<PAGE>
As filed with the Securities and Exchange Commission on October 20, 2000
Registration Statement No. 333-36652
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
C-QUENTIAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 8742 04-3510387
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification
jurisdiction of Classification Code Number)
incorporation or Number)
organization)
---------------
c-quential, Inc.
25 Acorn Park
Cambridge, MA 02140-2390
(617) 498-5951
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------
Rudolf Fischer
Chief Executive Officer
c-quential, Inc.
25 Acorn Park
Cambridge, MA 02140-2390
(617) 498-5951
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------
Copies to:
Stuart M. Cable, P.C. Matthew J. Mallow, Esq.
Robert P. Whalen, Jr., P.C. Skadden, Arps, Slate, Meagher & Flom LLP
Goodwin, Procter & Hoar LLP 4 Times Square
Exchange Place, 53 State Street New York, New York 10036
Boston, Massachusetts 02109-2881 (212) 735-3000
(617) 570-1000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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, please 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, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that 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 Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
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--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion, dated October 20, 2000
7,250,000 Shares
[Logo of c-quential, Inc. appears here]
Class A Common Stock
--------------------------------------------------------------------------------
This is our initial public offering of shares of Class A common stock. No
public market currently exists for our shares.
Our Class A common stock has been approved for listing on the Nasdaq National
Market, subject to notice of issuance, under the symbol "CQTL." We anticipate
the initial public offering price to be between $13.00 and $15.00 per share.
Investing in our Class A common stock involves risks. Risk Factors begin on
page 7.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price.......................................... $ $
Underwriting Discount.......................................... $ $
Proceeds to c-quential......................................... $ $
</TABLE>
Following this offering, Arthur D. Little, Inc., or ADL, will own common stock
representing 96% of the combined voting power of all classes of our common
stock. We estimate that ADL will receive $50.6 million from the net proceeds of
this offering.
We have granted the underwriters the right to purchase up to 1,087,500
additional shares within 30 days after the date of this prospectus to cover any
over-allotments.
Neither the Securities and Exchange Commission, nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver these shares
on or about , 2000.
--------------------------------------------------------------------------------
Lehman Brothers
Chase H&Q
Thomas Weisel Partners LLC
Fidelity Capital Markets
a division of National Financial Services LLC
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 7
Forward-Looking Statements.......... 16
Use of Proceeds..................... 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 19
Selected Financial Data............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 36
Management....................... 50
Certain Relationships and
Related Transactions............ 57
Principal Shareholders........... 61
Description of Capital Stock..... 62
Shares Eligible for Future Sale.. 66
Underwriting..................... 68
Legal Matters.................... 72
Experts.......................... 72
Additional Information........... 72
Index to Financial Statements.... F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. c-
quential, Inc. and the underwriters have not authorized anyone to provide you
with information different from that contained in this prospectus. We may not
sell shares of our Class A common stock until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is
not an offer to sell shares of our Class A common stock and it is not
soliciting an offer to buy shares of our Class A common stock in any state or
jurisdiction where the offer or sale is not permitted. The information
contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any
sale of Class A common stock. This preliminary prospectus is subject to
completion prior to this offering.
Until , 2000, all dealers selling our Class A common stock, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes appearing elsewhere in this
prospectus. Except as otherwise indicated, the information in this prospectus
assumes that the over-allotment option granted to the underwriters is not
exercised and gives effect to a 36-for-1 stock split of our common stock
effected in the form of a stock dividend effective August 28, 2000.
c-quential, Inc.
Our Business
We are a global management and technology consulting firm serving the
telecommunications, information technology, media and electronics industries.
We help our clients realize the opportunities, address the challenges and
mitigate the risks presented by rapid and significant advances in computing and
communications technologies and regulatory changes in the telecommunications
sector. We combine in-depth knowledge of our four targeted industries,
technology expertise, strategy development and implementation capabilities to
provide an integrated range of consulting services to our clients. Through a
network of offices in over 20 countries, our consultants, led by our senior-
level professionals who average approximately 14 years of experience in the
telecommunications, information technology, media and electronics industries,
serve a broad range of clients from start-ups to industry leaders.
Our services include technology strategy, network and systems roll-out
project management, organizational design and change, and implementation
management. Our revenue consists of fees for professional services rendered to
our clients. We provide substantially all of our services and earn fees on a
time (per-hour) and materials basis. Our costs consist of direct costs, which
are made up of payroll and fringe benefits costs for our professionals and
independent consultants, subcontracting costs, which include fees we pay to
Arthur D. Little, Inc., or ADL, when we utilize its professionals on our client
engagements and selling, general and administrative expenses.
Our top three clients, based on revenue for the twelve months ended June 30,
2000, were: Electricidade de Portugal, S.A. (EDP), KPN Telecom and
Telefonaktiebolaget LM Ericsson. For the six months ended June 30, 2000, 72.9%
of our revenue was derived from clients in Europe, 8.0% from clients in North
America, 13.9% from clients in Asia Pacific, and 5.2% from clients in Latin
America and other regions. For the year ended December 31, 1999, approximately
65% of our revenue was derived from client engagements in the
telecommunications industry.
Our Relationship with ADL
From 1995 until August 2000, we operated as the telecommunications,
information technology, media and electronics industries-focused consulting
segment of ADL, a privately-held global consulting firm. Effective August 26,
2000, ADL transferred this business to c-quential, Inc., which was formed as a
subsidiary of ADL in March 2000. Prior to this transfer, we were not a separate
subsidiary or division of ADL. Substantially all of our existing client
engagements originated while we operated as part of ADL. Following the
transfer, we began operating independently from ADL, although, after the
completion of this offering, ADL will own all of the outstanding shares of our
unlisted Class B common stock and 71% of the outstanding shares of our Class A
common stock, or 68% of the outstanding shares of our Class A common stock if
the underwriters fully exercise their over-allotment option. As a result, ADL
will own common stock representing 96% of the combined voting power of all
classes of our common stock. ADL determined to effect this offering in order to
raise capital for our business, retire a portion of ADL's debt, create a public
market for our securities and create value for the shareholders of ADL.
1
<PAGE>
Although ADL has no current plan or intention to do so, it may in the future
determine to divest all or a portion of the shares of our common stock it
holds, either gradually or in a single transaction. The determination as to the
form and timing of any divestiture will be based on financial and business
considerations and prevailing market conditions. The form of any divestiture
could include any of the following (or any combination thereof):
. a distribution or spin-off to ADL shareholders of all of the shares of
our common stock owned by ADL
. sales of our common stock by ADL into the public market
. a privately negotiated sale or sales of our common stock by ADL to one
or more third parties
Our Market Opportunity
The development and deployment of new technologies, such as wireless and
broadband communications and mobile commerce, or m-commerce, is creating many
new communications-based applications for businesses and consumers. To address
the opportunities and challenges presented by technology-driven changes,
telecommunications, information technology, media and electronics industry
companies are entering into new business combinations, strategic alliances and
joint ventures with one another. To be successful, we believe that companies in
each of these four industries must be knowledgeable about the effect of
technology-driven changes across all of the four industries. The expertise
required by these changes in technologies, the time and expense associated with
the recruitment of specialists and their scarcity has led to a large increase
in the demand for consulting services offered by third-party providers. Kennedy
Information Research Group estimates that the worldwide market for
communications, high technology and media, entertainment and publishing
consulting services offered by third-party providers will grow from $14.7
billion in 1998 to $30.7 billion in 2003, representing a 16% compound annual
growth rate. The increasing use of the Internet is further spurring demand for
consulting services as companies seek to improve their business practices
through Internet-based communications solutions. International Data
Corporation, or IDC, projects that the worldwide demand for Internet services,
which includes Internet consulting services, will grow from approximately $16.2
billion in 1999 to $99.1 billion in 2004, representing a 44% compound annual
growth rate.
Our Strategy
We intend to strengthen our competitive position in providing management and
technology consulting services to the telecommunications, information
technology, media and electronics industries. The key elements of our strategy
are:
. attracting and retaining outstanding professionals
. expanding existing and developing new relationships with established and
emerging industry-leading clients
. expanding market share in North America and our media and electronics
practices globally
. building the c-quential brand
. establishing and fostering relationships with venture capital firms,
start-ups and business incubators
Risk Factors
The principal risks we face in implementing our strategy are that our
business and its potential for growth will be harmed if:
. we are unable to successfully make the transition to an independent,
publicly-traded company from our status as a part of a large, privately-
held company
. we are unable to attract, motivate and retain a significant number of
professionals
. we lose the services of a substantial number of our senior-level
professionals or executive officers
. we are unable to develop sufficient awareness of the c-quential brand
. we are unable to compete effectively in our highly competitive market
2
<PAGE>
Our Agreements with ADL
Effective August 26, 2000, we entered into agreements with ADL that provide
for:
. the transfer of the telecommunications, information technology, media
and electronics industries-focused consulting practice of ADL, including
approximately $7.6 million of accounts receivable and interests in
subsidiaries, to us in exchange for shares of our Class A and Class B
common stock, and our agreement to assume and repay $40.6 million of
ADL's debt (including accrued interest)
. ADL's retention of approximately $24.1 million of the accounts
receivable of the telecommunications, information technology, media and
electronics industries-focused consulting practice existing on August
26, 2000
. ADL's retention of approximately $3.9 million in cash collected by ADL
in advance billings on client contracts transferred to us, which cash
will be transferred to us by ADL when earned under the terms of the
client contracts
. ADL's provision to us of $360,000 to cover our initial working capital
needs and ADL's agreement to provide to us, upon our request, additional
funds (which we estimate will be a total of $1 million) for our short-
term working capital needs through the closing of this offering, all of
which amounts will be repaid to ADL using a portion of the net proceeds
of the offering
. our agreement to assume and repay $40.6 million of ADL's debt, including
accrued interest, which provides a preferential distribution to ADL
without a corresponding benefit to investors in this offering and our
agreement to pay an approximately $1.3 million intercompany payable to
ADL
. ADL's grant to us, and our grant to ADL upon its request, of the right
to use space in leased real property for the term of the underlying
master lease at a rate equal to the applicable licensor's actual cost of
leasing such licensed space
. the grant of licenses to us to use ADL intellectual property related to
our business on an exclusive basis for a three-year period following
this offering and for a perpetual period on a non-exclusive basis (other
than the license to use the "Arthur D. Little, Inc." name, which has a
five-year term)
. certain administrative and corporate services to be provided by ADL to
us, and by us to ADL, for three years following this offering at a rate
based on the actual cost of providing such services
. the allocation of tax liabilities and benefits between ADL and us for an
unlimited period of time
. the grant to ADL of registration rights relating to the shares of our
common stock held by ADL
ADL will receive a benefit of approximately $50.6 million from the following
payments which we will make from the net proceeds of this offering:
. approximately $40.6 million to repay the indebtedness of ADL which we
have assumed and agreed to repay (including accrued interest)
. approximately $1.3 million payable to ADL for an intercompany payable
. an estimated $2.0 million to reimburse ADL for its internal costs
relating to both the separation of our business from ADL and this
offering
. an estimated $5.3 million to reimburse ADL for our costs that it paid
relating to the separation of our business from ADL
. an estimated $1.36 million to reimburse ADL for working capital advances
we expect will be made to us prior to this offering
As a subsidiary of ADL, we also guarantee approximately $56.5 million of ADL
indebtedness to several financial institutions, which includes the $40.6
million of debt (including accrued interest) we have assumed and are obligated
to pay with the proceeds of this offering. We will be released from the
guarantees upon consummation of this offering.
3
<PAGE>
Trademarks
We have filed for trademark protection in the United States for the name "c-
quential, Inc." and our logo. This prospectus also contains the trademarks and
trade names of other entities, including ADL, which are the property of their
respective owners.
The Offering
<TABLE>
<S> <C>
Class A common stock offered................. 7,250,000 shares
Common stock outstanding after this offering:
Class A common stock..................... 25,250,000 shares
Class B common stock..................... 18,000,000 shares
Total common stock........................... 43,250,000 shares
Use of proceeds.............................. Repayment of debt of ADL and related
accrued interest assumed by us prior to
the offering, repayment to ADL of an
intercompany payable and working capital
advances made to us, working capital and
general corporate purposes. See "Use of
Proceeds"
Nasdaq National Market Symbol................ "CQTL"
Proposed Frankfurt Stock Exchange Symbol..... "CQEL"
</TABLE>
We have filed an application to have our Class A common stock approved for
listing on the official list of the Frankfurt Stock Exchange with participation
in its small caps segment, or SMAX. The SMAX is a segment of the Frankfurt
Stock Exchange created in April 1999 for established small and medium-sized
companies.
Holders of Class A common stock and unlisted Class B common stock have
identical rights, except with respect to voting. Holders of Class A common
stock are entitled to one vote per share and holders of Class B common stock
are entitled to ten votes per share. Except as required by law, holders of
Class A common stock and Class B common stock vote together as a single class.
See "Description of Capital Stock."
Common stock outstanding after this offering excludes:
. 1,087,500 shares of Class A common stock that may be issued pursuant to
the over-allotment option granted to the underwriters
. 8,701,613 shares of Class A common stock issuable upon the exercise of
stock options outstanding as of October 9, 2000 at an exercise price of
$13.00 per share (260,000 of which are currently exercisable and the
remainder of which will not be exercisable before August 28, 2001)
. 86,946 shares of Class A common stock issuable upon the exercise of
stock options which we expect to grant at the time of this offering at
an exercise price equal to the initial public offering price (none of
which will be exercisable before the first anniversary of this offering)
. 4,711,441 shares of Class A common stock available for future grant
under our 2000 Stock Option and Incentive Plan
Additional Information
Our principal executive offices are located at 25 Acorn Park, Cambridge,
Massachusetts 02140-2390 and our telephone number is (617) 498-5951. We are
incorporated in the State of Delaware.
4
<PAGE>
Summary Financial Data
The following tables summarize the statement of operations data and balance
sheet data for c-quential (predecessor to c-quential, Inc.), operated as the
telecommunications, information technology, media and electronics industries-
focused consulting practice of ADL's Global Management Consulting business. The
statement of operations data for the years ended December 31, 1997, 1998 and
1999 and the balance sheet data as of December 31, 1998 and 1999 are derived
from our audited financial statements included elsewhere in this prospectus.
The statement of operations data for the six months ended July 2, 1999 and
June 30, 2000 and the balance sheet data as of June 30, 2000 are derived from
our unaudited condensed financial statements included elsewhere in this
prospectus. The statement of operations data for the years ended December 31,
1995 and 1996 are derived from our unaudited financial statements that include,
in the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for such periods. This data should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and the notes
thereto included elsewhere in this prospectus. The financial data do not
reflect any additional selling, general and administrative expenses associated
with c-quential operating as a stand-alone, publicly-traded company, including
executive management, overhead and public company costs, insurance and risk
management costs, and other costs. Therefore, the financial data are not
necessarily indicative of the results of operations or financial position that
would have resulted if we had been an independent company during the periods
shown. The statement of operations data of c-quential for the year ended
December 31, 1999 and the six months ended June 30, 2000 is summarized:
. on an actual basis
. on a pro forma basis to reflect the discontinuance of a trademark
license fee historically allocated to us by ADL, and an increase in the
provision for taxes based on the higher taxable income resulting from
discontinuance of the trademark license fee
The balance sheet data as of June 30, 2000 is summarized:
. on an actual basis
. on a pro forma basis to reflect the formation of c-quential, Inc., the
transfer from ADL to us of ADL's telecommunications, information
technology, media and electronics industries-focused consulting
practice, including specified assets and liabilities, in exchange for
shares of our Class A and Class B common stock, our assumption of $40.6
million of debt from ADL (including accrued interest), the recognition
of an estimated $5.1 million of costs to be incurred after June 30, 2000
relating to our separation from ADL and this offering as a payable to
ADL and ADL's retention of approximately $23 million of accounts
receivable
. on a pro forma as adjusted basis to reflect the sale of 7,250,000 shares
of Class A common stock in this offering at an assumed initial public
offering price of $14.00 per share after the deduction of estimated
underwriting discounts and commissions and our estimated offering
expenses, the repayment of the $40.6 million of debt assumed from ADL
(including accrued interest), the reimbursement to ADL of an estimated
$5.3 million for our costs it paid relating to the separation of our
business from ADL and an estimated $2.0 million for its internal costs
relating to both the separation of our business from ADL and this
offering, the repayment to ADL of approximately $1.0 million in other
intercompany payables and the receipt of $1.4 million from ADL to
reimburse us for certain employment liabilities assumed as part of the
separation of our business from ADL
5
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
-------------------------------------------------- ------------------------------
1999 July 2, June 30, June 30, 2000
1995 1996 1997 1998 1999 Pro Forma 1999 2000 Pro Forma
------- ------- ------- ------- -------- --------- ------- -------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Professional service
revenue.............. $48,370 $55,483 $61,156 $76,831 $106,580 $106,580 $55,940 $62,258 $62,258
Gross profit.......... 15,748 19,019 22,530 29,560 44,428 44,428 23,285 30,323 30,323
Income before taxes... 4,403 6,006 8,186 9,815 17,134 18,981 9,676 9,504 10,958
Net income............ $ 2,686 $ 3,664 $ 4,993 $ 6,085 $ 10,794 $ 11,958 $ 6,096 $ 5,702 $ 6,358
======= ======= ======= ======= ======== ======== ======= ======= =======
Per Share Data:
Net income per share:
Basic and diluted..... $ 0.31 $ 0.16
Weighted average number
of shares outstanding:
Basic and diluted..... 38,857 38,857
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------------------
Pro Forma,
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...................... $ 299 $ 1,170 $45,225
Working capital (deficit)...................... (3,440) (41,283) 50,102
Total assets................................... 38,716 18,618 61,104
Debt assumed from ADL.......................... -- 40,000 --
Practice/Stockholders' equity (deficit)(1)..... 250 (36,288) 55,097
</TABLE>
--------
(1) Practice equity represents ADL's net equity investment in its
telecommunications, information technology, media and electronics
industries-focused consulting practice.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks and all other information
contained in this prospectus before purchasing our Class A common stock. If any
of the following risks occur, our business, results of operations, financial
condition and reputation could be harmed. As a result, the trading price of our
Class A common stock could decline, and you could lose all or part of your
investment.
Risks Related to Our Separation from ADL
Our business may be adversely affected if the services we obtain from ADL are
inadequate and we are unable to replace them satisfactorily
The business operated by c-quential has been a part of ADL's Global
Management Consulting business since 1995. Effective August 26, 2000, ADL
transferred this business to us, a newly-formed entity, c-quential, Inc. We
have no experience in operating our business independently from ADL, and our
business will be adversely affected if we do not successfully obtain the
infrastructure and administrative support needed to operate independently of
ADL. At the time of the transfer of our business to c-quential, we entered into
contractual arrangements with ADL under which ADL agreed to provide
infrastructure and administrative support to us, including services related to:
. space, facilities and equipment
. information technology systems
. human resources administration
. legal, finance and accounting
Though ADL is contractually obligated to provide these services and
facilities, generally for three to five years following this offering, we
cannot be sure that these arrangements will be sufficient to support our
current operations or future growth or that we will be able to find adequate
substitute arrangements after the terms of our arrangements with ADL expire.
Our costs may increase as our agreements with ADL expire or the services we
obtain from ADL become inadequate and we are forced to obtain these services
from third parties
Our agreements with ADL under which ADL has agreed to provide us with
services and facilities have limited terms, generally of three to five years.
We may find that the services we obtain from ADL are inadequate to support our
growth and independent operations. As our arrangements with ADL expire or if
they become unsatisfactory to us, we will be forced to renegotiate with ADL or
obtain substitute or supplementary services from third parties. The terms of
these renegotiated or new arrangements may not be as favorable to us as our
existing agreements with ADL.
We may incur costs under our agreements with ADL that are higher than those we
would incur if we obtained services and facilities from unrelated third parties
The terms of our agreements with ADL for the provision of infrastructure
support and administrative services were not determined through arm's length
negotiations. We cannot be sure that the terms of these arrangements are as
favorable to us as the terms that we may have obtained through negotiations
with an unaffiliated third party.
Our ability to issue equity, to make acquisitions and to raise capital is
limited by our obligation to maintain ADL's ownership percentage and voting
power
Following this offering, ADL will own 83% of our outstanding shares of
capital stock, or 81% if the underwriters fully exercise their over-allotment
option. In connection with the separation of our business from ADL, we agreed,
absent ADL's consent, not to take any action (excluding the issuance of stock
upon the
7
<PAGE>
exercise of stock options under our 2000 Stock Option and Incentive Plan) or
fail to take any action if it would result in ADL owning less than either 80%
of our outstanding shares of capital stock or 80% of the voting power of our
outstanding capital stock and we have agreed to indemnify ADL for any tax
liability that ADL incurs as a result of our breach of this agreement. See "--
We have potential liability to ADL for tax indemnification obligations." This
agreement limits our ability to issue additional common stock, including for
purposes of making acquisitions for stock consideration and raising capital.
See "Certain Relationships and Related Transactions--Our Relationship with
ADL--Tax Allocation Agreement."
This agreement is intended to preserve our membership in ADL's consolidated
group for United States federal income tax purposes, and to preserve ADL's
ability to distribute, or spin-off, the shares of our common stock that it owns
to its shareholders on a tax-free basis, though ADL has no current plan or
arrangement to effect a spin-off of our common stock. To distribute shares of
our common stock on a tax-free basis under current United States tax law, ADL
would be required to distribute to its shareholders shares representing at
least 80% of the voting power of our outstanding common stock. We have agreed
to indemnify ADL for any tax liability it incurs as a result of our actions or
omissions (excluding the issuance of stock upon the exercise of stock options
under our 2000 Stock Option and Incentive Plan) that cause any such spin-off
distribution to be taxable for United States federal income tax purposes. See
"--We have potential liability to ADL for tax indemnification obligations."
Our business may suffer if ADL does not refer clients to us
Many of our existing clients were referred to us from divisions or segments
of ADL that will not be part of c-quential following this offering. Our
business may suffer if ADL does not continue to refer its clients and prospects
to us following our separation from ADL.
Conflicts of interest with ADL may arise that may have a negative impact on our
business
We may encounter conflicts of interest with ADL in some areas relating to
our past and ongoing relationships. For example:
. we may be unsatisfied with the services ADL provides to us and we may
dispute the amounts that ADL charges us for these services
. we may compete with ADL for the hiring and retention of professional
consultants and this may harm our relations with ADL
. we may disagree with positions ADL takes on its tax returns relating to
our separation from ADL
In addition, although we have entered into an agreement with ADL under which
it has agreed, subject to exceptions and for a limited period, not to compete
with us within the telecommunications, information technology, media and
electronics industries, we cannot be certain that the terms of the agreement
are broad enough to protect us against future competition from ADL. We may not
be able to amicably resolve any potential conflicts with ADL. Further,
resolutions of any conflicts may be less favorable to us than if we were
dealing with an unaffiliated third party.
The agreements governing the separation of our business from ADL were not
negotiated in an arm's length transaction and the terms of these agreements may
not be as favorable to us as those we may have been able to obtain from an
unaffiliated third party
Prior to August 26, 2000, we operated as part of ADL's Global Management
Consulting business. The agreements that we entered into with ADL effective
August 26, 2000 governing the separation of our business from ADL were the
result of negotiations between a parent and its wholly-owned subsidiary. We
cannot be sure that the terms of these agreements are as favorable to us as
those we may have been able to obtain through negotiations with an unaffiliated
third party in an arm's length transaction. For example, though we assumed the
liabilities under client contracts relating to our business arising after
August 26, 2000, we received approximately $7.6 million, and ADL retained
approximately $24.1 million, of the accounts receivable relating to our
business which existed on August 26, 2000.
8
<PAGE>
Three of our directors may have conflicts of interest because they are also
directors, officers and/or stockholders of ADL
Two of our directors, Messrs. Lorenzo C. Lamadrid and Gerhard Schulmeyer,
are also directors and/or officers of ADL. These members of our board of
directors, in addition to our Chief Executive Officer, Mr. Rudolf Fischer, also
hold shares of ADL stock and options to purchase ADL shares. These individuals
may have conflicts of interest with respect to decisions involving business
opportunities, our business relations with ADL and similar matters that may
arise in the course of our business or the business of ADL. Conflicts, if any,
could be resolved in a manner adverse to us and our stockholders.
We have potential liability for taxes payable by ADL
For all periods in which ADL owns 80% or more of both the voting power and
value of our outstanding capital stock, we will be included in ADL's
consolidated group for United States federal income tax purposes. If ADL fails
to pay any of the group's required United States federal income taxes, we could
be required to pay such taxes because each member of a consolidated group is
liable for the United States federal income tax obligations of the group. ADL
has agreed to pay all United States federal income tax obligations relating to
our business for periods prior to the completion of this offering. If ADL is
unable to pay any United States federal income taxes for the year 2000, we
could be required to pay such taxes as a member of ADL's consolidated group.
See "Certain Relationships and Related Transactions--Our Relationship with
ADL--Tax Allocation Agreement." In connection with the separation of our
business from ADL, ADL incurred and has agreed to pay taxes of approximately
$15.0 million (substantially all of which was for taxes other than United
States federal income taxes). If ADL is unable to pay any taxes relating to the
separation, we could be liable under applicable state or foreign law to pay
such taxes as a member of ADL's consolidated tax group or as a successor to, or
transferee of, ADL.
We have potential liability to ADL for tax indemnification obligations
Although it has no plan or arrangement to do so, ADL may in the future
decide to distribute the shares of our capital stock that it owns to its
shareholders in a spin-off transaction. We have agreed to indemnify ADL for any
tax liability that ADL incurs as a result of our actions or omissions, whether
before or after such a spin-off (excluding the issuance of stock upon the
exercise of stock options granted prior to such a spin-off under our 2000 Stock
Option and Incentive Plan), that cause the spin-off distribution to be taxable
for United States federal income tax purposes. If such a spin-off were taxable,
ADL would incur United States federal income tax and possibly state income tax
on the unrecognized built-in gain in the distributed shares based on the fair
market value of the distributed shares at the time of the spin-off. If we were
required to indemnify ADL in respect of this liability, our business would be
immediately and substantially harmed. We have also agreed to indemnify ADL for
any tax liability that ADL incurs as a result of our actions or omissions
(excluding the issuance of stock upon the exercise of stock options under our
2000 Stock Option and Incentive Plan) which result in ADL owning less than
either 80% of our outstanding shares of capital stock or 80% of the voting
power of our outstanding capital stock, including any United States federal
income tax liability triggered by our failure to qualify as a member of ADL's
consolidated group; if such failure were to occur immediately after the
offering, the tax liability would be approximately $16 million.
ADL's control of our voting stock will reduce the influence of other
stockholders and may lower the trading price of our stock
Upon completion of this offering, ADL will own shares of our common stock
representing approximately 96% of the voting power of our outstanding common
stock. As a result, ADL will effectively control all matters affecting us.
ADL's control over our business may have an adverse effect on the trading price
of our Class A common stock. We have agreed not to take, or fail to take, any
action (excluding the issuance of stock upon the exercise of stock options
under our 2000 Stock Option and Incentive Plan) that would result in a
reduction in ADL's ownership below 80% of the voting power of our outstanding
common stock. As long as ADL owns shares representing at least a majority of
the voting power of our outstanding common stock, ADL will be able to
unilaterally determine the outcome of all stockholder votes and investors in
this offering will not be able to affect the outcome of any stockholder vote.
9
<PAGE>
We depend on services and facilities provided and leased by third parties to
ADL, and we may not have recourse against those third parties
Many of the services and facilities that are provided to us by ADL under the
terms of our agreements with ADL are provided or leased to ADL by third
parties. As a result, in the event of a dispute between ADL and a third party
vendor, we could lose access to, or the rights to use, as applicable, office
space, personnel, corporate services and other operating assets. In such a
case, we may have no recourse against the third party vendor. Our inability to
use these services, facilities and operating assets for any reason, including
any termination of the agreements between us and ADL or the agreements between
ADL and third party vendors, could result in interruptions of our operations.
The trading price of our Class A common stock may be adversely affected by
sales or the prospect of sales of our stock by ADL
As long as ADL owns a substantial portion of our outstanding common stock,
there will be a potential for sales of our stock into the public market by ADL.
Following the offering, we will have 43,250,000 shares of common stock
outstanding. Of these shares, the 7,250,000 shares sold in this offering will
be freely tradeable. The remaining 36,000,000 shares, all of which are owned by
ADL, are subject to a 180-day lock-up agreement with the underwriters and the
18,000,000 shares of our Class A common stock owned by ADL are subject to an
180-day lock-up arrangement with Deutsche Borse AG which is required for the
listing of our Class A common stock on the official list of the Frankfurt Stock
Exchange with participation in SMAX. After expiration of these lock-up periods,
ADL will have the ability to sell shares of our Class A common stock into the
public market pursuant to Rule 144 under the Securities Act, subject to volume
and holding period limitations. In addition, ADL and its transferees will have
the right to require us, on any five occasions beginning six months after
completion of this offering, to register for sale any or all shares of our
common stock held by them. Although there is currently no trading market for
our shares of Class B common stock, all of which are owned by ADL, ADL could
effectively require us to arrange for the shares of Class B common stock to be
traded on Nasdaq or another securities exchange. Upon such an event, ADL's
ability to sell shares of our common stock would be increased. Sales by ADL of
our common stock, or the prospect of such sales in the future, may have an
adverse effect on the trading price of our common stock.
The trading price of our Class A common stock may be adversely affected if ADL
defaults on its outstanding indebtedness and its lenders foreclose on and sell
shares of our common stock owned by ADL
ADL has pledged all of the shares of our Class A and Class B common stock
that it owns to Citibank, N.A., The Chase Manhattan Bank, Connecticut General
Life Insurance Company, Life Insurance Company of North America, ACE Property
and Casualty Insurance Company and The Lincoln National Life Insurance Company
to secure approximately $56.5 million of indebtedness to these institutions,
$40.6 million of which (including accrued interest) we have assumed and will
repay out of the proceeds of this offering. In the event that ADL defaults
under this indebtedness, the lenders could foreclose on all or any of the
shares. In the event of such a foreclosure, the lender or lenders could vote
the shares or could sell any or all of such shares, subject to restrictions of
a 180-day lock-up agreement with Deutsche Borse AG which is required for the
listing of our Class A common stock on the Frankfurt Stock Exchange, and
subject to the volume and holding period limitations of Rule 144 under the
Securities Act. In addition, following a default, these lenders have the right
to require ADL to register any or all shares of our common stock held by them.
Sales of our common stock by any of these lenders, or the prospect of such
sales in the future, may have an adverse effect on the trading price of our
common stock.
10
<PAGE>
Our ability to issue equity, to make acquisitions, to incur debt, to pay
dividends, to make investments, to sell assets, to merge and to raise capital
is limited by our obligation to comply with the covenants under ADL's debt
agreements.
The Amended and Restated Credit Agreement, and the Amended and Restated Note
Purchase Agreement govern ADL's indebtedness to Citibank, N.A., The Chase
Manhattan Bank, Connecticut General Life Insurance Company and the Lincoln
National Life Insurance Company, include restrictive covenants which provide,
among other things, that except as permitted under the debt agreements, ADL
will not and that ADL will cause each of its subsidiaries, including us, not
to:
. incur additional indebtedness (with an exception permitting debt incurred
by us up to an aggregate of the lesser of $50 million or the amount of
net proceeds of this offering, which exception is included in the Amended
and Restated Credit Agreement and the Amended and Restated Note Purchase
Agreement)
. create any liens or encumbrances on its assets or make any guarantees
. make investments that, together with all investments of ADL and its
subsidiaries, exceed 5% of ADL's consolidated total assets (approximately
$16 million as of August 25, 2000) in the aggregate, excluding loans or
advances to employees that do not exceed $5 million in the aggregate,
investments in wholly-owned subsidiaries and investments consisting of
intercompany debt
. pay dividends, or issue, redeem or retire capital stock
. dispose of or sell assets or enter into a merger or a similar transaction
We have agreed with ADL that we will not take any action to cause ADL to breach
its covenants in the debt agreements through December 29, 2000, the accelerated
maturity date of the indebtedness evidenced by these agreements. As a result,
these restrictions limit our ability to issue equity, to make acquisitions, to
incur debt, to pay dividends, to make investments, to sell assets, to merge and
to raise capital. ADL's obligation to cause us to comply with these
restrictions will continue until the outstanding indebtedness under the debt
agreements is paid in full. Though the scheduled maturity date of the debt is
December 29, 2000, we cannot be sure that ADL will pay the debt in full by that
date. If ADL does not pay the debt in full by December 29, 2000, then ADL's
obligation to cause us to comply with these restrictions will remain in effect
until the debt is paid in full.
Risks Related to Our Business
We do not have an independent operating history and our business may be harmed
if we are unable to adequately address the risks generally encountered by
newly-formed and rapidly growing companies
We have been part of ADL since 1995 and have only operated as an independent
business entity since August 26, 2000. As a newly-formed company, we are
subject to risks and uncertainties associated with implementing our business
plan that are not typically encountered by mature companies with management
teams and administrative personnel more experienced in operating an independent
entity.
