 318 and
360 shares of the Company's common stock were paid as dividends upon
exchange of 299, 133 and 150 shares, respectively, of the Company's "old"
common stock.
TREASURY STOCK:
For the year ended September 30, 1998, 26,897 shares of the Company's
outstanding common stock were received in exchange for options exercised
covering 176,000 shares of common stock.
LONG-TERM DEBT AND ACQUISITION OF BUSINESS:
As a result of Amendment No. 2 of the Catalog Resources, Inc. purchase
agreement, (as explained in Note 2 to the Consolidated Financial
Statements), additional long-term debt of $506,250 was recorded, offset by
charges to common stock issuable of $418,899 and additional paid-in capital
of $87,351 during fiscal 1998. For the years ended September 30, 1997 and
1996, $455,552 and $461,538 of common stock issuable was converted into
38,762 and 34,621 issued shares, respectively, of the Company's common
stock, in accordance with the terms of the Catalog Resources, Inc. purchase
agreement, as amended.
See notes to consolidated financial statements
F-56
<PAGE> 144
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Consolidation
The consolidated financial statements include the accounts of LCS
Industries, Inc. and its subsidiaries (the "Company"). The Company provides
outsourcing services specializing in fulfillment, list and computer services and
international telecommunications database development and management. The
Company's services are performed within the United States and Canada except for
a computer services contract with a non-U.S. telecommunications company. All
material intercompany transactions and balances have been eliminated in
consolidation.
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 revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are made when accounting for
allowance for doubtful accounts, sales adjustments, depreciation and
amortization, carrying value of goodwill, costs to complete long-term contracts
which are accounted for using the percentage-of-completion method of accounting,
taxes and contingencies.
Cash and Cash Equivalents
Cash and cash equivalents include short-term cash investments with
maturities of three months or less at date of acquisition. Such investments are
carried at cost, which approximates market, and amounted to $18,409,000 and
$12,931,000 at September 30, 1998 and 1997, respectively.
Investments
The Company records its investments based on the provisions of Statement of
Financial Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. In accordance with the provisions of this statement, the
Company has classified its investments in debt securities into held-to-maturity
or available-for-sale based upon management's intent with respect to such
investments and the Company's ability to so hold. Debt securities are stated at
amortized cost. Equity securities are classified as available-for-sale or
trading depending on management's intent. Market values are based on publicly
quoted market prices.
Long-Lived Assets
Effective October 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. Long-lived assets and
identifiable intangibles to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Impairment is measured by comparing the carrying value
of the long-lived assets to the estimated undiscounted future cash flows
expected to result from use of the assets and their eventual disposition. If the
sum of the expected undiscounted future cash flows is less than the carrying
amount of the assets, the Company would recognize an impairment loss. The
impairment loss, if determined to be necessary, would be measured as the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
The Company determined that as of September 30, 1998 and 1997, there had been no
impairment in the carrying value of long-lived assets.
F-57
<PAGE> 145
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization,
which includes the amortization of assets recorded under capital leases, are
computed using the straight-line method over the estimated serviceable lives of
the respective assets or the initial or remaining terms of leases. Leasehold
improvements are amortized, using the straight-line method, over the shorter of
the estimated useful life of the asset or the life of the lease.
Goodwill
Represents the unamortized excess cost of acquiring Catalog Resources, Inc.
over the fair value of the net assets received at the acquisition date. This
asset is being amortized on the straight-line basis over 30 years. The
consolidated statements of operations for the fiscal years ended September 30,
1998, 1997 and 1996 include goodwill amortization of $286,300, $286,300 and
$286,400, respectively. The Company regularly assesses the recoverability of
goodwill in accordance with the provisions of SFAS No. 121.
Revenue Recognition
Sales and related cost of sales are recognized when services are performed.
Revenues under long-term consulting contracts are recognized based on the
percentage-of-completion method of accounting measured by the percentage of
labor hours incurred to date to the estimated total labor hours required for
each contract. Deferred revenue represents billings in excess of revenues
recognized as sales.
Income Taxes
The Company records income taxes based on the provisions of Statement of
Financial Standards No. 109, Accounting for Income Taxes. Deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled.
Earnings Per Common Share
Effective October 1, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, issued
in March 1997. Basic earnings per share includes no dilution and is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of the
Company. The prior years' earnings per share amounts have been restated to
reflect the provisions of SFAS No. 128.
F-58
<PAGE> 146
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is the reconciliation of the weighted average shares used in
the computations of basic and dilutive earnings per share:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding used for
basic earnings per share.......................... 4,808,274 4,624,702 4,329,663
Weighted average dilutive stock options............. 259,633 371,985 627,947
Shares issuable in connection with the acquisition
of Catalog Resources, Inc. ....................... 89,733 107,151 160,475
--------- --------- ---------
Weighted average common shares outstanding for
dilutive earnings per share....................... 5,157,640 5,103,838 5,118,085
========= ========= =========
</TABLE>
The weighted average shares used in the computations of fiscal years 1998,
1997 and 1996 diluted earnings per share include the shares issuable in
accordance with the agreement, as amended, related to the acquisition of Catalog
Resources, Inc.
Disclosure of Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires a reconciliation of net income to comprehensive income in
the financial statements. Comprehensive income includes items that are excluded
from net income and reported as components of stockholders' equity, such as
unrealized gains and losses on certain investments in debt and equity
securities, foreign currency items and minimum pension liability adjustments.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Management of the Company does not believe there will be any material effect
from adopting SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. SFAS No. 131 requires the reporting of
profit and loss, specific revenue and expense items and assets for reportable
segments. It also requires the reconciliation of total segment revenues, total
segment profit or loss, total segment assets and other amounts disclosed for
segments to the corresponding amounts in the general-purpose financial
statements. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The Company is planning to adopt the provisions of SFAS No. 131 for
its fiscal year beginning October 1, 1998 but has not yet fully determined what
additional disclosures may be required to complete its implementation.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. Generally, it
requires that an entity recognized all derivatives as either an asset or
liability and measure those instruments at fair value, as well as identify the
conditions for which a derivative may be specifically designed as a hedge. The
Company does not have any derivative instruments.
2. ACQUISITION
On April 1, 1993, the Company completed the purchase of all the outstanding
stock of Catalog Resources, Inc. ("CRI"). CRI's results of operations are
included in the Company's Consolidated Statements of Income from that date. The
initial purchase price was $3,500,000 with additional payments earned if CRI's
pretax income, as defined by the agreement, reached certain amounts during the
next five years. Of the initial purchase price, a total of $1,900,000 was paid
consisting of $950,000 in cash and 324,956 shares of the Company's common stock.
F-59
<PAGE> 147
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective August 1, 1994, the purchase agreement was amended to limit to
$8,100,000 the aggregate amount of additional purchase consideration to be paid
in addition to the $1,900,000 paid at such date. The additional amount to be
paid is based upon the operating performance of CRI over the eight-year period
beginning October 1, 1993. Based upon CRI's earnings for each fiscal year ending
on September 30, a maximum annual payment of $1,012,500 is payable in January of
the following year, which amount is subject to a dollar-for-dollar reduction
based on CRI's operating results. Such payments are calculated separately for
each year. Each payment will consist of 50 percent in cash and 50 percent in
common stock of the Company with the maximum number of shares to be delivered
under the purchase agreement, as amended, not to exceed 660,000 shares. The
portion of these payments not made in stock is payable in cash. The number of
shares to be issued will be based on the market value, as defined, of the common
stock at the future payment dates. Based on the terms of the amended agreement
and the achievement of the required operating results for the preceding fiscal
year, payments of $1,012,500, 50 percent in cash and 50 percent in stock, were
made on January 1, 1995, 1996 and 1997. As of September 30, 1997, 538,287 shares
had been delivered under the provisions of the purchase agreement, as amended.
On December 30, 1997, the Company and former shareholders of Catalog
Resources, Inc. agreed to Amendment No. 2 of the purchase agreement dated April
1, 1993 and amended August 1, 1994. This Amendment provided for the payment made
January 2, 1998 of $1,012,500 to be 100 percent in cash compared to the
previously agreed 50 percent in cash and 50 percent in common stock of the
Company, subject to a maximum number of shares to be issued of 660,000.
Accordingly, the current portion of long-time debt at December 31, 1997 was
increased by $506,250 (50% of the $1,012,500 payment). This was offset by a
reduction in common stock issuable of $418,899, representing the present value
at September 30, 1995 of the originally anticipated stock issuance, and a charge
to additional paid-in capital of $87,351.
As a result of Amendment No. 2, the parties agreed to reduce the maximum
number of share issuable under the amended agreement by the shares which would
have been issued on January 2, 1998 based on the provisions of the original
agreement. The revised maximum number of shares issuable is 628,020 of which
538,287 shares have been previously issued.
The common stock issuable amount reflects the maximum number of shares
(628,020, as adjusted for Amendment No. 2 to the purchase agreement, less those
shares issued and delivered prior to September 30, 1995) issuable under the
terms of the purchase agreement, as amended, based on the market price of the
Company's common stock at September 30, 1995. This amount is subject to
adjustment, based on the future movements in the market price of the Company's
common stock. No adjustment was recorded during the current fiscal year. Based
on the operating results for the fiscal year ended September 30, 1998, the
January 1, 1999 scheduled payment of $1,012,000 will be paid.
3. INVESTMENTS
During the year ended September 30, 1997, the valuation account related to
the available-for-sale marketable securities portfolio was adjusted to reflect
an increase in market values of $31,583, net of deferred taxes. The valuation
account was no longer required in fiscal year 1998 as a result of selling the
available-for-sale securities portfolio to which the valuation account related.
F-60
<PAGE> 148
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the components of investments held at
September 30, 1998:
<TABLE>
<CAPTION>
UNREALIZED
COST MARKET VALUE HOLDING GAIN
----------- ------------ ------------
<S> <C> <C> <C>
Held-to-Maturity:
U.S. Government due January 31, 1999........ $ 24,996 $ 25,016 $20
Commercial paper-various issues............. 11,454,124 11,454,124 --
----------- ----------- ---
Total............................... $11,479,120 $11,479,140 $20
=========== =========== ===
</TABLE>
During the year ended September 30, 1998, proceeds from redemptions of
investments were $36,731,307. The Company uses specific identification for
securities sold.
The following table sets forth the components of investments held at
September 30, 1997:
<TABLE>
<CAPTION>
UNREALIZED
COST MARKET VALUE HOLDING LOSS
----------- ------------ ------------
<S> <C> <C> <C>
Available-for-sale:
U.S. Government due January 31, 1999........ $ 24,996 $ 24,695 $ (301)
Equity securities........................... 103,799 99,013 (4,786)
----------- ----------- -------
Total............................... $ 128,795 $ 123,708 $(5,087)
=========== =========== =======
Held-to-Maturity:
Commercial paper-various issues............. $14,410,101 $14,410,101 $ --
=========== =========== =======
</TABLE>
During the year ended September 30, 1997, proceeds from redemptions of
investments were $24,445,993 resulting in a realized gain of $474. The Company
uses specific identification for securities sold.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Activity in the Allowance for Doubtful Accounts for the three years ended
September 30, 1998 includes:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Balance at beginning of year....................... $ 496,000 $ 627,000 $624,000
Additions -- charged to expense.................... 134,000 119,000 65,000
Deductions......................................... (128,000) (250,000) (62,000)
--------- --------- --------
Balance at end of year............................. $ 502,000 $ 496,000 $627,000
========= ========= ========
</TABLE>
F-61
<PAGE> 149
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
The components of property and equipment include:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Furniture and fixtures.................................. $ 3,267,647 $ 3,094,284
Leasehold improvements.................................. 2,231,127 2,207,228
Computer equipment...................................... 8,216,147 7,508,056
Computer equipment under capital leases................. 1,915,567 1,915,567
Other equipment......................................... 4,984,534 4,228,200
------------ ------------
20,615,022 18,953,335
Less: Accumulated depreciation and amortization......... (14,162,493) (11,859,545)
------------ ------------
$ 6,452,529 $ 7,093,790
============ ============
</TABLE>
Depreciation and amortization charged to operations was approximately
$2,324,000, $2,218,000, and $2,035,000 for 1998, 1997 and 1996, respectively.
6. UNSECURED LINE OF CREDIT
A bank holds available, until March 31, 1999, a $5,000,000 unsecured bank
line of credit. The line of credit has been renewed annually. During fiscal
years 1998 and 1997, the available line of credit was not used.
7. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Payable to former shareholders of CRI....................... $2,176,260 $2,499,945
Notes payable to banks...................................... 1,424,485 2,032,099
---------- ----------
3,600,745 4,532,044
Less: Current portion....................................... 1,026,147 1,087,511
---------- ----------
$2,574,598 $3,444,533
========== ==========
</TABLE>
See Note 2 for a description of the amounts due to the former shareholders
of CRI.
Notes payable to banks consist of one note for a five-year term loan
payable through December 15, 1998 with interest at 6.90%. The loan is secured by
certain equipment located at CRI with a net book value of $180,314 as of
September 30, 1998. A second note is for a five-year term loan payable through
June 27, 2001 with interest at 7.99%. This loan is secured by certain equipment
located at CRI with a net book value at September 30, 1998 of $1,631,812. CRI
must continue to meet a financial ratio test and maintain net worth of at least
$5,000,000 after September 30, 1996. The Company has guaranteed the repayment of
this loan.
F-62
<PAGE> 150
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt include:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30, AMOUNT
----------------- ----------
<S> <C>
1999...................................................... $1,026,147
2000...................................................... 1,018,464
2001...................................................... 767,215
2002...................................................... 788,919
----------
Total long-term debt........................................ $3,600,745
==========
</TABLE>
8. PROVISION FOR INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal........................................ $3,994,000 $4,413,000 $4,292,000
State.......................................... 1,137,000 1,244,000 1,216,000
---------- ---------- ----------
Total provision for current income
taxes................................ 5,131,000 5,657,000 5,508,000
Deferred
Federal........................................ 175,000 (179,000) (22,000)
State.......................................... 70,000 (42,000) 1,000
---------- ---------- ----------
Total provision for deferred income
taxes................................ 245,000 (221,000) (21,000)
---------- ---------- ----------
Total provision for income taxes................. $5,376,000 $5,436,000 $5,487,000
========== ========== ==========
</TABLE>
The total provision for income taxes varies from the U.S. federal statutory
rate. The following reconciliation shows the significant differences in the tax
at statutory and effective rates:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Federal income tax at statutory rate............. $4,524,000 $4,248,000 $4,564,000
State income taxes -- net of federal tax
benefit........................................ 794,000 740,000 791,000
Non-deductible expenses.......................... 145,000 149,000 148,000
Non-taxable income............................... (1,000) (5,000) (16,000)
Valuation allowance against capital loss
carryforward................................... (86,000) 298,000 --
Other............................................ -- 6,000 --
---------- ---------- ----------
Total provision for income taxes................. $5,376,000 $5,436,000 $5,487,000
========== ========== ==========
</TABLE>
F-63
<PAGE> 151
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred income tax assets and liabilities at September
30, 1998 include:
<TABLE>
<CAPTION>
NET NON- NET NON-
NET CURRENT CURRENT NET CURRENT CURRENT
ASSET LIABILITY ASSET LIABILITY
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Property and equipment.................. $ -- $ 235,000 $ -- $251,000
Allowance for doubtful accounts......... 205,000 -- 201,000 --
Non-deductible expenses................. -- -- 392,000 --
Unrealized holding loss on marketable
securities............................ -- -- -- (2,000)
Vacation accrual........................ 90,000 -- 91,000 --
Deferred compensation................... -- (128,000) -- --
Capital loss carryforward............... 212,000 -- 298,000 --
Valuation allowance against capital loss
carryforward.......................... (212,000) -- (298,000) --
--------- --------- --------- --------
Total......................... $ 295,000 $ 107,000 $ 684,000 $249,000
========= ========= ========= ========
</TABLE>
9. STOCK OPTIONS
The Company has an Incentive Stock Option Plan (the "Plan") which was
adopted and became effective in May, 1993. The Plan calls for granting incentive
stock options to certain officers and other employees, as defined, under current
tax laws to purchase shares of the Company's common stock. The stock options are
exercisable at prices not less than the fair market value of the common stock on
the date the options are granted. The aggregate number of shares which may be
issued under the Plan is 2,200,000.
The 1996 non-qualified Non-Employee Directors Stock Option Plan ("1996
Plan"), provides for the granting of options covering 250,000 shares. Each
non-employee director, who is a non-employee director at the date of grant of
the option and who was a non-employee at all times during the fiscal year
preceding the date of grant, shall be granted an option to purchase 11,000
shares of the common stock on the date the 1996 Plan was approved by the
stockholders and on each succeeding fifth business day following the public
release of the Company's annual earnings for any fiscal year in which sales and
net income per share of common stock increase by more than 5% over the prior
fiscal year. Options granted under the 1996 Plan are based on the market value
on the date of grant. During fiscal 1997, 22,000 shares were granted, based on
fiscal year 1996 results, at a price of $15.00, all of which are outstanding. At
September 30, 1998, 8,800 of these shares were exercisable. No options were
granted for fiscal years 1998 and 1997. The 1993 non-qualified Non-Employee
Directors Stock Option Plan ("1993 Plan") was terminated when the 1996 Plan was
approved. The 1993 Plan has 11,600 options which remain outstanding at prices of
$3.53-$16.00. At September 30, 1998, 7,400 shares were exercisable at prices of
$3.53-$16.00. There was no other activity in this plan during fiscal years 1998
and 1997.
Non-employee directors have been granted non-qualified options, at the fair
market value on the date of grant, to purchase 54,000 shares of the Company's
common stock at prices of $2.05 to $5.38 per share. At September 30, 1998,
46,000 options were exercisable. During the current year, no options were
exercised and no options were cancelled.
During the year ended September 30, 1995, certain officers of the Company
were issued non-qualified options to purchase 75,000 shares of the Company's
common stock at a price of $5.75 per share (100 percent of fair market value).
During fiscal year 1998, options to purchase 50,000 shares were exercised.
F-64
<PAGE> 152
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following schedule sets forth the activity under the 1983 Incentive
Stock Option Plan for the years ended September 30, 1998, 1997 and 1996.
Granting of options under this plan ceased in May 1994.
<TABLE>
<CAPTION>
INCENTIVE OPTIONS NUMBER OPTION PRICE
- ----------------- -------- ------------
<S> <C> <C>
Outstanding September 30, 1995.............................. 565,900 $1.25-$3.75
Exercised................................................... (165,200) $2.05- 3.41
--------
Outstanding September 30, 1996.............................. 400,700 $1.25- 3.41
Exercised................................................... (176,300) $2.25- 3.41
--------
Outstanding September 30, 1997.............................. 224,400 $1.25- 2.69
Exercised................................................... (136,400) $1.25- 2.69
--------
Outstanding September 30, 1998.............................. 88,000 $2.61
========
Exercisable September 30, 1998.............................. 88,000 $2.61
========
</TABLE>
The following schedule sets forth the activity of the 1993 Incentive Stock
Option Plan for the years ended September 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
INCENTIVE OPTIONS NUMBER OPTION PRICE
- ----------------- --------- -------------
<S> <C> <C>
Outstanding September 30, 1995............................. 554,374 $ 2.88-$16.85
Granted.................................................... 110,000 15.50
Exercised.................................................. (32,403) 2.88- 5.75
Expired or Cancelled....................................... (23,998) 2.96- 5.75
---------
Outstanding September 30, 1996............................. 607,973 2.96- 16.85
Granted.................................................... 110,800 12.75- 15.00
Exercised.................................................. (17,375) 2.96- 15.50
Expired or Cancelled....................................... (117,448) 2.96- 15.50
---------
Outstanding September 30, 1997............................. 583,950 2.96- 16.85
Granted.................................................... 159,200 14.00- 14.63
Exercised.................................................. (63,200) 2.96- 15.50
Expired or Cancelled....................................... (215,500) 2.96- 16.85
---------
Outstanding September 30, 1998............................. 464,450 $ 2.96- 16.85
=========
Exercisable September 30, 1998............................. 195,725 $ 2.96-$16.85
=========
Available for grant September 30, 1998..................... 1,602,146
=========
</TABLE>
F-65
<PAGE> 153
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following schedule sets forth the status of the incentive stock options
outstanding and exercisable at September 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
--------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
RANGE OF NUMBER REMAINING EXERCISE AVERAGE # EXERCISE
EXERCISE PRICES OF SHARES LIFE-YEARS PRICE OF SHARES PRICE
- --------------- --------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
1983 Incentive Plan
$2.61..................................... 88,000 4.5 $ 2.61 88,000 $ 2.61
1993 Incentive Plan
$2.96 to $5.50............................ 62,650 6.1 3.84 50,150 3.79
$12.75 to $16.85.......................... 401,800 8.2 14.49 145,575 15.19
------- -------
Total 1993 Plan........................... 464,450 195,725
------- -------
Total Plans............................... 552,450 283,725
======= =======
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, issued in October, 1995. In accordance with the provisions of SFAS
No. 123, the Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans and, accordingly, does not recognize
compensation cost. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at the various grant dates, as
prescribed by SFAS No. 123, net income and earnings per share would have been
adjusted to the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income -- as reported........................ $7,835,474 $6,986,659 $7,837,645
Net income -- pro forma.......................... 7,548,105 6,751,871 7,726,185
Diluted earnings per share -- as reported........ 1.52 1.37 1.53
Diluted earnings per share -- pro forma.......... 1.46 1.32 1.51
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Binery Option Pricing Model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Expected dividend yield......................... 1.10% .80% .80%
Expected stock volatility....................... 48.83% 59.65% 59.65%
Risk free interest rates........................ 4.61-4.66% 5.86-6.13% 5.84-5.93%
Expected life of options........................ 7 years 5-10 years 5-7 years
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of the effect on future amounts.
The Company's stock options are not transferable, and the actual value of
the stock options that an employee may realize, if any, will depend on the
excess of the market price on the date of exercise over the exercise price. The
Company has based its assumption for stock price volatility on the variance of
weekly closing prices of the Company's stock for the last three years. The
risk-free rate of return used equals the yield on zero-coupon U.S. Treasury
issues on the grant date based on the grants estimated life.
F-66
<PAGE> 154
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. 1994 EMPLOYEE STOCK PURCHASE PLAN AND EMPLOYMENT AGREEMENTS
At the annual meeting of stockholders in March 1994, the 1994 Employee
Stock Purchase Plan (the "Purchase Plan") was adopted. The Purchase Plan
provides eligible employees of the Company and its subsidiaries the opportunity
to acquire up to 300,000 shares of common stock. Purchases are made on a monthly
basis through payroll deductions of 1 percent to 10 percent of eligible
compensation. Shares are offered at a 15 percent discount from the closing price
on the last trading date of each month with no brokerage commissions.
Participation in the Purchase Plan began September 1, 1994. For the years ended
September 30, 1998, 1997 and 1996, shares purchased totaled 6,341, 6,892 and
9,968, respectively.
Employment agreements with current and former officers of a subsidiary
include the provision for the quarterly purchase of the Company's common stock
to the extent of 5 percent of any bonus earned, as defined. Shares are offered
at a discount from the quarter end closing market price of the common stock.
During fiscal years 1998, 1997 and 1996, a total of 395, 1,713 and 1,749 shares,
respectively, were purchased under these agreements. Effective December 31,1997,
the election for future purchases was terminated by the remaining participant.
11. EMPLOYEE RETIREMENT SAVINGS PLAN (401(k))
The Company sponsors a tax deferred retirement savings plan ("401(k) Plan")
which permits eligible employees to contribute varying percentages of their
compensation up to the limit allowed by the Internal Revenue Service. The 401(k)
Plan also provides for discretionary Company contributions. No discretionary
contributions were made for the years ended September 30, 1998, 1997 and 1996.
The Company matches employees' contributions to a maximum of 25 percent of
the employee's first 6 percent contributed. The Company's matching contributions
were temporarily increased to 35 percent of eligible employee contributions in
fiscal years 1998, 1997 and 1996, during the period of January 1 to June 30.
Matching contributions charged to expense were $233,000, $189,000 and $196,000
for the fiscal years ended September 30, 1998, 1997 and 1996, respectively.
12. NON-QUALIFIED DEFERRED COMPENSATION PLANS
During the current fiscal year, the Company established Plans providing
senior and other executives of the Company and its subsidiaries the opportunity
to participate in unfunded deferred compensation programs.
The Executive Non-Qualified Deferred Compensation Plan provides senior
officers retirement benefits through the deferring of compensation, as defined,
on a pre-tax basis to a maximum of $30,000 per year. The Company provides a 30
percent matching contribution of the amounts deferred. Participants fully vest
in the Company's matching contributions and related earnings/losses after three
years of service with the Company.
The Management Non-Qualified Deferred Compensation Plan provides certain
management employees retirement benefits through the deferring of compensation,
as defined, on a pre-tax basis to a maximum of $10,000 per year. The Company
provides a 20 percent matching contribution of the amounts deferred.
Participants fully vest in the Company's matching contribution and related
earnings/losses after five years of participation in the plan or attaining age
62.
The Plans are not qualified under Section 401 of the Internal Revenue Code
and, therefore, the participants are general creditors of the Company with
respect to these benefits. The Company has established irrevocable rabbi trusts
to assist in funding the Plan's benefits. Trust investments are recorded as
assets of the Company with the related earnings/losses passed on to the Plan
participants.
F-67
<PAGE> 155
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred compensation expense for the year, represented by the Company
matching contributions and net earnings/losses, was $77,000.
13. OPERATING LEASE COMMITMENTS
The Company and its subsidiaries lease certain properties, equipment and
software under noncancellable long-term operating leases, which expire at
various dates. Certain of the leases on real estate require the payment of real
estate taxes. Minimum rentals under the leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING LEASES
- ----------- ----------------
<S> <C>
1999.................................................. $2,309,000
2000.................................................. 1,594,000
2001.................................................. 1,224,000
2002.................................................. 1,204,000
2003.................................................. 1,141,000
Thereafter............................................ 1,409,000
----------
Total....................................... $8,881,000
==========
</TABLE>
Real estate, equipment and software operating lease costs include:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Real estate...................................... $2,634,000 $2,535,000 $2,324,000
Equipment and software........................... 719,000 740,000 788,000
---------- ---------- ----------
Total.................................. $3,353,000 $3,275,000 $3,112,000
========== ========== ==========
</TABLE>
14. OTHER (INCOME) EXPENSE
In June 1997, the Company recorded a loss on investment of $954,000
($863,000 net of taxes) representing a non-recurring charge for the write-off of
the Company's investment in McIntyre & King, Ltd. ("M&K"). This charge
represented $.17 per diluted share. The Company's Board of Directors decided to
sever the relationship with M&K due to unexpected operating losses that would
have required unacceptable demands on management's time and financial support
required to attempt to return M&K to profitability. As a result, effective April
5, 1997, the Company agreed to rescind its acquisition of M&K. The rescission
agreement, dated June 30, 1997, provided for the return of a portion of the down
payment in one year. However, recovery was uncertain and, therefore, the Company
expensed all payments, advances and all related costs. On November 28, 1997, the
Company received a payment from M&K of approximately $210,000 in final
settlement of a portion of the down payment, which was recorded in other income
in the quarter ended December 31, 1997.
On October 6, 1997, the Company announced the recording of a non-recurring
charge of $960,000 ($570,000 net of taxes or $.11 per diluted share) in the
period ended September 30, 1997 related to death benefits payable under
employment agreements and other severance amounts due to the Company's former
Chairman, the late Arnold J. Scheine, who passed away on September 22, 1997.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, investments
held-to-maturity, trade receivables, other current assets, accounts payable and
amounts included in investments and accruals meeting the definition of a
financial instrument approximate fair value. The carrying values and related
estimated fair
F-68
<PAGE> 156
LCS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
values for the Company's long-term debt payable to banks is estimated based on
the current rates offered to the Company for debt of the same maturities as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Carrying value.............................................. $1,424,000 $2,032,000
Fair value.................................................. 1,439,000 2,037,000
</TABLE>
16. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal claims and disputes that are
normal and incidental to the Company's business. In the opinion of management,
after consultation with legal counsel, the amount of losses that might be
sustained, if any, from such claims and disputes would not have a material
effect on the Company's financial statements.
The Company has entered into agreements with certain of its key management
employees providing for payments totaling $385,000 if there is a change in
control transaction signed by the Company.
At September 30, 1998, the Company and its subsidiaries have employment
agreements with certain of their officers with terms expiring at various times
through September 30, 2002, which provide for aggregate future minimum
compensation of $1,175,000. One of the agreements provides for a bonus based on
the results of the respective subsidiary's operations. Certain of the agreements
provide for severance payments equal to six months salary.
During the current fiscal year, one of the Company's subsidiaries had in
effect a $500,000 standby letter of credit agreement securing the timely
payments, by the subsidiary, of amounts owing to a customer. No claims were made
against this agreement during the year. The fair value of the standby agreement
approximates the cost of the agreement.
17. MAJOR CUSTOMERS
For the years ended September 30, 1998, 1997 and 1996, revenues recognized
under the contract to provide computer services to a non-U.S. telecommunications
company amounted to 12 percent, 15 percent and 14 percent, respectively, of
consolidated sales.
18. SUBSEQUENT EVENT
On December 17, 1998, the Company and CustomerONE Holding Corporation, a
subsidiary of Onex Corporation announced that they have entered into a
definitive merger agreement pursuant to which CustomerONE will acquire all of
the outstanding shares of LCS common stock at a price of $17.50 per share in
cash, representing an aggregate transaction value of approximately $97.3
million. Onex Corporation is a diversified company with 1997 consolidated
revenues of $11 billion Canadian and consolidated assets of $6.4 billion
Canadian.
Pursuant to the merger agreement, CustomerONE will make a cash tender offer
for all of the outstanding common shares of LCS common stock. The tender offer
is expected to commence the week of December 21. Consummation of the tender
offer is subject to U.S. antitrust regulatory clearance and other customary
closing conditions.
The tender offer is not subject to financing. Onex has agreed to provide
CustomerONE with all necessary funds to effect the tender offer and merger.
The Board of Directors of LCS has unanimously approved the merger and has
recommended that LCS stockholders accept the tender offer and approve and adopt
the merger agreement.
F-69
<PAGE> 157
LCS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $26,686,545 $19,702,803
Investments -- held-to-maturity........................... 6,737,645 11,479,120
Accounts receivable, net (less allowance for doubtful
accounts: December 31 -- $497,000 and September
30 -- $502,000)........................................ 21,720,927 22,020,995
Inventory................................................. 157,133 --
Prepaid expenses and other current assets................. 1,652,620 1,623,264
Deferred taxes............................................ 287,000 295,000
----------- -----------
Total current assets.............................. 57,241,870 55,121,182
----------- -----------
Property and equipment, net............................... 6,886,610 6,452,529
Goodwill (net of accumulated amortization: December
31 -- $1,164,141 and September 30 -- $1,092,553)....... 6,923,040 6,994,628
Other assets.............................................. 931,449 811,022
----------- -----------
Total assets...................................... $71,982,969 $69,379,361
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $13,149,996 $13,691,193
Accrued salaries and commissions.......................... 2,782,952 2,311,796
Other accrued expenses.................................... 2,184,983 2,993,400
Income taxes payable...................................... 986,906 151,210
Current portion of long-term debt......................... 1,536,948 1,026,147
Current portion of capital lease obligations.............. 262,608 --
----------- -----------
Total current liabilities......................... 20,904,393 20,173,746
----------- -----------
Long-term debt, net of current portion.................... 2,473,172 2,574,598
Capital lease obligations................................. 522,020 --
Deferred taxes............................................ 16,000 107,000
Deferred compensation and other........................... 1,118,364 313,922
Stockholders' Equity:
Common stock $.01 par value; authorized 15,000,000
shares; issued December 31 -- 4,898,447 shares and
September 30 -- 5,111,899 shares...................... 51,131 51,119
Common stock issuable..................................... -- 1,071,532
Additional paid-in capital................................ 10,315,953 10,424,048
Retained earnings......................................... 37,287,441 35,368,901
----------- -----------
47,654,525 46,915,600
Less: Treasury stock, at cost............................. (705,505) (705,505)
----------- -----------
Total stockholders' equity........................ 46,949,020 46,210,095
----------- -----------
$71,982,969 $69,379,361
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-70
<PAGE> 158
LCS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales................................................... $24,965,427 $25,646,160
Cost of sales............................................... 18,372,075 17,771,754
----------- -----------
Gross profit.............................................. 6,593,352 7,874,406
Selling and administrative expenses......................... 3,808,157 4,180,503
Other (income) expense:
Dividend and interest income.............................. (423,367) (420,580)
Interest expense.......................................... 77,806 96,706
Other (income) expense.................................... -- (210,000)
----------- -----------
Income before income taxes.................................. 3,130,756 4,227,777
Provision for income taxes.................................. 1,030,000 1,640,000
----------- -----------
Net income.................................................. 2,100,756 2,587,777
----------- -----------
Retained earnings beginning of period....................... 35,368,901 28,245,206
Dividends................................................... (182,216) (173,722)
----------- -----------
Retained earnings end of period............................. $37,287,441 $30,659,261
=========== ===========
Per common and common equivalent share:
Basic earnings............................................ $ 0.429 $ 0.55
=========== ===========
Diluted earnings.......................................... $ 0.411 $ 0.50
=========== ===========
Dividends................................................. $ 0.04 $ 0.04
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-71
<PAGE> 159
LCS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income................................................ $ 2,100,756 $ 2,587,777
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 635,913 700,786
Deferred income taxes.................................. (83,000) (58,000)
Provision for doubtful accounts receivable............. (5,000) 80,000
Deferred compensation.................................. 118,104 156,000
----------- -----------
Total adjustments................................. 666,017 878,786
Changes in operating assets and liabilities:
Accounts receivable.................................... 305,068 (258,800)
Prepaid expenses and other current assets.............. (388,843) (234,314)
Accounts payable and accrued expenses.................. (835,243) (1,986,754)
Income taxes payable................................... 835,696 1,289,560
Deferred revenue....................................... -- (1,275,500)
Other, net............................................. (120,427) (20,204)
----------- -----------
Total adjustments and changes..................... 462,268 (1,607,226)
----------- -----------
Net cash provided by operating activities......... 2,563,024 980,551
----------- -----------
Cash flows from investing activities:
Additions to property and equipment....................... (213,778) (303,100)
Sales of investments...................................... 4,943,829 2,964
----------- -----------
Net cash provided by (used in) investing
activities...................................... 4,730,051 (300,136)
----------- -----------
Cash flows from financing activities:
Repayments of note payable, long-term debt and capital
leases (including current portion)..................... (140,090) (246,682)
Dividends paid............................................ (182,216) (173,722)
Exercise of stock options................................. -- 120,628
Other..................................................... 12,973 31,424
----------- -----------
Net cash used in financing activities............. (309,333) (268,352)
----------- -----------
Cash and cash equivalents:
Net increase in cash and cash equivalents................. 6,983,742 412,063
Cash and cash equivalents at beginning of period.......... 19,702,803 14,619,271
----------- -----------
Cash and cash equivalents at end of period........ $26,686,545 $15,031,334
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 34,598 $ 44,055
Income taxes........................................... $ 282,323 $ 233,932
</TABLE>
See notes to consolidated financial statements
F-72
<PAGE> 160
LCS INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim financial data as of December 31, 1998 and for the three months
ended December 31, 1997 and the three months ended December 31, 1998 is
unaudited. In the opinion of management, the financial statements reflect all
adjustments, consisting of normal recurring adjustments of the Company, in
accordance with generally accepted accounting principles applicable to interim
periods. The financial statements do not include all of the information and
footnotes required by generally accepted accounting principles. The accompanying
unaudited financial statements should be read in conjunction with the September
30, 1998 audited financial statements of LCS Industries, Inc. Interim results of
operations are not necessarily indicative of results for the full year.
2. ACQUISITION
On April 1, 1993, the Company completed the purchase of all the outstanding
stock of Catalog Resources, Inc. ("CRI"). CRI's results of operations are
included in the Company's Consolidated Statements of Income from that date. The
initial purchase price was $3,500,000 with additional payments earned if CRI's
pretax income, as defined by the agreement, reached certain amounts during the
next five years. Of the initial purchase price, a total of $1,900,000 was paid
consisting of $950,000 in cash and 324,956 shares of the Company's common stock.
Effective August 1, 1994, the purchase agreement was amended to limit to
$8,100,000 the aggregate amount of additional purchase consideration to be paid
in addition to the $1,900,000 paid at such date. The additional amount to be
paid is based upon the operating performance of CRI over the eight-year period
beginning October 1, 1993. Based upon CRI's earnings for each fiscal year ending
on September 30, a maximum annual payment of $1,012,500 is payable in January of
the following year, which amount is subject to a dollar-for-dollar reduction
based on CRI's operating results. Such payments are calculated separately for
each year. Each payment will consist of 50 percent in cash and 50 percent in
common stock of the Company with the maximum number of shares to be delivered
under the purchase agreement, as amended, not to exceed 660,000 shares. The
portion of these payments not made in stock is payable in cash. The number of
shares to be issued will be based on the market value, as defined, of the common
stock at the future payment dates. Based on the terms of the amended agreement
and the achievement of the required operating results for the preceding fiscal
year, payments of $1,012,500, 50 percent in cash and 50 percent in stock, were
made on January 1, 1995, 1996 and 1997. As of September 30, 1997, 538,287 shares
had been delivered under the provisions of the purchase agreement, as amended.
On December 30, 1997, the Company and former shareholders of Catalog
Resources, Inc. agreed to Amendment No. 2 of the purchase agreement dated April
1, 1993 and amended August 1, 1994. This Amendment provided for the payment made
January 2, 1998 of $1,012,500 to be 100 percent in cash compared to the
previously agreed 50 percent in cash and 50 percent in common stock of the
Company, subject to a maximum number of shares to be issued of 660,000.
Accordingly, the current portion of long-term debt at December 31, 1997 was
increased by $506,250 (50% of the $1,012,500 payment). This was offset by a
reduction in common stock issuable of $418,899, representing the present value
at September 30, 1995 of the originally anticipated stock issuance, and a charge
to additional paid-in capital of $87,351.
As a result of Amendment No. 2, the parties agreed to reduce the maximum
number of share issuable under the amended agreement by the shares which would
have been issued on January 2, 1998 based on the provisions of the original
agreement. The revised maximum number of shares issuable is 628,020 of which
538,287 shares have been previously issued.
F-73
<PAGE> 161
LCS INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The common stock issuable amount reflects the maximum number of shares
(628,020, as adjusted for Amendment No. 2 to the purchase agreement, less those
shares issued and delivered prior to September 30, 1995) issuable under the
terms of the purchase agreement, as amended, based on the market price of the
Company's common stock at September 30, 1995. This amount is subject to
adjustment, based on the future movements in the market price of the Company's
common stock. No adjustment was recorded during the current fiscal year. Based
on the operating results for the fiscal year ended September 30, 1998, the
January 1, 1999 scheduled payment of $1,012,000 will be paid.
On December 31, 1998, the Company and former shareholders of Catalog
Resources, Inc. agreed to Amendment No. 3 of the purchase agreement dated April
1, 1993 and amended August 1, 1994 and December 30, 1997. This Amendment
provided for the payment made January 3, 1999 of $1,012,000 to be 100 percent in
cash compared to the previously agreed 50 percent in cash and 50 percent in
common stock of the Company, subject to a maximum number of shares to be issued
of 660,000. Accordingly, the current portion of long-term debt at December 31,
1998 was increased by $506,250 (50% of the $1,012,000 payment). This was offset
by a reduction in common stock issuable of $385,194, representing the present
value at September 30, 1995 of the originally anticipated stock issuance, and a
charge to additional paid-in capital of $121,056.
As a result of Amendment No. 3, the parties agreed to reduce the maximum
number of share issuable under the amended agreement by the shares which would
have been issued on January 3, 1999 based on the provisions of the original
agreement. The revised maximum number of shares issuable is 628,020 of which
570,833 shares have been previously issued.
The common stock issuable amount reflects the maximum number of shares
(628,020, as adjusted for Amendment No. 3 to the purchase agreement, less those
shares issued and delivered prior to September 30, 1995) issuable under the
terms of the purchase agreement, as amended, based on the market price of the
Company's common stock at September 30, 1995. This amount is subject to
adjustment, based on the future movements in the market price of the Company's
common stock. No adjustment was recorded during the current fiscal year. Based
on the operating results for the fiscal year ended September 30, 1998, the
January 3, 1999 scheduled payment of $1,012,000 will be paid.
Pursuant to the definitive merger agreement with CustomerOne Holding
Corporation (see note 5), subsequent to January 2, 1999, all remaining payments
under the initial CRI purchase agreement will be made in cash. As a result, the
common stock issuable has been reclassified as a long-term liability at December
31, 1998.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Activity in the Allowance for Doubtful Accounts for December 31, 1998
includes:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Balance at beginning of year............................ $502,000
Additions -- charged to expense......................... 15,000
Deductions.............................................. (20,000)
--------
Balance at end of year.................................. $497,000
========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal claims and disputes that are
normal and incidental to the Company's business. In the opinion of management,
after consultation with legal counsel, the amount of
F-74
<PAGE> 162
LCS INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
losses that might be sustained, if any, from such claims and disputes would not
have a material effect on the Company's financial statements.
