As filed with the Securities and Exchange Commission on May 12, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ICONIXX CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 7371 58-241497
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
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8300 Boone Boulevard
Suite 250
Vienna, VA 22182
(703) 790-9008
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
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Graham B. Perkins
Vice President, Chief Financial Officer, Secretary and Treasurer
ICONIXX CORPORATION
8300 Boone Boulevard
Suite 250
Vienna, VA 22182
(703) 790-9008
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Steven A. Museles Joseph E. Mullaney III
Kevin L. Vold Mintz, Levin, Cohn, Ferris,
Hogan & Hartson L.L.P. Glovsky and Popeo, P.C.
555 Thirteenth Street, N.W. One Financial Center
Washington, D.C. 20004-1109 Boston, MA 02111
(202) 637-5600 (617) 542-6000
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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, 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 of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed maximum
Title of each class of securities aggregate offering price Amount of
to be registered (1) registration fee
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Common Stock, $.01 par value..... $86,250,000 $22,770
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(1)Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US federal securities law to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION - May 12, 2000
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PROSPECTUS
, 2000
[LOGO OF ICONIXX]
Shares of Common Stock
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Iconixx Corporation: The Offering:
. We are a leading e- . We are offering shares of our
business solutions common stock.
provider focused on
leveraging emerging . The underwriters have an option to
wireless and broadband purchase an additional shares from us
technologies to enhance to cover over-allotments.
our clients' businesses.
. This is our initial public offering and
. 8300 Boone we anticipate that the initial public
Boulevard, Suite 250 offering price will be between and
Vienna, VA 22182 per share.
(703) 790-9008
. Closing: , 2000.
Proposed Symbol & Market:
. ICXX/Nasdaq
National Market
--------------------------------------------------
Per Share Total
--------------------------------------------------
Public offering price: $ $
Underwriting fees:
Proceeds to Iconixx Corporation:
--------------------------------------------------
This investment involves risks. See "Risk
Factors" beginning on Page 4.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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Donaldson, Lufkin & Jenrette Bear, Stearns & Co. Inc.
Banc of America Securities LLC
DLJdirect Inc.
INSIDE FRONT COVER OF PROSPECTUS
[Graphic consists of icons representing a laptop computer, wireless
telephone, palmtop computing device and a desktop computer employing broadband
technology, all connected to the Internet, represented by the letters "www."
The word "Iconixx" appears in a box above the icons.]
TABLE OF CONTENTS
Page
Prospectus Summary.................. 1
Risk Factors........................ 4
Special Note Regarding Forward-
Looking Statements................. 11
Use of Proceeds..................... 12
Dividend Policy..................... 12
Capitalization...................... 13
Dilution............................ 14
Selected Financial Data............. 15
Pro Forma Condensed Combined
Financial Data..................... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 24
Page
Business........................... 35
Management......................... 49
Related Party Transactions......... 57
Principal Stockholders............. 60
Description of Capital Stock....... 62
Shares Eligible For Future Sale.... 64
Underwriting....................... 66
Legal Matters...................... 69
Experts............................ 69
Where You Can Find More Information
About Iconixx Corporation......... 69
Index to Financial Statements...... F-1
PROSPECTUS SUMMARY
The information below is only a summary of more detailed information
included in other sections of this prospectus. This summary may not contain all
the information that is important to you or that you should consider before
buying shares in this offering. The other information is important, so please
read this entire prospectus carefully.
Iconixx Corporation
We are a leading end-to-end e-business solutions provider focused on
leveraging broadband, wireless and other emerging technologies to enhance our
clients' businesses. We deliver comprehensive, high-quality e-business
solutions that capitalize on the interdependency of user experience, mission-
critical business applications and robust network infrastructure to enhance
value in online business. Our services include e-business strategy and
planning, user experience, business functionality and network infrastructure.
These services, combined with our deep expertise in wireless and broadband
technologies, enable us to create dynamic, media-rich and scalable e-business
solutions for our clients that allow them to increase speed to market and
e-commerce activity. We enjoy long-standing relationships with our clients,
which range from the Global 1000 to emerging growth companies.
Because organizations generally find it more efficient for one firm to serve
as the single source providing all of these services, we believe that our end-
to-end services provide us with a competitive advantage in the marketplace. As
a part of our e-business strategy and planning services, we assist our clients
in developing e-business models, web channels and Internet strategies, and
designing business processes and network architectures. Our user experience
services include branding and web design to create an engaging experience for
our client's customers. To provide each client with an e-business solution that
supports its Internet strategy and provides a compelling user experience, our
business functionality services include the development and integration of
custom-designed applications, commercially available software packages and
legacy applications that allow users to access data and execute transactions
over the Internet. Our network infrastructure services include the planning,
designing and implementing of server and network architectures that support
transaction-intensive applications, integrate a client's e-business solutions
with its existing network and deliver wireless and broadband content.
The broad adoption of the Internet as a new channel of communication and
commerce is redefining and fundamentally changing the economics of business.
The recent evolution of the communications and Internet infrastructure has
heightened the level of sophistication demanded of Internet applications. The
growth in wireless communications solutions has allowed anytime, anywhere
access to the Internet, which has significantly increased traffic to an
organization's website and affected how data and processes are designed and
delivered to users. At the same time, the growing demand for increased
transmission frequency and volume, coupled with the need to support
applications with media-rich content and increased traffic and transaction
activity, has driven the demand for increased bandwidth and broadband
capabilities. The emergence of wireless and broadband technologies is producing
a fundamental change in the types of e-business solutions organizations
require. As a result, today's e-business solutions are becoming increasingly
complex and need to be more flexible and scalable to take advantage of new
market opportunities.
We manage the delivery of these services using a collaborative approach
within our cross-functional teams that is designed to create business value by:
. implementing a state-of-the-art solution that is aligned with the
client's business strategy;
. accelerating the deployment of the solution;
. integrating the solution with the client's existing business practices
and processes;
. offering the client a secure, reliable and scalable solution; and
. preserving the flexibility to modify the solution to allow the client to
deploy emerging technologies faster than its competitors.
1
We were organized in Delaware in September 1995 under the name "Business
Solutions Group, LLC." In November 1999, following our acquisition of
IconixGroup, Inc., we changed our name to Iconixx Corporation. Our principal
executive offices are located at 8300 Boone Boulevard, Vienna, VA 22182 and our
telephone number is (703) 790-9008. Our website can be found at
www.iconixx.com. Information contained on our website is not intended to be a
prospectus and is not incorporated into this prospectus.
The Offering
Common stock offered ............... shares
Common stock to be outstanding after
this offering...................... shares
Use of proceeds..................... To repay indebtedness and for general
corporate purposes, including funding our
operations, working capital and possible
acquisitions of complementary businesses.
Proposed Nasdaq National Market
Symbol............................. ICXX
The shares of common stock to be outstanding after this offering is
based on the shares outstanding as of , 2000 and includes shares
of common stock being sold by us in this offering. The number of shares of
common stock that will be outstanding after this offering excludes shares
of common stock underlying options granted under our 1999 stock option plan and
outstanding as of April 30, 2000 at a weighted average exercise price of $
per share.
Assumptions That Apply To This Prospectus
Unless we indicate otherwise, all share amounts and financial information in
this prospectus assume the following:
. an increase in the number of our authorized shares of common stock to be
effected on completion of this offering;
. no exercise by the underwriters of their over-allotment option;
. the conversion of all currently outstanding shares of our convertible
preferred stock into shares of our common stock;
. the conversion of our currently outstanding convertible promissory notes
into shares of our common stock; and
. a -for- stock split to be effected before completion of this offering.
2
Summary Actual and Pro Forma Financial Data
(in thousands, except per share data)
The following summary actual and pro forma financial data have been derived
from:
. our audited consolidated financial statements for each of the three years
in the period ended December 31, 1999;
. our unaudited consolidated financial statements for the three months
ended March 31, 2000; and
. our unaudited pro forma condensed combined financial data included
elsewhere in this prospectus.
You should read the information below with our consolidated financial
statements and the related notes, "Use of Proceeds," "Capitalization," "Pro
Forma Condensed Combined Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus.
Three Months Ended
Year Ended December 31, March 31, 2000
------------------------------------ -----------------------
Actual Pro Forma Actual Pro Forma
----------------------- 1999
1997 1998 1999
(unaudited) (unaudited) (unaudited)
Statement of Operations
Data:
Revenues................ $18,568 $49,898 $48,978 $78,957 $ 14,026 $ 20,533
Gross profit............ 3,636 9,373 9,678 26,971 4,491 8,219
Income (loss) from
operations............. 2,923 6,175 2,152 (23,465) (3,908) (6,444)
Net income (loss)
attributable to common
stockholders........... 2,953 6,300 (199) (33,033) (10,089) (14,267)
Basic and diluted net
income (loss) per
common share........... $ 0.16 $ 0.34 $ (0.01) $ (0.85) $ (0.22) $ (0.26)
As of March 31, 2000
-----------------------
Actual As Adjusted
Balance Sheet Data:
Cash and cash
equivalents............ $ 4,639
Working capital......... 5,095
Total assets............ 102,986
Total debt and other
long-term obligations.. 17,500
Class A convertible
preferred stock........ 92,846
Stockholders' (deficit)
equity................. (20,774)
3
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information in this
prospectus, including our financial statements and the related notes before you
decide to buy our common stock. The trading price of our common stock could
decline due to any of these risks, and you could lose all or part of your
investment.
Risks Related to Our Business
Our limited operating history, particularly in light of our recent
acquisitions, makes it difficult for you to evaluate our business and to
predict our future success.
Our senior management team came together in September 1998 through the
formation of Empyrean Group, Inc. Our limited operating history as a combined
company may make it difficult for you to predict our future success. In August
1999, we recapitalized Business Solutions Group, Inc., a provider of systems
and software development and network architecture consulting services to the
telecommunications industry with approximately 190 professionals at the time of
the recapitalization. In November 1999, we acquired IconixGroup, a web
development, strategy and branding firm with approximately 65 professionals,
and renamed our combined operations "Iconixx Corporation." In March 2000, we
acquired three additional companies:
. Lead Dog Design, Inc., a provider of web, multimedia and print design
services with approximately 45 professionals;
. Internet Information Services, Inc., a provider of Internet technology
consulting and professional services with approximately 55 professionals;
and
. EnterpriseWorks, LLC, a provider of web-based information technology
solutions, including e-business, customer care, sales force automation
and infrastructure design services, with approximately 130 professionals.
You should evaluate our chances of financial and operational success in
light of the risks, uncertainties, expenses, delays and difficulties associated
with operating a new business, many of which are beyond our control. You should
not rely on the historical results of operations of the acquired companies as
indications of our future performance. The uncertainty of our future
performance and of our operation in a new and expanding market increase the
risk that your investment will decline.
We were not profitable in the first quarter of 2000 and do not expect to
achieve profitability in the near future, if ever.
We had a loss from operations of $3.9 million for the three months ended
March 31, 2000. As a result of our continued amortization of the goodwill we
acquired in our recent acquisitions and our intention to spend significant time
and money to acquire and invest in sales and marketing, operating companies and
the infrastructure required to support our combined operations, we expect to
continue to incur net losses for the foreseeable future and may never become
profitable. As of March 31, 2000, we had goodwill and other intangible assets
of approximately $81.9 million, net of accumulated amortization. The charges we
expect to incur in connection with the amortization of these intangible assets
will adversely affect our net income for the foreseeable future. Additionally,
we may not ever realize the value of these intangible assets. In the future, as
events or changes in circumstances indicate that the carrying amount of our
intangible assets may not be recoverable, we may take an additional charge to
our earnings. If we take an additional charge or charges, our results of
operations would likely suffer.
If our operating results fluctuate from quarter to quarter, we may fail to meet
the expectations of our investors and analysts, and our stock price would
likely decline.
Our financial results may fluctuate from quarter to quarter. In future
quarters, our operating results may not meet investors' and public market
analysts' expectations. If that happens, the price of our common stock may
fall. Many factors can cause these fluctuations, including:
4
. the number, size, timing and scope of our projects;
. client concentration;
. long and unpredictable sales cycles;
. contract terms of projects;
. project delays or cancellations;
. competition for and utilization of employees;
. how well we estimate the resources we need to complete projects;
. the integration of acquired businesses;
. pricing changes in the industry; and
. economic conditions specific to the Internet and information technology
consulting.
A high percentage of our operating expenses, particularly personnel and
rent, are fixed in advance of any particular quarter. As a result, if we
experience unanticipated changes in our projects, including fluctuations in our
Sprint projects similar to those that have occurred in the past, or in our
employee utilization rates, we could experience large variations in quarterly
operating results and losses in any particular quarter. Due to these factors,
we believe you should not compare our quarter-to-quarter operating results to
predict our future performance.
Because we have grown rapidly and we expect our growth to continue, we may have
difficulty managing our growth effectively, which could adversely affect the
quality of our services and the results of our operations.
We have grown rapidly and expect to continue to grow rapidly by acquiring
new companies, hiring new employees and serving new industry and geographic
markets. We have acquired five companies since August 1999. The integration of
these acquisitions presents us with significant financial, managerial and
operational challenges. Further, as a result of these acquisitions, the total
number of professionals under our current senior management team has grown from
six to 480 between September 1998 and March 31, 2000, and several members of
our senior management team have only recently joined us. Our recent growth has
placed, and is expected to continue to place, a significant strain on our
management and our operating and financial systems. We do not believe our
recent growth rate is sustainable for the long term.