11
<PAGE>
Our historical financial information may not be representative of our results
as a separate company
The historical financial information included in this prospectus does not
reflect the actual operations of a separate company but has been compiled in an
effort to represent what our financial statements may have looked like had we
been an independent operating company during the applicable period. This
historical financial information was derived from the consolidated financial
statements of ADL using the historical results of operations and historical
bases of the assets and liabilities as reflected in ADL's consolidated
financial statements. This historical financial information may not accurately
reflect what our financial condition, results of operations and cash flows
would have been had we been a separate, stand-alone company during the periods
presented. Our costs and expenses include allocations from ADL for centralized
corporate services and regional infrastructure costs, including:
. legal
. accounting
. treasury
. facilities
. information technology
. sales and marketing
The adjustments and allocations were determined on bases that we and ADL
considered to be reasonable. However, we cannot assure you that these
adjustments and allocations appropriately reflect our operations as if we had
actually operated as a stand-alone entity during the periods presented.
Our historical financial information does not reflect additional costs we are
incurring following our separation from ADL and will incur following this
offering
Our operations underwent substantial changes as a result of our separation
from ADL. As our agreements with ADL expire, we will no longer benefit from the
economies of scale we enjoyed as a part of a much larger entity and we may
incur additional costs as a result. In addition, following this offering we
will incur increased costs associated with our establishment as a publicly-
traded company, including executive management, overhead, insurance and risk
management costs. These increased costs are not reflected in the historical
financial information contained in this prospectus. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
If we are unable to attract, motivate and retain a growing staff of
professionals we will be unable to maintain and grow our business
Our revenue consists of fees for the services our professionals provide to
our clients. As a result, the execution of our growth strategy depends on our
significantly increasing the number of our professionals in the near future. If
we are unable to maintain and increase our present number of professionals, our
ability to serve our existing clients may be hindered and our growth will be
limited. The professionals that we desire are highly talented and possess our
targeted mix of industry experience and academic qualifications. Competition to
employ these individuals is intense. We compete not only with other consulting
firms, but also with companies in the telecommunications, information
technology, media and electronics industries, financial and academic
institutions and governments. Some of these competitors are able to offer
combinations of compensation, quality of work and lifestyle that may be more
attractive to potential employees than those we offer. Increased competition
for suitable professionals may also result in higher labor costs, which could
have an adverse effect on our operating results.
The loss of senior-level professionals and executive officers could adversely
affect our business and competitive position
We rely on the efforts, abilities, business generation capabilities and
service-delivery skills of our senior-level professionals. We particularly
depend on these individuals because personal relationships are a critical
element of obtaining and maintaining our client engagements. We also depend
upon the managerial,
12
<PAGE>
operational and administrative skills of our executive officers. The loss of
any key individuals or their failure to perform at or above historical levels
could affect our financial performance. We have experienced attrition among
our senior-level professionals in the first eight months of 2000, particularly
in our United Kingdom and United States offices, where an aggregate of seven
individuals have resigned during that period. We do not believe that this
attrition has had a material adverse effect our business.
Our profitability and growth may be limited if we are unable to develop
sufficient awareness of the c-quential brand
We believe that establishing and maintaining name recognition and a good
reputation is critical to attracting and expanding our targeted client base,
as well as attracting and retaining professionals. We have no experience in
developing and building a brand name. If we fail to successfully promote and
maintain our brand name, our level of profitability will decline and our
growth may be limited. To promote our brand name, we plan to increase our
marketing expenses, which will negatively impact our profitability. In
addition, our brand may be closely associated with the business success or
failure of some of our high-profile clients, many of whom are pursuing
unproven business models in competitive markets. As a result, the failure or
difficulties of one or more of our high-profile clients may damage our brand.
Our diverse international operations subject us to a variety of economic,
regulatory, political and social environments which may adversely affect our
business
For the six months ended June 30, 2000, approximately 92% of our revenue
was derived from clients outside North America. Although we intend to increase
our market share in the United States, we anticipate that the vast majority of
our revenue for the foreseeable future will be derived from international
engagements. There are many risks inherent in our international operations,
including:
.foreign currency fluctuations
.legal uncertainty regarding foreign laws and trade barriers
.evolving regulatory requirements
.uncertain and potentially adverse tax consequences
.political instability
.cultural differences
Any of these factors could increase our costs, reduce our revenues or
hinder our international operations.
Our quarterly operating results may fluctuate as a result of seasonality
We expect to experience seasonal fluctuations in revenue and expenses which
may contribute to fluctuations in our quarterly operating results. In
particular, we anticipate that our revenue and results of operations will be
adversely affected during the third and fourth fiscal quarters of each year as
a result of the reduction in business activity in Europe during August and
December. For the six months ended June 30, 2000, 72.9% of our revenue was
derived from clients in Europe.
Our reported revenue may be negatively affected by currency exchange rates
Exchange rates between the United States dollar, in which our results are
and will be reported, and the local currency in the countries in which we
provide many of our services, may fluctuate from quarter-to-quarter. Since we
report our interim and annual results in United States dollars, we are subject
to the risk of currency fluctuations. When the dollar appreciates against the
applicable local currency in any reporting period, the actual earnings
generated by our services in that country are diminished in the conversion.
For the six months ended June 30, 2000, operations outside North America
accounted for approximately 92% of our revenues. If in the future, our foreign
revenue and expense transactions are not denominated in the local currency
and/or our foreign earnings are reinvested in a currency other than their
functional currency, we
13
<PAGE>
will also be subject to the risk of transaction losses. We have not
historically entered into hedging contracts or other derivative instruments to
limit our exposure to currency fluctuations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Disclosures About
Market Risk."
Risks Related to Our Industry
We focus on serving companies in the telecommunications, information
technology, media and electronics industries and changes in these industries
could reduce our customer base or the use of outside consultants by companies
in these industries
We currently derive almost all of our revenues from client engagements
within the telecommunications, information technology, media and electronics
industries. Our growth will depend on trends in these industries, including:
. rapid technological advancements
. increased globalization of markets
. world-wide deregulation of the telecommunications industry
. increased competition
We believe that these trends are creating much of the demand for our
professional services. If these trends slow, our revenues may be less than we
expect and our operating results may suffer.
Competition from both established and new competitors may result in the loss of
market share and reduced profitability
The market for providing professional services to the telecommunications,
information technology, media and electronics industries is intensely
competitive. We compete with general management consulting firms, the
consulting practices of major accounting firms, and foreign, local and regional
firms specializing in the telecommunications, information technology, media and
electronics industries. We cannot assure you that we will be able to compete
successfully with our existing competitors or new competitors, and our
financial condition and results of operations will be adversely affected if we
are unable to do so. Some of our competitors have formed strategic alliances
with telecommunications and technology companies. We also compete with the
internal resources of our clients and potential clients. There are low barriers
to entry in our industry, and this will encourage new competitors to enter our
markets from time to time. Many of our competitors have greater brand name
recognition and financial, technical and marketing resources than we do. Our
current and potential competitors include the following:
. strategic consulting firms (such as Bain & Company, Boston Consulting
Group, Booz, Allen & Hamilton, Cluster Consulting and McKinsey & Co.)
. accounting firms (such as Ernst & Young and PricewaterhouseCoopers)
. information technology consulting firms (such as Andersen Consulting, Cap
Gemini, Diamond Technology Partners and IBM Global Services)
. technology consulting firms (such as PA Consulting, Scientific Generics
and SRI)
. Internet professional services firms (such as Proxicom, Razorfish,
Sapient, Scient and US Interactive)
Actual and perceived conflicts of interest may constrain our growth
Most of our revenue is derived from advising large companies in the
telecommunications, information technology, media and electronics industries.
The need to avoid actual and potential conflicts of interest may constrain our
ability to obtain new clients or to obtain further work from our existing
clients, and this could inhibit our growth. In the course of our engagements,
we often obtain sensitive information about our clients.
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<PAGE>
This information often includes:
. the clients' business and growth plans
. strategic transactions being considered by our clients, including
acquisitions of or joint ventures with other companies
. competitive analyses prepared by our clients and plans to defeat the
clients' competitors
Many of these clients expect us to demonstrate loyalty to their interests. When
we commence an engagement for a client, we are sometimes requested to agree not
to perform a similar engagement for a direct competitor of the client within
its geographic area for a specified time period, generally one year. In
addition, the regulations governing auctions for communications licenses often
prohibit us from advising more than one bidder for a particular license. These
factors will limit our ability to offer our services to companies, or parts of
companies, that compete directly with existing clients. The number of large
companies in the telecommunications, information technology, media and
electronics industries is limited, and there is a trend towards consolidation
through mergers and alliances that may have the effect of reducing this number
further.
Risks Related to the Securities Markets and This Offering
The trading price of our Class A common stock may be volatile and investors in
our Class A common stock may experience substantial losses
The trading price of our Class A common stock may be volatile. Our stock
price could decline or fluctuate in response to a variety of factors. In
addition, the stock markets as a whole have recently experienced extreme price
and volume fluctuations. General securities market conditions, as well as
public announcements by companies in our industry regarding their performance
or other factors, could lower the market price of our Class A common stock,
regardless of our actual operating performance.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of their
securities. This type of litigation could result in substantial costs and a
diversion of management attention and resources.
We will have broad discretion over the use of the proceeds of this offering and
you may not agree with how we use the proceeds of this offering
Our management will have significant flexibility in applying the net
proceeds of this offering and may use the net proceeds in ways with which
stockholders disagree. Management's failure to effectively apply these proceeds
could have an adverse effect on our ability to implement our business strategy.
Risks Related to Legal Uncertainty
Provisions of Delaware law and of our charter and by-laws may make a takeover
more difficult
Provisions in our certificate of incorporation and by-laws and in the
Delaware corporate law may make it difficult and expensive for a third party to
pursue a tender offer, change in control or takeover attempt which is opposed
by our management and board of directors. Public stockholders who might desire
to participate in such a transaction may not have an opportunity to do so. Our
certificate of incorporation provides for a staggered board of directors, which
makes it difficult for stockholders to change the composition of the board of
directors in any one year. Additional anti-takeover provisions include
limitations on actions by our stockholders by written consent and the right of
our board of directors to issue preferred stock without stockholder approval,
which would allow the stock ownership of a potential acquiror to be diluted.
These anti-takeover provisions could substantially impede the ability of public
stockholders to benefit from a change in control or change our management and
board of directors. Delaware law also imposes some restrictions on mergers and
other business combinations between us and any holder of 15% or more of our
common stock, though ADL is not subject to these restrictions.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements under the captions
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business," "Certain
Relationships and Related Transactions--Our Relationship with ADL" and
elsewhere. These forward-looking statements include statements about the
following:
. implementing our business strategy
. managing our growth
. our relationship with ADL
. other statements that are not historical facts
In some cases you can identify these statements by forward-looking words
such as "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "should," "will," and "would" or similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, contain projections of our future results of operations or of our
financial position or state other "forward-looking" information. We believe
that it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or control and our actual results may differ materially from the
expectations we describe in our forward-looking statements. Before you invest
in our Class A common stock, you should be aware that the occurrence of the
events described under the caption "Risk Factors" and elsewhere in this
prospectus could have an adverse effect on our business, results of operations
and financial position.
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<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 7,250,000 shares of Class
A common stock in this offering will be approximately $91.385 million, at an
assumed initial public offering price of $14.00 per share and after deducting
the estimated underwriting discounts and commissions and our estimated offering
expenses.
Pursuant to our agreements with ADL, we have assumed and agreed to repay $40
million of ADL's indebtedness to several financial institutions, and we will
use approximately $40.6 million of the net proceeds of this offering to repay
this debt, including accrued interest. This debt of ADL which we have assumed
was not directly related to the operations of our business. Our assumption and
agreement to repay this debt provides a preferential distribution to ADL
without a corresponding benefit to investors in this offering. The debt that we
have assumed and agreed to repay matures on June 1, 2001 and bears interest at
variable rates. As of September 1, 2000, $21.875 million of the debt bore
interest at a rate of 10.00% and $18.125 million of the debt bore interest at a
rate of 9.62%. The maturities of this debt accelerate to December 29, 2000 as a
result of this offering. Accordingly, these terms are not indicative of the
repayment of $40.6 million of such debt (including accrued interest) by c-
quential, Inc., which is expected to occur immediately after the closing of
this offering. The remaining $50.785 million in net proceeds from this offering
will be used:
. to reimburse ADL an estimated $5.3 million for our costs it paid
relating to the separation of our business from ADL
. to reimburse ADL an estimated amount of $2.0 million for its costs
relating to both the separation of our business from ADL and this
offering
. to repay ADL an estimated $1.36 million for funds expected to be
advanced to us to support our working capital needs prior to this
offering
. to pay an intercompany payable to ADL of approximately $1.3 million
. to support our working capital requirements and for other general
corporate purposes including approximately $9.2 million for increased
recruiting efforts and approximately $7.0 million for marketing
initiatives associated with promoting our brand. We also intend to apply
proceeds of this offering to facilities and expansion activities and
potential acquisitions or strategic investments, although we cannot at
this time estimate the amounts to be spent on such initiatives.
Until allocated for specific use, we will invest these proceeds in
government securities and other short-term, investment-grade securities.
DIVIDEND POLICY
We currently intend to retain our future earnings, if any, to finance the
expansion of our business and we do not expect to pay any cash dividends in the
foreseeable future. We have agreed with ADL to not pay any dividends prior to
December 29, 2000 in order to comply with the covenants under its debt
agreements.
Payment of cash dividends after the offering, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
. on an actual basis
. on a pro forma basis to reflect:
- the formation of c-quential, Inc.
- the transfer from ADL to us of ADL's telecommunications, information
technology, media and electronics industries-focused consulting
practice, including specified assets and liabilities, in exchange for
shares of our Class A and Class B common stock
- the recognition of an estimated $5.1 million of costs to be incurred
after June 30, 2000 relating to our separation from ADL and the
offering as a payable to ADL
- our assumption of $40.6 million of debt from ADL (including accrued
interest)
. on a pro forma as adjusted basis to reflect:
- the sale of the 7,250,000 shares of Class A common stock in this
offering at an assumed initial public offering price of $14.00 per
share, after the deduction of estimated underwriting discounts and
commissions and our estimated offering expenses
- the repayment of the $40.6 million of debt assumed from ADL (including
accrued interest)
- the reimbursement to ADL of an estimated $5.3 million for our costs it
paid relating to the separation of our business from ADL and an
estimated $2.0 million for its internal costs it paid relating to both
the separation of our business from ADL and this offering
- the payment to ADL of approximately $1.0 million in other intercompany
payables
- the receipt of $1.4 million from ADL to reimburse us for certain
employment liabilities assumed as part of the separation of our
business from ADL
The pro forma as adjusted basis does not reflect the repayment to ADL of an
estimated $1.36 million for funds expected to be advanced to us prior to the
offering to support our working capital needs.
You should read this information in conjunction with our financial
statements and the notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of June 30, 2000
-----------------------------
Pro Forma,
Actual Pro Forma As Adjusted
------ --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Cash and cash equivalents......................... $ 299 $ 1,170 $45,225
===== ======== =======
Debt assumed from ADL............................. $ -- $ 40,000 $ --
Practice/Stockholders' equity (deficit):
Preferred stock, par value $0.01 per share;
25,000,000 shares authorized, no shares issued
or outstanding pro forma or pro forma as
adjusted....................................... -- -- --
Class A common stock, par value $0.01 per share;
200,000,000 shares authorized, 18,000,000
shares issued and outstanding pro forma; and
25,250,000 shares issued and outstanding pro
forma as adjusted.............................. -- 180 253
Class B common stock, par value $0.01 per share;
50,000,000 shares authorized, 18,000,000 shares
issued and outstanding pro forma; and
18,000,000 shares issued and outstanding pro
forma as adjusted.............................. -- 180 180
Additional paid-in capital (deficit)............ -- (31,001) 60,311
Retained earnings............................... -- (5,647) (5,647)
ADL's net equity investment..................... 250 -- --
----- -------- -------
Practice/Stockholders' equity (deficit)....... 250 (36,288) 55,097
----- -------- -------
Total capitalization........................ $ 250 $ 3,712 $55,097
===== ======== =======
</TABLE>
18
<PAGE>
DILUTION
Our pro forma net tangible book value at June 30, 2000 was approximately
$(39.9) million or $(1.11) per share. Pro forma net tangible book value per
share is determined by dividing our pro forma tangible net worth, which is
total pro forma tangible assets less total pro forma liabilities after giving
effect to the formation of c-quential, Inc. and the transfer from ADL to us of
ADL's telecommunications, information technology, media and electronics
industries-focused consulting practice and our assumption of $40 million of ADL
debt as though such transactions had occurred as of June 30, 2000, by the
number of shares of common stock outstanding immediately before this offering.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
Class A common stock in this offering and the pro forma net tangible book value
per share of our common stock immediately afterwards. After giving effect to
our sale of 7,250,000 shares of Class A common stock in this offering at an
assumed initial public offering price of $14.00 per share and after deducting
an assumed underwriting discount and estimated offering expenses payable by us,
our pro forma as adjusted net tangible book value at June 30, 2000 would have
been approximately $51.5 million or $1.19 per share.
This represents an immediate increase in pro forma net tangible book value
of $2.30 per share to our existing stockholder and an immediate dilution in pro
forma net tangible book value of $12.81 per share to new investors purchasing
shares of Class A common stock in this offering. The following table
illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
------
Pro forma net tangible book value per share as of June 30,
2000....................................................... $(1.11)
------
Increase in pro forma book value per share attributable to
new investors.............................................. $ 2.30
------
Pro forma as adjusted net tangible book value per share
after this offering........................................ $ 1.19
------
Dilution in pro forma net tangible book value per share to
new investors.............................................. $12.81
======
</TABLE>
The discussion and table above assume no exercise of options outstanding
under our 2000 Stock Option and Incentive Plan. As of October 9, 2000, there
were options outstanding to purchase a total of 8,701,613 shares of our Class A
common stock (260,000 of which are currently exercisable and the remainder of
which will not be exercisable before August 28, 2001) at an exercise price of
$13.00 per share. We expect to grant options to purchase an additional 86,946
shares of our Class A common stock (none of which will be exercisable before
the first anniversary of this offering) at the time of this offering at an
exercise price equal to the initial public offering price. To the extent that
any of these options are exercised, there could be further dilution to new
investors.
The following table sets forth, as of June 30, 2000 on a pro forma as
adjusted basis described above, the difference between the number of shares of
Class A common stock purchased from us, the par value per share of common stock
paid by our existing stockholder and by the new investors in this offering at
an assumed initial public offering price of $14.00 per share before deducting
the estimated underwriting discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder...... 36,000,000 83% $ 360,000 0.4% $ 0.01
New investors............. 7,250,000 17% 101,500,000 99.6% 14.00
---------- ---- ------------ -----
Total................... 43,250,000 100% $101,860,000 100%
========== ==== ============ =====
</TABLE>
If the underwriters fully exercise their over-allotment option, the
following will occur:
. the number of shares of common stock held by our existing stockholder
will decrease to approximately 81% of the total number of shares of
common stock outstanding
. the number of shares held by new investors will be increased to 8,337,500
shares, or approximately 19% of the total number of shares of our common
stock outstanding after this offering
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected statement of operations data for the years ended
December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31,
1998 and 1999 are derived from the audited financial statements of c-quential
(predecessor to c-quential, Inc.) included elsewhere in this prospectus. The
selected statement of operations data for the six months ended July 2, 1999 and
June 30, 2000 and the balance sheet data as of June 30, 2000, have been derived
from our unaudited condensed financial statements included elsewhere in this
prospectus. The selected statement of operations data for the years ended
December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995,
1996 and 1997 are derived from our unaudited financial statements that include,
in the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for such periods. The historical results
presented are not necessarily indicative of the results to be expected for any
future period. The selected financial data should be read in conjunction with
our financial statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
---------------------------------------- ----------------------
June
July 2, 30,
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- -------- -------------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Professional service
revenue............... $48,370 $55,483 $61,156 $76,831 $106,580 $55,940 $62,258
Costs of services:
Direct costs of
services............. 14,655 15,513 18,515 24,145 36,014 18,024 23,572
Arthur D. Little, Inc.
subcontract costs.... 17,967 20,951 20,111 23,126 26,138 14,631 8,363
------- ------- ------- ------- -------- ------- -------
Total costs of
services........... 32,622 36,464 38,626 47,271 62,152 32,655 31,935
------- ------- ------- ------- -------- ------- -------
Gross profit........... 15,748 19,019 22,530 29,560 44,428 23,285 30,323
Selling, general and
administrative
expenses.............. 11,345 13,013 14,344 19,745 27,294 13,609 20,819
------- ------- ------- ------- -------- ------- -------
Income before taxes.... 4,403 6,006 8,186 9,815 17,134 9,676 9,504
Provision for income
taxes................. 1,717 2,342 3,193 3,730 6,340 3,580 3,802
------- ------- ------- ------- -------- ------- -------
Net income............. $ 2,686 $ 3,664 $ 4,993 $ 6,085 $ 10,794 $ 6,096 $ 5,702
======= ======= ======= ======= ======== ======= =======
<CAPTION>
As of December 31, As of June 30,
---------------------------------------- --------------
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- -------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents........... $ -- $ -- $ -- $ -- $ 304 $ 299
Working capital
(deficit)............. -- -- -- -- (453) (3,440)
Total assets........... 11,519 12,071 14,040 16,591 28,433 38,716
Practice/Stockholders'
equity ............... -- -- -- -- 3,595 250
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected Financial
Data," our financial statements and the notes to those financial statements
included elsewhere in this prospectus. The historical financial information
included in this prospectus has been derived from the historical consolidated
financial statements of ADL. In addition to historical information, this
discussion contains forward-looking information that involves risks,
uncertainties and assumptions. Our actual results could differ materially from
those anticipated in such forward-looking information due to competitive
factors, risks associated with our growth strategy and other factors, including
those discussed under "Risk Factors" and elsewhere in this prospectus.
Overview and Arrangements with ADL
The business to be operated by c-quential following this offering has
historically operated as part of ADL's Global Management Consulting business.
Founded in 1886, ADL is a privately-held global consulting firm with more than
50 offices worldwide. During the year ended December 31, 1999, ADL had
consolidated professional service revenue of $473 million (including
professional service revenue earned by its telecommunications, information
technology, media and electronics industries-focused consulting practice and
reflected as professional service revenue of c-quential in the financial
statements contained in this prospectus).
ADL in the normal course of business continuously evaluates potential
strategic activities that may complement or strengthen its consulting,
technology, electronic commerce business, or e-business, environmental, fuel
cell, medical devices or other business segments in which it competes. At the
present time ADL is focusing its attention on activities in the e-business
area. Such strategic activities may take the form of mergers, acquisitions,
joint ventures, marketing alliances, strategic partnerships and other business
ventures and may involve the issuance of securities of ADL, the payment of cash
or the contribution of ADL assets. However, the agreements governing ADL's
indebtedness include restrictive covenants which may limit ADL's ability to
engage in these types of strategic transactions. The covenants provide, among
other things, that except as permitted under the debt agreements, ADL will not
and that ADL will cause each of its subsidiaries, including us, not to:
. incur additional indebtedness
. create any liens or encumbrances on its assets or make any guarantees
. make investments that, together with all investments of ADL and its
subsidiaries, exceed 5% of ADL's consolidated total assets (approximately
$16 million as of August 25, 2000) in the aggregate, excluding loans or
advances to employees that do not exceed $5 million in the aggregate,
investments in wholly-owned subsidiaries and investments consisting of
intercompany debt
. pay dividends, or issue, redeem or retire capital stock
. dispose of or sell assets or enter into a merger or a similar transaction
As a result, these restrictions limit ADL's ability to issue equity, to make
acquisitions, to incur debt, to pay dividends, to make investments, to sell
assets, to merge and to raise capital. In any case, there can be no assurances
that any such strategic activities will be consummated or, if so, the time
frame in which such activities will take place.
We began using the c-quential name in July 2000. In connection with our
separation from ADL, ADL and its affiliates contributed and assigned to us as
of August 26, 2000 the assets relating to our business, consisting primarily
of:
. approximately $3.7 million in cash (which represents an increase from the
June 30, 2000 pro forma balance of $1.2 million presented in the pro
forma condensed balance sheet included elsewhere in this prospectus)
21
<PAGE>
. rights under existing client contracts and bids
. approximately $7.6 million of accounts receivable and work in process
(which represents a decrease from the June 30, 2000 pro forma balance of
$10.1 million presented in the pro forma condensed balance sheet included
elsewhere in this prospectus)
. goodwill relating to ADL's telecommunications, information technology,
media and electronics industries-focused consulting practice
. a license to use the "Arthur D. Little, Inc." name, software and business
methodologies
. ownership interests in subsidiaries
. $1.2 million of personal property and equipment, such as vehicles,
computers and other office equipment
We have hired from ADL 508 professionals and 127 support staff, representing
substantially all of the staff who previously served ADL in its
telecommunications, information technology, media and electronics industries-
focused consulting practice. ADL assigned to us all of its rights under all of
the client contracts related to our business, other than rights with respect to
approximately $24.1 million in receivables for work performed prior to the
separation.
In connection with the transfer by ADL to us of the assets relating to our
business, we assumed liabilities of ADL and its affiliates, including $40.6
million of ADL's outstanding debt (including accrued interest), an intercompany
payable to ADL of approximately $1.3 million, the obligations under client
contracts relating to our business and $1.4 million of liabilities relating to
our employees which will be reimbursed by ADL.
Also effective August 26, 2000, we entered into agreements related to our
future relationship with ADL. These agreements provide, among other things,
that:
. in the event that we utilize ADL professionals on our client engagements
or ADL utilizes our professionals on ADL client engagements, the party
utilizing such professionals will pay the other party 85% of the
standard billing rate for the services provided by the subcontracted
professionals
. ADL will provide us, and we will provide ADL, with a variety of
administrative and corporate services for three years following this
offering, subject to the right of each party to terminate the agreement
upon 120 days' notice, at a rate equal to the actual cost of providing
such services
. ADL will grant us, and upon ADL's request we will grant ADL, a license
to use space in leased real property for the term of the underlying
master lease at a rate equal to the applicable licensor's actual cost of
leasing such licensed space
. we will pay ADL an amount equal to the United States federal income
taxes that we would have been obligated to pay, and ADL will pay us an
amount equal to any United States federal income tax refund that we
would have received, in each case had we not been part of ADL's
consolidated group, and similar payments between ADL and us will be made
with respect to other taxes reported by ADL and us on a consolidated,
combined or unitary basis, and ADL will reimburse us for tax benefits
generated by us but used to reduce United States federal income tax on
income earned by ADL
We may also negotiate new or revised arrangements with various third
parties. We cannot assure you that the terms we will be able to negotiate with
these third parties will be as favorable as those contained in our agreements
with ADL, nor can we assure you that the terms contained in our agreements with
ADL are as favorable as those we may have been able to negotiate with
unaffiliated third parties. In addition, as part of ADL, we have historically
benefited from various economies of scale including shared global
administrative functions and facilities. We expect that our costs may increase
as a result of the loss of these economies of scale as we renegotiate and enter
into new arrangements.
22
<PAGE>
ADL's telecommunications, information technology, media and electronics
industries-focused consulting practice included the operations of Contactica
Limited and Contactica Asia Limited, referred to together as Contactica. The
Contactica business is focused solely on telecommunications consulting services
and consists of 26 professionals in two offices worldwide. On January 31, 1999,
ADL acquired the remaining 72% of Contactica it did not already own for $4.5
million. Fifty percent of the purchase price was paid in cash at the time of
closing with the remaining 50% to be paid over three years in cash and stock of
ADL. The number of shares to be issued will be determined based on the fair
market value of ADL stock at the time of each subsequent payment as determined
by semi-annual valuations of ADL by an independent appraiser. The transaction
has been accounted for using the purchase method of accounting. The aggregate
purchase price of the shares exceeded the fair value of the net assets at the
date of the acquisition by approximately $4.6 million. The resulting goodwill
is being amortized by c-quential on a straight-line basis over seven years. ADL
has retained its obligation for the remaining purchase price. On August 26,
2000, ADL transferred to us the entire Contactica business. All of the
professionals in the Contactica business consented to the transfer.
Our Business
Revenue. Our revenue consists of fees for professional services rendered to
our clients. We provide substantially all of our services on a time and
materials basis. Prior to commencement of a client engagement, we estimate the
total fees for the engagement based on its expected scope, our anticipated
staffing requirements and the expected level of client involvement. We
recognize revenue as services are performed in accordance with the terms of the
client engagement. Once revenue for a particular engagement reaches the amount
at which our fees were originally estimated, we cease recognizing revenue on
that engagement unless and until we are able to receive approval from the
client to continue billing. We include in our revenue amounts attributable to
subcontractors working on our client engagements. Revenue attributable to
subcontractors was $26.3 million, $30.1 million and $36.7 million,
respectively, in 1997, 1998 and 1999. The most significant subcontractor was
ADL at 90.1%, 90.2 % and 83.7% of total subcontractor revenue in 1997, 1998 and
1999, respectively. ADL subcontractors generated 38.7%, 35.4% and 28.9% of
total revenue for c-quential in 1997, 1998 and 1999, respectively. From a
staffing perspective, c-quential would have needed approximately 115 additional
full-time professionals during 1999 in order to deliver the same amount of
revenue without utilizing ADL subcontractors. Our revenue excludes reimbursable
expenses charged to clients.
We make provisions for estimated uncollectible amounts based on a monthly
case by case review. Although from time to time we have been required to make
revisions to our accounts receivable based on our monthly reviews, to date none
of these revisions has had a material adverse effect on our financial
condition, liquidity or results of operations.
Our revenue is earned in many countries using different currencies, but we
report our revenue in United States dollars. As a result, fluctuations in
currency exchange rates may lead to fluctuations in our reported revenue.
Revenue is assigned to specific geographic regions based on the location of the
office responsible for securing the contract.
We typically invoice for an advance payment from our clients upon
commencement of an engagement, with additional billings on a monthly basis or
upon attainment of engagement milestones. We regularly analyze our fees for
services to ensure that they are competitive within the industry.
Cost Structure. Direct costs of services consist primarily of payroll and
fringe benefits costs for our professionals and independent (non ADL-related)
consultants. ADL subcontract costs consist of the fees we pay to ADL when we
utilize their professionals on our client engagements. Under our agreements
with ADL, we pay ADL 85% of the standard billing rate for the services provided
by the subcontracted professionals. We anticipate that we will continue to use
a material number of ADL professionals on our client engagements in the near
future as we focus on expanding our internal professional staff. As the size of
our professional staff increases, we anticipate that our dependence on ADL
professionals, and thus our ADL subcontract costs, will decrease, while our
direct costs of services will increase.
23
<PAGE>
Selling, general and administrative expenses have historically consisted of
direct costs and allocations from ADL of costs associated with business
development and support of our client-serving professionals. These costs
include: professional development and recruiting costs; expenses associated
with sales and marketing initiatives; operational, finance and information
systems costs; and facilities and other administrative expenses. After this
offering, selling, general and administrative expenses will also include costs
associated with operating as a public company and amounts payable to ADL under
our agreements with ADL, including the cost of administrative and corporate
services and leasing of real and personal property. The agreements that we
have entered into with ADL will result in c-quential incurring expenses
substantially equivalent to those reflected in c-quential's historical
financial statements. See "Certain Relationships and Related Transactions--Our
Relationship With ADL."
In deriving our historical financial statements from ADL's consolidated
financial statements, we considered ADL professionals who charged 70% or more
of their billable hours to telecommunications, information technology, media
and electronics industries-related engagements during any year to be
c-quential staff for that year. Direct costs of services represent the total
employment costs of these individuals as well as the cost of independent
subcontractors on telecommunications, information technology, media and
electronics industries-related client engagements. ADL subcontract costs
represent 85% of the gross revenue at standard billing rates generated on
telecommunications, information technology, media and electronics industries-
related client engagements by ADL professionals who were not considered to be
c-quential staff for the applicable year. Bid and proposal costs for
telecommunications, information technology, media and electronics industries-
related client engagements as well as overhead costs directly attributable to
those individuals deemed to be c-quential staff were included in the c-
quential financial statements. The remaining ADL overhead and infrastructure
expenses were allocated between ADL and c-quential. Specifically, a portion of
ADL's regional infrastructure expenses were allocated to c-quential using a
ratio of c-quential direct employee compensation costs in the various
jurisdictions as a percentage of the total ADL consolidated direct employee
compensation costs in those same jurisdictions applied to the pool of ADL
expenses in those jurisdictions. In addition, c-quential was charged a
trademark license fee based on a percentage of revenue basis for use of the
"Arthur D. Little, Inc." name. We will not be charged a trademark license fee
in the future for use of the "Arthur D. Little, Inc." name, although our
agreements with ADL permit us to use the "Arthur D. Little, Inc." name for
five years following the offering. Using the historical rate charged under the
trademark license fee agreement applied to projected revenues and discounted
on a present value basis, we estimate the approximate value of our permission
to use the "Arthur D. Little, Inc." name for five years to be $22 million. ADL
may not unilaterally withdraw the permission granted to us to use the name.
We regularly analyze our costs to determine whether compensation we pay to
our professionals is consistent and competitive with that paid in the industry
and whether our overhead costs are comparable to those of our competitors. We
manage activities of our professionals by closely monitoring engagement
schedules and staffing requirements for new engagements. While the total
number of professional staff must be adjusted to reflect active engagements,
we must maintain a sufficient number of senior professionals to oversee
existing client engagements and participate in our sales efforts to secure new
client assignments.
Prior to this offering, selected ADL professionals terminated their
employment with ADL or were transferred from ADL to c-quential, Inc. and, in
either case, formally became c-quential, Inc. employees. Selected ADL
administrative staff members also became our employees. We expect that ADL
will continue to make its professionals available to us on an as needed basis,
although we will endeavor to reduce our dependence on ADL through an
aggressive recruitment program as well as through selective potential
acquisitions.