At December 31, 1998, the Company and its subsidiaries have employment
agreements with certain of their officers with terms expiring at various times
through September 30, 2002, which provide for aggregate future minimum
compensation of $1,016,250. One of the agreements provides for a bonus based on
the results of the respective subsidiary's operations. Certain of the agreements
provide for severance payments equal to six months salary.
5. MERGER
On December 17, 1998, the Company and CustomerONE Holding Corporation, a
subsidiary of Onex Corporation announced that they have entered into a
definitive merger agreement pursuant to which CustomerONE will acquire all of
the outstanding shares of LCS common stock at a price of $17.50 per share in
cash, representing an aggregate transaction value of approximately $97.3
million. Onex Corporation is a diversified company with 1997 consolidated
revenues of $11 billion Canadian and consolidated assets of $6.4 billion
Canadian. The transaction was completed January 27, 1999.
F-75
<PAGE> 163
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and to
the Shareholders of Cordena Call Management B.V.
In our opinion the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity presented in Dutch Guilders (NLG) present fairly, in all material
respects, the financial position of Cordena Call Management B.V. and
subsidiaries as at December 31, 1998 and 1997, and the results of their
operations and cash flows for the years ended December 31, 1998, 1997 and 1996
and in conformity with accounting principles generally accepted in the
Netherlands. These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the Netherlands which
are substantially similar to generally accepted auditing standards in the United
States of America. These standards require that we plan and perform our audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Accounting principles generally accepted in the Netherlands vary in certain
significant respects from accounting principles generally accepted in the United
States. The application of the latter would have affected the determination of
consolidated net income for the years ended December 31, 1998 and 1997, and the
determination of consolidated shareholders' equity at December 31, 1998 and
1997, respectively to the extent summarised in Note 2.7 to the consolidated
financial statements.
Utrecht, March 30, 1999
/s/ PRICWATERHOUSECOOPERS N.V.
PricewaterhouseCoopers N.V.
F-76
<PAGE> 164
CORDENA CALL MANAGEMENT B.V., THE HAGUE
CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- -------------------
NLG '000 NLG '000 NLG '000 NLG '000
<S> <C> <C> <C> <C>
FIXED ASSETS
Intangible fixed assets
Goodwill........................................... 37,946 12,880
Formation expenses................................. 2,912 675
------ ------
Tangible fixed assets.............................. 40,858 13,555
Leasehold building improvements.................... 291 207
Equipment.......................................... 8,882 687
------ ------
CURRENT ASSETS....................................... 9,173 894
Receivables
Trade debtors, net of NLG 100 and NLG 100,
respectively.................................... 13,253 2,816
Unbilled revenues.................................. 1,711 1,298
Taxes and social security premiums................. 1,240 844
Other receivables and prepaid expenses............. 4,532 1,504
------ ------
20,736 6,462
Cash............................................... 765 2,572
------ ------
71,532 23,483
====== ======
SHAREHOLDERS' EQUITY................................. 19,568 6,026
LONG TERM LIABILITIES
Bank loan.......................................... 15,447 5,300
Acquisition liabilities............................ 6,147 0
Other long term loans and lease obligations........ 1,355 67
------ ------
22,949 5,367
CURRENT LIABILITIES
Short term portion of long term loans and lease
obligations and other short term loans.......... 2,504 1,449
Bank overdraft..................................... 0 298
Trade creditors.................................... 9,037 2,807
Payable to vendors of acquired companies........... 1,347 0
Acquisition liabilities............................ 200 2,012
Taxes and social security premiums................. 5,554 1,730
Other payables and accrued expenses................ 10,373 3,794
------ ------
29,015 12,090
------ ------
71,532 23,483
====== ======
</TABLE>
The notes hereto form an integral part of the financial statements.
F-77
<PAGE> 165
CORDENA CALL MANAGEMENT B.V., THE HAGUE
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------------- ------------------- ------------
NLG '000 NLG '000 NLG '000 NLG '000 NLG '000
<S> <C> <C> <C> <C> <C>
Net sales.................................... 73,767 8,376 --
Cost of sales................................ 18,908 1,699 --
------ ------ -----
Gross margin................................. 54,859 6,677 --
Personnel expenses........................... 36,154 2,499 --
Depreciation of tangible fixed assets........ 1,772 292 --
Amortization of intangible fixed assets...... 8,612 1,431 --
Other operating expenses..................... 12,131 3,683 --
------ ----- ------
58,669 7,905 --
------ ------ -----
Operating (loss)/income...................... (3,810) (1,228) --
Interest expense............................. (1,565) (201) --
------ ------ -----
Result before taxation....................... (5,375) (1,429) --
Income taxes................................. (1,420) 59 --
------ ------ -----
Result after taxation........................ (6,795) (1,370) --
====== ====== =====
</TABLE>
The notes hereto form an integral part of the financial statements.
F-78
<PAGE> 166
CORDENA CALL MANAGEMENT B.V., THE HAGUE
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------------- ------------------- ------------
NLG '000 NLG '000 NLG '000 NLG '000 NLG '000
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities
Operating result...................... (3,810) (1,228) --
Depreciation and amortisation......... 10,384 1,723 --
------- ------- -------
6,574 495 --
Changes in current assets and
liabilities:
- receivables...................... (1,208) (1,843) --
- current liabilities excluding
financing........................ (324) 3,232 --
------- ------- -------
(1,532) 1,389 --
------- ------- -------
Cash flow from operations before tax.... 5,042 1,884 --
Interest expense...................... (1,565) (201) --
Income taxes.......................... (1,420) 59 --
------- ------- -------
(2,985) (142) --
------- ------- -------
Net cash flow from operating
activities............................ 2,057 1,742 --
Cash flow from investing activities
Purchase of intangible fixed assets... (2,653) (750) --
Purchase of tangible fixed assets..... (3,795) (602) --
Acquisitions, net of cash acquired.... (35,156) (12,453) --
------- ------- -------
(41,604) (13,805) --
------- ------- -------
To carry forward...................... (39,547) (12,063) --
Carried forward....................... (39,547) (12,063) --
Cash flow from financing activities
Bank loans............................ 10,007 4,928 --
Due to shareholders................... 7,694 2,012 --
Capital contribution.................. 20,337 856 --
------- ------- -------
38,038 7,796 --
------- ------- -------
Net (decrease) in cash.................. (1,509) (4,267) --
Cash at the beginning of the year....... 2,274 6,541 6,541
------- ------- -------
Cash less bank overdraft at year-end.... 765 2,274 6,541
======= ======= =======
</TABLE>
The impact on the consolidated cash flow statement of acquisitions is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
NLG '000 NLG '000 NLG '000
<S> <C> <C> <C>
Intangible fixed assets........................ (34,240) (14,311) --
Tangible fixed assets.......................... (6,256) (510) --
Inventories.................................... 0 (30) --
Receivables.................................... (13,066) (4,588) --
Provisions..................................... 0 610 --
Long term liabilities.......................... 0 110 --
Short term loans............................... 1,324 1,778 --
Current liabilities excluding bank overdrafts
and short term loans......................... 17,082 4,488 --
------- ------- -------
(35,156) (12,453) --
======= ======= =======
</TABLE>
The notes hereto form an integral part of the financial statements.
F-79
<PAGE> 167
CORDENA CALL MANAGEMENT B.V., THE HAGUE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL NOTES
General
Cordena Call Management B.V. ("Cordena" or "the company") started
operations in 1997 and is active in the outsourced call center market in Europe.
Prior to 1997, the entity was named Cordena Holding B.V. and was inactive. The
company has its statutory seat in Amsterdam, The Netherlands.
In 1997, Cordena acquired all outstanding shares in HDM B.V. (formerly
named Hulsink Direct Marketing B.V.) of Almelo, The Netherlands and its
subsidiaries. In 1998, the group acquired operations in Austria, Switzerland,
United Kingdom, Germany and Norway.
Consolidation principles
The consolidated financial statements include the financial information of
Cordena Call Management B.V. and companies which constitute an economic and
organisational unit with Cordena Call Management B.V. These companies are fully
consolidated, minority interests being stated separately. Intercompany
receivables, payables and transactions are eliminated from the consolidated
financial statements.
Based on these criteria the consolidated financial statements include the
financial information of the parent company and of the following subsidiary
companies:
<TABLE>
<CAPTION>
PARTICIPATION
-------------
<S> <C>
HDM B.V., Almelo, The Netherlands........................ 100%
HDM GmbH, Nordhorn, Germany.............................. 100%
HDM Aps, Copenhagen, Denmark............................. 100%
HDM Sarl, Lille, France.................................. 100%
Cordena Call Management Beteiligungs GmbH, Frankfurt,
Germany................................................ 100%(1)
Cordena Call Management Erste Verwaltungs GmbH,
Frankfurt, Germany..................................... 100%(1)
Cordena Call Management Zweite Verwaltungs GmbH,
Frankfurt, Germany..................................... 100%(1)
Tetel GmbH, Duisburg, Germany............................ 100%(1)
DTS GmbH, Duisburg, Germany.............................. 100%(1)
Intercall GmbH, Dusseldorf, Germany...................... 100%(1)
Cordena UK Holding Ltd, Exeter, United Kingdom........... 100%(2)
Salestrac Ltd., Exeter, United Kingdom................... 100%(2)
Cordena Call Management Norway, Gjerdrum, Norway......... 100%(3)
Cordena Call Management Beteiligungs GmbH, Vienna,
Austria................................................ 100%(4)
Cordena Handels GmbH, Vienna, Austria.................... 100%(4)
Cordena Telefondienst GmbH, St. Gallen, Switzerland...... 100%(4)
Tetel Osterreich GmbH, Salzburg, Austria................. 100%(5)
</TABLE>
- ---------------
(1) as from January 1, 1998
(2) as from April 1, 1998
(3) as from July 1, 1998
(4) as from September 1, 1998
(5) as from December 31, 1998
F-80
<PAGE> 168
CORDENA CALL MANAGEMENT B.V., THE HAGUE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summary of significant accounting policies
ACCOUNTING CONVENTION
The financial statements are prepared under the historical cost accounting
convention.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities as well as revenues and expenses of foreign
subsidiaries are translated at year-end rates of exchange. Gains and losses
resulting from translation are accumulated in shareholders' equity. Gains and
losses resulting from foreign currency transactions and from the conversion into
local currency of assets and liabilities denominated in foreign currency are
included in net income.
INTANGIBLE FIXED ASSETS
Intangible fixed assets relate to goodwill arising from acquisitions and to
formation expenses. Goodwill consists of the difference between the purchase
consideration and the value of the acquired company as determined on the basis
of the fair value of the subsidiary's assets and liabilities at the time of the
acquisition. Formation expenses and goodwill are amortised on a straight-line
basis.
TANGIBLE FIXED ASSETS
Tangible fixed assets are valued at purchase price less accumulated
depreciation calculated on a straight-line basis over the expected useful life
of the assets.
INVENTORIES
Inventories are carried at the lower of historical cost or market, with
cost determined on a first-in, first-out (FIFO) basis. Provisions are made for
slow moving, obsolete or defective inventories.
RECEIVABLES
Receivables are stated at nominal value less required provision for
doubtful accounts of NLG 100,000 both at December 31, 1998 and 1997.
UNBILLED REVENUES
Unbilled revenues are services performed for clients that have not yet been
invoiced at the balance sheet date.
OTHER ASSETS AND LIABILITIES
Unless explicitly stated otherwise assets and liabilities are stated at
face value.
DETERMINATION OF INCOME
Income is determined on the basis of the difference between realisable
value of services rendered and costs and other expenses for the year. Income
from transactions is accounted for in the year in which it is realised. Losses
are accounted for as soon as they are foreseeable.
REVENUE RECOGNITION
Net turnover represents the amounts charged to third parties for
telemarketing and fulfilment services provided, disbursements charged through
and other income rendered in the reporting year, less discounts and exclusive of
VAT.
F-81
<PAGE> 169
CORDENA CALL MANAGEMENT B.V., THE HAGUE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE FIXED ASSETS
The movements in intangible fixed assets can be summarised as follows:
<TABLE>
<CAPTION>
FORMATION
GOODWILL EXPENSES TOTAL
-------- --------- --------
NLG '000 NLG '000 NLG '000
<S> <C> <C> <C>
Bookvalue January 1, 1998.............................. 12,880 675 13,555
------ ----- -------
CHANGES
Acquisition of subsidiary companies.................. 33,262 2,653 35,915
Amortisation......................................... (8,196) (416) (8,612)
------ ----- -------
25,066 2,237 27,303
------ ----- -------
Bookvalue December 31, 1998............................ 37,946 2,912 40,858
====== ===== =======
DECEMBER 31, 1998
At cost.............................................. 47,573 3,403 50,976
Accumulated depreciation............................. (9,627) (491) (10,118)
------ ----- -------
Bookvalue December 31, 1998.......................... 37,946 2,912 40,858
====== ===== =======
Yearly amortisation rate............................. 20% 20%
------ -----
</TABLE>
TANGIBLE FIXED ASSETS
The movements in tangible fixed assets can be summarised as follows:
<TABLE>
<CAPTION>
LEASEHOLD
BUILDING
IMPROVEMENTS EQUIPMENT TOTAL
------------ --------- --------
NLG '000 NLG '000 NLG '000
<S> <C> <C> <C>
Bookvalue January 1, 1998...................... 207 687 894
----- -------- ------
CHANGES
Acquisition of subsidiary companies.......... 15 6,241 6,256
Net investments.............................. 171 3,624 3,795
Depreciation................................. (102) (1,670) (1,772)
----- -------- ------
84 8,195 8,279
----- -------- ------
Bookvalue December 31, 1998.................... 291 8,882 9,173
===== ======== ======
DECEMBER 31, 1998
At cost...................................... 1,162 14,930 16,092
Accumulated depreciation..................... (871) (6,048) (6,919)
----- -------- ------
Bookvalue December 31, 1998.................. 291 8,882 9,173
===== ======== ======
Yearly depreciation rates.................... 20-25% 20-33,33%
----- --------
</TABLE>
F-82
<PAGE> 170
CORDENA CALL MANAGEMENT B.V., THE HAGUE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Movements in shareholders' equity are as follows:
<TABLE>
<CAPTION>
ADDITIONAL
SHARE PAID-IN LEGAL OTHER
CAPITAL CAPITAL RESERVE RESERVES TOTAL
-------- ---------- -------- -------- --------
NLG '000 NLG '000 NLG '000 NLG '000 NLG '000
<S> <C> <C> <C> <C> <C>
December 31, 1997.................. 100 6,392 675 (1,141) 6,026
New shares issued.................. 125 20,212 0 0 20,337
Result for the year................ 0 0 0 (6,795) (6,795)
Transfer to legal reserve.......... 0 0 2,237 (2,237) 0
--- ------ ----- ------- ------
December 31, 1998.................. 225 26,604 2,912 (10,173) 19,568
=== ====== ===== ======= ======
</TABLE>
ISSUED AND PAID-UP SHARE CAPITAL
The authorised share capital amounts to NLG 500,000, divided into
12,500,000 shares of NLG 0.04 each. The issued and paid-up share capital amounts
to NLG 224.587, divided into 5,614,664 shares of NLG 0.04 each.
LEGAL RESERVE
The company has to maintain a non-distributable reserve for the bookvalue
of the formation expenses of NLG 2,912,000.
OPTION SCHEMES
Under the Stock Option Plan, the company has granted options to its
directors and senior management to purchase 1,009,480 Depository Receipts of
Shares at an option price of NLG 3.00, 178,112 Depository Receipts of Shares at
an option price of NLG 6.00 and 371,067 Depository Receipts of Shares at an
option price of NLG 7.00. The options vest at December 30, 2000 and 2001
respectively and are exercisable until December 30, 2002 and 2003 respectively.
During 1998 no options have been exercised.
LONG TERM BANK LOAN
The long term liabilities comprises:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
NLG '000 NLG '000
<S> <C> <C>
Bank loan.................................................. 16,007 6,000
Acquisition liabilities.................................... 6,147 0
Other long term loans and lease obligations................ 1,355 67
------ -----
23,509 6,067
Amount due in 1999 (classified under short term
liabilities)............................................. 560 700
------ -----
22,949 5,367
====== =====
</TABLE>
The long term bank loan comprises a 6 year loan at LIBOR + 1.875% interest.
Repayment is due in 11 installments as follows: 3.5% in December 1999, 15% in
2000, 15% in 2001, 20% in 2002, 20% in 2003 and the remaining 26.5% in 2004. The
amount due in 1999 is classified under short term liabilities.
F-83
<PAGE> 171
CORDENA CALL MANAGEMENT B.V., THE HAGUE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The loan is covered by the following securities:
- Pledge on the shares in the subsidiary companies.
- Pledge of stocks.
- Pledge of receivables.
- Pledge of business chattels
The acquisition liabilities are classified as long term liabilities as
these are covered by the 6 year bank loan agreement. These loans will be
contracted when the acquisition liabilities are settled.
OVERDRAFT FACILITIES
The group has an overdraft facility of NLG 7 million. The overdraft
facility is covered by the same securities that cover the long term bank loan.
On December 31, 1998 the facility was not used.
OFF BALANCE SHEET OBLIGATIONS
At December 31, 1998 the group has the following obligations not evident
from the balance sheet:
- lease-obligations of approximately NLG 490,000 for 1999; which relate to
operating leases;
- at December 31, 1998 the company has issued a bank guarantee amounting to
approximately NLG 125,000;
- the annual amount for rental commitments is approximately NLG 2 million,
per year.
F-84
<PAGE> 172
CORDENA CALL MANAGEMENT B.V., THE HAGUE
NOTES TO THE CONSOLIDATED STATEMENTS OF INCOME FOR THE
YEAR ENDED DECEMBER 31, 1998
NET SALES
The group's activities comprise inbound and outbound telemarketing services
and fulfilment operations. In 1998, approximately 28% (1997: 73%) of its
turnover was realised in The Netherlands, the remainder being realised in other
Western European countries.
TAXATION
The consolidated taxable income of the group is approximately NLG 4
million. The difference with the loss for reporting purposes mainly comprises
the non-deductible amortisation of goodwill. As at December 31, 1998 the group
has net operating losses available for carryforward of approximately NLG
3,000,000, of which some NLG 2,400,000 is indefinitely available. No deferred
tax asset has, however, been accounted for as it is too uncertain when these
losses will be utilised.
PERSONNEL
At year-end the number of staff employed by the group was approximately 805
(December 31, 1997: 130).
REMUNERATION OF DIRECTORS
The group has two executive directors (1997: 2), who together received NLG
740,000 remuneration (1997: NLG 49,167) and who were granted options to purchase
878,164 Depository Receipts of Shares at an option price of NLG 3.00 and 39,613
Depository Receipts of Shares at an option price of NLG 7.00. The group has two
Supervisory Directors (1997: none). The Supervisory Directors received no
remuneration.
F-85
<PAGE> 173
CORDENA CALL MANAGEMENT B.V., THE HAGUE
SUMMARY OF DIFFERENCES BETWEEN DUTCH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(IN THOUSANDS OF DUTCH GUILDERS (NLG))
The company's financial statements have been prepared in accordance with
generally accepted accounting principles in The Netherlands (Dutch GAAP), which
differ in certain significant respects from generally accepted accounting
principles in the United States (US GAAP). The effect of the application of US
GAAP to net income and shareholders' equity is set out in the tables below.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
NLG '000 NLG '000 NLG '000
<S> <C> <C> <C>
NET INCOME UNDER DUTCH GAAP............................. (6,795) (1,370) --
1) HDM -- Goodwill amortisation......................... 120 1,001 --
1) HDM -- Effective date of inclusion of the results of
acquisition........................................... 0 (486) --
2) Formation Expenses................................... (118) (225) --
3) Provisions and Restructuring......................... (800) 0 --
4) Tetel -- Goodwill amortisation....................... 2,486
4) Tetel -- Effective date of inclusion of results of
Operations, including effect of minority interest.... (1,022)
5) Salestrac -- Acquisition and Contingent
Consideration......................................... 210
6) Cordena Handels -- Provisions........................ (234)
7) Other acquisitions................................... 49
8) Deferred taxes on US GAAP adjustments................ 761 249 --
------ ------ --
NET INCOME UNDER US GAAP................................ (5,343) (831) --
====== ====== ==
SHAREHOLDERS' EQUITY UNDER DUTCH GAAP................... 19,568 6,026
1) HDM -- Goodwill -- accumulated amortisation.......... 1,121 1,001
1) HDM -- Effective date of inclusion of the results of
acquisition........................................... (486) (486)
2) Formation Expenses................................... (343) (225)
3) Provisions and Restructuring......................... (800)
4) Tetel -- Goodwill amortisation....................... 2,486
4) Tetel -- Effective date of inclusion of results of
Operations, including the effect of the minority
interest............................................. (1,022)
5) Salestrac -- Acquisition and Contingent
Consideration......................................... 210
6) Cordena Handels -- Provisions........................ (234)
7) Other Acquisitions................................... 49
8) Deferred tax on US GAAP adjustments.................. 1,010 249
------ ------
SHAREHOLDERS' EQUITY UNDER US GAAP...................... 21,559 6,565
====== ======
</TABLE>
1) HDM -- GOODWILL, AMORTISATION AND EFFECTIVE DATE OF INCLUSION OF THE RESULTS
OF THE ACQUISITION
Under Dutch GAAP, acquisitions are recorded when the Company has "economic"
control which is defined as ability to exercise influence over the target
company. Management has identified this date as July 1, 1997 and as such the
acquisition was recorded on this date in the Dutch financial statements. For US
GAAP purposes the purchase is recorded on the effective date of the transfer of
the shares and the closing date of the agreement. The transfer and closing date
was November 16, 1997.
F-86
<PAGE> 174
CORDENA CALL MANAGEMENT B.V., THE HAGUE
SUMMARY OF DIFFERENCES BETWEEN DUTCH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(IN THOUSANDS OF DUTCH GUILDERS (NLG)) -- (CONTINUED)
Since the date for recording the acquisition for US GAAP and Dutch GAAP was
different, the results of the subsidiary for inclusion in the financial
statements is July 1, 1997 for Dutch GAAP and November 16, 1997 for US GAAP.
Goodwill is recorded as the excess of purchase price less the fair value of
the assets and liabilities acquired. For Dutch GAAP, certain provisions are
allowed to be included in the fair value adjustments which do not meet the
criteria of fair value adjustments under US GAAP.
The amount of goodwill for US GAAP purposes is less than goodwill recorded
for Dutch GAAP by NLG 1,398 due to the difference of the fair value (assets
acquired less liabilities assumed) of the subsidiary acquired.
Due to the timing differences of the recording of the acquisition and the
difference in the amount of goodwill, amortisation expense is different for US
and Dutch GAAP.
2) FORMATION EXPENSES
Under Dutch GAAP, various expenses that are incurred for and around the
time of the acquisition, can be capitalised as formation expenses and amortised
over five years. For US GAAP, only certain costs which include financing costs
related to debt incurred, legal fees and other consulting costs directly related
to the acquisition can be capitalised.
The costs included in formation expenses capitalised under Dutch GAAP that
are not allowed to be capitalised under US GAAP relate to costs associated with
hiring a new managing director for the new company. This cost has been expensed
as incurred for US GAAP purposes.
3) PROVISIONS AND RESTRUCTURING PROVISIONS
Dutch GAAP allows provisions to be made for obligations, losses which exist
on the balance sheet date for which an amount can be reasonably estimated.
Provision can also be made for expenses to be incurred in a subsequent financial
year, provided that such expenses originated, at least partly, in the current or
a preceding financial year and that the purpose of the provision is to spread
the expenses over a number of financial years.
Under US GAAP provisions are made for estimated losses if prior to issuance
of the financial statements it is probable that the liability has been incurred
or an asset had been impaired and the amount can be reasonably estimated.
Provisions can not be recognised for future expenses if no obligation existed at
the balance sheet date to incur those expenses.
Under Dutch GAAP when a decision has been made to reorganise part of the
Group's business, provisions are made for redundancy as well as other closing,
integration and moving costs.
Under US GAAP only costs that qualify as exit costs under the guidelines
set out in EITF 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring) and therefore do not relate to the ongoing operations of the
company may be provided for. In addition, a number of specific criteria also
must be met before these costs that do qualify as exit costs can be recognised
as an expense. Among these is the requirement that all the significant actions
to be taken as part of the reorganisation must be identified along with their
expected completion dates and the exit program must be approved by the balance
sheet date. Costs that do not qualify as exit costs are expensed when the
obligation exists to pay cash or otherwise sacrifice assets.
F-87
<PAGE> 175
CORDENA CALL MANAGEMENT B.V., THE HAGUE
SUMMARY OF DIFFERENCES BETWEEN DUTCH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(IN THOUSANDS OF DUTCH GUILDERS (NLG)) -- (CONTINUED)
In 1997, provisions of NLG 800 were recorded in the Dutch GAAP accounts as
set out in footnote 1 above. In 1998, the Company reversed the provision against
income for Dutch GAAP purposes due to the fact that the provision was no longer
needed. For US GAAP purposes, this release of the provision has been reversed as
the original provision did not meet the criteria set out above for a fair value
adjustment.
THE TETEL ACQUISITION
4) GOODWILL AMORTISATION AND EFFECTIVE DATE OF INCLUSION OF FINANCIAL
INFORMATION IN THE FINANCIAL STATEMENTS
On May 19, 1998, the Company acquired 75% of the outstanding shares in
Tetel GmbH, Intercall GmbH, and DTS Gmbh (collectively "Tetel") for
consideration of Deutche Marks 16,125,000 (NLG 18,170). In this transaction, the
Company obtained a call option to purchase the remaining 25% of the Tetel shares
for a consideration of 8 to 9 times the amount of EBITDA (Earnings before taxes,
depreciation and amortisation). The option was exercisable immediately and had
an expiration date of December 31, 2001.
On December 30, 1998, the Company exercised the option and purchased the
25% of the shares.
Under Dutch GAAP, acquisitions are recorded when the Company has "economic"
control which is defined as ability to exercise some influence over the target
company.
The above transaction was recorded as of January 1, 1998 as management
determined that the Company had economic control and intended to exercise the
option. 100% of the assets and liabilities of Tetel were recorded and 100% of
the results were included from January 1, 1998 in the financial statements under
Dutch GAAP.
Under US GAAP, the purchase of the subsidiary is recorded on the closing
and the effective date of the legal transfer of shares and ownership.
The date for recording the acquisition for US GAAP purposes is different
than for Dutch GAAP purposes and as such the results of the subsidiary for
inclusion in the financial statements was January 1, 1998 for Dutch GAAP
purposes and May 19, 1998 for US GAAP purposes.
As the Company only owned 75% of the shares from May 19, 1998 to December
30, 1998, a minority interest for that portion of the year was recorded for US
GAAP purposes.
For US GAAP purposes, the exercise of the option to purchase the remaining
25% of the Company was recorded when executed and the consideration was
exchanged which was December 30, 1998.
For Dutch and US GAAP, the company assigned the purchase price to the fair
value of the assets acquired and liabilities assumed with the excess recorded as
goodwill however the criteria of when and how to record the liabilities under US
GAAP are more stringent than the guidelines under Dutch GAAP. As such NLG 245 of
liabilities recorded were not allowed to be recorded for US GAAP purposes. The
amount of goodwill for US GAAP purposes differs from Dutch GAAP due to the
difference of the fair value of the subsidiary acquired on January 1, 1998 and
May 18, 1998 and the recording of the 25% interest. Goodwill for US GAAP
purposes at the acquisition date was NLG 5,979 less than the goodwill recorded
in the Dutch GAAP accounts due to the fact that the 25% interest was actually
purchased on December 30, 1998.
Due to the difference in the amount of goodwill, amortisation expense under
US GAAP was NLG 2,486 less than amortisation expense under Dutch GAAP for the
year ended December 31, 1998.
F-88
<PAGE> 176
CORDENA CALL MANAGEMENT B.V., THE HAGUE
SUMMARY OF DIFFERENCES BETWEEN DUTCH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(IN THOUSANDS OF DUTCH GUILDERS (NLG)) -- (CONTINUED)
5) SALESTRAC -- ACQUISITION AND CONTINGENT CONSIDERATION
On April 6, 1998, the Company acquired 100% of the outstanding shares of
Salestrac Ltd. for an initial consideration of NLG 4,430 and contingent
consideration of NLG 826 based on the gross profit of Salestrac Ltd. for the
year ended March 31, 1999.
For Dutch GAAP this consideration was estimated and recorded in 1998
however for US GAAP purposes, contingent consideration is not recorded until
determined thus this additional consideration should be recorded in 1999. This
additional goodwill is being amortised over five years for US and Dutch GAAP
purposes.
Based on the timing difference on the contingent consideration and the
recording of a deferred tax asset for US GAAP, goodwill was NLG 1,401 less than
goodwill for Dutch GAAP purposes.
6) CORDENA HANDELS -- ACQUISITION
The Company acquired Cordena Handels on September 1, 1999, the effective
date of the transaction. Under Dutch GAAP, a provision was recorded for
restructuring which did not meet the purchase accounting criteria for US GAAP.
This provision was reversed for US GAAP and the expenses related to this
restructuring are included in the profit and loss statement when incurred.
As a result of the additional provisions recorded for Dutch GAAP and other
fair value adjustments, goodwill was NLG 527 less for US GAAP than for Dutch
GAAP.
7) OTHER ACQUISITIONS
For all of the other minor acquisitions in 1998, there were differences in
the accounting treatment under Dutch and US GAAP as set out above in note 1 and
5.
8) DEFERRED TAXATION
The deferred taxes on other adjustments is calculated as the tax effect at
35% (statutory rate) of the expected reversal of the income statement items
which are tax deductible.
ADDITIONAL US GAAP DISCLOSURES
DEFERRED TAXATION
At December 31, 1997 and 1998, the Company has a net deferred tax assets
which mainly consist of net operating loss carryforwards of NLG 0 and NLG 3,000.
These net operating loss carryforwards were acquired through the various
acquisitions. For Dutch GAAP purposes, a full valuation allowance has been
recorded against these assets based on the expected utilisation of losses and
historical losses. The majority of these losses have an indefinite life.
For US GAAP purposes, the evaluation of a deferred tax asset and the
potential utilization is different. If a deferred tax asset has an indefinite
life, based on the going concern assumption at some point in the future the
Company will be able to utilise these carryforwards. As such, a valuation
allowance is only recorded for the net operating loss carryforwards that have a
limited life. These deferred tax assets have been recorded in the purchase
accounting for each subsidiary.
For US GAAP purposes, at December 31, 1997 and December 31, 1998, the net
operating loss carryforwards are 0 and NLG 3,000, respectively.
F-89
<PAGE> 177
CORDENA CALL MANAGEMENT B.V., THE HAGUE
SUMMARY OF DIFFERENCES BETWEEN DUTCH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(IN THOUSANDS OF DUTCH GUILDERS (NLG)) -- (CONTINUED)
STOCK OPTIONS
The Company accounts for stock options under APB 25. If the exercise of the
stock option price is less than the fair value of the common stock, the
difference between the fair value and the exercise price is compensation
expense.
The Company has a stock option plan and has granted options to its
directors and senior management in 1997 and 1998. The fair value of the common
stock as determined by the board of directors in 1997 was NLG 3. Stock options
in 1997 were granted with the exercise price of NLG 3.
In 1998, the fair value of the common stock as determined by the board of
directors was NLG 6 in the first and second quarter and then was determined to
be NLG 7 during the second half of 1998. All stock options were granted fair
market value at the grant date throughout 1998.
SUBSEQUENT EVENT
On October 7, 1999, the Company was purchased by Client Logic, Inc. and all
stock options for all employees of Cordena vested immediately.
F-90
<PAGE> 178
CORDENA CALL MANAGEMENT B.V., THE HAGUE
CONSOLIDATED BALANCE SHEET AS AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(AFTER APPROPRIATION OF RESULT)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------------- -----------------------
NLG '000 NLG '000 NLG '000 NLG '000
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Fixed assets:
Intangible fixed assets......................... 35,112 40,858
Tangible fixed assets........................... 9,125 9,173
Current assets:
Inventories..................................... 234 0
Receivables
Trade debtors and unbilled revenues net of NLG
100 and 100, respectively.................... 11,922 13,253
Other receivables and prepaid expenses............ 6,576 7,483
------ ------
18,498 20,736
Cash and banks.................................... 0 765
------ ------
62,969 71,532
====== ======
Shareholders' equity.............................. 7,290 19,568
Long term liabilities:
Loans........................................... 0 15,447
Acquisition liabilities......................... 0 6,147
Other long term loans and lease obligations..... 2,558 1,355
------ ------
2,558 22,949
Current liabilities
Short term portion of long term loan and lease
obligations and other short term loans....... 23,254 2,504
Bank overdraft.................................. 9,458 0
Trade creditors................................. 10,899 9,037
Payable to vendors of acquired companies........ 0 1,347
Acquisition liabilities......................... 300 200
Taxes and social security premiums................ 2,380 5,554
Other payables and accrued expenses............. 6,830 10,373
------ ------
53,121 29,015
------ ------
62,969 71,532
====== ======
</TABLE>
F-91
<PAGE> 179
CORDENA CALL MANAGEMENT B.V., THE HAGUE
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS PERIOD ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
-------------------- --------------------
NLG '000 NLG '000 NLG '000 NLG '000
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales......................................... 62,380 49,235
Cost of sales..................................... (14,617) (12,117)
------- -------
Gross profit...................................... 47,763 37,118
Personnel expenses................................ 35,383 23,536
Depreciation of tangible fixed assets............. 2,301 1,359
Amortization of intangible fixed assets........... 8,046 6,345
Other operating expenses.......................... 15,541 9,335
------ ------
61,271 40,575
------- -------
Operating result.................................. (13,508) (3,457)
Financial income and (expense).................... (1,703) (540)
------- -------
Result before taxation............................ (15,211) (3,997)
Income taxes...................................... (46) (336)
------- -------
Result after taxation............................. (15,257) (4,333)
======= =======
</TABLE>
F-92
<PAGE> 180
CORDENA CALL MANAGEMENT B.V., THE HAGUE
CONSOLIDATED CASH FLOW STATEMENT FOR THE NINE MONTHS PERIOD ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
-------------------- --------------------
NLG '000 NLG '000 NLG '000 NLG '000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flow from operating activities...............
Operating result.................................. (13,507) (3,457)
Depreciation and amortisation..................... 10,347 7,704
Changes in current assets and liabilities:
-- receivables.................................. 2,004 641
-- current liabilities excluding financing...... (4,855) (5,383)
------ -------
(2,851) (4,742)
------- -------
Cash flow from operations before tax.............. (6,011) (495)
Financial income and (expense).................... (1,703) (540)
Income taxes...................................... (46) (336)
------ -------
(1,749) (876)
------- -------
Net cash flow from operating activities........... (7,760) (1,371)
Cash flow from investing activities
Purchase of intangible fixed assets............... (2,300) (1,132)
Purchase of tangible fixed assets................. (2,253) (1,660)
Acquisitions, net of cash acquired................ 0 (35,156)
------ -------
(4,553) (37,948)
------- -------
To carry forward.................................. (12,313) (39,319)
</TABLE>
F-93
<PAGE> 181
CORDENA CALL MANAGEMENT B.V., THE HAGUE
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
-------------------- --------------------
NLG '000 NLG '000 NLG '000 NLG '000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Carried forward................................... (12,313) (39,319)
Cash flow from financing activities
Bank loans........................................ 6,506 14,456
Due to shareholders............................... (7,394) 5,682
Capital input..................................... 2,247 16,615
Translation adjustments........................... 731 0
------ ------
2,090 36,753
------- -------
Net (decrease) in cash............................ (10,223) (2,566)
Cash at the beginning of the year................. 765 2,274
------- -------
Cash less bank overdraft at year-end.............. (9,458) (292)
------- -------
</TABLE>
The impact on the consolidated cash flow statement of acquisitions is as
follows:
<TABLE>
<CAPTION>
9 MONTHS
1999 1998
-------- --------
NLG '000 NLG '000
<S> <C> <C>
Intangible fixed assets................................. 0 (34,240)
Tangible fixed assets................................... 0 (6,256)
Inventories............................................. 0 0
Receivables............................................. 0 (13,066)
Provisions.............................................. 0 0
Long term liabilities................................... 0 0
Short term loans........................................ 0 1,324
Current liabilities excluding bank overdrafts and short
term loans............................................ 0 17,082
-- -------
0 (35,156)
== =======
</TABLE>
F-94
<PAGE> 182
CORDENA CALL MANAGEMENT B.V., THE HAGUE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements are presented in Dutch
Guilders and are based on the historical cost convention prepared in accordance
with accounting principles generally accepted in the Netherlands ("Dutch GAAP").
These standards vary in certain material respects from accounting principles
generally accepted in the United States ("US GAAP"). See Note 2 for a summary of
material differences between Dutch GAAP and US GAAP as applied to Cordena Call
Management B.V.
2. SUMMARY OF DIFFERENCES BETWEEN DUTCH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The company's financial statements have been prepared in accordance with
generally accepted accounting principles in The Netherlands (Dutch GAAP), which
differ in certain significant respects from generally accepted accounting
principles in the United States (US GAAP). The effect of the application of US
GAAP to net income and shareholder's equity is set out in the tables below.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
NLG NLG
<S> <C> <C>
Net income under Dutch GAAP............................... (15,257) (4,333)
(1) HDM -- Goodwill amortisation........................ 90 90
(2) Formation Expenses.................................. 19 (89)
(3) Provisions and Restructuring........................ (600)
(4) Tetel -- Goodwill amortisation...................... 217 2,187
(4) Tetel -- Effective date of inclusion of results of
operations, Including the effect of minority
interest............................................ (901)
(5) Sales trac -- Acquisition and contingent
consideration........................................ 137 118
(7) Other Acquisitions.................................. 127 12
(8) Deferred tax on adjustments......................... (7) 553
------- ------
Net income under US GAAP.................................. (14,674) (2,963)
======= ======
</TABLE>
During 1998, there were various acquisitions as set out in the notes. In
1999, there were not any acquisitions from the period of January 1, 1999 to
September 30, 1999.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
Shareholders' equity under Dutch GAAP.................... 7,290 18,308
(1) HDM -- Goodwill and accumulated amortisation....... 1,211 1,091
(1) HDM -- Effective date of inclusion of the results
of acquisition..................................... (486) (486)
(2) Formation Expenses................................. (324) (314)
(3) Provisions and Restructuring....................... (800) (600)
(4) Tetel -- Goodwill amortisation..................... 2,703 2,187
(4) Tetel -- Effective date of inclusion in the
financials......................................... (1,022) (901)
(5) Salestrac -- Acquisition and contingent
consideration...................................... 347 118
(6) Cordena Handels -- Acquisition..................... (234)
(7) Other Acquisitions................................. 176
(8) Deferred taxes on US GAAP adjustments.............. 1,003 801
------ ------
Shareholders' equity under US GAAP....................... 9,864 20,204
====== ======
</TABLE>
F-95
<PAGE> 183
CORDENA CALL MANAGEMENT B.V., THE HAGUE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) HDM -- Goodwill, Amortisation and Effective date of inclusion of the
results of the acquisition
Under Dutch GAAP, acquisitions are recorded when the Company has "economic"
control which is defined as ability to exercise influence over the target
company. Management has identified this date as July 1, 1997 as such the
acquisition was recorded on this date in the Dutch accounts. For US GAAP
purposes the purchase is recorded on the effective date of the transfer of the
shares and the closing date of the agreement. The transfer and closing date was
November 16, 1997.
Goodwill is recorded as the excess of purchase price less the fair value of
the assets and liabilities acquired. For Dutch GAAP, certain provisions are
allowed to be included in the fair value adjustments which do not meet the
criteria of fair value adjustments under US GAAP.
The amount of goodwill for US GAAP purposes is less than goodwill recorded
for Dutch GAAP by NLG 1,398 due to the difference of the fair value (assets
acquired less liabilities assumed) of the subsidiary acquired.
Due to the timing differences of the recording of the acquisition and the
difference in the amount of goodwill, amortisation expense is different for US
and Dutch GAAP.
Since the date for recording the acquisition for US GAAP and Dutch GAAP was
different, the results of the subsidiary for inclusion in the financial
statements is July 1, 1997 for Dutch GAAP and November 16, 1997 for US GAAP.
(2) Formation Expenses
Under Dutch GAAP, various expenses that are incurred for and around the
time of the acquisition, can be capitalised as formation expenses and amortised
over five years. For US GAAP, only certain costs which include financing costs
related to debt incurred, legal fees and other consulting costs directly related
to the acquisition can be capitalised.
The costs included in formation expenses capitalised under Dutch GAAP that
are not allowed to be capitalised under US GAAP relate to costs associated with
hiring a new managing director for the new company. This cost has been expensed
for US GAAP purposes.
(3) Provisions and Restructuring Provisions
Dutch GAAP allows provisions to be made for obligations, losses which exist
on the balance sheet date for which an amount can be reasonably estimated.