Our personnel, systems, procedures and controls may be inadequate to support
our future operations. To accommodate the anticipated increase in the number of
projects, clients and size of our operations, we will need to hire, train and
retain appropriate personnel to manage our operations. We will also need to
improve our financial and management controls, reporting systems and operating
systems. We currently plan to implement or redesign several internal systems,
including our financial, accounting, human resources, resource planning, sales
force automation and knowledge management systems. We may encounter
difficulties in developing and implementing these new systems. If we are unable
to meet these challenges, the quality of our services may suffer, causing us to
lose customers and revenues.
Future acquisitions or investments could disrupt our ongoing business, distract
our management and employees, increase our expenses and adversely affect our
results of operations.
We expect to continue to grow rapidly by acquiring new companies, increasing
both the number of clients served and the number and types of products and
services we offer. Any acquisitions or investments we make in the future will
involve risks. We may not be able to make acquisitions or investments on
commercially acceptable terms. If we do acquire a company, we could have
difficulty retaining and assimilating that company's personnel. In addition, we
could have difficulty assimilating acquired products, services or
5
technologies into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees, increase our expenses and
materially and adversely affect our results of operations.
The companies we target for acquisition may not have audited financial
statements and often have varying degrees of internal controls and detailed
financial information. As a result, we may acquire undisclosed liabilities or
experience lower-than-expected revenues or higher-than-expected costs, which
could adversely affect our operating results. Furthermore, we may issue equity
securities or incur debt to pay for future acquisitions. If we issue equity
securities, your ownership share of Iconixx could be reduced. If we obtain debt
financing, we may be required to agree to restrictions on our activities that
could impair our ability to execute our business plan.
Our future success depends on our ability to keep pace with rapid technological
changes, evolving industry standards and changing client requirements.
The market for the e-business solutions we provide is relatively new and
evolving rapidly. Our future success will depend, in part, upon our ability to
provide services that are accepted by our clients as an integral part of their
business model. Demand and market acceptance for recently introduced services
are subject to a high level of uncertainty. The level of demand for e-business
solutions will depend upon a number of factors, including the following:
. the growth in consumer access to, and acceptance of, new interactive
technologies;
. the adoption of Internet-based business models; and
. the development of technologies, including wireless and broadband network
architectures and applications, that facilitate two-way communication
between companies and targeted audiences.
We have a limited number of significant clients, including Sprint, which
provided 57.4% of our pro forma revenues for 1999. If we lose a major client or
significant project, our revenues would be adversely affected.
We generate much of our revenues from a limited number of major clients. As
a result, if we lose a major client or large project, our revenues would be
adversely affected. In 1999, for example, giving effect to our five recent
acquisitions as if they had all occurred on January 1, 1999, our largest
client, Sprint, accounted for approximately 57.4% of our revenues. Based upon
contract orders currently outstanding, our agreement with Sprint expires
December 2000. This agreement may, however, be terminated by Sprint before then
on 14 days' notice to us. We perform varying amounts of work for specific
clients from year to year. A major client in one year may not use our services
in another year. In addition, we may derive revenues from a major client that
constitute a large portion of a particular quarter's revenues. If we were to
lose Sprint or any of our other major clients or if Sprint or any of our major
clients were to cancel or significantly reduce a large project's scope, our
revenues could decline. Also, if we fail to collect a large account receivable,
we could be subjected to significant financial exposure.
We have many short-term engagements that can be cancelled with little or no
notice without penalty. If clients, including the start-up ventures we service,
terminate engagements with us, our results of operations could suffer.
Our engagements with clients are generally short-term. Also, most clients
can reduce or cancel their engagements for our services without penalty and
with little or no notice. If a significant client or a number of small clients
terminate or significantly reduce business relationships with us, our revenues
could decline significantly. Consequently, you should not predict or anticipate
our future revenues based on the number of clients we have or the number and
size of our existing projects. When a client postpones, significantly reduces
the scope of or cancels a project, we have to shift our employees to other
projects in an attempt to minimize the resulting adverse impact on our
operating results.
6
In addition, we believe that an increasing portion of our future revenues
could be derived from emerging companies formed specifically to conduct
business over the Internet. These companies often have little or no earnings or
cash flow, and their businesses are more likely to fail than those of more
mature companies. As a result, these clients may cancel their engagements
without paying our fees in a timely fashion, if at all.
If we fail to meet our clients' expectations, we could damage our reputation
and have difficulty attracting new business.
Many of our projects are complex and critical to our clients. As a result,
if we fail or are unable to meet a client's expectations, we could damage our
reputation. This could adversely affect our ability to attract new business
from that client or others. If we fail to perform adequately on a project, a
client could sue us for economic damages. Any claims brought against us could
exceed the level of our insurance. The insurance we carry may not continue to
be available on economically reasonable terms, or at all. If we lose a lawsuit
arising from one or more claims that are uninsured or in excess of our
insurance coverage or cause us to agree to premium increases or other adverse
changes to our insurance policies, our revenues could be adversely affected.
If we are unable to leverage our knowledge of network architectures, we may be
unable to successfully increase or maintain our client base and revenues.
To date, we have generated a majority of our revenues from network
architecture consulting services related to large-scale, complex networks
through our work with Sprint. We believe that we will continue to derive a
significant portion of our revenues from providing these services to Sprint and
other clients. As a result, our future success depends on the continued growth
and acceptance of large-scale, complex computer networks and the current trend
among our clients to use third-party providers. If the growth in the use of
networks does not continue, our business may not grow and our revenues may
decline.
If our cash needs change, we may not be able to obtain sufficient funds to
execute our business plan in the future.
We expect that the net proceeds of this offering, together with our cash
from operations, will be sufficient to fund our operations for the next 12
months. If, however, our cash needs change as a result of our desire to pursue
additional acquisitions, accelerate our growth or otherwise, we may require
additional financing earlier to fund operations, capital expenditures for
expansion and acquisitions. If we obtain additional equity financing, the per
share value of our outstanding common stock may be diluted. If we obtain
additional debt financing, we may be required to agree to restrictions on our
activities that could impair our ability to execute our business plan. For
example, these restrictions may prohibit us from incurring additional debt or
making acquisitions without lender approval. In general, if we are unable to
obtain financing on favorable terms, we may be unable to implement our business
plan.
We could lose money on our fixed-price contracts.
From time to time, we enter into fixed-price, fixed-time contracts, rather
than contracts based on payment for time and materials. On occasion, we fix the
price or timeframe before we finalize the design specifications. If we
miscalculate the resources or time we need for these projects, we could lose
money on these projects.
We could become involved in disputes with our clients over intellectual
property rights, which could cause us to lose clients, incur significant
expenses and pay damages.
In our normal course of business, we develop software applications for
specific client engagements. From time to time, we sell ownership of the
software to the client on completion of the engagement, although we generally
retain a license for limited uses. Issues relating to ownership of and rights
to use software applications and frameworks can be complicated. We may become
involved in disputes that affect our ability to sell or use similar
applications and frameworks we created for particular clients. A successful
claim could subject us to significant liability that would have a material
adverse effect on our liquidity and capital
7
resources. In addition, even the successful defense of a claim could require us
to incur substantial costs and result in diversion of our management's efforts
and damage to our brand perception by our clients.
We sometimes enter into non-compete agreements with our clients and agree not
to perform services for our clients' competitors, which reduces the number of
our prospective clients and sources of revenues.
We sometimes agree to enter into contracts which contain restrictive
provisions that prohibit us from performing the same or substantially similar
services or developing similar products for our clients' competitors. These
restrictive provisions generally last for the term of our contract and may
remain in effect for up to two years after the completion of the project. These
restrictive provisions reduce the number of our prospective clients and our
sources of revenues.
Risks Related to Our Industry
We may not be able to hire and retain highly skilled professionals, which would
affect our ability to compete effectively.
To succeed, we must hire and retain professionals who are highly skilled in
the Internet and its rapidly changing technology. Because of the recent and
rapid growth of the Internet, individuals who have Internet expertise and can
perform the services we offer are scarce. Competition for these individuals,
therefore, is intense. We might not be able to hire enough professionals or to
train, motivate, retain and manage the professionals we are able to hire. This
could hinder our ability to complete existing projects and bid for new
projects. In addition, because the competition for qualified professionals in
the Internet industry is intense, hiring, training, motivating, retaining and
managing professionals with the strategic, technical and creative skills we
need is both time-consuming and expensive.
We may not compete successfully with our competitors, which could result in
reduced revenues.
Our market is intensely competitive, highly fragmented and subject to rapid
technological change. We may not compete successfully with our competitors. We
currently compete both for client assignments and experienced professionals
principally with the following:
. large systems integrators and outsourcing firms;
. consulting arms of the "Big Five" accounting firms;
. network services firms;
. full service e-business solutions providers;
. e-business technology solutions providers; and
. creative e-business solutions providers.
Many of these businesses have longer operating histories and significantly
greater financial, technical, marketing and managerial resources than we do. In
addition, our markets have relatively low barriers to entry. We expect to
continue to face competition from new market entrants. Competition in our
market is based primarily on the following factors:
. Internet expertise and talent;
. quality, pricing and speed of service delivery;
. client references;
. integrated strategy, technology and creative design services; and
. vertical industry knowledge.
Many of these competitive factors are outside of our control. These factors
include our competitors' hiring and retention of senior staff, development of
software that is competitive with our products and services and response to
client needs.
8
Lack of growth or decline in Internet usage could cause our business to suffer.
We have derived most of our revenues from projects involving the Internet.
The Internet is relatively new and rapidly evolving. The market for our
services may not develop as we anticipate, our services may not be adopted and
individual users in business or at home may not use the Internet or the
wireless and broadband networks and applications we design, develop and deliver
for commerce and communication. A number of factors may inhibit Internet usage.
These factors include inadequate network infrastructure, security concerns,
inconsistent service quality and lack of cost-effective, high-speed service. On
the other hand, if Internet usage grows, the Internet infrastructure may not
support the demands this growth will place on it. The Internet's performance
and reliability may decline. In addition, outages and delays have occurred
throughout the Internet network infrastructure that have interrupted Internet
service. If these outages or delays occur frequently in the future, Internet
usage could grow more slowly or decline.
We face risks associated with government regulation of, and legal uncertainties
surrounding, the Internet.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could increase our cost of doing business or
otherwise have a material adverse effect on our business. Laws and regulations
directly applicable to Internet communications, commerce and advertising are
becoming more prevalent. The laws governing the Internet, however, remain
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws governing
intellectual property, copyright, privacy, libel and taxation apply to the
Internet. In addition, the growth and development of e-business may prompt
calls for more stringent consumer protection laws, both in the United States
and abroad which could adversely affect our business.
Risks Related to this Offering
We are controlled by a small group of stockholders, whose interests may differ
from yours.
Our directors, executive officers and affiliates currently beneficially own
approximately % of the outstanding shares of our common stock, and after this
offering will beneficially own approximately % of the outstanding shares of
our common stock. Accordingly, these stockholders will be able to determine the
outcome of any corporate transaction or other matter submitted to the
stockholders for approval, including mergers, acquisitions, consolidations and
the sale of all or substantially all of our assets, and also the power to
prevent or cause a change in control. The interests of these stockholders may
differ from your interests.
You will experience immediate and substantial dilution and pay a higher price
for our stock than existing stockholders.
If you purchase stock in this offering, you will pay more for your shares
than the amounts paid by existing stockholders for their shares. As a result,
you will experience immediate and substantial dilution of approximately $ per
share. For more information, see the section of this prospectus captioned
"Dilution."
Our stock has not traded publicly, and after this offering its market price may
fluctuate widely.
The initial public offering price will be determined through negotiations
between us and the representatives of the underwriters based on factors that
may not be indicative of future market performance. The initial public offering
price may bear no relationship to the price at which the common stock will
trade upon completion of this offering. An active public market for our common
stock may not develop or be sustained after this offering, and the market price
could fall below the initial public offering price. The market price of our
common stock could fluctuate substantially after this offering due to:
. future announcements concerning us or our competitors;
9
. quarterly fluctuations in operating results;
. announcements of acquisitions or technological innovations; or
. changes in earnings estimates or recommendations by analysts.
In addition, the stock prices of many technology companies fluctuate widely
for reasons which may be unrelated to operating results. Fluctuations in our
common stock's market price may affect our visibility and credibility in the e-
business solutions market.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources, which could have a material adverse effect on our
business and the market price of our common stock.
We may allocate this offering's net proceeds in ways with which you and other
stockholders may not agree.
We have not determined how the majority of the proceeds of this offering
will be spent. Our management may spend this offering's net proceeds in ways
with which you and our other stockholders may not agree. See "Use of Proceeds."
Future sales of our common stock in the public market could lower our stock
price and impair our ability to raise funds in new stock offerings.