Variability of Operating Results. Our revenue and operating results are
difficult to predict and may vary significantly from quarter to quarter and
year to year due to a number of factors. These fluctuations may be significant
since, for example, a substantial portion of our revenues are derived in
Europe, where it is customary to have extended holidays during August and
December. For the six months ended June 30, 2000, 72.9% of our revenue was
derived from clients in Europe. Further, it is difficult for us to forecast
accurately the frequency and duration of our client engagements. We incur
expenses, which are mainly fixed expenses, based on our expectations
concerning our future revenue stream. We may not be able to adjust our
spending in a
24
<PAGE>
timely manner to compensate for any shortfall in our projected revenues. In the
event of such a shortfall, our expenses as a percentage of our revenue would
increase and thus our gross margins would decline. Our quarterly operating
results may not meet the expectations of analysts or investors. This may cause
a decline in the market price of our common stock.
Historical Operating Results May Not Reflect Future Operating Results. The
historical financial information presented in this prospectus is not
necessarily indicative of what our financial position, results of operations or
cash flows may be in the future, nor is it necessarily indicative of what our
financial condition, results of operations or cash flows would have been had we
been a separate, stand-alone entity for the periods presented. The financial
information presented in this prospectus does not include pro forma adjustments
to reflect potential increases in costs that may occur as a result of our
separation from ADL and the implementation of our business plan. Such cost
increases may result from:
. significant increases in compensation expense associated with our
recruiting and retention initiatives
. increased costs relating to reduced economies of scale
. increased marketing expenses associated with building a brand identity
separate from ADL
. increased costs associated with operating as a stand-alone, publicly-
traded company
We intend to expand our professional staff through an aggressive recruiting
campaign. As the size of our professional staff grows, we expect that our
dependence on ADL subcontractors on our client engagements will decrease. As a
result, we expect that our ADL subcontract costs will decrease and our direct
costs of services will increase.
Basis of Presentation
Our historical financial statements have been derived from the consolidated
financial statements of ADL using the historical results of operations and
historical bases of the assets and liabilities as reflected in ADL's
consolidated financial statements. The financial statements also include
allocations to us of ADL regional administrative and corporate expenses,
including human resources, legal, accounting, treasury, facilities, information
technology, marketing and other ADL corporate services and infrastructure
costs. The expense allocations have been determined on bases that we and ADL
considered to be reasonable estimates of the utilization of the services
provided to us or the benefit received by us. Specifically, the allocations of
the ADL expenses noted above have been calculated using a ratio of our direct
employee compensation costs as a percentage of total ADL consolidated direct
employee compensation costs in each jurisdiction, applied to the pool of ADL
expenses in that jurisdiction. The agreements that we have entered into with
ADL for transitional services have cost allocation terms that we believe are
consistent with these allocation methodologies.
In this section, we discuss revenue by geographical regions. For this
purpose, we refer to the United States and Canada as "North America," and South
America and Central America, including Mexico, as "Latin America."
25
<PAGE>
Results of Operations
The following table sets forth, as a percentage of revenue, selected
statement of operations data of c-quential, (predecessor to c-quential, Inc.)
for the years ended December 31, 1997, 1998 and 1999 and the six months ended
July 2, 1999 and June 30, 2000:
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
------------------------- ----------------
July 2, June 30,
1997 1998 1999 1999 2000
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Professional service revenue...... 100% 100% 100% 100% 100%
Costs of services:
Direct costs of services........ 30 31 34 32 38
Arthur D. Little, Inc.
subcontract costs.............. 33 30 24 26 13
------- ------- ------- ---- ----
Gross profit...................... 37 39 42 42 49
Selling, general and
administrative expenses.......... 24 26 26 25 34
------- ------- ------- ---- ----
Income before taxes............... 13 13 16 17 15
Provision for income taxes........ 5 5 6 6 6
------- ------- ------- ---- ----
Net income........................ 8% 8% 10% 11% 9%
======= ======= ======= ==== ====
</TABLE>
Six Months Ended June 30, 2000 Compared to Six Months Ended July 2, 1999
Revenue. Our revenue increased $6.3 million, or 11.3%, to $62.3 million for
the six months ended June 30, 2000 from $56.0 million for the six months ended
July 2, 1999. The revenue growth was due to an increase in the number of active
client engagements in European, Latin American and Asia Pacific locations,
partially offset by a period-to-period decline in North America and other
international locations.
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
June
July 2, Percent 30, Percent Percent
Region 1999 of Total 2000 of Total Change Change
------ ------- -------- ------- -------- ------ -------
(in thousands, unaudited)
<S> <C> <C> <C> <C> <C> <C>
Europe........................ $37,675 67.3% $45,362 72.9% $7,687 20.4%
North America................. 7,808 14.0 5,010 8.0 (2,798) (35.8)
Asia Pacific.................. 6,367 11.4 8,683 13.9 2,316 36.4
Latin America................. 1,676 3.0 2,471 4.0 795 47.4
Other International........... 2,414 4.3 732 1.2 (1,682) (69.7)
------- ----- ------- ----- ------ -----
Total......................... $55,940 100.0% $62,258 100.0% $6,318 11.3%
======= ===== ======= ===== ====== =====
</TABLE>
Revenue from European locations increased $7.7 million, or 20.4%, to $45.4
million for the six months ended June 30, 2000 from $37.7 million for the six
months ended July 2, 1999. As a percentage of total revenue, revenue from
European locations was 72.9% for the six months ended June 30, 2000, an
increase from 67.3% for the six months ended July 2, 1999. The increase in the
European region was primarily attributable to revenue increases of $3.6 million
in the Netherlands, $3.1 million in the United Kingdom, $1.5 million in France,
$1.2 million in Austria and $0.9 in each of Spain and Italy, partially offset
by a decrease of $1.6 million each in Germany and Belgium.
Revenue from North America decreased $2.8 million, or 35.8%, to $5.0 million
for the six months ended June 30, 2000 from $7.8 million for the six months
ended July 2, 1999. As a percentage of total revenue, revenue from North
America was 8.0% for the six months ended June 30, 2000, a decrease from 14.0%
for the six months ended July 2, 1999. The decrease in North America was the
result of the completion of several assignments.
26
<PAGE>
Revenue from the Asia Pacific region increased $2.3 million, or 36.4%, to
$8.7 million for the six months ended June 30, 2000 from $6.4 million for the
six months ended July 2, 1999. As a percentage of total revenue, revenue from
the Asia Pacific region was 13.9% for the six months ended June 30, 2000, an
increase from 11.4% for the six months ended July 2, 1999. The revenue increase
in the Asia Pacific region was attributable to an increase of $2.2 million in
China and $1.1 million in Singapore. This increase was partially offset by a
decrease of $1.1 million in Taiwan.
Revenue from the Latin America region increased $0.8 million, or 47.4%, to
$2.5 million for the six months ended June 30, 2000 from $1.7 million for the
six months ended July 2, 1999. As a percentage of total revenue, revenue from
the Latin America region was 4.0% for the six months ended June 30, 2000, an
increase from 3.0% for the six months ended July 2, 1999. The increase in the
Latin America region was attributable to an increase of $0.6 million in Brazil.
Revenue from all other international regions decreased $1.7 million, or
69.7%, to $0.7 million for the six months ended June 30, 2000 from $2.4 million
for the six months ended July 2, 1999. As a percentage of total revenue,
revenue from all other international regions was 1.2% for the six months ended
June 30, 2000, a decrease from 4.3% for the six months ended July 2, 1999. The
decrease in the other international regions was the result of the completion of
several assignments.
Costs of Services. Total costs of services decreased $0.7 million, or 2.2%,
to $31.9 million for the six months ended June 30, 2000 from $32.7 million for
the six months ended July 2, 1999. Direct costs of services, which includes
direct employment costs and non-ADL subcontract costs, increased $5.5 million,
or 30.8%, to $23.6 for the six months ended June 30, 2000 from $18.0 million
for the six months ended July 2, 1999. ADL subcontract costs decreased $6.3
million, or 42.8%, to $8.4 million for the six months ended June 30, 2000 from
$14.6 million for the six months ended July 2, 1999. As a percentage of total
revenue, ADL subcontract costs decreased from 26.2% for the six months ended
July 2, 1999 to 13.8% for the six months ended June 30, 2000. The increase in
direct costs of services was due to direct employment costs, which increased
$5.2 million, or 32.2%, to $21.5 million for the six months ended June 30, 2000
from $16.3 million for the six months ended July 2, 1999. This was attributable
to the increase in the number of ADL professionals who charged more than 70% of
their billable hours to telecommunications, information technology, media and
electronics industries-related engagements and were thus deemed to be
c-quential professionals. Direct full-time equivalent staff increased 38.5% to
341 at the end of June 2000 from 252 at the end of December 1999.
Non-ADL subcontract costs increased $0.3 million, or 17.6%, from the six
months ended July 2, 1999 to the six months ended June 30, 2000, comprising
5.6% of the period-to-period increase in direct costs of services. The increase
in professional staff (and to a lesser extent the increase in non-ADL
subcontractors), coupled with the decrease in ADL subcontract costs, resulted
in a 7.1% decrease in costs of services as a percentage of revenue for the six
months ended June 30, 2000 when compared to the six months ended July 2, 1999.
We expect that our direct costs of services will increase following this
offering as our compensation expenses rise in connection with the planned
expansion of our professional staff. As our professional staff increases, we
expect our use of ADL subcontractors to be reduced, thus further decreasing our
ADL subcontract costs as a percentage of revenue.
Gross Profit. Gross profit increased $7.0 million, or 30.2%, to $30.3
million for the six months ended June 30, 2000 as compared to $23.3 million for
the six months ended July 2, 1999. As a percentage of revenue, gross profit was
48.7% for the six months ended June 30, 2000 compared to 41.6% for the six
months ended July 2, 1999. The increase in gross profit was due to the increase
in the percentage of revenue attributable to professionals who charged more
than 70% of their billable hours to telecommunications, information technology,
media and electronics industries-related engagements, which accounted for $8.0
million in increased gross profit, partially offset by a smaller contribution
to gross profit by ADL subcontractors during the six months ended June 30, 2000
when compared to the six months ended July 2, 1999.
27
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $7.2 million, or 53.0%, to $20.8 million for
the six months ended June 30, 2000 from $13.6 million for the six months ended
July 2, 1999. Selling, general and administrative expenses increased as a
result of additional costs allocated to us due to the increase in our
professional staff, and $2.2 million in non-recurring expenses related to our
separation from ADL. The primary component of our selling, general and
administrative expenses is the allocation of regional and corporate
infrastructure costs from ADL, which totaled $10.4 million for the six months
ended June 30, 2000 compared to $8.0 million for the six months ended July 2,
1999. As a percentage of revenue, selling, general and administrative expenses
increased to 33.4% for the six months ended June 30, 2000 from 24.3% for the
six months ended July 2, 1999. We expect that our selling, general and
administrative expenses will increase following this offering as we incur costs
associated with our establishment as a stand-alone, publicly-traded company as
well as costs associated with increasing the support necessary for our
expanding professional staff.
Provision for Income Taxes. Our tax provision increased $0.2 million, or
6.2%, to $3.8 million for the six months ended June 30, 2000 from $3.6 million
for the six months ended July 2, 1999. Our effective tax rate was 40.0% for the
six months ended June 30, 2000, an increase from 37% for the six months ended
July 2, 1999. The increase in the effective tax rate was due to a greater
concentration of profitable business in countries with relatively high tax
rates.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. Our revenue increased $29.7 million, or 38.7%, to $106.6 million
for the year ended December 31, 1999 from $76.8 million for the year ended
December 31, 1998. The revenue growth resulted in part from a 25.5% increase in
the total number of client engagements. In addition, our Contactica subsidiary,
which ADL acquired at the end of January 1999, generated revenue of $4.3
million for the eleven-month period ended December 31, 1999, representing 14.5%
of the $29.7 million of revenue growth from the year ended December 31, 1998 to
the year ended December 31, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
Percent Percent Percent
Region 1998 of Total 1999 of Total Change Change
------ ------- -------- -------- -------- ------- -------
(in thousands, unaudited)
<S> <C> <C> <C> <C> <C> <C>
Europe...................... $48,770 63.5% $ 72,917 68.4% $24,147 49.5%
North America............... 12,671 16.5 14,527 13.6 1,856 14.6
Asia Pacific................ 5,747 7.5 12,350 11.6 6,603 114.9
Latin America............... 7,434 9.7 3,983 3.7 (3,451) (46.4)
Other International......... 2,209 2.9 2,803 2.6 594 26.9
------- ----- -------- ----- ------- -----
Total....................... $76,831 100.0% $106,580 100.0% $29,749 38.7%
======= ===== ======== ===== ======= =====
</TABLE>
Revenue from European locations increased $24.1 million, or 49.5%, to $72.9
million for the year ended December 31, 1999 from $48.8 million for the year
ended December 31, 1998. As a percentage of total revenue, revenue from
European locations was 68.4% for the year ended December 31, 1999, an increase
from 63.5% for the year ended December 31, 1998. Increases in the European
region were widespread and led by Portugal, the United Kingdom, Sweden,
Switzerland and the Netherlands. Revenue from North America increased $1.9
million, or 14.6%, to $14.5 million for the year ended December 31, 1999 from
$12.7 million for the year ended December 31, 1998. As a percentage of total
revenue, revenue from North America was 13.6% for the year ended December 31,
1999, a decrease from 16.5% for the year ended December 31, 1998. Revenue from
the Asia Pacific region increased $6.6 million, or 114.9%, to $12.4 million for
the year ended December 31, 1999 from $5.7 million for the year ended December
31, 1998. As a percentage of total revenue, revenue from the Asia Pacific
region was 11.6% for the year ended December 31, 1999, an increase from 7.5%
for the year ended December 31, 1998. This increase was due to the addition of
several new large client engagements in that region. Revenue from the Latin
America region decreased $3.5 million, or 46.4%, to $4.0
28
<PAGE>
million for the year ended December 31, 1999 from $7.4 million for the year
ended December 31, 1998 due to the completion of a number of large engagements
in the prior year. As a percentage of total revenue, revenue from the Latin
America region was 3.7% for the year ended December 31, 1999, a decrease from
9.7% for the year ended December 31, 1998. Revenue from all other international
regions increased $0.6 million, or 26.9%, to $2.8 million for the year ended
December 31, 1999 from $2.2 million for the year ended December 31, 1998. As a
percentage of total revenue, revenue from all other international regions was
2.6% for the year ended December 31, 1999, a slight decrease from 2.9% for the
year ended December 31, 1998.
Costs of Services. Total costs of services increased $14.9 million, or
31.5%, to $62.2 million for the year ended December 31, 1999 from $47.3 million
for the year ended December 31, 1998. Direct costs of services, which includes
direct employment costs and non-ADL subcontract costs, increased $11.9 million,
or 49.2%, to $36.0 million for the year ended December 31, 1999 from $24.1
million for the year ended December 31, 1998. ADL subcontract costs increased
$3.0 million, or 13.0%, to $26.1 million for the year ended December 31, 1999
from $23.1 million for the year ended December 31, 1998, although ADL
subcontract costs decreased as a percentage of revenue from 30.1% for the year
ended December 31, 1998 to 24.5% for the year ended December 31, 1999.
The increase in direct costs of services was due to direct employment costs
which increased 43.3% to $31.9 million for the year ended December 31, 1999
from $22.3 million for the year ended December 31, 1998 and non-ADL subcontract
costs which increased $2.2 million, or 119.1%, from $1.9 million for the year
ended December 31, 1999 to $4.1 million over the same period in 1998. Direct
employment costs increased as the number of ADL professionals who charged more
than 70% of their billable hours to telecommunications, information technology,
media and electronics industries-related engagements increased and were thus
deemed to be c-quential professionals. Direct full-time equivalent staff
increased 46.7% to 252 at the end of December 1999 from 172 at the end of
December 1998. Included in the increase in full-time equivalent staff at the
end of December 1999 were 19 employees of Contactica, which ADL acquired in
January 1999. The acquisition of Contactica accounted for $3.4 million, or
28.3%, of the increase in direct costs and 23.8% of the increase in staff size.
Gross Profit. Gross profit increased $14.9 million, or 50.3%, to $44.4
million for the year ended December 31, 1999 from $29.6 million for the year
ended December 31, 1998. As a percentage of revenue, gross profit was 41.7% for
the year ended December 31, 1999 compared to 38.5% for the year ended
December 31, 1998. The increase in gross profit was principally due to the
volume of services delivered by the larger c-quential staff, which accounted
for $12.7 million, or 85.8%, of the change from the prior year and increased
utilization, which accounted for $0.8 million, or 5.2%, of the change.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $7.5 million, or 38.2%, to $27.3 million for
the year ended December 31, 1999 from $19.7 million for the year ended December
31, 1998. Selling, general and administrative expenses increased primarily as a
result of $5.2 million of additional costs allocated to us as a result of
increased staffing and $1.7 million in operating costs incurred by Contactica
since ADL acquired it at the end of January 1999. As a percentage of revenues,
selling, general and administrative expenses decreased slightly to 25.6% for
the year ended December 31, 1999 from 25.7% for the year ended December 31,
1998. The primary component of our selling, general and administrative expenses
is the allocation of regional and corporate infrastructure costs from ADL,
which totaled $15.9 million for the year ended December 31, 1999 and $12.5
million for the year ended December 31, 1998.
Provision for Income Taxes. Our tax provision increased $2.6 million, or
70.0%, to $6.3 million for the year ended December 31, 1999 from $3.7 million
for the year ended December 31, 1998. Our effective tax rate for the year ended
December 31, 1999 was 37.0%, a slight decrease from our effective tax rate of
38.0% for the year ended December 31, 1998. Income taxes have been calculated
as if c-quential were a stand-alone entity. The decrease in our effective tax
rate was due to a greater concentration of profitable business in countries
with relatively low tax rates.
29
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Our revenue increased $15.7 million, or 25.6%, to $76.8 million for
the year ended December 31, 1998 from $61.2 million for the year ended December
31, 1997. The revenue increase resulted primarily from higher average billings
per engagement. These higher billings were a result of more complex and labor
intensive engagements.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
Percent Percent Percent
Region 1997 of Total 1998 of Total Change Change
------ ------- -------- ------- -------- ------- -------
(in thousands, unaudited)
<S> <C> <C> <C> <C> <C> <C>
Europe....................... $31,240 51.1% $48,770 63.5% $17,530 56.1%
North America................ 10,863 17.8 12,671 16.5 1,808 16.6
Asia Pacific................. 8,851 14.5 5,747 7.5 (3,104) (35.1)
Latin America................ 8,719 14.3 7,434 9.7 (1,285) (14.7)
Other International.......... 1,483 2.4 2,209 2.9 726 49.0
------- ----- ------- ----- ------- -----
Total........................ $61,156 100.0% $76,831 100.0% $15,675 25.6%
======= ===== ======= ===== ======= =====
</TABLE>
Revenue from European locations increased $17.5 million, or 56.1%, to $48.8
million for the year ended December 31, 1998 from $31.2 million for the year
ended December 31, 1997. As a percentage of total revenue, revenue from
European locations was 63.5% for the year ended December 31, 1998, an increase
from 51.1% for the year ended December 31, 1997. Increases in the European
region were widespread and were led by the German, French, Spanish, Portuguese
and Swiss markets. Revenue from North America increased $1.8 million, or 16.6%,
to $12.7 million for the year ended December 31, 1998 from $10.9 million for
the year ended December 31, 1997. As a percentage of total revenue, revenue
from North America was 16.5% for the year ended December 31, 1998, a decrease
from 17.8% for the year ended December 31, 1997. Revenue from the Asia Pacific
region decreased $3.1 million, or 35.1%, to $5.7 million for the year ended
December 31, 1998 from $8.9 million for the year ended December 31, 1997. As a
percentage of total revenue, revenue from the Asia Pacific region was 7.5% for
the year ended December 31, 1998, a decrease from 14.5% for the year ended
December 31, 1997. Revenue from the Latin America region decreased $1.3
million, or 14.7%, to $7.4 million for the year ended December 31, 1998 from
$8.7 million for the year ended December 31, 1997. As a percentage of total
revenue, revenue from the Latin America region was 9.7% for the year ended
December 31, 1998, a decrease from 14.3% for the year ended December 31, 1997.
This decrease in the Asia Pacific and Latin America region was due to the
completion of a number of large engagements in the prior year. Revenue from all
other international regions increased $0.7 million, or 49.0%, to $2.2 million
for the year ended December 31, 1998 from $1.5 million for the year ended
December 31, 1997. As a percentage of total revenue, revenue from all other
international regions was 2.9% for the year ended December 31, 1998, an
increase from 2.4% for the year ended December 31, 1997.
Costs of Services. Total costs of services increased $8.6 million, or 22.4%,
to $47.3 million for the year ended December 31, 1998 from $38.6 million for
the year ended December 31, 1997. Direct costs of services, which include
direct employment costs and non-ADL subcontract costs, increased $5.6 million,
or 30.4%, to $24.1 million for the year ended December 31, 1998 from $18.5
million for the year ended December 31, 1997. This increase was a result of an
increase in direct employment costs of $5.2 million, or 30.4%, to $22.3 million
for the year ended December 31, 1998, while non-ADL subcontract costs increased
$0.4 million, or 30.2%, to $1.9 million over the same period. ADL subcontract
costs increased $3.0 million, or 15.0%, to $23.1 million for the year ended
December 31, 1998 from $20.1 million for the year ended December 31, 1997.
However, ADL subcontract costs decreased as a percent of revenues to 30.1% for
the year ended December 31, 1998 from 32.9% for the year ended December 31,
1997 as a greater number of professionals charged more than 70% of their
billable hours to telecommunications, information technology, media and
electronics industries-related engagements. The increase in direct employment
costs was primarily due to a 19.5% increase in direct full-time equivalent
staff to 172 at the end of December 1998 from 144 at the end of December 31
1997, which represents $3.3 million of the $5.2 million cost increase.
30
<PAGE>
Gross Profit. Gross profit increased $7.0 million, or 31.2%, to $29.6
million for the year ended December 31, 1998 from $22.5 million for the year
ended December 31, 1997. As a percentage of revenue, gross profit was 38.5% for
the year ended December 31, 1998 compared to 36.8% for the year ended
December 31, 1997. The gross profit increase of $7.0 million was due primarily
to the volume of services delivered by the larger c-quential staff, which
accounted for $5.7 million or 81.7%, of the increase from the prior year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5.4 million, or 37.7%, to $19.7 million for
the year ended December 31, 1998 from $14.3 million for the year ended December
31, 1997. The increase in selling, general and administrative expenses was
primarily attributable to the $3.8 million increase in costs allocated to us as
a result of higher direct employee compensation in relation to ADL consolidated
direct employee compensation costs in various jurisdictions. The primary
component of our selling, general and administrative expenses is the allocation
of regional and corporate infrastructure costs from ADL, which totaled $12.5
million for the year ended December 31, 1998 and $9.2 million for the year
ended December 31, 1997. Our rapid growth and that of ADL in markets outside
North America led to the increase in regional costs. Not only did ADL's overall
costs increase in these regions, but our proportional share of such costs
increased as well.
Provision for Income Taxes. Our tax provision increased $0.5 million, or
16.8%, to $3.7 million for the year ended December 31, 1998 from $3.2 million
for the year ended December 31, 1997. Our effective tax rate for the year ended
December 31, 1998 was 38.0%, a slight decrease from our effective tax rate of
39.0% for the year ended December 31, 1997. Income taxes have been calculated
as if c-quential were a stand-alone entity. The decrease in our effective tax
rate was due to greater concentration of profitable business in countries with
relatively low tax rates.
Quarterly Operating Results
The following table presents the unaudited historical quarterly results of
operations of c-quential, (predecessor to c-quential, Inc.). We believe that
all necessary adjustments, consisting only of normal recurring adjustments,
have been made in the amounts stated below to fairly present such quarterly
information when read in conjunction with the financial statements included
elsewhere in this prospectus. The results of operations may vary substantially
from quarter to quarter; accordingly, the operating results for any quarter are
not necessarily indicative of results for any subsequent quarter or for the
full year. We have included this information to demonstrate that there is
variability in revenues and expenses of the business described above.
The allocations of ADL expenses have been calculated using a ratio of our
direct employee compensation as a percentage of total ADL consolidated direct
employee compensation in each jurisdiction applied to the pool of ADL expenses
in that jurisdiction. For the four quarters of 1999, the allocation was
calculated using a ratio of direct compensation costs reported for the year
applied against the pool of ADL expenses for each quarter. For the two quarters
of 2000, the ratio was calculated using direct compensation costs reported for
the quarter applied against the pool of ADL expenses for the same quarter.
Management has determined that the effect of using direct compensation costs
for the year, rather than direct compensation costs for the quarter, to
determine the ratio is not material to the comparative results for each of the
quarters presented.
31
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------
Dec. Jun.
Apr. 2, July 2, Oct. 1, 31, Mar. 31, 30,
1999 1999 1999 1999 2000 2000
------- ------- ------- ------- -------- -------
(in thousands, unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Professional service
revenue................ $26,494 $29,446 $24,916 $25,724 $29,058 $33,200
Costs of services:
Direct costs of
services............. 8,351 9,674 9,030 8,959 11,293 12,279
Arthur D. Little, Inc.
subcontract costs.... 7,117 7,513 5,714 5,794 3,494 4,869
------- ------- ------- ------- ------- -------
Gross profit............ 11,026 12,259 10,172 10,971 14,271 16,052
Selling, general and
administrative
expenses............... 6,919 6,689 6,686 7,000 8,970 11,849
------- ------- ------- ------- ------- -------
Income before taxes..... 4,107 5,570 3,486 3,971 5,301 4,203
Provision for income
taxes.................. 1,520 2,061 1,290 1,469 2,120 1,682
------- ------- ------- ------- ------- -------
Net income.............. $ 2,587 $ 3,509 $ 2,196 $ 2,502 $ 3,181 $ 2,521
======= ======= ======= ======= ======= =======
As a Percentage of
Revenue:
Professional service
revenue................ 100% 100% 100% 100% 100% 100%
Costs of services:
Direct costs of
services............. 31 33 36 35 39 37
Arthur D. Little, Inc.
subcontract costs.... 27 25 23 22 12 15
------- ------- ------- ------- ------- -------
Gross profit............ 42 42 41 43 49 48
Selling, general and
administrative
expenses............... 26 23 27 27 31 35
------- ------- ------- ------- ------- -------
Income before taxes..... 16 19 14 16 18 13
Provision for income
taxes.................. 6 7 5 6 7 5
------- ------- ------- ------- ------- -------
Net income.............. 10% 12% 9% 10% 11% 8%
======= ======= ======= ======= ======= =======
</TABLE>
Liquidity and Capital Resources
Prior to the separation of our business from ADL, which was effective August
26, 2000, we operated as part of ADL's business and, prior to this offering, we
have relied upon ADL's capital resources. Although we have generated sufficient
cash flow from operations to fund our growth, since we were not a distinct
subsidiary or unit, ADL historically used all of our positive cash flow to help
fund the ADL business as a whole. Net cash provided from our operating
activities for the years ended December 31, 1997, 1998 and 1999, before being
retained by ADL, was $3.0 million, $3.5 million, and $4.7 million,
respectively. Cash provided by operating activities in each of these periods
was primarily the result of net income.
As a subsidiary of ADL, we guarantee approximately $56.5 million of ADL
indebtedness. ADL has pledged all of the shares of our Class A and Class B
common stock that it owns to secure this indebtedness. Effective August 26,
2000, we assumed and agreed to repay $40 million of this debt, which we will
repay (with accrued interest) with a portion of the net proceeds from this
offering. Our assumption and agreement to repay this debt provides a
preferential distribution to ADL without a corresponding benefit to investors
in this offering.
The ADL debt consists of the following obligations:
. We guarantee an aggregate of $25.6 million of debt, which is the total
amount outstanding under the Amended and Restated Credit Agreement, dated
April 25, 2000, among ADL, Arthur D. Little International, Inc.,
Citibank, N.A. and The Chase Manhattan Bank. We have assumed and agreed
to repay $18.125 million of this debt. The debt has a maturity date of
June 1, 2001 and, as of September 1, 2000, bore interest at a rate of
9.62%.
32
<PAGE>
. We guarantee an aggregate of $30.9 million of senior notes, which is the
total amount outstanding under the Amended and Restated Note Purchase
Agreement, dated April 25, 2000, between ADL, Connecticut General Life
Insurance Company, Life Insurance Company of North America, Ace Property
and Casualty Insurance Company and the Lincoln National Life Insurance
Company. We have assumed and agreed to repay $21.875 million of this
debt. The notes have a maturity date of June 1, 2001 and, as of September
1, 2000, bore interest at a rate of 10.00%.
Upon consummation of this offering, we will be released from our guarantee
of this debt, approximately $16.5 million of which will remain outstanding. The
maturities of this ADL debt accelerate to December 29, 2000 as a result of the
offering. The ADL debt agreements also include a number of financial covenants,
including covenants with respect to the maintenance of a minimum consolidated
tangible net worth, a maximum debt to EBITDA ratio, and a minimum fixed charge
ratio. These financial covenants apply to ADL and its subsidiaries on a
consolidated basis. The debt agreements also contain restrictive covenants
which provide, among other things, that except as permitted under the debt
agreements, ADL will not and that ADL will cause each of its subsidiaries,
including us, not to:
. incur additional indebtedness (with an exception permitting debt incurred
by us up to an aggregate of the lesser of $50 million or the amount of
net proceeds of this offering, which exception is included in the Amended
and Restated Credit Agreement and the Amended and Restated Note Purchase
Agreement)
. create any liens or encumbrances on its assets or make any guarantees
. make investments that, together with all investments of ADL and its
subsidiaries, exceed 5% of ADL's consolidated total assets (approximately
$16 million as of August 25, 2000) in the aggregate, excluding loans or
advances to employees that do not exceed $5 million in the aggregate,
investments in wholly-owned subsidiaries and investments consisting of
intercompany debt
. pay dividends, or issue, redeem or retire capital stock
. dispose of or sell assets or enter into a merger or a similar transaction
We have agreed with ADL that we will not take any action to cause ADL to breach
its covenants in the debt agreements, including the covenants described above,
through December 29, 2000, the accelerated maturity date of the indebtedness
evidenced by these agreements. In addition, ADL's obligation to cause us to
comply with these restrictions will continue until the outstanding indebtedness
under the debt agreements is paid in full. Though the scheduled maturity date
of the debt is December 29, 2000, we cannot be sure that ADL will pay the debt
in full by that date. If ADL does not pay the debt in full by December 29,
2000, then ADL's obligations to cause us to comply with these restrictions will
remain in effect until the debt is paid in full. After the offering, we will
not be a guarantor of the indebtedness, approximately $16.5 million of which
will remain outstanding. However, if ADL, we or any other ADL subsidiary causes
a default under the debt agreements, the lenders could foreclose on and,
subject to lock-up restrictions, sell the shares of our Class A and Class B
common stock pledged by ADL to secure the indebtedness.
ADL retained approximately $24.1 million of the total $31.7 million of
billed and unbilled receivables relating to the telecommunications, information
technology, media and electronics industries-focused consulting practice
recorded through August 26, 2000. Any accounts receivable and work in process
generated after August 26, 2000 relating to this practice belong to us. Because
our billing and collection cycle has historically averaged approximately sixty
days, for approximately thirty to sixty days following the offering we will not
generate a significant amount of cash from our operations. As a result, we will
be dependent on the net proceeds of this offering to repay the $40.6 million in
debt we assumed from ADL (including accrued interest), the approximately $5.3
million of costs relating to our separation from ADL, the approximately $2.0
million of ADL internal costs relating to our separation from ADL and this
offering, the approximately $1.3 million intercompany payable to ADL and the
estimated $1.36 million in working capital advances ADL has made to us. In
addition, we plan to use approximately $10 to $20 million of the net proceeds
of this offering to fund our operations during the thirty
33
<PAGE>
to sixty day period following this offering. We are dependent upon the
remaining net proceeds of this offering to meet our operating and capital
requirements to support our expected growth for at least the twelve months
following this offering. We believe the funds available from this offering,
together with those generated by ongoing operations, will be sufficient to
meet our operating and capital requirements for at least the next twelve
months. In the event that we did not receive the proceeds of the offering, we
may be required to significantly curtail or delay our growth plans, including
our increased recruiting efforts and marketing initiatives.
Under the Use and Occupancy Agreement, ADL has granted to us, and we will
grant to ADL upon its request, a license to use and occupy a portion of the
leased real property at locations worldwide. Under the Use and Occupancy
Agreement, the licensee will reimburse the licensor on a monthly basis for its
proportionate share of the actual costs of the leased property at each such
location. The term of each individual license granted corresponds to the term
of the underlying master lease for the property. These leases have terms of up
to ten years. Based on our current staffing levels, our expected annual
commitment under the Use and Occupancy Agreement will be approximately $6.0
million.
We anticipate that the net proceeds of this offering will be sufficient to
pay the $40.6 million in debt that we assumed from ADL (including accrued
interest) and leave us with remaining net proceeds to, at first,
. pay our costs relating to the separation of our business from ADL
. reimburse ADL for its costs relating to both the separation of our
business from ADL and this offering
. repay ADL for funds advanced to us to support our working capital needs
prior to this offering
. pay an intercompany payable to ADL
In addition, we will need to use a portion of these funds to begin to build
our own infrastructure. Although some existing infrastructure was transferred
to us by ADL and ADL will continue to make facilities and infrastructure
available to us under the Use and Occupancy and Corporate Services Agreements,
these may not be sufficient to support our expansion. We plan to increase the
size of our staff to support our operations and to develop our own systems and
infrastructure. We are not currently seeking bank financing and do not intend
to have any reliance upon advances from ADL subsequent to this offering.