Provision can also be made for expenses to be incurred in a subsequent financial
year, provided that such expenses originated, at least partly, in the current or
a preceding financial year and that the purpose of the provision is to spread
the expenses over a number of financial years.
Under US GAAP provisions are made for estimated losses if prior to issuance
of the financial statements it is probable that the liability has been incurred
or an asset had been impaired and the amount can be reasonably estimated.
Provisions can not be recognised for future expenses if no obligation existed at
the balance sheet date to incur those expenses.
Under Dutch GAAP when a decision has been made to reorganise part of the
Group's business, provisions are made for redundancy as well as other closing,
integration and moving costs.
Under US GAAP only costs that qualify as exit costs under the guidelines
set out in EITF 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring) and therefore do not relate to the ongoing operations of the
company may be provided for. In addition, a number of specific criteria also
must be met before these costs that do qualify as exit costs can be recognised
as an expense. Among these is the
F-96
<PAGE> 184
CORDENA CALL MANAGEMENT B.V., THE HAGUE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requirement that all the significant actions to be taken as part of the
reorganisation must be identified along with their expected completion dates and
the exit program must be approved by the balance sheet date. Costs that do not
qualify as exit costs are expensed when the obligation exists to pay cash or
otherwise sacrifice assets.
In 1997, provisions of NLG 800 were recorded in the Dutch GAAP. In 1998,
the Company reversed the provision against income for Dutch GAAP purposes due to
the fact that the provision was no longer needed. For US GAAP purposes, this
release of the provision has been reversed as the original provision did not
meet the criteria set out above for a fair value adjustment.
THE TETEL ACQUISITION
(4) Goodwill amortisation and Effective Date of Inclusion of Financial
Information in the Financial Statements
On May 19, 1998, the Company acquired 75% of the outstanding shares in
Tetel GmbH, Intercall GmbH and DTS GmbH (collectively "Tetel") for consideration
of Deutche Marks 16,125,000 (NLG 18,170). In this transaction, the Company
obtained a call option to purchase the remaining 25% of the Tetel shares for a
consideration of 8 to 9 times the amount of EBITDA (Earnings before taxes,
depreciation and amortisation). The option was exercisable immediately and had
an expiration date of December 31, 2001.
On December 30, 1998, the Company exercised the option and purchased the
25% of the shares. Under Dutch GAAP, acquisitions are recorded when the Company
has "economic" control which is defined as ability to exercise influence over
the target company.
The above transaction was recorded as of January 1, 1998 as management
determined that the Company had economic control and intended to exercise the
option. 100% of the assets and liabilities of Tetel were recorded and 100% of
the results were included form January 1, 1998 in the financial statements under
Dutch GAAP.
Under US GAAP as noted in footnote (1), on the closing and the effective
date of the legal transfer of shares and ownership, the purchase of a subsidiary
is recorded.
As discussed in note (1) above, the date for recording the acquisition for
US GAAP purposes is different than for Dutch GAAP purposes and as such the
results of the subsidiary for inclusion in the financial statements was January
1, 1998 for Dutch GAAP purposes and May 19, 1998 for US GAAP purposes.
For US GAAP purposes, as the Company only owned 75% of the shares from May
19, 1998 to December 30, 1998, a minority interest for that portion of the year
was recorded for US GAAP purposes.
Under US GAAP, the purchase of the subsidiary should be recorded on the
effective legal date of the transaction which was May 19, 1998 and only 75% of
the assets and liabilities of Tetel were recorded. For US GAAP purposes, the
exercise of the option to purchase the remaining 25% of the Company was recorded
when executed and the consideration was exchanged which was December 30, 1998.
For Dutch and US GAAP, the company assigned the purchase price to the fair
value of the assets acquired and liabilities assumed with the excess recorded as
goodwill however as noted in footnote 4, the criteria of when and how to record
the liabilities under US GAAP are more stringent than the guidelines under Dutch
GAAP. As such NLG 245 of liabilities recorded were not allowed to be recorded
for US GAAP purposes. The amount of goodwill for US GAAP purposes differs from
Dutch GAAP due to the difference of the fair value of the subsidiary acquired on
January 1, 1998 and May 18, 1998 and the recording of the 25% interest. Goodwill
for US GAAP purposes at the acquisition date was NLG 5,979
F-97
<PAGE> 185
CORDENA CALL MANAGEMENT B.V., THE HAGUE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
less than the goodwill recorded in the Dutch GAAP accounts due to the fact that
the 25% interest was actually purchased on December 30, 1998.
Due to the difference in the amount of goodwill, amortisation expense under
US GAAP was NLG 2,486 less than amortisation expense under Dutch GAAP for the
year ended December 31, 1998.
(5) Salestrac -- Acquisition and Contingent Consideration
On April 6, 1998, the Company acquired 100% of the outstanding shares of
Salestrac Ltd. for an initial consideration of NLG 4,430 and contingent
consideration of NLG 826 based on the gross profit of Salestrac Ltd. for the
year ended March 31, 1999.
For Dutch GAAP this consideration was estimated and recorded in 1998
however for US GAAP purposes, contingent consideration is not recorded until
determined thus this additional consideration should be recorded in 1999. This
additional goodwill is being amortised over five years for US and Dutch GAAP
purposes.
Based on the timing difference on the contingent consideration and the
recording of a deferred tax asset for US GAAP, goodwill was NLG 1,401 less than
goodwill for Dutch GAAP purposes.
(6) Cordena Handels -- Acquisition
The Company acquired Cordena Handels on September 1, 1999, the effective
date of the transaction. Under Dutch GAAP, a provision was recorded for
restructuring which did not meet the purchase accounting criteria for US GAAP.
This provision was reversed for US GAAP and the expenses related to this
restructuring are included in the profit and loss statement when incurred.
As a result of the additional provisions recorded for Dutch GAAP and other
fair value adjustments, goodwill was NLG 527 less for US GAAP than for Dutch
GAAP.
(7) Other Acquisitions
For all of the other minor acquisitions in 1998, there were differences in
the accounting treatment under Dutch and US GAAP as set out above in note 1 and
5.
(8) Deferred taxation
The deferred taxes on other adjustments is calculated as the tax effect at
35% (statutory rate) of the expected reversal of the income statement items
which are tax deductible.
ADDITIONAL US GAAP DISCLOSURES
Deferred Taxation
At December 31, 1997 and 1998, the Company has a net deferred tax asset
which mainly consist of net operating loss carryforwards of NLG 0 and NLG 3,000.
These net operating loss carryforwards were acquired through the various
acquisitions. For Dutch GAAP purposes, a full valuation allowance has been
recorded against these assets based on the expected utilisation of losses and
historical losses. These assets have an indefinite life.
For US GAAP purposes, if a deferred tax asset has an indefinite life, based
on the going concern assumption at some point in the future the Company will be
able to utilise these carryforwards. As such, a valuation allowance is only
recorded for the net operating loss carryforwards that have a limited life.
These deferred tax assets have been recorded in the purchase accounting for each
subsidiary.
F-98
<PAGE> 186
CORDENA CALL MANAGEMENT B.V., THE HAGUE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For US GAAP purposes, at December 31, 1997 and December 31, 1998, the net
operating loss carryforwards are 0 and NLG 3,000, respectively.
STOCK OPTIONS
The Company accounts for stock options under APB 25. If the exercise of the
stock option price is less than the fair value of the common stock, the
difference between the fair value and the exercise price is compensation
expense.
The Company has a stock option plan and has granted options to its
directors and senior management in 1997 and 1998. The fair value of the common
stock as determined by the board of directors in 1997 was NLG 3. Stock options
in 1997 were granted with the exercise price of NLG 3.
In 1998, the fair value of the common stock as determined by the board of
directors was NLG 6 in the first and second quarter and then was determined to
be NLG 7 during the second half of 1998. All stock options were granted fair
market value at the grant date throughout 1998.
SUBSEQUENT EVENT
On October 7, 1999, the Company was purchased by Client Logic, Inc. and all
stock options for all employees of Cordena vested immediately.
F-99
<PAGE> 187
INDEPENDENT AUDITOR'S REPORT
Board of Directors
MarketVision, Inc.
Denver, Colorado
We have audited the accompanying balance sheet of MarketVision as of
December 31, 1998, and the related statements of income, retained earnings, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MarketVision as of December
31, 1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ TERRY & STEPHENSON
May 11, 1999
Denver, Colorado
F-100
<PAGE> 188
MARKETVISION, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 200,807
Accounts receivable....................................... 864,007
Contracts receivable...................................... 19,587
Other current assets...................................... 28,145
----------
Total current assets.............................. 1,112,546
----------
Fixed assets:
Furniture, equipment, and commercial software............. 634,640
Capitalized software...................................... 610,212
----------
Total fixed assets................................ 1,244,852
Other assets................................................ 37,140
----------
Total assets................................................ $2,394,538
==========
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 115,583
Payroll taxes............................................. 22,260
Current portion of long-term debt......................... 97,585
Current portion of capital lease obligations.............. 128,551
Other current liabilities................................. 7,771
----------
Total current liabilities......................... 371,750
----------
Long-term debt
Capital lease obligations................................. 112,004
Bank loans................................................ 216,036
----------
Total long-term debt.............................. 328,040
----------
Total liabilities........................................... 699,790
----------
CAPITAL
Common stock.............................................. 5,000
Retained earnings......................................... 1,689,748
----------
Total capital............................................... 1,694,748
----------
Total liabilities and capital............................... $2,394,538
==========
</TABLE>
See accompanying notes to financial statements
F-101
<PAGE> 189
MARKETVISION, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Income
RMS software revenue...................................... $2,594,416
Service revenues.......................................... 1,274,942
----------
Total Income................................................ 3,869,358
Expenses
Account management expenses............................... 263,065
Call center expenses...................................... 491,693
Administrative expenses................................... 1,016,509
Sales and marketing expenses.............................. 381,694
Development expenses...................................... 376,997
Operational expenses...................................... 215,145
Amortization and depreciation............................. 312,935
----------
Total S, G, & A expenses.................................... 3,058,038
----------
Operating income............................................ 811,320
Other income and expenses................................... (61,312)
----------
Net income.................................................. 750,008
Retained earnings beginning of year......................... 1,018,003
Distributions............................................... (78,263)
----------
Retained earnings end of year............................... $1,689,748
==========
</TABLE>
See accompanying notes to financial statements
F-102
<PAGE> 190
MARKETVISION, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) from operations......................... $ 750,008
Adjustment to net income:
Depreciation and amortization.......................... 312,935
Net change is operating assets and liabilities:
(Increase) decrease in accounts receivable............. (157,738)
(Increase) decrease in contracts receivable............ (19,587)
(Increase) decrease in other current assets............ (22,001)
Increase (decrease) in accounts payable................ 26,098
Increase (decrease) in payroll taxes................... 10,145
Increase (decrease) in other current liabilities....... 2,674
---------
Net cash provided by operations........................... 902,534
Cash flows from investment activities:
Purchases of property, plant and equipment................ (20,603)
Capitalization of software................................ (179,192)
---------
Net cash used in investment activities.................... (199,795)
Cash flows from financing activities:
Payments on line of credit................................ (325,000)
Payments on notes payable................................. (67,578)
Payments on capitalized leases............................ (127,840)
Proceeds from notes payable............................... 31,652
Distributions to shareholders............................. (106,246)
---------
Net cash used in financing activities..................... (595,012)
---------
Net increase (decrease) in cash............................. 107,727
Cash and cash equivalents at beginning of period............ 93,079
---------
Cash and cash equivalents at end of period.................. $ 200,806
=========
Supplemental information:
Interest payments......................................... $ 64,363
=========
Capital lease obligations of $157,360 were incurred when the
Company entered into leases for new equipment.
Shareholder debt of $139,910 and a shareholder note
receivables of $111,927 were converted to distributions
during 1998.
</TABLE>
See accompanying notes to financial statements
F-103
<PAGE> 191
MARKETVISION, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
1. NATURE OF OPERATIONS
MarketVision, Inc. was established in June of 1992 as a provider of
data-driven marketing solutions ranging from direct marketing to relationship
marketing. The Relationship Management System (RMS(TM)) is an integrated
platform supporting traditional and emerging programs for customer and channel
marketing. MarketVision, Inc.'s client list includes Global Fortune 500
companies crossing many industries, including Newspaper, Pharmaceuticals,
Telecommunications, Computer Hardware and Software, and Subscription based
publishing.
2. SIGNIFICANT ACCOUNTING POLICIES
Software Revenue Recognition
Software arrangements range from those that provide a license for a single
software product to those that, in addition to the delivery of software or a
software system, require significant production, modification, or customization
of software. If an arrangement to deliver software or a software system, either
alone or together with other products or services, requires significant
production, modification, or customization of software, the entire arrangement
is accounted for in conformity with current accounting guidelines.
If the arrangement does not require significant production, modification,
or customization of software, revenue is recognized when all the following
criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred;
- The vendor's fee is fixed or determinable;
- Collectibility is probable.
If an arrangement includes multiple elements, the fee is allocated to the
various elements based on vendor-specific objective evidence of fair value.
Production Costs of Computer Software
Software production costs for computer software that is to be used as an
integral part of a product or process is not capitalized until both (a)
technological feasibility had been established for the software and (b) all
research and development activities for the other components of the product or
process have been completed.
Costs of producing product masters incurred subsequent to establishing
technological feasibility is capitalized. Those costs included coding and
testing performed subsequent to establishing technological feasibility. Costs of
maintenance and customer support are charged to expense when related revenue is
recognized or when those costs are incurred.
Amortization of Capitalized Software Costs
The annual amortization is the greater of the amount computed using (a) the
ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
remaining estimated economic life of the product including the period being
reported on. Amortization starts when the product is available for general
release to customers. The
F-104
<PAGE> 192
MARKETVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
capitalized software costs is being amortized through the year 2000.
Amortization of capitalized software costs charged to operations in 1998 was
$146,747.
Depreciation
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. The cost of leasehold improvements is amortized
over the lessor of the length of the related leases or the estimated useful
lives of the assets. Depreciation is computed on the straight-line method for
financial reporting purposes.
The useful lives of the fixed assets for purposes of computing depreciation
are:
<TABLE>
<S> <C>
Furniture and fixtures...................................... 7 years
Leasehold improvements...................................... 3 years
Computers and peripherals................................... 5 years
Commercial software......................................... 3 years
Equipment................................................... 5 years
Third party development software............................ 3 years
</TABLE>
Trademark
The cost of the trademark acquired is being amortized over the
straight-line method over 15 years; it's remaining life. Amortization expense
charged to operations in 1998 was $1,147.
Allowance for Doubtful Accounts
Management reviews the list of customer accounts receivable balances on a
regular basis. When accounts are determined to be uncollectible, they are
written off. As of December 31, 1998, all balances are considered collectible.
Income Taxes
The Company operates as an S corporation under the internal revenue code
section. As a result, all profits and losses flow through to the shareholders of
the Company. The Company does not incur any income tax liabilities or benefits.
Use of Estimates
The process of preparing financial statements in conformity with generally
accepted accounting principals requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues, and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts.
F-105
<PAGE> 193
MARKETVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at cost, less
accumulated depreciation:
<TABLE>
<S> <C>
Furniture and fixtures.................................. $ 186,262
Leasehold improvements.................................. 2,694
Artwork................................................. 6,234
Computers and peripherals............................... 640,780
Commercial software..................................... 124,466
Equipment............................................... 103,842
Third party development software........................ 53,001
Capitalized software.................................... 1,182,033
-----------
2,299,312
Less: Accumulated depreciation and amortization......... (1,054,460)
-----------
Total......................................... $ 1,244,852
===========
</TABLE>
Depreciation charged to operations was $166,188. All property and equipment
are pledged as collateral for bank loans. The above list includes the assets
held under capitalized leases. See note 5 for the detail.
4. NOTES PAYABLE
Following is a summary of long-term debt at December 31, 1998:
<TABLE>
<S> <C>
Note payable to bank due March 21, 2003, plus interest
payable monthly at 1.3755% above prime, secured by the
property and equipment.................................... $246,266
9% note due May 10, 2000, payable to bank in monthly
installments of $2,385, secured by property and
equipment................................................. 38,101
12% note payable to supplier in monthly installments of
$1,880, due March 30, 2000, secured by software with a
book value of $44,510..................................... 29,254
--------
313,621
Less: Current maturities included in current liabilities.... (97,585)
--------
$216,036
========
</TABLE>
Under the terms of a revolving credit agreement with a bank, dated
September 18, 1998, the Company may borrow up to $750,000 at 1% above the bank's
prime interest rate through September 18, 1999. Funds from these borrowings may
be used for any purpose. At December 31, 1998, the Company had $750,000 of
unused funds available through the revolving credit agreement.
Following are maturities of long-term debt for each of the next years:
<TABLE>
<S> <C>
1999...................................................... $ 97,585
2000...................................................... 77,190
2001...................................................... 61,788
2002...................................................... 67,668
2003...................................................... 9,390
--------
$313,621
========
</TABLE>
F-106
<PAGE> 194
MARKETVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASES
The Company is the lessee of computers and equipment under capital leases
expiring in various years through 2002. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum of lease
payments or the fair value of the asset. The assets are amortized over their
estimated productive lives. Amortization of assets under capital leases is
included in depreciation expense for 1998.
Following is a summary of property held under capital leases which are
included in property and equipment in Note 3:
<TABLE>
<S> <C>
Computers and peripherals................................ $ 319,360
Equipment................................................ 12,847
Furniture and fixtures................................... 110,751
Capitalized software..................................... 67,879
---------
510,837
Less: Accumulated amortization........................... (137,138)
---------
$ 373,699
=========
</TABLE>
Minimum future lease payments under capital leases as of December 31, 1998
for each of the next five years and in the aggregate are:
<TABLE>
<S> <C>
1999...................................................... $145,146
2000...................................................... 78,367
2001...................................................... 41,607
2002...................................................... 1,533
--------
Total minimum lease payments.............................. 266,653
Less: Amount representing interest........................ (26,103)
--------
Present value of net minimum lease payments............... $240,550
========
</TABLE>
Interest rates on capitalized leases vary from 8.0% to 11.7% and are
imputed based on the lessor's implicit rate of interest.
Certain capital leases provide for renewal, and/or purchase options.
Generally, purchase options are at prices representing the expected fair value
of the property at the expiration of the lease term.
Minimum future rental payments under noncancellable operating leases having
remaining terms in excess of one year as of December 31, 1998 for each of the
next five years and in the aggregate are:
<TABLE>
<S> <C>
1999...................................................... $329,578
2000...................................................... 255,005
2001...................................................... 180,628
--------
$765,211
========
</TABLE>
Rent expense under all operating leases for 1998 was $68,899.
The annual rental costs for office space for 1998 was $262,172. The office
space lease expires on September 14, 2001. There is a renewal option to extend
the lease for an additional two 60-month periods at the current fair rental
rate.
F-107
<PAGE> 195
MARKETVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDER'S EQUITY
The aggregate number of shares of stock the Corporation is authorized to
issue is 50,000 shares of common stock with a par value of $1 per share. The
Corporation has 5,000 shares issued and outstanding as of December 31, 1998.
7. EMPLOYMENT PENSION PLAN
The Company offers a 401(k) plan to its employees. The employee must have a
minimum of three months of service, and a minimum of 21 years of age to
participate in the plan. The Company has the right to contribute to the plan but
has elected not to during 1998. Entry dates for the plan are January 1, April 1,
July 1, and October 1.
8. DISTRIBUTIONS
The distributions account consists of cash and non-cash transactions. The
cash transactions consist of a $106,246 distribution to the shareholder. The
non-cash transactions consist of a $139,910 forgiveness of a note payable to the
shareholder and $111,927 on a forgiveness of a note receivable from the
shareholder. The effects of these transactions ($78,263) were recorded in the
distributions account.
F-108
<PAGE> 196
MARKETVISION, INC.
BALANCE SHEETS
NOVEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 26,144 $ 200,807
Accounts receivable....................................... 1,245,974 864,007
Contracts receivable...................................... 106,296 19,587
Other current assets...................................... 37,315 28,145
---------- ----------
Total current assets.............................. 1,415,729 1,112,546
---------- ----------
Fixed assets:
Furniture, equipment, and commercial software............. 581,875 634,640
Capitalized software...................................... 885,631 610,212
---------- ----------
Total fixed assets................................ 1,467,506 1,244,852
Other assets................................................ 34,695 37,140
---------- ----------
Total assets...................................... $2,917,930 $2,394,538
========== ==========
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 257,720 $ 115,583
Payroll taxes............................................. 26,949 22,260
Current portion of long-term debt......................... 418,543 97,585
Current portion of capital lease obligations.............. 91,895 128,551
Other current liabilities................................. 121,713 7,771
---------- ----------
Total current liabilities......................... 916,820 371,750
---------- ----------
Long-term debt
Capital lease obligations................................. 91,674 112,004
Bank loans................................................ 544,820 216,036
---------- ----------
Total long-term debt.............................. 636,494 328,040
---------- ----------
Total liabilities................................. 1,553,314 699,790
---------- ----------
Capital
Common stock.............................................. 5,000 5,000
Retained earnings......................................... 1,359,616 1,689,748
---------- ----------
Total capital..................................... 1,364,616 1,694,748
---------- ----------
Total liabilities and capital..................... $2,917,930 $2,394,538
========== ==========
</TABLE>
See accompanying notes to financial statements
F-109
<PAGE> 197
MARKETVISION, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Income
RMS software revenue...................................... $ 401,789 $2,329,271
Service revenues.......................................... 2,950,187 1,177,920
---------- ----------
Total Income...................................... 3,351,976 3,507,191
Expenses
Cost of services.......................................... 1,252,854 1,046,680
Administrative Expenses................................... 915,892 876,328
Sales and marketing expenses.............................. 467,311 340,610
Operational expenses...................................... 257,474 276,306
Amortization and Depreciation............................. 408,862 344,669
---------- ----------
Total S, G, & A expenses.......................... 3,302,393 2,884,593
---------- ----------
Operating income............................................ 49,583 622,598
Other income and expenses................................... (76,765) (48,512)
---------- ----------
Net income.................................................. (27,182) 574,086
Retained earnings beginning of year......................... 1,689,748 1,052,142
Distributions............................................... (302,950) (102,746)
---------- ----------
Retained earnings end of year............................... $1,359,616 $1,523,482
========== ==========
</TABLE>
See accompanying notes to financial statements
F-110
<PAGE> 198
MARKETVISION, INC.
STATEMENTS OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) from operations......................... $ (27,182) $ 574,086
Adjustment to net income:
Depreciation and amortization.......................... 408,862 343,628
Net change is operating assets and liabilities:
(Increase) decrease in accounts receivable............. (381,967) (36,925)
(Increase) decrease in contracts receivable............ (86,709) (95,550)
(Increase) decrease in other current assets............ (9,170) (34,908)
(Increase) decrease in other assets.................... -- (21,246)
Increase (decrease) in accounts payable................ 138,638 57,745
Increase (decrease) in payroll taxes................... 4,689 12,293
Increase (decrease) in other current liabilities....... 113,942 1,544
---------- ---------
Net cash provided by operations................... 161,103 800,667
Cash flows from investment activities:
Purchases of property, plant and equipment................ (72,444) (23,787)
Capitalization of software................................ (485,520) (78,203)
Decrease in other assets.................................. 1,363 --
---------- ---------
Net cash used in investment activities.................... (556,601) (101,990)
Cash flows from financing activities:
Borrowings from revolving credit agreement................ 1,205,000 --
Payments on revolving credit agreement.................... (950,000) --
Payments on short-term borrowings......................... -- (325,000)
Payments on long-term borrowings.......................... -- (61,366)
Payments on capitalized leases............................ (125,957) (95,699)
Proceeds from other notes payable......................... 500,000 39,932
Payments on other notes payable........................... (105,258) (18,587)
Distributions to shareholders............................. (302,950) (102,746)
---------- ---------
Net cash provided by (used in) financing
activities...................................... 220,835 (563,466)
---------- ---------
Net increase (decrease) in cash............................. (174,663) 135,211
Cash and cash equivalents at beginning of period............ 200,807 93,079
---------- ---------
Cash and cash equivalents at end of period.................. $ 26,144 $ 228,290
========== =========
Supplemental information:
Interest payments......................................... $ 76,044 $ 50,904
========== =========
Noncash capital lease obligations......................... $ 72,471 $ 146,983
========== =========
</TABLE>
See accompanying notes to financial statements
F-111
<PAGE> 199
MARKETVISION, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim financial data as of November 30, 1999 and for the eleven
months ended November 30, 1998 and the eleven months ended November 30, 1999 is
unaudited. In the opinion of management, the financial statements reflect all
adjustments, consisting of normal recurring adjustments of the Company, in
accordance with generally accepted accounting principles applicable to interim
periods. The financial statements do not include all of the information and
footnotes required by generally accepted accounting principles. The accompanying
unaudited financial statements should be read in conjunction with the December
31, 1998 audited financial statements of MarketVision, Inc. Interim results of
operations are not necessarily indicative of results for the full year.
2. SIGNIFICANT ACCOUNTING POLICIES
Amortization of Capitalized Software Costs
Capitalized software costs are amortized on the straight-line method over
the remaining estimated economic life of the product which ranges from three to
five years. Amortization starts when the product is available for general
release to customers. Amortization of capitalized software costs charged to
operations for the eleven months ended November 30, 1999 was $210,101. There was
approximately $627,000 of capitalized software costs as of November 30, 1999
that had yet to commence amortization as the products were not available for
general release to customers.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Management reviews the list of customer accounts receivable balances on a
regular basis. When accounts are determined to be uncollectible, they are
written off. As of November 30, 1999, all balances are considered collectible.
3. LEASES
The Company is the lessee of computers and equipment under capital leases
expiring in various years through 2002. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum of lease
payments or the fair value of the asset. The assets are amortized over their
estimated productive lives. Amortization of assets under capital leases is
included in depreciation expense for 1999.
Following is a summary of property held under capital leases which are
included in property and equipment in Note 3:
<TABLE>
<S> <C>
Computers and peripherals............................... $ 366,514
Equipment............................................... 12,847
Furniture and fixtures.................................. 136,069
Capitalized software.................................... 67,879
---------
583,309
Less: Accumulated amortization.......................... (237,531)
---------
$ 345,778
=========
</TABLE>
F-112
<PAGE> 200
MARKETVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Minimum future lease payments under capital leases as of December 31, 1999
for each of the next five years and in the aggregate are:
<TABLE>
<S> <C>
2000...................................................... $ 91,895
2001...................................................... 66,225
2002...................................................... 25,449
--------
Total minimum lease payments.................... $183,569
========
</TABLE>
Interest rates on capitalized leases vary from 6.6% to 11.7% and are
imputed based on the lessor's implicit rate of interest.
Certain capital leases provide for renewal, and/or purchase options.
Generally, purchase options are at prices representing the expected fair value
of the property at the expiration of the lease term.
Minimum future rental payments under noncancellable operating leases having
remaining terms in excess of one year as of November 30, 1999 for each of the
next five years and in the aggregate are:
<TABLE>
<S> <C>
2000...................................................... $259,410
2001...................................................... 183,028
--------
$442,438
========
</TABLE>
Equipment rental expense under all operating leases for 1999 was $54,008.
The annual rental costs for office space for the eleven months ended
November 30, 1999 was $238,651. The office space lease expires on September 14,
2001. There is a renewal option to extend the lease for an additional two
60-month periods at the current fair rental rate.
4. SUBSEQUENT EVENT NOTES
On December 5, 1999, in anticipation of the sale of the Company,
MarketVision, Inc. paid a special bonus totaling $364,000 to all of the
employees of the Company. The bonus was funded through a capital contribution of
the MarketVision, Inc. owners prior to the sale to ClientLogic, Inc.
On December 6, 1999, MarketVision, Inc. was acquired by ClientLogic, Inc.
for $21,250,000. The consideration was comprised of $11,000,000 in cash,
1,000,000 shares of ClientLogic common stock valued at $5,000,000 (to be issued
in January 2000), and a promissory note in the amount of $5,250,000, with an
annual interest rate of 8.30%, payable in five equal annual installments
commencing on December 6, 2000. In connection with the acquisition, ClientLogic
assumed all of the liabilities of MarketVision, Inc. ($1,234,000 at December 6,
1999) including $709,000 in outstanding debt.
F-113
<PAGE> 201
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13,300,000 SHARES
CLIENTLOGIC CORPORATION
CLASS A COMMON STOCK
[CLIENTLOGIC LOGO]
------------
PROSPECTUS
, 2000
------------
SALOMON SMITH BARNEY
ROBERTSON STEPHENS
DEUTSCHE BANC ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
DLJDIRECT INC.
TD SECURITIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 202
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table lists the fees payable to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc., and other
estimated expenses we expect to incur in connection with the issuance and
distribution of the Class A common stock being registered. We are responsible
for paying all of the fees and expenses listed below.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 66,792
NASD Fee.................................................... 25,800
Nasdaq National Market Listing Fee.......................... 96,000
Printing and Engraving Expenses............................. 400,000
Accounting Fees and Expenses................................ 650,000
Legal Fees and Expenses..................................... 600,000
Transfer Agent Fees and Expenses............................ 36,800
Blue Sky qualifications fees and expenses................... 10,000
Miscellaneous............................................... 314,608
----------
Total............................................. $2,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
provides that a corporation may indemnify any person, including officers and
directors, who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation) because that person was an officer, director, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation. The indemnity may
include expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by a person in connection with an
action, suit or proceeding, provided that officer, director, employee or agent
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests and, for criminal proceedings, had
no reasonable cause to believe that his conduct was unlawful. A Delaware
corporation may indemnify officers and directors in an action by or on the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or our company director is
successful on the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify him against the expenses which such
officer or director actually or reasonably incurred.
Our amended and restated certificate of incorporation provides that we
shall indemnify each person who is or was an officer or director of our company
to the fullest extent permitted under the General Corporation Law of the State
of Delaware (including the right to be paid expenses incurred in investigating
or defending any proceeding in advance of its final disposition).
In addition, our amended and restated certificate of incorporation provides
that our directors shall not be personally liable to us and our stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of law;
- under Section 174 of the General Corporation Law of the State of
Delaware; or
- for any transaction from which the director derived an improper personal
benefit.
II-1
<PAGE> 203
We have purchased a directors' and officers' liability insurance policy. We
have also entered into indemnification agreements with Mark B. Briggs, Thomas P.
Dea, Thomas O. Harbison and Seth M. Mersky in connection with their service as
directors and/or executive officers on our behalf and on behalf of our
subsidiaries. The indemnification agreements provide that we will indemnify
Messrs. Briggs, Dea, Harbison and Mersky for any losses in connection with any
proceedings to the fullest extent permitted under the General Corporation Law of
the State of Delaware. See "-- Certain Relationships and Related Party
Transactions -- Director Indemnification Agreements."
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Issuances of Stock
In September 1998, we issued 22,499,995 shares of our common stock to Onex
ClientLogic Holdings LLC for an aggregate cash purchase price of $35,000,000 in
connection with our acquisition of SOFTBANK Services Group in September 1998.
The shares were sold at $1.56 per share. The securities were issued in a private
placement in reliance on Section 4(2) of the Securities Act.
In December 1998, we issued 7,739,998 shares of our common stock to Onex
ClientLogic Holdings LLC as repayment of a promissory note in the amount of
$12,040,000 in connection with our acquisition of SOFTBANK Services Group in
September 1998. The shares were sold at $1.56 per share. The securities were
issued in a private placement in reliance on Section 4(2).
In December 1998, we issued 128,571 shares of our common stock to Mark R.
Briggs for an aggregate cash purchase price of $200,000. The shares were sold at
$1.56 per share. The securities were issued in a private placement in reliance
on Section 4(2).
In December 1998, we issued 1,774,285 shares of our common stock to Edward
Schwartz and Peter Berczi for an aggregate cash purchase price of $2,760,000.
The shares were sold at $1.56 per share. The securities were issued in a private
placement in reliance on Regulation S promulgated under the Securities Act.
In December 1998, we issued 7,335,044 shares of our common stock to Onex
Corporation in consideration for 11,526,055 shares of common stock of
Onexco -- 1293219 Ontario Inc. The price attributed to our common stock was
$1.56. The securities were issued in a private placement in reliance on
Regulation S promulgated under the Securities Act.
In February 1999, we issued 197,390 shares of our common stock to Jordan
Levy and Ronald Schreiber for an aggregate cash purchase price of $307,050.
These share were sold at $1.56 per share. The securities were issued in a
private placement in reliance on Section 4(2).
In April 1999, we issued an aggregate of 92,190 shares of our common stock
to Paul Ford and Greg Zehr upon the exercise of subscription rights for an
aggregate cash purchase price of $215,109. The shares were sold at $2.33 per
share. The securities were issued in a private placement in reliance on
Regulation S of the Securities Act.
In July 1999, we issued 1,061 shares of our common stock to Anne Marie
Casey Christiansen upon her cash exercise of a stock option. The securities were
issued in a transaction exempt from Section 5 of the Securities Act pursuant to
Rule 701 under the Securities Act.
In August 1999, we issued 68,571 shares of common stock to Howard Sarna for
an aggregate cash purchase price of $159,999. The shares were sold at $2.33 per
share. The securities were issued in a private placement in reliance on
Regulation S of the Securities Act.
In October 1999, we issued 13,392,854 shares of our common stock to Onex
ClientLogic Holdings LLC for an aggregate cash purchase price of $25,000,000 in
connection with our acquisition of LCS Industries in January 1999. The shares
were sold at $1.87 per share. The securities were issued in a private placement
in reliance on Section 4(2) of the Securities Act.
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<PAGE> 204
In October 1999, we issued 4,065,400 shares of our common stock to Onex
ClientLogic Holdings LLC as a partial repayment in the amount of $7,588,748 of a
promissory note in the amount of $10,000,000 in connection with our acquisition
of LCS Industries in January 1999. We repaid the remaining $2,411,252 of the
promissory note in cash. The shares were sold at $1.87 per share. The securities
were issued in a private placement in reliance on Section 4(2) of the Securities
Act.
In October 1999, we issued 377,700 shares of our common stock to Melissa
Bailey, Joanne G. Biltekoff, Sandi Bush, Julie M. Casteel, Gary M. Crosby,
Joseph Duryea, Steven M. Kawalick, William Rella and Lee O. Waters for an
aggregate cash purchase price of $705,039 in connection with our acquisition of
LCS Industries in January 1999. The shares were sold at $1.87 per share. The
securities were issued in a private placement in reliance on Section 4(2) of the
Securities Act.
In October 1999, we issued 914,043 shares of our common stock to Edward
Schwartz for an aggregate cash purchase price of $1,706,212.80 in connection
with our acquisition of LCS Industries in January 1999. The shares were sold at
$1.87 per share. The securities were issued in a private placement in reliance
on Regulation S of the Securities Act.
In October 1999, we issued 718,738 shares of our common stock to Jan L.
Bardoux, Peter E. Dekker, Ole Sommer Erickson, Sytze Koopmans, Alesandra M.
Kortenhorst, Jules K. Kortenhorst, Jules T.H.M. Kortenhorst, Ranier G.
Kortenhorst, Winston P. Kortenhorst, Caroline J.G. Smits, Jeroen J. Smits,
Carien J.G. van der Laan, and Joost A.J. van Gaal as partial consideration for
their depository receipts in Stichting Administratiekantoor Cordena Call
Management. The price attributed to our shares of common stock was $3.50 per
share. The securities we issued in a private placement in reliance on Regulation
S promulgated under the Securities Act.
In October 1999, we issued 35,019 shares of our common stock to the
Kortenhorst Vetter Family Trust as partial consideration for its depository
receipts in Stichting Administratiekantoor Cordena Call Management. The price
attributed to our shares of common stock was $3.50 per share. The securities we
issued in a private placement in reliance on Section 4(2) of the Securities Act.
In October 1999, we issued 465,334 shares of our common stock to Frank
Loubaresse, Laurent Loubaresse and Online Services SARL as partial consideration
for their shares of Groupe Adverbe SA capital stock. The price attributed to our
shares of common stock was $3.50 per share. The securities we issued in reliance
on Regulation S promulgated under the Securities Act.
In October of 1999, we issued 14,465 shares of our common stock to Stephen
C. Wright upon his cash exercise of a stock option. The securities were issued
in a transaction exempt from Section 5 of the Securities Act pursuant to Rule
701 under the Securities Act.
In November 1999, we issued 33 shares of our common stock to Brent Fiene
upon his cash exercise of a stock option. The securities were issued in a
transaction exempt from Section 5 of the Securities Act pursuant to Rule 701
under the Securities Act.
In November 1999, we issued 33 shares of our common stock to John Syzmanski
upon his cash exercise of a stock option. The securities were issued in a
transaction exempt from Section 5 of the Securities Act pursuant to Rule 701
under the Securities Act.
In December 1999, we issued 103,139 shares of our common stock to Joanne G.
Biltekoff, Julie M. Casteel, Joseph Duryea, Robert A. Fetter, Steven M.
Kawalick, Jordan Levy, Ronald Schreiber and Lee O. Waters for an aggregate cash
purchase price of $360,983.25 in connection with the acquisition of Cordena in
October 1999. The shares were sold at $3.50 per share. These securities were
issued in a private placement in reliance on Section 4(2) of the Securities Act.
In December 1999, we issued 12,703 shares of our common stock to Howard
Sarna for an aggregate cash purchase price of $44,457.75 in connection with the
acquisition of Cordena in October 1999. The shares were sold at $3.50 per share.
These securities were issued in reliance on Regulation S promulgated under the
Securities Act.
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<PAGE> 205
In December 1999, we issued 804 shares of our common stock to Robert
Carnall upon his cash exercise of a stock option. The securities were issued in
a transaction exempt from Section 5 of the Securities Act pursuant to Rule 701
under the Securities Act.
In December 1999, we issued 9,884,158 shares of our common stock to Onex
ClientLogic Holdings LLC for an aggregate cash purchase price of $34,594,560 in
connection with the acquisition of Cordena in October 1999. The shares were sold
at $3.50 per share. The securities were issued in a private placement in
reliance on Section 4(2) of the Securities Act.
In December 1999, we issued 1,533,772 shares of our common stock to Onex
ClientLogic Holdings LLC for an aggregate cash purchase price of $11,929,335 in
connection with the acquisition of MarketVision in December 1999. The shares
were sold at $7.78 per share. The securities were issued in a private placement
in reliance on Section 4(2) of the Securities Act.
In December 1999, we issued 9,086 shares of our common stock to Joseph
Duryea, William Rella, Sandi Bush and Melissa Bailey for an aggregate cash
purchase price of $70,665 in connection with the acquisition of MarketVision in
December 1999. The shares were sold at $7.78 per share. The securities were
issued in a private placement in reliance on Section 4(2) of the Securities Act.
In January 2000, we issued 642,858 shares of our common stock to Joseph L.
Temple, Jr. and S. Dianne Thompson as partial consideration for their shares of
common stock of MarketVision. The price attributed to the shares issued was
$7.78 per share. We will issue the securities in a private placement in reliance
on Section 4(2) of the Securities Act.
In January 2000, we issued 16,073 shares of our common stock to Greg Young
and Ihab Ghabour upon the cash exercise of stock options. The securities were
issued in a transaction exempt from Section 5 of the Securities Act pursuant to
Rule 701 under the Securities Act.
In January 2000, we issued 144,644 shares to Lonnie Mandel and Anthony
Capato as partial payment for their shares of capital stock of two of our
subsidiaries. The price attributed to the shares was $7.78 per share. These
securities were issued in a private placement in reliance on Section 4(2) of the
Security Act.
In February 2000, we issued 66,082 shares of our common stock to Patrick D.
Andrews, Maria C. Arraiz, Steven C. Baskin, Tracy Brege, Sandra Bush, Norman
Hidalgo, Caroline Jones, Gloria Kaplan, Aleksandra Karbowniczek, Mitchell B.
Levy, Christopher J. Maraszek, Greg Muscato, Frances Piekos, Christine Procknal,
Edward Regan, David Reisman, William Rella, Jane Reukauf, Julienne Ricchiazzi,
Charles Roberts, Elizabeth Rott, Josett Sfeir, Doug VanSant, Deborah Wachowicz,
Peter Weinbrecht and Stacey Wright upon the cash exercise of stock options.
These securities were issued in transactions exempt from Section 5 of the
Securities Act pursuant to Rule 701 under the Securities Act.
In March 2000, we issued 168,400 shares of our Class A common stock to 134
employees and 5 holders of options to purchase our Class A common stock upon the
cash exercise of stock options. These securities were issued in a private
placement in reliance on Section 4(2) of the Securities Act and in transactions
exempt from Section 5 of the Securities Act pursuant to Regulation S and Rule
701 under the Securities Act.
In April 2000, we issued 2,250 shares of Class A common stock to an
employee upon the exercise of stock options. These securities were issued in a
transaction exempt from Section 5 of the Securities Act pursuant to Rule 701
under the Securities Act.
Issuances of Rights to Purchase Common Stock
In October 1998, we granted 1,035,315 options under the 1998 Stock Option
Plan to Mark R. Briggs, Jordan Levy and Ronald Schreiber in connection with Mr.