Sales of a large number of shares after this offering, or the perception
that these sales could occur, could adversely affect the market price of our
common stock and could impair our ability to raise funds in additional stock
offerings. The shares of common stock sold in this offering will generally be
freely tradable without restriction or further registration under the
Securities Act. The remaining outstanding shares of our common stock will
be restricted from resale under federal securities laws. Holders of restricted
shares will generally be entitled to sell these shares in the public market
pursuant to a registration statement or without registration either under Rule
144 or any other applicable exemption under the Securities Act.
As soon as practicable after this offering we intend to register up to
shares of common stock subject to outstanding stock options or reserved for
issuance under our stock plans. As of the date of this prospectus, options to
purchase shares of common stock were outstanding. In addition, upon
completion of this offering, the holders of shares of common stock have the
right to request registration of these shares in future public offerings of our
equity securities.
10
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Forward-looking
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "expects," "plans," "anticipates," "could,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other similar words. These statements are only predictions.
The outcome of the events described in these forward-looking statements is
subject to risks. Actual results could differ materially. The section captioned
"Risk Factors" and those sections captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" as
well as other sections in this prospectus discuss some of the factors that
could contribute to these differences.
The forward-looking statements made in this prospectus relate only to events
as of the date on which the statements are made. We undertake no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of
unanticipated events.
This prospectus also contains market data related to our business and
industry. This market data includes projections that are based on a number of
assumptions. If these assumptions turn out to be incorrect, actual results may
differ from the projections based on these assumptions. As a result, our
markets may not grow at the rates projected by these data, or at all. The
failure of these markets to grow at these projected rates may have a material
adverse effect on our business, results of operations and financial condition,
and the market price of our common stock.
11
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common
stock we are offering will be approximately $ based upon an assumed initial
public offering price of $ per share, after deducting underwriting discounts
and commissions and the estimated offering expenses payable by us. If the
underwriters exercise their over-allotment option in full, we estimate that the
net proceeds will be approximately $ .
The principal purposes of this offering are:
.to increase our equity capital;
.to facilitate future access by us to public equity markets;
. to provide increased visibility and credibility in a marketplace where
several of our current and prospective competitors are, or may in the
future be, public companies; and
. to enhance our ability to use our common stock as consideration for
acquisitions and as a means of attracting and retaining key employees.
We intend to use $ of the net proceeds of this offering to repay all of
the existing indebtedness under our credit facility. We incurred a significant
portion of the outstanding indebtedness to fund our five recent acquisitions.
At April 30, 2000, the interest rate on our credit facility was % and it
matures in August 2004. An affiliate of Banc of America Securities LLC, one of
the representatives of the underwriters, is a lender on our credit facility
and, upon application of the net proceeds from this offering, will receive its
proportionate share of the amount of the credit facility to be repaid.
We intend to use the remaining net proceeds for general corporate purposes,
including funding our operations, capital expenditures, working capital and
acquisitions of complementary businesses. As part of our growth strategy, we
are continually evaluating and engaging in discussions with acquisition
candidates. There can be no assurance that any of these discussions will lead
to acquisitions. Until they are used, we will invest the net proceeds of the
offering in short-term marketable securities.
The foregoing represents our intentions based upon our present plans and
business conditions. The occurrence of unforeseen events or changed business
conditions, however, could result in our applying the proceeds of this offering
in a manner other than as described in this prospectus.
DIVIDEND POLICY
We do not anticipate paying any dividends on our common stock in the
foreseeable future. We currently intend to retain all of our earnings, if any,
for use in our business. We may also incur debt in the future which may
prohibit or restrict the payment of dividends.
12
CAPITALIZATION
The following table shows our capitalization as of March 31, 2000 on (a) an
actual basis and (b) an as adjusted basis to reflect:
. the sale of shares of our common stock in this offering at an assumed
initial public offering price of $ per share, net of $ of offering
expenses, and the application of the net proceeds of this offering;
. the exchange of all shares of Class A convertible preferred stock,
including related accrued dividends, for shares of our common stock
at an exchange rate based on an assumed initial public offering price of
$ per share; and
. the exchange of $2.6 million of convertible subordinated notes payable
for shares of our common stock at an exchange rate based on an
assumed initial public offering price of $ per share.
You should read this table together with "Use of Proceeds," "Pro Forma
Condensed Combined Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and related notes included elsewhere in this prospectus.
The amounts shown for stockholders' equity (deficit) and common stock
exclude 1,055,342 shares of common stock reserved for issuance under our 1999
stock option plan.
As of March 31, 2000
---------------------
Actual As Adjusted
(in thousands)
Cash and cash equivalents............................... $ 4,639 $
======== =====
Credit facility......................................... $ 13,800 $
Convertible subordinated notes payable.................. 2,650
Other long-term liabilities(1).......................... 1,050
Class A convertible preferred stock, $0.01 par value,
actual, 150,000 shares authorized, 88,556 shares issued
and outstanding, liquidation value of $92,845,760; pro
forma as adjusted, shares issued and
outstanding(2)......................................... 92,846
Stockholders' equity (deficit):
Common stock, $0.01 par value, 99,850,000 shares
authorized; 53,855,713 and shares issued and
outstanding; actual and as adjusted, respectively.... 589
Additional paid-in capital............................ 27,300
Notes receivable-stockholders......................... (414)
Treasury stock, 5,000,000 shares at cost.............. (10,282)
Deferred compensation................................. (1,447)
Retained earnings (accumulated deficit)............... (36,520)
-------- -----
Total stockholders' equity (deficit)................ (20,774)
-------- -----
Total capitalization.............................. $ 89,572 $
======== =====
- --------
(1) Other long-term liabilities reflect amounts due to former IconixGroup
shareholders.
(2) Class A convertible preferred stock is recorded at its liquidation value;
shares issued and outstanding does not reflect $4.3 million in paid-in-kind
dividends accrued as of March 31, 2000.
13
DILUTION
Our net tangible book value as of March 31, 2000 was $ , or $ per share
of common stock. Net tangible book value per share represents the amount of
total tangible assets less total liabilities, divided by the number of shares
of common stock outstanding.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of common stock in this offering and the
net tangible book value per share of common stock immediately after completion
of this offering. After giving effect to our sale of shares of common stock
at an assumed initial public offering price of $ per share, and after
deducting underwriting discounts and commissions and the estimated offering
expenses payable by us, our adjusted net tangible book value as of March 31,
2000 would have been $ or $ per share. This represents an immediate
increase in tangible book value per share to existing shareholders of $ and
an immediate dilution in tangible book value per share to new investors
purchasing shares in the offering of $ per share. The following table
illustrates this per share dilution.
Assumed initial public offering price per share.................. $
Net tangible book value per share as of March 31, 2000......... $
Increase per share attributable to new investors...............
----
Net tangible book value per share after this offering............
----
Dilution per share to new investors.............................. $
====
The following table presents on an adjusted pro forma basis as of March 31,
2000, the number of shares of common stock purchased from us and the total
consideration paid to us and by new investors:
Shares
Purchased Total Consideration
-------------- --------------------- Average Price
Number Percent Amount Percent Per Share
Existing stockholders... % $ % $
New investors...........
--- ----- -------- ----------
Total................. 100.0% $ 100.0%
=== ===== ======== ==========
The above discussion excludes:
. any shares we may issue under the over-allotment option; and
. shares of common stock issuable upon the exercise of options
outstanding under our stock option plans at a weighted average
exercise price of $ as of . To the extent any of these stock
options are exercised, there will be further dilution to new
investors.
14
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following tables contain selected financial data of Iconixx Corporation
for each of the five years in the period ended December 31, 1999, and for each
of the three months ended March 31, 1999 and 2000. The consolidated statement
of operations data for each of the years ended December 31, 1997, 1998 and 1999
and the balance sheet data as of December 31, 1998 and 1999 are derived from
financial statements audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this prospectus. The balance sheet
data as of December 31, 1997 have also been derived from financial statements
audited by Arthur Andersen LLP. The statement of operations data and the
balance sheet data as of and for the years ended December 31, 1995 and 1996 are
unaudited and, in the opinion of management, have been prepared on the same
basis as our audited consolidated financial statements included elsewhere in
this prospectus. The consolidated statement of operations data for each of the
three months ended March 31, 1999 and 2000 and the balance sheet data as of
March 31, 2000 are derived from our unaudited financial statements included
elsewhere in this prospectus. The balance sheet data as of March 31, 1999 are
also derived from our unaudited financial statements. The pro forma
consolidated statements of operations data for the year ended December 31, 1999
and for the three months ended March 31, 2000 are derived from unaudited pro
forma condensed combined statement of operations included elsewhere in this
prospectus. In the opinion of management, this unaudited information includes
all adjustments, consisting of only normally recurring adjustments, necessary
for a fair presentation of such information. The historical results are not
necessarily indicative of results to be expected for any future period. You
should read the data below together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for period-to-period
analyses, and our consolidated financial statements and related notes included
elsewhere in this prospectus.
Year Ended December 31, Three Months Ended March 31,
------------------------------------------------------------ -----------------------------------
Pro forma Pro forma
1995 1996 1997 1998 1999 1999 1999 2000 2000
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Statement of
Operations Data:
Revenues............. $ -- $5,643 $18,568 $49,898 $48,978 $ 78,957 $14,053 $ 14,026 $ 20,533
Cost of revenues..... -- 4,895 14,932 40,525 39,300 51,986 11,639 9,535 12,314
------ ------ ------- ------- ------- --------- ------- -------- --------
Gross profit......... -- 748 3,636 9,373 9,678 26,971 2,414 4,491 8,219
Operating expenses:
Selling, general and
administrative...... 84 197 689 3,170 5,189 20,126 795 5,211 9,315
Depreciation and
amortization........ -- 7 24 28 1,918 30,310 24 3,188 5,348
Loss on divestiture
of operating
division............ -- -- -- -- 419 -- 419 -- --
------ ------ ------- ------- ------- --------- ------- -------- --------
Total operating
expenses........... 84 204 713 3,198 7,526 50,436 1,238 8,399 14,663
------ ------ ------- ------- ------- --------- ------- -------- --------
Income (loss) from
operations.......... (84) 544 2,923 6,175 2,152 (23,465) 1,176 (3,908) (6,444)
Interest expense..... -- -- -- -- (335) (1,369) -- (256) (341)
Interest and other
income.............. -- -- 30 125 154 191 30 58 60
------ ------ ------- ------- ------- --------- ------- -------- --------
Income before
provision (benefit)
for income taxes.... (84) 544 2,953 6,300 1,971 (24,643) 1,206 (4,106) (6,725)
Provision (benefit)
for income taxes.... -- -- -- -- 4 (2,540) -- (371) --
------ ------ ------- ------- ------- --------- ------- -------- --------
Net income (loss).... (84) 544 2,953 6,300 1,967 (22,103) 1,206 (3,735) (6,725)
Dividends on Class A
convertible
preferred stock..... -- -- -- -- 2,166 10,930 -- 6,354 7,542
Net income (loss)
attributable to
common
stockholders........ $ (84) $ 544 $ 2,953 $ 6,300 $ (199) $(33,033) $ 1,206 $(10,089) $(14,267)
====== ====== ======= ======= ======= ========= ======= ======== ========
Distributions to
stockholders (1).... -- 50 1,468 4,822 3,321 -- 1,532 -- --
====== ====== ======= ======= ======= ========= ======= ======== ========
Basic and diluted net
income (loss) per
common share........ $(0.00) $ 0.02 $ 0.16 $ 0.34 $ (0.01) $ (0.85) $ 0.07 $ (0.22) $ (0.26)
====== ====== ======= ======= ======= ========= ======= ======== ========
Weighted average
common shares
outstanding......... 18,500 18,500 18,500 18,500 28,281 39,061 18,500 46,433 53,856
15
As of December 31,
---------------------------------------------- As of March 31,
1995 1996 1997 1998 1999 2000
(unaudited) (unaudited) (unaudited)
Balance Sheet Data:
Cash and cash
equivalents........... $-- $691 $1,153 $1,261 $ 1,537 $ 4,639
Working capital........ 6 318 1,768 3,212 1,840 5,095
Total assets........... 869 947 3,605 7,150 39,116 102,986
Total debt and other
long-term obligations
(2)................... -- 118 146 -- 10,200 17,500
Class A convertible
preferred stock....... -- -- -- -- 53,322 92,846
Stockholders' equity
(deficit)............. 16 331 1,816 3,294 (33,175) (20,774)
- --------
(1) Prior to August 1999, we made distributions to our stockholders while
operating under Subchapter S of the Internal Revenue Code.
(2) Total debt includes current and long-term portion of notes payable and
capital lease obligations, liabilities to former IconixGroup shareholders,
and our credit facility.
16
PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following tables present the unaudited pro forma condensed combined
statements of operations of Iconixx Corporation for the year ended December 31,
1999 and for the three months ended March 31, 2000. The pro forma condensed
combined statement of operations for the year ended December 31, 1999 gives
effect, on a pro forma basis, to the acquisitions we made in 1999 and 2000 and
the disposition of our professional staffing division, or PSD, as if these
transactions occurred on January 1, 1999. The pro forma condensed combined
statement of operations for the three months ended March 31, 2000, gives
effect, on a pro forma basis, to the acquisitions we made in 2000, as if these
acquisitions occurred on January 1, 1999. The pro forma condensed combined
statements of operations for the year ended December 31, 1999 and for the three
months ended March 31, 2000 also give effect, on a pro forma as adjusted basis,
to reflect:
. the reduction of interest expense due to the exchange of promissory notes
with an aggregate value of $2.6 million, which are convertible into
shares of our common stock upon completion of this offering;
. the reduction of the dividends on preferred stock resulting from the
conversion of 88,556 shares of Class A convertible preferred stock, which
has a liquidation preference, including accrued and unpaid dividends of
$92.8 million as of March 31, 2000, for shares of our common stock; and
. the reduction of interest expense resulting from the repayment of our
credit facility.