Thereafter, we may sell additional equity or debt securities or seek credit
facilities. Sales of additional equity or convertible debt securities would
result in additional dilution to our existing stockholders. We may need to
raise additional funds sooner in order to support more rapid expansion,
develop new or enhanced services and products, respond to competitive
pressures, acquire complementary businesses or technologies or take advantage
of unexpected opportunities. Our future liquidity and capital requirements
will depend upon numerous factors, including the success of our existing and
new service offerings and competing technological and market developments.
Additional financing, if any, may not be available on satisfactory terms. Our
ability to raise equity capital will be limited by our agreement with ADL to
preserve its 80% ownership of our common stock and our 180-day lock-up
agreements with the representatives of the underwriters and the Deutsche Borse
AG.
Disclosures About Market Risk
Interest Rate Sensitivity
To date, our cash needs have been funded by ADL. As a result, we have had
no exposure to movements in interest rates. In addition, we have no borrowings
with the exception of the debt that will be assumed prior to the offering. A
portion of the proceeds from this offering will be used to repay this debt. We
would not expect our operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates.
Foreign Currency Exchange Risk
Although we have a significant presence in many distinct geographic
markets, we do not bear significant foreign currency exchange transaction
risk. It has historically been the practice of each of our locations to bill
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its customers in its local currency and fund its operating costs, including
working capital, from these local currency receipts. Therefore, foreign
exchange transaction gains or losses have had an immaterial impact on our
financial statements. It is also not our intention to engage in the movements
of significant amounts of foreign currency between our subsidiaries.
Therefore, foreign exchange risk is further mitigated. For the periods
presented in this prospectus, translation gains and losses have not had any
material impact on our financial statements. However, because we report our
results in United States dollars, we are subject to the risk that currency
fluctuations may impact our period-to-period comparative results.
During the periods presented in the financial statements presented in this
prospectus, we did not have balances of any significance that would contradict
the above-described practices.
Equity Security Price Risk
We do not own any equity investments. Therefore, we do not currently have
any direct equity price risk.
Effects of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 was amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133." These statements
require companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 133
will be effective for the Company commencing January 1, 2001. We believe that
adoption of these statements will not have a significant impact on our
financial results.
In December 1999, the SEC released Staff Accounting Bulletin, or SAB, No.
101, "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views regarding when a business enterprise should recognize
revenue from transactions with customers. c-quential's revenue practices fall
within, and are in compliance with, AICPA Statement of Position No. 81-1 ("SOP
81-1"), "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." SAB 101 did not modify the precepts of SOP 81-1.
Accordingly, no changes to either reported revenues or c-quential's accounting
policies are expected.
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BUSINESS
Overview
We are a global management and technology consulting firm serving the
telecommunications, information technology, media and electronics industries.
We help our clients realize the opportunities, address the challenges and
mitigate risks presented by rapid and significant advances in computing and
communications technologies and regulatory changes in the telecommunications
sector. We combine in-depth knowledge of our four targeted industries,
technology expertise, strategy development and implementation capabilities to
provide an integrated range of consulting services to help our clients realize
opportunities and mitigate risks. Through a network of offices in over 20
countries, our consultants, led by our senior-level professionals who average
approximately 14 years of experience in the telecommunications, information
technology, media and electronics industries, serve a broad range of clients
from start-ups to industry leaders.
We have operated as part of Arthur D. Little's Global Management Consulting
business since 1995. After this offering, ADL will continue to provide support
services to us at cost, including human resources, accounting, legal and other
administrative support, and will have over an 80% voting and economic interest
in us.
Industry Background
The development and deployment of new technologies is creating many new
communications-based applications for businesses and consumers. Wireline,
broadband and digital broadcasting technologies will be capable of delivering
high-definition television and video-on-demand, while third generation, or 3G,
digital broadband mobile technology is expected to enable multimedia services
and m-commerce through wireless devices.
These communications services will be delivered to businesses and consumers
under the authority of communications licenses, which provide companies with
the exclusive right to use a specified portion of the communications spectrum
for the transmission of signals and the distribution of information. Licenses
are granted for transmission over wireless, satellite and other networks.
Governments often use an auction process to allocate these licenses. Auction
processes generally consist of the submission of bids for the applicable
license as well as business plans for the development and deployment of the
application to be transmitted over the licensed spectrum. The applications
enabled by many of these new technologies are increasing the value of
communications licenses. This increase in the inherent value of these licenses
encourages new and non-traditional market entrants and incumbents to review
their business models and consider bidding for new licenses in order to provide
these new communications-based services.
These changes in communications technologies are significantly affecting
telcos and media companies. As technology improves and becomes more accessible,
we believe that "any place, any time" will become the dominant paradigm of the
personal communications age. To gain or maintain a competitive advantage,
telcos and media companies must anticipate changes in technology, delivery of
content and applications, and adjust their current operations and business
processes accordingly. Telcos have already started and will increasingly bundle
value-added services with their existing core offerings. They are also creating
new transaction- and content-oriented business models. Many media companies are
transforming their businesses from analog-based to digitally-based distribution
and changing their operating models to address the "any place, any time" and
interactive nature of the personal communications age. Telcos and media
companies are entering new geographic markets for their products and services
as a result of increasing globalization in these industries and deregulation of
telecommunications. Finally, companies in both industries are facing new
competitors entering their sectors with advanced technologies and business
models.
The following technological advancements, applications and trends in
business and personal communications illustrate the opportunities and
challenges confronting telcos and media companies:
. 3G mobile networks are expected to deliver content-rich information and
multimedia services with enhanced functionality compared to existing
mobile networks, while providing universal coverage and
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global roaming. We expect these technologies to be introduced in the next
three to five years, with their deployment anticipated first in Japan and
Europe, and subsequently in the United States
. The broad deployment of new broadband access technologies will create
opportunities to provide enhanced access to users. These technologies
include digital subscriber line, or DSL, terrestrial and satellite
digital broadcasting, interactive digital cable and Wireless Local Loop.
These technologies will allow content and service providers to offer
services ranging from voice communications and high-definition television
to video-on-demand. IDC estimates that the number of households with
broadband Internet access worldwide will grow from at least 11.3 million
at the end of 1999 to at least 54.9 million at the end of 2003,
representing a 48% compound annual growth rate
. We believe that media companies will no longer be successful simply
delivering mass communications via a single medium. End-users are
increasingly demanding personalized content. We expect that companies
will provide individuals with customized access to news, information and
entertainment on an "any place, any time" and interactive basis in the
near future
As a result of these technological developments, executives of telcos and
media companies must be prepared to re-evaluate their core strategies and
operating models and, in some cases, build entirely new businesses based on
these emerging technologies. They must sometimes invest heavily in licenses
using commercially unproven technologies, infrastructure and products. Finally,
telcos and media companies must be capable of quickly implementing these new
initiatives while effectively integrating them into their existing businesses.
Electronics and information technology companies are also significantly
affected by the changes in communications technology. These companies must
contend with the evolution of protocols and competing technology standards
while developing new products and systems. Increasingly, their customers are
demanding value-added solutions that require integrated combinations of
products and services. As the rate of technological change increases, the close
collaboration among firms with the expertise required to develop these
integrated offerings, such as equipment manufacturers, software vendors,
service providers and network operators, will become increasingly important,
frequent and complex.
To address the opportunities and challenges presented by these technological
changes, telecommunication, information technology, media and electronics
industry companies must be knowledgeable about the effects of technology-driven
change across these four industries. The expertise required by these changes in
technology is outside the core competencies of many of these companies. In
addition, telecommunication, information technology, media and electronics
industry companies are entering into new business combinations, strategic
alliances and joint ventures with each other. The time and expense associated
with the recruitment of specialists with technological expertise and their
scarcity has led to a large increase in the demand for third-party service
providers. Kennedy Information Research Group estimates that the worldwide
market for communications, high technology and media, entertainment and
publishing consulting services offered by third-party providers will grow from
$14.7 billion in 1998 to $30.7 billion in 2003, representing a 16% compound
annual growth rate. The growth rate of the use of the Internet is further
spurring demand for consulting services as companies seek to improve their
business practices through Internet-based communications solutions. IDC
projects that the worldwide demand for Internet services, which includes
Internet consulting services, will grow from approximately $16.2 billion in
1999 to $99.1 billion in 2004, representing a 44% compound annual growth rate.
Companies in the telecommunication, information technology, media and
electronics industries are among the first to be affected by the changes in
communications technologies and, as a result, we expect that these companies
will be the initial developers of new applications. The changes in the
communications technology landscape will, however, significantly impact
companies in other industries as well. We expect that executives of companies
in other industries will soon be confronted with the same fundamental business
decisions that are currently facing executives of telecommunication,
information technology, media and electronics industry companies.
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We believe that the successful management and technology consulting firms
focused on the telecommunications, information technology, media and
electronics industries will be those that combine a global presence with
multiple competencies, including comprehensive industry knowledge, technology
expertise and extensive strategy development and implementation capabilities.
Knowledge across these four industries provides clients with the ability to
address complex, interdisciplinary problems. Technology expertise is required
to quickly identify the opportunities and limits of technological development,
so that they can be factored into strategic planning. Lastly, strategy
development and implementation capabilities allow clients to realize the
opportunities created by changes in technologies.
Our Solution
We help our clients realize the opportunities, address the challenges and
mitigate the risks presented by rapid and significant advances in computing and
communications technologies and regulatory changes in the telecommunications
sector. We believe that the key elements of the solution we offer to our
clients' business issues are:
Innovative strategic advice combined with technological expertise. We help
our clients evaluate their strategies and operating models and develop new
approaches to address technology-driven changes in their industries. Our strong
knowledge base in existing and new technologies combined with our understanding
of business strategies enables us to help our clients complete the
transformations to their businesses that are essential to their success in the
rapidly changing environment of the telecommunications, information technology,
media and electronics industries.
Pragmatic business solutions supported by comprehensive operations and
industry knowledge. We offer practical solutions to our clients' business
problems accompanied by clearly defined steps to achieve desired business
transformations. Many of our professional consultants are former members of
senior management of telecommunications, information technology, media and
electronics industry companies. Our more than 43 senior-level professionals
average approximately 14 years of professional experience in the
telecommunications, information technology, media and electronics industries.
This operations and industry experience drives our pragmatic business solutions
and enables our professionals to assess trends, help our clients objectively
analyze business opportunities, and develop practical and implementable
solutions.
Implementation capabilities which include business process methodologies. We
work closely with our clients, sometimes taking leadership positions in our
clients' organizations with project management responsibilities, as they
implement new strategies. We use a proprietary set of methodologies and tools
to help our clients solve complex business problems. We have also built "Expert
Circles," groups of our consultants who build knowledge in certain key areas,
develop new thinking and disseminate their expertise throughout our
organization.
Our Strategy
We intend to strengthen our industry position in providing management and
technology consulting services to the telecommunications, information
technology, media and electronics industries. The key elements are:
Attracting and retaining outstanding professionals. We intend to continue to
attract professionals through an aggressive recruiting program, including
hiring executives from within our four targeted industries and individuals with
PhDs in relevant fields. Consulting professionals have joined c-quential from
leading telecommunications, information technology, media and electronics
industry companies, strategic consulting firms, investment banks, venture
capital and private equity investment firms and other institutions. Our culture
of innovation and emphasis on professional development, together with our
exclusive focus on our four targeted industries, provide an attractive career
option to candidates with the combination of industry and technology expertise
and managerial skills that we desire.
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Expanding existing and developing new relationships with established and
emerging industry-leading clients. We intend to expand the scope and term of
engagements with our existing clients, and to develop new long-term
relationships with other leading companies in the telecommunications,
information technology, media and electronics industries. We have established
account management teams which use a systematic client management process,
enabling us to offer tailored solutions to our clients. In addition to
providing better day-to-day service to our clients, our account management
teams are designed to enable us to:
. sell other types of services to our existing clients
. sell our services to other parts of existing clients' organizations
. identify and realize new business opportunities for our clients
In seeking new key clients, we intend to target industry-leading companies.
We currently focus, and intend in the near future to continue to focus, on
companies in the telecommunications, information technology, media and
electronics industries. However, as changes in communications technologies
begin to significantly impact other industries, we intend to also establish
relationships with clients in these other industries. Our focus on industry
leaders gives us the best opportunities to utilize the depth of our expertise,
attract outstanding professional consultants, enhance our reputation and have
an impact on the industries in which our clients operate.
Expanding market share in North America. Our business in North America has
historically been focused on the identification and assessment of the
capabilities, applications, and business opportunities that are continually
being generated by technological innovations in areas such as broadband
communications and wireless data systems, as well as by several enabling
software and networking technologies that lie at the heart of the Internet
infrastructure. We have developed sophisticated knowledge and expertise in
these new technologies and applications, which we intend to combine with the
complementary expertise we have built through our work in Europe and Asia,
particularly in the domain of m-commerce, where several recent applications
have been implemented ahead of North America. In North America in particular we
intend to broaden our practice and strengthen our presence in strategic and
financial advisory services by capitalizing on our existing relationships with
European and Asian clients as they expand into this market. In addition, we may
consider acquiring professional services companies in North America with
complementary skills and key client relationships.
Building the c-quential brand. Historically, we have operated as part of ADL
and we have only recently begun conducting business using the c-quential brand.
In order to enhance our corporate identity, we intend to develop our website
and undertake a global advertising campaign. In addition, we intend to maintain
a regular schedule of:
. hosting events for senior industry leaders and journalists
. participating in conferences, trade shows and other industry events
. publishing proprietary research and analyses
. conducting direct mail campaigns
Since our professionals are frequently sought by the trade and financial
press for their views on industry trends, we also intend to promote awareness
of our business within the trade and financial press. Finally, we expect that
our relationship with ADL will help to rapidly build global awareness of our
brand.
Expanding our media and electronics practices. As the telecommunications,
information technology, media and electronics industries continue to converge,
we intend to expand our media and electronics practices through:
. leveraging our existing relationships with telcos as they develop
partnerships with media companies
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. leveraging our experience and existing relationships with media and
electronics companies in local markets
. aggressive recruiting of media and electronics industry experts,
including two to three senior-level professionals in the electronics
practice
. publishing media-specific industry analyses
. conducting a targeted sales and marketing program
Applying the best expertise and knowledge available globally to strengthen
our offerings in every region. We intend to draw upon the knowledge and
expertise we have acquired globally on client engagements throughout our major
regional markets of Europe, North America, Asia and Latin America to extend the
breadth and enhance the distinctive competitiveness of our offerings worldwide.
In particular, we will share the expertise we have gained in the United States
market in Internet-related technologies, and our European and Asian expertise
in strategy, finance, organizational and network design and implementation, and
content applications. We will achieve this sharing of knowledge and expertise
by staffing internationally on engagements, managing our knowledge management
infrastructure, expanding our "Expert Circles" in key knowledge areas and
enhancing our career-stage training.
Establishing and fostering relationships with start-ups, venture capital
firms and business incubators. We intend to work with early-stage companies,
venture capital firms and business incubators. Our work evaluating new
technologies for these clients will help keep us at the forefront of
technological change.
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Service Offerings
Our service offerings are based on a number of capabilities, each of which
is underpinned by our knowledge of the telecommunications, information
technology, media and electronics industries and our technology expertise. Each
capability consists of a number of tools that are highly standardized. The
following is a representative list of the principal capabilities that are
included in our service offerings, divided into four categories based on our
primary competency areas:
[A chart appears with a graphic depiction of the principal capabilities included
in c-quential's service offerings with boxes above, below and to the right and
left of a circle captioned "Integrated Service Delivery," with each box
connected to the circle with an arrow. The box above the circle is captioned
"Strategy, Organization and Corporate Finance" under which are listed Corporate
and business unit strategy development, Organizational design, Management
control, cultural integration, Financial strategy and transaction support,
Business planning and financial modeling, Valuation and due diligence and
Mergers and acquisitions. The box to the right of the circle is captioned
"Technology and Innovation Management" under which are listed Technology
strategy, Technology scanning and assessment, Network and systems roll-out
project management and Network and systems architecture and design. The box
below the circle is captioned "Consulting and Knowledge Software" under which
are listed Decision support, Communication and visualization and Process
support. The box to the left of the circle is captioned "Performance Improvement
and Implementation" under which is listed Manufacturing and service provisions
strategy, Operational excellence, supply chain management and change and
implementation management.]
We use these principal capabilities to tailor consulting solutions to meet
specific client needs. When designing a tailored solution for a client, we
generally combine a number of capabilities, often from more than one of the
four categories set forth above, into a single integrated service offering. Our
principal service offerings are summarized below:
. Ambition-Driven Strategy(TM). This service offering is our key product
for e-business strategy formulation. We guide our clients through
internal and external review, vision and scenario development, strategy
development and strategy implementation, all within the context of
organizational change
. High Performance Business Scorecard. We design and implement a management
and learning process for our clients that helps to ensure the effective
implementation and monitoring of a chosen strategy
. Value Driven Management. We identify the key e-business drivers of value
and define actions to align a client's organization to the identified
value drivers and established value targets. As a result, all employees
and their behavior are directed and aligned to the envisioned value
target
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. Knowledge Management. We identify the knowledge that is strategically
relevant to a client and its source (in-house or via a network of
external knowledge resources). After the identification of the relevant
knowledge, we design all processes and systems to manage the relevant
knowledge. Our Knowledge Management process is designed to ensure a
comprehensive approach to intellectual capital management
. Acquisition and Alliance Screening. We screen potential acquisition
targets and alliance partners for our clients using a worldwide network
of industry and finance specialists. We also use this service offering to
help clients develop content partnering arrangements relating to both the
acquisition and distribution of content
. License Winner Framework. We develop winning license bids. Our License
Winner Framework manages the bid development process to ensure that the
bid is focused on the applicable assessment criteria
. OPEX for Operators. We help telcos develop world class operational
processes. Based on our benchmarking database which includes blueprints
of all major business processes for telecommunications operators and the
practical industry experience of our professionals, we help our clients
define and implement business processes for launch, planning, engineering
and execution
. E-Supply Chain Transformation. We plan the appropriate supply chain
strategy and the necessary business transformations to address
fundamental changes in a company's supply chain due to significant
product changes, as well as new business-to-business market mechanics
. Post-Merger Integration. We help our clients fully realize the planned
benefits of mergers. We provide consulting services throughout the entire
merger and integration process, including merger design, integration
planning and business transformation. To address the communication,
culture and change in organizational dynamics issues raised by mergers,
we have developed various tools to give advice in internal and external
communication to stakeholders, to develop and implement a cultural change
strategy and to facilitate conflict resolution
. Technology Audit. We assess a client's technological position in two
stages. The first stage evaluates the status of the client's
technologies, ranging from base to emerging technologies. The second
stage assesses the client's technological position in relation to its
competitors
. Network and Platform Design. We plan and implement new fixed and mobile
networks, review existing and planned systems, design networks, and
optimize existing networks on behalf of telcos and financial
institutions. We use this service offering to take on an operational
role in developing requests for proposals for networks and related
technology requirements
. Program Management. We oversee the implementation of mobile and fixed
telecommunications networks. We have used our Program Management service
offering in connection with many projects, including:
. scheduling the roll-out of mobile networks
. development of Wireless Local Loop and Asynchronous Transfer Mode
broadband networks
. implementation of cabling and telecom support infrastructure and
office automation systems
. development of Voice over Internet Protocol networks
Software Tools. We enhance most of our consulting services with the use of
software tools. Most of the software tools we currently use are proprietary to
ADL and will be licensed to us to be offered to our clients. Examples of our
software are tools to assess and graphically present the strategic position of
companies or to build and analyze complex financial structures and business
plans. We also use Internet-based applications to facilitate post-merger
integration and the implementation of global business processes.
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Representative Clients
We serve clients from start-ups to industry leaders across the
telecommunications, information technology, media and electronics industries in
many countries. During the six months ended June 30, 2000:
. Clients in Europe accounted for 72.9% of our revenues
. Clients in North America accounted for 8.0% of our revenues
. Clients in Asia Pacific accounted for 13.9% of our revenues
. Clients in Latin America and other regions accounted for 5.2% of our
revenues
The following is a representative list of our clients based on revenue for
the twelve months ended June 30, 2000. The list of European clients includes
clients who represented more than $700,000 in revenue and the lists of North
American, Asia Pacific and Latin American clients include clients who
represented more than $250,000 in revenue.
<TABLE>
<S> <C>
Europe North America Asia Pacific Latin America
Ascom Holding AG Aptus Networks Canotec Co., Inc. Alestra S.A. de
Bouygues Telecom Bridge Information COMPAQ Computer C.V.
S.A. Systems, Inc. Corporation INTELIG
Cesky Telecom Comcast Corporation Fuji Xerox Co., Partcon
The Chase Manhattan COMPAQ Computer Ltd. Administracao
Corporation Corporation Hyundai Group Participacoes
Deutsche Bahn AG Ctr Co. Isla LTDA
diAx Glenayre Communications Telet S.A.
Dutchtone NV Technologies, Inc. JSAT Corporation Unibanco-Uniao
Electricidade de National Grid Korea Telecom de Bancos
Portugal, S.A. Company Nippon Telegraph Brasileiros
E-Plus Mobilfunk PSINet Inc. and Telephone S.A.
GmbH The Readers Digest Corporation
First Mark Association, Inc. OMRON Corporation
Communications Pacific
Gaz de Lisboa Communications
General Electric Development
Company Plc Corporation
Hagemeyer NV PSINet Inc.
Hypovereinsbank AG Samsung Group
KPN Telecom Telekom Malaysia
Onda Telstra
Orange Plc Corporation
Radio Telefis Limited
Eireann Tsuzuki
Retevision Group Integrated
Sachsen LB Educational
Siemens AG Institution
Telefonaktiebolaget
LM Ericsson
Telecom Austria AG
Telia AB
</TABLE>
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Client Case Studies
The following case studies provide representative examples of the type of
engagements we perform for our clients:
diAx: Program Management for a New Wireless Internet and Telephony Provider in
Europe
We were hired by diAx, a consortium of a number of Swiss energy utilities, a
Swiss insurance company and SBC Communications, Inc., to develop a bid strategy
for a GSM license in Switzerland and to project manage the building of diAx's
network systems. Based in part on the bid we developed with diAx, the licensing
authority awarded diAx a dual band 900/1800 MHz license. To meet the terms of
the license, diAx was required to build functional network systems within six
months.
We supervised the overall program management in coordination with diAx's
marketing, sales, information technology, customer service and network
departments. In addition to overall program management, we were directly
responsible for the implementation of the following modules:
. specification and management of the development and testing of an
automated dealer activation system and dealer commissioning system
. management and coordination of all systems suppliers necessary for launch
. support of the design of the network launch promotion and management of
the establishment of the dealer network
diAx succeeded in launching its mobile network and services within the
required time frame. Subsequently, and as a result of the quality of our prior
work, we have been involved in a number of technology and strategy-to-
implementation projects for diAx such as:
. designing and advising on the roll-out of an Internet protocol-based data
network and data services
. evaluating the technology to support prepaid services and designing
diAx's next generation of prepaid mobile services
. project managing the introduction of Wireless Application Protocol
services as part of diAx's mobile Internet offering
. designing and implementing e-business practices for delivery of client
requests received through diAx's call center
Electricidade de Portugal, S.A.: Building an e-business Service Provider in
Europe
We were hired by Electricidade de Portugal, S.A., or EDP, a large utilities
company in Portugal, to identify and evaluate strategic opportunities for its
telecommunications business unit arising from the convergence of the
telecommunications, information technology, media and electronics industries
and select those opportunities that would have the greatest positive impact on
shareholder value. EDP also requested that we provide guidelines for it to use
in evaluating new business opportunities outside of its core operations in
fixed and mobile telecommunications.
In the course of developing a strategy for EDP, we:
. simulated and selected potential industry scenarios
. developed strategies to best achieve EDP's ambitions
. evaluated strategic options based on potential value creation
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. developed a detailed business and implementation plan, as well as the
organizational structure for the most attractive strategy
We concluded that EDP should take an aggressive approach, focusing on e-
business initiatives, rather than attempt to compete solely based on its
traditional carrier model under which we believed its services would rapidly
become a commodity. Following our recommendation for this approach, EDP
requested that we develop a broad e-business strategy for the organization.
EDP's goal was to extend its operations beyond pure telecommunications and
create an e-business platform in Portugal. In connection with our
recommendation, we were also retained by EDP's subsidiary, Oni, to project
manage the establishment of an Internet Service Provider, or ISP, which we
successfully completed within eight weeks.
PSINet: Winning Three Licenses in Asia
PSINet, which had recently consolidated seven ISPs, hired us to prepare
license bids in Hong Kong. Three licenses were being offered by the regulatory
authority: Local Wireless Fixed Network, External Fixed Network by Satellite
and External Fixed Networks by Cable. The license submissions had to be
developed in less than six weeks with minimal contribution from PSINet due to
its limited available resources.
We developed a strategic plan, which included performance bond studies, a
business and marketing plan and a financial model for each license, based on
our assessment of the most likely decision criteria to be applied by the
regulatory authority. A critical part of our work involved the planning of the
technical requirements for a successful bid. We developed the following:
. a marketing plan including competitor analysis and demand forecast
. a product and service strategy
. a network design including underwater and satellite connections to Japan,
Korea and Taiwan
. a project plan for the implementation of the network roll-out
. a financial model for the various businesses and a set of application
documents
As a result of our work, PSINet won all three licenses. Since winning the
licenses, PSINet has retained us to provide the necessary management resources
to ensure the build-out of the ISP network within the time permitted by the
performance bonds as well as to help it simultaneously build a network and a
business organization.
Consortium of Telcos and Financial Institutions: Bidding for a Broadband Cable
TV Network in Europe
We were hired by a consortium of telcos and financial institutions to
prepare a bid for one of the regions of Deutsche Telekom's cable television
network. Prior to the submission of a bid the client needed to:
. design the overall portfolio of services to be offered by a cable
operator, including telephony, high-speed Internet access and portal,
interactive and digital television applications
. plan a cost effective upgrade to the network that would support all
planned applications
. develop a business plan and a resulting financial valuation
We supported our client with overall project management and our expertise on
financial modeling, network technologies and interactive services. As part of
this engagement we:
. developed telephony, high-speed Internet and cable television services
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. planned network upgrade concepts and associated capital expenditure
requirements ultimately able to support all planned applications
. developed a business unit to provide operational support for the new
business
. assisted in the development of the financial model and reviewed the
client's independent model
. established an efficient communication framework to gather internal and
external intelligence
As a result, a successful model of the planned business and network was
developed and a valuation range for the bid established. As a result of our
work, our client's bid has continued to the final selection round and our
client is in exclusive negotiations with the regulatory authority.
Sales and Marketing
We primarily market our services to leading companies in the
telecommunications, information technology, media and electronics industries,
emphasizing our technological and industry expertise. Our more than 43 senior-
level professionals have primary responsibility for client development and
management. Each of these individuals has a sales target that has been
established in a manner that encourages team sales efforts and is responsible
for managing one or more key client relationships. Revenue bookings to those
key clients form an integral part of that individual's incentive compensation.
For larger clients, we have dedicated account management teams that enable us
to build in-depth, client-specific knowledge in order to create more fully-
integrated solutions and to develop closer relationships.
We will continue to develop our relationship with journalists in the trade
and financial press who frequently quote our professionals on technological and
industry trends. Further, we intend to capitalize on our relationship with ADL
to assist our marketing efforts.
We also maintain five advisors that we refer to as our "Senior Advisors" to
assist our sales and marketing efforts. These Senior Advisors are experts from
the telecommunications, media and corporate finance sectors. The Senior
Advisors assist our sales activities using their networks of contacts and skill
sets to market our range of services to their former companies, as well as
companies in the same industry as their former companies. They also participate
in client engagements in an advisory capacity, for which they are paid on a per
hour or per day basis. We generally enter into rolling six-month or one-year
contracts with these Senior Advisors.
We intend to place significant emphasis on building awareness of the c-
quential brand name. We have hired a marketing manager with primary
responsibility for promoting our brand and we intend to increase our spending
on advertising and other promotional activities. We have also retained a public
relations firm and an advertising agency to assist in our brand-building
efforts.
Our Relationship with ADL
From 1995 until August 2000, we operated as part of ADL's Global Management
Consulting business. Effective August 26, 2000, ADL transferred our business to
a newly-formed entity, c-quential, Inc. and we entered into agreements with ADL
to facilitate the separation. After the completion of this offering, ADL will
own all of the outstanding shares of our unlisted Class B common stock and 71%
of the outstanding shares of our Class A common stock, or 68% of the Class A
common stock if the underwriters fully exercise their over-allotment option. As
a result, ADL will own stock representing 96% of the combined voting power of
all classes of our stock.
The agreements regarding the separation of our business operations from ADL
are described in the section entitled "Certain Relationships and Related
Transactions--Our Relationship with ADL" included elsewhere in this prospectus.
The assets and liabilities transferred to us are described more fully in our
financial statements and the notes to those statements included elsewhere in
this prospectus.
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Competition
We face strong competition in providing consulting services to the
telecommunications, information technology, media and electronics industries.
Our current and potential competitors include the following:
. strategic consulting firms (such as Bain & Company, Boston Consulting
Group, Booz, Allen & Hamilton, Cluster Consulting and McKinsey & Co.)
. accounting firms (such as Ernst & Young and PricewaterhouseCoopers)
. information technology consulting firms (such as Andersen Consulting, Cap
Gemini, Diamond Technology Partners and IBM Global Services)
. technology consulting firms (such as PA Consulting, Scientific Generics
and SRI)
. Internet professional services firms (such as Proxicom, Razorfish,
Sapient, Scient and US Interactive)
As barriers to entry are relatively low in our industry, we expect other
market entrants to compete with us in the future. Several of our competitors
have substantially greater financial, technical and marketing resources, as
well as more established relationships in the industry, than we do. As a
result, these competitors may be able to develop and expand their service
offerings to make them more competitive. Also, these competitors have entered,
and will continue to enter, into joint ventures and consortiums to provide
additional competitive services.
We believe that the principal factors on which we compete in delivering
services to our clients are:
. knowledge of communications technologies
. industry expertise
. strategic planning and project management capabilities
. global presence
. reputation and experience of professionals and quality of services
delivered
We believe that we compete favorably with respect to each of these factors
except that technology consulting firms, with whom we compete most often, are
often on equal footing with us with respect to knowledge of communications
technologies and industry expertise.
Human Resources
To succeed in developing long-term relationships with our current and
prospective clients in the telecommunications, information technology, media
and electronics industries we:
. recruit, employ and retain industry experts and qualified technological
talent
. maintain an environment that fosters entrepreneurial spirit, continuous
learning and knowledge acquisition, as well as opportunities to grow
personally, professionally, and financially
. attempt to develop a culture that breeds teamwork, creativity, innovation
and a drive to succeed
. reward performance excellence at all levels
As of September 22, 2000, we had 691 employees, 558 of whom were
professional consultants (444 full-time and 114 part-time) and 133 of whom were
support staff (114 full-time and 19 part-time). We intend to increase our
professional ranks significantly in the near future. Our human resources
functions have historically been provided by ADL, and we will have access to
ADL's human resources facilities and professionals following this offering
under our agreements with ADL. In addition, we intend to build our internal
human resources department following this offering.
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Recruiting. We have an aggressive plan to recruit senior professionals. The
individuals that we require are industry experts, individuals with Ph.Ds in
relevant fields and business school graduates from leading universities
globally.
Under the direction of a global human resources consultant, we have
associations with regional human resources specialists covering Europe, Mid-
East, Africa, the Americas and Australia. Through direct contact, specialized
and global search firms, and campus recruiting, we attempt to hire talented and
experienced individuals to ensure our technological advantage and overall
success.
Professional Development. In conjunction with ADL, our professional
development programs provide training and knowledge acquisition and are
designed to keep our professionals at the forefront of industry change. From
their first day of employment, our professionals are exposed to a comprehensive
orientation in
our culture and processes, career-stage training, technological development,
industry expertise and functional training. Within the first few months of
their hiring, our professionals attend a ten day orientation program
introducing them to general business consulting practices, as well as our
philosophies and methodologies. Additional formal company-wide training
programs are provided to our professionals annually and as they are promoted or
hired for case management or senior business development positions. These
broad-based programs are supplemented by regionally-focused training provided
by the particular home office of each professional. In addition, we are
currently in discussions with external training organizations to form
partnerships to create company specific training programs aimed at developing
the skills in strategy development, technological innovation and project
management that we require of our professionals.
Our formal training and development programs are supplemented by external
programs that we encourage our professionals to attend and the coaching and
mentoring process that we foster and intend to continue to support within the
c-quential organization. Through these programs, we enable our professionals to
develop their skills in areas such as issue analysis, public speaking,
facilitation, research, project management, client relationships, key client
management and strategic sales.
Compensation. We provide base and incentive compensation, as well as
employee benefits that we think are competitive in our industry. Following this
offering, and with the commencement of the 2000 Stock Option and Incentive
Plan, we believe that our compensation package will remain competitive in the
industry. Additionally, we intend to use stock options for eligible employees
to align their interests with those of our shareholders.