Briggs' employment and Messrs. Levy and Schreiber's consulting agreements at an
exercise price of $1.56 per share. The securities were issued in a transaction
exempt from Section 5 of the Securities Act pursuant to Rule 701 under the
Securities Act.
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<PAGE> 206
In October 1998, we granted 1,597,070 options under the 1998 Stock Option
Plan to 368 employees at an exercise price of $2.33 per share. The securities
were issued in a transaction exempt from Section 5 of the Securities Act
pursuant to Rule 701 under the Securities Act.
In December 1998, we granted 10 former employees of North Direct Response
159,097 options at an exercise price $0.64, 22,274 options at an exercise price
of $1.28 and 260,283 options at an exercise price of $1.63 under the 1998 Stock
Option Plan in exchange for 260,000 options at an exercise price of CDN$0.625,
40,000 options at an exercise price of CDN$1.25 and 364,000 options at an
exercise price of $1.60 to purchase shares of North Direct Response. The
securities were issued in a private placement in reliance on Regulation S of the
Securities Act.
In January 1999, we granted 375,000 options under the 1998 Stock Option
Plan to Mark R. Briggs at an exercise price of $1.87 per share. The securities
were issued in a transaction exempt from Section 5 of the Securities Act
pursuant to Rule 701 under the Securities Act.
In January 1999, we granted 444,487 options under the 1998 Stock Option
Plan to 139 employees at an exercise price of $2.72 per share. The securities
were issued in a transaction exempt from Section 5 of the Securities Act
pursuant to Rule 701 under the Securities Act.
In March 1999, we granted 1,844 options under the 1998 Stock Option Plan to
Mark R. Briggs at an exercise price of $2.33 per share. The securities were
issued in a transaction exempt from Section 5 of the Securities Act pursuant to
Rule 701 under the Securities Act.
In March 1999, we granted 173,574 options under the 1998 Stock Option Plan
to Paul Ford and Greg Zehr in connection with their employment and to John
Jancaitis and Lawrence Trudeau in connection with their consulting agreements at
an exercise price of $2.33 per share. The securities were issued Messrs. Ford
and Zehr in a private placement in reliance on Regulation S of the Securities
Act. The securities were issued to Messrs. Jancaitis and Trudeau in a
transaction exempt from Section 5 of the Securities Act pursuant to Rule 701
under the Securities Act.
In March 1999, we granted 325,131 stock subscription rights to Messrs.
Ford, Zehr, Jancaitis and Trudeau at an exercise price of $2.33 per share as
partial consideration for the assets of Canadian Access Insurance Services Inc.
The securities were issued Messrs. Ford and Zehr in a private placement in
reliance on Regulation S of the Securities Act. The securities were issued to
Messrs. Jancaitis and Trudeau in a private placement in reliance on Section 4(2)
of the Securities Act.
In May 1999, we granted 180,001 options under the 1998 Stock Option Plan to
two employees at an exercise price of $2.72 per share. The securities were
issued in a transaction exempt from Section 5 of the Securities Act pursuant to
Rule 701 under the Securities Act.
In July 1999, we granted 131,213 options under the 1998 Stock Option Plan
to 10 employees at an exercise price of $2.72 per share. The securities were
issued in a transaction exempt from Section 5 of the Securities Act pursuant to
Rule 701 under the Securities Act.
In July 1999, we granted 141,429 options under the 1998 Stock Option Plan
to an employee at an exercise price of $2.72 per share. The securities were
issued in a transaction exempt from Section 5 of the Securities Act pursuant to
Rule 701 under the Securities Act.
In October 1999, we granted 15,300 options under the 1998 Stock Option Plan
to an employee at an exercise price of $3.50 per share. The securities were
issued in a transaction exempt from Section 5 of the Securities Act pursuant to
Rule 701 under the Securities Act.
In October 1999, we granted to Alesandra M. Kortenhorst, Carien C. van der
Laan, Caroline J.G. Smits, Jan L. Baurdoux, Jereon J. Smits, Jules K.
Kortenhorst, Jules T. Kortenhorst, Peter E. Dekker, Ranier G. Kortenhorst, Sytze
Koopmans and Winston P. Kortenhorst an aggregate of 37,322 warrants with an
exercise price of $4.25 per share in exchange for their 37,658 warrants for the
purchase depository receipts of Cordena at an exercise price of NLG 7.00 per
depository receipt in connection with the
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<PAGE> 207
acquisition of Cordena. The securities were issued in a private placement in
reliance on Regulation S of the Securities Act.
In October 1999, we granted to the Kortenhorst Vetter Family Trust 3,115
warrants with an exercise price of $4.25 per share in exchange for 3,143
warrants for the purchase depository receipts of Cordena at an exercise price of
NLG 7.00 per depository receipt in connection with the acquisition of Cordena.
The securities were issued in a private placement in reliance on Section 4(2) of
the Securities Act.
In October 1999, we granted to Alesandra M. Kortenhorst, Carien C. van der
Laan, Caroline J.G. Smits, Jan L. Baurdoux, Jereon J. Smits, Jules K.
Kortenhorst, Jules T. Kortenhorst, Peter E. Dekker, Ranier G. Kortenhorst, Sytze
Koopmans and Winston P. Kortenhorst an aggregate of 803,924, 136,882 and 125,451
options with exercise prices of $2.27, $4.54 and $4.25 per share, respectively,
in exchange for their 811,148, 138,112 and 126,578 options to purchase
depository receipts of Cordena with exercise prices of NLG 3.00, NLG 6.00, and
NLG 7.00 per depository receipt, respectively, in connection with the
acquisition of Cordena. The securities were issued in a private placement in
reliance on Regulation S of the Securities Act.
In October 1999, we granted to the Kortenhorst Vetter Family Trust 39,644
options with an exercise prices of $4.54 per share in exchange for 40,000
options to purchase depository receipts of Cordena with an exercise price of NLG
6.00 per depository receipt in connection with the acquisition of Cordena. The
securities were issued in a private placement in reliance on Section 4(2) of the
Securities Act.
In October 1999, we granted 223,124 options under our 1998 Stock Option
Plan to Mark R. Briggs at an exercise price of $3.50 per share. The securities
were issued in a transaction exempt from Section 5 of the Securities Act
pursuant to Rule 701 under the Securities Act.
In November 1999, we granted 90,789 options under our 1998 Stock Option
Plan to 38 employees at an exercise price of $3.50 per share. The securities
were issued in a transaction exempt from Section 5 of the Securities Act
pursuant to Rule 701 under the Securities Act.
In November 1999, we granted 435,243 options under our 1998 Stock Option
Plan to 50 employees at an exercise price of $5.44 per share. The securities
were issued in a transaction exempt from Section 5 of the Securities Act
pursuant to Rule 701 under the Securities Act.
In December 1999, we granted 198,016 options under our 1998 Stock Option
Plan to 24 employees at an exercise price of $7.78 per share. The securities
were issued in a transaction exempt from Section 5 of the Securities Act
pursuant to Rule 701 under the Securities Act.
In December 1999, we granted 3,215 options under our 1998 Stock Option Plan
to an employee at an exercise price of $11.67 per share. The securities were
issued in a transaction exempt from Section 5 of the Securities Act pursuant to
Rule 701 under the Securities Act.
In December 1999, we granted 32,143 options under our 1998 Stock Option
Plan to an employee at an exercise price of $11.67 per share. The securities
were issued in a transaction exempt from Section 5 of the Securities Act
pursuant to Rule 701 under the Securities Act.
In December 1999, we granted 16,072 options under our 1998 Stock Option
Plan to an employee at an exercise price of $7.78 per share. The securities were
issued in a transaction exempt from Section 5 of the Securities Act pursuant to
Rule 701 under the Securities Act.
In January 2000, we granted 3,215 options under our 1998 Stock Option Plan
an employee at an exercise price of $13.38 per share. The securities were issued
in a transaction exempt from Section 5 of the Securities Act pursuant to Rule
701 under the Securities Act.
In January 2000, we granted 189,332 options under our 1998 Stock Option
Plan to 21 employees at an exercise price of $13.38 per share. The securities
were issued in a transaction exempt from Section 5 of the Securities Act
pursuant to Rule 701 under the Securities Act.
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<PAGE> 208
In January 2000, we granted 32,143 options under our 1998 Stock Option Plan
to an employee at an exercise price of $13.38 per share. The securities were
issued in a transaction exempt from Section 5 of the Securities Act pursuant to
Rule 701 under the Securities Act.
In January 2000, we granted 16,072 options under our 1998 Stock Option Plan
to an employee at an exercise price of $13.38 per share. The securities were
issued in a transaction exempt from Section 5 of the Securities Act pursuant to
Rule 701 under the Securities Act.
In January 2000, we granted 12,858 options under our 1998 Stock Option Plan
to an employee at an exercise price of $13.38 per share. The securities were
issued in a transaction exempt from Section 5 of the Securities Act pursuant to
Rule 701 under the Securities Act.
In February 2000, we granted 12,858 options under our 1998 Stock Option
Plan to an employee at an exercise price of $13.38 per share. The securities
were issued in a transaction exempt from Section 5 of the Securities Act
pursuant to Rule 701 under the Securities Act.
In March 2000, we granted 71,070 options under our 1998 Stock Option Plan
to William Rella at an exercise price of $2.72 as payment of his bonus for 1999.
The securities were issued in a transaction exempt from Section 5 of the
Securities Act pursuant to Rule 701 under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.(1)
2.1 -- Stock Purchase Agreement, dated September 30, 1998, among
Upgrade Corporation of America, Softbank Holdings Inc.,
SB Holdings (Europe) Ltd., CustomerOne Holding
Corporation, and SSG Acquisition Corp.(1)
2.2 -- Share Exchange Agreement, dated December 17, 1998,
between Onex Corporation and CustomerOne Holding
Corporation.(1)
2.3 -- Agreement and Plan of Merger, dated December 17, 1998, by
and among LCS Industries, Inc., CustomerOne Holding
Corporation and Catalog Acquisition Co.(1)
2.4 -- Asset Purchase Agreement, dated March 19, 1999, among
CustomerOne Corporation, Canadian Access Insurance
Services Inc. and the Stockholders of Canadian Access
Insurance Services Inc.(1)
2.5 -- Share Purchase Agreement, dated as of October 7, 1999, by
and among ClientLogic Holding Corporation, ClientLogic
International Holding, Inc., Stichting
Administratiekantoor Cordena Call Management and the
Management Shareholders listed on the signature pages
thereto.(1)
2.6 -- Stock Purchase Agreement, dated October 8, 1999, among
ClientLogic International Holding, Inc., Messrs. Franck
Loubaresse, Laurent Loubaresse, Jacques Loubaresse and
Online Services.(1)
2.7 -- Stock Purchase Agreement, dated December 6, 1999, among
ClientLogic Holding Corporation, MarketVision, Inc.,
Joseph L. Temple, Jr. and S. Dianne Thompson.(1)
3.1 -- Amended and Restated Certificate of Incorporation of
ClientLogic Corporation.(1)
3.2 -- Amended and Restated Bylaws of ClientLogic
Corporation.(1)
3.3 -- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of ClientLogic Corporation,
dated March 27, 2000.(3)
</TABLE>
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<PAGE> 209
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.1 -- Stockholders Agreement, dated October 1, 1998, among
CustomerOne Holding Corporation and the Security Holders
executing signature pages thereto.(1)
4.2 -- Amendment No. 1 to Stockholders Agreement, dated December
21, 1999, among ClientLogic Holding Corporation and the
Security Holders listed on Schedule A thereto.(1)
4.3 -- Amended and Restated Stockholders Agreement regarding
Registration Rights, dated April , 2000, between
ClientLogic Corporation, Onex Holding Property Management
Ltd. and the security holders listed on the signature
pages thereof.(1)
5.1 -- Opinion of Legality of Weil, Gotshal & Manges LLP.(2)
10.1 -- Credit Agreement, dated May 25, 1999, among ClientLogic
Corporation, each of the subsidiaries of ClientLogic
Corporation identified on the signature pages thereto,
Onex CustomerOne Finance LLC, as lender, and Toronto
Dominion (Texas), Inc. as agent. (1)
10.2 -- Credit Agreement, dated May 25, 1999, among ClientLogic
Corporation, each of the subsidiaries of ClientLogic
Corporation identified on the signature pages thereto,
each of the lenders signatory thereto and Toronto
Dominion (Texas), Inc. as agent.(1)
10.3 -- Amendment No. 1 to the Credit Agreement, dated October 4,
1999, among ClientLogic Corporation, each of the
subsidiaries of ClientLogic Corporation identified on the
signature pages thereto, Onex CustomerOne Finance LLC, as
lender, and Toronto Dominion (Texas), Inc. as agent. (1)
10.4 -- Amendment No. 1 to the Credit Agreement, dated October 4,
1999, among ClientLogic Corporation, each of the
subsidiaries of ClientLogic Corporation identified on the
signature pages thereto, each of the lenders signatory
thereto and Toronto Dominion (Texas), Inc. as agent. (1)
10.5 -- Amendment No. 2 to the Credit Agreement, dated September
1, 1999, among ClientLogic Corporation, each of the
subsidiaries of ClientLogic Corporation identified on the
signature pages thereto, Onex CustomerOne Finance LLC, as
lender, and Toronto Dominion (Texas), Inc. as agent. (1)
10.6 -- Amendment No. 2 to the Credit Agreement, dated September
1, 1999, among ClientLogic Corporation, each of the
subsidiaries of ClientLogic Corporation identified on the
signature pages thereto, each of the lenders signatory
thereto and Toronto Dominion (Texas), Inc. as agent. (1)
10.7 -- Amendment No. 3 to the Credit Agreement, dated March 10,
2000, among ClientLogic Corporation, each of the
subsidiaries of ClientLogic Corporation identified on the
signature pages thereto, Onex CustomerOne Finance LLC, as
lender, and Toronto Dominion (Texas), Inc. as agent. (1)
10.8 -- Amendment No. 3 to the Credit Agreement, dated March 10,
2000, among ClientLogic Corporation, each of the
subsidiaries of ClientLogic Corporation identified on the
signature pages thereto, each of the lenders signatory
thereto and Toronto Dominion (Texas), Inc. as agent. (1)
10.9 -- Credit Agreement, dated March 10, 2000, between
ClientLogic Corporation and Toronto Dominion (Texas),
Inc. (1)
10.10 -- Subordination Agreement, dated as of March 10, 2000,
among ClientLogic Corporation, the subsidiary guarantors
party thereto and Toronto Dominion (Texas), Inc. (1)
</TABLE>
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<PAGE> 210
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.11 -- Letter Agreement, dated February 28, 2000, between
Toronto Dominion (Texas), Inc. and ClientLogic
Corporation.(1)
10.12 -- CustomerOne Holding Corporation 1998 Stock Option
Plan.(1)
10.13 -- First Amendment to the CustomerOne Holding Corporation
1998 Stock Option Plan, effective as of June 21, 1999.(1)
10.14 -- Second Amendment to the CustomerOne Holding Corporation
1998 Stock Option Plan, effective as of December 21,
1999.(1)
10.15 -- ClientLogic Holding Corporation Deferred Compensation
Plan.(1)
10.16 -- Cordena Call Management B.V. Stock Option Plan.(1)
10.17 -- Monitoring and Oversight Agreement, effective as of
January 1, 1999, among CustomerOne Holding Corporation,
the subsidiaries party thereto and Onex Service
Partners.(1)
10.18 -- Financial Advisory Agreement, dated May 1, 1999, among
CustomerOne Holding Corporation, the subsidiaries party
thereto and Onex Service Partners.(1)
10.19 -- Indemnification Agreement, dated January 27, 1999, among
CustomerOne Holding Corporation, the subsidiaries party
thereto and Mark R. Briggs.(1)
10.20 -- Indemnification Agreement, dated January 27, 1999, among
CustomerOne Holding Corporation, the subsidiaries party
thereto and Thomas P. Dea.(1)
10.21 -- Indemnification Agreement, dated January 27, 1999, among
CustomerOne Holding Corporation, the subsidiaries party
thereto and Thomas O. Harbison.(1)
10.22 -- Indemnification Agreement, dated January 27, 1999, among
CustomerOne Holding Corporation, the subsidiaries party
thereto and Seth M. Mersky.(1)
10.23 -- Phantom Stock Unit Agreement, dated October 1, 1998,
between Joanne G. Biltekoff and CustomerOne Holding
Corporation.(1)
10.24 -- Phantom Stock Unit Agreement, dated October 1, 1998,
between Mark R. Briggs and CustomerOne Holding
Corporation.(1)
10.25 -- Phantom Stock Unit Agreement, dated October 1, 1998,
between Steven M. Kawalick and CustomerOne Holding
Corporation.(1)
10.26 -- Contingent Securities Purchase Agreement, effective as of
April 1, 1999, between ClientLogic Holding Corporation
and Gene S. Morphis.(1)
10.27 -- Non-Qualified Stock Option Agreement, effective as of
October 1, 1998, between CustomerOne Holding Corporation
and Mark R. Briggs.(1)
10.28 -- Amendment No. 1 to Non-Qualified Stock Option Agreement,
effective as of October 1, 1998, between CustomerOne
Holding Corporation and Mark R. Briggs.(1)
10.29 -- Stock Option Agreement, between ClientLogic Holding
Corporation and Mark R. Briggs.(1)
10.30 -- Stock Option Agreement, between ClientLogic Holding
Corporation and Mark R. Briggs.(1)
10.31 -- Cordena Call Management B.V. Share Issue (Kortenhorst
Warrant Agreement), dated September 21, 1999.(1)
10.32 -- Cordena Call Management B.V. Share Issue (Kortenhorst
Warrant Agreement), dated September 17, 1998.(1)
</TABLE>
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<PAGE> 211
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.33 -- Employment Agreement, dated September 30, 1998, among
ClientLogic Corporation, ClientLogic Operating
Corporation and Mark R. Briggs.(1)
10.34 -- Employment Agreement, dated November 1, 1999, between
ClientLogic Corporation and Julie M. Casteel.(1)
10.35 -- Employment Agreement, dated August 13, 1998, between Onex
Service Partners and Thomas O. Harbison.(1)
10.36 -- Employment Agreement, dated May 4, 1998, between Softbank
Services Group and Steven M. Kawalick.(1)
10.37 -- Employment Agreement, dated January 31, 2000, between
Cordena Call Management B.V. and Jules T. Kortenhorst.(1)
10.38 -- Employment Agreement, dated June 23, 1999, between
ClientLogic Corporation and Jeffrey J. Michel.(1)
10.39 -- Employment Agreement, effective as of April 1, 1999,
between ClientLogic Corporation, ClientLogic Operating
Corporation and Gene S. Morphis.(1)
10.40 -- Employment Agreement, dated August 25, 1997, between
Softbank Services Group Inc. and Lee O. Waters.(1)
10.41 -- Promissory Note, dated October 11, 1999, executed by Lee
O. Waters in favor of ClientLogic Corporation.(1)
10.42 -- Pledge Agreement, dated October 11, 1999, executed by Lee
O. Waters in favor of ClientLogic Holding Corporation.(1)
10.43 -- Promissory Note, dated October 12, 1999, executed by Lee
O. Waters in favor of ClientLogic Corporation.(1)
10.44 -- Pledge Agreement, dated October 12, 1999, executed by Lee
O. Waters in favor of ClientLogic Corporation.(1)
10.45 -- Letter of Agreement, dated March 17, 2000, between
ClientLogic Corporation and Jules T. Kortenhorst.(1)
10.46 -- Promissory Note, dated December 6, 1999 between
MarketVision, Inc. and Joseph L. Temple.(1)
10.47 -- Promissory Note, dated December 6, 1999, between
MarketVision, Inc. and S. Dianne Thompson.(1)
10.48 -- Contingent Promissory Note, dated December 6, 1999,
between MarketVision, Inc. and Joseph L. Temple.(1)
10.49 -- Contingent Promissory Note, dated December 6, 1999,
between MarketVision, Inc. and S. Dianne Thompson.(1)
10.50 -- Third Amendment to the Client Logic Holding Corporation
Stock Option Plan, effective as of March 1, 2000.(1)
10.51 -- Letter Agreement, dated February 23, 1999, between
William R. Rella and ClientLogic Corporation.(1)
10.52 -- ECM Partners II, L.P. Agreement of Limited Partnership,
dated March 1, 2000.(3)
10.53 -- Articles of Amendment of 1293220 Ontario Inc., dated
December 17, 1998 (Exchangeable Preferred Shares
Terms).(3)
10.54 -- Support Agreement, dated December 17, 1998, among
Customer One Holding Corporation, 1293219 Ontario Inc.
and 1293220 Ontario Inc.(3)
</TABLE>
II-10
<PAGE> 212
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.55 -- Default Share Exchange Agreement, dated December 17,
1998, among Customer One Holding Corporation, 1293220
Ontario Inc., Peter A. Berczi, Edward Schwartz and Bruce
Simpson.(3)
21.1 -- Subsidiaries of ClientLogic Corporation(1)
23.1 -- Consent of Weil, Gotshal & Manages LLP (included in the
opinion filed as Exhibit 5.1)
23.2 -- Consent of PricewaterhouseCoopers LLP(3)
23.3 -- Consent of Deloitte & Touche, LLP.(3)
23.4 -- Consent of PricewaterhouseCoopers LLP(3)
23.5 -- Consent of PricewaterhouseCoopers N.V.(3)
23.6 -- Consent of Terry & Stephenson, P.C.(3)
23.7 -- Consent of PricewaterhouseCoopers LLP(3)
24.1 -- Power of Attorney.(1)
27.1 -- Financial Data Schedule.(3)
</TABLE>
- ---------------
(1) Previously filed.
(2) To be filed by amendment.
(3) Filed herewith.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
PAGE NUMBER DESCRIPTION
----------- -----------
<C> <S>
S-1 -- Reports of Independent Public Accountants on Financial
Statement Schedules
S-3 -- Schedule II -- Valuation and Qualifying Accounts
</TABLE>
All other schedules are omitted because the required information is not
present or is not present in the amounts sufficient to require submission of the
schedules, or because the information required is included in the financial
statements and notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the 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 the registrant of expenses incurred or
paid by a director, officer of controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant 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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A
II-11
<PAGE> 213
and contained in a form of prospectus filed by the registrant 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, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-12
<PAGE> 214
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration to be signed on its behalf by the undersigned,
thereunto duly authorized, in Nashville, Tennessee, on April 20, 2000.
CLIENTLOGIC CORPORATION
By: /s/ GENE S. MORPHIS
----------------------------------
Gene S. Morphis,
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board April 20, 2000
- ----------------------------------------------------- (Principal Executive Officer)
Thomas O. Harbison
* President, Chief Executive April 20, 2000
- ----------------------------------------------------- Officer and Chief Operating
Mark R. Briggs Officer and Director
/s/ GENE S. MORPHIS Chief Financial Officer April 20, 2000
- ----------------------------------------------------- (Principal Financial and
Gene S. Morphis Accounting Officer)
* Chief of International April 20, 2000
- ----------------------------------------------------- Operations and Director
Jules T. Kortenhorst
* Director April 20, 2000
- -----------------------------------------------------
Thomas P. Dea
* Director April 20, 2000
- -----------------------------------------------------
Seth M. Mersky
*By: /s/ GENE S. MORPHIS
------------------------------------------------
Gene S. Morphis, Attorney-in-Fact
</TABLE>
II-13
<PAGE> 215
REPORTS OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders
of ClientLogic Corporation
Our report on the financial statements of ClientLogic Corporation at
December 31, 1999 and 1998, and for the year ended December 31, 1999 and the
period from April 28, 1998 through December 31, 1998 is included on page F-3 of
this Form S-1. In connection with our audits of such financial statements, we
have also audited the related financial statement schedules listed on pages S-3
and S-4 of this Form S-1.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PRICEWATERHOUSE COOPERS LLP
PricewaterhouseCoopers LLP
Buffalo, New York
January 29, 2000, except as to Note 20,
for which the date is March 27, 2000, and
as to Note 23, for which the date is April 19, 2000
S-1
<PAGE> 216
REPORTS OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders
of North Direct Response, Inc. ("Predecessor Company")
Our report on the financial statements of North Direct Response, Inc. at
April 27, 1998, and for the period January 1, 1998 through April 27, 1998 and
the year ended December 31, 1997, is included on page F-4 of this Form S-1. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed on page S-3 of this Form S-1.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PRICEWATERHOUSE COOPERS LLP
PricewaterhouseCoopers LLP
Buffalo, New York
January 29, 2000
S-2
<PAGE> 217
SCHEDULE II
CLIENTLOGIC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
($000'S OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO RESERVE AT
BALANCE AT CHARGED TO OTHER DATE OF BALANCE AT
BEGINNING COST AND ACCOUNTS BUSINESS END OF
DESCRIPTION OF PERIOD EXPENSE (DESCRIBE) DEDUCTIONS ACQUISITION PERIOD
- ----------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Predecessor Company
Year ended December 31, 1997:
Allowance for deferred tax
asset........................ $ 28 $ -- $ 150(a) $ -- $ -- $ 178
Period from January 1, 1998 to
April 27, 1998:
Allowance for deferred tax
asset........................ 178 -- 148(a) -- -- 326
- --------------------------------------------------------------------------------------------------------------------
ClientLogic Corporation
Period from April 28, 1998 to
December 31, 1998:
Allowance for deferred tax
asset........................ 326 -- 711(a) -- 7,490 8,527
Year ended December 31, 1999:
Allowance for deferred tax
asset........................ 8,527 (1,170) 1,085(b) -- 2,186 10,628
</TABLE>
- ---------------
(a) Additions to allowance for deferred taxes generated during the period for
which no benefit was recognized, net of true-ups.
(b) Includes additions to allowance for deferred taxes generated during the
period for which no benefit was recognized, net of the reversal of
valuation allowance due to the anticipated distribution of InsLogic in
2000.
S-3
<PAGE> 218
SCHEDULE II
CLIENTLOGIC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
($000'S OF DOLLARS)
<TABLE>
<CAPTION>
RESERVE AT
BALANCE AT CHARGED TO DATE OF BALANCE AT
BEGINNING OF COST AND BUSINESS END OF
DESCRIPTION PERIOD EXPENSE DEDUCTIONS ACQUISITION PERIOD
- ----------- ------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ClientLogic Corporation
Period from April 28, 1998 to December 31, 1998:
Allowance for doubtful accounts............... -- (206) (91) 577 280
Year ended December 31, 1999:
Allowance for doubtful accounts............... 280 2,305 (442) 335 2,478
</TABLE>
S-4
<PAGE> 219
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.(1)
2.1 -- Stock Purchase Agreement, dated September 30, 1998, among
Upgrade Corporation of America, Softbank Holdings Inc.,
SB Holdings (Europe) Ltd., CustomerOne Holding
Corporation, and SSG Acquisition Corp.(1)
2.2 -- Share Exchange Agreement, dated December 17, 1998,
between Onex Corporation and CustomerOne Holding
Corporation.(1)
2.3 -- Agreement and Plan of Merger, dated December 17, 1998, by
and among LCS Industries, Inc., CustomerOne Holding
Corporation and Catalog Acquisition Co.(1)
2.4 -- Asset Purchase Agreement, dated March 19, 1999, among
CustomerOne Corporation, Canadian Access Insurance
Services Inc. and the Stockholders of Canadian Access
Insurance Services Inc.(1)
2.5 -- Share Purchase Agreement, dated as of October 7, 1999, by
and among ClientLogic Holding Corporation, ClientLogic
International Holding, Inc., Stichting
Administratiekantoor Cordena Call Management and the
Management Shareholders listed on the signature pages
thereto.(1)
2.6 -- Stock Purchase Agreement, dated October 8, 1999, among
ClientLogic International Holding, Inc., Messrs. Franck
Loubaresse, Laurent Loubaresse, Jacques Loubaresse and
Online Services.(1)
2.7 -- Stock Purchase Agreement, dated December 6, 1999, among
ClientLogic Holding Corporation, MarketVision, Inc.,
Joseph L. Temple, Jr. and S. Dianne Thompson.(1)
3.1 -- Amended and Restated Certificate of Incorporation of
ClientLogic Corporation.(1)
3.2 -- Amended and Restated Bylaws of ClientLogic
Corporation.(1)
3.3 -- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of ClientLogic Corporation,
dated March 27, 2000.(3)
4.1 -- Stockholders Agreement, dated October 1, 1998, among
CustomerOne Holding Corporation and the Security Holders
executing signature pages thereto.(1)
4.2 -- Amendment No. 1 to Stockholders Agreement, dated December
21, 1999, among ClientLogic Holding Corporation and the
Security Holders listed on Schedule A thereto.(1)
4.3 -- Amended and Restated Stockholders Agreement regarding
Registration Rights, dated April , 2000, between
ClientLogic Corporation, Onex Holding Property Management
Ltd. and the security holders listed on the signature
pages thereof.(1)
5.1 -- Opinion of Legality of Weil, Gotshal & Manges LLP.(2)
10.1 -- Credit Agreement, dated May 25, 1999, among ClientLogic
Corporation, each of the subsidiaries of ClientLogic
Corporation identified on the signature pages thereto,
Onex CustomerOne Finance LLC, as lender, and Toronto
Dominion (Texas), Inc. as agent. (1)
10.2 -- Credit Agreement, dated May 25, 1999, among ClientLogic
Corporation, each of the subsidiaries of ClientLogic
Corporation identified on the signature pages thereto,
each of the lenders signatory thereto and Toronto
Dominion (Texas), Inc. as agent.(1)
</TABLE>
<PAGE> 220
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.3 -- Amendment No. 1 to the Credit Agreement, dated October 4,
1999, among ClientLogic Corporation, each of the
subsidiaries of ClientLogic Corporation identified on the
signature pages thereto, Onex CustomerOne Finance LLC, as
lender, and Toronto Dominion (Texas), Inc. as agent. (1)
10.4 -- Amendment No. 1 to the Credit Agreement, dated October 4,
1999, among ClientLogic Corporation, each of the
subsidiaries of ClientLogic Corporation identified on the
signature pages thereto, each of the lenders signatory
thereto and Toronto Dominion (Texas), Inc. as agent. (1)
10.5 -- Amendment No. 2 to the Credit Agreement, dated September
1, 1999, among ClientLogic Corporation, each of the
subsidiaries of ClientLogic Corporation identified on the
signature pages thereto, Onex CustomerOne Finance LLC, as
lender, and Toronto Dominion (Texas), Inc. as agent. (1)
10.6 -- Amendment No. 2 to the Credit Agreement, dated September
1, 1999, among ClientLogic Corporation, each of the
subsidiaries of ClientLogic Corporation identified on the
signature pages thereto, each of the lenders signatory
thereto and Toronto Dominion (Texas), Inc. as agent. (1)
10.7 -- Amendment No. 3 to the Credit Agreement, dated March 10,
2000, among ClientLogic Corporation, each of the
subsidiaries of ClientLogic Corporation identified on the
signature pages thereto, Onex CustomerOne Finance LLC, as
lender, and Toronto Dominion (Texas), Inc. as agent. (1)
10.8 -- Amendment No. 3 to the Credit Agreement, dated March 10,
2000, among ClientLogic Corporation, each of the
subsidiaries of ClientLogic Corporation identified on the
signature pages thereto, each of the lenders signatory
thereto and Toronto Dominion (Texas), Inc. as agent. (1)
10.9 -- Credit Agreement, dated March 10, 2000, between
ClientLogic Corporation and Toronto Dominion (Texas),
Inc. (1)
10.10 -- Subordination Agreement, dated as of March 10, 2000,
among ClientLogic Corporation, the subsidiary guarantors
party thereto and Toronto Dominion (Texas), Inc. (1)
10.11 -- Letter Agreement, dated February 28, 2000, between
Toronto Dominion (Texas), Inc. and ClientLogic
Corporation.(1)
10.12 -- CustomerOne Holding Corporation 1998 Stock Option
Plan.(1)
10.13 -- First Amendment to the CustomerOne Holding Corporation
1998 Stock Option Plan, effective as of June 21, 1999.(1)
10.14 -- Second Amendment to the CustomerOne Holding Corporation
1998 Stock Option Plan, effective as of December 21,
1999.(1)
10.15 -- ClientLogic Holding Corporation Deferred Compensation
Plan.(1)
10.16 -- Cordena Call Management B.V. Stock Option Plan.(1)
10.17 -- Monitoring and Oversight Agreement, effective as of
January 1, 1999, among CustomerOne Holding Corporation,
the subsidiaries party thereto and Onex Service
Partners.(1)
10.18 -- Financial Advisory Agreement, dated May 1, 1999, among
CustomerOne Holding Corporation, the subsidiaries party
thereto and Onex Service Partners.(1)
10.19 -- Indemnification Agreement, dated January 27, 1999, among
CustomerOne Holding Corporation, the subsidiaries party
thereto and Mark R. Briggs.(1)
10.20 -- Indemnification Agreement, dated January 27, 1999, among
CustomerOne Holding Corporation, the subsidiaries party
thereto and Thomas P. Dea.(1)
10.21 -- Indemnification Agreement, dated January 27, 1999, among
CustomerOne Holding Corporation, the subsidiaries party
thereto and Thomas O. Harbison.(1)
</TABLE>
<PAGE> 221
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.22 -- Indemnification Agreement, dated January 27, 1999, among
CustomerOne Holding Corporation, the subsidiaries party
thereto and Seth M. Mersky.(1)
10.23 -- Phantom Stock Unit Agreement, dated October 1, 1998,
between Joanne G. Biltekoff and CustomerOne Holding
Corporation.(1)
10.24 -- Phantom Stock Unit Agreement, dated October 1, 1998,
between Mark R. Briggs and CustomerOne Holding
Corporation.(1)
10.25 -- Phantom Stock Unit Agreement, dated October 1, 1998,
between Steven M. Kawalick and CustomerOne Holding
Corporation.(1)
10.26 -- Contingent Securities Purchase Agreement, effective as of
April 1, 1999, between ClientLogic Holding Corporation
and Gene S. Morphis.(1)
10.27 -- Non-Qualified Stock Option Agreement, effective as of
October 1, 1998, between CustomerOne Holding Corporation
and Mark R. Briggs.(1)
10.28 -- Amendment No. 1 to Non-Qualified Stock Option Agreement,
effective as of October 1, 1998, between CustomerOne
Holding Corporation and Mark R. Briggs.(1)
10.29 -- Stock Option Agreement, between ClientLogic Holding
Corporation and Mark R. Briggs.(1)
10.30 -- Stock Option Agreement, between ClientLogic Holding
Corporation and Mark R. Briggs.(1)
10.31 -- Cordena Call Management B.V. Share Issue (Kortenhorst
Warrant Agreement), dated September 21, 1999.(1)
10.32 -- Cordena Call Management B.V. Share Issue (Kortenhorst
Warrant Agreement), dated September 17, 1998.(1)
10.33 -- Employment Agreement, dated September 30, 1998, among
ClientLogic Corporation, ClientLogic Operating
Corporation and Mark R. Briggs.(1)
10.34 -- Employment Agreement, dated November 1, 1999, between
ClientLogic Corporation and Julie M. Casteel.(1)
10.35 -- Employment Agreement, dated August 13, 1998, between Onex
Service Partners and Thomas O. Harbison.(1)
10.36 -- Employment Agreement, dated May 4, 1998, between Softbank
Services Group and Steven M. Kawalick.(1)
10.37 -- Employment Agreement, dated January 31, 2000, between
Cordena Call Management B.V. and Jules T. Kortenhorst.(1)
10.38 -- Employment Agreement, dated June 23, 1999, between
ClientLogic Corporation and Jeffrey J. Michel.(1)
10.39 -- Employment Agreement, effective as of April 1, 1999,
between ClientLogic Corporation, ClientLogic Operating
Corporation and Gene S. Morphis.(1)
10.40 -- Employment Agreement, dated August 25, 1997, between
Softbank Services Group Inc. and Lee O. Waters.(1)
10.41 -- Promissory Note, dated October 11, 1999, executed by Lee
O. Waters in favor of ClientLogic Corporation.(1)
10.42 -- Pledge Agreement, dated October 11, 1999, executed by Lee
O. Waters in favor of ClientLogic Holding Corporation.(1)
10.43 -- Promissory Note, dated October 12, 1999, executed by Lee
O. Waters in favor of ClientLogic Corporation.(1)
10.44 -- Pledge Agreement, dated October 12, 1999, executed by Lee
O. Waters in favor of ClientLogic Corporation.(1)
10.45 -- Letter of Agreement, dated March 17, 2000, between
ClientLogic Corporation and Jules T. Kortenhorst.(1)
</TABLE>
<PAGE> 222
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.46 -- Promissory Note, dated December 6, 1999 between
MarketVision, Inc. and Joseph L. Temple.(1)
10.47 -- Promissory Note, dated December 6, 1999, between
MarketVision, Inc. and S. Dianne Thompson.(1)
10.48 -- Contingent Promissory Note, dated December 6, 1999,
between MarketVision, Inc. and Joseph L. Temple.(1)
10.49 -- Contingent Promissory Note, dated December 6, 1999,
between MarketVision, Inc. and S. Dianne Thompson.(1)
10.50 -- Third Amendment to the Client Logic Holding Corporation
Stock Option Plan, effective as of March 1, 2000.(1)
10.51 -- Letter Agreement, dated February 23, 1999, between
William R. Rella and ClientLogic Corporation.(1)
10.52 -- ECM Partners II, L.P. Agreement of Limited Partnership,
dated March 1, 2000.(3)
10.53 -- Articles of Amendment of 1293220 Ontario Inc., dated
December 17, 1998 (Exchangeable Preferred Shares
Terms).(3)
10.54 -- Support Agreement, dated December 17, 1998, among
Customer One Holding Corporation, 1293219 Ontario Inc.
and 1293220 Ontario Inc.(3)
10.55 -- Default Share Exchange Agreement, dated December 17,
1998, among Customer One Holding Corporation, 1293220
Ontario Inc., Peter A. Berczi, Edward Schwartz and Bruce
Simpson.(3)
21.1 -- Subsidiaries of ClientLogic Corporation(1)
23.1 -- Consent of Weil, Gotshal & Manages LLP (included in the
opinion filed as Exhibit 5.1)
23.2 -- Consent of PricewaterhouseCoopers LLP(3)
23.3 -- Consent of Deloitte & Touche, LLP.(3)
23.4 -- Consent of PricewaterhouseCoopers LLP(3)
23.5 -- Consent of PricewaterhouseCoopers N.V.(3)
23.6 -- Consent of Terry & Stephenson, P.C.(3)
23.7 -- Consent of PricewaterhouseCoopers LLP(3)
24.1 -- Power of Attorney.(1)
27.1 -- Financial Data Schedule.(3)
</TABLE>
- ---------------
(1) Previously filed.
(2) To be filed by amendment.
(3) Filed herewith.
<PAGE> 1
EXHIBIT 3.3
STATE OF DELAWARE
PAGE 1
OFFICE OF THE SECRETARY OF STATE
------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "CLIENTLOGIC CORPORATION", FILED IN THIS OFFICE ON THE
TWENTY-SEVENTH DAY OF MARCH, A.D. 2000, AT 4 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
/s/ EDWARD J. FREEL
----------------------------------------
[SEAL] Edward J. Freel, Secretary of State
2948347 8100 AUTHENTICATION: 0342440
001150468 DATE: 03-27-00
<PAGE> 2
[STAMP]
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
CLIENTLOGIC CORPORATION
MARCH 27, 2000
The undersigned, being the Secretary of ClientLogic Corporation, a
Delaware corporation (the "Corporation"), does hereby certify:
FIRST: The name of the Corporation is ClientLogic Corporation.
SECOND: The Amended and Restated Certificate of Incorporation of the
Corporation (the "Amended and Restated Certificate of Incorporation") was
originally filed with the Secretary of State of the State of Delaware on March
1, 2000.
THIRD: On March 27, 2000 the Board of Directors of the Corporation (the
"Board of Directors") duly adopted a resolution setting forth the following
amendments to the Amended and Restated Certificate of Incorporation:
A new SECTION E is hereby added to ARTICLE FOURTH of the Amended
and Restated Certificate of Incorporation to read, in its entirety, as follows:
"SECTION E. Reclassification of Issued and Outstanding Capital Stock.
1. This Certificate of Amendment is intended to, and shall,
effect a reclassification of the issued and outstanding shares of Class A
Common Stock and Class B Common Stock in accordance with the provisions of
this Section E. (for the purposes of this Section E., the
"Reclassification"). Subject to paragraph 2 below, upon this Certificate of
Amendment becoming effective in accordance with Section 103 of the DGCL (for
the purposes of this Section E., the "Effective Time"), each share of Class
A Common Stock, par value $0.01 per share, that was issued and outstanding
immediately prior to the Effective Time shall automatically and without any
action on the part of the holder thereof or any other Person be
reclassified, changed and converted into 0.642857 of a share of Class A
Common Stock, par value $0.01 per share, and each share of Class B Common
Stock, par value $0.01 per share, that was issued and outstanding
immediately prior to the Effective Time shall automatically and without any
action on the part of the holder thereof or any other Person be
reclassified, changed and converted into 0.642857 of a share of Class B
Common Stock, par value $0.01 per share; provided, however, that nothing
contained in this Section
<PAGE> 3
E. shall be construed to reduce the number of shares of stock
which the Corporation shall have authority to issue pursuant
to the first paragraph of ARTICLE FOURTH above.