In August 1999, we acquired Empyrean Group, Inc. for $1.7 million. The
purchase consideration consisted of 1,639 shares of our convertible preferred
stock and 862,500 shares of our common stock. In November 1999, we acquired
IconixGroup, Inc. for $26.0 million. The purchase consideration consisted of
$19.0 million in cash, $2.7 million in convertible subordinated notes payable,
1.8 million shares of common stock, assumption of debt of $365,000 and 3,467.5
shares of convertible preferred stock. In March 2000, we acquired all of the
capital stock of Lead Dog Design, Inc. for $14.3 million. The purchase
consideration consisted of $10.0 million in cash, 1.0 million shares of common
stock and 3,000 shares of convertible preferred stock. In March 2000, we
acquired substantially all of the assets and assumed substantially all of the
liabilities of EnterpriseWorks LLC, for $27.5 million. The purchase
consideration consisted of $17.0 million in cash and 3.9 million shares of
common stock. In March 2000, we acquired some of the assets and assumed some of
the liabilities of Internet Information Services, Inc. for $17.6 million. The
purchase consideration consisted of $13.0 million in cash, 600,000 shares of
common stock and 2,220 shares of convertible preferred stock.
The acquisitions we made were accounted for using the purchase method of
accounting. The purchase method of accounting allocates the aggregate purchase
price to the assets acquired and liabilities assumed based upon their relative
fair values. The excess of purchase price over the fair value of tangible and
identifiable intangible assets acquired, net of liabilities assumed, has been
reflected as goodwill. We believe that the preliminary allocations are
reasonable. However, in some cases, the final allocations will be based upon
valuations and other studies that are not yet complete. As a result, the
allocations reflected in the accompanying statements may be revised as
additional information becomes available, and the revised allocations could
differ from those shown.
The information in the pro forma condensed combined statement of operations
for the year ended December 31, 1999 has been derived from the audited
statements of operations for the year ended December 31, 1999 of Iconixx
Corporation, Lead Dog Design, Internet Information Services, and
EnterpriseWorks and the audited statement of operations of Empyrean Group, Inc.
for the eight months ended August 31, 1999, all of which are included elsewhere
in this prospectus, and from the unaudited statement of operations of
IconixGroup, Inc. for the period from January 1, 1999 through November 3, 1999.
The information in the pro forma condensed combined statement of operations
for the three months ended March 31, 2000 has been derived from the unaudited
statement of operations of Iconixx Corporation for the
17
three months ended March 31, 2000, included elsewhere in this prospectus, and
the unaudited statements of operations for the companies acquired in 2000 for
the periods during 2000 prior to their acquisitions.
The unaudited pro forma condensed combined statements of operations are
based upon currently available information and assumptions and estimates which
management believes are reasonable. These assumptions and estimates, however,
may change. The pro forma condensed combined statements of operations for the
year ended December 31, 1999 and for the three months ended March 31, 2000
include approximately $754,000 and $778,000 in special compensation paid to
management of the acquired companies. These amounts have not been eliminated as
the charges were not a direct result of the acquisition. These statements are
presented for comparative purposes only and do not purport to be indicative of
the actual results of operations that might have occurred or expected future
results. You should read the unaudited condensed combined pro forma financial
data and related notes together with our consolidated financial statements and
related notes and the audited financial statements and the related notes of the
companies we acquired included elsewhere in this prospectus.
18
Iconixx Corporation
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 31, 1999
(in thousands, except per share data)
Pro forma
Historical Adjustments
------------------------------------------------------------- ----------------
Internet
Empyrean Iconix Lead Dog Enterprise Information Offering
Iconixx Group(a) Group(a) Design(a) Works(a) Services(a) PSD(k) Other Pro forma Adjustments
Revenues......... $48,978 $ -- $ 9,750 $3,959 $9,643 $7,193 $(566) $ -- $ 78,957 $ --
Cost of
revenues......... 39,300 -- 4,084 1,416 4,035 3,564 (413) -- 51,986 --
------- ------- ------- ------ ------ ------ ----- -------- -------- -------
Gross profit.... 9,678 -- 5,666 2,543 5,608 3,629 (153) -- 26,971 --
Operating
expenses:
Selling, general
and
administrative.. 5,189 1,253 6,997 1,882 4,456 3,104 (141) (2,614)(b) 20,126 --
Depreciation and
amortization.... 1,918 8 263 93 199 71 -- 27,758 (c) 30,310 --
Loss on
divestiture of
operating
division........ 419 -- -- -- -- -- (419) -- -- --
------- ------- ------- ------ ------ ------ ----- -------- -------- -------
Total operating
expenses........ 7,526 1,261 7,260 1,975 4,655 3,175 (560) 25,144 50,436 --
------- ------- ------- ------ ------ ------ ----- -------- -------- -------
Income (loss)
from operations.. 2,152 (1,261) (1,594) 568 953 454 407 (25,144) (23,465) --
Interest
expense.......... (335) -- (25) -- (59) (75) -- (875)(d) (1,369) 1,369(h)
Other income
(expense), net... 154 10 27 -- -- -- -- -- 191 --
------- ------- ------- ------ ------ ------ ----- -------- -------- -------
Income (loss)
before provision
(benefit) for
income taxes..... 1,971 (1,251) (1,592) 568 894 379 407 (26,019) (24,643) 1,369
Provision
(benefit) for
income taxes..... 4 -- (766) 72 65 -- -- (1,915)(f) (2,540) --
------- ------- ------- ------ ------ ------ ----- -------- -------- -------
Net income
(loss)........... 1,967 $(1,251) $ (826) $ 496 $ 829 $ 379 $ 407 (24,104) (22,103) 1,369
======= ======= ====== ====== ====== =====
Dividends on
Class A
convertible
preferred stock.. 2,166 8,764 (g) 10,930 (10,930)(i)
------- -------- -------- -------
Net (loss) income
attributable to
common
stockholders..... $ (199) $(32,868) $(33,033) $12,299
======= ======== ======== =======
Basic and diluted
net (loss) income
per common
share............ $ (0.01) $ (0.85)
======= ========
Weighted average
common shares
outstanding(j)... 28,281 39,061
======= ========
Pro forma
As Adjusted
Revenues......... $ 78,957
Cost of
revenues......... 51,986
-----------
Gross profit.... 26,971
Operating
expenses:
Selling, general
and
administrative.. 20,126
Depreciation and
amortization.... 30,310
Loss on
divestiture of
operating
division........ --
-----------
Total operating
expenses........ 50,436
-----------
Income (loss)
from operations.. (23,465)
Interest
expense.......... --
Other income
(expense), net... 191
-----------
Income (loss)
before provision
(benefit) for
income taxes..... (23,274)
Provision
(benefit) for
income taxes..... (2,540)
-----------
Net income
(loss)........... (20,734)
Dividends on
Class A
convertible
preferred stock.. --
-----------
Net (loss) income
attributable to
common
stockholders..... $(20,734)
===========
Basic and diluted
net (loss) income
per common
share............ $
===========
Weighted average
common shares
outstanding(j)...
===========
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
19
Iconixx Corporation
Unaudited Pro Forma Combined Condensed Statement of Operations
Three Months Ended March 31, 2000
(in thousands, except per share data)
Historical
------------------------------------------
Internet
Lead Dog Enterprise Information Pro forma Offering Pro forma
Iconixx Design(a) Works(a) Services(a) adjustments Pro forma adjustments As adjusted
Revenues................ $ 14,026 $ 776 $ 3,699 $ 2,032 $ -- $ 20,533 $ -- $20,533
Cost of revenues........ 9,535 316 1,551 912 -- 12,314 -- 12,314
-------- ----- ------- ------- ------ -------- ------- -------
Gross profit........... 4,491 460 2,148 1,120 -- 8,219 -- 8,219
Operating expenses:
Selling, general and
administrative........ 5,211 524 4,503 1,803 (2,726)(b) 9,315 -- 9,315
Depreciation and
amortization.......... 3,188 27 85 15 2,033 (c) 5,348 -- 5,348
-------- ----- ------- ------- ------ -------- ------- -------
Total operating
expenses.............. 8,399 551 4,588 1,818 (693) 14,663 -- 14,663
-------- ----- ------- ------- ------ -------- ------- -------
Income (loss) from
operations............. (3,908) (91) (2,440) (698) 693 (6,444) -- (6,444)
Interest expense........ (256) -- (34) (25) (26)(d) (341) 341 (h) --
Other income (expense),
net.................... 58 (65) (737) (496) 1,300 (e) 60 -- 60
-------- ----- ------- ------- ------ -------- ------- -------
Income (loss) before
provision (benefit) for
income taxes........... (4,106) (156) (3,211) (1,219) 1,967 (6,725) 341 (6,384)
Provision (benefit) for
income taxes........... (371) -- -- -- 371 (f) -- -- --
-------- ----- ------- ------- ------ -------- ------- -------
Net income (loss)....... $ (3,735) $(156) $(3,211) $(1,219) 1,596 (6,725) 341 (6,384)
===== ======= =======
Dividends on Class A
convertible preferred
stock.................. 6,354 1,188 (g) 7,542 (7,542)(i) --
-------- ------ -------- ------- -------
Net (loss) income
attributable to common
stockholders........... $(10,089) $ 408 $(14,267) $ 7,883 $(6,384)
======== ====== ======== ======= =======
Basic and diluted net
(loss) income per
common share........... $ (0.22) $ (0.26) $
======== ======== =======
Weighted average common
shares outstanding(j).. 46,433 53,856
======== ======== =======
The accompanying notes are an integral part of these
unaudited pro forma condensed combined financial statements.
20
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
For the Year Ended December 31, 1999 and for the Three Months Ended March 31,
2000
The following adjustments were applied to our condensed combined statements
of operations and the financial data of the companies we acquired in 1999 and
2000 to arrive at the unaudited pro forma condensed combined statements of
operations.
(a) In the pro forma condensed combined statement of operations for the
year ended December 31, 1999, these columns reflect the actual historical
results of operations for the acquisitions we completed in 1999 from
January 1, 1999 to the date prior to which each respective acquisition was
consummated, and for the companies we acquired in 2000, for the full year
ended December 31, 1999. In the pro forma condensed combined statement of
operations for the three months ended March 31, 2000, these columns reflect
the actual results of operations for the acquisitions we completed in 2000
from January 1, 2000 to the date prior to which each respective acquisition
was consummated.
(b) Reflects the elimination of stock-based and other acquisition-
related compensation recorded by the acquired companies prior to their
acquisition by us that arose as a direct result of the acquisitions, as
follows:
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
(in thousands)
EnterpriseWorks....................... $ -- $1,863
Internet Information Services......... -- 863
IconixGroup........................... 2,614 --
------ ------
$2,614 $2,726
====== ======
(c) Reflects the amortization expense related to identifiable intangible
assets and goodwill. These amounts are being amortized over the estimated
useful life of each asset, primarily three years.
(d) Reflects a full year of interest expense on acquisition debt
financing assuming the amounts outstanding under the credit facility were
drawn on January 1, 1999. The increase in the interest expense is a result
of the amounts drawn under the credit facility to the balance outstanding
as of March 31, 2000 of approximately $13,800,000 at a weighted average
interest rate of 8.0%. Additionally, the increase results from convertible
subordinated notes issued to selling shareholders with a principal balance
of approximately $2,650,000 as of March 31, 2000 that bear an interest rate
of 10.0%. The adjustment is as follows:
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
(in thousands)
Interest on acquisition debt
financing.......................... $1,104 $275
Interest on notes to selling
shareholders....................... 265 66
Less: related interest recorded by
our acquired companies and us...... (494) (315)
------ ----
Net adjustment...................... $ 875 $ 26
====== ====
(e) Reflects the elimination of the costs of investment advisors and
other professionals incurred by Lead Dog Design ($65,000), EnterpriseWorks
($739,000) and Internet Information Services ($496,000) that were directly
attributable to their acquisition by us.
(f) Reflects the incremental benefit for federal and state income taxes
relating to the historical income tax provisions for the acquired companies
and the termination of our status as an S Corporation. The
21
estimated tax benefit for the year ended December 31, 1999 and for the
three months ended March 31, 2000 reflect the tax impact of the previous
pro forma adjustments:
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
(in thousands)
Income tax benefit.................. $(2,540) $ --
Less: historical tax benefit
recorded by Iconixx and the
companies we acquired........... (625) (371)
------- -----
Net adjustment...................... $(1,915) $ 371
======= =====
(g) Reflects a full year of dividends on the Class A convertible
preferred stock issued to finance our acquisitions.