Intellectual Property Rights
We have filed for trademark protection in the United States for the name "c-
quential, Inc." and our logo. We also have a license from ADL to use the
"Arthur D. Little, Inc." name, software and business methodologies that relate
to our business. The licenses are fully paid-up, royalty-free, worldwide and
perpetual (other than the license to use the "Arthur D. Little, Inc." name,
which has a five-year term). Also, ADL has agreed not to license its
intellectual property or the ADL name to anyone within the telecommunications,
information technology, media and electronics industries for a period of three
years. We will seek to protect these intellectual property rights through a
combination of trademark, service mark, copyright and trade secret laws and
license agreements. We intend to enter into confidentiality agreements with our
employees and clients and otherwise use our best efforts to protect our
proprietary information and that which we license from third parties, including
ADL.
Our efforts to protect our intellectual property rights could be inadequate
to deter misappropriation of proprietary information, and we may not be able in
all cases to detect and terminate unauthorized use of our intellectual
property.
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Offices
Our corporate headquarters are located in approximately 5,000 square feet of
an ADL-leased facility in Cambridge, Massachusetts. Our license from ADL for
this office space has a term of ten years and expires in 2010. We also have
offices in the following countries where we have similar agreements with ADL
(although we directly lease offices in Argentina, Portugal and China):
. Argentina . Czech Republic . Malaysia . South Korea
. Austria . France . Mexico . Spain
. Australia . Germany . Netherlands . Sweden
. Belgium . India . Norway . Switzerland
. Brazil . Italy . Portugal . United Kingdom
. China . Japan . Singapore . Venezuela
The ten countries in which we have our largest number of professionals as of
September 22, 2000 are as follows:
. Our offices in the United Kingdom are staffed with 92 full-time
professionals
. Our office in Spain is staffed with 61 full-time professionals
. Our office in the Netherlands is staffed with 39 full-time and 30 part-
time professionals
. Our offices in the United States are staffed with 33 full-time
professionals
. Our office in Portugal is staffed with 30 full-time professionals
. Our office in Switzerland is staffed with 25 full-time professionals
. Our offices in Sweden are staffed with 24 full-time and 29 part-time
professionals
. Our offices in Germany are staffed with 18 full-time professionals
. Our office in South Korea is staffed with 16 full-time and 21 part-time
professionals
. Our office in Czech Republic is staffed with 15 full-time professionals
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MANAGEMENT
Executive Officers, Key Employees and Directors
Our executive officers, key employees and the members of our board of
directors, and their respective ages as of September 1, 2000 and positions as
of the initial public offering date, are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Executive Officers
Rudolf Fischer...................... 44 President, Chief Executive Officer and Member of
our Board of Directors
G. Roy Davis........................ 44 Executive Vice President, Global Head of
Operations Management Practice and Managing
Director of United Kingdom
Eulogio Naz......................... 50 Executive Vice President and Managing Director
of Spain, France and Latin America
Raj Mitta........................... 43 Executive Vice President and Managing Director
of Asia
Robert Broadley..................... 52 Executive Vice President and Chief Financial
Officer
Martyn Roetter...................... 56 Vice President, Global Head of Technology
Practice and Head of North America Operations
Key Employees
Carlos Bartolo...................... 44 Vice President and Managing Director of Portugal
Paul Berriman....................... 43 Director and Global Head of Network Planning and
Implementation Practice
Taesoo Jung......................... 44 Vice President and Managing Director of Korea
Thomas W. Kuehle.................... 41 Director and Head of Palo Alto Operations
Hubertus M. Muhlhauser.............. 30 Associate Director and Global Head of Strategy
Practice
Arno Wilfert........................ 39 Associate Director and Managing Director of
Germany and Austria
Niamh Byrne......................... 30 Manager and Head of Marketing
Fraser Curley....................... 39 Associate Director and Head of Mobile Expert
Group
Members of our Board of Directors
Lorenzo C. Lamadrid................. 49 Chairman of our Board of Directors
George H. Heilmeier(1).............. 64 Member of our Board of Directors
Gerhard Schulmeyer.................. 61 Member of our Board of Directors
Carl J. Yankowski(2)................ 51 Member of our Board of Directors
Frank E. Weise, III(2).............. 56 Member of our Board of Directors
</TABLE>
--------
(1) Member of the Audit Committee
(2) Member of the Audit and Compensation Committees
Rudolf Fischer. Mr. Fischer serves as our President and Chief Executive
Officer and as a member of our Executive Committee and our Board of Directors.
He joined ADL in 1995 and has served as Vice President, Head of the Global
Telecommunications, Information Technology, Media and Electronics Practice and
a member of ADL's Global Leadership Team since 1999. Prior to 1995, Mr. Fischer
served as Managing Director and head of Strategic Planning for ASCOM Ericsson
Transmission AG, and as a Regional Sales Manager for Public Switching Systems.
He also served as Head of Fiber Optic Measurement Systems Development for Brown
Boveri prior to 1988. Presently, he serves as a board member of Nextrom AG, a
public company in Switzerland specializing in machinery to manufacture
telecommunication and energy cables. Mr. Fischer holds a MSc. in Electrical
Engineering from ETH Zurich and an M.B.A. from the Graduate School of Business
Administration in Zurich.
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G. Roy Davis. Mr. Davis is Global Head of our Operations Management
Practice, Managing Director of our United Kingdom operations and is a member of
our Executive Committee. Since joining ADL in 1993, he has served as Vice
President since 1998, Director of ADL Europe since 1997, head of the European
Operations Management Practice since 1999 and Global Head of ADL's Operations
Management Practice since the beginning of 2000. Prior to 1993, he was
Operations Director for Tricom, a leading United Kingdom data communications
company and he worked for Wyatts, a trading room telecommunications equipment
subsidiary of Reuters. Mr Davis began his career at Rolls-Royce Motors as a Car
Systems Design Engineer. He then worked with USS Oil Well International, a
division of USX, as a Technical Sales Engineer. Mr. Davis has also been
employed by Molex Inc., a manufacturer of connectors and inter-connection
devices, as Assistant to the Vice President of Global Operations in the U.S.A.,
Production Manager of Molex Taiwan and Technical Operations Manager of Molex
U.K. Mr. Davis has Bachelor of Science Honours Degree in Mechanical Engineering
from Southampton University and an M.B.A. from the London Business School. He
is also a non-executive director of two public companies in the United Kingdom,
Gyrus plc and Osmetech plc both high tech medical device companies.
Eulogio Naz. Mr. Naz serves as our Managing Director of Operations in Spain,
France and Latin America, and is a member of our Executive Committee. He joined
ADL in 1998, during which time he has served as a Vice President, Member of the
Global Telecommunications, Information Technology, Media and Electronics
Practice Leadership Team and Managing Director of Spanish Operations. From 1996
through 1998, Mr. Naz was the Deputy General Manager of Information Systems at
Telefonica de Espana. Prior to 1996, he served as Director of Technology &
Telecom Subsidiaries and Director of Electronic Banking at Caja de Madrid
beginning in 1994. Mr. Naz holds a B.S. from Telecommunications Engineering
University, Madrid and a P.M.D. from Harvard Business School.
Raj Mitta. Mr. Mitta serves as our Managing Director of Asian operations and
as a member of our Executive Committee. In 1996, he joined ADL and has served
as Vice President since 1996, as a member of the Global Telecommunications,
Information Technology, Media and Electronics Practice Leadership Team since
1998 and Managing Director of Asian Operations since 1999. He began his
consulting career with Booz, Allen & Hamilton and has spent in excess of
fifteen years consulting clients in North America, Europe and Asia. His primary
area of focus is in competitive restructuring, brand and marketing
effectiveness and customer management. A significant portion of Mr. Mitta's
consulting experience involved consumer goods firms. Mr. Mitta is a member of
the Young Presidents Organisation and holds a bachelor's degree in Chemical
Engineering and an M.B.A. from the Indian Institute of Management where he was
a Bank of America scholar.
Robert Broadley. Mr. Broadley serves as our Chief Financial Officer. From
1997 to March 2000, he served as the Group Finance Director at the Adscene
Group plc, a newspaper publishing and commercial printing group quoted on the
London Stock Exchange. From 1989 to 1996, he served as Group Financial
Controller at United News & Media plc. Prior to 1989, he worked with Reuters
and Brown and Root. Mr. Broadley qualified with Deloitte & Touche as a
Chartered Accountant FCA in 1975. He holds a B.A. Honors degree in Business
Studies from Greenwich University, London.
Martyn Roetter. Dr. Roetter serves as our Global Head of the Technology
Practice, Head of North American Operations and as a member of our Executive
Committee. He has more than twenty years service with ADL, beginning in 1970.
Dr. Roetter has served as Vice President of Communications and Information
Technology in the North American Telecommunications, Information Technology,
Media and Electronics Leadership Team since February 1999. From April 1992
through February 1996, he was Vice President of Decision Resources Inc. and
from 1980 until 1984 he was Vice President of Telecommunications at PA
Consulting in London, England and Princeton, New Jersey. During Dr. Roetter's
twenty years of experience in business and technological consulting in the
telecommunications, computing, and electronic industries he has worked in North
America, Europe, Asia and Latin America. Presently, he serves on the board of
directors of Allen Telecom, a wireless equipment provider. Dr. Roetter holds a
B.A. and a Ph.D. in Physics from Oxford University.
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Carlos Bartolo. Mr. Bartolo serves as Managing Director of our Portuguese
Operations. He has served as Managing Director of the Lisbon office since 1998.
Prior to joining ADL, Mr. Bartolo was a shareholder and member of the board of
more than twenty companies, including Midland Montagu Fininter and Banco
Privado Portugues. He was the president of Fininter, a financial services
company, from 1988 to 1998, and a member of the Executive Board of J Soares
Correia, the leading steel distribution company in Portugal, from 1992 to 1998.
Prior to 1988, Mr. Bartolo worked for McKinsey & Co., where he led cases for
industrial and financial companies in Western Europe and South America. Mr.
Bartolo holds an M.B.A. from IMEDE in Lausanne and a degree in electrical
engineering from the Ecole Politechnique Federal de Lausanne, Switzerland.
Paul Berriman. Mr. Berriman serves as Head of Contactica. He has been with
Contactica (Asia) Ltd. as founder and Managing Director since 1995. Prior to
founding Contactica, Mr. Berriman served as Director of New World Telephone, a
Hong Kong fixed and mobile network operator, from 1993 to 1995. Prior to 1993,
he served as a Director of Wyatts and as an Engineering Manager of Mobile
Services for Cable & Wireless - Hong Kong Telecom. Mr. Berriman is an active
member of a number of Telecommunications Authority advisory bodies in Hong
Kong, including the Office of the Telecommunications Authority (OFTA) Numbering
Advisory Committee, OFTA Radio Spectrum Advisory Committee and OFTA Technical
Standards Advisory Committee. Mr. Berriman is a Chartered Engineer and holds a
Bachelors degree in Electro-Acoustics from the University of Salford in the
United Kingdom, as well as an M.B.A. from the University of Hong Kong. Mr.
Berriman is also a founding Council Member of the Hong Kong Institute of
Directors.
Taesoo Jung. Mr. Jung serves as Head of our Korean operations. He joined ADL
in 1991, where he has served as Vice President since 1996 and as Managing
Director of the Seoul office since 1995. Presently, Mr. Jung is the Chief
Executive Officer of ADL Partners, a venture capital firm in Korea. Prior to
1989, Mr. Jung held marketing positions at IBM, including consultant, account
manager, executive instructor and systems engineer. Mr. Jung has studied
political science at the Yonsei University in Seoul, and holds an M.B.A. from
the International Institute for Management Development in Lausanne,
Switzerland.
Thomas W. Kuehle. Mr. Kuehle is the Head of our Palo Alto, California
operations. Since joining ADL in 1990, he has served as a Director in the
Telecommunications, Information Technology, Media and Electronics practice
since 1997 and as Head of Strategy for Computer Industry Clients in North
America since 1998. Mr. Kuehle has served as a Managing Director of Global
Technology Ventures, an ADL operation located in Palo Alto, dedicated to
servicing clients engaged in new high technology business ventures around the
world. Prior to 1988, Mr. Kuehle worked with Hewlett Packard Company as a
regional sales representative and district sales manager. Mr. Kuehle holds a
B.S. degree in aeronautical engineering from San Jose State University, an
M.B.A. from the University of San Francisco and an M.I.M. degree from Harvard
University.
Hubertus M. Muhlhauser. Mr. Muhlhauser serves as our Global Head of the
Strategy Practice. He joined ADL in 1994, and has served as a member of the
Executive Committee of the Swiss office since 1999, as a member of the Global
Strategy Board since 1998 and as head of the Swiss Strategy and Organization
practice since 1997. He has also been a Global Product Manager for ADL's
strategy development methodologies since 1997. Prior to 1994, he worked as a
Key Client Manager with KHM, a German engineering and manufacturing company.
Mr. Muhlhauser holds a M.B.A. from the European Business School in Oestrich-
Winkel, Germany.
Arno Wilfert. Dr. Wilfert serves as our Managing Director of German
operations. He joined ADL in 1995 and has served as Associate Director in the
Dusseldorf office since 1995, and Head of the German Telecommunications,
Information Technology, Media and Electronics practice and as a member of the
European Telecommunications, Information Technology, Media and Electronics
Practice Board since 1996. From 1992 to 1995, Dr. Wilfert worked with Detecon,
a German consulting company specializing in telecommunications and, prior to
1992, as a lecturer and researcher at the University of Bayreuth. He holds a
Masters and a Ph. D. in Economics from University of Bayreuth and regularly
publishes articles regarding telecommunications.
Niamh Byrne. Ms. Byrne serves as a Manager and Head of Marketing. From 1999
to 2000, she was employed at British Telecom (BT) as Marketing Communications
Manager for the banking sector in Global
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Business Markets. Prior to joining BT, Ms. Byrne worked for a subsidiary of the
Accor Group in Paris from 1998 to 1999. In 1996 and 1997, she was involved with
the launch of Esat Digifone, Ireland's second mobile phone operator. Prior to
1996, she spent three years with the Jefferson Smurfit Group in the graduate
management program. Ms. Byrne received a Bachelor of Arts (Moderatorship)
degree in Business, Marketing & Political Science from Trinity College in
Dublin.
Fraser Curley. Mr. Curley serves as an Associate Director and the Head of
the Mobile Expert Group. Since 1995, he has served as Director of Mobile
Communications at DETECON GmbH, reporting directly to the management board
(Geschaftsfuhrung). From 1998 to 1999, Mr. Curley was President, Chief
Executive Officer and a board member of DETECON Inc. He has also served as a
board member of Tmm Telecomunicacoes Moveis de Mocambique LDA since 1997. Prior
to joining DETECON in 1992, Mr. Curley held a variety of positions in
engineering and defense companies. He holds a Bachelor of Science - Physics
from University of Manchester Institute of Science and Technology, and a Master
of Science - Electrical Engineering from the University of London.
Lorenzo C. Lamadrid. Mr. Lamadrid serves as the Chairman of our Board of
Directors. Since July 1999 he has served as the President and Chief Executive
Officer of ADL. Prior to accepting that position, Mr. Lamadrid was with Western
Resources Inc., serving as President of Western Resources International, Inc.
from 1996 to 1999 and as Managing Director and founding partner of The Wing
Group, a leading international electric power project-development company, from
1992 to 1999. Prior to joining Western Resources, Mr. Lamadrid spent eight
years with the General Electric Company. He was a corporate officer, serving as
Vice President and General Manager with GE Aerospace and head of International
Operations from 1986 to 1992, and a Corporate Staff Executive for strategic
planning and business development from 1984 to 1986. Mr. Lamadrid was also one
of the founders of the Boston Beer Company (Samuel Adams). Prior to working for
GE, Mr. Lamadrid worked for six years at the Boston Consulting Group. Mr.
Lamadrid holds a dual bachelor's degree in Chemical Engineering and
Administrative Sciences from Yale University, a M.S. in Chemical Engineering
from the Massachusetts Institute of Technology and an M.B.A. in Marketing and
International Business from the Harvard Business School.
George H. Heilmeier. Mr. Heilmeier serves as a member of our Board of
Directors. He has served as Chairman Emeritus of Telcordia Technologies
(formerly known as Bellcore) since November 1997. Mr. Heilmeier was employed by
Bell Communications Research, Inc. from March 1991 to November 1997, served as
the President and Chief Executive Officer from March 1991 to October 1996 and
as the Chairman and Chief Executive Officer from November 1996 to November
1997. Prior to that, from 1983 to 1991, he served as the Senior Vice President
and Chief Technical Officer of Texas Instruments Incorporated. Mr. Heilmeier
holds a M.S. in Engineering, a Master of Arts degree and a Ph.D from Princeton
University and a Bachelor of Science from University of Pennsylvania.
Gerhard Schulmeyer. Mr. Schulmeyer serves as a member of our Board of
Directors. He has served as Director of ADL since 1998 and as the Chairman of
the Board of Directors of ADL since July 1999.Mr. Schulmeyer has been the
President and Chief Executive Officer of Siemens Corporation, U.S.A. since
January 1999. Prior to 1999, he served as the President and Chief Executive
Officer of Siemens Nixdorf, Munich, Germany.
Carl J. Yankowski. Mr. Yankowski serves as a member of our Board of
Directors. He has been Chief Executive Officer and a director of Palm, Inc.,
since December 1999. From September 1998 to December 1999, Mr. Yankowski was
Executive Vice President of Reebok International Ltd. and President and Chief
Executive Officer of the Reebok Division. From November 1993 to January 1998,
Mr. Yankowski was President and Chief Operating Officer of Sony Electronics
Inc., a subsidiary of the Sony Corporation. Mr. Yankowski holds a Bachelor of
Science degree in electrical engineering from the Massachusetts Institute of
Technology as well as a Bachelor of Science degree in management which he
earned concurrently from MIT's Sloan School of Management. Mr. Yankowski also
serves as a director of Safeguard Scientifics and Avidyne, Inc., and he is a
member of the board of advisors of Boston College Business School.
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Frank E. Weise, III. Mr. Weise serves as a member of our Board of Directors.
He has been President and Chief Executive Officer and a director of Cott
Corporation since June 1999. From May 1997 to May 1998, Mr. Weise served as
Chairman of Confab Corporation. Mr. Weise was employed by Campbell Soup Company
from January 1992 to January 1997, serving as Senior Vice President and Chief
Financial Officer from April 1992 until April 1995 and from April 1995 to
January 1997 as Senior Vice President and President of Bakery and Confectionery
Division. Prior to that, from 1967 to January 1992, Mr. Weise served in various
executive positions for The Procter & Gamble Company. Mr. Weise holds a
Bachelor of Arts degree in Economics and a Masters of Science degree in
Business Economics (with a concentration in Finance and Accounting) from Lehigh
University.
Board Composition
The number of directors on our board of directors is currently fixed at six,
three of whom are independent. Subsequent to the offering, we intend to recruit
an additional independent director so that our Board will consist of seven
directors. Our board of directors is divided into three classes, each of whose
members will serve for a staggered three-year term. At the time of the
offering, our board of directors will consist of two Class I directors, whose
term of office will continue until the 2001 annual meeting of stockholders, two
Class II directors, whose term of office will continue until the 2002 annual
meeting of stockholders, and three Class III directors, whose term of office
will continue until the 2003 annual meeting of stockholders. Initially, the
Class I directors will be Frank E. Weise, III and Gerhard Schulmeyer; the Class
II directors will be George H. Heilmeier and Lorenzo C. Lamadrid; and the Class
III directors will be Rudolf Fischer and Carl J. Yankowski. At each annual
meeting of stockholders, a class of directors will be elected for a three-year
term to succeed the directors of the same class whose terms are then expiring.
Board Committees
Audit Committee. The members of the audit committee, all of whom will be
independent directors, will be responsible for recommending to the board of
directors the engagement of our outside auditors and reviewing our accounting
controls and the results and scope of audits and other services provided by our
auditors. Initially, Messrs. Heilmeier, Yankowski and Weise will be members of
the audit committee, and Mr. Weise will serve as chairman of the audit
committee.
Compensation Committee. The members of the compensation committee, a
majority of whom will be independent directors, will be responsible for
reviewing and recommending to the board of directors the amount and type of
consideration to be paid to senior management, administering our equity based
compensation plans and establishing and reviewing general policies relating to
compensation and benefits of employees. Initially, Messrs. Yankowski and Weise
will be members of the compensation committee, and Mr. Yankowski will serve as
chairman of the compensation committee.
Director Compensation
Directors who are employees of c-quential or ADL receive no additional
compensation for their services as directors. Non-employee directors receive
cash compensation of $30,000 per year, plus reimbursement of expenses incurred
in attending each meeting. Non-employee directors are eligible to participate
in our 2000 Stock Option and Incentive Plan at the discretion of our Board of
Directors. In accordance with a policy approved by our Board of Directors, non-
employee directors will receive non-qualified stock options to purchase 65,000
shares of Class A common stock upon initial election or appointment to the
Board of Directors and non-qualified stock options to purchase an additional
25,000 shares of Class A common stock annually thereafter. All non-qualified
stock options granted to non-employee directors will be granted with exercise
prices equal to the fair market value of the Class A common stock on the date
of grant and will be immediately exercisable.
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Executive Compensation
We are a recently formed company. Prior to August 26, 2000, we did not
conduct any operations. As a result, we only recently began paying compensation
to our Chief Executive Officer and other executive officers. For fiscal year
2000, the base salaries for our Chief Executive Officer and each of our next
four most highly compensated executive officers are: Mr. Fischer: $413,304, Mr.
Mitta: $360,000, Mr. Davis: $332,640, Mr. Naz: $330,000 and Mr. Bartolo:
$296,100. ADL paid the portion of these salaries payable to these executive
officers through August 26, 2000, and we will be responsible for paying the
remaining portion through December 31, 2000.
2000 Stock Option and Incentive Plan
Our board of directors and shareholders have adopted the 2000 Stock Option
and Incentive Plan, which permits the issuance of up to 13,500,000 shares of
Class A common stock. The plan permits us to:
. grant incentive stock options
. grant non-qualified stock options
. grant stock appreciation rights
. issue or sell Class A common stock with vesting or other restrictions, or
without restrictions
. grant rights to receive Class A common stock in the future with or
without vesting
. grant common stock upon the attainment of specified performance goals
. grant dividend rights in respect of Class A common stock
These grants may be made to officers, employees, directors, consultants,
advisors and other key persons of c-quential or our affiliates.
Our compensation committee has the right, in its discretion, to select the
individuals eligible to receive awards, to determine the terms and conditions
of the awards granted, to accelerate the vesting schedule of any award and
generally to administer and interpret the plan. The compensation committee may
authorize our Chief Executive Officer to grant options under the plan at fair
market value to individuals who are not subject to the reporting and other
provisions of Section 16 of the Exchange Act or "covered employees" within the
meaning of Section 162(m) of the Internal Revenue Code of 1986.
The exercise price of options granted under the plan is determined by the
compensation committee with respect to individuals subject to Section 16
reporting requirements. Under present law, incentive stock options and options
intended to qualify as performance-based compensation under Section 162(m) of
the Internal Revenue Code of 1986 may not be granted at an exercise price less
than the fair market value of the common stock on the date of grant, or less
than 110% of the fair market value in the case of incentive stock options
granted to optionees holding more than 10% of the voting power of our
outstanding common stock.
Upon the exercise of options, the option exercise price must be paid in full
either in cash or by certified or bank check or other instrument acceptable to
the compensation committee or, in the sole discretion of the committee, by
delivery of shares of common stock that have been owned by the optionee free of
restrictions for at least six months. The exercise price may also be delivered
to us by the optionee in the form of a promissory note if the loan of funds to
the optionee has been authorized by the compensation committee and the optionee
pays so much of the exercise price as represents the par value of the common
stock acquired in a form other than a promissory note or by a broker under
irrevocable instructions to the broker selling the underlying shares from the
optionee.
Non-qualified stock options may be granted at prices which are less than the
fair market value of the underlying shares on the date granted. Options are
typically subject to a vesting schedule pursuant to which
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25% is vested one year after grant and the remaining 75% vests ratably on a
monthly basis over the ensuing thirty-six months. The options generally
terminate ten years from the date of grant and may be exercised for specified
periods after the termination of the optionee's employment or other service
relationship with us.
As of October 9, 2000, options to purchase an aggregate of 8,701,613 shares
of our Class A common stock had been granted under the plan. We anticipate
granting options to purchase an additional 86,946 shares of our Class A common
stock at the time of this offering. The table below shows the options that have
been granted or are expected to be granted at the time of this offering:
<TABLE>
<CAPTION>
Number of Shares
Name and Position Underlying Stock Options(1)
----------------- ---------------------------
<S> <C>
Rudolf Fischer, President, Chief Executive Officer
and Member of our Board of Directors............. 99,846
Raj Mitta, Executive Vice President and
Managing Director of Asia........................ 99,846
G. Roy Davis, Executive Vice President, Global
Head
of Operations Management Practice and Managing
Director
of United Kingdom................................ 99,846
Eulogio Naz, Executive Vice President and Managing
Director
of Spain, France and Latin America............... 99,846
Carlos Bartolo, Vice President and Managing
Director
of Portugal...................................... 99,846
Executive Officer Group (6 persons)............... 580,242
Non-Executive Officer Employee Group.............. 7,948,317
Independent Members of Board of Directors
as a Group (4 persons)........................... 260,000
</TABLE>
(1) All options granted on or before October 9, 2000 were granted with
exercise prices of $13.00 per share. All options granted at the time of
this offering will be granted with an exercise price per share equal to
the initial public offering price. Except for options granted to
independent directors, which vest immediately, all of such options are
subject to a vesting schedule pursuant to which 25% is vested one year
after grant and the remaining 75% vests ratably on a monthly basis over
the ensuing 36 months.
Employment Agreements
Employment agreements have been entered into with Messrs. Rudolf Fischer,
Robert Broadley, Raj Mitta and Eulogio Naz. The current base salaries for these
individuals are $413,304 for Mr. Fischer, $202,992 for Mr. Broadley, $360,000
for Mr. Mitta and $330,000 for Mr. Naz. We do not presently have employment
agreements with Messrs. Davis and Roetter. The compensation committee of our
board of directors will make all future salary and other compensation
determinations for our executive officers.
Mr. Fischer's employment agreement was assigned to us on August 26, 2000.
Mr. Fischer's employment agreement has no specific term and may be terminated
by either party with six months' notice. The agreement imposes confidentiality
and non-competition obligations on Mr. Fischer during the term of his
employment and outlines the terms of Mr. Fischer's vacation, insurance and
retirement benefits.
Mr. Broadley's employment agreement with us has no specific term and may be
terminated by either party with two months' notice. The agreement imposes
confidentiality, non-competition and non-solicitation obligations on Mr.
Broadley and outlines the terms of Mr. Broadley's vacation, insurance and
retirement benefits.
Mr. Mitta's employment agreement was transferred to us on August 26, 2000.
The agreement outlines the terms of Mr. Mitta's insurance, housing, car and
educational allowances, and deferred compensation package. The deferred
compensation package equals 17.2% of Mr. Mitta's incentive compensation bonus,
which is equal to up to 55.7% of his base salary. The deferred compensation is
payable upon Mr. Mitta's termination, disability or death (in which case
payments are made to Mr. Mitta's designated beneficiary).
Mr. Naz's employment agreement with us has no specific term. The agreement
imposes confidentiality and exclusivity obligations on Mr. Naz for the course
of his employment. Mr. Naz is entitled to receive severance payments, including
up to 12 months of salary, as well as insurance and retirement benefits.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship with Siemens
Gerhard Schulmeyer serves as a member of our Board of Directors, and is the
President and Chief Executive Officer of Siemens Corporation, U.S.A. During the
fiscal year ended December 31, 1998, we provided $5,788,000 in services to
Siemens Corporation, U.S.A. and its affiliates. We believe that the terms of
our relationship with Siemens Corporation, U.S.A. and its affiliates were no
less favorable to us than they would have been had they been obtained from
unaffiliated third parties.
Our Relationship with ADL
From 1995 until August 26, 2000, we operated as part of ADL's Global
Management Consulting business. ADL developed capabilities and expertise in the
telecommunications, information technology, media and electronics industries by
investing capital and resources over the past five years. The development and
growth of our business has been in large part due to the collaborative efforts
of ADL's and our management, and ADL's reputation in the professional services
industry.
Separation from ADL. Effective August 26, 2000, we entered into a
Reorganization Agreement and several other agreements with ADL and its
affiliates in order to organize and separate our business from ADL's other
operations and to access the use of certain of ADL's services and assets. The
other agreements included a Corporate Services Agreement, a Use and Occupancy
Agreement, an Intellectual Property Agreement, a Tax Allocation Agreement and a
Registration Rights Agreement. In an effort to mitigate any conflicts of
interest between ADL and us under these agreements, we agreed with ADL that
none of these agreements may be amended without the approval of a majority of
the directors of ADL who are not officers, directors or employees of us and a
majority of our directors who are not officers, directors or employees of ADL.
In connection with our separation from ADL, ADL and its affiliates
contributed and assigned to us as of August 26, 2000 the assets relating to our
business, consisting primarily of:
. approximately $3.7 million in cash (which represents an increase from the
June 30, 2000 pro forma balance of $1.2 million presented in the pro
forma condensed balance sheet included elsewhere in this prospectus)
. rights under existing client contracts and bids
. approximately $7.6 million of accounts receivable and work in process
(which represents a decrease from the June 30, 2000 pro forma balance of
$10.1 million presented in the pro forma condensed balance sheet included
elsewhere in this prospectus)
. goodwill relating to ADL's telecommunications, information technology,
media and electronics industries-focused consulting practice
. a license to use the "Arthur D. Little, Inc." name, software and business
methodologies
. ownership interests in subsidiaries
. $1.2 million of personal property and equipment, such as vehicles,
computers and other office equipment
We have hired from ADL 508 professionals and 127 support staff, representing
substantially all of the staff who previously served ADL in its
telecommunications, information technology, media and electronics industries-
focused consulting practice. ADL assigned to us all of its rights under all of
the client contracts related to our business, other than rights with respect to
approximately $24.1 million in receivables for work performed prior to the
separation.
In connection with the transfer by ADL to us of the assets relating to our
business, we assumed liabilities of ADL and its affiliates, including $40.6
million of ADL's outstanding debt including accrued interest, an intercompany
payable to ADL of approximately $1.3 million, the obligations under client
contracts relating to our business and $1.4 million of liabilities relating to
our employees which will be reimbursed by ADL. In connection
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<PAGE>
with our separation from ADL, we also issued to c-quential holdings, Inc., an
indirect subsidiary of ADL, 17,998,200 shares of our Class A common stock and
17,998,200 shares of our Class B common stock and agreed to the terms of the
other agreements discussed below.
Reorganization Agreement. The Reorganization Agreement is the master
agreement setting forth the terms and conditions of our separation from ADL,
including the transfer of assets from ADL to us and the assumption of
liabilities by us from ADL. In addition, ADL agreed to indemnify us with
respect to any liabilities and losses we may suffer which result from the
operation of our business prior to the separation date, including the employee
liabilities we assumed, as well as for any breaches of its representations and
covenants in the Reorganization Agreement. ADL also agreed to provide us with
$360,000 to cover our initial working capital needs, as well as to make
available to us upon our request funds for our short-term working capital needs
prior to the offering (which amounts will be repaid to ADL out of the proceeds
of this offering). We, in turn, agreed to indemnify ADL and its affiliates for
any liabilities and losses they may suffer resulting from our business and the
transferred assets after the separation date, any breaches of our
representations and covenants in the Reorganization Agreement and related
agreements, and for any liabilities relating to this offering. We agreed to pay
the costs of this offering and to reimburse ADL for its internal costs and for
certain expenditures made on our behalf, in each case relating to this offering
and our separation from ADL.
ADL also agreed to make reasonable provision in its employee benefits plans
to allow our employees to continue to participate in the ADL plans until such
time as we adopt our own benefits plans, such period not to exceed the maximum
period permitted under the applicable plan or applicable law. We agreed to
establish plans that recognize, to the extent financially practical, employee
service, compensation and other benefit determinations that are consistent with
the corresponding ADL plan.
ADL and its affiliates also agreed not to engage in or provide, directly or
indirectly, to companies in the telecommunications, information technology,
media and electronics industries, any consulting services similar to those we
have historically provided. ADL may, however, make passive investments of less
than five percent of the outstanding equity in our publicly-traded competitors
and may acquire a business or entity, or division, unit, subsidiary, segment or
practice of such business or entity, that provides services similar to those we
have historically provided, so long as ADL offers us the right to purchase the
competing part of the business and negotiates with us in good faith to transfer
the business to us on terms mutually acceptable to ADL and our independent
directors. We have no obligation to acquire or negotiate to acquire the
competitive business. In the event that our independent directors notify ADL
that c-quential elects not to acquire the competitive business, ADL is
obligated to cease the relevant competitive activities within one year after
the date of the notice. ADL also agreed, on its behalf and on behalf of its
affiliates, not to recruit our professionals or other employees. We agreed not
to solicit the professionals or other employees of ADL. The non-solicitation
and non-competition covenants in the Reorganization Agreement will survive
until the earlier of the third anniversary of the offering date and such time
as ADL ceases to hold securities representing at least 40% of our outstanding
voting power.
Until such time as ADL ceases to hold securities representing at least 40%
of our outstanding voting power, ADL has agreed to vote its shares of our stock
to elect individuals to our Board of Directors such that at least a majority of
the members of our Board of Directors are not either directors, officers or
employees of ADL.