2. The shares of Class A Common Stock and
Class B Common Stock issuable to any individual stockholder
following the Reclassification shall be aggregated; provided,
that no fractional share of Class A Common Stock or Class B
Common Stock shall be issued to any stockholder as a result of
the Reclassification. If any holder of Class A Common Stock or
Class B Common Stock would, but for the preceding sentence, be
entitled to a fraction of a share of Class A Common Stock or
Class B Common Stock, such stockholder shall be entitled to
receive, in lieu of such fractional share, one whole share of
Class A Common Stock or Class B Common Stock.
3. After the Reclassification, each holder of
the shares of capital stock of the Corporation being
reclassified, changed and converted as provided herein shall
be entitled to receive, upon surrender at the office of the
Corporation or the transfer agent for the Class A Common Stock
or Class B Common Stock of such holder's certificate or
certificates representing the shares being reclassified, duly
endorsed in blank or accompanied by a duly executed proper
instrument of transfer, as promptly as practicable after such
surrender, one or more certificates evidencing the Class A
Common Stock or Class B Common Stock issuable to such holder
in respect of the Reclassification. After the
Reclassification, pending the issuance and delivery of such
certificates in accordance herewith, the certificate or
certificates evidencing the shares of previously outstanding
Class A Common Stock and Class B Common Stock being
reclassified shall be deemed to evidence the shares of Class A
Common Stock or Class B Common Stock, as applicable, issuable
upon the effectiveness of the Reclassification."
FOURTH: The stockholders of the Corporation
executed a written consent in accordance with the provisions of Section
228 of the General Corporation Law of the State of Delaware (the
"DGCL") adopting such amendments.
FIFTH: Said amendments were duly adopted in
accordance with Section 242 of the DGCL.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
2
<PAGE> 4
IN WITNESS WHEREOF, the Corporation has caused this
Certificate of Amendment to be signed pursuant to Section 103(a)(2)
of the DGCL by the undersigned duly authorized officer of the
Corporation as of the date first set forth above.
CLIIENTLOGIC CORPORATION
By: /s/ Gene S. Morphis
--------------------
Name: Gene S. Morphis
------------------
Title: Chief Financial Officer & Secretary
-------------------------------------
3
<PAGE> 1
EXHIBIT 10.52
ECM PARTNERS II, L.P.
(A Delaware Limited Partnership)
AGREEMENT OF LIMITED PARTNERSHIP
--------------------------------
Dated as of March 1, 2000
--------------------------------
i
<PAGE> 2
ECM PARTNERS II, L.P.
AGREEMENT OF LIMITED PARTNERSHIP
This Agreement of Limited Partnership of ECM Partners II, L.P., a Delaware
limited partnership, is made effective as of the 1st day of March, 2000 by ECM
GP LLC, a Delaware limited liability company (the "General Partner"), together
with such other Persons that may hereafter become Partners as provided herein.
ARTICLE 1
DEFINITIONS
The capitalized terms used in this Agreement shall, unless the context otherwise
requires, have the meanings specified in this Article 1.
ACT: means the Delaware Revised Uniform Limited Partnership Act, 6 Del.
C. Section 17-101, et seq., as it may be amended from time to time.
AFFILIATE: means any Person directly or indirectly, through one or more
intermediaries, Controlling, Controlled by, or under common Control with a
Person. The term "CONTROL" as used in the immediately preceding sentence, means,
with respect to a corporation, the right to exercise, directly or indirectly,
more than 50% of the voting rights for the election of a majority of the board
of directors of the Controlled corporation and with respect to any other Person,
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of the Controlled Person.
AGREEMENT: means this Agreement of Limited Partnership, which shall constitute
the limited partnership agreement of the Partnership for purposes of the Act, as
the same may be amended, supplemented, or otherwise modified from time to time.
BUSINESS DAY: means any day other than a Saturday, Sunday and those legal public
holidays specified in 5 U.S.C. Section 6103(a), as it may be amended from time
to time.
CAPITAL ACCOUNT: means, with respect to any Partner, a separate account
established by the Partnership and maintained for each Partner in accordance
with Section 4.6 hereof.
CAPITAL CONTRIBUTION: means the total amount of cash or the agreed Fair Market
Value of property contributed to the Partnership by all the Partners or any one
Partner, as the case may be, as shown on Schedule I, as the same may be amended
from time to time.
CARRIED INTEREST: means "Carried Interest", as defined in the LLC2 Agreement.
2
<PAGE> 3
CERTIFICATE: means the certificate of limited partnership of the Partnership as
filed on March 3, 2000 with the Secretary of State of the State of Delaware, as
amended or restated from time to time in accordance with the Act.
CLIENTLOGIC: ClientLogic Corporation (formerly known as ClientLogic Holding
Corporation), a Delaware corporation and its successors.
CODE: means the United States Internal Revenue Code of 1986, as amended. All
reference herein to sections of the Code shall include any corresponding
provision or provisions of succeeding law.
ELIGIBLE PERSON: means a Person who has the right to inspect the Partnership's
records pursuant to Section 7.2(b) hereof.
FAIR MARKET VALUE: means with respect to any asset, an amount determined in good
faith by the General Partner representing the current market value of such
asset.
FLP: means Harbison Family, L.L.P, a Texas limited liability partnership.
GENERAL PARTNER: means ECM GP LLC, a Delaware limited liability company, and any
other Person which is admitted to the Partnership as a substituted or additional
General Partner.
GROSS ASSET VALUE: means, with respect to any asset, such asset's adjusted basis
for federal income tax purposes, except as follows:
(i) the initial Gross Asset Value of any asset contributed by a Partner
to the Partnership shall be the gross Fair Market Value of such asset (computed
without taking into account Section 7701(g) of the Code);
(ii) the Gross Asset Value of all Partnership assets shall be adjusted,
in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(f) and (g), to equal
their respective gross Fair Market Values (without reduction for liabilities) as
of the following times: (a) the acquisition of an additional Interest by any new
or existing Partner in exchange for more than a de minimis Capital Contribution;
(b) the distribution by the Partnership to a Partner of more than a de minimis
amount of Partnership assets as consideration for an Interest; (c) a
determination by all of the Partners that the initial Gross Asset Value of any
asset contributed by a Partner to the Partnership was incorrectly determined at
the time such asset was so contributed; and (d) the liquidation of the
Partnership within the meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(g);
provided, however, that adjustments pursuant to clause (a) and clause (b) of
this sentence shall be made only if the Partnership reasonably determines that
such adjustments are necessary or appropriate to reflect the relative economic
interests of the Partners in the Partnership; and
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(iii) the Gross Asset Value of any asset distributed to any Partner
shall be the gross Fair Market Value of such asset on the date of distribution
(computed without taking into account Section 7701(g) of the Code), without
reduction for liabilities.
If the Gross Asset Value of an asset has been determined or
adjusted pursuant to paragraph (i) or paragraph (ii) above, such Gross Asset
Value shall thereafter be adjusted by the depreciation taken into account with
respect to such asset for purposes of computing Net Profits and Net Losses.
INTEREST: means all rights and interests of a Partner in the Partnership under
this Agreement and the Act, including (i) the right of a Partner, expressed as a
percentage on Schedule I, to receive distributions of revenues, allocations of
income and loss and distributions of liquidation proceeds under this Agreement,
(ii) the right to a distributive share of the assets of the Partnership; (iii)
the right, if a Limited Partner, to consent to certain actions of the General
Partner as set forth in Section 8.2 of this Agreement, and (iv) the right, if
the General Partner, to participate in the management of the affairs of the
Partnership, together with the obligations of such Partner to comply with all of
the terms and provisions of this Agreement and under the Act.
LIMITED PARTNER: means each Person whose name is set forth on Schedule I hereto
other than the General Partner, and any other Person which is admitted to the
Partnership as a substituted or additional Limited Partner.
LIQUIDATOR: means the Person who supervises the winding up of the Partnership in
accordance with Section 11.2 hereof.
LLC2: means ONEX CLIENTLOGIC HOLDINGS LLC, a Delaware limited liability company.
LLC2 AGREEMENT: means the Amended and Restated Limited Liability Company
Agreement of LLC2 dated as of January 28, 2000, as the same may be amended,
supplemented or otherwise modified from time to time.
MAJORITY-IN-INTEREST: means Limited Partners holding more than fifty percent
(50%) of the total Interests in the Partnership of all of the Limited Partners.
"NET PROFITS" and "NET LOSSES": means, for each fiscal year or portion thereof,
an amount equal to the Partnership's taxable income or loss for such fiscal year
or portion thereof, as determined for federal income tax purposes, and computed
in accordance with Section 703(a) of the Code (for this purpose, all items of
income, gain, loss or deduction required to be separately stated pursuant to
Section 703(a)(1) of the Code shall be included in taxable income or loss),
provided, however, for purposes of computing such taxable income or loss: (i)
any deductions for depreciation, cost recovery or amortization attributable to
any assets of the Partnership shall be determined in accordance with the Code,
except that if the Gross Asset Value of an asset differs from its adjusted tax
basis for federal income tax purposes at any time during such fiscal year, the
deductions for
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<PAGE> 5
depreciation, cost recovery or amortization attributable to such asset from and
after the date during such fiscal year in which such difference first occurs
shall bear the same ratio to the Gross Asset Value as of such date as the
federal income tax depreciation, amortization or other cost recovery deduction
for such fiscal year from and after such date bears to the adjusted tax basis as
of such date; (ii) any gain or loss attributable to the taxable disposition of
any Partnership property shall be determined by the Partnership as if the
adjusted tax basis of such property as of the date of such disposition were such
Gross Asset Value reduced by all amortization, depreciation, and cost recovery
deductions (determined in accordance with clause (a) above) which are
attributable to the property; (iii) the computation of all items of income,
gain, loss, and deduction shall be made without regard to any basis adjustment
under Section 743 of the Code which may be made by the Partnership; (iv) any
receipts of the Partnership that are exempt from federal income tax and are not
otherwise included in taxable income or loss shall be added to such taxable
income or loss; and (v) any expenditures of the Partnership described in Section
705(a)(2)(B) of the Code or treated as expenditures described in Section
705(a)(2)(B) of the Code pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(i)
shall reduce such taxable income or increase such loss. An allocation of Net
Profit or Net Loss to a Partner shall be treated as an allocation to such
Partner of the same share of each item of income, gain, loss, deduction, and
item of tax-exempt income or Section 705(a)(2)(B) expenditure (or item treated
as such expenditure pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(i)) that
is taken into account in computing Net Profit or Net Loss.
NOTIFICATION: means a writing containing any information required by this
Agreement to be communicated to any Person, which may be personally delivered,
sent by registered or certified mail, postage prepaid, or sent by facsimile
transmission promptly confirmed to such Person, at the last known address of
such Person on the Partnership records. Any such notification shall be deemed
given (i) when delivered, in the case of personal delivery, (ii) on the date on
which it is deposited in a regularly maintained receptacle for the deposit of
United States mail addressed and sent as aforesaid, in the case of mail, and
(iii) within the first business hour (being 9:00 a.m. to 5:00 p.m., local time
for the recipient, on any Business Day) after receipt by the addressee, in the
case of facsimile transmission. Any communication containing information sent to
any Person other than as required by the foregoing sentences, but which is
actually received by such Person, shall constitute Notification as of the date
of such receipt for all purposes of this Agreement.
PARTNER: means, at any time, the Persons who then own Interests in the
Partnership, both as General Partner and Limited Partners and have been admitted
as Partners of the Partnership pursuant to this Agreement. The initial Partners
are listed on Schedule I.
PARTNERSHIP: means the limited partnership formed pursuant to this Agreement.
PARTNERSHIP PROPERTY: means all interests, properties and rights of any type
owned by the Partnership, whether owned by the Partnership at the date of its
formation or thereafter acquired.
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PERCENTAGE INTEREST: of a Partner, means such Partner's aggregate Partnership
Interest in the Partnership as set forth on Schedule I hereto, as the same may
be limited pursuant to Section 4.2 hereof, or as modified from time to time as
provided herein.
PERSON: means any natural person, limited liability company, limited liability
partnership, general partnership, joint stock association, limited partnership,
corporation, joint venture, trust, business trust, estate, cooperative,
association or other entity and the heirs, executors, administrators, successors
and permitted assigns of any such Person where the context requires.
REGULATION: means any regulation, including temporary regulations, promulgated
by the United States Department of Treasury with respect to the Code, as such
regulations are amended from time to time, or corresponding provisions of future
regulations.
"SUBSTITUTED PARTNER": means a Transferee of a Partnership Interest who becomes
a Partner pursuant to the terms of Article 9 of this Agreement and succeeds, to
the extent Transferred, to the rights and powers and becomes subject to the
restrictions and liabilities of the Transferor Partner and to the terms of this
Agreement.
TAX ITEMS: means, with respect to any property, all items of profit and loss
(including tax depreciation) recognized by or allowable to the Partnership with
respect to such property, as computed for federal income tax purposes.
"TRANSFER" or "TRANSFERRED": means (a) when used as a verb, to give, sell,
exchange, assign, transfer, pledge, hypothecate, bequeath, devise or otherwise
dispose of or encumber, and (b) when used as a noun, the nouns corresponding to
such verbs, in either case voluntarily or involuntarily, by operation of law or
otherwise. When referring to an Interest, "Transfer" shall mean the Transfer of
such Interest whether of record, beneficially, by participation or otherwise.
VESTED PERCENTAGE: means, as to each Limited Partner other than FLP, the
percentage set forth below opposite the latest date on which such Limited
Partner is (or was) employed by ClientLogic or any Affiliate of ClientLogic,
unless such date is accelerated as provided for below:
<TABLE>
<CAPTION>
DATE VESTED PERCENTAGE
---- -----------------
LIMITED PARTNERS GENE S.
EXCEPT FLP OR GM MORPHIS ("GM")
---------------- --------------
<S> <C> <C>
OCTOBER 1, 1999 APRIL 1, 1999 0%
OCTOBER 1, 2000 APRIL 1, 2000 25%
OCTOBER 1, 2001 APRIL 1, 2001 50%
OCTOBER 1, 2002 APRIL 1, 2002 75%
OCTOBER 1, 2003 APRIL 1, 2003 100%
</TABLE>
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Notwithstanding the foregoing vesting schedule, in the event that (i) LLC2
redeems the Carried Interest for cash or (ii) the Partnership no longer owns any
stock, directly or indirectly in ClientLogic, then on the date either such event
occurs, all of the Limited Partners except FLP shall be deemed to have a vested
Percentage of 100% from that date forward.
ARTICLE 2
ORGANIZATION
2.1 FORMATION OF PARTNERSHIP. The Partners have formed a limited partnership
pursuant to and in accordance with the provisions of the Act. The General
Partner has filed or will file, on behalf of the Partnership, the Certificate.
2.2 NAME. The name of the Partnership is ECM Partners II, L.P. The General
Partner may, in its sole discretion, change the name of the Partnership from
time to time and shall give prompt written notice thereof to the Limited
Partners; provided, however, that such name may not contain any portion of the
name or mark of any Partner without such Partner's consent. In any such event,
the General Partner shall promptly file in the office of the Secretary of State
of the State of Delaware an amendment to the Partnership's Certificate
reflecting such change of name.
2.3 CHARACTER OF BUSINESS. The purpose of the Partnership shall be to engage in
any lawful business as may be conducted by a limited partnership organized under
the laws of the State of Delaware.
2.4 DATE OF DISSOLUTION. The term of the Partnership commenced on the filing of
the Certificate and shall continue in perpetuity or until earlier dissolution
under Article 11 hereof or under the provisions of the Act. The existence of the
Partnership as a separate legal entity shall continue until cancellation of the
Certificate in the manner required by the Act.
2.5 QUALIFICATION. The General Partner of the Partnership is hereby authorized
to qualify the Partnership to do business as a foreign limited partnership in
each state and the General Partner is hereby designated as an "authorized
person" within the meaning of the Act, to execute, deliver and file any
amendments or restatements of the Certificate and any other certificates and any
amendments or restatements thereof necessary for the Partnership to so qualify
to do business in any such state.
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2.6 REGISTERED OFFICE AND AGENT. The name and address of the Partnership's
initial registered agent are Corporation Trust Company, Corporation Trust
Center, 1209 Orange Street, Wilmington, New Castle County, Delaware. The
Partnership's initial principal place of business shall be 8117 Preston Road,
Suite 205, Dallas, Texas 75225. The General Partner may change such registered
agent, registered office, or principal place of business from time to time. The
General Partner shall give prompt written notice of any such change to each
Limited Partner. The Partnership may from time to time have such other place or
places of business within or without the State of Texas as may be determined by
the General Partner.
ARTICLE 3
PARTNERS
3.1 INITIAL PARTNERS. The names and addresses of the initial Partners of the
Partnership are as set forth on Schedule I of this Agreement. At the date
hereof, the sole General Partner of the Partnership is ECM GP LLC and no other
Person has any right to take part in the management of the Partnership.
3.2 ADMISSION OF ADDITIONAL PARTNERS. Subject to the requirements of Section
4.3, additional Partners of the Partnership may be admitted as follows:
(a) If the proposed additional Partner desires to purchase an Interest
from the Partnership, such purchase may be made and the admission of the
additional Partner shall become effective only if the identity of the proposed
additional Partner and the amount of the Capital Contribution to be made by such
proposed additional Partner in exchange for such proposed additional Partner's
Interest is first approved by the General Partner.
(b) If the proposed additional Partner desires to acquire an Interest
in a Transfer from an existing Partner, such Transfer may be made and the
admission of the additional Partner shall become effective only in accordance
with Article 9. All other attempted Transfers of any interest or right, or any
part thereof, in or in respect of the Partnership shall be null and void ab
initio.
3.3 WITHDRAWAL. Except as provided in the immediately following sentence, no
Partner shall have the right to withdraw from the Partnership or to demand a
return of all or any part of its Capital Contribution or such Partner's Capital
Account during the term of the Partnership, and any return of a Partner's
Capital Contribution or Capital Account shall be made solely from the assets of
the Partnership and only in accordance with the terms of this Agreement. If a
Partner makes a Transfer in accordance with Article 9 of all of such Partner's
Partnership Interest and if each of the Transferees of such entire Interest have
been admitted to the Partnership as Substituted Partners as provided in said
Article 9, such Transferring Partner may resign or withdraw from the Partnership
following such admission.
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<PAGE> 9
3.4 REMOVAL OF GENERAL PARTNER.
(a) The General Partner may be removed by a vote of a
Majority-in-Interest of the Limited Partners (and the fact that FLP is an
Affiliate of the General Partner shall in no way impair FLP's right to vote on
any such removal or on the appointment of any successor General Partner) and
will thereafter cease to be the general partner of the Partnership only upon the
occurrence of any one or more of the following events, the General Partner:
(i) shall have all or substantially all of its assets
placed in the hands of a receiver or trustee;
(ii) makes an assignment for the benefit of creditors;
(iii) files a voluntary petition in bankruptcy;
(iv) is adjudicated a bankrupt or insolvent, or has
entered against him an order for relief in any
bankruptcy or insolvency proceeding;
(v) files a petition or answer seeking for itself any
reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation.
(vi) files an answer or other pleading admitting or
failing to contest the material allegations of a
petition filed against it in a proceeding of the type
described in subsection (b) of this Section 3.4;
(vii) seeks, consents to, or acquiesces in the appointment
of a trustee or receiver of it or of all or
substantially all of its assets;
(viii) dissolves and commences winding up its affairs;
(ix) resigns in violation of this Agreement;
(x) withdraws in violation of this Agreement;
(xi) is removed by an event that with the passage of the
specified period becomes an event of withdrawal under
Section 17-402(a)(4) or (5) of the Act (upon such
event the General Partner shall notify each Limited
Partner of the occurrence of the event within thirty
(30) days after the date of the occurrence of the
event of withdrawal); or
(xii) is removed by the vote of a Majority-in-Interest of
the Partnership Interests.
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(b) No removal in Section 3.4(a) shall become effective following the
occurrence of any of the events specified above until a Substituted Partner for
the General Partner has been appointed by a vote of a Majority-in-Interest of
the Limited Partners. Such removed General Partner and the Substituted Partner
for the General Partner shall execute an amendment to the Certificate to reflect
these changes.
ARTICLE 4
CAPITAL CONTRIBUTIONS
4.1 CAPITAL CONTRIBUTIONS TO THE PARTNERSHIP. The Partners shall contribute
capital to the Partnership in the amounts respectively set forth opposite their
names on Schedule I to this Agreement. Such initial Capital Contribution shall
be in the form of cash, property, services rendered, or a promissory note or
other obligation to pay cash or transfer property to the Partnership, as
specified on Schedule I. Schedule I may not be amended without the approval of
the General Partner.
4.2 INTERESTS. Upon making (a) the Capital Contribution specified on Schedule I
with respect to the General Partner and FLP or (b) the election available
pursuant to Section 83(b) of the Code within 30 days from the effective date
hereof with respect to each Limited Partner other than FLP, each Partner shall
own a Percentage Interest equal to the amount set forth opposite such Partner's
name on Schedule I. The Percentage Interest of each Partner may not be reduced
without such Partner's consent except as described below. Likewise, the Vested
Percentage of each Limited Partner other than FLP may not be changed without
such Limited Partners consent unless such Limited Partner ceases to be employed
by ClientLogic or any Affiliate of ClientLogic prior to the time such Limited
Partner's Vested Percentage is 100%. In the event that a Limited Partner ceases
to be employed by ClientLogic or any Affiliate of ClientLogic prior to the time
such Limited Partner's Vested Percentage is 100%, such Limited Partner's
Percentage Interest shall be reduced to an amount equal to the product of (i)
the Percentage Interest set forth opposite such Limited Partner's name on
Schedule I multiplied by (ii) such Limited Partner's Vested Percentage. Any
reduction of a Limited Partner's Percentage Interest shall increase FLP's
Percentage Interest by a like amount (and any Capital Account attributable to
such reduced Percentage Interest shall inure to the benefit of FLP).
4.3 NO FURTHER CAPITAL CONTRIBUTIONS. No Partner shall be obligated to make any
Capital Contribution other than that set forth opposite such Partner's name on
Schedule I. Without the approval of all the Partners, the General Partner shall
not permit or accept any Capital Contributions by any Partner beyond those
specified on Schedule I; provided, further, however, that the General Partner
shall not permit or accept any further Capital Contributions unless FLP shall
have received an opinion from FLP's tax advisor, in form reasonably satisfactory
to FLP, that such further Capital Contribution will not cause FLP to recognize
gain by reason of Section 721(b) of the Code.
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4.4 LOAN.
(a) A Partner may loan funds to the Partnership, or provide guarantees
to or for the benefit of the Partnership, with the consent of, and on such terms
and conditions as may be approved by, the General Partner, and, subject to other
applicable law, have the same rights and obligations with respect thereto as a
Person who is not a Partner. The existence of such a relationship and acting in
such a capacity will not affect the limited liability of a Limited Partner.
(b) No Partner shall be required to guarantee a loan made to the
Partnership. If a Partner guarantees a loan made to the Partnership and is
required to make payment pursuant to such guarantee to the maker of the loan,
then the amounts so paid to the maker of the loan shall be treated as a loan by
such Partner to the Partnership and not as an additional Capital Contribution.
(c) No Partner shall be required to loan funds to the Partnership.
Loans by a Partner to the Partnership shall not be considered Capital
Contributions. The amount of any such loans shall be a debt of the Partnership
owed to such Partner in accordance with the terms and conditions upon which such
loans are made.
(d) If a Partner is a lender, in exercising such Partner's rights as a
lender, including making such Partner's decision whether to foreclose on
property of the Partnership, such lender will have no duty to consider (i) such
Partner's status as a Partner, (ii) the interests of the Partnership, or (iii)
any duty such Partner may have to any other Partner or the Partnership.
4.5 CAPITAL ACCOUNTS.
(a) A Capital Account shall be established and maintained for each
Partner. Each Partner's Capital Account (i) shall be increased by (A) the amount
of money contributed by that Partner to the Partnership, (B) the Gross Asset
Value of property contributed by that Partner to the Partnership (net of
liabilities secured by the contributed property that the Partnership is
considered to assume or take subject to under Section 752 of the Code), and (C)
allocations to that Partner of Partnership income and gain (or items thereof),
including income and gain exempt from tax and income and gain described in
Treas. Reg. Section 1.704-1(b)(2)(iv)(g), but excluding income and gain
described in Treas. Reg. Section 1.704-1(b)(4)(i), and (ii) shall be decreased
by (A) the amount of money distributed to that Partner by the Partnership, (B)
the Gross Asset Value of property distributed to that Partner by the Partnership
(net of liabilities secured by the distributed property that the Partner is
considered to assume or take subject to under Section 752 of the Code), (C)
allocations to that Partner of expenditures of the Partnership described in
Section 705(a)(2)(B) of the Code, and (D) allocations of Partnership loss and
deduction (or items thereof), including loss and deduction described in Treas.
Reg. Section 1.704-1(b)(2)(iv)(g), but excluding items described in clause
(ii)(C) above and loss or deduction described in Treas. Reg. Section
1.704-1(b)(4)(i) or Section 1.704-1(b)(4)(iii). The Partners' Capital Accounts
also shall be maintained and adjusted as permitted by the provisions of Treas.
Reg.
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Section 1.704l(b)(2)(iv)(f) and as required by the other provisions of Treas.
Reg. Sections 1.704-1(b)(2)(iv) and 1.7041(b)(4), including adjustments to
reflect the allocations to the Partners of depreciation, depletion,
amortization, and gain or loss as computed for book purposes rather than the
allocation of the corresponding item as computed for tax purposes, as required
by Treas. Reg. Section 1.704-1(b)(2)(iv)(g). A Partner that has more than one
Interest shall have a single Capital Account that reflects all its Interests,
regardless of the class of Interests owned by that Partner and regardless of the
time or manner in which those Interests were acquired.
(b) On the Transfer of all or part of an Interest, the Capital Account
of the Transferor that is attributable to the transferred Interest or part
thereof shall carry over to the Transferee Partner in accordance with the
provisions of Treas. Reg. Section 1.704-1(b)(2)(iv)(1).
(c) The manner in which Capital Accounts are to be maintained pursuant
to this Section 4.6 is intended to comply with the requirements of Code Section
704(b) and the Regulations and, to the greatest extent practicable, shall be
interpreted in a manner consistent with said Code section and Regulations.
4.6 NEGATIVE CAPITAL ACCOUNTS. At no time during the term of the Partnership or
upon dissolution and liquidation thereof shall a Partner with a negative or zero
balance in such Partner's Capital Account have any obligation to the Partnership
or to the other Partners to restore such negative balance, except as may be
required by law or in respect of any negative balance resulting from a
withdrawal of capital or distribution in contravention of this Agreement.
4.7 USE OF CAPITAL CONTRIBUTIONS. All Capital Contributions shall be held or
expended by the General Partner in furtherance of the purposes of the
Partnership.
ARTICLE 5
ALLOCATIONS AND DISTRIBUTIONS
5.1 Allocations of Net Profits and Net Losses.
(a) The Net Profits and Net Losses shall be allocated to the Partners
as follows:
(i) Partnership Net Profit shall be allocated first, to
the Partners to reverse any Net Losses allocated to
the Partners under Section 5.01(a)(iii) hereof;
second, to GM to the least extent necessary to cause
his positive Capital Account balance to bear the same
ratio to FLP's positive Capital Account balance as
his Percentage Interest bears to FLP's Percentage
Interest; third to the Partners to the least extent
necessary to cause the positive Capital Account
balances of all Partners to be in proportion to their
respective
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Percentage Interests; and thereafter to the Partners
pro rata in accordance with their respective
Percentage Interests;
(ii) Partnership Net Loss shall be allocated to the
Partners pro rata in accordance with their respective
Percentage Interests.
(iii) Notwithstanding anything in Section 5.1(a)(ii) hereof
to the contrary, Net Loss shall not be allocated to
any Partner to the extent such allocation would
create or increase a deficit balance in such
Partner's Capital Account. Any such Net Loss shall be
reallocated among the remaining Partners with
positive balances in their Capital Accounts pro rata
in accordance such positive Capital Account balances.
(iv) In the event any Partner unexpectedly receives any
adjustments, allocations, or distributions described
in Treas. Reg. Section 1.704-l(b)(2)(ii)(d)(4), (5),
or (6), then items of Partnership income and gain
(consisting of a pro rata portion of each item of
Partnership income, including gross income, and gain
for such year and, if necessary, for subsequent
years) shall be specially allocated to the Capital
Account of such Partner in an amount and manner
sufficient to eliminate the deficit balance
referenced in Treas. Reg. Section 1.704-1(b)(2)(ii)(d)
as quickly as possible. It is the Partners' intent
that this Section 5.01(a)(iv) constitute a "qualified
income offset" within the meaning of Treas. Reg.
Section 1.704-1(b)(2)(ii)(d)(3).
(b) All Net Profit or Net Loss allocable to any Interest that may have
been transferred shall be allocated between the Transferor and the Transferee
based on the portion of the calendar year during which each was recognized as
owning that Interest, without regard to the results of Partnership operations
during any particular portion of that calendar year and without regard to
whether cash distributions were made to the Transferor or the Transferee during
that calendar year, provided, however, that this allocation must be made in
accordance with a method permissible under Section 706 of the Code and the
Regulations.
5.2 DETERMINATION OF INCOME AND LOSS. At the end of each fiscal year of the
Partnership, Net Profits and Net Losses shall be determined for the accounting
period then ending and shall be allocated to the Partners in accordance with
Section 5.1.
5.3 ALLOCATION OF TAX ITEMS. Subject to the provisions of Section 704(c) of the
Code and the Regulations thereunder (which the Partners agree shall be applied
using the "Traditional Method"), each Tax Item shall be allocated among the
Partners in the same manner as each correlative item of profit or loss, as
calculated for book purposes, is allocated to the Partners pursuant to Section
5.1 hereof.
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5.4 DISTRIBUTIONS. From time to time, the General Partner in its sole discretion
may cause Partnership Property to be distributed to the Partners, which
distributions must be made pro rata in accordance with each Partner's respective
Percentage Interest. Immediately prior to a distribution of Partnership Property
other than cash, the Capital Accounts of the Partners shall be adjusted as
provided in Treas. Reg. Section 1.704-1(b)(2)(iv)(e). In no event shall any
such distribution be made to any Partner to the extent that such distribution
would cause such Partner to have a negative balance in such Partner's Capital
Account.
5.5 PERSONS ENTITLED TO DISTRIBUTIONS. All distributions of Partnership Property
to the Partners under this Article 5 shall be made to the Persons shown on the
records of the Partnership to be entitled thereto as of the last day of the
fiscal period for which such distribution is to be made, unless the Transferor
and Transferee of any Interest otherwise agree in writing to a different
distribution and such distribution is consented to in writing by the General
Partner.
5.6 INTENT TO COMPLY WITH ALTERNATE TEST FOR ECONOMIC EFFECT. The Partners
intend for this Agreement to comply with the requirements of Treas. Reg. Section
1.704-1(b)(2)(ii)(d)(3) and, as a result, for the allocations under Section 5.1
hereof to be considered to have economic effect within the meaning of the
Regulations under Section 704 of the Code. This Agreement shall be interpreted
in a manner consistent with that intent and may be modified by the General
Partner to the least extent necessary to cause this Agreement to comply with
such requirements.
5.7 MINIMUM GAIN CHARGEBACK. Pursuant to section Treas. Reg. Section 1.704-2(f)
(relating to minimum gain chargebacks), if there is a net decrease in
partnership minimum gain (as such term is defined in Treas. Reg. Section
1.704-2(b)(2)) for such year (or if there was a net decrease in partnership
minimum gain for a prior fiscal year and the Partnership did not have sufficient
amounts of income (including gross income) and gain during prior years to
allocate among the Partners under this Section 5.7), then items of Partnership
income (including gross income) and gain shall be allocated, before any other
allocation is made pursuant to the preceding section of this Article 5 for such
year, to each Partner in an amount equal to such Partner's share of the net
decrease in such partnership minimum gain (as determined under Treas.
Reg. Section 1.704-2(g)(2)).
5.8 PARTNER NONRECOURSE DEBT MINIMUM GAIN CHARGEBACK. Pursuant to section
1.704-2(i)(4) of the Regulations (relating to partner nonrecourse debt minimum
gain chargebacks), if there is a net decrease in partner nonrecourse debt
minimum gain (as such term is defined in section 1.704-2(i)(2) of the
Regulations) for such year (or if there was a net decrease in partner
nonrecourse debt minimum gain for a prior fiscal year and the Partnership did
not have sufficient amounts of income (including gross income) and gain during
prior years to allocate among the Partners under this Section 5.8), then items
of Partnership income (including gross income) and gain shall be allocated,
before any other allocation is made pursuant to the preceding sections of this
Article 5 for such year, to each Partner in an amount equal to such Partner's
share of the net decrease in such partner nonrecourse debt minimum gain (as
determined under Treas. Reg. Section 1.704-2(i)(5)).
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ARTICLE 6
OWNERSHIP OF PARTNERSHIP PROPERTY
6.1 TITLE; RECORDS. Partnership Property shall be deemed to be owned by the
Partnership as an entity, and no Partner, individually or collectively, shall
have any ownership interest in such Partnership Property or any portion thereof.
Title to any or all Partnership Property may be held in the name of the
Partnership or one or more nominees, as the General Partner may determine. All
Partnership Property shall be recorded as the property of the Partnership on its
books and records, irrespective of the name in which legal title to such
Partnership Property is held.
ARTICLE 7
FISCAL MATTERS; BOOKS AND RECORDS
7.1 BANK ACCOUNTS; INVESTMENTS. Capital Contributions, revenues and any other
Partnership funds shall be deposited by the General Partner in a bank account
established in the name of the Partnership, or shall be invested by the General
Partner in furtherance of the purpose of the Partnership. The General Partner
may, in its sole discretion, deposit funds of the Partnership in a central
disbursing account maintained by or in the name of one of the Partners in which
funds of other Persons are also deposited, provided that at all times books of
account are maintained which show the amount of funds of the Partnership on
deposit in such account and interest accrued with respect to such funds is
credited to the Partnership. Funds deposited in the Partnership's bank accounts
may be withdrawn only to be invested in furtherance of the Partnership purpose,
to pay Partnership debts or obligations or to be distributed to the Partners
pursuant to this Agreement.
7.2 RECORDS REQUIRED BY ACT; RIGHT OF INSPECTION.
(a) RECORDS REQUIRED. During the term of the Partnership and for a
period of four (4) years thereafter, the General Partner, at the expense of the
Partnership, shall maintain, or cause to be maintained, in the Partnership's
principal office in the United States specified in Section 2.6 hereof all
records required to be kept pursuant to the Act, including, without limitation,
(i) a current list of the names, addresses and Interests held by each of the
Partners; (ii) copies of federal, state and local information or income tax
returns for each of the Partnership's six (6) most recent tax years; (iii)
copies of this Agreement and the Certificate, including all amendments or
restatements; (iv) if such information is not otherwise set forth in the
Certificate or this Agreement, a written statement of (A) the amount of the cash
Capital Contribution and a description and statement of the agreed Fair Market
Value of any other Capital Contribution made by
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each Partner, and the amount of the cash Capital Contribution and a description
and statement of the agreed Fair Market Value of any other Capital Contribution
that the Partner has agreed to make in the future as an additional Capital
Contribution; (B) the times at which any additional Capital Contributions are to
be made or events requiring Capital Contributions to be made; (C) events
requiring the Partnership to be dissolved and its affairs wound up; and (D) the
date on which each Partner became a Partner of the Partnership; and (v) correct
and complete books and records of account of the Partnership.
(b) RIGHT OF INSPECTION. On written request stating the purpose, a
Partner or an assignee of a Partner's Interest (an "Eligible Person") may
examine and copy in person or by the Eligible Person's representative, at any
reasonable time, for any proper purpose, and at the Eligible Person's expense,
records required to be maintained under the Act and such other information
regarding the business, affairs and financial condition of the Partnership as is
just and reasonable for the Eligible Person to examine and copy. Upon written
request by any Eligible Person made to the General Partner at the address of the
Partnership's principal office in the United States specified in Section 2.6
hereof, the Partnership shall provide to the Eligible Person without charge true
copies of (i) this Agreement and the Certificate and all amendments or
restatements, and (ii) any of the tax returns of the Partnership described
above.
7.3 BOOKS AND RECORDS OF ACCOUNT. The General Partner, at the expense of the
Partnership, shall maintain, or cause to be maintained, for the Partnership
adequate books and records of account that shall be maintained on the cash or
accrual method of accounting and on a basis consistent with appropriate
provisions of the Code, containing, among other entries, a Capital Account for
each Partner.
7.4 TAX RETURNS AND INFORMATION. The Partners intend for the Partnership to be
treated as a partnership for tax purposes. The General Partner shall prepare or
cause to be prepared all federal, state and local income and other tax returns
that the Partnership is required to file. Within the shorter of (a) such period
as may be required by applicable law or regulation, or (b) one hundred twenty
(120) days after the end of each calendar year, the General Partner shall send
or deliver to each Person who was a Partner at any time during such year such
tax information as shall be reasonably necessary for the preparation by such
Person of such Person's federal income tax return and state income and other tax
returns.
7.5 DELIVERY OF FINANCIAL STATEMENTS TO PARTNERS. As to each fiscal year of the
Partnership, the General Partner shall send to each Partner a copy of (a) a
balance sheet of the Partnership as of the end of the fiscal year, (b) an income
statement of the Partnership for such year, and (c) a statement showing the
revenues distributed by the Partnership to Partners in respect of such year.
Such financial statements shall be delivered by no later than one hundred twenty
(120) days following the end of the fiscal year to which the statements apply.
Unless a Partner requests in writing prior to the end of the fiscal year to
which the financial statements apply that the financial statements
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shall be audited (in which case Section 7.6 below shall apply), such statements
need not be audited.
7.6 AUDITS AT REQUEST OF PARTNER. Any Partner shall have the right to have an
audit conducted of the Partnership books, which audit may be requested with
respect to the annual financial statements under Section 7.5 above. The cost of
the audit shall be borne by the Partner or Partners requesting that the audit be
performed or, upon the approval of the General Partner, by the Partnership. The
audit shall be performed by an accounting firm acceptable to the General Partner
and the Partner requesting the audit. Not more than one (1) audit shall be
required by any or all of the Partners for any fiscal year.
7.7 FISCAL YEAR. The Partnership's fiscal year shall end on December 31 of each
calendar year.
7.8 TAX ELECTIONS. The Partnership shall make the following elections on the
appropriate tax returns:
(a) to adopt the calendar year as the Partnership's fiscal year;
(b) to keep the Partnership's books and records on the income-tax
method; and
(c) to elect to amortize the organizational expenses of the Partnership
ratably over a period of sixty (60) months as permitted by Section 709(b) of the
Code.
None of the Partnership, the General Partner or any other Partner may make an
election for the Partnership to be excluded from the application of the
provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar
provisions of applicable state law. If a distribution of Partnership Property as
described in Section 734 of the Code occurs or if a transfer of Interest as
described in Section 743 of the Code occurs, on written request of any Partner,
the Partnership may elect, pursuant to Section 754 of the Code, to adjust the
basis of Partnership Properties. The General Partner may also make any other
election it deems appropriate and in the best interests of the Partners.
7.9 "TAX MATTERS PARTNER". The General Partner shall be the "tax matters
partner" of the Partnership pursuant to Section 6231(a)(7) of the Code. Such
General Partner shall take such action as may be necessary to cause each other
Partner to become a "notice partner" within the meaning of Section 6223 of the
Code. Such General Partner shall inform each other Partner of all significant
matters that may come to its attention in its capacity as "tax matters partner"
by giving notice thereof. Such General Partner may exercise all rights
conferred, and perform all duties, imposed upon the "tax matters partner" under
Sections 6222 through 6232 of the Code and the Regulations.
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ARTICLE 8
MANAGEMENT OF THE PARTNERSHIP
8.1 MANAGEMENT.
(a) The powers of the Partnership shall be exercised by or under the
authority of, and the business and affairs of the Partnership shall be managed
under the direction of, the General Partner. Any Person dealing with the
Partnership, other than a Partner, may rely on the authority of the General
Partner and duly designated officers in taking any action in the name of the
Partnership without inquiry into the provisions or compliance herewith,
regardless of whether that action is actually taken in accordance with the
provisions of this Agreement.
(b) The General Partner may designate one or more individuals as
officers of the Partnership, who shall have such titles and exercise and perform
such powers and duties as shall be assigned to them from time to time by the
General Partner. Officers need not be Partners or the General Partner. Any
officer may be removed by the General Partner at any time, with or without
cause. Each officer shall hold office until his or her successor shall be duly
designated and take office or until the earlier of the officer's death,
resignation or removal. Any number of offices may be held by the same Person.
The salaries or other compensation, if any, of the officers and agents of the
Partnership shall be fixed by the General Partner.