(h) Reflects the elimination of interest expense as a result of the
repayment of the bank credit facility and the exchange of promissory notes
with an aggregate value of $2.6 million, which are convertible into shares
of our common stock as a result of this offering:
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
(in thousands)
Repayment of credit facility......... $1,104 $275
Exchange of notes payable into shares
of our common stock................. 265 66
------ ----
Net adjustment....................... $1,369 $341
====== ====
(i) Reflects the elimination of dividends on our preferred stock as a
result of the exchange of Class A convertible preferred stock in connection
with this offering.
(j) Pro forma and pro forma as adjusted weighted average common shares
outstanding consist of the following:
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
(in thousands)
Weighted average common shares
outstanding during period........... 28,281 46,433
Common shares issued in connection
with the acquisitions completed
during the periods, weighted for
the period prior to their
acquisition........................ 10,780 7,423
------ ------
Pro forma weighted average common
shares outstanding during period.... 39,061 53,856
Exchange of Class A convertible
preferred stock at an assumed
initial public offering price of
$ per share....................
------ ------
Exchange of promissory notes with an
aggregate value of $2.6 million,
which are convertible into shares
of our common stock at an assumed
initial public offering price of
$ ..............................
------ ------
Common shares issued in offering....
------ ------
Pro forma as adjusted weighted
average common shares outstanding
during the periods..................
------ ------
22
If the closing date of this offering occurs after , the number of
shares of common stock to be issued on the exchange, assuming an initial public
offering price of $ , would increase by approximately shares per month
thereafter.
Following this offering, our authorized capital stock will consist of
shares of common stock of which there will be shares issued and
outstanding. There will be no shares of Class A convertible preferred stock
issued and outstanding following this offering.
(k) Reflects the effect of our divestiture of our professional staffing
division, which occurred on February 1, 1999, as though it had occurred on
January 1, 1999.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations with "Selected Consolidated Financial Data," "Pro Forma
Condensed Combined Financial Data," our consolidated financial statements and
related notes and the financial statements of the acquired businesses included
elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Please see the sections
captioned "Risk Factors" and "Special Note Regarding Forward-Looking
Statements."
Overview
We are a leading end-to-end e-business solutions provider focused on
leveraging wireless, broadband and other emerging technologies to enhance our
clients' businesses. We deliver comprehensive, high-quality e-business
solutions that capitalize on the interdependency of user experience, mission-
critical business applications and robust network infrastructure to enhance
value in online business. Our services include e-business strategy and
planning, user experience, business functionality and network infrastructure.
These services, combined with our deep expertise in wireless and broadband
technologies, enable us to create dynamic, media-rich and scalable e-business
solutions for our clients that allow them to increase speed to market and
e-commerce activity. We enjoy long-standing relationships with our clients,
which range from the Global 1000 to emerging growth companies.
We were formed in September 1995 under the name Business Solutions Group,
LLC. At that time, we provided network architecture consulting and development
services within the telecommunications industry, primarily to Sprint, for which
we developed a business model responsive to its procurement and operational
needs. In order to respond quickly to increasing demands from Sprint, we
adopted a flexible staffing approach by sourcing engagements through a
combination of independent consultants and employees. We negotiated long-term
billing rates lower than the general market rates for similar skill sets but
sufficiently high enough to ensure the longevity of the programs. We focused on
developing and servicing engagements with voice, data and broadband components
within the Sprint environment, particularly in the direct design and
development of the Sprint Integrated On-Demand Network, or ION, rather than
market our services to others. This strategy enabled us to minimize indirect
expenses such as selling, general and administrative costs. Overall, this
combination of long-term contract rates, flexible staffing plan, focus on our
key customer requirements and minimized indirect costs supported the profitable
growth in our business from our inception through July 1999.
In February 1999, we divested a professional staffing business which was a
separate division of our company, unrelated to our core business within the
telecommunications industry. In August 1999, we converted from a limited
liability company to a corporation. Subsequent to this conversion, we were
recapitalized through an investment by Thayer ITECH Holdings, LLC. As part of
the recapitalization, we redeemed an aggregate of 27,027 shares of common stock
from our sole stockholder, BSG Holdings, Inc., for $10.0 million. In its
investment, Thayer purchased 58,378 of those shares of common stock from BSG
Holdings, Inc. for $21.6 million. Each of the issued and outstanding shares of
common stock held by BSG Holdings, Inc. and Thayer was then converted into 185
shares of common stock and 0.3515 shares of convertible preferred stock.
In August 1999, we acquired Empyrean Group, Inc., a management services
company formed for the purpose of building a web services and development
provider, through the acquisition of all of Empyrean's capital stock. The
acquisition strengthened our management team and allowed us to expand our
business model to include a strategy for delivering end-to-end e-business
solutions. Our network architecture consulting and development services
provided us with one component of our strategy. We recognized, however, that we
needed to expand our service offerings to enable us to provide a comprehensive
set of solutions to other clients. As a result, we created a template to
evaluate potential acquisitions which would provide us with skills in
e-business strategy and planning, branding, web design and engineering and
development of business applications.
24
Our acquisitions in November 1999 and March 2000, which are detailed below,
provided us with the skill sets and resources to execute our strategy. In
November 1999, we acquired IconixGroup, Inc., a web development, strategy and
branding firm, which provided us with web services and development
capabilities. In addition, IconixGroup provided off-line/print and branding
services. Concurrent with this acquisition, we changed our name to Iconixx
Corporation to capitalize on the brand name recognition of IconixGroup.
In March 2000, we acquired all of the capital stock of Lead Dog Design,
Inc., a provider of web, multimedia and print design services. The acquisition
of Lead Dog Design, Inc. brought our services to the New York and Los Angeles
metropolitan markets and deepened our web and multimedia design and development
skills. We also acquired substantially all of the assets and assumed
substantially all of the liabilities of EnterpriseWorks LLC, a provider of web-
based information technology solutions, including e-business, customer care,
sales force automation and infrastructure design services. Finally, we acquired
some of the assets and assumed some of the liabilities of Internet Information
Services, Inc., an Internet technology consulting and professional services
firm with expertise in the development of custom web applications that
integrate with diverse platforms, third-party tools and legacy applications.
We have been operating as an integrated company since April 1, 2000. Our
post-acquisition activities include the application of a company-wide operating
methodology, the development of a high-quality sales and marketing organization
on a company-wide level, and the implementation of a new management information
system and operating infrastructure. In addition, our professionals are
currently working together to form full-service project teams to better service
our customers.
We provide our services to clients in a variety of industries, including
financial services, energy and utilities, information technology/dot-coms and
telecommunications. Although many of our clients engage us to provide a
comprehensive set of services for their e-business solutions, our clients,
Sprint and USWest, in the telecommunications industry engaged us principally to
provide network architecture consulting and development services. The services
we provide to USWest share many of the characteristics of the services we
provide to Sprint. Therefore, to monitor our operating performance, including
our revenue growth and gross profit as a percentage of revenues, we have
segregated our business into two segments: web services and telecom consulting
services. Web services consist primarily of web strategy, design and
development, as well as technical consulting and development of web-related
applications. In addition, we are pursuing opportunities to integrate our
expertise with wireless, broadband and other emerging technologies into our web
service offerings. Telecom consulting services consist primarily of systems
engineering and network architecture services, including services which employ
both wireless and broadband technologies, within the telecommunications
industry.
Web services represented approximately 41% and 52% of our total pro forma
revenues during the year ended December 31, 1999 and the three months ended
March 31, 2000, respectively. In addition, web services currently provide gross
profit as a percentage of revenues averaging approximately 55%. As web services
is a growth industry where demand currently exceeds supply, resistance to
billing rate increases is not as strong as telecom consulting services. In
addition, our use of employees rather than independent contractors within this
segment generally results in a lower cost of revenues, and therefore increased
gross profit. Although we anticipate that our gross profit as a percentage of
revenues will remain consistent in the near future periods, pressure on web
services billing rates may increase as the supply of these services also
increases.
During the year ended December 31, 1999 and the three months ended March 31,
2000, telecom consulting services represented approximately 59%, of which
Sprint was 57%, and 47%, of which Sprint was 43%, of our pro forma revenues. We
have entered into a master service agreement with Sprint, under which contract
orders exist through December 2000. Due to the anticipated duration and
importance of the current projects for Sprint, we expect that Sprint will
continue to engage us in periods subsequent to December 2000. However, as we
grow our customer base, we expect the impact of customer concentration with
Sprint to diminish over time.
25
Our telecom consulting services provide gross profit as a percentage of
revenues averaging approximately 20%. Within the telecommunications industry,
contract commitments are longer in nature. However, there exists a downward
pressure on billing rates for the duration of the commitment and in future
commitments, restricting the potential for growth through increased prices. In
addition, our current staffing model, which includes the use of independent
contractors to maintain flexibility in meeting fluctuating Sprint requirements,
results in increased cost of revenues, and therefore decreased gross profits,
as independent contractors are often more expensive than our employees.
However, this flexibility in our staffing model allows us to eliminate nearly
all non-billable time from our historical telecom business. We anticipate that
our gross profit as a percentage of revenues within telecom consulting services
will remain consistent in future periods, as significant room for growth of
billing rates or decrease in related costs does not exist.
Our telecom consulting professionals are beginning to work within our web
services segment to provide end-to-end e-business solutions. As this trend
continues, we expect that our overall gross profit as a percentage of revenues
will increase.
We derive a substantial majority of our revenues from professional services
billed primarily on a time and materials basis, with a limited number of fixed-
price contracts. Revenues from time and materials projects are recognized as
services are performed, based on fixed hourly rates for direct labor hours
expended. Revenues from fixed-price contracts are recognized based on the
percentage of completion method of accounting, with costs and estimated profits
recorded as the work is performed. We make provisions for estimated losses on
uncompleted contracts on a contract-by-contract basis and recognize these
provisions in the period in which the losses are determined.
Changes in contract scope and estimated profitability, including final
contract settlements, may result in adjustments to costs and revenues and are
recognized in the period in which the adjustments are determined. Any payments
received in advance of services performed are recorded as deferred revenue;
services performed prior to billing are recorded as unbilled revenue. The
majority of our customers reimburse us for direct expenses allocated to a
project, such as airfare, lodging and meals, through either direct
reimbursement or through fully loaded billing rates. Direct reimbursements are
excluded from revenues and netted against the expense incurred. In addition,
our customers reimburse us for direct costs of production, such as materials
and supplies. The reimbursement of production costs for which we bear a risk of
loss is included in revenues.
We currently derive a portion of our revenues from emerging companies formed
specifically to conduct business over the Internet. These companies often have
little or no earnings or cash flow, and their businesses are more likely to
fail than those of more mature companies. To ensure that all revenues are
realized, we typically do not perform services for these types of companies
unless we receive a substantial initial deposit, the company has been funded
for operating under its business plan, or there is strong evidence indicating
near-term funding. Although historically we have done so on a very limited
basis, we may accept a limited equity interest in the client in lieu of a
portion of our fees. In these circumstances, we require a clear basis of
valuation to determine the value of the interest to be received.
Gross profit represents revenues recognized less the direct cost of related
revenues. Cost of revenues includes salaries, benefits and related payroll
expenses, as well as costs of independent consultants, associated with the
generation of revenues. Payroll and related costs for billable consultants are
included in cost of revenues based on billable time; costs related to non-
billable time are included in selling, general and administrative expenses, as
discussed below. Therefore, our gross margins are not affected by trends in the
utilization of our billable consultants. In addition, cost of revenues includes
direct expenses such as travel, net of reimbursement, and direct costs.
Selling and marketing expenses comprise the salaries, commissions and
related employee benefits of sales and marketing employees, and the cost of
sales, marketing and advertising activities. Selling and marketing expenses are
increasing, and we anticipate that they will continue to increase in future
periods as we continue to build our sales and marketing organization and expand
our marketing strategy to promote the Iconixx brand.
26
General and administrative expenses include management, accounting, legal
and human resources costs. General and administrative expenses also include
facilities costs, recruiting, training and other corporate costs. As indicated
above, non-billable time related to our billable consultants is reflected
within general administrative expenses and therefore is directly affected by
trends in utilization.
Depreciation and amortization expenses relates primarily to goodwill and
other intangibles related to the acquisitions, as well as normal operating
property and equipment. Goodwill and other identifiable intangibles are
amortized on a straight-line basis over their estimated useful lives, primarily
three years. As of March 31, 2000, goodwill and other identifiable intangibles,
net of accumulated amortization, related to the acquisitions approximated $81.9
million. Property and equipment are depreciated on straight-line basis over
their estimated useful lives, ranging from three to ten years.
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in our financial statements or tax returns.
Our income tax rates may vary from the federal statutory rate, predominately
due to goodwill and other intangible amortization and the utilization of net
operating loss carryforwards acquired in one of the acquisitions. For the year
ended December 31, 1999 and the three months ended March 31, 2000, we
recognized an effective tax rate of 0.2% and 9.0%. These effective rates differ
from statutory rates due in part to our election to be taxed as an S
corporation before August 1999.
Combined Quarterly Results of Operations
The combined results of operations of the acquired businesses for the
periods presented do not represent combined results of operations presented in
accordance with generally accepted accounting principles, but are only a
summation of the revenues, cost of revenues and selling, general and
administrative expenses of the individual businesses on a historical basis. The
combined results also exclude the effect of pro forma adjustments and may not
be comparable to, and may not be indicative of, post-acquisition results.