Corporate Services Agreement. We entered into a Corporate Services Agreement
with ADL that states the terms and conditions under which ADL provides to us,
and we provide to ADL, on an as-requested basis, certain administrative and
operational management services. The Corporate Services Agreement specifies
that ADL shall provide to us its tax and accounting, corporate development and
legal, administrative, human resources and internal audit services. With
limited exception, these services are to be provided at a rate based on the
actual cost of providing such services, including the costs of third party
vendors and providers, and reimbursement is to be made on a monthly basis. The
cost of services under the agreement may or may not be greater than the cost a
third party may charge for such services. The term of the Corporate Services
Agreement is three years, subject to the right of the recipient of any service
to terminate the use of any specific service
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contained therein, upon 120 days' notice or upon the bankruptcy or insolvency
of ADL. Each provider of any service may similarly discontinue providing such
service under the Corporate Services Agreement upon 120 days' notice to the
receiving party if such party no longer provides such service for itself.
The agreement also provides for certain cross-consulting arrangements
between ADL and us. Each of us agreed to make available to the other party, on
an as-requested basis, the assistance of our respective consultants, subject to
reasonable restrictions on their availability and provided that the
consultants' services are in all material respects limited to the type,
quality, quantity and timeliness of such services that the party supplying such
services provides on its own behalf. The cost for such consultant sharing is an
amount equal to 85% of the standard billing rate for the services provided by
the subcontracted professionals. This percentage was chosen in an effort to
split the profits between ourselves and ADL as evenly as possible. The cross-
consulting arrangements have a term of three years and may only be terminated
upon the mutual agreement of the parties.
Use and Occupancy Agreement. We entered into a Use and Occupancy Agreement
with ADL and its affiliates pursuant to which it agreed to license to us, and,
upon request of ADL, we agreed to license to ADL and its affiliates, certain
leased real property. The space licenses provide the licensee with the right to
use and occupy a portion of the leased real property at locations worldwide.
The licensee will reimburse the licensor on a monthly basis for its
proportionate share of the costs of the leased property at each such location.
The agreement requires that the licensor comply with the terms of the master
lease agreements for so long as the license is in effect. Each license has the
same term as the corresponding master lease, and the licensing party has the
option to renew the license each time the corresponding master lease is
renewed. The Use and Occupancy Agreement runs so long as any license remains in
effect.
Intellectual Property Agreement. We entered into an Intellectual Property
Agreement with ADL pursuant to which ADL granted us a license to use its name,
marks, software and business methodologies related to the operation of our
business, and to promote our business using the licensed intellectual property.
The licenses are fully paid-up, royalty-free, worldwide and perpetual (other
than the license to use the "Arthur D. Little, Inc." name, which has a five-
year term). ADL agreed not to license the intellectual property to anyone
within the telecommunications, information technology, media and electronics
industries for a period of three years. Any intellectual property rights which
we develop after the date of our separation from ADL and which are derived from
the licensed intellectual property belong to us.
Tax Allocation Agreement. We entered into a Tax Allocation Agreement with
ADL pursuant to which, for any year during which we are a member of ADL's
consolidated group for United States federal income tax purposes, we will pay
ADL an amount equal to the amount of federal income taxes that we would have
been obligated to pay, and ADL pays us an amount equal to any federal income
tax refund that we would have
received, calculated in each case as if we had never been part of ADL's
consolidated group. However, ADL agreed to reimburse us for tax benefits
generated by us but used to reduce United States federal income tax on income
earned by ADL. ADL is responsible for the filing of the consolidated tax
returns, as well as for any audit response and litigation with respect thereto,
for any year in which we are part of ADL's consolidated group. State, local and
foreign taxes returned on a consolidated, combined, or unitary basis are
treated in a manner consistent with that of United States federal income taxes.
ADL agreed to pay the taxes that arise as a result of the reorganization. We
will reimburse ADL for the tax benefits that we receive as a result of ADL's
payment of such taxes. Our reimbursement payments will be made as such tax
benefits are realized by us. Any tax obligation incurred by either party or our
respective affiliates which is not calculated on a consolidated, combined or
unitary basis is the responsibility of that party, together with the
preparation of returns, audits and litigation relating to that tax liability.
We agreed with ADL that, in the preparation of all tax returns and in the
conduct of all tax-related proceedings, the party responsible for the return or
proceeding shall take into account and promote the tax objectives of the other
party, provided that, in so doing, the party responsible for the return or
proceeding is not adversely affected. We also agreed not to take any action
(excluding the issuance of stock upon the exercise of stock options under our
2000 Stock Option and Incentive Plan), or fail to take any action, that would
result in ADL owning less than 80% of our outstanding capital stock by vote or
value, or less than 80% of any class of our non-voting capital stock (if any)
without the consent of ADL.
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We agreed with ADL that, in the event ADL determines that it is in the best
interests of its stockholders to distribute the shares of our capital stock
that it owns to its shareholders in a spin-off transaction intended to qualify
as a tax-free distribution under Section 355 of the Code, we will enter into an
agreement under which we will indemnify each other for any tax liability
attributable to our respective acts and omissions (excluding the issuance of
stock upon the exercise of stock options granted prior to the spin-off
transaction under our 2000 Stock Option and Incentive Plan) which result in the
spin-off failing to qualify under Section 355 as a tax-free distribution. We
also agreed that such an agreement would provide that, after the consummation
of such a spin-off, neither party shall participate in any merger,
reorganization, acquisition, equity restructuring or other transaction that
results in one or more persons acquiring a 50% or greater interest in such
party within the four-year period beginning two years prior to such spin-off
(excluding the issuance of stock upon the exercise of stock options granted
prior to the spin-off transaction under our 2000 Stock Option and Incentive
Plan).We also agreed that such an agreement would include customary provisions
with respect to cooperation, exchange of information, control of audits and
litigation, and consistency in tax return positions.
Registration Rights. We entered into a Registration Rights Agreement with
ADL pursuant to which ADL and its transferees have the right to request the
registration shares of our common stock held by them whenever we propose to
register any shares of common stock for our own or another's account under the
Securities Act for a public offering, other than registrations in respect of
shares to be used in connection with a business combination or shares relating
to our employee benefit plans. ADL and its transferees also have the right, on
up to five occasions beginning six months after the completion of this
offering, to demand that we register under the Securities Act any or all shares
of our common stock held by it. ADL's rights to request registration of our
common stock remain subject to:
. its agreement with the underwriters not to sell or transfer any shares
for a period of 180 days after the consummation of this offering
. its obligation, as part of the listing of our Class A common stock on
the official list of the Frankfurt Stock Exchange with participation in
SMAX, not to sell or transfer any shares of our Class A common stock for
a period of 180 days after the consummation of the offering
. our right, at the request of any underwriter in any proposed offering,
to cut-back the number of shares of common stock to be offered thereby
. our right not to effect any registration of our shares of common stock
within 180 days of any other public offering of our securities
In connection with the registration of any ADL-owned shares, we agreed to
pay all costs and expenses of ADL, other than underwriting discounts and
commissions.
ADL's Ownership of our Common Stock. Following this offering, ADL will own
all of the outstanding shares of our unlisted Class B common stock and 71% of
the outstanding shares of our Class A common stock, or 68% of our outstanding
shares of Class A common stock if the underwriters fully exercise their over-
allotment option. Although ADL has no current plan or intention to do so, it
may in the future determine to divest all or a portion of the shares of our
common stock it holds, either gradually or in a single transaction. The
determination as to the form and timing of any divestiture will be based on
financial and business considerations and prevailing market conditions. The
form of any divestiture could include any of the following (or any combination
thereof):
. a distribution or spin-off to ADL shareholders of all of the shares of
our common stock owned by ADL
. sales of our common stock by ADL into the public market
. a privately negotiated sale or sales of our common stock by ADL to third
parties
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PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of c-quential common stock by:
. all persons known by us to own beneficially 5% or more of c-quential's
common stock
. each independent member of our Board of Directors
. our directors and executive officers as a group
<TABLE>
<CAPTION>
Percentage of Common Stock
Number of Shares Beneficially Owned Beneficially Owned
--------------------------------------------------- -------------------------------
Prior to After
Prior to Offering After Offering Offering Offering(2)
------------------------- ------------------------- --------------- ---------------
Name of Beneficial Owner(1) Class A Class B Class A Class B Class A Class B Class A Class B
--------------------------- ---------- ----------- ---------- ----------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5% Shareholder
c-quential holdings, Inc.(3)(4)
25 Acorn Park
Cambridge, MA 02140-2390...... 18,000,000 18,000,000 18,000,000 18,000,000 100% 100% 71% 100%
Gerhard Schulmeyer............. 65,000(5) -- 65,000(5) -- * * * *
Carl J. Yankowski.............. 65,000(5) -- 65,000(5) -- * * * *
Frank E. Weise, III............ 65,000(5) -- 65,000(5) -- * * * *
George H. Heilmeier............ 65,000(5) -- 65,000(5) -- * * * *
All directors and executive
officers as a group
(11 persons).................. 260,000(5) -- 260,000(5) -- * * * *
</TABLE>
--------
* Less than 1%
(1) The Class A common stock is entitled to one vote per share and the Class B
common stock is entitled to ten votes per share.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) c-quential holdings, Inc. is a subsidiary of Arthur D. Little
International, Inc., which is a wholly-owned subsidiary of ADL.
(4) The shares of our common stock are pledged to several financial
institutions to secure approximately $56.5 million of indebtedness of ADL,
the indirect parent of c-quential holdings, Inc. ($40.6 million of which
indebtedness, including accrued interest, has been assumed and will be
repaid by us out of the proceeds of this offering).
(5) Represents shares of Class A common stock subject to currently exercisable
stock options.
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DESCRIPTION OF CAPITAL STOCK
Our Authorized and Outstanding Capital Stock
Following the offering, our authorized capital stock will consist of
200,000,000 shares of Class A common stock, of which 25,250,000 will be issued
and outstanding, 50,000,000 shares of Class B common stock, of which 18,000,000
will be issued and outstanding, and 25,000,000 shares of undesignated preferred
stock issuable in one or more series designated by our board of directors, of
which no shares will be issued and outstanding. The shares of Class A and Class
B common stock entitle their holders to identical rights in all respects other
than voting rights.
Common Stock
Voting Rights
Holders of Class A common stock are entitled to one vote per share while
holders of Class B common stock are entitled to ten votes per share. Holders of
our Class A and Class B common stock are not entitled to vote cumulatively for
the election of directors. Generally, all matters to be voted on by
stockholders must be approved by a majority, or, in the case of the election of
directors, by a plurality, of the votes cast at a meeting at which a quorum is
present, voting together as a single class, subject to any voting rights
granted to holders of any then outstanding preferred stock and as required by
law.
For example, if the results of voting on a particular matter at a meeting of
stockholders at which a quorum is present are as follows:
Votes in favor:
5,000 shares of Class A common stock and 5,000 shares of Class B
common stock
Votes against:
50,000 shares of Class A common stock and no shares of Class B
common stock
A single tally will result, with each share of Class B common stock counting
for ten votes. Thus, the matter would be approved by a vote of 55,000 in favor
to 50,000 against.
Dividends
Holders of common stock will share ratably in any dividends declared by our
board of directors, subject to the preferential rights of any preferred stock
then outstanding. No dividend may be paid on the Class A common stock unless a
corresponding dividend is paid on the Class B common stock and no dividend may
be paid on the Class B common stock unless a corresponding dividend is paid on
the Class A common stock, provided that dividends consisting of shares of Class
A common stock may be paid only to holders of shares of Class A common stock
and dividends consisting of shares of Class B common stock may be paid only to
holders of shares of Class B common stock.
Additional Rights
Upon the liquidation, dissolution or winding up of c-quential, all holders
of common stock are entitled to share ratably in any assets available for
distribution to holders of shares of common stock. No shares of common stock
are subject to redemption or have preemptive rights to purchase additional
shares of common stock.
Conversion
Shares of Class B common stock automatically convert into shares of Class A
common stock on a one-for-one basis upon any transfer or other disposition of
such shares of Class B common stock that occurs after the fifth anniversary of
the completion of this offering, to any person other than ADL, a stockholder of
ADL, a party related to ADL or to a stockholder of ADL under Section 267(b) or
Section 707(b) of the Code, or a party whose ownership of stock could be
attributed to ADL or to a stockholder of ADL under Section 318 of the Code.
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Preferred Stock
Our certificate of incorporation provides that shares of preferred stock may
be issued from time to time in one or more series. Our board of directors is
authorized to fix the voting rights, if any, designations, powers, preferences,
qualifications, limitations and restrictions thereof, applicable to the shares
of each series. Our board of directors may, without stockholder approval, issue
preferred stock with voting and other rights that could adversely affect the
voting power and other rights of the holders of the common stock and could have
anti-takeover effects, including preferred stock or rights to acquire preferred
stock in connection with implementing a shareholder rights plan. We have no
present plans to issue any shares of preferred stock. The ability of our board
of directors to issue preferred stock without stockholder approval could have
the effect of delaying, deferring of preventing a change of control of c-
quential or the removal of existing management.
Limitations on Liability
We have entered into indemnification agreements with each of our directors.
The form of indemnity agreement provides that we will indemnify our directors
for expenses incurred because of their status as a director, to the fullest
extent permitted by Delaware law, our certificate of incorporation and our
bylaws.
Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors for monetary
damages for breaches of their fiduciary duty, including breaches involving
negligence or gross negligence in business combinations, unless the director
has breached his or her duty of loyalty, failed to act in good faith, engaged
in intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the Delaware General Corporation
Law or obtained an improper personal benefit. This provision does not alter a
director's liability under the federal securities laws and does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty. Our by-laws provide that directors and officers shall
be, and in the discretion of our board of directors, non-officer employees may
be, indemnified by c-quential to the fullest extent authorized by Delaware law,
as it now exists or may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with service for or on behalf of
c-quential. The by-laws also provide for the advancement of expenses to
directors and, at the discretion of our board of directors, officers and non-
officer employees. In addition, our by-laws provide that the right of directors
and officers to indemnification shall be a contract right and shall not be
exclusive of any other right now possessed or hereafter acquired under any by-
law, agreement, vote of stockholders or otherwise. We also have directors' and
officers' insurance against certain liabilities. We believe that the
indemnification agreements, together with the limitation of liability and
indemnification provisions of our certificate of incorporation and by-laws and
directors' and officers' insurance will assist us in attracting and retaining
qualified individuals to serve as directors and officers of c-quential.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling c-
quential as described above, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. At
present, there is no pending litigation or proceeding involving any director,
officer, employee or agent of c-quential in which indemnification will be
required or permitted.
Certain Anti-Takeover Provisions
Certain provisions of our certificate of incorporation and by-laws described
below, as well as the ability of our board of directors to issue shares of
preferred stock and to set the voting rights, preferences and other terms
thereof, may have an anti-takeover effect and may discourage takeover attempts
not first approved by our board of directors, including takeovers which
particular stockholders may deem to be in their best interests. These
provisions also could have the effect of discouraging open market purchases of
our common stock because they may be considered disadvantageous by a
stockholder who desires subsequent to such purchases to participate in a
business combination transaction with us or elect a new director to our board.
63
<PAGE>
Classified Board of Directors
Our board of directors is divided into three classes serving staggered
three-year terms, with one class of directors being elected each year. Our
classified board, together with certain other provisions of our certificate of
incorporation authorizing the board of directors to fill vacant directorships
or increase the size of the board, may prevent a stockholder from removing, or
delay the removal of, incumbent directors and simultaneously gaining control of
the board of directors by filling vacancies created by such removal with its
own nominees.
Director Vacancies and Removal
Our certificate of incorporation provides that vacancies in our board of
directors shall be filled only by the affirmative vote of a majority of the
remaining directors. Our certificate of incorporation provides that directors
may be removed from office only with cause and only by the affirmative vote of
holders of at least seventy-five percent of the shares then entitled to vote in
an election of directors.
No Stockholder Action by Written Consent
Our certificate of incorporation provides that any action required or
permitted to be taken by our stockholders at an annual or special meeting of
stockholders must be effected at a duly called meeting and may not be taken or
effected by a written consent of stockholders.
Special Meetings of Stockholders
Our certificate of incorporation and by-laws provide that a special meeting
of stockholders may be called only by our board of directors. Our by-laws
provide that only those matters included in the notice of the special meeting
may be considered or acted upon at that special meeting unless otherwise
provided by law.
Advance Notice of Director Nominations and Stockholder Proposals
Our by-laws include advance notice and informational requirements and time
limitations on any director nomination or any new proposal which a stockholder
wishes to make at an annual meeting of stockholders. For the first annual
meeting following the completion of this offering, a stockholder's notice of a
director nomination or proposal will be timely if delivered to the secretary of
c-quential at our principal executive offices not later than the close of
business on the later of the 75th day prior to the scheduled date of such
annual meeting or the 10th day following the day on which public announcement
of the date of such annual meeting is made by c-quential.
Amendment of the Certificate of Incorporation
As required by Delaware law, any amendment to our certificate of
incorporation must first be approved by a majority of our board of directors
and, if required by law, thereafter approved by a majority of the total voting
power represented by the shares of common stock outstanding and entitled to
vote on such amendment, except that any amendment to the provisions relating to
stockholder action by written consent, directors, limitation of liability and
the amendment of our certificate of incorporation must be approved by not less
than sixty-six and two-thirds percent of the total voting power represented by
the shares of common stock outstanding and entitled to vote on such amendment.
Amendment of By-laws
Our certificate of incorporation and by-laws provide that our by-laws may be
amended or repealed by our board of directors or by the stockholders. Such
action by the board of directors requires the affirmative vote of a majority of
the directors then in office. Such action by the stockholders requires the
affirmative vote of at least sixty-six and two-thirds percent of the total
voting power represented by the shares of common stock present in person or
represented by proxy at an annual meeting of stockholders or a special meeting
called for such purpose and entitled to vote on such amendment or repeal unless
our board of directors recommends that
64
<PAGE>
the stockholders approve such amendment or repeal at such meeting, in which
case such amendment or repeal only requires the affirmative vote of a majority
of the total voting power represented by the shares of common stock present in
person or represented by proxy at the meeting and entitled to vote on such
amendment or repeal.
Statutory Business Combination Provision
Following the offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which prohibits a publicly held Delaware corporation
from consummating a "business combination," except under certain circumstances,
with an "interested stockholder" for a period of three years after the date
such person became an "interested stockholder" unless:
. before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination
. upon the closing of the transaction that resulted in the interested
stockholder becoming such, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares held by directors who are also
officers of the corporation and shares held by employee stock plans
. following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of at least two-thirds of the
outstanding voting stock of the corporation not owned by the interested
stockholder. The term "interested stockholder" generally is defined as a
person who, together with affiliates and associates, owns, or, within
the prior three years, owned, 15% or more of a corporation's outstanding
voting stock
The term "business combination" includes mergers, consolidations, asset
sales involving 10% or more of a corporation's assets and other similar
transactions resulting in a financial benefit to an interested stockholder.
Section 203 makes it more difficult for an "interested stockholder" to effect
various business combinations with a corporation for a three-year period. A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or by-laws resulting from an amendment approved by
holders of at least a majority of the outstanding voting stock. Neither our
certificate of incorporation nor our by-laws contain any such exclusion. ADL is
not an "interested stockholder" of c-quential under Section 203.
Trading on the Nasdaq National Market System
Our common stock has been approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "CQTL."
Trading on the Frankfurt Stock Exchange
We have applied to have our common stock be admitted for listing on the
official list of the Frankfurt Stock Exchange with participation in SMAX under
the symbol "CQEL."
No Preemptive Rights
No holder of any class of our stock has any preemptive right to subscribe
for or purchase any kind or class of our securities.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be EquiServe
Trust Company.
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock,
and no prediction can be made as to the effect, if any, that sales of common
stock or the availability of common stock for sale will have on the market
price of our common stock prevailing from time to time. Nonetheless,
substantial sales of common stock in the public market following this offering,
or the perception that such sales could occur, could lower the market price of
our common stock or make it difficult for us to raise additional equity capital
in the future.
All of the shares of our Class A common stock sold in this offering will be
freely tradable without restriction under the Securities Act, except for any
shares which may be acquired by an "affiliate" of us, as that term is defined
in the Securities Act, and except for shares acquired through the directed
share program which are subject to the restrictions of 90-day, and in some
cases 180-day, lock-up agreements. Persons who may be deemed to be affiliates
generally include individuals or entities that control, are controlled by, or
are under common control with, us and may include our directors and executive
officers as well as our significant stockholders.
Sales of Restricted Securities
The shares of our Class A common stock held by ADL are deemed "restricted
securities" as defined in Rule 144 under the Securities Act, and may not be
sold other than through registration under the Securities Act or under an
exemption from registration, such as the exemption provided by Rule 144. We,
ADL, and all of our and ADL's directors and executive officers have agreed not
to offer or sell any shares of our common stock for a period of 180 days after
the date of this prospectus without the prior written consent of Lehman
Brothers Inc.
The shares of our super-voting Class B common stock, all of which are held
by ADL, are not currently listed or quoted for trading on any securities
exchange or quotation system.
ADL has pledged all of the shares of our Class A and Class B common stock
which it owns to several financial institutions to secure approximately $56.5
million of indebtedness to these institutions, $40.6 million of which
(including accrued interest) we have assumed and will repay with a portion of
the net proceeds of this offering. In the event that ADL were to be in default
in respect of any of this indebtedness, the lenders would be entitled to
foreclose on all or a portion of the shares. In the event of such a
foreclosure, the lender or lenders would be entitled to sell any or all of such
shares, subject to the volume and holding period limitations of Rule 144 under
the Securities Act and subject to the restrictions of a 180-day lock-up
agreement with Deutsche Borse AG, required as part of the listing of our shares
of Class A common stock on the Frankfurt Stock Exchange. In addition, after a
default, these lenders have the right to require us to register any or all of
the shares of our common stock held by them.
ADL and the lenders to whom ADL has pledged its shares of our common stock
have undertaken in accordance with the Regulations of the Frankfurt Stock
Exchange and in compliance with the applicable regulations of the German
national corporate law not to offer, sell, announce such sale or take any other
action economically equivalent to a sale of any of the shares of Class A common
stock still held by them on or outside of the stock exchange within a period of
180 days from the date of the admittance of the Class A common stock to the
official list of the Frankfurt Stock Exchange.
Stock Options
After completion of this offering, but not prior to 180 days following the
date of this prospectus, we intend to file a registration statement on Form S-8
with respect to the aggregate number of shares of common stock issuable under
our stock option and incentive plan. Shares issued upon the exercise of stock
options after the effective date of the Form S-8 registration statement will be
eligible for resale in the public market without restriction, except that
affiliates must comply with Rule 144.
66
<PAGE>
Registration Rights
We entered into a Registration Rights Agreement with ADL pursuant to which
ADL and its transferees have the right to request the registration of shares of
our common stock held by them whenever we propose to register any shares of
common stock for our own or another's account under the Securities Act for a
public offering, other than registrations in respect of shares to be used in
connection with a business combination or shares relating to our employee
benefit plans. ADL and its transferees also have the right, on up to five
occasions beginning six months after the completion of this offering, to demand
that we register under the Securities Act any or all shares of our common stock
held by them. ADL's rights to request registration of our common stock remain
subject to:
. its agreement with the underwriters not to sell or transfer any shares
for a period of 180 days after the consummation of this offering
. its obligation, as part of the listing of our Class A common stock on
the official list of the Frankfurt Stock Exchange with participation in
SMAX, not to sell or transfer any shares of our Class A common stock for
a period of 180 days after the consummation of this offering
. our right, at the request of any underwriter in any proposed offering,
to cut-back the number of shares of stock to be offered thereby
. our right not to effect any registration of our shares of common stock
within 180 days of any other public offering of our securities
In connection with the registration of any ADL-owned shares, we agreed to
pay all costs and expenses of ADL, other than underwriting discounts and
commissions.
67
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., Chase Securities Inc., Thomas Weisel
Partners LLC and Fidelity Capital Markets, a division of National Financial
Services LLC, are acting as representatives, have each agreed to purchase from
us the respective number of shares of Class A common stock shown opposite its
name below:
<TABLE>
<CAPTION>
Number
Underwriters of Shares
------------ ---------
<S> <C>
Lehman Brothers Inc..............................................
Chase Securities Inc.............................................
Thomas Weisel Partners LLC.......................................
Fidelity Capital Markets, a division of National Financial
Services LLC....................................................
---------
Total.......................................................... 7,250,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of Class A common stock depend on the satisfaction of the
conditions contained in the underwriting agreement, and that if any of the
shares of Class A common stock are purchased by the underwriters under the
underwriting agreement, then all of the shares of Class A common stock which
the underwriters have agreed to purchase under the underwriting agreement must
be purchased. The conditions contained in the underwriting agreement include
the requirement that the representations and warranties made by us to the
underwriters are true, that there is no material change in the financial
markets and that we deliver to the underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of Class A common stock directly to the public at the public
offering price set forth on the cover of this prospectus, and to dealers, who
may include the underwriters, at the public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and the
dealers may reallow, a concession not in excess of $ per share to brokers and
dealers. After this offering, the underwriters may change the offering price
and other selling terms.
We have granted to the underwriters an option to purchase up to an aggregate
of 1,087,500 additional shares of Class A common stock, to cover over-
allotments, if any, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option at any time until 30 days after the date
of the underwriting agreement. If this option is exercised, each underwriter
will be committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of Class A common stock
proportionate to the underwriter's initial commitment as indicated in the
preceding table, and we will be obligated under the over-allotment option to
sell the shares of Class A common stock to the underwriters.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase 1,087,500 additional shares of Class A common stock. This underwriting
fee is the difference between the public offering price and the amount the
underwriters pay to us to purchase the shares from us. On a per share basis,
the underwriting fee is 7% of the public offering price. The amount of these
fees has been determined by negotiations between the underwriters and us.
<TABLE>
<CAPTION>
Total
-----------------------------
Without With
Per Share Over-Allotment Over-Allotment
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting fees to be paid by
us............................... $ $ $
</TABLE>
68
<PAGE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $3.0 million. The following
table details these expenses. All amounts shown are estimates, with the
exception of the SEC Registration Fee, the NASD Filing Fee and the Nasdaq
National Market Listing Fee:
<TABLE>
<S> <C>
SEC Registration Fee................................................ $ 39,600
NASD Filing Fee..................................................... $ 15,500
Nasdaq National Market Listing Fee.................................. $ 95,000
Frankfurt Stock Exchange Listing Fee................................ $ 10,000
Accounting Fees and Expenses........................................ $1,000,000
Legal Fees and Expenses............................................. $ 800,000
Printing Expenses................................................... $ 500,000
Blue Sky Qualification Fees and Expenses............................ $ 12,000
Transfer Agent's Fee................................................ $ 25,000
Miscellaneous....................................................... $ 513,000
----------
TOTAL............................................................. $3,010,100
==========
</TABLE>
We have agreed that, without the prior consent of Lehman Brothers Inc., we
will not, directly or indirectly, offer, sell or otherwise dispose of any
shares of common stock or any securities that may be, converted into or
exchanged for any shares of common stock for a period of 180 days from the date
of this prospectus. ADL, all of ADL's and our directors and executive officers
have agreed under lock-up agreements that, without the prior written consent of
Lehman Brothers Inc., they will not, directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities that may be
converted into or exchanged for any shares of common stock for the period
ending 180 days after the date of this prospectus. See "Shares Eligible for
Future Sale."
c-quential has committed to Deutsche Borse AG ("DBAG") in compliance with
the applicable regulations of German stock corporation law, not to directly or
indirectly offer for sale, sell, announce such sale or take any other action
economically equivalent to a sale of any Class A common stock within a period
of six months from the date of the listing of the Class A common stock on the
Frankfurt Stock Exchange.
ADL and the lenders to whom ADL has pledged its shares of our common stock
have undertaken in accordance with the regulations of the Frankfurt Stock
Exchange and in compliance with the applicable regulations of the German
national corporate law not to offer, sell, announce such sale or take any other
action economically equivalent to a sale of any of the Class A common stock
still held by them on or outside of the stock exchange within a period of 180
days from the date of the admittance of the Class A common stock to the
Frankfurt Stock Exchange.
Prior to this offering, there has been no public market for the shares of
Class A common stock. The public offering price will be negotiated between the
representatives and us. In determining the public offering price of the Class A
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions, our performance and capital
structure, estimates of our business potential and earning prospects, an
overall assessment of our management and the consideration of the above factors
in relation to market valuation of companies in related businesses.
Fidelity Capital Markets, a division of National Financial Services LLC, is
acting as an underwriter of this offering and will be facilitating electronic
distribution through the Internet.
We and ADL have agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of the representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may be required
to make for these liabilities.
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<PAGE>
Until the distribution of the Class A common stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the
underwriters and selling group members to bid for and purchase shares of Class
A common stock. As an exception to these rules, the representatives are
permitted to engage in transactions that stabilize the price of the Class A
common stock. These transactions may consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Class A common
stock.
The underwriters may purchase and sell shares of common stock in the open
market. These transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short sales involve
the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. "Covered" short sales are sales made in
an amount not greater than the underwriters' option to purchase additional
shares from the issuer in the offering. The underwriters may close out any
covered short position by either exercising their option to purchase additional
shares or purchasing shares in the open market. In determining the source of
shares to close out the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common stock in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of common stock made by the underwriters in
the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters' purchases to cover
the syndicate short sales may have the effect of raising or maintaining the
market price of the common stock or preventing or retarding a decline in the
market price of the common stock. As a result, the price of the common stock
may be higher than the price that might otherwise exist in the open market.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class A common stock. In addition,
neither we nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
Purchasers of the shares of Class A common stock offered in this prospectus
may be required to pay stamp taxes and other charges under the laws and
practices of the country of purchase, in addition to the public offering price
listed on the cover page of this prospectus.
The representatives have informed us that they do not intend to confirm
sales of shares of Class A common stock in excess of 5% of the shares offered
by them to any accounts over which they exercise discretionary authority.
At our request, the underwriters have reserved up to 507,500 shares, or 7%
of the Class A common stock offered by this prospectus, for sale to ADL's
officers, directors, employees and members of employees' families through a
directed share program at the public offering price set forth on the cover page
of this prospectus. These persons must commit to purchase no later than the
close of business on the day following the date of this prospectus.
Participants in the directed share program will agree not to, directly or
indirectly, offer, sell or otherwise dispose of any shares of our common stock
or any securities that may be converted into or exchanged for any shares of our
common stock for a period of 90 days, and in some cases 180 days, from the date
of this prospectus. The number of shares available for sale to the general
public will be reduced to the extent these persons purchase the reserved
shares.
70
<PAGE>
Lehman Brothers Inc. has been engaged by ADL as a financial advisor to
review and evaluate strategic alternatives concerning the development of ADL's
business, including general advice with respect to acquisitions, divestitures,
joint ventures and other corporate transactions. Lehman Brothers Inc. will
receive customary fees for these services.
Due to the fact that one of the representatives of the underwriters was
organized within the last three years, we are providing you the following
information. Thomas Weisel Partners LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December 1998.
Since December 1998, Thomas Weisel Partners has been named as a lead or co-
manager of, or a syndicate member in, numerous public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except with
respect to its contractual relationship with us pursuant to the underwriting
agreement entered into in connection with this offering.
Chase Manhattan International Limited will act as selling agent outside the
United States for Chase Securities Inc.
We intend to use approximately $9 million of the net proceeds of the
offering to repay indebtedness to The Chase Manhattan Bank that we have assumed
from ADL. The Chase Manhattan Bank is an affiliate of Chase Securities Inc.,
one of the underwriters. Under Rule 2710(c)(8) of the Conduct Rules of the
NASD, Chase Securities Inc. may be deemed to have a "conflict of interest" with
us. This offering is being conducted in accordance with Rule 2710(c)(8), which
provides that, among other things, when an NASD member participates in the
underwriting of the equity securities of a company with which it is deemed to
have a conflict of interest, the public offering price per share can be no
higher than that recommended by a "qualified independent underwriter", or
"QIU", meeting certain standards.
In accordance with this requirement, Lehman Brothers Inc. has assumed the
responsibilities of acting as a QIU. In its role as QIU, Lehman Brothers Inc.
has performed a due diligence investigation and reviewed and participated in
the preparation of this prospectus and the registration statement of which this
prospectus is a part. We, ADL and the other underwriters have agreed to
indemnify Lehman Brothers Inc. in its capacity as QIU against certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments Lehman Brothers Inc. in its capacity as QIU may be
required to make in respect of any of those liabilities.
Trading on the Frankfurt Stock Exchange
Trading of shares listed on the Frankfurt Stock Exchange takes place on the
floor of the stock exchange, but is computer-aided. Markets in listed
securities are generally of the auction type, but listed securities also change
hands in inter-bank dealer markets off the Frankfurt Stock Exchange. Price
formation in the Frankfurt Stock Exchange is determined by open bid by
appointed specialists (Freimakler) who are themselves exchange members, but who
do not, as a rule, deal with the public. Prices of currently traded securities
are displayed continuously during trading hours. At the halfway point of each
trading day, a single standard quotation is determined for all shares.
The members' association of the Frankfurt Stock Exchange publishes a daily
list of prices which contains the standard prices of all traded securities, as
well as their highest and lowest quotations during the past year at
http://www.exchange.de.
Shares traded on the Frankfurt Stock Exchange are also traded on a computer-
aided system called Xetra. Trading takes place on every business day between
9:00 a.m and 8:00 p.m., Frankfurt time. Trading within the Xetra system is done
by banks and securities dealers who have been admitted to trading on at least
one of Germany's stock exchanges. Xetra is integrated into the Frankfurt Stock
Exchange and is subject to its rules and regulations.