8.2 POWERS OF GENERAL PARTNER. The General Partner shall have no power to cause
the Partnership to do any act outside the purpose of the Partnership as set
forth in Section 2.3 hereof. Subject to the foregoing limitation and all other
limitations in this Agreement, the Certificate or the Act, the General Partner
shall have full, complete and exclusive power to manage and control the
Partnership, and shall have the authority to take any action it deems to be
necessary, convenient or advisable in connection with the management of the
Partnership, including, but not limited to, the power and authority on behalf of
the Partnership:
(a) to expend the Partnership's Capital Contributions and revenues and
to execute and deliver all checks, drafts, endorsements and other orders for the
payment of Partnership funds;
(b) to employ agents, employees, accountants, lawyers, clerical help,
and such other assistance and services as may seem proper, and to pay therefor
such remuneration as the General Partner may deem reasonable and appropriate
from Partnership funds;
(c) to purchase, lease, rent, or otherwise acquire or obtain the use of
office equipment, materials, supplies, and all other lands and types of real or
personal property, and to incur expenses for travel, telephone, telegraph and
for such other things, services and facilities, as may be deemed necessary,
convenient or advisable for carrying on the business of the Partnership;
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(d) to carry, at the expense of the Partnership, insurance of the kinds
and in the amounts that the General Partner deems advisable or make other
arrangements for payment of losses or liabilities to protect the Partnership or
the Partners, General Partner, officers, agents and employees of the Partnership
against loss or liability;
(e) to borrow money from any Person for any Partnership purpose on
whatever terms and conditions the General Partner deems advisable, to enter into
any guarantees, to obligate the Partnership to repay the borrowed money, and in
connection therewith, to encumber or hypothecate Partnership Property as
security for such repayment by mortgage, deed of trust, pledge or otherwise;
(f) to sell, transfer, assign, dispose of trade, exchange, quitclaim,
surrender, release or abandon Partnership Property, or any interests therein, to
any Person, including the General Partner or its affiliates, and in connection
therewith to receive such consideration as it deems fair and in the best
interests of the Partnership;
(g) to sue and be sued, complain and defend in the name and on behalf
of the Partnership;
(h) to do all acts, take part in any proceedings, and exercise all
rights and privileges as could an absolute owner of Partnership Property,
subject to the limitations expressly stated in this Agreement and the faithful
performance of the General Partner's fiduciary obligations to the Partnership
and the Limited Partners;
(i) in the exercise of any of the foregoing powers, to negotiate,
execute and perform, on any terms deemed desirable in the General Partner's sole
discretion, such agreements, contracts, leases, instruments and other documents
as the General Partner shall from time to time approve in accordance with, and
subject to, the terms of this Agreement;
(j) in connection with certain tax matters described in that certain
letter agreement dated as of __________, 2000 from Onex ClientLogic LLC to FLP
(the "Tax Letter"), (i) to accept an assignment of FLP's rights under the Tax
Letter to the Partnership, including, without limitation, the right to receive
(A) certain nonrecourse loans from Onex ClientLogic LLC on the terms and
conditions described therein, in the event income is allocated with respect to
the Carried Interest without a corresponding distribution of cash and (B)
certain reimbursement rights for any penalties and interest incurred with
respect to ownership of the Carried Interest in the event income is allocated
with respect to the Carried Interest without a corresponding distribution of
cash and (ii) to extend the benefits of the Tax Letter to the Partners by making
pass-through nonrecourse loans to the Partners, in the event income is allocated
to the Partners without a corresponding distribution of cash on substantially
the same terms and conditions as those contained in the underlying loan(s) to
the Partnership in an amount sufficient to allow each Partner to pay such
Partner's actual tax liability; and
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(k) to take such other action and perform such other acts as the
General Partner deems necessary, convenient or advisable in carrying out the
business of the Partnership.
The enumeration of powers in this Agreement shall not limit
the general or implied powers of the General Partner or any additional powers
provided by law.
Notwithstanding the foregoing, the General Partner may not
cause the Partnership to do any of the following without the consent of a
Majority-in-Interest of the Limited Partners:
(a) Purchase any real property;
(b) Sell any real property owned by the Partnership;
(c) Merge with or into another Person, regardless of
whether the Partnership is the surviving entity of
such merger;
(d) Reorganize the Partnership;
(e) Take any action in contravention of this Agreement,
the Act or the Certificate;
(f) Make an assignment for the benefit of creditors of
the Partnership or file a voluntary petition under
the federal bankruptcy code or any state insolvency
law on behalf of the Partnership;
(g) Confess any judgment against the Partnership;
(h) Admit a Person as a substitute or additional General
Partner; or
(i) Do any act that would make it impossible to carry on
the normal and ordinary business of the Partnership.
8.3 IDENTITY OF GENERAL PARTNER. The identity of the General Partner of the
Partnership shall be as provided in this Agreement.
8.4 OTHER BUSINESS. The Partners (including the General Partner) may engage in
or possess an interest in other business ventures (unconnected with the
Partnership) of every kind and description, independently or with others,
including, without limitation, serving as general partner of other limited
partnerships and participating in businesses competitive with that of the
Partnership. Neither the Partnership nor the Partners shall have any rights in
or to such independent ventures or the income or profits therefrom.
8.5 POWER OF ATTORNEY. Each Partner hereby appoints the General Partner (and any
Liquidator) as that Partner's attorney-in-fact for the purpose of executing,
swearing to, acknowledging, and delivering all certificates, documents, and
other instruments as may be necessary, appropriate, or advisable in the judgment
of the General Partner (or the
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Liquidator) in furtherance of the business of the Partnership or complying with
applicable law. This power of attorney is irrevocable and is coupled with an
interest. On request by the General Partner (or the Liquidator), a Partner shall
confirm such Partner's grant of this power of attorney or any use thereof by the
General Partner (or the Liquidator) and shall execute, swear to, acknowledge,
and deliver any such certificate, document, or other instrument.
8.6 STATUS OF LIMITED PARTNER.
(a) The Limited Partners shall not be bound by, or personally liable
for, the expenses, liabilities or obligations of the Partnership, except as
provided in the Act. The Limited Partners shall not be required or obligated to
make contributions of any sort whatsoever to the capital of the Partnership in
excess of their initial Capital Contribution, if any; provided, however, that a
Limited Partner receiving a distribution shall be liable to the Partnership to
the extent provided by the Act.
(b) To the extent the Limited Partners exercise rights with respect to
material matters relating to the Partnership or its affairs, or otherwise
exercise rights in relation to the Partnership, such powers shall be exercised
under and in conformity with the provisions of the Act and this Agreement so as
not to constitute taking part in the control of the business of the Partnership.
8.7 EXPENSES. The General Partner shall cause the Partnership to pay all
expenses (including legal and administrative costs and expenses) of the
Partnership, including, without limitation, the reimbursement of any expenses
incurred by the General Partner in the performance of its duties hereunder.
ARTICLE 9
RIGHTS, POWERS, AND OBLIGATIONS OF PARTNERS
9.1 AUTHORITY, LIABILITY TO THIRD PARTIES. No Partner (other than the General
Partner or an officer) has the authority or power to act for or on behalf of the
Partnership, to do any act that would be binding on the Partnership, or to incur
any expenditures on behalf of the Partnership. No Partner (including the General
Partner) shall be liable in connection with this Agreement to the Partnership
for any consequential or indirect loss or damage, including loss of revenues,
cost of capital, loss of goodwill, loss of "benefit of the bargain" or any other
special or incidental damages. Neither shall any Partner (including the General
Partner) be liable for the debts, obligations or liabilities of the Partnership,
including a judgment decree or order of a court, except as set forth in the Act.
9.2 TRANSFERS OF INTERESTS. A Partner may make a Transfer of such Partner's
Interest, in whole or in part, only upon compliance with the following
procedure:
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(a) The Transferor Partner or the Transferee must file with the
Partnership a written and dated instrument of such Transfer, in form and
substance reasonably satisfactory to the General Partner, executed by both the
Transferor and the Transferee, which instrument shall (i) contain the acceptance
by the Transferee of all of the terms and provisions of this Agreement, to the
extent applicable to an assignee of an Interest; (ii) contain such
representations as the General Partner may deem necessary or advisable to assure
that such Transfer need not be registered under any applicable federal or state
securities laws; (iii) instruct the General Partner as to the Interest
transferred and to whom and at what address Partnership distributions and
Notifications in respect of such Interest should henceforth be sent; and (iv)
contain any information required under the Code that is requested by the General
Partner.
(b) Unless expressly waived by the General Partner, the Transferor or
Transferee shall deliver to the Partnership an opinion of counsel acceptable to
the General Partner that (i) such Transfer is exempt from the registration
requirements of the Securities Act of 1933, as amended, applicable state
securities laws, and any rules or regulations promulgated thereunder, and will
not otherwise cause the Partnership to be in violation of such laws and
regulations; (ii) the Transfer will not result in a termination of the
Partnership for purposes of Section 708 of the Code; (iii) the Transfer will not
result in the Partnership being taxed as an association taxable as a corporation
under Section 7701 of the Code; and (iv) the Transfer will not result in the
loss of the limited liability of a Limited Partner under the Act.
(c) The Transferor Partner and the Transferee shall have received a
written acknowledgment from the General Partner that the Transfer has been
approved by (i) the General Partner, if the Interest to be Transferred is owned
by a Limited Partner, or (ii) a Majority-in-Interest of the Limited Partners, if
the Interest to be Transferred is owned by the General Partner; provided,
however, that the Interest of any individual Partner shall be transferable
without such approval if both of the following factors apply: (x) such Transfer
occurs by reason of the death of the Partner and each Transferee is a member of
such Partner's immediate family (i.e., spouse, parent or child of such Partner),
or a trust, corporation or other entity controlled by or for the benefit of such
Partner or members of such Partner's immediate family, and (y) each Transferee
otherwise complies with the provisions of paragraphs (a) and (b) of this Section
9.2 (except that the instrument described in Section 9.2(a) need not be executed
by the Transferor Partner).
9.3 EFFECT OF TRANSFER OF INTEREST. A Transfer of an Interest pursuant to
Section 9.2 above does not entitle the Transferee to become, or to exercise
rights or powers of, a Substituted Partner. A Transfer only entitles the
Transferee to receive cash distributions and allocations of Partnership profits
and losses to the extent of the Interest to be Transferred; provided, however,
that any Transfer of an Interest that would result in the Partnership becoming a
publicly traded partnership taxable as a corporation will not be recognized by
the Partnership and the Transferee will not be entitled to any distributions
hereunder. Until the Transferee is admitted as a Substituted Partner pursuant to
Section 9.4 below, the Transferor Partner shall continue to be a Partner and to
be entitled to exercise any rights or powers of a Partner with respect to the
Interest Transferred.
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9.4 SUBSTITUTED PARTNER. No Transferee of a Partnership Interest shall become a
Substituted Partner within the meaning of the Act unless:
(a) The General Partner (or in the case of a Transfer by the General
Partner of its General Partner's Partnership Interest, a Majority-in-Interest of
the Limited Partners) gives prior express written consent; and
(b) The Transferee elects in writing to become a Substituted Partner
and executes and acknowledges such other instruments as the General Partner
deems necessary or advisable (or, in the case of a Transfer by the General
Partner of its General Partner Partnership Interest, such instruments as the
Majority-in-Interest of Limited Partners deem necessary or advisable) to effect
the admission of such Person as a Substituted Partner, including without
limitation, written acceptance and adoption by such Person of all of the
provisions of this Agreement.
9.5 Legal Counsel. Each Limited Partner hereby agrees and acknowledges that:
(a) the General Partner has retained Weil, Gotshal & Manges LLP in
connection with the formation of the Partnership and may in the future retain
Weil, Gotshal & Manges LLP in connection with the operation of the Partnership,
including making, holding and disposing of Interests.
(b) Weil, Gotshal & Manges LLP have not represented and will not
represent the Limited Partners in connection with the formation of the
Partnership, the offering of Interests, the management and operation of the
Partnership, or any dispute which may arise between the Limited Partners on one
hand and the General Partner and/or the Partnership on the other hand (the
"Partnership Legal Matters"). Each Limited Partner will, if it wishes counsel on
a Partnership Legal Matter, retain such Limited Partner's own independent
counsel with respect thereto and will pay all fees and expenses of such
independent counsel.
(c) each Limited Partner hereby agrees that Weil, Gotshal & Manges LLP
may represent the General Partner and the Partnership in connection with any and
all Partnership Legal Matters (including any dispute between the General Partner
and/or one or more Limited Partners) and waives any present or future conflict
of interest with Weil, Gotshal & Manges LLP based solely on the representation
of the General Partner and the Partnership by Weil, Gotshal & Manges LLP and
such Limited Partners' status as a Limited Partner of the Partnership.
ARTICLE 10
MEETINGS OF PARTNERS
10.1 ANNUAL MEETINGs. The General Partner shall hold a general informational
meeting for the Partners each year at such time and on such date, as it deems
appropriate. The General Partner shall provide all Partners with at least thirty
(30) days notice of each
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annual meeting. To the extent reasonably practicable, Partners may participate
in each annual meeting by telephone. At the meeting of the Partners, the General
Partner shall adopt such rules for the conduct of such meeting as it shall deem
appropriate. The expenses of any such meeting, including the cost of providing
Notification thereof, shall be borne by the Partnership.
10.2 PROXY. A Partner may authorize any Person or Persons to act for such
Partner by proxy in all matters in which a Partner is entitled to participate.
Every proxy must be signed by such Partner or such Partner's attorney-in-fact
(other than the General Partner). No proxy shall be valid after the expiration
of six (6) months from the date thereof. Every proxy shall be revocable by the
Partner executing it.
10.3 WRITTEN CONSENTS. Whenever Partners are required or permitted to take any
action by vote or at a meeting, such action may be taken without a meeting and
without a vote if a written consent setting forth the action so taken is signed
by the Partners owning not less than the minimum number of Interests that would
be necessary to authorize or take such action by vote or at a meeting.
Notification of any action to be so taken by written consent shall be given by
the General Partner to all Partners, promptly after the taking of such action.
ARTICLE 11
DISSOLUTION AND WINDING UP
11.1 EVENTS CAUSING DISSOLUTION. The Partnership shall be dissolved upon the
first of the following events to occur:
(a) the written consent of a Majority-in-Interest of the Partners at
any time to dissolve and wind up the affairs of the Partnership;
(b) the sale, Transfer or other disposition of substantially all of the
assets of the Partnership and the receipt and distribution of all the proceeds
therefrom;
(c) the withdrawal of the General Partner pursuant to Section 3.4
hereof prior to the appointment of a Substituted Partner for the General Partner
in accordance with Article 9 or Section 3.4(b) hereof; and
(d) the occurrence of any other event that causes the dissolution of a
limited partnership under the Act.
11.2 WINDING UP. If the Partnership is dissolved pursuant to Section 11.1, the
Partnership's affairs shall be wound up as soon as reasonably practicable in the
manner set forth below.
(a) The winding up of the Partnership's affairs shall be supervised by
a Liquidator. The Liquidator shall be the General Partner or, if the Partners
prefer, a
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liquidator selected by a Majority-in-Interest of the Limited Partners (each, a
"Liquidator").
(b) In winding up the affairs of the Partnership, the Liquidator shall
have full right and unlimited discretion, for and on behalf of the Partnership:
(i) to prosecute and defend civil, criminal or
administrative suits;
(ii) to collect Partnership assets, including obligations
owed to the Partnership;
(iii) to settle and close the Partnership's business;
(iv) to dispose of and convey all Partnership Property for
cash, and in connection therewith to determine the
time, manner and terms of any sale or sales of
Partnership Property, having due regard for the
activity and condition of the relevant market and
general financial and economic conditions;
(v) to pay all reasonable selling costs and other
expenses incurred in connection with the winding up
out of the proceeds of the disposition of Partnership
Property;
(vi) to discharge the Partnership's known liabilities and,
if necessary, to set up, for a period not to exceed
five (5) years after the date of dissolution, such
cash reserves as the Liquidator may deem reasonably
necessary for any contingent or unforeseen
liabilities or obligations of the Partnership;
(vii) to distribute any remaining proceeds from the sale of
Partnership Property to the Partners;
(viii) to prepare, execute, acknowledge and file a
certificate of cancellation under Section 17-203 of
the Act and any other certificates, tax returns or
instruments necessary or advisable under any
applicable law to effect the winding up and
termination of the Partnership; and
(ix) to exercise, without further authorization or consent
of any of the Partners or their legal representatives
or successors in interest, all of the powers
conferred upon the General Partner under the terms of
this Agreement to the extent necessary or desirable
in the good faith judgment of the Liquidator to
perform the Liquidator's duties and functions. The
Liquidator (if not the General Partner) shall not be
liable as a General Partner to the Partners and
shall, while acting in such capacity on behalf of the
Partnership, be entitled to the indemnification
rights set forth in the Certificate and in Article 12
hereof.
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11.3 COMPENSATION OF LIQUIDATOR. The Liquidator appointed as provided herein
shall be entitled to receive such reasonable compensation for the Liquidator's
services as shall be agreed upon by the Liquidator and a Majority-in-Interest of
the Limited Partners.
11.4 DISTRIBUTION OF PARTNERSHIP PROPERTY AND PROCEEDS OF SALE THEREOF.
(a) Upon completion of all desired sales of Partnership Property, and
after payment of all selling costs and expenses, the Liquidator shall distribute
the proceeds of such sales, and any Partnership Property that is to be
distributed in kind, to the following groups in the following order of priority:
(i) to the extent permitted by law, to satisfy
Partnership liabilities to creditors, including
Partners who are creditors (other than for past due
Partnership distributions), of the Partnership,
whether by payment or establishment of reserves; and
(ii) to the Partners, in accordance with the positive
balances in their respective Capital Accounts.
(b) The claims of each priority group specified above shall be
satisfied in full before satisfying any claims of a lower priority group. If the
assets available for disposition are insufficient to dispose of all of the
claims of a priority group, the available assets shall be distributed in
proportion to the amounts owed to each creditor or the respective Capital
Account balances or Percentage Interests of each Partner in such group.
11.5 FINAL AUDIT. Within a reasonable time following the completion of the
liquidation, the Liquidator shall supply to each of the Partners a statement
which shall set forth the assets and the liabilities of the Partnership as of
the date of complete liquidation and each Partner's pro rata portion of
distributions pursuant to Section 11.4.
11.6 DEFICIT CAPITAL ACCOUNTS. Notwithstanding anything to the contrary
contained in this Agreement, and notwithstanding any custom or rule of law to
the contrary, to the extent that the deficit, if any, in the Capital Account of
any Partner results from or is attributable to deductions and losses of the
Partnership (including non-cash items such as depreciation), or distributions of
money pursuant to this Agreement to all Partners in proportion to their
respective Percentage Interests, upon dissolution of the Partnership such
deficit shall not be an asset of the Partnership and such Partner shall not be
obligated to contribute such amount to the Partnership to bring the balance of
such Partner's Capital Account to zero.
11.7 NO ACTION FOR DISSOLUTION. The Partners acknowledge that irreparable damage
would be done to the goodwill and reputation of the Partnership if any Partner
should
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bring an action in court to dissolve the Partnership under circumstances where
dissolution is not required by Section 11.1. Accordingly, except where the
Liquidator has failed to liquidate the Partnership as required by this Article
11 and except as specifically provided in Section 17-802 and Section 17-803(a)
of the Act, each Partner hereby to the fullest extent permitted by law waives
and renounces such Partner's right to initiate legal action to seek dissolution
of the Partnership or to seek appointment of a receiver or trustee to wind up
the affairs of the Partnership, except in cases of fraud, violation of law, bad
faith, gross negligence, willful misconduct or willful violation of this
Agreement.
ARTICLE 12
INDEMNIFICATION AND INSURANCE
12.1 EXCULPATION. Neither the General Partner nor any affiliate of the General
Partner, nor any officer, director, employee, agent, stockholder, partner,
manager or member of the General Partner or any of its affiliates, shall be
liable, responsible, or accountable in damages or otherwise to the Partnership
or any Partner by reason of, or arising from, the operations, business, or
affairs of, or any action taken or failure to act on behalf of, the Partnership,
except to the extent that any of the foregoing is determined, by a final,
nonappealable order of a court of competent jurisdiction, to have been primarily
caused by the gross negligence or willful misconduct of the Person claiming
exculpation.
12.2 INDEMNIFICATION AND ADVANCE OF EXPENSES. The Partnership shall indemnify
the General Partner, each affiliate of the General Partner, and each officer,
director, stockholder, manager, member, partner, employee, or agent of the
General Partner or any of its affiliates, against any claim, loss, damage,
liability, or expense (including reasonable attorneys' fees, court costs, and
costs of investigation and appeal) suffered or incurred by any such indemnitee
by reason of, or arising from, the operations, business, or affairs of, or any
action taken of failure to act on behalf of, the Partnership, except to the
extent any of the foregoing (a) is determined by final, nonappealable order of a
court of competent jurisdiction to have been primarily caused by the gross
negligence or willful misconduct of the Person claiming indemnification or (b)
is suffered or incurred as a result of any claim (other than a claim for
indemnification under this Agreement) asserted by the indemnitee as plaintiff
against the Partnership. Unless a determination has been made (by final,
nonappealable order of a court of competent jurisdiction) that indemnification
is not required, the Partnership shall, upon the request of any indemnitee,
advance or promptly reimburse such indemnitee's reasonable costs of
investigation, litigation, or appeal, including reasonable attorneys' fees;
provided, however, that the affected indemnitee shall, as a condition of such
indemnitee's right to receive such advances and reimbursements, undertake in
writing to repay promptly the Partnership for all such advancements or
reimbursements if a court of competent jurisdiction determines that such
indemnitee is not then entitled to indemnification under this Section 12.2. No
Partner shall be required to contribute capital in respect of any
indemnification claim under this Section 12.2 unless otherwise provided in any
other written agreement to which such Partner is a party.
27
<PAGE> 28
12.3 INSURANCE. The Partnership may purchase and maintain insurance on behalf of
any Person who is or was a Partner, officer, employee or agent of the
Partnership, or is or was serving at the request of the Partnership as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
Person and incurred by such Person in any such capacity, or arising out of such
Person's status as such, whether or not the Partnership would have the power to
indemnify such Person against such liability under the provisions of Section
12.2 or otherwise.
12.4 LIMIT ON LIABILITY OF PARTNERS. The indemnification set forth in and
insurance allowed under this Article 12 shall in no event cause the Partners to
incur any personal liability beyond their total Capital Contributions, nor shall
it result in any liability of the Partners to any third party.
ARTICLE 13
MISCELLANEOUS PROVISIONS
13.1 ENTIRE AGREEMENT. This Agreement and the Certificate constitutes the entire
agreement among the Partners relating to the subject matter hereof and all prior
agreements relative hereto which are not contained herein are terminated.
13.2 LAW GOVERNING. This Agreement shall be governed by and construed in
accordance with the local, internal laws of the State of Delaware. In
particular, this Agreement is intended to comply with the requirements of the
Act and the Certificate. In the event of a direct conflict between the
provisions of this Agreement and the mandatory provisions of the Act or any
provision of the Certificate, the Act and the Certificate, in that order of
priority, will control.
13.3 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall
inure to the benefit of the Partners and their respective heirs, legal
representatives, successors and permitted assigns.
13.4 SEVERABILITY. This Agreement is intended to be performed in accordance
with, and only to the extent permitted by, all applicable laws, ordinances,
rules and regulations. If any provision of this Agreement or the application
thereof to any Person or circumstance shall, for any reason and to any extent,
be invalid or unenforceable, but the extent of such invalidity or
unenforceability does not destroy the basis of the bargain among the Partners as
expressed herein, the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected thereby, but
rather shall be enforced to the greatest extent permitted by law.
13.5 AMENDMENT. Except as expressly provided herein, this Agreement may be
amended by action of the General Partner.
28
<PAGE> 29
13.6 HEADINGS. The Article and Section headings appearing in this Agreement are
for convenience only and are not intended, to any extent or for any purpose, to
limit or define the text of any Article or Section.
13.7 CONSTRUCTION. Whenever required by the context, as used in this Agreement,
the singular number shall include the plural, and vice versa, and the gender of
all words used shall include the masculine, feminine and the neuter. Unless
expressly stated herein, all references to Articles and Sections refer to
articles and sections of this Agreement, and all references to Schedules are to
schedules attached hereto, each of which is made a part hereof for all purposes.
13.8 OFFSET. Whenever the Partnership is to pay any sum to any Partner, any
amounts that Partner owes the Partnership may be deducted from that sum before
payment.
13.9 EFFECT OF WAIVER OR CONSENT. A waiver or consent, express or implied, to or
of any breach or default by any Person in the performance by that Person of that
Person's obligations with respect to the Partnership is not a consent or waiver
to or of any other breach or default in the performance by that Person of the
same or any other obligations of that Person with respect to the Partnership.
Failure on the part of a Person to complain of any act of any Person or to
declare any Person in default with respect to the Partnership, irrespective of
how long that failure continues, does not constitute a waiver by that Person of
that Person's rights with respect to that default until the applicable
statute-of-limitations period has run.
13.10 FURTHER ASSURANCES. In connection with this Agreement and the transactions
contemplated hereby, each Partner shall execute and deliver any additional
documents and instruments and perform any additional acts that may be necessary
or appropriate to effectuate and perform the provisions of this Agreement and
those transactions.
13.11 WAIVER OF CERTAIN RIGHTS. Each Partner irrevocably waives any right such
Partner may have to maintain any action for partition of the Partnership
Property.
13.12 COUNTERPARTS AND BINDING EFFECT. This Agreement may be executed in one or
more counterparts, each of which shall be an original, but all of which taken
together shall constitute a single document. This Agreement shall be binding
upon each Partner upon adoption by the initial General Partner as evidenced by
their signatures below, regardless of whether any Partner has executed the same
or any counterpart thereof.
13.13 NO THIRD PARTY RIGHTS. Except as otherwise provided in this Agreement,
none of the provisions contained in this Agreement shall be for the benefit of
or enforceable by any third parties, including creditors of the Partnership.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
29
<PAGE> 30
IN WITNESS WHEREOF, the undersigned have executed this
instrument effective as of March 1, 2000.
GENERAL PARTNER:
ECM GP LLC, a Delaware limited liability company
By: Harbison Family, L.L.P.,
a Texas limited liability partnership, its sole
Member
By: /s/ THOMAS O. HARBISON
------------------------------------------------
Thomas O. Harbison, Trustee under the
Thomas O. Harbison Living Trust, its
general partner
LIMITED PARTNERS:
HARBISON FAMILY, L.L.P., a Texas limited
liability partnership
By: /s/ THOMAS O. HARBISON
------------------------------------------------
Thomas O. Harbison, Trustee under the
Thomas O. Harbison Living Trust, its
general partner
/s/ GENE S. MORPHIS
---------------------------------------------------
Gene S. Morphis
/s/ LEE O. WATERS
---------------------------------------------------
Lee O. Waters
/s/ JOANNE G. BILTEKOFF
---------------------------------------------------
Joanne G. Biltekoff
/s/ ROBERT A. FETTER
---------------------------------------------------
Robert A. Fetter
/s/ JEFFREY MICHEL
---------------------------------------------------
Jeffrey Michel
30
<PAGE> 31
/s/ JULIE M. CASTEEL
---------------------------------------------------
Julie M. Casteel
/s/ SANDRA S. BUSH
---------------------------------------------------
Sandra S. Bush
/s/ MELISSA J. BAILEY
---------------------------------------------------
Melissa J. Bailey
/s/ STEVEN M. KAWALICK
---------------------------------------------------
Steven M. Kawalick
/s/ MARK R. BRIGGS
---------------------------------------------------
Mark R. Briggs
31
<PAGE> 32
SCHEDULE I
Agreement of Limited Partnership
of
ECM PARTNERS II, L.P.
<TABLE>
<CAPTION>
INITIAL CAPITAL
PARTNER AND ADDRESS CONTRIBUTIONS PERCENTAGE INTERESTS
- ------------------------------------------------ ------------------------- ----------------------
(in U.S. dollars)
<S> <C> <C>
GENERAL PARTNER 1% of Carried Interest 1.00%
ECM GP LLC with a Fair Market
8117 Preston Road Value of $729,479
Suite 205
Dallas, Texas 75225
LIMITED PARTNERS:
Harbison Family, L.L.P. 99% of Carried 64.00%
3612 Beverly Drive Interest with a Fair
Dallas, Texas 75201 Market Value of
Attn: Thomas O. Harbison, Trustee under the $72,218,421
Thomas O. Harbison Living Trust, its
general partner
Gene S. Morphis $-0- 7.50%
193 Carronbridge Way
Franklin, TN 37067
Lee O. Waters $-0- 1.00%
451 Autumn Lake Trail
Franklin, TN 37067
Joanne G. Biltekoff $-0- 1.00%
103 Nottingham Terrace
Buffalo, NY 14216
Robert A. Fetter $-0- 1.00%
269 Jackson
Denver, CO 80206
</TABLE>
i
<PAGE> 33
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Jeffrey Michel $-0- 1.00%
- ------------------
- -------------------
Julie M. Casteel $-0- 1.00%
5212 Country Club Drive
Brentwood, TN 37027
Sandra S. Bush $-0- 0.50%
444 Elmington #114
Nashville, TN 37205
Melissa J. Bailey $-0- 0.50%
6 Fawn Terrace
Orchard Park, NY 14127
Steven M. Kawalick $-0- 1.00%
1101 Bedfordshire Court
Nashville, TN 37221
Mark R. Briggs $-0- 20.50%
810 Hickorywood
Clarksville, TN 37043
TOTAL ALL PARTNERS $72,947,900 100.00%
</TABLE>
ii
<PAGE> 1
EXHIBIT 10.53
-------------------------------
For Ministry Use Only Ontario Corporation Number
A l'usage exclusif du ministere Numero de la societe en Ontario
-------------------------------
[LOGO] Ministry of Ministere de
Consumer and la Consommation 1293220
Commercial Relations et du Commerce
CERTIFICATE CERTIFICAT
This is to certify that these Ceci certifie que les presents
articles are effective on statuts entrent en vigueur le
DECEMBER 17 DECEMBRE, 1998
- ---------------------------------------------------------------
/s/ [ILLEGIBLE] Trans
Director/Directeur Code
Business Corporations Act/Loi eur los societes par actions [C]
18
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ARTICLES OF AMENDMENT
STATUS DE MODIFICATION
<S> <C> <C>
Form 3 1. The present name of the corporation is: Denomination sociale actuelle de la societe:
Business ---------------------------------------------------------------------------------------------------------------
Corporations 1293220 ONTARIO INC.
Act ---------------------------------------------------------------------------------------------------------------
Formute 3 ---------------------------------------------------------------------------------------------------------------
Loi sur les
societes par ---------------------------------------------------------------------------------------------------------------
actions
---------------------------------------------------------------------------------------------------------------
2. The name of the corporation is changed to (if Nouvelle denomination sociale de la societe (s'il y a
applicable): lieu):
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
3. Date of incorporation/amalgamation: Date de la constitution ou de la fusion:
24/APRIL/1998
---------------------------------------------------------------------------------------------------------------
(Day, Month, Year)
(jour, mois, annee)
4. The articles of the corporation are amended as Les statuts de la societe sont modifies de la facon
follows: suivante:
to increase the authorized capital of the Corporation by the creation of an unlimited
number of Exchangeable Shares (the "Exchangeable Shares") and providing that the
Exchangeable Shares shall have attached thereto the rights, privileges, restrictions and
conditions set out in Schedule A.
</TABLE>
<PAGE> 2
1A
4. Continued SCHEDULE A
PROVISIONS ATTACHING TO
NON-VOTING EXCHANGEABLE SHARES
The Non-Voting Exchangeable Shares in the capital of the Corporation shall have
the following rights, privileges, restrictions and conditions.
ARTICLE 1
INTERPRETATION
1.1 For the purposes of these share provisions:
"AFFILIATE" of any person means any other person directly or indirectly
controlling, controlled by, or under common control with, that person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlling", controlled by" and "under common control with"), as
applied to any person, means the possession by another person, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of that first mentioned person, whether through the ownership of voting
securities, by contract or otherwise.
"BOARD OF DIRECTORS" means the board of directors of the Corporation.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a legal
holiday on which banks are not open for business in Toronto, Ontario.
"CANADIAN DOLLAR EQUIVALENT" means, in respect of an amount expressed in
U.S. Dollars (the "U.S. Dollar Amount") at any date, the product obtained by
multiplying (a) the U.S. Dollar Amount by (b) the noon spot exchange rate on
such date for U.S. Dollars expressed in Canadian Dollars as reported by the Bank
of Canada or, in the event such spot exchange rate is not available, such
exchange rate as the Board of Directors deems to be appropriate for such
purpose.
"CANADIAN DOLLARS" means the lawful currency of Canada in immediately
available funds.
"CAPITAL REORGANISATION" has the meaning ascribed thereto in section 8.1 of
these share provisions.
"COMMON SHARES" means common shares in the capital of the Corporation.
"CORPORATION" means 1293220 Ontario Inc., a corporation existing under the
laws of the Province of Ontario, Canada.
"CORPORATION CHEQUE" has the meaning ascribed thereto in Section 2.3 of
these share provisions.
"CURRENT MARKET PRICE" means, in respect of a Holding Share on any date,
the amount determined by the Board of Directors, in good faith and in its sole
discretion to be the Current Market Price of a Holding Share, or if the Holding
Shares are then traded or
<PAGE> 3
1B
4. Continued
quoted on a stock exchange or automated quotation system, the Canadian Dollar
Equivalent of the average of the closing bid and ask prices of Holding Shares
during a period of 20 consecutive trading days ending not more than three
trading days before such date on the principal stock exchange or automated
quotation system on which such shares are traded or quoted; provided, however,
that if in the opinion of the Board of Directors the public distribution or
trading activity of Holding Shares during such period does not create a market
which reflects the fair market value of a Holding Share the Current Market Price
shall be determined by the Board of Directors in good faith and in its sole
discretion, and provided further that any such selection, opinion or
determination by the Board of Directors shall be conclusive and binding.
"EXCHANGE RIGHT" has the meaning ascribed thereto in section 2.1 of the
Share Exchange Agreement.
"EXCHANGEABLE SHARES" mean the Non-Voting Exchangeable Shares of the
Corporation having the rights, privileges, restrictions and conditions set forth
herein.
"HOLDER" means any holder of an Exchangeable Share.
"HOLDING" means CustomerOne Holding Corporation, a corporation existing
under the laws of the State of Delaware, and any successor or continuing
corporation.
"HOLDING CHEQUE" has the meaning ascribed thereto in section 3.6 of these
share provisions.
"HOLDING DIVIDEND DECLARATION DATE" means the date on which the board of
directors of Holding declares any dividend on the Holding Shares.
"HOLDING SHARES" mean the shares of common stock of Holding and any other
securities into which such shares may be changed.
"HOLDING SUCCESSOR" has the meaning ascribed thereto within the definition
of "Retraction Event".
"LIEN" means any lien, pledge, adverse claim, security interest, mortgage,
restriction, claim, charge or other encumbrance of any kind or nature
whatsoever.
"LIQUIDATION AMOUNT" has the meaning ascribed thereto in section 3.1 of
these share provisions.
"LIQUIDATION CALL PURCHASE PRICE" has the meaning ascribed thereto in
section 3.4 of these share provisions.
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in section 3.4 of
these share provisions.
"LIQUIDATION DIVIDEND AMOUNT" has the meaning ascribed thereto in section
3.1 of these share provisions;
"LIQUIDATION DATE" has the meaning ascribed thereto in section 3.1 of these
share provisions.
<PAGE> 4
1C
4. Continued
"OBCA" means the Business Corporations Act (Ontario), as amended from time
to time.
"REDEMPTION CALL PURCHASE PRICE" has the meaning ascribed thereto in
section 5.5 of these share provisions.
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in section 5.5 of
these share provisions.
"REDEMPTION DATE" means such date, if any, as may be established by the
Board of Directors for the redemption by the Corporation of all but not less
than all of the outstanding Exchangeable Shares pursuant to Article 5.
"REDEMPTION DIVIDEND AMOUNT" has the meaning ascribed thereto in section
5.1 of these share provisions.
"REDEMPTION PRICE" has the meaning ascribed thereto in section 5.1 of these
share provisions.
"REDEMPTION SHARES" has the meaning ascribed thereto in section 5.5 of
these share provisions.
"RETRACTED SHARES" has the meaning ascribed thereto in section 4.1 of these
share provisions.
"RETRACTION CALL NOTICE" has the meaning ascribed thereto in section 4.7 of
these share provisions.
"RETRACTION CALL PURCHASE PRICE" has the meaning ascribed thereto in
section 4.7 of these share provisions.
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in section 4.7 of
these share provisions.
"RETRACTION DATE" has the meaning ascribed thereto in section 4.2 of these
share provisions.
"RETRACTION DIVIDEND AMOUNT" has the meaning ascribed thereto in section
4.1 of these share provisions.
"RETRACTION PRICE" has the meaning ascribed thereto in section 4.1 of these
share provisions.
"RETRACTION REQUEST" has the meaning ascribed thereto in section 4.1 of
these share provisions.
"SHARE EXCHANGE AGREEMENT" means the Default Share Exchange Rights
Agreement made as of December 17, 1998 among Holding, the Corporation, Peter
Berczi, Edward Schwartz and Bruce Simpson, as the same may be amended or
restated from time to time in accordance with its terms.
<PAGE> 5
1D
4. Continued
"SUPPORT AGREEMENT" means the Support Agreement among Holding, 1293219
Ontario Inc. and the Corporation, made as of December 17, 1998.
"U.S. DOLLARS" means the lawful currency of the United States of America in
immediately available funds.
1.2 All amounts required or permitted to be paid, deposited or delivered
hereunder shall be paid, deposited or delivered after deduction of any amount
required by applicable law to be deducted or withheld on account of tax and the
deduction of such amounts and remittance to the applicable tax authorities
shall, to the extent thereof satisfy such requirement to pay, deposit or deliver
hereunder. All transfer taxes payable on the transactions contemplated hereby
shall be paid by the Holder.
ARTICLE 2
RANKING OF AND DIVIDENDS ON EXCHANGEABLE SHARES
2.1 The Exchangeable Shares shall rank senior to the Common Shares and
senior to any other shares ranking junior to the Exchangeable Shares, with
respect to the payment of dividends and the distribution of assets in the event
of the liquidation, dissolution or winding-up of the Corporation, whether
voluntary or involuntary, or any other distribution of the assets of the
Corporation among its shareholders for the purpose of winding up its affairs.
2.2 A Holder shall be entitled to receive and the Board of Directors shall,
subject to applicable law, declare on each Holding Dividend Declaration Date a
dividend on each Exchangeable Share (a) in the case of a cash dividend declared
on the Holding Shares, in an amount in cash for each Exchangeable Share equal to
the Canadian Dollar Equivalent of the cash dividend declared on each Holding
Share, (b) in the case of a stock dividend declared on the Holding Shares to be
paid in Holding Shares, in such whole number of Exchangeable Shares for each
Exchangeable Share held by such Holder as is equal to the number of Holding
Shares to be paid as a dividend per Holding Share (if such calculation, when
made on an aggregate basis for all Exchangeable Shares held by that Holder,
results in a fraction of an Exchangeable Share, the holder shall receive in lieu
of such fraction an amount in cash equal to the Canadian Dollar Equivalent of
the amount that would be payable in respect of an equal fraction of a Holding
Share as at the declaration date of such dividend), or (c) in the case of a
dividend declared on the Holding Shares to be paid in property other than cash
or Holding Shares (including without limitation other securities of Holding), in
such type and amount of property for each Exchangeable Share as is the same
as or economically equivalent (as determined by the Board of Directors as
contemplated by section 2.7 of these share provisions) to the type and amount of
property to be paid as a dividend on each Holding Share. Such dividends shall be
paid out of money, assets or property of the Corporation properly applicable to
the payment of dividends, or out of authorized but unissued Exchangeable Shares,
as the case may be.
2.3 Cheques of the Corporation payable at par at any branch of the bankers
of the Corporation (each a "Corporation Cheque") shall be issued in respect of
(a) any cash dividend contemplated by subsection 2.2(a) above, (b) of any cash
amount payable in lieu of a fractional Exchangeable Share in connection with any
stock dividend contemplated by subsection 2.2(b) above or (c) any cash amount
that the Board of Directors determines to pay as the economically equivalent
type of property contemplated by subsection 2.2(c), and the
<PAGE> 6
1E
4. Continued
sending of such a cheque to each Holder shall satisfy the cash dividend
represented thereby unless the cheque is not paid on presentation. Certificates
registered in the name of the Holder shall be issued or transferred in respect
of any stock dividend contemplated by subsection 2.2(b) hereof and the sending
of such a certificate to each Holder shall satisfy the stock dividend
represented thereby. Such other type and amount of property in respect of any
dividend contemplated by subsection 2.2(c) hereof shall be issued, distributed
or transferred by the Corporation in such manner as it shall determine and the
issuance, distribution or transfer thereof by the Corporation to each Holder
shall satisfy the dividend represented thereby. No Holder shall be entitled to
recover by action or other legal process against the Corporation any dividend
that is represented by a cheque that has not been duly presented to the
Corporation's bankers for payment or that otherwise remains unclaimed for a
period of six years from the date on which such dividend was payable.