The following tables show unaudited combined quarterly financial data for
the periods indicated. We derived this data from our unaudited financial
statements and the unaudited financial statements of the companies we have
acquired. In the opinion of our management, they include all adjustments, which
consist only of normal recurring adjustments, necessary to present fairly the
financial results for the periods. Results of operations for any prior fiscal
quarter may not be necessarily indicative of results for any future period.
27
Three Months Ended
-------------------------------------------------------
June
March 31, 30, September 30, December 31, March 31,
1999 1999 1999 1999 2000
(in thousands)
Revenues:
Web services............... $ 6,457 $ 7,980 $ 8,554 $ 9,378 $10,603
Telecom consulting
services(1)............... 14,053 13,000 10,855 9,246 9,930
------- ------- ------- ------- -------
Total revenues............ 20,510 20,980 19,409 18,624 20,533
------- ------- ------- ------- -------
Cost of revenues:
Web services............... 2,738 3,505 3,495 4,312 4,692
Telecom consulting
services(1)............... 11,639 10,734 8,717 7,259 7,622
------- ------- ------- ------- -------
Total cost of revenues.... 14,377 14,239 12,212 11,571 12,314
------- ------- ------- ------- -------
Gross profit............ $ 6,133 $ 6,741 $ 7,197 $ 7,053 $ 8,219
======= ======= ======= ======= =======
Selling, general and
administrative
expenses(1)................ $ 4,893 $ 4,881 $ 6,193 $ 6,914 $12,041 (2)
======= ======= ======= ======= =======
As a Percentage of Total Revenues:
Revenues:
Web services............... 31.5% 38.0% 44.1% 50.4% 51.6%
Telecom consulting
services.................. 68.5 62.0 55.9 49.6 48.4
------- ------- ------- ------- -------
Total revenues............ 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- -------
Cost of revenues:
Web services(3)............ 42.4 43.9 40.9 46.0 44.3
Telecom consulting
services(3)............... 82.8 82.6 80.3 78.5 76.8
------- ------- ------- ------- -------
Total cost of revenues.... 70.1 67.9 62.9 62.1 60.0
------- ------- ------- ------- -------
Gross profit............ 29.9% 32.1% 37.1% 37.9% 40.0%
======= ======= ======= ======= =======
Selling, general and
administrative expenses.... 23.9% 23.3% 31.9% 37.1% 58.6%(2)
======= ======= ======= ======= =======
- --------
(1) Amounts include operating results from the professional staffing division
before we divested it.
(2) Amount includes stock-based and other special compensation of $3.5 million,
or 17.1% of total revenues.
(3) Calculated as a percentage of total related revenues and not total
revenues, therefore amounts will not total.
Our quarterly results have varied in the past and will continue to do so in
the future due to a number of factors including, but not limited to, changes in
average billing rates, utilization rates and personnel additions, as well as
the timing of expenses. Accordingly, our results for any given quarter or
series of quarters are not necessarily indicative of our results for any future
period.
Our revenues from web services have increased steadily from quarter to
quarter during 1999, reflecting a wider customer base and smaller engagements
compared to telecom consulting services. Since the three months ended March 31,
1999, web services has grown from 31.5% of total combined revenues to 51.6% of
total combined revenues, and we expect this trend to continue, reflecting the
strong customer demand for our web services. The growth in web services has
also accounted for increases in total combined gross margin, from 29.9% in the
three months ended March 31, 1999 to 40.0% in the three months ended March 31,
2000. This improvement is explained by the growth in web services revenues
which generated gross margins of 55% and more, while gross margins from telecom
consulting services average about 20%.
Our revenues from telecom consulting services varied from quarter to quarter
as we adjusted our staffing in response to the workload at Sprint. In the
respective three months ended March 31 and June 30, 1999,
28
workload requirements were high as we completed key development phases of the
ION project at Sprint prior to its deployment. In the respective three months
ended September 30 and December 31, 1999, as the ION project moved to
deployment, our workload decreased accordingly. We expect to continue to
experience variations in workload in telecom consulting services, and expect
that our revenues will fluctuate from quarter to quarter.
As a result of our divestiture of an operating division, total combined
revenues decreased after the three months ended March 31, 1999. The decrease in
revenues during the respective three months ended September 30 and December 31,
1999 is partially a result of our engagements providing off-line/print
services, which provide most of their revenues during the respective three
months ended March 31 and June 30 each year. This trend is not expected to
continue in future periods as the off-line/print portion of work is not one of
our growth areas.
29
Results of Operations
The following table shows our selected historical operating data and that
data as a percentage of revenues.
Three Months
Year Ended December 31, Ended March 31,
----------------------- ----------------
1997 1998 1999 1999 2000
Revenues........................ $18,568 $49,898 $48,978 $14,053 $ 14,026
Cost of revenues................ 14,932 40,525 39,300 11,639 9,535
------- ------- ------- ------- --------
Gross profit.................... 3,636 9,373 9,678 2,414 4,491
Operating expenses:
Selling, general and
administrative expenses...... 689 3,170 5,189 795 5,211
Depreciation and amortization
expenses..................... 24 28 1,918 24 3,188
Loss on divestiture of
operating division........... -- -- 419 419 --
------- ------- ------- ------- --------
Total operating expenses.... 713 3,198 7,526 1,238 8,399
------- ------- ------- ------- --------
Income (loss) from operations... 2,923 6,175 2,152 1,176 (3,908)
Interest expense................ -- -- (335) -- (256)
Interest and other income....... 30 125 154 30 58
------- ------- ------- ------- --------
Income before provision
(benefit) for income taxes..... 2,953 6,300 1,971 1,206 (4,106)
Provision (benefit) for income
taxes.......................... -- -- 4 -- (371)
------- ------- ------- ------- --------
Net income (loss)............... 2,953 6,300 1,967 1,206 (3,735)
Dividends on Class A convertible
preferred stock................ -- -- 2,166 -- 6,354
------- ------- ------- ------- --------
Net income (loss) attributable
to common stockholders......... $ 2,953 $ 6,300 $ (199) $ 1,206 $(10,089)
======= ======= ======= ======= ========
As a Percentage of Revenues:
Revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... 80.4 81.2 80.2 82.8 68.0
----- ----- ----- ----- -----
Gross profit.......................... 19.6 18.8 19.8 17.2 32.0
----- ----- ----- ----- -----
Operating expenses:
Selling, general and administrative
expenses........................... 3.7 6.4 10.6 5.6 37.2
Depreciation and amortization
expense............................ 0.1 0.0 3.9 0.2 22.7
Loss on divestiture of operating
division........................... 0.0 0.0 0.9 3.0 0.0
----- ----- ----- ----- -----
Income (loss) from operations......... 15.8 12.4 4.4 8.4 (27.9)
----- ----- ----- ----- -----
Interest expense...................... 0.0 0.0 (0.7) 0.0 (1.8)
Interest and other income............. 0.1 0.2 0.3 0.2 0.4
----- ----- ----- ----- -----
Income before provision (benefit) for
income taxes......................... 15.9 12.6 4.0 8.6 (29.3)
Provision (benefit) for income taxes.. 0.0 0.0 0.0 0.0 (2.6)
----- ----- ----- ----- -----
Net income (loss)..................... 15.9 12.6 4.0 8.6 (26.7)
Dividends on Class A convertible
preferred stock...................... 0.0 0.0 4.4 0.0 45.3
----- ----- ----- ----- -----
Net income (loss) attributable to
common stockholders.................. 15.9% 12.6% (0.4%) 8.6% (72.0%)
===== ===== ===== ===== =====
30
The following discussion addresses our historical, combined and pro forma
results of operations.
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
Revenues. Revenues remained consistent at $14.0 million during the three-
month periods ended March 31, 2000 and March 31, 1999. On a combined basis,
revenues remained consistent at $20.5 million during the three-month periods
ended March 31, 2000 and March 31, 1999. On both a historical and a combined
basis, revenues remained consistent as additional revenues and revenue growth
from our acquisitions offset the decline in revenues as a result of our
divestiture of an operating division in 1999, which contributed $566,000 in
revenues during the three months ended March 31, 1999, as well as decreased
Sprint revenues of approximately $3.5 million.
Gross Profit. Gross profit increased $2.1 million, or 86.0%, to $4.5 million
for the three months ended March 31, 2000 from $2.4 million for the three
months ended March 31, 1999. On a combined basis, gross profit increased $2.1
million, or 34.0%, to $8.2 million for the three months ended March 31, 2000
from $6.1 million for the three months ended March 31, 1999. On a historical
and a combined basis, the increase was primarily attributable to the increase
in web services revenues, which carry a lower direct cost of revenues, as
compared to revenues generated from Sprint.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $4.4 million to $5.2 million for the three
months ended March 31, 2000 from $795,000 for the three months ended March 31,
1999. On a combined basis, selling, general and administrative expenses
increased $7.1 million to $12.0 million for the three months ended March 31,
2000 from $4.9 million for the three months ended March 31, 1999. The increase
was primarily attributable to:
. on a historical and a combined basis, the formation of our expanded
sales and marketing team;
. on a historical and a combined basis, increased management and
infrastructure to support our operations on a post-acquisition and
integration basis;
. on a historical and a combined basis, the movement in revenue to a
higher percentage of web services, which carries a higher amount of
selling, general and administrative expenses;
. on a historical basis, the inclusion of payroll and related costs of
billable employees for non-billable time; and
. on a combined basis, stock-based and other special compensation costs of
$3.5 million.
On a pro forma basis, selling, general and administrative expenses were $9.3
million during the three months ended March 31, 2000. This pro forma amount
excludes $2.7 million of stock-based and other special compensation costs
incurred by the acquired companies upon their respective acquisitions.
Depreciation and Amortization Expense. Depreciation and amortization
increased to $3.2 million for the three months ended March 31, 2000 from
$24,000 for the three months ended March 31, 1999, representing primarily
amortization of goodwill and other intangibles resulting from the acquisitions,
as well as additional depreciation and amortization from the acquisitions of
IconixGroup and Lead Dog. On a pro forma basis, depreciation and amortization
was $5.3 million during the three months ended March 31, 2000, representing a
full three months of goodwill and identifiable intangible amortization assuming
all of the acquisitions occurred on January 1, 1999.
Loss on Divestiture of Operating Division. Loss on divestiture of an
operating division of $419,000 in the three months ended March 31, 1999
represents costs incurred related to the termination of certain employment
agreements in 1999 as a result of selling the assets of an operating division.
This amount has been adjusted in the pro forma results of operations.
31
Dividends on Convertible Preferred Stock. Dividends on convertible preferred
stock of $6.4 million during the three months ended March 31, 2000 include the
accretion of the annual 15% dividend to be paid in kind in preferred shares of
$2.1 million. In addition, dividends include $4.3 million resulting from the
rights to purchase common stock at a discount to its fair value in connection
with the issuance of preferred stock in March 2000. On a pro forma basis,
dividends on preferred stock were $7.5 million during the three months ended
March 31, 2000, representing additional accretion assuming all preferred stock
issuances took place January 1, 1999.
Provision (Benefit) for Income Taxes. Benefit for income taxes of $371,000
during the three months ended March 31, 2000 was a result of losses during that
period. During the three months ended March 31, 1999, we operated under
Subchapter S of the Internal Revenue Code, and therefore no provision for
income taxes was necessary. On a pro forma basis, we had no benefit for income
taxes during the three months ended March 31, 2000.
Years Ended December 31, 1999, 1998 and 1997
Revenues. Revenues increased $31.3 million from $18.6 million in 1997 to
$49.9 million in 1998 and decreased $920,000, or 1.8%, to $49.0 million in
1999. On a combined basis, revenues increased $10.7 million, or 15.6%, to $79.5
million in 1999 from $68.8 million in 1998. On a historical basis, the increase
in revenues in 1998 was primarily a result of significant increased activity at
Sprint during that period. The decrease in revenues in 1999 is primarily the
result of the divestiture of an operating division, which contributed
approximately $3.4 million in revenues during 1998, as compared to $566,000
during 1999, offset by additional revenues from the acquisition of IconixGroup.
On a combined basis, the increase in revenues in 1999 was primarily the result
of an average revenue growth at the acquired businesses of approximately 75%
based on an increase in both billing rates and headcount, offset by the
divestiture of an operating division. On a pro forma basis, revenues for the
year ended December 31, 1999 were $79.0 million, as revenues from the divested
operating division have been excluded.
Gross Profit. Gross profit increased $5.7 million from $3.6 million in 1997
to $9.4 million in 1998 and $305,000, or 3.3%, to $9.7 million in 1999. On a
combined basis, gross profit increased $7.7 million, or 39.7%, from $19.4
million in 1998 to $27.1 million in 1999. On a historical basis, gross profit
as a percentage of revenues remained constant at approximately 19.0%. On a
combined basis, gross profit as a percentage of revenues increased from 28.2%
in 1998 to 34.1% in 1999 primarily as a result of a higher percentage of
revenues derived from web services, which realize a higher gross profit as a
percentage of revenues. On a pro forma basis, gross profit for the year ended
December 31, 1999 was $27.0 million, as gross profit from the divested
operating division has been excluded.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.5 million from $689,000 in 1997 to $3.2
million in 1998 and $2.0 million, or 63.7%, to $5.2 million during 1999. On a
combined basis, selling, general and administrative expenses increased $9.8
million from $12.9 million in 1998 to $22.9 million in 1999. On both a
historical and combined basis, selling, general and administrative expenses as
a percentage of revenues increased. The increases are due to increased
management and infrastructure to support both increased activities at Sprint in
1998 as well as our operations as a whole post-acquisition in 1999. On a
combined basis, selling, general and administrative expenses include stock and
special compensation charges in 1999 in the amount of $3.5 million. On a pro
forma basis, selling, general and administrative expenses during the year ended
December 31, 1999 were $20.1 million and exclude $141,000 in costs from the
divested operating division and $2.7 million of stock-based and other special
compensation costs incurred by the acquired companies upon their respective
acquisitions.