71
<PAGE>
Transactions on the Frankfurt Stock Exchange (including transactions within
the Xetra system) are settled on the second business day following trading.
Trading can be suspended by the Frankfurt Stock Exchange if orderly stock
exchange trading is temporarily endangered or if a suspension is in the public
interest.
Trading on German stock exchanges is regulated by the responsible
authorities of the states (Laender) where the seat of the stock exchange has
its seat. The Frankfurt Stock Exchange is regulated by the Ministry of
Economics of Hessia. The Federal Supervisory Office for Securities Trading
(Bundesaufsichtsamt fur den Wertpapierhandek) among other things, supervises
all trades, on and off exchange, to detect insider trading.
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Certain
legal matters will be passed upon for the underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York.
EXPERTS
The financial statements as of December 31, 1999 and 1998 and for each of
the years in the three year period ended December 31, 1999 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the Class A
common stock we propose to sell in this offering. This prospectus, which
constitutes part of the registration statement, does not contain all of the
information set forth in the registration statement. For further information
about us and the Class A common stock we propose to sell in this offering, we
refer you to the registration statement and the exhibits and schedules filed as
a part of the registration statement. Statements contained in this prospectus
as to the contents of any contract or other document filed as an exhibit to the
registration statement are not necessarily complete. If a contract or document
has been filed as an exhibit to the registration statement, we refer you to the
copy of the contract or document that we have filed. This prospectus identifies
all provisions of the exhibits to the registration statement that are material
to an understanding of c-quential or this offering. You may inspect the
registration statement, including exhibits, without charge at the principal
office of the Securities and Exchange Commission in Washington, D.C. You may
inspect and copy the same at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Room 1024, Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center,
Suite 1300, New York, New York 10048. You can also obtain copies of this
material at prescribed rates by mail from the Public Reference Section of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Securities and Exchange Commission maintains a website
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Securities and Exchange Commission.
72
<PAGE>
c-quential
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
C-QUENTIAL FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report............................................. F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Practice Equity............................................ F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Interim Condensed Balance Sheets......................................... F-14
Interim Condensed Statements of Operations............................... F-15
Interim Condensed Statements of Cash Flows............................... F-16
Notes to Unaudited Interim Condensed Financial Statements................ F-17
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Balance Sheets............................. F-20
Unaudited Pro Forma Condensed Statements of Operations................... F-21
Notes to Unaudited Pro Forma Condensed Financial Statements.............. F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Boards of Directors of
Arthur D. Little, Inc. and c-quential, Inc.:
We have audited the accompanying balance sheets of c-quential (predecessor
to c-quential, Inc.)- (representing the telecommunications, information
technology, media and electronics industries-focused consulting practice of
Arthur D. Little, Inc.) as of December 31, 1999 and 1998, and the related
statements of operations, Practice equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of c-quential as of December 31, 1999 and
1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
May 5, 2000
F-2
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ -- $ 304
Accounts receivable and unbilled services - payable on
receipt to Arthur D. Little, Inc............................ 16,591 24,048
Other current assets......................................... -- 28
Deferred tax assets.......................................... -- 5
------- -------
Total current assets....................................... 16,591 24,385
Property and equipment, net.................................... -- 79
Goodwill....................................................... -- 3,969
------- -------
Total assets............................................... $16,591 $28,433
======= =======
LIABILITIES AND PRACTICE EQUITY
Current Liabilities:
Accounts payable to Arthur D. Little, Inc.................... $16,591 $24,048
Trade payable and other accrued expenses..................... -- 790
Debt assumed from Arthur D. Little, Inc...................... -- --
------- -------
Total current liabilities.................................. 16,591 24,838
------- -------
Commitments and Contingencies
Practice Equity:
Arthur D. Little, Inc.'s net equity investment............... -- 3,595
------- -------
Total Practice equity...................................... -- 3,595
------- -------
Total liabilities and Practice equity...................... $16,591 $28,433
======= =======
</TABLE>
See notes to financial statements.
F-3
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Professional service revenue:
Direct professional service revenue................. $58,170 $73,267 $101,620
Subcontracted from Arthur D. Little, Inc............ 2,986 3,564 4,960
------- ------- --------
Total professional service revenue................ 61,156 76,831 106,580
------- ------- --------
Costs of services:
Direct costs of services............................ 18,515 24,145 36,014
Arthur D. Little, Inc. subcontract costs............ 20,111 23,126 26,138
------- ------- --------
Total costs of services........................... 38,626 47,271 62,152
------- ------- --------
Gross profit.......................................... 22,530 29,560 44,428
Selling, general and administrative expenses.......... 14,344 19,745 27,294
------- ------- --------
Income before taxes................................... 8,186 9,815 17,134
Provision for income taxes............................ 3,193 3,730 6,340
------- ------- --------
Net income............................................ $ 4,993 $ 6,085 $ 10,794
======= ======= ========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
STATEMENTS OF PRACTICE EQUITY
(in thousands)
<TABLE>
<CAPTION>
Arthur D. Little, Inc.'s
Net Equity Investment
------------------------
<S> <C>
BALANCE, JANUARY 1, 1997............................... $ --
Net income........................................... 4,993
Earnings retained by Arthur D. Little, Inc........... (4,993)
--------
BALANCE, DECEMBER 31, 1997............................. --
Net income........................................... 6,085
Earnings retained by Arthur D. Little, Inc........... (6,085)
--------
BALANCE, DECEMBER 31, 1998............................. --
Contribution of Contactica........................... 4,175
Net income........................................... 10,794
Earnings retained by Arthur D. Little, Inc........... (11,374)
--------
BALANCE, DECEMBER 31, 1999............................. $ 3,595
========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 4,993 $ 6,085 $ 10,794
------- ------- --------
Adjustments to reconcile net income to net cash
provided by operating activities prior to
distribution and changes in payable to Arthur D.
Little, Inc.:
Depreciation and amortization.................... -- -- 636
Provision for doubtful accounts.................. 448 259 1,398
Deferred income taxes............................ -- -- (5)
Changes in assets and liabilities, net of effects
of acquisition:
Accounts receivable and unbilled services....... (2,417) (2,810) (8,509)
Other current assets............................ -- -- 467
Trade payables and other accrued expenses....... -- -- (66)
------- ------- --------
Total adjustments.............................. (1,969) (2,551) (6,079)
------- ------- --------
Net cash provided by operating activities prior
to distribution and changes in payable to
Arthur D. Little, Inc.......................... 3,024 3,534 4,715
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payable to Arthur D. Little, Inc................ 1,969 2,551 6,963
Earnings retained by Arthur D. Little, Inc...... (4,993) (6,085) (11,374)
------- ------- --------
Net cash used for the financing activities..... -- -- (4,411)
------- ------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......... -- -- 304
------- ------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... -- -- --
------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR........... $ -- $ -- $ 304
======= ======= ========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
INFORMATION:
Contribution of Contactica business to c-quential
by Arthur D. Little, Inc. ........................ $ -- $ -- $ 4,175
======= ======= ========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands)
1. OVERVIEW AND BASIS OF PRESENTATION
The financial statements of c-quential (predecessor to c-quential, Inc.)
(the "Company") reflect the operations of the telecommunications, information
technology, media and electronics industries-focused consulting practice of
Arthur D. Little, Inc. ("ADL"), which serves the telecommunications,
information technology, media and electronics industries. The c-quential
practice was formed in 1995. For the periods presented, ADL has had the ability
to direct all operations of the Company. The Company is a global provider of
management and technology consulting services principally to the
telecommunications, information technology, media and electronics industries.
In March 2000, ADL formed a separate wholly owned subsidiary named c-
quential, Inc., a Delaware corporation, which will succeed to the c-quential
operations. Prior to the initial public offering ADL intends to transfer
certain assets, liabilities and employees to the Company. In return ADL will
receive all the shares of c-quential, Inc. and c-quential, Inc. will assume
approximately $40,000 of ADL's third party debt. This debt is not directly
related to the operations of c-quential, Inc. and is therefore deemed to be a
preferential distribution at the time of repayment. Tax benefits arising as
part of this transaction will continue to be allocated to ADL. Because
c-quential, Inc. had neither net assets nor operations prior to the transfer
from ADL of the telecommunications, information technology, media and
electronics industries-focused consulting practice to c-quential, Inc., the
financial statements of c-quential, Inc.'s predecessor have been provided in
this registration statement.
Subsequent to the offering, the third party debt will be repaid with the
proceeds of the offering. Management does not anticipate that c-quential will
incur any significant amount of interest chargerelative to the debt since it
will be repaid immediately. ADL plans to retain at least an 80% interest in c-
quential, Inc.
The accompanying financial statements are presented on a carve-out basis and
reflect the historical results of operations, financial position and cash flows
of the Company. For purposes of deriving direct costs of services, the Company
considered ADL professionals who charged 70% or more of their billable hours to
telecommunications, information technology, media and electronics industries-
related engagements during any year to be c-quential staff for that year. For
all periods presented, certain expenses reflected in the financial statements
include an allocation of ADL's corporate expenses and regional infrastructure
costs. Management believes that the methods used to allocate expenses are
reasonable, although the costs of services could be higher if obtained from
other sources. In addition, certain service fee revenue and costs of service
fee revenue have been reflected by c-quential for services subcontracted to c-
quential by ADL. The service fee revenue, cost of service fee revenue and
allocated expenses have been reflected on bases that ADL and c-quential
consider to be a reasonable reflection of the services provided and revenue
earned by c-quential and the utilization of services provided by ADL and the
benefit received by c-quential.
The financial information included herein may not reflect the financial
position, operating results, changes in ADL's net investment and cash flows of
c-quential in the future or what they would have been had c-quential been a
separate, stand-alone entity during the periods presented. Accounts receivable
reflected on the balance sheets are those representing trade receivables from
c-quential cases. c-quential does not have rights to the receipts on these
trade receivables, and accordingly, an offsetting payable to ADL is reflected
on the balance sheets. This payable to ADL does not represent borrowings from
ADL, and, accordingly, no interest expense has been imputed on the payable
balance.
ADL and c-quential, Inc. intend to enter into a series of agreements that
specify services and facilities that ADL will supply in the future and the
basis for the calculation of the costs of services to be provided. The
provisions of the agreements are consistent with the historical presentation of
expenses seen in these financial statements.
F-7
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition--Revenue from substantially all engagements are
recognized, as services are provided based upon hours worked and contractually
agreed-upon hourly rates. The Company may also receive "incentive revenue" on a
contingent basis. Incentive revenue is based upon agreed upon formulas relating
to customer specific measures. Measurements are performed at time intervals
specified in the contract. Both the Company and the client agree to the
measurements and corresponding incentive fees earned by the Company at these
contractual time intervals. Incentive revenue is recorded at that time.
Provision is made for estimated unbillable and uncollectable amounts. The
Company also bills its clients for expenses, which include travel, other out-
of-pocket expenses and other reimbursable expenses. These billed expenses
amounted to $7,421, $9,148, and $12,938 in 1997, 1998, and 1999, respectively.
Such amounts are netted against the expense amounts in the accompanying income
statements.
Foreign Currency--The functional currency for most of the Company's non-U.S.
operations is the local currency. The assets and liabilities of these
operations are translated into U.S. dollars at year-end exchange rates. Income
and expense items are translated at the average of monthly exchange rates.
Revenue and expense transactions generally occur in the local currency of the
transacting office and, accordingly, do not result in transaction gains or
losses. Transaction gains or losses in currencies other than the functional
currency have not been material in the periods presented. The U.S. dollar is
used as the functional currency for operations in highly inflationary
economies. Gains or losses from translation are included in operations.
Fair Value of Financial Instruments--The Company determines the fair value
of financial instruments and includes this information in the notes to the
financial statements when the fair value is materially different from the
carrying value of those financial instruments. As of December 31, 1999 and
1998, the carrying values of the Company's financial instruments, which consist
primarily of receivables approximated their fair values because of their short
term nature.
Cash and Cash Equivalents--The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Accounts Receivable--Accounts receivable include outstanding trade accounts
receivable as well as certain unbilled amounts owed to ADL (but attributable to
c-quential cases) by clients in accordance with contracts. Unbilled amounts
represent that portion of revenues earned and expenses incurred on client
contracts which have not yet been billed. The unbilled amounts at December 31,
1998 and 1999 was approximately $4,019 and $3,192, respectively. The allowance
for doubtful accounts amounted to $1,359 and $2,757, in 1998 and 1999,
respectively.
Property and Equipment--Property and equipment is stated at cost.
Depreciation is provided primarily using the straight-line method over the
estimated useful lives of the property and equipment over 3 years. At December
31, 1999, property and equipment consisted primarily of equipment and motor
vehicles net of accumulated depreciation of $339.
Deferred Revenue--Deferred revenue represents amounts paid to the Company in
advance of services rendered. For the years ended December 31, 1998 and 1999,
such advance payments amounted to $1,018 and $5,232, respectively. The advances
are due to the Company from ADL, accordingly, the receivable and the deferred
liability have been included in the intercompany accounts with ADL.
F-8
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Goodwill--Goodwill represents the excess of costs over the fair value of net
assets acquired. Goodwill is amortized on a straight-line basis over a period
of seven years. Accumulated amortization was $598 as of December 31, 1999.
Impairment of Long Lived Assets--Long-lived assets to be held and used are
reviewed for impairment whenever circumstances indicate that the carrying
amount of an asset may not be recoverable. Long-lived assets to be disposed of
are reported at the lower of the carrying amount or fair value less cost (net
realizable value) to sell.
Income Taxes--These historical financial statements reflect the tax expense
of the Company as if it were a stand-alone entity filing its own tax return. It
has, however, historically filed as part of the ADL consolidated returns.
Recently Issued Accounting Pronouncements--In June 1998 the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 was amended by SFAS No. 137
which requires adoption of the SFAS requirements by the Company effective
January 1, 2001. This statement requires all derivative instruments to be
carried on the consolidated balance sheet at fair value. It also discusses
changes to the requirements for hedge accounting. In the opinion of management,
the effect of adoption of this standard will not have a material impact on the
operating results of the Company.
In December 1999, the SEC released Staff Accounting Bulletin, or SAB, No.
101, "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views regarding when a business enterprise should recognize
revenue from transactions with customers. c-quential's revenue practices fall
within, and are in compliance with, AICPA Statement of Position No. 81-1 ("SOP
81-1"), "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." SAB 101 did not modify the precepts of SOP 81-1.
Accordingly, no changes to either reported revenues or c-quential's accounting
policies are expected.
3. STEP ACQUISITION OF CONTACTICA
Cambridge Consultants Limited, a wholly owned subsidiary of ADL, purchased a
28% interest in Contactica Limited, a United Kingdom Company, and Contactica
Asia Limited, a Hong Kong Limited Company in 1993. ADL had recorded its pro-
rata portion of Contactica losses to the extent of its investment. These losses
were recorded prior to 1997.
As of January 31, 1999, ADL acquired the remaining 72% of Contactica
Limited, and Contactica Asia Limited, for $4,521 in cash and stock. 50% of the
purchase price was paid in cash at the time of closing with the remaining 50%
to be paid over three years in cash and stock of ADL. The number of shares to
be issued will be determined based on the fair market value of ADL stock at the
time of each subsequent payment as determined by semi-annual valuations of ADL
by an independent appraiser. The transaction has been accounted for using the
purchase method of accounting. Results of operations of Contactica Limited have
been included in the statements of income for the period beginning January 31,
1999. The aggregate acquisition price of the shares exceeded the fair value of
the net assets at the date of acquisition by approximately $4,567. The
resulting goodwill is being amortized on a straight-line basis over seven
years.
F-9
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Following are the Company's unaudited pro forma results for 1997, 1998 and
1999 assuming the acquisition occurred on January 1:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Professional service revenue........................ $65,165 $79,723 $107,184
Net income.......................................... 4,911 5,047 10,799
</TABLE>
4. SIGNIFICANT GROUP CONCENTRATIONS
All of the receivables attributable to c-quential are obligations of
companies in the telecommunications, information technology, media and
electronics industries. The Company generally does not require collateral or
other security on their accounts receivable. The credit risk on these accounts
is controlled through credit approvals, limits and monitoring procedures. No
customer exceeded 10% of c-quential's revenue for the years ended December 31,
1997, 1998 and 1999, nor did any customer exceed 10% of accounts receivable at
December 31, 1998 and 1999.
Professional service revenue is assigned to specific geographic regions
based on the location of the office responsible for securing the contract.
Revenue was assigned to the following countries and geographic regions:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
United States....................................... $10,695 $12,493 $ 14,393
International:
United Kingdom.................................... 6,357 7,252 11,802
Germany........................................... 5,721 11,137 10,656
Other European.................................... 19,162 30,381 50,459
Asia Pacific...................................... 8,851 5,747 12,350
Latin America..................................... 8,719 7,434 3,983
Other International............................... 1,651 2,387 2,937
------- ------- --------
Total........................................... $61,156 $76,831 $106,580
======= ======= ========
</TABLE>
c-quential currently operates in one segment, management consulting to the
telecommunications, information technology, media and electronics industries.
Segment determination is based on the way management makes decisions, allocates
resources and assesses performance.
5. TRANSACTIONS WITH ADL
The Company's costs and expenses include allocations from ADL for certain
general administrative services including information technology, financial,
treasury, legal, insurance and other corporate functions as well as certain
costs of operations including facility charges. These allocations have been
estimated on bases that ADL and the Company consider to be a reasonable
reflection of the utilization of services provided or the benefit received by
the Company. Total allocated charges were $14,344, $19,745, and $25,621 in
1997, 1998, and 1999, respectively. The allocation of expenses from ADL was
computed using a ratio of c-quential direct employee compensation costs in the
various jurisdictions as a percentage of the total ADL consolidated direct
employee compensation costs in the same jurisdictions applied to the pool of
expenses incurred by ADL in those jurisdictions. However, these allocations of
costs and expenses do not necessarily indicate the costs and expenses that
would have been or will be incurred by the Company on a stand-alone basis.
F-10
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Management estimates that it would have incurred additional selling, general
and administrative expenses if c-quential had been operating as a stand-alone
publicly traded company. Such selling, general and administrative expenses
would likely include, but not be limited to, executive management costs and
related overhead, public company costs, and insurance and risk management
costs. Also included in costs and expenses is a fee charged by ADL as a
trademark license fee based on a percentage of revenue for use of the Arthur D.
Little, Inc. name, which fee will be discontinued on the date of the transfer.
Such fees were $937, $1,126, and $1,847 in 1997, 1998 and 1999, respectively.
Our agreements with ADL permit us to use the Arthur D. Little, Inc. name for
five years following the offering.
In addition, included in the financial statements is revenue which has been
reflected by c-quential for certain services subcontracted to c-quential by ADL
under ADL's contractual agreements for non-c-quential engagements. Revenue
applicable to these contracts were $2,986, $3,564 and $4,960 in 1997, 1998, and
1999, respectively. Certain services also have been subcontracted to ADL by c-
quential under c-quential's contractual agreements and are included in cost of
services in the financial statements. Cost of services applicable to these
contracts were $20,111, $23,126, and $26,138 in 1997, 1998, and 1999,
respectively. These costs of services represent 85% of the professional service
revenue at standard billing rates recognized ($23,660, $27,207 and $30,751 in
1997, 1998 and 1999, respectively) by c-quential in the accompanying statements
of operations. Management believes that the terms under which these services
are provided or received will not change materially when ADL and c-quential,
Inc. execute final intercompany service agreements.
6. INCOME TAXES
The Company's operations have been included in the consolidated income tax
returns filed by ADL. If ADL or other members of the consolidated group fail to
make tax payments required by law, the tax authorities would have the ability
to assess any member of the consolidated group including c-quential's
successor, c-quential, Inc. The provision for income taxes reflected in the
statements of operations and the deferred tax assets reflected in the balance
sheets have been computed as if c-quential had filed a separate tax return.
The provision (benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------
1997 1998 1999
------ ------- ------
<S> <C> <C> <C>
Current
Domestic.......................................... $ 297 $ 557 $ 575
State............................................. 138 70 177
Foreign........................................... 3,037 4,278 6,135
------ ------- ------
Total current................................... $3,472 $ 4,905 $6,887
====== ======= ======
Deferred
Domestic.......................................... $ (279) $ (969) $ (602)
State............................................. -- -- --
Foreign........................................... -- (206) 55
------ ------- ------
Total deferred.................................. $ (279) $(1,175) $ (547)
====== ======= ======
</TABLE>
In connection with the asset transfer, ADL may incur certain tax obligations
relating to the transfer of its businesses. Such transfer may result in ADL
paying taxes. As a result, c-quential, Inc. may have an increase in its tax
bases and will accordingly receive future tax benefits. ADL and c-quential,
Inc. will enter into a Tax Allocation Agreement which specifies that such tax
benefits if they arise will be used by ADL and not c-quential, Inc.
F-11
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
The Agreement also specifies that should ADL spin-off the remaining holdings
of the Company at some time in the future, the Company has agreed to indemnify
ADL for any tax liability it suffers arising out of actions taken by the
Company (excluding the issuance of stock upon the exercise of stock options),
before or after a spin-off by ADL that would cause the spin-off to lose its
qualification as a tax-free distribution for United States federal income tax
purposes.
7. BENEFIT PLANS
ADL has several U.S. and non-U.S. benefit plans that provide benefits to
substantially all employees. Amounts related to c-quential employees have been
included in costs of services in the accompanying financial statements.
Contributions on behalf of c-quential, Inc. employees to both the Arthur D.
Little, Inc. Employee Stock Ownership Plan (the "ESOP") and the Arthur D.
Little Inc. Employees' MDT Retirement Plan (the "MDT Plan") will be continued
by c-quential, Inc., for the remainder of 2000. Replacement plans have not yet
been formulated. New plans will be established within three years.
Employee Stock Ownership Plan--The ESOP is a defined contribution plan which
is designed to invest primarily in ADL stock. Contributions are made to
participants' accounts based on a percentage of their eligible earnings. Total
contributions on behalf of c-quential employees to this plan were $221, $428
and $479 for 1997, 1998, and 1999, respectively. Shares of ADL stock are
subject to a put option. Such option can only be exercised by an employee upon
termination of employment with ADL or its affiliated companies. c-quential,
Inc. does not have an obligation to fund ADL's repurchase of a terminated
employee's shares.
MDT Plan--The MDT Plan is a defined contribution plan covering employees of
Arthur D. Little, Inc. and certain affiliated entities. Benefits under the MDT
Plan are based on the amount of ADL contributions and the earnings on the
balances in the members' accounts. The annual contribution is based on a
formula that is applied to each participating employee's compensation, subject
to discretionary adjustments by the Board of Directors of ADL. Only U.S.
employees attributed to c-quential receive benefits under this plan. Total
contributions on behalf of c-quential employees to this plan were $204, $282,
and $194 for 1997, 1998, and 1999, respectively.
Non-U.S. Employee Defined Benefit Plans--ADL sponsors several non-U.S.
employee benefit plans. The Company's funding policy for its defined benefit
plans is to contribute an amount annually based upon actuarial assumptions
designed to achieve adequate funding of projected benefit obligations. Pension
expense applicable to c-quential staff amounted to $58, $34, and $54 in 1997,
1998, and 1999, respectively. c-quential will not be responsible for the
unfunded status, if any, of the defined benefit plans.
Non-U.S. Employee Defined Contribution Plans -In addition to the above
plans, ADL also sponsors other defined contribution plans which cover
employees. Contributions are based upon a percentage of the annual eligible
earnings of each employee. Certain plans allow for employee contributions into
the plans. Contributions to these plans on behalf of certain c-quential
designated employees amounted to $396, $790, and $1,085, in 1997, 1998 and
1999, respectively.
8. STOCK PURCHASE AND AWARD PLANS
Stock Purchase Plans--ADL maintains various stock purchase plans ("SPP's")
which allow for designated employees and directors to purchase shares of ADL
common stock at its fair market value. ADL also maintains various stock award
plans ("SAP's") which allow for employees to receive shares of the Company's
common stock as a performance award in lieu of cash. The number of shares
issued under the
F-12
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
SAP's is determined based upon the fixed dollar amount of the award at the
grant date and the fair market value at the end of the vesting period.
Generally, the awards vest over a three to five year period. Certain c-quential
employees have participated in such plans. Compensation charges relative to the
amortization of the discounts and awards described above have not been material
to these financial statements.
The shares purchased under these plans are subject to a call by ADL at the
time of an employee's termination from ADL or its affiliated companies. c-
quential, Inc. does not have an obligation to fund ADL's repurchase of an
employee's shares.
9.SUBSEQUENT EVENTS (UNAUDITED)
On August 26, 2000, ADL transferred employees, certain accounts receivable
balances, property and equipment, employment liabilities and the assets and
liabilities of Contactica to the Company. In return ADL received all the shares
of c-quential, Inc. and c-quential, Inc. assumed approximately $40,000 of ADL's
third party debt. This debt is not directly related to the operations of c-
quential, Inc. and is therefore deemed to be a preferential distribution. ADL
has retained a portion of the receivables (billed and unbilled) attributable to
c-quential cases as recorded through the transfer date. At the same time the
Company entered into a series of agreements with ADL that specify services and
facilities that ADL will supply in the future.
As part of the transfer, c-quential, Inc. became the primary lessee under
certain office leases previously held by ADL. These leases expire in 2002 and
2003. Minimum future annual rental payments under these non-cancelable
operating leases are as follows:
<TABLE>
<S> <C>
2000.................................................................... $ 78
2001.................................................................... 234
2002.................................................................... 168
----
Total................................................................... $480
====
</TABLE>
As of August 26, 2000, c-quential, Inc., in addition to assuming the $40
million of ADL debt, became a guarantor, along with several other ADL
subsidiaries, guaranteeing amounts outstanding under the Credit Agreement and
Senior Note Agreement of ADL (the "Agreements"). As of September 1, 2000, ADL
had $56.5 million outstanding under the Agreements. The Agreements expire on
June 1, 2001. The maturities of this ADL debt accelerate to December 29, 2000
as a result of an initial public offering by c-quential, Inc. c-quential, Inc.
shall be released from the guarantee at the time of the initial public
offering.
The agreements governing ADL's indebtedness include restrictive covenants
which provide, among other things, that except as permitted under the debt
agreements, ADL will not and that ADL will cause each of its subsidiaries,
including us, not to:
. incur additional indebtedness (with an exception permitting debt incurred
by us up to an aggregate of the lesser of $50 million or the amount of
net proceeds of this offering)
. create any liens or encumbrances on its assets or make any guarantees
. make investments that, together with all investments of ADL and its
subsidiaries, exceed 5% of ADL's consolidated total assets (approximately
$16 million as of August 25, 2000) in the aggregate, excluding loans or
advances to employees that do not exceed $5 million in the aggregate,
investments in wholly-owned subsidiaries and investments consisting of
intercompany debt
. pay dividends, or issue, redeem or retire capital stock
. dispose of or sell assets or enter into a merger or a similar transaction
F-13
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
INTERIM CONDENSED BALANCE SHEETS
(in thousands)
The Company has agreed with ADL that we will not take any action to cause ADL
to breach its covenants in the debt agreements through December 29, 2000, the
accelerated maturity date of the indebtedness evidenced by these agreements. As
a result, these restrictions limit the Company's ability to issue equity, to
make acquisitions, to incur debt, to pay dividends, to make investments, to
sell assets, to merge and to raise capital. ADL's obligation to cause the
Company to comply with these restrictions will continue until the outstanding
indebtedness under the debt agreements is paid in full. Though the scheduled
maturity date of the debt is December 29, 2000, we cannot be sure that ADL will
pay the debt in full by that date. As a result, the restrictions could remain
in effect after December 29, 2000 and until the debt is paid in full.
On August 28, 2000 the Board of Directors of c-quential, Inc. authorized
13,500,000 shares of Class A common stock for issuance under the 2000 Stock
Option and Incentive Plan (the "option plan"). The option plan, which is
currently administered by the Compensation Committee of the Board of Directors
of c-quential, Inc., provides for the granting of incentive awards in the form
of stock options to directors, executive management, key employees, and outside
consultants of c-quential, Inc. and its subsidiaries. The right to purchase
shares under the stock option agreements typically vest over a three year
period. Stock options must be exercised within 10 years from the date of grant.
Stock options are generally issued at fair market value. As of September 1,
2000 c-quential, Inc. has issued options to purchase 4,976,820 common shares at
an exercise price per share of $13.00.
<TABLE>
<CAPTION>
June 30,
December 31, June 30, 2000
1999 2000 Pro Forma
------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............... $ 304 $ 299 $ 1,170
Accounts receivable and unbilled
services -- payable on receipt to
Arthur D. Little, Inc. ................ 24,048 33,039 10,113
Other current assets.................... 28 1,584 2,304
Deferred tax assets..................... 5 104 36
------- ------- -------
Total current assets.................. 24,385 35,026 13,623
Property and equipment, net............... 79 47 1,268
Other assets.............................. -- -- 84
Goodwill.................................. 3,969 3,643 3,643
------- ------- -------
Total assets.......................... $28,433 $38,716 $18,618
======= ======= =======
LIABILITIES AND PRACTICE EQUITY
Current Liabilities:
Accounts payable to Arthur D. Little,
Inc. .................................. $24,048 $36,811 $ 5,143
Trade payable and other accrued
expenses............................... 790 1,655 3,771
Deferred revenue........................ -- -- 5,992
Debt assumed from Arthur D. Little,
Inc. .................................. -- -- 40,000
------- ------- -------
Total current liabilities............. 24,838 38,466 54,906
------- ------- -------
Commitments and Contingencies
Practice Equity:
Arthur D. Little, Inc.'s net equity
investment............................. 3,595 250 (36,288)
------- ------- -------
Total Practice equity................. 3,595 250 (36,288)
------- ------- -------
Total liabilities and Practice
equity............................... $28,433 $38,716 $18,618
======= ======= =======
</TABLE>
See notes to unaudited interim condensed financial statements.
F-14
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
INTERIM CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
July 2, June 30,
1999 2000
------- --------
<S> <C> <C>
Professional service revenue:
Direct professional service revenue.......................... $53,390 $60,619
Subcontracted from Arthur D. Little, Inc. ................... 2,550 1,639
------- -------
Total professional service revenue......................... 55,940 62,258
------- -------
Costs of services:
Direct costs of services..................................... 18,024 23,572
Arthur D. Little, Inc. subcontract costs..................... 14,631 8,363
------- -------
Total costs of services.................................... 32,655 31,935
------- -------
Gross Profit................................................... 23,285 30,323
Selling, general and administrative expenses................... 13,609 20,819
------- -------
Income before taxes............................................ 9,676 9,504
Provision for income taxes..................................... 3,580 3,802
------- -------
Net income..................................................... $ 6,096 $ 5,702
======= =======
</TABLE>
See notes to unaudited interim condensed financial statements.
F-15
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
INTERIM CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------
July 2, June 30,
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 6,096 $ 5,702
-------- -------
Adjustments to reconcile net income to net cash provided by
operating activities prior to distribution and changes in
payable to Arthur D. Little, Inc.:
Depreciation and amortization............................. 278 358
Provision for doubtful accounts........................... 55 (495)
Deferred income taxes..................................... (6) (99)
Changes in assets and liabilities, net of effects of
acquisition:
Accounts receivable and unbilled services................ (12,099) (8,496)
Other current assets..................................... 475 (15)
Trade payables and other accrued expenses................ (189) 865
-------- -------
Total adjustments....................................... (11,486) (7,882)
-------- -------
Net cash provided by (used for) operating activities
prior to distribution and changes in payable to Arthur
D. Little, Inc. ........................................ (5,390) (2,180)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payable to Arthur D. Little, Inc. ....................... 12,390 11,222
Earnings retained by Arthur D. Little, Inc. ............. (7,000) (9,047)
-------- -------
Net cash provided by (used for) the financing
activities............................................. 5,390 2,175
NET INCREASE IN CASH AND CASH EQUIVALENTS................... -- (5)
-------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ -- 304
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ -- $ 299
======== =======
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING INFORMATION:
Contribution of Contactica business to c-quential by Arthur
D. Little, Inc. ........................................... $ 4,175 $ --
======== =======
</TABLE>
See notes to unaudited interim condensed financial statements.
F-16
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
(dollars in thousands)
1. OVERVIEW AND BASIS OF PRESENTATION
The interim condensed financial statements of c-quential (the "Company")
reflect the operations of the telecommunications, information technology, media
and electronics industries-focused consulting practice of Arthur D. Little,
Inc. ("ADL"), which serves the telecommunications, information technology,
media and electronics industries. The c-quential practice was formed in 1995.
For the periods presented, ADL has had the ability to direct all operations of
the Company. The Company is a global provider of management and technology
consulting services principally to the telecommunications, information
technology, media and electronics industries.
In March 2000, ADL formed a separate wholly owned subsidiary named c-
quential, Inc., a Delaware corporation, which will succeed to the c-quential
operations. Prior to the initial public offering ADL intends to transfer
certain assets, liabilities and employees to the Company. In return ADL will
receive all the shares of c-quential, Inc. and c-quential, Inc. will assume
approximately $40,000 of ADL's third party debt. This debt is not directly
related to the operations of c-quential, Inc. Tax benefits arising as part of
this transaction will continue to be allocated to ADL.
Subsequent to the offering, the third party debt will be repaid with the
proceeds of the offering. Management does not anticipate that c-quential will
incur any significant amount of interest charge relative to the debt since it
will be repaid immediately. ADL plans to retain at least an 80% interest in c-
quential, Inc.