2.4 The record date for the determination of the Holders entitled to
receive payment of, and the payment date for, any dividend declared on the
Exchangeable Shares under section 2.2 hereof shall be the same dates as the
record date and payment date, respectively, for the corresponding dividend
declared on the Holding Shares.
2,5 If on any payment date for any dividends declared on the Exchangeable
Shares under section 2.2 hereof, the dividends are not paid in full on all of
the Exchangeable Shares then outstanding, any such dividends that remain unpaid
shall be paid on a subsequent date or dates determined by the Board of Directors
on which the Corporation shall have sufficient moneys, assets or property
properly applicable to the payment of such dividends.
2.6 So long as any of the Exchangeable Shares are outstanding, the
Corporation shall not at any time without, but may at any time with, the
approval of the Holders given as specified in section 7.2 of these share
provisions or if required to do so pursuant to these share provisions:
(a) pay any dividends on the Common Shares, or any other shares ranking
junior to the Exchangeable Shares, other than stock dividends
payable in Common Shares or any such other shares ranking junior to
the Exchangeable Shares, as the case may be;
(b) redeem or purchase or make any capital distribution in respect of
Common Shares or any other shares ranking junior to the
Exchangeable Shares;
(c) redeem or purchase any other shares of the Corporation ranking
equally with the Exchangeable Shares with respect to the payment of
dividends or on any liquidation distribution; or
(d) issue any Exchangeable Shares or other shares of the Corporation
ranking equal or senior to the Exchangeable Shares;
provided that the restrictions in subsections (a), (b), (c) and (d) above shall
not apply if all dividends on the outstanding Exchangeable Shares corresponding
to dividends, if any, declared to date on the Holding Shares shall have been
declared on the Exchangeable Shares and paid in full.
<PAGE> 7
1F
4. Continued
2.7 The Board of Directors shall determine, in good faith and in its sole
discretion (with the assistance of such reputable and qualified independent
financial advisors and/or other experts as the Board of Directors may require in
its sole judgement; provided that no independent financial advice shall be
deemed to be required except and unless expressly determined by the Board of
Directors), economic equivalence for the purposes of section 2.2(c) and section
8.3 of these share provisions hereof, and each such determination shall be
conclusive and binding on the Corporation and its shareholders. In making each
such determination, the following factors shall, without excluding other factors
determined by the Board of Directors to be relevant, be considered by the Board
of Directors:
(a) in the case of the issuance or distribution of any rights, options
or warrants to subscribe for or purchase Holding Shares (or
securities exchangeable for or convertible into or carrying rights
to acquire Holding Shares), the relationship between the exercise
price of each such right, option or warrant and the Current Market
Price of a Holding Share;
(b) in the case of the issuance or distribution of any other form of
property (including without limitation any shares or securities of
Holding of any class other than Holding Shares, any rights, options
or warrants other than those referred to in section 2.7(a) of these
share provisions, any evidences of indebtedness of Holding or any
assets of Holding), the relationship between the fair market value
(as determined by the Board of Directors in the manner above
contemplated) of such property to be issued or distributed with
respect to each outstanding Holding Share and the Current Market
Price of a Holding Share; and
(c) in all such cases, the general taxation consequences of the
relevant event to Holders to the extent that such consequences may
differ from the taxation consequences to holders of Holding Shares
as a result of differences between taxation laws of Canada and the
United States (except for any differing consequences arising as a
result of differing marginal taxation rates and without regard to
the individual circumstances of holders of Exchangeable Shares).
ARTICLE 3
DISTRIBUTION ON LIQUIDATION
3.1 In the event of the liquidation, dissolution or winding-up of the
Corporation or any other distribution of the assets of the Corporation among its
shareholders for the purpose of winding up its affairs, a Holder shall be
entitled, subject to applicable law, to receive from the assets of the
Corporation in respect of each Exchangeable Share held by such Holder on the
effective date (the "Liquidation Date") of such liquidation, dissolution or
winding-up, before any distribution of any part of the assets of the Corporation
among the holders of the Common Shares or any other shares ranking junior to the
Exchangeable Shares, (a) an amount per share equal to the Current Market Price
of a Holding Share determined on the Liquidation Date, which shall be satisfied
in full by the Corporation causing to be delivered to the Holder one Holding
Share, plus (b) the aggregate of all declared and unpaid cash dividends on such
Exchangeable Share up to the Liquidation Date
<PAGE> 8
1G
4. Continued
in respect of which the record date has passed (the "Liquidation Dividend
Amount", collectively, the "Liquidation Amount").
3.2 On or before the Liquidation Date, and subject to the exercise by
Holding of the Liquidation Call Right and subject to section 1.2 of these
provisions, the Corporation shall cause to be delivered to the Holders of the
Exchangeable Shares the Liquidation Amount for each such Exchangeable Share upon
presentation and surrender of the certificates representing such Exchangeable
Shares, free and clear of all Liens, together with such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares under
the OBCA and the by-laws of the Corporation and such additional documents and
instruments as the Corporation may reasonably require, at the registered office
of the Corporation or at such other place that may be specified by the
Corporation in a notice to the Holders of the Exchangeable Shares. Payment of
the Liquidation Amount for each Exchangeable Share shall be made by delivery to
the Holder thereof, at the address of the Holder recorded in the securities
register of the Corporation for the Exchangeable Shares or by holding for
pick-up by the Holder at the registered office of the Corporation or at such
other place that may be specified by the Corporation by notice to the Holders of
Exchangeable Shares, of certificates representing the Holding Shares to be
delivered in payment thereof (which shares shall be duly issued as fully paid
and non-assessable and shall be free and clear of any Liens placed thereon by
the Corporation or Holding) plus a Corporation Cheque for the Liquidation
Dividend Amount. After the Liquidation Date, a Holder of Exchangeable Shares
shall cease to be the Holder of such Exchangeable Shares and shall not be
entitled to exercise any of the rights of a Holder in respect thereof, other
than the right to receive the Liquidation Amount in respect of each such
Exchangeable Share, without interest unless payment of the Liquidation Amount
for each such Exchangeable Share shall not be made upon presentation and
surrender of share certificates in accordance with the foregoing provisions, in
which case the rights of the Holder shall remain unaffected until the
Liquidation Amount for each of such Holder's Exchangeable Shares has been paid
in the manner provided above. The Corporation shall have the right at any time
before, on or after the Liquidation Date to deposit or cause to be deposited the
total Liquidation Amounts in respect of the Exchangeable Shares represented by
certificates for the benefit of the Holders in a custodial account with any
chartered bank or trust company in Canada. Upon such deposit being made, the
rights of the Holders of Exchangeable Shares after such deposit shall be limited
to receiving the total Liquidation Amount (without interest) for such
Exchangeable Shares so deposited, against presentation and surrender of the said
certificates held by them, respectively, in accordance with the foregoing
provisions. Upon such payment or deposit of the total Liquidation Amounts, the
Holders of the Exchangeable Shares shall thereafter be considered and deemed for
all purposes to be the Holders of the Holding Shares delivered to them or the
custodian on their behalf.
3.3 After the Corporation has satisfied its obligations to pay the Holders
of the Exchangeable Shares the Liquidation Amount per Exchangeable Share
pursuant to section 3.1 of these share provisions, such Holders shall not be
entitled to share in any further distribution of the assets of the Corporation.
3.4 Holding shall have the overriding right (the "Liquidation Call Right"),
in the event of and notwithstanding the proposed liquidation, dissolution or
winding-up of the Corporation, to purchase from all but not less than all of the
Holders (other than Holding and its Affiliates) of Exchangeable Shares on the
Liquidation Date all but not less than all of the Exchangeable Shares held by
each Holder upon payment by Holding for each Exchangeable
<PAGE> 9
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4. Continued
Share of (a) an amount equal to the Current Market Price of a Holding Share,
determined on the Liquidation Date, which shall be satisfied in full by Holding
causing to be delivered to each Holder one Holding Share, and (b) an amount
equal to the Liquidation Dividend Amount in respect of an Exchangeable Share
(collectively, the "Liquidation Call Purchase Price"). In the event of the
exercise of the Liquidation Call Right by Holding, each Holder shall be
obligated to sell all the Exchangeable Shares held by the Holder to Holding on
the Liquidation Date on payment by Holding to the Holder of the Liquidation Call
Purchase Price for each such share.
3.5 To exercise the Liquidation Call Right, Holding must notify the
Corporation of Holding's intention to exercise such right at least one Business
Day before the Liquidation Date. The Corporation will notify the Holders of
Exchangeable Shares as to whether or not Holding has exercised the Liquidation
Call Right forthwith after the expiration of the date by which the same may be
exercised by Holding. If Holding exercises the Liquidation Call Right on the
Liquidation Date, Holding will purchase and the Holders will sell all of the
Exchangeable Shares then outstanding for a price per share equal to the
Liquidation Call Purchase Price.
3.6 For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Liquidation Call Right, Holding shall be entitled, subject to
section 1.2 of these provisions, to deposit with the Corporation, on or before
the Liquidation Date (or, where the Holder of the Exchangeable Shares is a
non-resident of Canada, as soon as practicable thereafter), certificates
representing the aggregate number of Holding Shares deliverable by Holding
(which shares shall be duly issued as fully paid and non-assessable and shall be
free and clear of any Liens placed thereon by the Corporation or Holding),
together with a cheque of Holding payable at par and in Canadian Dollars at any
branch of the bankers of Holding or of the Corporation in Canada (a "Holding
Cheque") for an amount equal to the total Liquidation Dividend Amount, in
payment of the total Liquidation Call Purchase Price. Provided that such total
Liquidation Call Purchase Price has been so deposited with the Corporation, the
rights of each Holder of Exchangeable Shares will be limited to receiving such
Holder's proportionate part of the total Liquidation Call Purchase Price payable
by Holding, without interest upon presentation and surrender by the Holder of
certificates representing the Exchangeable Shares held by such Holder and the
Holder shall on and after such deposit be considered and deemed for all purposes
to be the Holder of the Holding Shares delivered to such Holder. Upon surrender
to the Corporation of a certificate or certificates representing Exchangeable
Shares, free and clear of all Liens, together with such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares under
the OBCA and the articles and by-laws of the Corporation and such additional
documents and instruments as the Corporation may reasonably require, the Holder
of such surrendered certificate or certificates shall be entitled to receive in
exchange therefor, and the Corporation on behalf of Holding shall deliver to
such Holder, certificates representing the Holding Shares to which the Holder is
entitled, plus a Holding Cheque in payment of the remaining portion, if any, of
the total Liquidation Call Purchase Price.
ARTICLE 4
RETRACTION OF EXCHANGEABLE SHARES BY HOLDER
4.1 A Holder shall be entitled, subject to the exercise by Holding of the
Retraction Call Right and otherwise upon compliance with the provisions of this
Article 4, to require the Corporation to redeem all but not less than all of the
Exchangeable Shares registered in the name of such Holder (the "Retracted
Shares") by payment for each Exchangeable Share
<PAGE> 10
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4. Continued
of (a) an amount for each Retracted Share equal to the Current Market Price of a
Holding Share determined on the date the Corporation receives the Retraction
Request, which shall be satisfied in full by the Corporation causing to be
delivered to such Holder one Holding Share plus (b) an additional amount equal
to the aggregate of all declared and unpaid dividends on such Exchangeable Share
up to the Retraction Date in respect of which the record date has passed (the
"Retraction Dividend Amount") (collectively, the "Retraction Price"). To effect
such redemption, the Holder shall present and surrender at the registered office
of the Corporation the certificate or certificates representing the Retracted
Shares, free and clear of all Liens, together with such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares under
the OBCA and the by-laws of the Corporation and such additional documents and
instruments as the Corporation may reasonably require, and together with a duly
executed statement (the "Retraction Request") in the form of Exhibit A hereto or
in such other form as may be acceptable to the Corporation:
(a) specifying that the Holder desires to have the Retracted Shares
represented by such certificate or certificates redeemed by the
Corporation; and
(b) acknowledging the Retraction Call Right of Holding to purchase all
but not less than all the Retracted Shares directly from the Holder
and that the Retraction Request shall be deemed to be an
irrevocable offer by the Holder to sell the Retracted Shares to
Holding in accordance with the Retraction Call Right
4.2 Subject to the exercise by Holding of the Retraction Call Right; upon
receipt by the Corporation in the manner specified in section 4.1 hereof of a
Retraction Request and a certificate or certificates representing the number of
Exchangeable Shares which the Holder desires to have the Corporation redeem,
free and clear of all Liens together with such other documents and instruments
as may be required, the Corporation shall redeem the Retracted Shares effective
at the close of business on the sixth Business Day after the Retraction Request
is received (the "Retraction Date") and shall cause to be delivered to such
Holder the total Retraction Price with respect to such shares.
4.3 Upon receipt by the Corporation of a Retraction Request as set forth in
section 4.1, the Corporation shall forthwith notify Holding thereof.
4.4 If a Retraction Request is received by the Corporation pursuant to
section 4.1 and Holding has not exercised the Retraction Call Right pursuant to
section 4.7, subject to section 1.2 of these provisions, the Corporation shall
deliver to the Holder of the Retracted Shares, at the address of the Holder
recorded in the securities register of the Corporation for the Exchangeable
Shares or at the address specified in the Holder's Retraction Request or by
holding for pick-up by the Holder at the registered office of the Corporation,
certificates representing the Holding Shares to be delivered to the Holder in
payment of the total Retraction Price for the Retracted Shares (which shares
shall be duly issued as fully paid and non-assessable and shall be free and
clear of any Liens placed thereon by the Corporation or Holding) registered in
the name of the Holder or in such other name as the Holder may request, plus a
Corporation Cheque for the total Retraction Dividend Amount, and such delivery
of such certificates and/or cheque by the Corporation shall be deemed to be
payment of and shall satisfy and discharge all liability for the total
Retraction Price for the Retracted
<PAGE> 11
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4. Continued
Shares, to the extent that the same is represented by such share certificates or
cheque, unless such cheque is not paid on due presentation.
4.5 On and after the close of business on the Retraction Date, the Holder
of the Retracted Shares redeemed in accordance with 4.2 hereof shall
cease to be a Holder of such Retracted Shares and shall not be entitled
to exercise any of the rights of a Holder in respect thereof, other than the
right to receive the Retraction Price, without interest, unless upon
presentation and surrender of certificates in accordance with the foregoing
provisions, payment of the total Retraction Price shall not be made, in which
case the rights of such Holder shall remain unaffected until the total
Retraction Price has been paid in the manner provided above. On and after the
close of business on the Retraction Date, provided that presentation and
surrender of certificates and payment of the total Retraction Price has been
made in accordance with the foregoing provisions, the Holder of the Retracted
Shares so purchased by Holding shall thereafter be considered and deemed for all
purposes to be a Holder of the Holding Shares delivered to such Holder.
4.6 Notwithstanding any other provision of this Article 4, the Corporation
shall not be obligated to redeem Retracted Shares specified by a Holder in a
Retraction Request to the extent that such redemption of Retracted Shares would
be contrary to solvency requirements or other provisions of applicable law. If
the Corporation believes that on any Retraction Date it would not be permitted
by any of such provisions to redeem the Retracted Shares tendered for redemption
on such date, and provided that Holder shall not have exercised the Exchange
Right or Holding shall not have exercised the Retraction Call Right with respect
to the Retracted Shares, the Corporation shall be obligated to redeem Retracted
Shares specified by a Holder in a Retraction Request only to the extent of the
maximum number that may be so redeemed (rounded down to a whole number of
shares) as would not be contrary to such provisions on a pro rata basis and
shall notify the Holder at least two Business Days prior to the Retraction Date
as to the number of Retracted Shares which will not be redeemed by the
Corporation and the Corporation shall issue to each Holder of Retracted Shares a
new certificate, at the expense of the Corporation, representing the Retracted
Shares not redeemed by the Corporation pursuant to section 4.3 hereof.
4.7 Holding shall have the overriding right (the "Retraction Call Right"),
notwithstanding the proposed redemption of Retracted Shares by the Corporation
on a Retraction Date, to purchase from the Holder of the Retracted Shares on the
Retraction Date the Retracted Shares upon payment by Holding to the Holder for
each Retracted Share of (a) an amount equal to the Current Market Price of a
Holding Share, determined on the date Holding provides the Retraction Call
Notice which shall be satisfied in full by Holding causing to be delivered to
each Holder one Holding Share, plus (b) an amount equal to the Retraction
Dividend Amount (collectively, the "Retraction Call Purchase Price".)
4.8 In order to exercise the Retraction Call Right, Holding must notify the
Corporation in writing of its determination to do so (a Retraction Call
Notice") at least one Business Day before the Retraction Date. If Holding
delivers the Retraction Call Notice before the end of such Business Day, the
Retraction Request shall thereupon be considered only to be an offer by the
Holder to sell the Retracted Shares to Holding in accordance with the Retraction
Call Right. In such event the Corporation shall not redeem the Retracted Shares
and Holding shall purchase from such Holder, and such Holder shall sell to
Holding on the Retraction Date the Retracted Shares for the Retraction Call
Purchase Price for each Retracted Share. If Holding does not so notify the
Corporation, the Corporation shall notify the Holder that Holding will not
exercise the Retraction Call Right.
<PAGE> 12
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4. Continued
4.9 For the purposes of completing a purchase of the Retracted Shares
pursuant to the Retraction Call Right, subject to section 1.2 of these
provisions, Holding shall be entitled to deposit with the Corporation, on or
before the Retraction Date (or, where the Holder of the Retracted Shares is a
non-resident of Canada, as soon as practicable thereafter), a cheque in an
amount equal to the total Retraction Dividend Amount, together with certificates
representing the Holding Shares to be delivered to the Holder of the Retracted
Shares in payment of the total Retraction Call Purchase Price for the Retracted
Shares. Provided that such total Retraction Call Purchase Price has been so
deposited with the Corporation, the closing of the purchase and sale of the
Retracted Shares pursuant to the Retraction Call Right shall be deemed to have
occurred as of the close of business on the Retraction Date and, for greater
certainty, no redemption by the Corporation of such Retracted Shares shall take
place on the Retraction Date. Holding shall cause the Corporation to deliver
to the Holder of the Retracted Shares, at the address of such Holder recorded in
the securities register of the Corporation for the Exchangeable Shares or at the
address specified in the Holder's Retraction Request or by holding for pick-up
by the Holder at the office of the Corporation to which the Retraction Request
was delivered, in payment of such total Retraction Call Purchase Price,
certificates representing the Holding Shares to be delivered in respect of such
payment (which shares shall be duly issued as fully paid and non-assessable and
shall be free and clear of any Liens placed thereon by the Corporation, Onexco
or Holding) registered in the name of the Holder or in such other name as the
Holder may request in payment of such and, if applicable, a Holding Cheque for
an amount equal to the Retraction Dividend Amount, and such delivery of such
certificates and/or cheque to the Holder on behalf of Holding by the Corporation
shall be deemed to be payment of and shall satisfy and discharge all liability
for the total Retraction Call Purchase Price to the extent that the same is
represented by such share certificates and cheque, unless such cheque is not
paid on due presentation.
4.10 On and after the close of business on the Retraction Date, the Holder
of the Retracted Shares purchased in accordance with 4.7 hereof shall cease to
be a Holder of such Retracted Shares and shall not be entitled to exercise any
of the rights of a Holder in respect thereof, other than the right to receive
the Retraction Call Purchase Price, unless upon presentation and surrender of
certificates in accordance with the foregoing provisions, payment of the total
Retraction Call Purchase Price shall not be made, in which case the rights of
such Holder shall remain unaffected until the total Retraction Call Purchase
Price has been paid in the manner provided above. On and after the close of
business on the Retraction Date, provided that presentation and surrender of
certificates and payment of the total Retraction Call Purchase Price has been
made in accordance with the foregoing provisions, the Holder of the Retracted
Shares so purchased by Holding shall thereafter be considered and deemed for all
purposes to be a Holder of the Holding Shares delivered to such Holder.
ARTICLE 5
REDEMPTION OF EXCHANGEABLE SHARES BY THE CORPORATION
5.1 Subject to applicable law, and provided Holding has not exercised the
Redemption Call Right, the Corporation may, but shall not be obligated to, on or
after the Redemption Date, redeem all but not less than all of the then
outstanding Exchangeable Shares by payment for each Exchangeable Share of (a) an
amount equal to the Current Market Price of a Holding Share on the last Business
Day prior to the Redemption Date, which shall be satisfied in full by the
Corporation causing to be delivered one Holding Share, plus (b) an amount equal
to the aggregate of all declared and unpaid cash dividends on such
<PAGE> 13
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4 Continued
Exchangeable Shares through the effective date of such redemption in respect of
which the record date has passed (the "Redemption Dividend Amount")
(collectively, the "Redemption Price".)
5.2 In case the Corporation shall elect to redeem Exchangeable Shares under
this Article 5, the Corporation shall, on as many days prior to the Redemption
Date as the Board of Directors may consider reasonable, send or cause to be sent
to each Holder a notice in writing of the redemption by the Corporation or the
purchase by Holding under the Redemption Call Right, as the case may be, of the
Exchangeable Shares held by such Holder. Such notice shall set forth the formula
for determining the Redemption Price or the Redemption Call Purchase Price, as
the case may be, the Redemption Date and, if applicable, particulars of the
Redemption Call Right.
5.3 On or after the Redemption Date and subject to the exercise by Holding
of the Redemption Call Right, the Corporation shall, subject to section 1.2 of
these provisions, cause to be delivered to the Holders of the Exchangeable
Shares to be redeemed the Redemption Price for each such Exchangeable Share upon
presentation and surrender at the registered office of the Corporation or other
location as may be specified by the Corporation in such notice of the
certificates representing such Exchangeable Shares, free and clear of all Liens,
together with such other documents and instruments as may be required to effect
a transfer of Exchangeable Shares under the OBCA and the by-laws of the
Corporation and such additional documents and instruments as the Corporation may
reasonably require. Payment of a Holder's portion of the total Redemption Price
for the Exchangeable Shares shall be made by delivery to such Holder, at the
address of the Holder recorded in the securities register of the Corporation or
by holding for pick-up by the Holder at the registered office of the Corporation
or at location as may be specified by the Corporation in such notice, on behalf
of the Corporation of certificates representing the Holder's portion of the
Holding Shares (which shares shall be duly issued as fully paid and
non-assessable and shall be free and clear of any Liens placed thereon by the
Corporation or Holding), plus a Corporation Cheque for the Holder's portion of
the total Redemption Dividend Amount.
5.4 On and after the Redemption Date, the Holders of the Exchangeable
Shares called for redemption in accordance with section 5.1 hereof shall cease
to be Holders of such Exchangeable Shares and shall not be entitled to exercise
any of the rights of Holders in respect thereof, other than the right to receive
their proportionate part of the total Redemption Price, without interest, unless
payment of the total Redemption Price shall not be made upon presentation and
surrender of certificates in accordance with the foregoing provisions, in which
case the rights of the Holders shall remain unaffected until the total
Redemption Price has been paid in the manner provided above. The Corporation
shall have the right at any time after the sending of notice of its intention to
redeem the Exchangeable Shares as set forth above to deposit or cause to be
deposited the total Redemption Price for the Exchangeable Shares so called for
redemption, or of such of the said Exchangeable Shares represented by
certificates that have not at the date of such deposit been surrendered by the
Holders thereof in connection with such redemption, in a custodial account of
any chartered bank or trust company in Canada named in such notice. Upon such
deposit having been made, the Exchangeable Shares in respect whereof such
deposit shall have been made shall be redeemed and the rights of the Holders
thereof after such deposit or Redemption Date, as the case may be, shall be
limited to receiving their proportionate part of the total Redemption Price
against presentation and surrender of said certificates held by them, free and
clear of all Liens, in accordance with the foregoing provisions. Upon such
payment or deposit of the total Redemption Price, the Holders of the
Exchangeable Shares shall thereafter be
<PAGE> 14
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4. Continued
considered and deemed for all purposes to be Holders of the Holding Shares
delivered to them.
5.5 Holding shall have the overriding right (the "Redemption Call Right"),
notwithstanding the proposed redemption of Exchangeable Shares by the
Corporation pursuant to this Article 5, to purchase from all but not less than
all of the Holders of such Exchangeable Shares on the Redemption Date such
Exchangeable Shares (the "Redemption Shares") upon payment by Holding for each
such Exchangeable Share of (a) an amount equal to the Current Market Price of a
Holding Share, determined on the Redemption Date, which shall be satisfied in
full by Holding causing to be delivered one Holding Share, plus (b) an amount
equal to the Redemption Dividend Amount (collectively, the "Redemption Call
Purchase Price".)
5.6 For the purposes of completing a purchase of the Redemption Shares
pursuant to the Redemption Call Right, subject to section 1.2, Holding shall be
entitled to deposit with the Corporation, on or before the Redemption Date (or,
where the Holder of the Redemption Shares is a non-resident of Canada, as soon
as practicable thereafter), a cheque in an amount equal to the total Redemption
Dividend Amount, together with certificates representing the Holding Shares to
be delivered to the Holders of the Redemption Shares in payment of the total
Redemption Call Purchase Price for the Redemption Shares. Provided that such
total Redemption Call Purchase Price has been so deposited with the Corporation,
the closing of the purchase and sale of the Redemption Shares pursuant to the
Redemption Call Right shall be deemed to have occurred as of the close of
business on the date of such deposit. Holding shall cause the Corporation to
deliver to the Holders of such Redemption Shares, at the address of such Holders
recorded in the securities register of the Corporation for the Exchangeable
Shares or by holding for pick-up by the Holder at the office of the Corporation,
in payment of such Holder's proportionate share of the total Redemption Call
Purchase Price, certificates representing the Holding Shares to be delivered in
respect of such payment (which shares shall be duly issued as fully paid and
non-assessable and shall be free and clear of any Liens placed thereon by the
Corporation or Holding) registered in the name of the Holder or in such other
name as the Holder may request in payment of such and, if applicable, a Holding
Cheque for an amount equal to the Redemption Dividend Amount payable to such
Holder, and such delivery of such certificates and/or cheque to the Holder on
behalf of Holding by the Corporation shall be deemed to be payment of and shall
satisfy and discharge all liability for such Holders portion of the total
Redemption Call Purchase Price to the extent that the same is represented by
such share certificates and cheque, unless such cheque is not paid on due
presentation.
5.7 On and after the close of business on the Redemption Date, the Holder
of the Redemption Shares purchased in accordance with section 5.5 hereof shall
cease to be a Holder of such Redemption Shares and shall not be entitled to
exercise any of the rights of a Holder in respect thereof, other than the right
to receive the Redemption Call Purchase Price for each such share, without
interest, unless upon presentation and surrender of certificates in accordance
with the foregoing provisions, payment of the total Redemption Call Purchase
Price shall not be made, in which case the rights of such Holder shall remain
unaffected until such Holders portion of the total Redemption Call Purchase
Price has been paid in the manner provided above. On and after the close of
business on the Redemption Date, provided that presentation and surrender of
certificates and payment of a Holder's portion of the total Redemption Call
Purchase Price has been made in accordance with the foregoing provisions, a
Holder of the Redemption Shares so purchased by Holding shall
<PAGE> 15
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4. Continued
thereafter be considered and deemed for all purposes to be a Holder of the
Holding Shares delivered to such Holder.
ARTICLE 6
VOTING RIGHTS
6.1 Except as required by applicable law and section 7.2 of these
provisions, the Holders of the Exchangeable Shares shall not be entitled as such
to receive notice of or to attend any meeting of the shareholders of the
Corporation or to vote at any such meeting. The Holders of the Exchangeable
Shares shall not be entitled to vote separately as a class with respect to the
amendment of the articles of the Corporation referred to in clauses (a), (b) or
(e) of subsection 170(1) of the OBCA.
ARTICLE 7
AMENDMENT AND APPROVAL
7.1 The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed but only with the
approval of the Holders of the Exchangeable Shares given as hereinafter
specified.
7.2 Any approval given by the Holders of the Exchangeable Shares to add to,
change or remove any right, privilege, restriction or condition attaching to the
Exchangeable Shares or any other matter requiring the approval or consent of the
Holders of the Exchangeable Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to a
minimum requirement that such approval be evidenced by resolution passed by not
less than two-thirds of the votes cast on such resolution at a meeting of
Holders of Exchangeable Shares duly called and held at which at least one or
more Holders of not less than 10% of the outstanding Exchangeable Shares at that
time are present or represented by proxy. If at any such meeting one or more
Holders of at least 10% of the outstanding Exchangeable Shares at that time are
not present or represented by proxy within one-half hour after the time
appointed for such meeting then the meeting shall be adjourned to such date not
less than five days thereafter and to such time and place as may be designated
by the Chairman of such meeting. At such adjourned meeting one or more Holders
of Exchangeable Shares present or represented by proxy thereat may transact the
business for which the meeting was originally called and a resolution passed
thereat by the affirmative vote of not less than two thirds of the votes cast on
such resolution at such meeting shall constitute the approval or consent of the
Holders of the Exchangeable Shares. In lieu of calling a meeting of Holders of
Exchangeable Shares, any matter requiring the approval or consent of the Holders
of Exchangeable Shares shall be deemed to have been sufficiently given if a
written resolution in respect of such matter is signed by all the Holders of
Exchangeable Shares entitled to vote on such matter.
ARTICLE 8
CHANGES RELATING TO HOLDING
8.1 If at any time there is a capital reorganisation, consolidation,
merger, arrangement or amalgamation (statutory or otherwise) of Holding with or
into another entity (any such event being called a "Capital Reorganisation"),
any Holder of Exchangeable Shares whose Exchangeable Shares have not been
exchanged for Holding Shares in accordance with the provisions hereof or the
provisions of the Share Exchange Agreement on or before the record date for
such Capital Reorganisation shall be entitled to receive and
<PAGE> 16
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4. Continued
shall accept, upon any such exchange occurring pursuant to the provisions hereof
or the Share Exchange Agreement at any time after the record date for such
Capital Reorganisation, in lieu of the Holding Shares that the Holder would
otherwise have been entitled to receive pursuant to the provisions hereof or the
Share Exchange Agreement, the number of shares or other securities of Holding or
of the body corporate resulting, surviving or continuing from the Capital
Reorganisation, or other property, that such Holder would have been entitled to
receive as a result of such Capital Reorganisation if, on the record date, such
Holder had been the registered Holder of the number of Holding Shares to which
such Holder was then entitled upon any exchange of such Holder's Exchangeable
Shares into Holding Shares in accordance with the provisions hereof or the Share
Exchange Agreement.
8.2 No certificates or scrip representing fractional Holding Shares shall
he delivered to Holders of Exchangeable Shares pursuant to the provisions
hereof. In lieu of any such fractional security, each person entitled to a
fractional interest in a Holding Share will receive an amount of cash (rounded
to the nearest whole cent), without interest, equal to the Canadian Dollar
Equivalent as of the second Business Day prior to the relevant date of delivery
of certificates representing Holding Shares (the "Fractional Share Calculation
Date") of the product of such fraction and the Current Market Price.
8.3 (a) If Holding:
(i) issues or distributes Holding Shares (or securities
exchangeable for or convertible into or carrying rights to
acquire Holding Shares) to the holders of all or
substantially all of the then outstanding Holding Shares
by way of stock dividend or other distribution, other than
an issue of Holding Shares (or securities exchangeable for
or convertible into or carrying rights to acquire Holding
Shares) to holders of Holding Shares who exercise an
option to receive dividends in Holding Shares (or
securities exchangeable for or convertible into or
carrying rights to acquire Holding Shares) in lieu of
receiving cash dividends; or
(ii) issues or distributes rights, options or warrants to the
holders of all or substantially all of the then
outstanding Holding Shares entitled them to subscribe for
or to purchase Holding Shares (or securities exchangeable
for or convertible into or carrying rights to acquire
Holding Shares); or
(iii) issues or distributes to the holders of all or
substantially all of the then outstanding Holding Shares
(A) shares or securities of Holding of any class other
than Holding Shares (or shares convertible into or
exchangeable for or carrying rights to acquire Holding
Shares), (B) rights, options or warrants other than those
referred to in Section 8.3(a)(ii) above, (C) evidences of
indebtedness of Holding or (d) assets of Holding;
then, unless the Corporation has complied with Article 2 of these
share provisions in connection with such issuance, the Corporation
shall issue or distribute, as the case may be, to Holders, as soon as
is practicable, the
<PAGE> 17
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4. Continued
economic equivalent (as determined by the Board of Directors as
contemplated by section 2.7 of these share provisions) on a per share
basis of such rights, options, securities, shares, evidences of
indebtedness or other assets is issued or distributed to holders of
Holding Shares.
(b) If Holdings shall:
(i) subdivide or otherwise change the then outstanding Holding
Shares into a greater number of Holding Shares; or
(ii) consolidate or otherwise change the then outstanding
Holding Shares into a lesser number of Holding Shares; or
(iii) reclassify or otherwise change the Holding Shares;
then the Corporation shall effect an economically equivalent (as
determined by the Board of Directors as contemplated by Section
2.7 of the share provisions) subdivision, consolidation,
reclassification or change to the Exchangeable Shares, or in the
rights of the holders of, the Exchangeable Shares.
ARTICLE 9
ACTIONS BY THE CORPORATION UNDER SUPPORT AGREEMENT
9.1 The Corporation will take all such actions and do all such things
within its power permitted under applicable law as shall be necessary or
advisable to perform and comply with, and to ensure performance and compliance
by Holding with, all provisions of the Support Agreement and the Share Exchange
Agreement applicable to the Corporation, 1293219 Ontario Inc. and Holding,
respectively, in accordance with the terms thereof including, without
limitation, taking all such actions and doing all such things as shall be
necessary or advisable to enforce to the fullest extent possible for the direct
benefit of the Corporation all rights and benefits in favour of the Corporation
under or pursuant to such agreements.
9.2 The Corporation shall not propose, agree to or otherwise give effect to
any amendment to, or waiver or forgiveness of its rights or obligations under
the Support Agreement without the approval of the Holders of the Exchangeable
Shares given in accordance with section 7.2 of these share provisions other
than such amendments, waivers and/or forgiveness as may be necessary or
advisable for the purposes of:
(a) adding to the covenants of the other party or parties to such
agreement for the protection of the Corporation or the Holders of
Exchangeable Shares; or
(b) making such provisions or modifications not inconsistent with
such agreement as may be necessary or desirable with respect to
matters or questions arising thereunder which, in the opinion of
the Board of Directors, it may be expedient to make, provided
that the Board of Directors shall be of the opinion, after
consultation with counsel, that such provisions and modifications
will not be materially prejudicial to the interests of the
Holders of the Exchangeable Shares; or
<PAGE> 18
1Q
4. Continued
(c) making such changes in or corrections to such agreement which, on
the advice of counsel to the Corporation, are required for the
purpose of curing or correcting any ambiguity or defect or
inconsistent provision or clerical omission or mistake or
manifest error contained therein, provided that the Board of
Directors shall be of the opinion, after consultation with
counsel, that such changes or corrections will not be prejudicial
to the interests of the Holders of the Exchangeable Shares.
The Corporation shall provide each Holder with written notification of any such
amendment, waiver and/or forgiveness.
ARTICLE 10
LEGEND AND COMPLIANCE WITH SECURITIES LAWS
10.1 The certificates evidencing the Exchangeable Shares shall contain or
have affixed thereto a legend, in form and on terms approved by the Board of
Directors, with respect to the Support Agreement and the Share Exchange
Agreement (including the provisions relating to the Liquidation Call Right, the
Retraction Call Right and the Redemption Call Right). Certificates representing
Holding Shares will have affixed such legends as are required under United
States federal and state securities laws. THE SECURITIES REPRESENTED HEREBY HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR PURSUANT
TO THE SECURITIES OR "BLUE SKY" LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE
OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT
PURSUANT TO (I) A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH
HAS BEEN DECLARED AND REMAINS EFFECTIVE UNDER SUCH ACT, (II) RULE 144 UNDER SUCH
ACT, OR (III) UPON RECEIPT OF AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY
THAT SUCH SECURITIES MAY BE TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION UNDER
THE ACT AND APPLICABLE STATE LAW.
THIS SECURITY IS SUBJECT TO RESTRICTIONS ON TRANSFER, VOTING AND OTHER
TERMS AND CONDITIONS SET FORTH IN THE STOCKHOLDERS AGREEMENT BY AND AMONG THE
COMPANY AND THE PARTIES THERETO, A COPY OF WHICH MAY BE OBTAINED FROM THE
COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.
THE CORPORATION IS AUTHORIZED TO ISSUE SHARES OF MORE THAN ONE CLASS
AND TO ISSUE SHARES IN MORE THAN ONE SERIES OF AT LEAST ONE CLASS. THE
CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A
STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.
10.2 Notwithstanding any other provision hereof, neither Holding nor the
Corporation shall have any obligation to deliver Holding shares pursuant to the
terms of the Exchangeable Shares prior to receipt of advice of counsel to
Holding that Holding, the
<PAGE> 19
1R
4. Continued
Corporation and/or the Holders, as applicable, have complied with all applicable
United States federal and state securities laws. Among other things, no delivery
of Holding shares shall be made prior to the delivery by the Holder of a
securities representation letter as reasonably requested by counsel in customary
form and substance addressing the sophistication and investment intent of the
Holder and such other matters as are reasonably requested by counsel to effect
compliance with law. Nothing contained herein shall be deemed to require Holding
or the Corporation to register or qualify any Holding shares pursuant to the
United States Securities Act of 1933, as amended, or any applicable securities
laws or any other jurisdiction. Each Holder, by accepting Exchangeable Shares,
acknowledges that such Holder may be required to, and may be required to
covenant that such Holder will, hold such Exchangeable Shares or Holding Shares
exchangeable therefor indefinitely.
10.3 Upon receipt of any Holding shares, the Holder shall immediately be
deemed to be a party to that certain Stockholders Agreement by and among Holding
and the other parties thereto, as such agreement may be hereafter amended (the
"Stockholders Agreement"). The Holder will, promptly upon request by Holding,
execute and deliver a Joinder Agreement in customary form acknowledging that
such Holder is a party to the Stockholders Agreement with the rights and
obligations appurtenant thereto, and such other documents and instruments as are
reasonably requested by Holding and its counsel to ensure compliance with
applicable law and regulation and to otherwise effect the purposes of these
provisions.
ARTICLE 11
NOTICES
11.1 Any notice, request or other communication to be given to the
Corporation by Holding or a Holder of Exchangeable Shares shall be in writing
and shall be valid and effective if given by personal delivery, fax or courier
to the registered office of the Corporation and addressed to the attention of
the President. Any such notice, request or other communication, if given by fax
or delivery, shall only be deemed to have been given and received upon actual
receipt thereof by the Corporation.
11.2 Any presentation and surrender by a Holder of Exchangeable Shares to
the Corporation of certificates representing Exchangeable Shares in connection
with the liquidation, dissolution or winding up of the Corporation or the
retraction or redemption of Exchangeable Shares shall be made by courier or by
delivery to the registered office of the Corporation or to such other place that
may be specified by the Corporation, in each case addressed to the attention of
the President of the Corporation. Any such presentation and surrender of
certificates shall only be deemed to have been made and to be effective upon
actual receipt thereof by the Corporation, as the case may be.
11.3 Any notice, request or other communication to be given to a Holder of
Exchangeable Shares by or on behalf of the Corporation shall be in writing and
shall be valid and effective if given by mail (postage prepaid), Federal Express
or other reputable courier or by delivery to the address of the Holder recorded
in the securities register of the Corporation or, in the event of the address of
any such Holder not being so recorded, then at the last known address of such
Holder. Any such notice, request or other communication, if given by mail, shall
be deemed to have been given and received on the third Business Day following
the date of mailing and, if given by delivery, Federal Express or other
reputable courier, shall be deemed to have been given and received on the date
of delivery. Accidental
<PAGE> 20
1S
4. Continued
failure or omission to give any notice, request or other communication to one or
more Holders of Exchangeable Shares shall not invalidate or otherwise alter or
affect any action or proceeding to be taken by the Corporation pursuant thereto.
<PAGE> 21
1T
4. Continued
EXHIBIT A
NOTICE OF RETRACTION
To: 1293220 Ontario Inc. (the "Corporation") and CustomerONE Holding
Corporation ("Holding")
This notice is given pursuant to Article 4 of the provisions (the "Share
Provisions") attaching to the Non-Voting Exchangeable Shares of the Corporation
(the "Exchangeable Shares"). All capitalized words and expressions used in this
notice and not otherwise defined herein that are defined in the Share Provisions
have the meanings ascribed to such words and expressions in such Share
Provisions.
The undersigned hereby notifies the Corporation that, subject to the Retraction
Call Right referred to below, the undersigned desires to have the Corporation
redeem in accordance with Article 4 of the Share Provisions:
[ ] all Exchangeable Shares held by the undersigned, which are represented by
certificate(s) number(s)______________, which accompanies this Notice.