Depreciation and Amortization. Depreciation and amortization remained
consistent at approximately $25,000 in 1997 and 1998 and increased to $1.9
million in 1999, representing amortization of goodwill and other identifiable
intangibles resulting from the acquisitions, as well as additional depreciation
and amortization from the acquisitions. On a pro forma basis, depreciation and
amortization was $30.3 million during the year
32
ended December 31, 1999, representing a full year of amortization of goodwill
and identifiable intangibles, assuming all of the acquisitions occurred as of
January 1, 1999.
Loss on Divestiture of Operating Division. Loss on divestiture of an
operating division of $419,000 in the year ended December 31, 1999 represents
costs incurred related to the termination of certain employment agreements in
1999 as a result of selling the assets of an operating division. This amount
has been adjusted in the pro forma results of operations.
Dividends on Convertible Preferred Stock. Dividends of $2.2 million in 1999
relate to the convertible preferred stock issuance in August 1999. On a pro
forma basis, dividends on preferred stock were $10.9 million during the year
ended December 31, 1999, representing additional dividends assuming all stock
issuances took place as of January 1, 1999.
Liquidity and Capital Resources
Since our inception in 1995, we have financed our business primarily with
cash from operations. We paid for our acquisitions through borrowings under the
credit facility described below, the sale of common and preferred stock under
two equity purchase agreements and the issuance of convertible, subordinated
notes payable. For details on these transactions, see the discussion of the
sale of common and preferred stock and the terms of the convertible,
subordinated notes payable under the section of this prospectus captioned
"Related Party Transactions." As of March 31, 2000, we had $4.6 million in cash
and cash equivalents.
In August 1999, we entered into a secured loan agreement with two commercial
lenders, providing a credit facility of up to $40.0 million and maturing in
August 2004. Borrowings under the facility were used as payment for redemption
of treasury stock, the acquisitions and for working capital purposes.
Outstanding borrowings under the facility bear interest, at our option, at the
lender's base rate plus a defined percentage or LIBOR plus a defined
percentage. In addition, a commitment fee on the unused facility is charged on
a quarterly basis. The credit facility includes restrictive covenants, which
require us, among other things, to maintain minimum levels of earnings before
interest, taxes, and depreciation and amortization, or EBITDA, ratios of total
debt to EBITDA, total debt to capitalization, and place limits on capital
expenditures. We intend to repay amounts outstanding under the credit facility
with the proceeds of the offering. As of March 31, 2000, borrowings on the
credit facility were equal to $13.8 million, and the amount of the unused
facility was $25.2 million. Banc of America Securities LLC, an affiliate of
Bank of America, N.A., one of the commercial lenders, is also one of the
representatives of the underwriters for this offering.
Net cash provided by operating activities increased in the three months
ended March 31, 2000 to $1.6 million from $1.2 million in the three months
ended March 31, 1999, primarily as a result of timing of payment of accounts
payable offset by cash receipt of accounts receivable. Net cash provided by
operating activities decreased in the year ended December 31, 1999 to $5.7
million from $5.0 million in the year ended December 31, 1998, due primarily to
the decrease in net income before depreciation and amortization and the
increase in payment of accounts payable and accrued expenses, offset by cash
receipts on accounts receivable. Net cash provided by operating activities
increased in the year ended December 31, 1998 to $5.0 million from $2.0 million
in the year ended December 31, 1997, due primarily to the increase in net
income and the deferral of accounts payable, offset by an increase in accounts
receivable.
Net cash used in investing activities increased to $42.0 million during the
three months ended March 31, 2000 from $34,000 during the three months ended
March 31, 1999, primarily due to the three acquisitions completed in 2000, as
well as construction activity on new office space being leased in Bethesda,
Maryland. Net cash used in investing activities increased in December 31, 1999
to $20.4 million from $78,000 in December 31, 1998 and $53,000 in December 31,
1997 as result of the IconixGroup acquisition.
Net cash provided by financing activities increased $45.1 million during the
three months ended March 31, 2000 to $43.6 million from $1.5 million used
during the three months ended March 31, 1999, primarily due to
33
issuance of common and preferred stock in 2000, as well as borrowings under the
credit facilities. Net cash provided by financing activities increased in 1999
to $14.9 million from net cash used in financing activities in 1998 of $4.8
million, as a result of borrowings under the credit facility, the issuance of
common stock and the issuance of convertible preferred stock, all offset by
debt repayments and the redemption of treasury stock. Net cash used in
financing activities in 1998 increased to $4.8 million from $1.5 million due
primarily to increased distributions paid in 1998.
On a historical basis, capital expenditures were $1.4 million, $656,000,
$78,000 and $53,000 in the three months ended March 31, 2000, and the years
ended December 31, 1999, 1998 and 1997, respectively. Total capital
expenditures for 2000 are expected to be approximately $5.5 million, consisting
primarily of construction costs incurred related to newly leased office space
in Bethesda, Maryland, computer equipment purchased in relation to revenue
generation and the new management information system and operating
infrastructure currently being implemented.
We have issued letters of credit under the credit facility in the aggregate
amount of $1.0 million as guarantees under current and future office space and
construction.
We believe that our current cash and cash equivalents, together with cash
generated from operations combined with available borrowings under the credit
facility, and without giving effect to the initial public offering, will be
sufficient to meet our foreseeable working capital needs for at least the next
12 months. If, however, our cash needs change as a result of our desire to
pursue additional acquisitions, accelerate our growth or otherwise, we may
require additional financing to fund operations, capital expenditures for
expansion and acquisitions. As part of our growth strategy, we are continually
evaluating and engaging in discussions with acquisition candidates. There can
be no assurance that any of these discussions will lead to acquisitions.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement of Financial Accounting
Standards No. 133, as amended, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000, and management has not yet determined its
effect on our financial statements or disclosures.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB No.
101"), "Revenue Recognition in Financial Statements", which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. This bulletin outlines the basic criteria that
must be met to recognize revenue and provides guidance for disclosure related
to revenue recognition policies. In March 2000, the SEC issued SAB No. 101A--
Amendment: Revenue Recognition in Financial Statements ("SAB No. 101A") which
amends the transition provisions of SAB No. 101 until the second fiscal quarter
for registrants with a fiscal year beginning after December 15, 1999. We will
apply the accounting and disclosures of SAB No. 101 during the fiscal quarter
ending June 30, 2000. Our management believes that the impact of SAB No. 101
and SAB No. 101A will not have a material effect on our financial position or
results of operations.
34
BUSINESS
Overview
We are a leading end-to-end e-business solutions provider focused on
leveraging broadband, wireless and other emerging technologies to enhance our
clients' businesses. We deliver comprehensive, high-quality e-business
solutions that capitalize on the interdependency of user experience, mission-
critical business applications and robust network infrastructure to enhance
value in online business. Our services include e-business strategy and
planning, user experience, business functionality and network infrastructure.
These services, combined with our deep expertise in wireless and broadband
technologies, enable us to create dynamic, media-rich and scalable e-business
solutions for our clients that allow them to increase speed to market and
e-commerce activity. We enjoy long-standing relationships with our clients, who
range from the Global 1000 to emerging growth companies.
Because organizations generally find it more efficient for one firm to serve
as the single source providing all of these services, we believe that our end-
to-end services provide us with a competitive advantage in the marketplace. As
a part of our e-business strategy and planning services, we assist our clients
in developing e-business models, web channels and Internet strategies, and
designing business processes and network architectures. Our user experience
services include branding and web design to create an engaging experience for
our client's customers. To provide each client with an e-business solution that
supports its Internet strategy and provides a compelling user experience, our
business functionality services include the development and integration of
custom-designed applications, commercially available software packages and
legacy applications that allow users to access data and execute transactions
over the Internet. Our network infrastructure services include the planning,
designing and implementing of server and network architectures that support
transaction-intensive applications, integrate a client's e-business solutions
with its existing network and deliver wireless and broadband content.
We manage the delivery of these services using a collaborative approach
within our cross-functional teams that is designed to create business value by:
. implementing a state-of-the-art solution that is aligned with the
client's business strategy;
. accelerating the deployment of the solution;
. integrating the solution with the client's existing business practices
and processes;
. offering the client a secure, reliable and scalable solution; and
. preserving the flexibility to modify the solution to allow the client to
deploy emerging technologies faster than its competitors.
Industry Background
The broad adoption of the Internet as a new channel of communication and
commerce is redefining and fundamentally changing the economics of business and
the interactions among merchants, customers, employees, suppliers and
distribution partners. To compete in this changing environment, organizations
are seeking solutions that will allow them to use the Internet to decrease the
time it takes to get their products and services to the market, expand their e-
commerce activity, realize process efficiencies and enhance their brand
awareness. As a result, organizations are demanding a full range of e-commerce
capabilities, network services and customer relationship and supply chain
management applications.
The recent evolution of the communications and Internet infrastructure has
heightened the level of sophistication users demand of Internet applications.
The emergence of wireless applications and devices and broadband technologies
is producing a fundamental change in the types of e-business solutions
organizations require. As a result, today's e-business solutions are becoming
increasingly complex and need to be more flexible and scalable to take
advantage of new market opportunities.
35
Users' demand for access to Internet content has grown to the point where an
increasing number of users demand anytime, anywhere access without having to
sit at their computers. Improved wireless networks and coverage have increased
due to recent advances in wireless technology that provide users with the
ability to access the Internet through new devices such as web-enabled cell
phones, personal digital assistants, or PDAs, and other handheld devices. In
addition to consumer applications which allow wireless access to stock quotes,
restaurant reviews and driving directions, businesses are increasingly using
wireless devices to allow employees and customers to access corporate databases
and applications remotely. To meet this demand, the Gartner Group has estimated
that by 2004, 70% of new wireless phones and 40% of new PDAs will use wireless
technology to provide users with direct access to web content and enterprise
networks.
This rising demand for wireless access to the Internet is forcing
organizations to significantly alter the way they interact with users. To
provide compelling interaction through wireless devices and applications,
organizations require e-business solutions that balance the speed of content
delivery with the complexity and functionality of the content provided. Because
of the limited display sizes of most wireless devices, wireless solutions must
reconfigure and customize data for each user and device. In addition, the
solutions must be adaptable to meet the challenges presented by the growing
variety of wireless devices, each of which employs a distinct display format.
Moreover, as wireless Internet traffic and transaction activity increase, e-
business solutions must be reliable and have strong access control and
security.
In addition to the increased demand for expanded access to the Internet,
users are requiring dynamic, media-rich content, such as real-time audio and
streaming video, as well as the ability to execute more complex e-commerce
transactions. This evolving user requirement has created increasing demand for
greater bandwidth access, commonly referred to as broadband, which in part has
helped to spur new market opportunities. Organizations require more advanced
broadband technologies with the capabilities to deliver media-rich content and
complex e-commerce transactions. Delivering dynamic, media-rich content and
applications requires geographically distributed computer systems connected by
broadband networks to create a reliable and scalable infrastructure. Before
integrating broadband capabilities into their existing systems, however,
organizations face several challenges. Organizations frequently lack a thorough
understanding of emerging broadband technology and how it can best be used to
deliver compelling content to their customers. In addition, they must be able
to evolve their existing infrastructures not only to facilitate delivery of new
media-rich applications and complex transactions, but also to integrate them
with their existing offerings.
Compounding the difficulty of capitalizing on the emerging technologies in
today's market, such as wireless and broadband, organizations are further
handicapped by a shortage of high quality, experienced technical professionals.
Given this shortage, many organizations lack the resources and in-house
technological expertise to design and deliver e-business solutions.
Organizations are focusing on their core businesses to increase their speed to
market and better manage their total costs. As a result, they are increasingly
relying on third-party Internet professional service firms to provide the
knowledge and technical expertise necessary to design, develop, implement and
integrate e-business solutions. International Data Corporation has estimated
that the market for Internet and e-commerce services worldwide will grow from
$7.8 billion in 1998 to $84.3 billion in 2003.
Despite the size of this market opportunity, there are relatively few
Internet professional services firms that can design, develop and deliver
comprehensive e-business solutions that integrate and utilize wireless and
broadband technologies. These end-to-end solutions providers must provide a
balanced suite of service offerings, from user experience to extensive
technical network architectures. To capitalize on today's wireless
technologies, e-business solutions providers must be able to balance the speed
of content delivery with the provision of compelling content, which is often
difficult because of the limited space in wireless device display areas. At the
same time, these providers must offer broadband solutions that can be
successfully integrated with today's existing network architectures, while
retaining the ability to deliver media-rich content to users. As a result,
today's e-business solutions providers must not only offer end-to-end solution
capabilities, but also address the challenges that arise with wireless,
broadband and other emerging technologies.