The interim condensed financial statements as of June 30, 2000, and for the
six months ended July 2, 1999 and June 30, 2000, respectively have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and are unaudited. The accompanying interim condensed financial
statements are presented on a carve-out basis and reflect the historical
results of operations, financial position and cash flows of the Company. For
purposes of deriving direct costs of services, the Company considered ADL
professionals who charged 70% or more of their billable hours to
telecommunications, information technology, media and electronics industries-
related engagements during any year to be c-quential staff for that year. For
all periods presented, certain expenses reflected in the interim condensed
financial statements include an allocation of ADL's corporate expenses and
regional infrastructure costs. For the six months ended June 30, 2000, the
allocations of ADL's expenses were calculated using a ratio of our direct
employee compensation in the various jurisdictions as a percentage of total ADL
consolidated direct employee compensation in those same jurisdictions applied
to the pool of ADL expenses as calculated on a quarterly basis. For the six
months ended July 2, 1999, the allocation was calculated using a ratio of
direct compensation costs reported for the year applied to the pool of ADL
expenses for each quarter. Management has determined that the effect of using
direct compensation costs for the year, rather than direct compensation costs
for the quarter, to determine the ratio is not material to the comparative
results for each of the quarters presented. Management believes that the
methods used to allocate expenses are reasonable, although the costs of
services could be higher if obtained from other sources. In addition, certain
service fee revenue and costs of service fee revenue have been reflected by c-
quential for services subcontracted to c-quential by ADL. The service fee
revenue, cost of service fee revenue and allocated expenses have been reflected
on bases that ADL and c-quential consider to be a reasonable reflection of the
services provided and revenue earned by c-quential and the utilization of
services provided by ADL and the benefit received by c-quential.
The financial information included herein may not reflect the financial
position, operating results, changes in ADL's net investment and cash flows of
c-quential in the future or what they would have been had c-quential been a
separate, stand-alone entity during the periods presented. Accounts receivable
reflected on the balance
F-17
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
(dollars in thousands)
sheets are those representing trade receivables from c-quential cases. c-
quential does not have rights to the receipts on these trade receivables, and
accordingly, an offsetting payable to ADL is reflected on the balance sheets.
This payable to ADL does not represent borrowings from ADL, and, accordingly,
no interest expense has been imputed on the payable balance.
ADL and c-quential, Inc. intend to enter into a series of agreements that
specify services and facilities that ADL will supply in the future and the
basis for the calculation of the costs of services to be provided. The
provisions of the agreements are consistent with the historical presentation of
expenses seen in these financial statements.
In the opinion of management, the unaudited interim condensed financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position as of June 30, 2000, its results of operations and its results of cash
flows for the six months ended July 2, 1999 and June 30, 2000, respectively.
Results of the Company's operations for interim periods may not be indicative
of results for the full fiscal year.
The unaudited interim condensed financial statements should be read in
conjunction with the audited financial statements and accompanying notes for
the years ended December 31, 1997, 1998 and 1999 included herein. Accounting
policies used in the preparation of the unaudited interim condensed financial
statements are consistent in all material respects with the accounting policies
described in the notes to audited financial statements.
2. TRANSACTIONS WITH ADL
The Company's costs and expenses include allocations from ADL for certain
general administrative services including information technology, financial,
treasury, legal, insurance and other corporate functions as well as certain
costs of operations including facility charges. These allocations have been
estimated on bases that ADL and the Company consider to be a reasonable
reflection of the utilization of services provided or the benefit received by
the Company. Total allocated charges were $12,028 and $16,927 in 1999 and 2000,
respectively. However, these allocations of costs and expenses do not
necessarily indicate the costs and expenses that would have been or will be
incurred by the Company on a stand-alone basis. Management estimates that it
would have incurred additional selling, general and administrative expenses if
c-quential had been operating as a stand-alone publicly traded company. Such
selling, general and administrative expenses would likely include, but not be
limited to, executive management costs and related overhead, public company
costs, and insurance and risk management costs. Also included in costs and
expenses is a fee charged by ADL as a trademark license fee based on a
percentage of revenue for use of the Arthur D. Little, Inc. name, which fee
will be discontinued on the date of the transfer. Such fees were $1,004 and
$1,094 in 1999 and 2000, respectively.
In addition, included in the financial statements is revenue which has been
reflected by c-quential for certain services subcontracted to c-quential by ADL
under ADL's contractual agreements for non-c-quential engagements. Revenue
applicable to these contracts were $2,550 and $1,639 in 1999 and 2000,
respectively. Certain services also have been subcontracted to ADL by c-
quential under c-quential's contractual agreements and are included in cost of
services in the financial statements. Cost of services applicable to these
contracts were $14,631 and $8,363 in 1999 and 2000, respectively. These costs
of services represent 85% of the professional service revenue recognized at
standard billing rates ($17,213 and $9,839 in 1999 and 2000, respectively) by
c-quential in the accompanying statements of operations. Management believes
that the terms under which these services are provided or received will not
change materially when ADL and c-quential, Inc. execute final intercompany
service agreements.
F-18
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
(dollars in thousands)
3. OTHER MATTERS
On May 10, 2000, c-quential announced its plans to file this offering and
stated its intention to enter into agreements with ADL, including a
reorganization agreement, a use and occupancy agreement, a corporate services
agreement, a tax allocation agreement, and an intellectual property agreement
which are expected to have a significant impact on the financial position and
results of operations of c-quential, Inc.
On August 26, 2000, ADL transferred employees, certain accounts receivable
balances, property and equipment, employment liabilities and the assets and
liabilities of Contactica to the Company. In return ADL received all the shares
of c-quential, Inc. and c-quential, Inc. assumed approximately $40,000 of ADL's
third party debt. This debt is not directly related to the operations of c-
quential, Inc. and is therefore deemed to be a preferential distribution. ADL
has retained a portion of the receivables (billed and unbilled) attributable to
c-quential cases as recorded through the transfer date. At the same time the
Company entered into a series of agreements with ADL that specify services and
facilities that ADL will supply in the future.
As part of the transfer, c-quential, Inc. became the primary lessee under
certain office leases previously held by ADL. These leases expire in 2002 and
2003. Minimum future annual rental payments under these non-cancelable
operating leases are as follows:
<TABLE>
<S> <C>
2000.................................................................... $ 78
2001.................................................................... 234
2002.................................................................... 168
----
Total................................................................... $480
====
</TABLE>
As of August 26, 2000, c-quential, Inc., in addition to assuming the $40
million of ADL debt, became a guarantor, along with several other ADL
subsidiaries, guaranteeing amounts outstanding under the Credit Agreement and
Senior Note Agreement of ADL (the "Agreements"). As of September 1, 2000, ADL
had $56.5 million outstanding. The Agreements expire on June 1, 2001. The
maturities of this ADL debt accelerate to December 29, 2000 as a result of an
initial public offering by c-quential, Inc. c-quential, Inc. shall be released
from the guarantee at the time of the initial public offering.
The agreements governing ADL's indebtedness include restrictive covenants
which provide, among other things, that except as permitted under the debt
agreements, ADL will not and that ADL will cause each of its subsidiaries,
including us, not to:
. incur additional indebtedness (with an exception permitting debt incurred
by us up to an aggregate of the lesser of $50 million or the amount of
net proceeds of this offering)
. create any liens or encumbrances on its assets or make any guarantees
. make investments that, together with all investments of ADL and its
subsidiaries, exceed 5% of ADL's consolidated total assets (approximately
$16 million as of August 25, 2000) in the aggregate, excluding loans or
advances to employees that do not exceed $5 million in the aggregate,
investments in wholly-owned subsidiaries and investments consisting of
intercompany debt
. pay dividends, or issue, redeem or retire capital stock
. dispose of or sell assets or enter into a merger or a similar transaction
F-19
<PAGE>
c-quential
(predecessor to c-quential, Inc.)
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
(dollars in thousands)
The Company has agreed with ADL that we will not take any action to cause ADL
to breach its covenants in the debt agreements through December 29, 2000, the
accelerated maturity date of the indebtedness evidenced by these agreements. As
a result, these restrictions limit the Company's ability to issue equity, to
make acquisitions, to incur debt, to pay dividends, to make investments, to
sell assets, to merge and to raise capital. ADL's obligation to cause the
Company to comply with these restrictions will continue until the outstanding
indebtedness under the debt agreements is paid in full. Though the scheduled
maturity date of the debt is December 29, 2000, we cannot be sure that ADL will
pay the debt in full by that date. As a result, the restrictions could remain
in effect after December 29, 2000 and until the debt is paid in full.
On August 28, 2000 the Board of Directors of c-quential, Inc. authorized
13,500,000 shares of Class A common stock for issuance under the 2000 Stock
Option and Incentive Plan (the "option plan"). The option plan, which is
currently administered by the Compensation Committee of the Board of Directors
of c-quential, Inc., provides for the granting of incentive awards in the form
of stock options to directors, executive management, key employees, and outside
consultants of c-quential, Inc. and its subsidiaries. The right to purchase
shares under the stock option agreements typically vest over a four year
period. Stock options must be exercised within 10 years from the date of grant.
Stock options are generally issued at fair market value. As of September 1,
2000 c-quential, Inc. has issued options to purchase 4,976,820 common shares at
an exercise price per share of $13.00.
The unaudited pro forma balance sheet as of June 30, 2000 has been prepared
to give effect to the pro forma adjustments to reflect the transfer of
approximately $9.1 million of net assets consisting primarily of $10.1 million
in accounts receivable related to the c-quential business, $1.9 million in
property and equipment and $1.4 million in employee related liabilities. Of the
amounts transferred, $1.0 million in net liabilities are not reflected in the
historical financial statements. This transfer was necessitated in order to
meet the legal requirements associated with achieving the tax objectives of ADL
in several jurisdictions. Such amounts were not previously reflected in the
historical balance sheet because the amounts were not separately determinable
for the periods presented. The pro forma amounts also reflect the assumption of
ADL's third party debt as a preferential distribution to ADL, and the issuance
to ADL of 18,000,000 shares of Class A common stock and 18,000,000 shares of
Class B common stock of the Company. In addition, the Company expects to incur
an additional $5.1 million in costs relating to both the separation from ADL
and the offering, and approximately $0.6 million in interest expense on the ADL
debt assumed. These amounts are expected to be repaid to ADL using the proceeds
of the offering and are also reflected in the unaudited pro forma balance
sheet.
F-20
<PAGE>
c-quential, Inc.
PRO FORMA CONDENSED BALANCE SHEETS (UNAUDITED)
JUNE 30, 2000
(in thousands, except share data)
<TABLE>
<CAPTION>
c-quential
(predecessor to
c-quential, Inc.) c-quential, Inc.
----------------------------------- -------------------------------------
Transfer Other IPO
Pro Forma Pro Forma Pro Forma IPO
Historical Adjustments Adjustments Pro Forma Adjustments Pro Forma
---------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents $ 299 $ 871 A $ -- $ 1,170 $44,055 I,H $ 45,225
Accounts receivable and
unbilled services--
payable on receipt to
Arthur D. Little, Inc. 33,039 (22,926)B -- 10,113 -- 10,113
Other current assets.... 1,584 720 A -- 2,304 (1,569)H 735
Deferred tax assets..... 104 (68)A -- 36 -- 36
------- -------- ------ ------- ------- --------
Total current assets... 35,026 (21,403) -- 13,623 42,486 56,109
Property and equipment,
net...................... 47 1,221 A -- 1,268 -- 1,268
Other assets.............. -- 84 A -- 84 -- 84
Goodwill.................. 3,643 -- -- 3,643 -- 3,643
------- -------- ------ ------- ------- --------
Total assets............ $38,716 $(20,098) $ -- $18,618 $42,486 $ 61,104
======= ======== ====== ======= ======= ========
LIABILITIES AND PRACTICE
EQUITY
Current Liabilities:
Accounts payable to
Arthur D. Little,
Inc.................... $36,811 $(37,315)C $5,647 G $ 5,143 $(8,899)H $(3,756)
Trade payables and other
accrued expenses....... 1,655 2,116 A -- 3,771 -- 3,771
Deferred revenue........ -- 5,992 D -- 5,992 -- 5,992
Debt assumed from Arthur
D. Little, Inc......... -- 40,000 E -- 40,000 (40,000)I --
------- -------- ------ ------- ------- --------
Total current
liabilities........... 38,466 10,793 5,647 54,906 (48,899) 6,007
------- -------- ------ ------- ------- --------
Commitments and
Contingencies
Practice/Stockholders'
equity:
Preferred stock, par
value $0.01 per share;
25,000,000 shares
authorized, no shares
issued or outstanding..
Class A common stock,
par value $0.01 per
share; 200,000,000
shares authorized,
18,000,000 shares
issued and outstanding
pro forma; and
25,250,000 shares
issued and outstanding
IPO pro forma.......... 180 F -- 180 73 H 253
Class B common stock,
par value $0.01 per
share; 50,000,000
shares authorized,
18,000,000 shares
issued and outstanding
pro forma; and
18,000,000 shares
issued and outstanding
IPO pro forma.......... 180 F -- 180 -- 180
Additional paid-in
capital (deficit)...... (31,001)F -- (31,001) 91,312 H,I,J,K 60,311
Retained earnings....... -- (5,647)G (5,647) -- (5,647)
ADL's net equity
investment............. 250 (250)F -- -- -- --
------- -------- ------ ------- ------- --------
Total
Practice/Stockholders'
equity................ 250 (30,891) (5,647) (36,288) 91,385 55,097
------- -------- ------ ------- ------- --------
Total liabilities and
Practice/Stockholders'
equity................. $38,716 $(20,098) -- $18,618 $42,486 $ 61,104
======= ======== ====== ======= ======= ========
</TABLE>
See notes to pro forma financial statements.
F-21
<PAGE>
c-quential, Inc.
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands except per share data)
<TABLE>
<CAPTION>
c-quential, c-
predecessor to c- quential,
quential, Inc. Inc.
---------------------- ---------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Professional service revenue:
Direct professional service revenue........ $101,620 $ -- $101,620
Subcontracted from Arthur D. Little,
Inc. ..................................... 4,960 -- 4,960
-------- ------- --------
Total professional service revenue....... 106,580 -- 106,580
-------- ------- --------
Costs of services:
Direct costs of services................... 36,014 -- 36,014
Arthur D. Little, Inc. subcontract costs... 26,138 -- 26,138
-------- ------- --------
Total costs of services.................. 62,152 -- 62,152
-------- ------- --------
Gross profit................................. 44,428 -- 44,428
Selling, general and administrative
expenses.................................... 27,294 (1,847)J 25,447
-------- ------- --------
Income before taxes.......................... 17,134 1,847 18,981
Provision for income taxes................... 6,340 683 K 7,023
-------- ------- --------
Net income................................... $ 10,794 $ 1,164 $ 11,958
Net income per common share:
Basic and diluted.......................... $ 0.31L
========
Weighted average number of common shares
outstanding:
Basic and diluted.......................... 38,857L
</TABLE>
See notes to pro forma financial statements.
F-22
<PAGE>
c-quential, Inc.
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(in thousands except per share data)
<TABLE>
<CAPTION>
c-quential,
predecessor to c-
quential, Inc.
----------------------
c-
Pro Forma quential, Inc.
Historical Adjustments Pro Forma
---------- ----------- --------------
<S> <C> <C> <C>
Professional service revenue:
Direct professional service revenue... $60,619 $ -- $60,620
Subcontracted from Arthur D. Little,
Inc. ................................ 1,639 -- 1,638
------- ------ -------
Total professional service revenue.. 62,258 -- 62,258
------- ------ -------
Costs of services:
Direct costs of services.............. 23,572 -- 23,572
Arthur D. Little, Inc. subcontract
costs................................ 8,363 -- 8,363
------- ------ -------
Total costs of services............. 31,935 -- 31,935
------- ------ -------
Gross profit............................ 30,323 -- 30,323
Selling, general and administrative
expenses............................... 20,819 (1,094)J 19,725
------- ------ -------
Income before taxes..................... 9,504 1,094 10,598
Provision for income taxes.............. 3,802 438 K 4,240
------- ------ -------
Net income.............................. $ 5,702 $ 656 $ 6,358
======= ====== =======
Net income per common share:
Basic and diluted..................... $ 0.16L
=======
Weighted average number of common shares
outstanding:
Basic and diluted..................... 38,857L
</TABLE>
See notes to pro forma financial statements.
F-23
<PAGE>
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The unaudited pro forma statements of operations of c-quential for the year
ended December 31, 1999 and the six months ended June 30, 2000 have been
prepared based on the financial statements and related notes presented
elsewhere in this prospectus. The unaudited pro forma statements of operations
and the unaudited pro forma balance sheets have been prepared as if the
transactions and events described in the following paragraphs had occurred as
of the beginning of the respective periods presented, and as of June 30, 2000,
respectively. The pro forma adjustments give effect to the transfer of assets
and liabilities from ADL to the newly formed c-quential, Inc., the assumption
of ADL third-party debt as a preferential distribution to ADL and the issuance
of stock in the offering. The actual amounts transferred on August 26, 2000 may
differ from the pro forma adjustments as of June 30, 2000, as a result of
normal operating activity.
c-quential based the following pro forma adjustments on available
information and certain estimates and assumptions. Therefore, it is likely that
the actual adjustments will differ from the pro forma adjustments. c-quential
believes that such assumptions provide a reasonable basis for presenting all of
the significant effects of the following transactions and events and that the
pro forma adjustments give appropriate effect to those assumptions and are
properly applied in the unaudited pro forma financial statements.
The unaudited pro forma statements of operations of c-quential for the year
ended December 31, 1999 and the six months ended June 30, 2000 do not include
pro forma adjustments to reflect potential increases in costs that may occur as
a result of our separation from ADL and the implementation of our business
plan. Such cost increases may result from:
. significant increases in compensation expense associated with our
recruiting and retention initiatives.
. increased costs relating to reduced economies of scale.
. increased marketing expenses associated with building a brand identity
separate from ADL.
. increased costs associated with operating as a stand-alone, publicly-
traded company.
Transfer Adjustments
A. Reflects the transfer of certain assets and liabilities in the net amount
of $0.7 million as a contribution to c-quential, Inc. Such assets and
liabilities consist primarily of property and equipment and employee
related liabilities. The transfer of these net assets was required to meet
the legal requirements associated with achieving the tax objectives of ADL
in connection with the transfer in certain jurisdictions. Such amounts were
not previously included in the historical financial statements as they were
not specifically identifiable until the transfer date.
B. Reflects the retention of accounts receivable and unbilled services by ADL
in the amount of $22.9 million and the contribution to c-quential, Inc. of
$10.1 million of accounts receivable and unbilled services from ADL.
C. Reflects a reduction in accounts payable to ADL in the amount of $22.9
million for accounts receivable and unbilled services retained by ADL; the
reduction of the payable to ADL for the contribution of accounts receivable
and unbilled services in the amount of $10.1 million; the recognition of a
receivable from ADL for reimbursement of employment related liabilities we
have assumed from ADL in the amount of $1.4 million; the transfer of an
intercompany payable to ADL in the amount of $0.9 million and the
recognition of a receivable from ADL in the amount of $3.8 million for
deferred revenue for which we will be reimbursed (excluding $2.2 million of
deferred revenue on client contracts on which accounts receivable and
unbilled have been contributed.).
D. Reflects the reclassification from accounts payable to ADL to deferred
revenue to identify the obligation of c-quential, Inc. under client
contracts transferred to c-quential, Inc. in the amount of $6.0 million.
E. Reflects the assumption of debt from ADL in the amount of $40 million.
F-24
<PAGE>
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
F. Reflects the preferential distribution to ADL as a result of the assumption
of ADL debt in the amount of $40 million, the contribution of $10.1 million
in accounts receivable and unbilled services, the assumption of $1.0
million in other net liabilities, the issuance of the shares of common
stock in the amount of $0.4 million, and contribution of ADL's net equity
investment of $0.25 million.
G. Reflects the recognition of an estimated $5.1 million in costs to be
incurred after June 30, 2000 through the closing of this offering relating
to both our separation from ADL (estimated at $4.7 million) and the
offering (estimated at $0.4 million) as a payable to ADL, and the
recognition of approximately $0.6 million interest payable on the ADL debt
assumed. The additional costs related to our separation from ADL consist of
legal and tax consulting fees associated with the establishment of legal
entities in each jurisdiction, and expenses related to the establishment of
the c-quential brand. The establishment of legal entities was necessitated
by the fact that c-quential did not have separate legal status in any of
the jurisdictions in which it operated prior to the transfer date. These
costs are expected to be repaid using the proceeds of the offering. These
costs and the interest expense on the debt assumed are not reflected in the
six month pro forma statement of operations because they are non-recurring.
Such costs will be reflected in the statement of operations subsequent to
June 30, 2000.
IPO Adjustments
H. Reflects the issuance of 7,250,000 shares of common stock in this offering,
assuming an initial public offering price of $14.00 per share, the
application of the estimated $91.385 million net proceeds to increase cash,
the settlement of $10.4 million in intercompany payables to ADL and $1.4
million in intercompany receivables from ADL. The remaining balance of $3.8
million represents a receivable from ADL for amounts paid to ADL in advance
of services rendered which will be remitted to c-quential, Inc. upon
fulfillment of the service obligations under the client contracts
transferred.
I. Reflects the repayment of the ADL debt assumed.
J. Reflects the discontinuance of a trademark license fee allocated to c-
quential by ADL.
K. Reflects income taxes determined in accordance with the provisions of SFAS
No. 109, "Accounting for Income Taxes." The pro forma adjustments to the
provision (benefit) for taxes reflect income taxes as if these transactions
and events had occurred as of the beginning of the respective period
presented. This pro forma blended statutory income tax rate may not be
indicative of performance in future periods.
L. The pro forma basic net income per share calculation was made using common
stock outstanding of 38,857,143 shares to give effect to the initial
capitalization, the 36-for-1 stock split effected on August 28, 2000, and
shares issued in the initial public offering to repay the $40 million of
assumed debt. Such shares were determined as follows:
<TABLE>
<S> <C>
Shares issued to ADL........................................... 36,000,000
Shares issued whose proceeds will be used to repay the assumed
debt using an initial public offering price of $14.00......... 2,857,143
----------
38,857,143
==========
</TABLE>
F-25
<PAGE>
7,250,000 Shares
[c-quential LOGO]
Class A Common Stock
---------------------
PROSPECTUS
, 2000
---------------------
Lehman Brothers
Chase H&Q
Thomas Weisel Partners LLC
Fidelity Capital Markets
a division of National Financial Services LLC
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 12. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses payable by us in
connection with the offering and distribution (excluding underwriting discounts
and commissions):
<TABLE>
<CAPTION>
Nature of Expense Amount
----------------- ----------
<S> <C>
SEC Registration Fee............................................. $ 39,600
NASD Filing Fee.................................................. $ 15,500
Nasdaq National Market Listing Fee............................... $ 95,000
Frankfurt Stock Exchange Listing Fee............................. $ 10,000
Accounting Fees and Expenses..................................... $1,000,000
Legal Fees and Expenses.......................................... $ 800,000
Printing Expenses................................................ $ 500,000
Blue Sky Qualification Fees and Expenses......................... $ 12,000
Transfer Agent's Fee............................................. $ 25,000
Miscellaneous.................................................... $ 513,000
----------
TOTAL.......................................................... $3,010,100
==========
</TABLE>
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq
National Market fees, are in each case estimated.
Item 14. Indemnification of Directors and Officers
In accordance with Section 145 of the Delaware General Corporation Law,
Article VII of our certificate of incorporation provides that no director of c-
quential will be personally liable to c-quential or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (1) for any breach of the director's duty of loyalty to c-quential or
its stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) in respect of
unlawful dividend payments or stock redemptions or repurchases, or (4) for any
transaction from which the director derived an improper personal benefit. In
addition, our certificate of incorporation provides that if the Delaware
General Corporation Law is amended to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the corporation shall be eliminated or limited to the fullest extent permitted
by the Delaware General Corporation Law, as so amended.
Article V of our by-laws provides for indemnification by c-quential of its
officers and certain non-officer employees under certain circumstances against
expenses, including attorneys fees, judgments, fines and amounts paid in
settlement, reasonably incurred in connection with the defense or settlement of
any threatened, pending or completed legal proceeding in which any such person
is involved by reason of the fact that such person is or was an officer or
employee of the registrant if such person acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
c-quential, and, with respect to criminal actions or proceedings, if such
person had no reasonable cause to believe his or her conduct was unlawful.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
c-quential has issued the following securities that were not registered
under the Securities Act of 1933, as amended (the "Securities Act"). The
shares of capital stock and other securities issued in the following
transactions were offered and sold in reliance upon Section 4(2) of the
Securities Act or Regulation D promulgated thereunder relative to sales by an
issuer not involving a public offering.
. We issued and sold 3,600 shares of common stock to Arthur D. Little
International, Inc., a subsidiary of ADL, as part of the initial
organization of c-quential for a total consideration of $1.00, as of
March 16, 2000. On August 25, 2000, we reclassified our common stock
into two classes, Class A and Class B. As a result, the shares held by
Arthur D. Little International, Inc. were reclassified into 1,800 shares
of Class A common stock and 1,800 shares of Class B common stock.
. On August 25, 2000 in connection with the transfer of our business, we
issued to Arthur D. Little International, Inc., a subsidiary of ADL,
17,998,200 shares of our Class A common stock and 17,998,200 shares of
our Class B common stock.
The transactions set forth above give effect to the 36-for-1 stock split
effected in the form of a stock dividend that was effective August 28, 2000.
Arthur D. Little International, Inc. subsequently transferred all of the
shares of our Class A common stock and Class B common stock that it owned to
its subsidiary, c-quential holdings, Inc.
Item 16. Exhibits and Financial Statement Schedules
<TABLE>
<C> <S>
+1.1 Form of Underwriting Agreement.
+3.1 Second Amended and Restated Certificate of Incorporation of c-quential,
Inc.
+3.2 Amended and Restated By-laws of c-quential, Inc.
+4.1 Specimen certificate for shares of common stock, $.01 par value, of
c-quential, Inc.
+5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the
securities being offered.
+10.1 2000 Stock Option and Incentive Plan.
+10.2 Reorganization Agreement, dated as of August 26, 2000, by and between
the registrant and
Arthur D. Little, Inc.
+10.3 Corporate Services Agreement, dated as of August 26, 2000, by and
between the registrant and
Arthur D. Little, Inc.
+10.4 Use and Occupancy Agreement, dated as of August 26, 2000, by and
between the registrant and Arthur D. Little, Inc.
+10.5 Intellectual Property Agreement, dated as of August 26, 2000, by and
between the registrant and Arthur D. Little, Inc.
+10.6 Tax Allocation Agreement, dated as of August 26, 2000, by and between
the registrant and
Arthur D. Little, Inc.
+10.7 Registration Rights Agreement, dated as of August 26, 2000, by and
between the registrant and
Arthur D. Little, Inc.
+10.8 Form of Indemnification Agreement entered into by the registrant and
each of its directors.
+10.9 Amended and Restated Credit Agreement, dated as of April 25, 2000 by
and between Arthur D. Little, Inc., Arthur D. Little International,
Inc. and the Lenders named therein.
+10.10 Amended and Restated Note Purchase Agreement, dated as of April 25,
2000, by and between
Arthur D. Little, Inc. and the Purchasers named therein.
+10.11 Stock Purchase Agreement by and among Arthur D. Little International,
Inc., and Simon C. Fawthrop, Simon C. Turpin, Martin Malden and J.
Gerard MacNamee dated as of February 1, 1999.
+10.12 Stock Purchase Agreement by and among Arthur D. Little International,
Inc., and Paul Berriman, Alvin Botting and Makolm Way dated as of
Feburary 1, 1999.
+10.13 Employment Agreement between Arthur D. Little AG and Rudolf Fischer
dated March 20, 1995.
+10.14 Stock Pledge Agreement between Arthur D. Little, Inc. and Citicorp USA,
Inc., as collateral agent, dated April 25, 2000.
+10.15 Guaranty Agreement dated as of April 25, 2000 by Arthur D. Little
International, Inc. and the registrant in favor of the Noteholders
named therein.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
+10.16 Contract of Employment between the registrant and Robert Broadley dated
as of August 26, 2000.
+10.17 Employment Agreement Letter between Arthur D. Little, Inc. and Raj
Mitta dated as of November 15, 1996.
+10.18 Employment Contract for High Management between the registrant and
Eulogio Naz dated as of September 1, 2000.
+10.19 TIME Guaranty Agreement dated as of April 25, 2000 from the registrant
in favor of the Lenders named therein.
+10.20 Security Agreement dated as of April 25, 2000 among Arthur D. Little,
Inc., Arthur D. Little International, Inc. and all ADL subsidiaries,
and the Banks named therein.
+12.1 Statement Regarding Computation of Certain Ratios.
+21.1 Subsidiaries of c-quential.
+23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1
hereto).
23.2 Consent of Deloitte & Touche LLP.
+24.1 Powers of Attorney.
+27.1 Financial Data Schedule.
</TABLE>
--------
+ previously filed
(b) Financial Statement Schedules
All schedules have been omitted because they are not required or because the
required information is given in the Financial Statements or Notes to those
statements.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, 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 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
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by 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 of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Amendment to this the City of
Cambridge, Commonwealth of Massachusetts, on October 20, 2000.
c-quential, Inc.
/s/ Rudolf Fischer
By:
----------------------------------
Rudolf Fischer
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to this Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Rudolf Fischer President, Chief Executive October 20, 2000
______________________________________ Officer and Director
Rudolf Fischer (Principal Executive
Officer)
/s/ Robert Broadley Executive Vice President and October 20, 2000
______________________________________ Chief Financial Officer
Robert Broadley (Principal Financial
Officer and Principal
Accounting Officer)
* Chairman of the Board of October 20, 2000
______________________________________ Directors
Lorenzo C. Lamadrid
* Director October 20, 2000
______________________________________
Gerhard Schulmeyer
* Director October 20, 2000
______________________________________
Carl J. Yankowski
* Director October 20, 2000
______________________________________
Frank E. Weise, III
</TABLE>
<TABLE>
<S> <C> <C>
* Director October 20, 2000
______________________________________
George H. Heilmeier
</TABLE>
*By: /s/ Rudolf Fischer
------------------------------ October 20,
Rudolf Fischer 2000
Attorney-in-Fact
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
------- ----------- --------
<C> <S> <C>
+1.1 Form of Underwriting Agreement.
+3.1 Second Amended and Restated Certificate of Incorporation
of c-quential, Inc.
+3.2 Amended and Restated By-laws of c-quential, Inc.
+4.1 Specimen certificate for shares of common stock, $.01 par
value, of c-quential, Inc.
+5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality
of the securities being offered.
+10.1 2000 Stock Option and Incentive Plan.
+10.2 Reorganization Agreement, dated as of August 26, 2000, by
and between the registrant and Arthur D. Little, Inc.
+10.3 Corporate Services Agreement, dated as of August 26,
2000, by and between the registrant and Arthur D. Little,
Inc.
+10.4 Use and Occupancy Agreement, dated as of August 26, 2000,
by and between the registrant and Arthur D. Little, Inc.
+10.5 Intellectual Property Agreement, dated as of August 26,
2000, by and between the registrant and Arthur D. Little,
Inc.
+10.6 Tax Allocation Agreement, dated as of August 26, 2000, by
and between the registrant and Arthur D. Little, Inc.
+10.7 Registration Rights Agreement, dated as of August 26,
2000, by and between the registrant and Arthur D. Little,
Inc.
+10.8 Form of Indemnification Agreement entered into by the
registrant and each of its directors.
+10.9 Amended and Restated Credit Agreement, dated as of April
25, 2000 by and between Arthur D. Little, Inc., Arthur D.
Little International, Inc. and the Lenders named therein.
+10.10 Amended and Restated Note Purchase Agreement, dated as of
April 25, 2000, by and between Arthur D. Little, Inc. and
the Purchasers named therein.
+10.11 Stock Purchase Agreement by and among Arthur D. Little
International, Inc., and Simon C. Fawthrop, Simon C.
Turpin, Martin Malden and J. Gerard MacNamee dated as of
February 1, 1999.
+10.12 Stock Purchase Agreement by and among Arthur D. Little
International, Inc., and Paul Berriman, Alvin Botting and
Makolm Way dated as February 1, 1999.
+10.13 Employment Agreement between Arthur D. Little AG and
Rudolf Fischer dated March 20, 1995.
+10.14 Stock Pledge Agreement between Arthur D. Little, Inc. and
Citicorp USA, Inc., as collateral agent, dated April 25,
2000.
+10.15 Guaranty Agreement dated as of April 25, 2000 by Arthur
D. Little International, Inc. and the registrant in favor
of the Noteholders named therein.
+10.16 Contract of Employment between the registrant and Robert
Broadley dated as of August 26, 2000.
+10.17 Employment Agreement Letter between Arthur D. Little,
Inc. and Raj Mitta dated as of November 15, 1996.
+10.18 Employment Contract for High Management between the
registrant and Eulogio Naz dated as of September 1, 2000.
+10.19 TIME Guaranty Agreement dated as of April 25, 2000 from
the registrant in favor of the Lenders named therein.
+10.20 Security Agreement dated as of April 25, 2000 among
Arthur D. Little, Inc., Arthur D. Little International,
Inc. and all ADL subsidiaries, and the Banks named
therein.
+12.1 Statement Regarding Computation of Certain Ratios.
+21.1 Subsidiaries of c-quential.
+23.1 Consent of Goodwin, Procter & Hoar LLP (included in
Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP.
+24.1 Powers of Attorney.
+27.1 Financial Data Schedule.
</TABLE>
--------
+ previously filed