The undersigned, pursuant to Article 4 of the Share Provisions, acknowledges the
Retraction Call Right of Holding to purchase all but not less than all the
Retracted Shares from the undersigned and that this notice shall be deemed to be
an irrevocable offer (subject as hereinafter provided) by the undersigned to
sell the Retracted Shares to Holding in accordance with the Retraction Call
Right on the Retraction Date for the Retraction Call Purchase Price. If Holding
determines not to exercise the Retraction Call Right, the Corporation will
notify the undersigned of such fact as soon as possible.
The undersigned acknowledges that if, as a result of solvency provisions of
applicable law or otherwise, the Corporation fails to redeem all Retracted
Shares, the undersigned will be deemed to have exercised the Exchange Right (as
defined in the Share Exchange Agreement) so as to require Holding to purchase
the unredeemed Retracted Shares.
The undersigned hereby represents and warrants to the Corporation and Holding:
(a) that the undersigned has good title to, and owns, the Retracted Shares
represented by the certificate(s) accompanying this Notice to be
acquired by the Corporation or Holding, as the case may be, free and
clear of all Liens;
AND
(b) either
[ ] the undersigned is a resident of Canada for purposes of the Income Tax Act
(Canada);
OR
[ ] the undersigned is not a resident of Canada for purposes of the Income Tax
Act (Canada).
The undersigned hereby acknowledges that, if the undersigned is not a resident
of Canada, and has not submitted with this notice a certificate issued by
Revenue Canada under section 116 of the Income Tax Act (Canada) in respect of
the Retracted Shares, the amount of any
<PAGE> 22
1U
4. Continued
securities or cash resulting from the retraction or the purchase of the
Retracted Shares will be reduced by the amount of withholdings required under
the Income Tax Act (Canada).
- ------------- ------------------------------ ---------------------------
(Date) (Signature of Shareholder) (Guarantee of Signature)
[ ] Please check this box if the securities and any cheque(s) resulting from
the retraction or purchase of the Retracted Shares are to be held for
pick-up by the shareholder at the registered office of the Corporation,
failing which the securities and any cheque(s) will be mailed to the last
address of the shareholder as it appears on the register.
NOTE: This panel must be completed and the certificate(s) for the Retracted
Shares, together with such additional documents as the Corporation may require,
must be deposited with the Corporation at its registered office in Toronto,
Ontario. The securities and any cheque(s) resulting from the retraction or
purchase of the Retracted Shares will be issued and registered in, and made
payable to, respectively, the name of the shareholder as it appears on the
register of the Corporation and the securities and cheque(s) resulting from
such retraction or purchase will be delivered to such shareholder as indicated
above, unless the form appearing immediately below is duly completed.
- ------------------------------------------- ----------------------------------
Name of Person in Whose Name Securities or Date
Cheque(s) Are To Be Registered, Issued or
Delivered (please print)
- ------------------------------------------- ----------------------------------
Street Address or P.O. Box Signature of Shareholder
- ------------------------------------------- ----------------------------------
City-Province Postal Code
<PAGE> 23
2
5. The amendment has been duly La modification a ete dument
authorized as required by autorisee conformement aux articles
sections 168 and 170 (as 168 et 170 (selon le cas) de la Loi
applicable) of the Business sur les societes par actions.
Corporations Act.
6. The resolution authorizing the Lee actionnaires ou les
amendment was approved by the administrateurs (selon le cas) de
shareholders/directors (as la societe ont approuve la
applicable) of the corporation resolution autorisant la
on modification le
17/DECEMBER/1998
- --------------------------------------------------------------------------------
(Day, Month, Year)
(jour, mois, annee)
These articles are signed in Les presents statuts sont signes en
duplicate. double exemplaire.
1293220 ONTARIO INC.
------------------------------------
(Name of Corporation)
(Denomination societe de la societe)
By/Par: /s/ DONALD W. LEWTAS Director
----------------------------------------
(Signature) (Description of Office)
(Signature) (Fonction)
<PAGE> 1
EXHIBIT 10.54
(245)
SUPPORT AGREEMENT
MEMORANDUM OF AGREEMENT made as of the 17th day of December, 1998.
AMONG:
CUSTOMERONE HOLDING CORPORATION,
a corporation existing under the laws
of the State of Delaware,
(hereinafter referred to as "Holding"),
OF THE FIRST PART,
- and -
1293219 ONTARIO INC.,
a corporation existing under the laws
of the Province of Ontario,
(hereinafter referred to as "Onexco"),
OF THE SECOND PART,
- and -
1293220 ONTARIO INC.,
a corporation existing under the laws
of the Province of Ontario,
(hereinafter referred to as "Buyco").
OF THE THIRD PART.
WHEREAS the parties hereto desire to make appropriate
provision and to establish a procedure whereby Holding will take certain actions
and make certain payments and deliveries necessary to ensure that Buyco will be
able to make certain payments and to deliver or cause to be delivered Holding
Shares in satisfaction of the obligations of Holding under the provisions (the
"Exchangeable Share Provisions") attaching to the Non-Voting Exchangeable Shares
in a capital of Buyco (the "Exchangeable Shares") with respect to Liquidation
Amounts, Retraction Prices and Redemption Prices, all in accordance with the
Exchangeable Share Provisions;
<PAGE> 2
-2-
NOW THEREFORE in consideration of the respective covenants in
this Agreement and for other good and valuable consideration (the receipt and
sufficiency of which are hereby acknowledged), the parties hereto hereby agree
as follows:
ARTICLE ONE
DEFINITIONS AND INTERPRETATION
1.1 DEFINED TERMS. In this Agreement including the recitals
hereto, all capitalized words and expressions used herein and not otherwise
defined herein shall have the meanings ascribed to such words and expressions in
the Exchangeable Share Provisions, unless the context requires otherwise.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of
this Agreement into articles, sections and paragraphs and the insertion of
headings are for convenience of reference only and shall not affect the
construction or interpretation of this Agreement.
1.3 NUMBER, GENDER, ETC. In this Agreement, words importing the
singular number only shall include the plural and vice versa, words importing
the use of any gender shall include all genders.
1.4 DATE FOR ANY ACTION. If any date on which any action is
required to be taken under this Agreement is not a Business Day, such action
shall be required to be taken on the next succeeding Business Day.
ARTICLE TWO
COVENANTS OF HOLDING AND ONEXCO
2.1 COVENANTS OF HOLDING REGARDING EXCHANGEABLE SHARES. So long as
any Exchangeable Shares are outstanding, Holding shall:
(a) take all such actions and do all such things as are
commercially reasonable to enable and permit Buyco, in
accordance with applicable law, to pay and otherwise perform
its obligations with respect to the payment of dividends,
Section 8.3 of the Exchangeable Share Provisions and the
satisfaction of the Liquidation Amount, the Retraction Price
or the Redemption Price in respect of each issued and
outstanding Exchangeable Share upon the liquidation,
dissolution or winding-up of Buyco, the delivery of a
Retraction Request by a holder of Exchangeable Shares or a
redemption of Exchangeable Shares by Buyco, as the case may
be, including, without limitation, all such actions and all
such things as are necessary or desirable to enable and permit
Buyco to cause to be delivered Holding Shares together with an
amount equal to any declared and unpaid dividends on such
Exchangeable Shares (a "Dividend Amount")
<PAGE> 3
-3-
to the holders of Exchangeable Shares in accordance with
Articles 3, 4 or 5, as the case may be, of the Exchangeable
Share Provisions.
(b) take all such actions and do all such things as are reasonably
necessary or desirable to enable and permit Onexco to comply
with its covenants set out in Section 2.2 of this Agreement.
2.2 COVENANTS OF ONEXCO REGARDING EXCHANGEABLE SHARES. So long as
any Exchangeable Shares are outstanding, Onexco shall take all such actions and
do all such things as are commercially reasonable to enable and permit Buyco, in
accordance with applicable law, to pay and otherwise perform its obligations
with respect to the payment of dividends, Section 8.3 of the Exchangeable Share
Provisions and the satisfaction of the Liquidation Amount, the Retraction Price
or the Redemption Price in respect of each issued and outstanding Exchangeable
Share upon the liquidation, dissolution or winding-up of Buyco, the delivery of
a Retraction Request by a holder of Exchangeable Shares or a redemption of
Exchangeable Shares by Buyco, as the case may be, including, without limitation,
all such actions and all such things as are commercially reasonable to enable
and permit Buyco to cause to be delivered Holding Shares together with any
Dividend Amount, to the holders of Exchangeable Shares in accordance with the
provisions of Articles 3, 4 or 5, as the case may be, of the Exchangeable Share
Provisions. Notwithstanding the prior provisions, nothing contained in this
Support Agreement shall be deemed to require the board of directors of Holding,
or any member thereof, to take or omit to take any action that would be in
breach of applicable law. Furthermore, no action shall be required that could,
as determined in good faith by the board of directors of Holding, result in a
breach of the terms of any agreement in respect of indebtedness for borrowed
money of Holding on a consolidated basis, provided that Holding takes reasonable
steps to seek a waiver of any affected provision thereof. The existence of such
indebtedness shall be determined in accordance with United States generally
accepted accounting principles.
2.3 NOTIFICATION OF CERTAIN EVENTS. In order to assist Holding to
comply with its obligations hereunder and permit it to exercise the Liquidation
Call Right, the Retraction Call Right and the Redemption Call Right, Buyco shall
give prior written notice to Holding and Onexco of each of the following events
at the time set forth below:
(a) in the event of any determination by the Board of Directors of
Buyco to institute voluntary liquidation, dissolution or
winding up proceedings or to effect any other distribution of
the assets of such corporation among its shareholders for the
purpose of winding up its affairs, at least 30 days prior to
the proposed effective date of such liquidation, dissolution,
winding up or other distribution;
(b) immediately, upon the earlier of receipt by Buyco of notice
of, or Buyco otherwise becoming aware of, any threatened or
instituted claim, suit, petition or other proceedings with
respect to the involuntary liquidation, dissolution or winding
up of
<PAGE> 4
-4-
such company or to effect any other distribution of the assets
of such company among its shareholders for the purpose of
winding up its affairs;
(c) immediately, upon receipt by Buyco of a Retraction Request;
and
(d) on the same date on which notice of redemption is given to
holders of Exchangeable Shares, upon a determination of a
Redemption Date in accordance with the Exchangeable Share
Provisions.
2.4 DELIVERY OF HOLDING SHARES. In furtherance of its obligations
under Sections 2.1(a) and (b) hereof, upon notice of any event that requires
Buyco to cause to be delivered Holding Shares to any holder of Exchangeable
Shares, the board of directors of Holding, subject to fulfilment of its
fiduciary obligations, shall forthwith issue and deliver the requisite Holding
Shares to or to the order of the former holder of the surrendered Exchangeable
Shares, as Buyco or Onexco, as applicable, shall direct, and Holding shall
forthwith deliver to Onexco, and Onexco shall then immediately deliver to Buyco,
all cash or other property required to enable Buyco to pay the value of all
declared but unpaid dividends then accruing to the holders of the Dividend
Amount on such Exchangeable Shares. In consideration of the issuance of each
such Holding Share by Holding, together with the payment of such Dividend Amount
by Holding as applicable, Buyco or Onexco, as applicable, shall, as Holding
shall direct, issue to Holding such number of common shares of Buyco or Onexco,
as applicable, as is equal to the fair value of such Holding Shares plus the
Dividend Amount.
2.5 DUE PERFORMANCE. Holding shall duly and timely perform all of
its obligations provided for in the Share Exchange Agreement and any obligations
of Holding that may arise upon the exercise of Holding's rights under the
Exchangeable Share Provisions.
2.6 CAPITAL REORGANIZATION OF HOLDING. If at any time Holding's
share capital is reorganized or a consolidation, merger, recapitalization or
share exchange (statutory or otherwise) of Holding with or into another entity
(any such event being called a "Capital Reorganization"), Holding shall take
commercially reasonable actions to ensure that holders of Exchangeable Shares
whose Exchangeable Shares have not been exchanged or automatically exchanged for
Holding Shares in accordance with the Exchangeable Share Provisions or the Share
Exchange Agreement on or before the record date for such Capital Reorganization
shall receive, upon any such exchange occurring pursuant to the Exchangeable
Share Provisions or the Share Exchange Agreement at any time after the record
date for such Capital Reorganization, in lieu of the Holding Shares that such
holders would otherwise have been entitled to receive pursuant to the
Exchangeable Share Provisions or the Share Exchange Agreement, the number of
shares or other securities of Holding or of the body corporate resulting,
surviving or continuing from the Capital Reorganization, or other property, that
such holders would have been entitled to receive as a result of such Capital
Reorganization if, on the record date, such holders would have been the
registered holders of the number of Holding Shares to which such holders were
then entitled upon any exchange of their Exchangeable Shares into Holding Shares
in accordance with the Exchangeable Share Provisions or the Share Exchange
<PAGE> 5
-5-
Agreement, subject to adjustment thereafter in the same manner, as nearly as may
be possible, as is provided for in Article 8 of the Exchangeable Share
Provisions.
ARTICLE THREE
GENERAL
3.1 TERM. This Agreement shall come into force and be effective as
of the date hereof and shall terminate and be of no further force and effect at
such time as there are no Exchangeable Shares (or securities or rights
convertible into or exchangeable for or carrying rights to acquire Exchangeable
Shares) held by any party other than Holding and its Affiliates.
3.2 CHANGES IN CAPITAL OF HOLDING AND BUYCO. Notwithstanding the
provisions of Section 3.4 hereof, at all times after the occurrence of any event
effected pursuant to Section 2.6 hereof, as a result of which either Holding
Shares or the Exchangeable Shares or both are in any way changed, this Agreement
shall forthwith to the extent practicable be amended and modified as necessary
in order that it shall apply with full force and effect to all new securities
into which Holding Shares or the Exchangeable Shares or both are so changed and
the parties hereto shall execute and deliver an agreement in writing giving
effect to and evidencing such necessary amendments and modifications.
3.3 SEVERABILITY. If any provision of this Agreement is held to be
invalid, illegal or unenforceable, the validity, legality or enforceability of
the remainder of this Agreement shall not in any way be affected or impaired
thereby and this Agreement shall be carried out as nearly as possible in
accordance with its original terms and conditions.
3.4 AMENDMENTS, MODIFICATIONS, ETC. This Agreement may not be
amended or modified except by an agreement in writing executed by Buyco, Holding
and Onexco and approved by the holders of the Exchangeable Shares in accordance
with Article 7 of the Exchangeable Share Provisions.
3.5 MINISTERIAL AMENDMENTS. Notwithstanding the provisions of
Section 3.4, the parties to this Agreement may without the approval of the
holders of the Exchangeable Shares, at any time and from time to time, amend or
modify this Agreement in writing for the purposes of:
(a) adding to the covenants of either or both parties for the
protection of the holders of the Exchangeable Shares;
(b) making such amendments or modifications not inconsistent with
this Agreement as may be necessary or desirable with respect
to matters or questions which, in the opinion of the board of
directors of each of Buyco, Holding and Onexco, it may be
expedient to make, provided that each such board of directors
shall be of the opinion
<PAGE> 6
-6-
that such amendments or modifications will not be prejudicial
to the interests of the holders of the Exchangeable Shares; or
(c) making such changes or corrections which, on the advice of
counsel to Buyco, Holding and Onexco, are required for the
purpose of curing or correcting any ambiguity or defect or
inconsistent provision or clerical omission or mistake or
manifest error herein, provided that the boards of directors
of each of Buyco, Holding and Onexco shall be of the opinion
that such changes or corrections will not be prejudicial to
the interests of the holders of the Exchangeable Shares.
3.6 MEETING TO CONSIDER AMENDMENTS. Buyco, at the request of
Holding, shall call a meeting or meetings of the holders of the Exchangeable
Shares for the purpose of considering any proposed amendment or modification
requiring approval pursuant to Section 3.4 hereof. Any such meeting or meetings
shall be called and held in accordance with the by-laws of Buyco and the
Exchangeable Share Provisions. In lieu of calling a meeting of holders of
Exchangeable Shares, with the consent of Holding, any proposed amendment or
modification requiring approval of the holders of Exchangeable Shares pursuant
to Section 3.4 hereof may be given by such holders executing a written
resolution evidencing the approval of such proposed amendment or modification,
which resolution must be signed by all the holders of Exchangeable Shares
entitled to vote on such matter.
3.7 WAIVERS. No waiver of any of the provisions of this Agreement
otherwise permitted hereunder shall be effective unless made in writing and
signed by all the parties hereto.
3.8 BINDING AGREEMENT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
3.9 NOTICES TO PARTIES. All notices and other communications
between the parties shall be in writing and shall be deemed to have been given
if delivered personally or by confirmed fax to the parties at the following
addresses (or at such other address for either such party as shall be specified
in like notice):
(a) if to Holding at:
CustomerONE Holding Corporation
c/o Onex Investment Corp.
712 Fifth Avenue
New York, New York
10019
Attention: Eric Rosen
(b) with a copy to:
<PAGE> 7
-7-
Weil, Gotshal & Manges LLP
100 Crescent Court
Suite 1300
Dallas, Texas
75201-6950
Attention: Mary Korby
(c) if to Onexco or Buyco at:
Onex Corporation
BCE Place
Canada Trust South Tower
161 Bay Street
49th Floor, P.O. Box 700
Toronto, Ontario
M5J 2S1
Attention: Seth M. Mersky
Fax: (416) 362-5765
Any notice or other communication given personally shall be deemed to have been
given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of confirmed receipt thereof
unless such day is not a Business Day or unless such notice or communication was
not given during the normal business hours of the recipient on such day, in
which case it shall be deemed to have been given and received upon the
immediately following Business Day.
3.10 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
3.11 JURISDICTION. This Agreement shall be governed by, construed
and enforced in accordance with the laws of the Province of Ontario and the
federal laws of Canada applicable in that
<PAGE> 8
-8-
province and the parties hereto hereby irrevocably attorn to the non-exclusive
jurisdiction of the courts of the Province of Ontario and all courts competent
to hear appeals therefrom.
IN WITNESS WHEREOF the parties have executed this Agreement as
of the date first above written.
CUSTOMERONE HOLDING
CORPORATION
by /s/ THOMAS P. DEA
------------------------------------
/s/ SETH M. MERSKY
------------------------------------
1293219 ONTARIO INC.
by /s/ THOMAS P. DEA
------------------------------------
/s/ SETH M. MERKSKY
------------------------------------
1293220 ONTARIO INC.
by /s/ THOMAS P. DEA
------------------------------------
/s/ SETH M. MERSKY
------------------------------------
<PAGE> 1
EXHIBIT 10.55
(244)
DEFAULT SHARE EXCHANGE RIGHTS AGREEMENT
MEMORANDUM OF AGREEMENT made as of the 17th day of December,
1998.
AMONG:
CUSTOMERONE HOLDING CORPORATION,
a corporation existing under the laws of
the State of Delaware,
(hereinafter referred to as "Holding"),
- and -
1293220 ONTARIO INC.,
a corporation existing under the laws of
the Province of Ontario,
(hereinafter referred to as "Buyco"),
- and -
PETER A. BERCZI,
an individual resident in the City of Oakville
in the Province of Ontario,
(hereinafter referred to as "Berczi"),
- and -
EDWARD SCHWARTZ,
an individual resident in the City of Toronto
in the Province of Ontario,
(hereinafter referred to as "Schwartz"),
- and -
<PAGE> 2
-2-
BRUCE SIMPSON,
an individual resident
in the Province of Ontario,
(hereinafter referred to as "Simpson").
WHEREAS Berczi, Schwartz and Simpson (collectively, the
"Shareholders") hold, in the aggregate, 3,054,055 Non-Voting Exchangeable Shares
in the capital of Buyco (the "Exchangeable Shares") which Exchangeable Shares
are exchangeable for shares of common stock in the capital of Holding on a 1:1
basis;
NOW THEREFORE in consideration of the respective covenants and
agreements provided in this Agreement and for other good and valuable
consideration (the receipt and sufficiency of which are hereby acknowledged),
the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS. In this Agreement, the following terms shall have the following
meanings:
"AFFILIATE" of any Person means any other Person directly or
indirectly controlling, controlled by, or under common control with,
that Person. For the purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling",
"controlled by" and "under common control with"), as applied to any
Person, means the possession by another Person, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of that first mentioned Person, whether
through the ownership of voting securities, by contract or otherwise;
"BOARD OF DIRECTORS" means the Board of Directors of Buyco;
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a
legal holiday on which banks are not open for business in Toronto,
Ontario;
"CASH EXCHANGE EVENT" means the inability of Buyco or Holding, as the
case may be, to deliver Holding Shares when required to do such
pursuant to the terms of the Exchangeable Share Provisions or the
terms of this Agreement as a result of it not receiving advice of
counsel to Holding that Holding, Buyco or the Shareholder, as
applicable, have complied with all applicable United States federal
and state securities laws; provided, however, that
<PAGE> 3
-3-
a Cash Exchange Event shall only occur if such inability continues for
90 days following the date on which the Holding Shares were to have been
delivered;
"CURRENT MARKET PRICE" means, in respect of a Holding Share on any date,
the amount determined by the board of directors of Holding, in good
faith and in its sole discretion to be the Current Market Price of a
Holding Share, or if the Holding Shares are then traded or quoted on a
stock exchange or automated quotation system, the average of the closing
bid and ask prices of Holding Shares during a period of 20 consecutive
trading days ending not more than three trading days before such date on
the principal stock exchange or automated quotation system on which such
shares are traded or quoted; provided, however, that if in the opinion
of the board of directors of Holding the public distribution or trading
activity of Holding Shares during such period does not create a market
which reflects the fair market value of a Holding Share it shall
determine the Current Market Price in good faith and in its sole
discretion, and provided further that any such selection, opinion or
determination by the Board of Directors shall be conclusive and binding;
"DEFAULT EVENT" means any failure of Buyco to deliver or cause to be
delivered Holding Shares in exchange for Exchangeable Shares pursuant to
the Exchangeable Share Provisions;
"DEFAULT EXCHANGE RIGHT" has the meaning ascribed thereto in section 2.1
hereof;
"EXCHANGEABLE SHARE PROVISIONS" means the rights, privileges,
restrictions and conditions set forth in the provisions attaching to the
Exchangeable Shares;
"EXCHANGEABLE SHARES" has the meaning ascribed thereto in the recitals
hereto;
"HOLDERS" means the registered holders from time to time of Exchangeable
Shares including, without limitation, the Shareholders, but excluding
Holding and its Affiliates;
"HOLDING SHARES" means the shares of common stock of Holding and any
other securities into which such shares may be changed;
"LIEN" means any lien, pledge, adverse claim, security interest,
mortgage, restriction, claim, charge or other encumbrance of any kind or
nature whatsoever;
"PERSON" includes an individual, partnership, corporation, company,
unincorporated syndicate or organization, trust, trustee, executor,
administrator and other legal representative;
"SHAREHOLDERS" has the meaning ascribed thereto in the recitals; and
<PAGE> 4
-4-
"STOCKHOLDERS' AGREEMENT" means the stockholders' agreement in respect
of Holding.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of this Agreement
into articles, sections and paragraphs and the insertion of headings are for
convenience of reference only and shall not affect the construction or
interpretation of this Agreement.
1.3 NUMBER, GENDER, ETC. In this Agreement, words importing the singular number
only shall include the plural and vice versa, and words importing the use of any
gender shall include all genders.
1.4 DATE FOR ANY ACTION. If any date on which any action is required to be taken
under this Agreement is not a Business Day, such action shall be required to be
taken on the next succeeding Business Day.
1.5 WITHHOLDING OF TAX. All amounts required to be paid, deposited or delivered
hereunder shall be paid, deposited or delivered after deduction of any amount
required by applicable law to be deducted or withheld on account of tax and the
deduction of such amounts and remittance to the applicable tax authorities
shall, to the extent thereof, satisfy such requirement to pay, deposit or
deliver hereunder.
ARTICLE 2
DEFAULT EXCHANGE RIGHT
2.1 GRANT AND OWNERSHIP OF THE DEFAULT EXCHANGE RIGHT. Holding hereby grants to
the Holders the right (the "Default Exchange Right"), upon the occurrence and
during the continuance of a Default Event, to require Holding to purchase from
each Holder all but not less than all of the Exchangeable Shares held by such
Holder, all in accordance with the provisions of this Agreement.
2.2 LEGENDED SHARE CERTIFICATES. Buyco shall cause each certificate representing
Exchangeable Shares to bear an appropriate legend notifying the Holders of the
right to exercise the Default Exchange Right in respect of the Exchangeable
Shares held by a Holder.
2.3 PURCHASE PRICE. The purchase price payable by Holding for each Exchangeable
Share to be purchased by Holding under the Default Exchange Right shall be (a)
an amount per share equal to the Current Market Price, determined on the last
Business Day prior to the day of closing of the purchase and sale of such
Exchangeable Shares under the Default Exchange Right (the "Exchange Date"),
which shall be satisfied in full by Holding causing to be delivered to each
Holder one Holding Share plus (b) an additional amount equal to the full amount
of all declared and unpaid dividends on each such Exchangeable Share held by
such Holder on any dividend record date which occurred prior to the closing of
the purchase and sale.
<PAGE> 5
-5-
2.4 EXERCISE OF THE DEFAULT EXCHANGE RIGHT. Subject to the terms and conditions
herein set forth, a Holder shall be entitled, upon the occurrence and during the
continuance of a Default Event, to exercise the Default Exchange Right with
respect to all but not less than all of the Exchangeable Shares registered in
the name of such Holder on the books of Buyco. To exercise the Default Exchange
Right, the Holder shall deliver to Holding, in person, by courier or by
certified or registered mail, at its principal office or at such other place as
Holding may from time to time designate by written notice to the Holders, the
certificates representing the Holder's Exchangeable Shares, duly endorsed in
blank, and accompanied by such other documents and instruments as Holding may
reasonably require together with:
(a) a duly completed form of notice of exercise of the Default Exchange
Right, contained on the reverse of or attached to the Exchangeable
Share certificates, stating (i) that the Holder thereby exercises
the Default Exchange Right so as to require Holding to purchase
from the Holder that number of Exchangeable Shares specified
therein, (ii) that such Holder has good title to and owns all such
Exchangeable Shares to be acquired by Holding free and clear of all
Liens, (iii) the names in which the certificates representing
Holding Shares issuable in connection with the exercise of the
Default Exchange Right are to be issued, and (iv) the names and
addresses of the Persons to whom such new certificates should be
delivered; and
(b) payment (or evidence satisfactory to Holding of payment) of the
taxes (if any) payable as contemplated by section 2.6 hereof.
2.5 DELIVERY OF HOLDING SHARES; EFFECT OF EXERCISE.
(a) Promptly after receipt of the certificates, duly endorsed in blank,
representing the Exchangeable Shares in respect of which the Default Exchange
Right has been exercised and any and all other documents acquired pursuant to
section 2.4 hereof, Holding shall notify Buyco of its receipt of the same and,
subject to section 1.5, Holding shall promptly thereafter deliver or cause to be
delivered to the Holder of such Exchangeable Shares (or to such other Persons,
if any, properly designated by such Holder) the certificates for the number of
Holding Shares issuable in connection with the exercise of the Default Exchange
Right together with payment of the balance, if any, of the purchase price for
such Exchangeable Shares.
(b) Immediately upon the exercise of the Default Exchange Right, as
provided in section 2.4 hereof, the closing of the transaction of purchase and
sale contemplated by the Default Exchange Right shall be deemed to have
occurred. The Holder of such Exchangeable Shares shall be deemed to have
transferred to Holding all of its right, title and interest in and to such
Exchangeable Shares free and clear of all Liens and shall cease to be a holder
of such Exchangeable Shares and shall not be entitled to exercise any of the
rights of a holder in respect thereof, other than the right to receive
<PAGE> 6
-6-
the purchase price therefor, unless (i) the requisite number of Holding Shares,
is not allotted, issued and/or delivered by Holding to such Holder (or to such
other Persons, if any, properly designated by such Holder) and (ii) if
applicable, the payment of the balance of the purchase price are not delivered
within five Business Days of the Exchange Date or such cheque is not honoured
when duly presented, in which case the rights of the Holder shall remain
unaffected until such Holding Shares are so allotted, issued and/or delivered by
Holding or such cheque in payment of a cash dividend is delivered or honoured,
as the case may be. Concurrently with such Holder ceasing to be a holder of
Exchangeable Shares, the Holder shall be considered and deemed for all purposes
to be a holder of Holding Shares delivered to such Holder pursuant to the
Default Exchange Right. Holding shall cause the Board of Directors to sanction
or approve any transfer of Exchangeable Shares made pursuant to an exercise of
the Default Exchange Right pursuant to the provisions hereof and such sanction
or approval shall be effective as at the closing of the transaction of purchase
and sale of Exchangeable Shares as provided in this section 2.5.
Notwithstanding any other provision hereof, Holding shall have
no any obligation to deliver Holding Shares pursuant to the terms hereof prior
to receipt of advice of counsel to Holding that Holding and/or the Holders, as
applicable, have complied with all applicable United States federal and state
securities laws. Among other things, no delivery of Holding Shares shall be made
prior to the delivery by the Holder of a securities representation letter as
reasonably requested by counsel in customary form and substance addressing the
sophistication and investment intent of the Holder and such other matters as are
reasonably requested by counsel to effect compliance with law. Nothing contained
herein shall be deemed to require Holding to register or qualify any Holding
Shares pursuant to the United States Securities Act of 1933, as amended, or the
securities laws of any other jurisdiction. Each Holder, by accepting Holding
Shares pursuant hereto, acknowledges that such Holder may be required to, and
may be required to represent that such Holder will, hold such Holding Shares
indefinitely.
(c) Upon receipt of any Holding Shares, the Holder shall immediately be
deemed to be a party to that certain Stockholders' Agreement by and among
Holding and the other parties thereto, as such agreement may be hereafter
amended (the "Stockholders Agreement"). The Holder will, promptly upon request
by Holding, execute and deliver a Joinder Agreement in customary form
acknowledging that such Holder is a party to the Stockholders Agreement with the
rights and obligations appurtenant thereto, and such other documents and
instruments as are reasonably requested by Holding and its counsel to ensure
compliance with applicable law and regulation and to otherwise effect the
purposes of these provisions.
2.6 STAMP OR OTHER TRANSFER TAXES. Upon any sale of Exchangeable Shares to
Holding pursuant to the Default Exchange Right, the share certificate or
certificates representing Holding Shares to be delivered in connection with the
payment of the purchase price therefor shall be issued in the name of the Holder
of the Exchangeable Shares so sold or in such names as such Holder may otherwise
direct in writing without charge to the Holder; provided, however, that such
Holder (a)
<PAGE> 7
-7-
shall pay (and neither Holding nor Buyco shall be required to pay) any
documentary, stamp, transfer or other similar taxes that may be payable in
respect of any transfer involved in the issuance or delivery of such shares to a
Person other than such Holder or (b) shall establish to the satisfaction of
Holding and Buyco that such taxes, if any, have been paid.
2.7 NOTICE OF DEFAULT EVENT. Immediately upon the occurrence of a Default Event,
Buyco and Holding shall give written notice thereof to the Holders. Such notice
shall describe the event that has occurred and shall specify that, pursuant to
this Agreement, the Holders are currently entitled, or may become entitled at a
later date, to exercise the Default Exchange Right.
ARTICLE 3
CASH EXCHANGE RIGHT
3.1 CASH EXCHANGE EVENT. Following the occurrence of a Cash Exchange Event,
Buyco or Holding, as the case may be, shall satisfy its obligation to deliver
Holding Shares by purchasing each Exchangeable Share in respect of which the
Cash Exchange Event has occurred. Each Shareholder who owns such an Exchangeable
Share shall be obligated to sell such Exchangeable Share in consideration of a
purchase price for each Exchangeable Share in an amount equal to the sum of (i)
the Current Market Price and (ii) an amount equal to the aggregate of all
declared and unpaid cash dividends on such Exchangeable Share through the date
on which the Cash Exchange Event occurred. The purchase price shall be satisfied
by delivery by Buyco or Holding, as the case may be, to such Shareholder of a
cheque in an amount equal to such sum. Upon the delivery of such cheque, the
Shareholder shall cease to be a holder of Exchangeable Shares and shall not be
entitled to exercise any of the rights of Holders in respect thereof.
ARTICLE 4
AMENDMENTS AND SUPPLEMENTAL AGREEMENTS
4.1 AMENDMENTS, MODIFICATIONS, ETC. Except as provided for in section 4.2
hereof, this Agreement may not be amended or modified except by an agreement in
writing executed by Buyco, Holding and Holders representing an aggregate of
50% of the issued and outstanding Exchangeable Shares. Any amendment or
modification of this Agreement by Buyco, Holding and the Holders shall bind the
Holders and Buyco, Holding and the Holders shall be entitled to rely on such
amendment or modification for all purposes.
4.2 CHANGES IN THE CAPITAL OF HOLDING OR BUYCO. Notwithstanding section 4.1
hereof, at all times after the occurrence of any capital reorganization,
consolidation, merger, arrangement of Holding or Buyco, as the case may be, or
amalgamation of Holding or Buyco, as the case may be, with or into another
entity, this Agreement shall forthwith be deemed to have been amended and
<PAGE> 8
-8-
modified as necessary in order that it shall apply with full force and effect to
all new securities into which Holding Shares or the Exchangeable Shares or both
are so changed and the parties hereto shall execute and deliver an agreement
giving effect to and evidencing such necessary amendments and modifications.
ARTICLE 5
TERMINATION
5.1 TERM.
(a) This Agreement, including the Default Exchange Right, shall come
into force and effect as at and from the date hereof and shall remain in force
and effect until the earliest to occur of the following events, at which time
this Agreement shall terminate:
(i) no outstanding Exchangeable Shares are held by the Holders;
or
(ii) the Holders, Buyco and Holding agree in writing to
terminate this Agreement.
(b) Notwithstanding anything herein to the contrary, the provisions of
this Agreement shall no longer be applicable to any Person (including, without
limitation, any Vendor) that ceases to be a registered holder of Exchangeable
Shares and such Person shall, upon ceasing to be a registered holder of
Exchangeable Shares, be deemed to have ceased to be a party to this Agreement.
ARTICLE 6
GENERAL
6.1 SEVERABILITY. If any provision of this Agreement is held to be invalid,
illegal or unenforceable, the validity, legality or enforceability of the
remainder of this Agreement shall not in any way be affected or impaired thereby
and this Agreement shall be carried out as nearly as possible in accordance with
its original terms and conditions.
6.2 BINDING AGREEMENT. Subject to the provisions of Article 6 hereof, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns and, where applicable,
their respective heirs and personal representatives. No party may assign its
rights or obligations hereunder without the express prior written consent of
each of the parties hereto.
<PAGE> 9
-9-
6.3 NOTICES TO PARTIES. All notices and other communications between the parties
hereunder shall be in writing and shall be deemed to have been given if
delivered personally or by overnight courier or by fax to the parties at the
following addresses (or at such other address for such party as shall be
specified in like notice):
(a) if to Holding at:
c/o Onex Investment Corp.
712 Fifth Avenue
New York, New York
10019
Attention: Seth M. Mersky
with a copy to:
Weil, Gotshal & Manges LLP
100 Crescent Court
Suite 1300
Dallas, Texas
75201-6950
Attention: Mary Korby
(b) if to Buyco at:
Onex Corporation
BCE Place
Canada Trust South Tower
161 Bay Street
49th Floor, P.O. Box 700
Toronto, Ontario
M5J 2S1
Attention: Seth M. Mersky
Fax: (416) 362-5765
<PAGE> 10
-10-
(c) if to Berczi at:
c/o North Direct Response Inc.
3250 Bloor Street West
East Tower, 11th Floor
P.O. Box 19
Toronto, Ontario
M8X 2X9
(d) if to Schwartz at:
c/o North Direct Response Inc.
3250 Bloor Street West
East Tower, 11th Floor
P.O. Box 19
Toronto, Ontario
M8X 2X9
(e) if to Simpson at:
c/o North Direct Response Inc.
3250 Bloor Street West
East Tower, 11th Floor
P.O. Box 19
Toronto, Ontario
M8X 2X9
Any notice or other communication given personally shall be
deemed to have been given and received upon delivery thereof unless such day is
not a Business Day or unless such notice or communication was not given during
the normal business hours of the recipient on such day in which case it shall be
deemed to have been given and received upon the immediately following Business
Day.
6.4 COUNTERPARTS. This Agreement and any amendments or supplements thereto may
be executed in counterparts, each of which shall be deemed an original, but all
of which taken together shall constitute one and the same instrument.
<PAGE> 11
-11-
6.5 JURISDICTION. This Agreement shall be governed by, construed and enforced in
accordance with the laws of the Province of Ontario and the federal laws of
Canada applicable in that province and the parties hereto hereby irrevocably
attorn to the non-exclusive jurisdiction of the courts of the Province of
Ontario and all courts competent to hear appeals therefrom.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 12
-12-
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
CUSTOMERONE HOLDING
CORPORATION
by: /s/ THOMAS P. DEA
--------------------------------------
by: /s/ SETH M. MERSKY
--------------------------------------
1293220 ONTARIO INC.
by: /s/ THOMAS P. DEA
--------------------------------------
by: /s/ SETH M. MERSKY
--------------------------------------
SIGNED, SEALED AND DELIVERED )
in the presence of )
)
)
)
)
)
) /s/ PETER BERCZI
) -----------------------------------------
) Peter Berczi
)
)
)
)
)
)
)
)
)
/s/ [ILLEGIBLE] ) /s/ EDWARD SCHWARTZ
) -----------------------------------------
) Edward Schwartz, in his personal
) capacity and in trust
)
)
) /s/ BRUCE SIMPSON
) -----------------------------------------
) Bruce Simpson
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-1 of our
report dated January 29, 2000 (except as to Note 20, for which the date is March
27, 2000, and as to Note 23, for which the date is April 19, 2000) relating to
the financial statements and financial statement schedules of ClientLogic
Corporation, which appear in such Registration Statement. We also consent to the
references to us under the heading "Experts" in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS, LLP
PricewaterhouseCoopers, LLP
Buffalo, New York
April 19, 2000
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-95951 of ClientLogic Corporation on Form S-1 of our report dated November 3,
1998 (December 17, 1998, as to Note 18) relating to the consolidated Financial
Statements of LCS Industries, Inc. and subsidiaries, appearing in the
Prospectus, which is part of this Registration Statement, and to the reference
to us under the heading "Experts" in the Prospectus, which is part of this
Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Parsippany, NJ
April 19, 2000
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-1 of our
report dated January 21, 2000 relating to the financial statements of Upgrade
Corporation of America and Subsidiary (d/b/a SOFTBANK Services Group) and The
Ivy Group Limited, which appear in such Registration Statement. We also consent
to the references to us under the heading "Experts" in such Registration
Statement.
/s/ PRICEWATERHOUSECOOPERS, LLP
PricewaterhouseCoopers, LLP
Buffalo, New York
April 19, 2000
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-1 of our
report dated March 30, 1999 relating to the financial statements of Cordena
Call Management B.V., which appear in such Registration Statement. We also
consent to the references to us under the heading "Experts" in such
Registration Statement.
/s/ PRICEWATERHOUSECOOPERS N.V.
PricewaterhouseCoopers N.V.
Utrecht, Netherlands
April 19, 2000
<PAGE> 1
EXHIBIT 23.6
CONSENT TO BE PLACED IN S1 DOCUMENT
We hereby consent to the use in the Registration Statement on Form S-1 of our
report dated May 11, 1999, relating to the audited financial statements of
Market Vision, Inc., which appear in such Registration Statement. We also
consent to the references to us under the heading "Experts" in such Registration
Statement.
/s/ TERRY & STEPHENSON, P.C.
- ----------------------------
Terry & Stephenson, P.C.
April 19, 2000
Denver, Colorado
<PAGE> 1
EXHIBIT 23.7
Consent of Independent Accountants
We hereby consent to the use in the Registration Statement on Form S-1 of our
report dated January 29, 2000 relating to the financial statements and
financial statement schedule of North Direct Response, Inc., which appear in
such Registration Statement. We also consent to the references to us under the
heading "Experts" in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS, LLP
PricewaterhouseCoopers, LLP
Buffalo, New York
April 19, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,090
<SECURITIES> 0
<RECEIVABLES> 61,906
<ALLOWANCES> 2,478
<INVENTORY> 0
<CURRENT-ASSETS> 87,404
<PP&E> 64,914
<DEPRECIATION> 11,932
<TOTAL-ASSETS> 292,726
<CURRENT-LIABILITIES> 89,131
<BONDS> 0
0
0
<COMMON> 714
<OTHER-SE> 98,348
<TOTAL-LIABILITY-AND-EQUITY> 292,726
<SALES> 177,791
<TOTAL-REVENUES> 177,791
<CGS> 99,478
<TOTAL-COSTS> 99,478
<OTHER-EXPENSES> 130,256
<LOSS-PROVISION> 2,305
<INTEREST-EXPENSE> 6,480
<INCOME-PRETAX> (60,728)
<INCOME-TAX> 322
<INCOME-CONTINUING> (61,050)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,050)
<EPS-BASIC> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