36
The Iconixx Solution
Iconixx is a leading e-business solutions provider focused on leveraging
wireless, broadband and other emerging technologies to enhance our clients'
businesses. We deliver comprehensive e-business solutions that capitalize on
the interdependency of user experience, mission-critical business applications
and robust network infrastructure to enhance value in online businesses. Our
formula for client success is based on the following key principles, which we
apply to each client engagement:
Comprehensive Services
We offer our clients comprehensive, end-to-end e-business services,
including extensive capabilities in wireless and broadband technologies. These
services help our clients develop and execute their Internet strategies to
transform their businesses. Our services include e-business strategy and
planning, user experience, business functionality and network infrastructure.
The knowledge and expertise we possess in the emerging broadband and wireless
technologies enhances our ability to provide cutting-edge solutions.
Deep Expertise in Wireless and Broadband Network Technologies
We have created our total solution with a focus on the design, development
and delivery of scalable networks that not only can meet clients' current
needs, but also can support next generation developments, including wireless
and broadband content and applications. We gained our ability to deliver these
cutting-edge solutions from our intimate involvement in building advanced
network infrastructures and enabling technologies for our clients in the
telecommunications industry. Our in-depth knowledge of network architectures
helps us integrate emerging technologies into existing systems and enables us
to develop complex, media-rich applications and content.
Integrated Delivery of Solutions
We deliver our solution for each engagement through a cross-functional team
of strategists, creative designers, technical experts and network architecture
specialists using a collaborative approach. By utilizing our Insight
methodology and leveraging our strength across the entire spectrum of e-
business solutions, we believe our balanced approach to client engagements
ensures that clients receive the optimal solution for their needs. We believe
that this integrated approach allows us to deliver comprehensive e-business
solutions that can be integrated seamlessly and quickly, increasing the
client's speed to market and providing a single point of accountability for the
engagement. To facilitate the integration of the solution, we use an engagement
manager for each transaction who ensures overall client satisfaction, maintains
client relationships, coordinates the efforts of our professionals and serves
as the primary contact person for the client.
Proven Frameworks and Methodologies for Reliable Solutions
By following an experience-based engagement methodology and leveraging the
skills of our project team members, we can rapidly deliver solutions that
satisfy our clients' needs. Our system of knowledge management enables us to
leverage the institutional knowledge of team members to hold best practices,
lessons learned and reusable frameworks. In addition, through our centers of
excellence program, our strategy, creative, technical and network engineering
professionals exchange ideas within a variety of online and in-person forums.
We believe our approach creates not only a speed to market advantage for our
clients but also ensures consistent delivery quality of our solutions and
enhances our ability to integrate new team members efficiently.
Growth Strategy
Our objective is to be a leader in the e-business solutions market by
continuing to deliver high quality, end-to-end e-business solutions utilizing
wireless and broadband capabilities. To achieve our objective, we plan to
pursue the following strategies:
37
Leverage Our Expertise in Wireless and Broadband Technologies
We intend to leverage our knowledge of wireless and broadband technologies
to create more comprehensive e-business solutions. We expect knowledge of
broadband and wireless infrastructures to play an increasingly important role
in the development and delivery of the next generation of e-business solutions.
We have extensive experience providing network infrastructures and enabling
technologies in the telecommunications industry. As a result, we understand
these new infrastructures and technologies and the challenges they present in
terms of the creation of applications and content. This understanding provides
us with a competitive advantage in the delivery of solutions capitalizing on
wireless and broadband technologies. In addition, we intend to enhance our
cutting-edge technical expertise by creating development labs through which we
plan to take advantage of our knowledge of wireless, broadband and other
emerging technologies to build new and innovative networks and infrastructures.
Develop and Expand Client Relationships
We intend to develop and expand our client relationships by providing an
end-to-end e-business service offering to our clients. We also intend to
capitalize on our wireless and broadband expertise by marketing those services
to existing and prospective clients. In addition, we intend to continue to
cross-sell our expertise in different areas as projects evolve. For example, we
are actively marketing the knowledge and skills of our network architecture
consultants to clients who have engaged us initially only to provide services
related to e-business strategy and web design.
Attract and Retain Experienced Professionals
We intend to continue to attract and retain experienced professionals in the
areas of business strategy, design, development and programming, network
architecture, engagement management and emerging technologies. In today's
competitive hiring environment, we believe our ability to attract and retain
skilled technical professionals depends on our ability to provide opportunities
to work on cutting-edge, highly challenging projects, our commitment to ongoing
professional development and our ability to maintain a culture that motivates,
recognizes and rewards outstanding work and professionalism. To communicate our
message to potential hires, we plan to utilize our growing internal recruiting
team, our employee referral program and our access to external resources
including web sites, placement agencies and advertising programs.
Pursue Selective Acquisitions
We intend to pursue selective acquisitions to provide us with increased
geographic coverage, closer proximity to our clients and a larger pool of
experienced technical professionals. We will evaluate potential acquisition
candidates based on their skills and experience, client relationships, cultures
and ability to be easily integrated into our existing organization.
Build Brand Awareness
We intend to create brand value for Iconixx by promoting client successes
and through aggressive sales and marketing. We are concentrating on increasing
visibility and awareness within target audiences of current and prospective
clients, employees and industry opinion leaders. Our marketing efforts include
national advertising, public relations efforts and executives' speaking
engagements. We believe that as awareness of the Iconixx brand grows, we will
be able to shorten our sales cycle by leveraging our reputation in the
industry. In addition, we believe that a strong brand will help us to attract
and retain qualified strategy, creative, technical, network engineering and
management professionals.
38
Services
With clients taking on increasingly large and mission-critical projects, our
comprehensive solution has evolved to include a broad range of e-business
service offerings that we believe is rare in the market today. Our end-to-end
solutions concentrate on:
. strategy and planning;
. user experience;
. business functionality; and
. systems infrastructure.
We believe that our end-to-end offerings provide us with a competitive
advantage because organizations generally find it more efficient for one firm
to serve as the single source providing all of these services. As a result, we
believe that our balanced expertise across each area differentiates us from our
competitors.
[GRAPH]
Iconixx Services
- -------------------------------------------------------------------------------
STRATEGY AND PLANNING
E-Business Technology Planning Business Process Planning
- -------------------------------------------------------------------------------
USER EXPERIENCE BUSINESS FUNCTIONALITY SYSTEMS INFRASTRUCTURE
- -------------------------------------------------------------------------------
Branding Application Development Broadband
- -------------------------------------------------------------------------------
Information Architecture Business Application
Integration Wireless
- -------------------------------------------------------------------------------
Interface Design Database Modeling Enterprise Implementation
- -------------------------------------------------------------------------------
Experience Engineering Back-Office Applications Systems Architecture
- -------------------------------------------------------------------------------
Systems Integration
- -------------------------------------------------------------------------------
Performance Modeling
- -------------------------------------------------------------------------------
Strategy and Planning
Successful Internet strategies address the interplay between corporate
strategy and technology. We begin engagements by working with our clients to
understand their markets and business opportunities. Our consultants consider
how technology enables and constrains business models, corporate brands and
relationships our clients have with their customers, suppliers and employees.
To ensure that the solutions we deliver to our clients support their overall
strategic vision, we assist our clients in developing e-business models, web
channels and Internet strategies. In addition, we assist clients in defining
business processes and technology architectures.
User Experience
Public perception of organizations is increasingly shaped by the experiences
and messages the organizations deliver over the Internet. Accordingly, when
designing web sites, Intranets and other multimedia presentations, we assign
great importance to creating an engaging experience for our clients' customers.
Our user experience services include branding, a practice in which we design
graphics intended to exemplify our client's electronic corporate identity. With
our interface design service, we create visually compelling web sites employing
logical information architectures and content mapping to enable intuitive
navigation. Through our user experience engineering services, we customize the
presentation of information on our clients' web sites consistent with their
branding and functional objectives. In addition, many of our clients also
engage us to support our user experience services with our off-line/print
business.
39
Business Functionality
We recognize that our creative efforts to build a positive user experience
are inextricably linked with the functionality of the solutions we deliver. To
provide our clients with a solution that supports their business strategies, we
combine our user experience services with development of business applications
designed to allow users to access data and execute transactions with our
clients over the Internet. Our business functionality services include the
development and integration of custom-designed applications, commercially
available software packages and legacy applications. By creating custom
applications or integrating software packages, we deploy business applications
such as customer relationship management, sales force automation and business
intelligence. Our database modeling expertise allows our teams to create highly
customized and context-driven applications. In addition, we integrate customer
and partner-facing applications with traditional back-office applications. This
range of abilities allows us to effectively deliver the business functionality
required to create a complete e-business solution.
Network Infrastructure
Creating a positive user experience requires careful planning and
construction of architectures that integrate the client's e-business solution
with its existing networks and systems. Our engineers have extensive experience
in developing infrastructures that are reliable, robust and redundant. We
provide our clients with a wide range of Internet engineering services,
including enterprise implementation, network architecture integration and
performance modeling. Our skills include planning, designing and implementing
server and network architectures that support transaction-intensive database
applications and the delivery of wireless and broadband content. We expect
knowledge of wireless and broadband infrastructures to play an increasingly
important role in the development and delivery of the next generation of e-
business solutions.
Our Client Engagement Approach
Our client engagement approach forms the backbone of our delivery of e-
business solutions to our clients. We developed our approach on the premise
that prospective clients desire to create business value by achieving the
following key objectives through their e-business initiatives:
. implement a state-of-the-art solution that is aligned with the client's
business strategy;
. accelerate the deployment of the solution;
. integrate the solution with the client's existing business practices and
processes;
. offer the client a secure, reliable and scalable solution; and
. preserve the flexibility to modify the solution to allow the client to
deploy emerging technologies and functionality faster than its
competitors.
Project Management
We believe that the design, development and delivery of e-business solutions
require constant communication between our clients and our technical
professionals. To maximize the efficiency of this constant communication, our
project teams are led by an engagement manager who serves as the single point
of accountability for the client. The engagement manager ensures overall client
satisfaction and maintains our long-term relationship with the client. The
engagement manager communicates with the client about all aspects of the
engagement, including discussing the scope, cost and schedule issues that arise
during the course of our work. In addition, the engagement manager obtains
feedback from the client regarding our work in progress and serves as the
liaison between the client and our cross-functional teams.
We also assign an interactive director to each of our project teams to
oversee its creative professionals, which generally consist of designers,
information architects and branding consultants. Using design expertise and
creative skills, the interactive director balances the various graphical,
navigational and technical
40
considerations to maximize the brand value and ease of navigation for the
solution we are providing. We believe that our project management approach
allows us to:
. focus the engagement manager on client interaction to ensure constant
alignment of client expectations with our project planning and technical
considerations;
. maintain a constant focus on overall design strategy and the desired user
experience;
. provide efficient coordination of all phases of the project;
. ensure the project remains on-schedule and on-budget;
. identify additional services that we may provide to our clients; and
. increase client satisfaction.
Insight Methodology
Our proprietary Insight methodology enables our project teams to understand
and plan for the complete life-cycle of each client engagement. This
methodology, beginning with the strategy phase and continuing through the
solution deployment and evolution phases, provides project teams with an
understanding of the interdependencies of all elements of engagements from
design to technical architecture. Our engagement managers work with each client
in the definition phase to clearly delineate the specific tasks and objectives
for both the Iconixx team and the client and to streamline the course of the
engagement. Understanding the entire life-cycle, coupled with our flexibility
to enter engagements at any stage, provides our project teams with the ability
to move quickly through the delivery process and the ability to effectively
address each client's needs. Additionally, the life-cycle perspective of our
Insight methodology ensures constant delivery quality and facilitates our
integration of new team members as we continue to grow.
Our Insight methodology consists of several components that we apply to each
client engagement. The following chart shows a graphical representation of the
various components:
[GRAPH APPEARS HERE]
[The chart shows a graphical representation of the various components of our
methodology. Those components are each represented within a series of black
boxes connected with lines and arrows. On the left side of the chart, the
first box represents define and is connected with three lines to the next
three components labeled architect, develop and integrate.
There are small arrows connecting architect, develop, integrate and test,
deploy and evolve. Integrate and test are represented with a circular graphic
illustrating the iterative process of the integrate and test components of
our methodology.]
Define. We begin each engagement with an in-depth working session with the
project team to understand market factors, business drivers, desired results,
business processes and business opportunities. Our consultants consider how
technology enables and constrains business models, corporate brands and the
relationships clients have with their customers, suppliers and employees. Tasks
in subsequent phases are integrated into the working plan in a pragmatic way,
which balances the needs of the client, the project timeline and the
deliverable quality. Starting with define, our methodology provides for
multiple points of entry into each phase.
Architect. Once the objectives and desired results are in place, our team of
strategists, designers, developers and engineers creates a detailed plan
outlining the interdependencies of the user experience, business functionality
and infrastructure. This plan outlines the delivery schedule and the technical
requirements, as well as initial design concepts, for the solution. The result
is a comprehensive design and technology vision for the engagement.
Develop. We have developed expertise in rapidly developing and delivering
prototypes of our proposed solutions to help our clients visualize the look and
feel, functionality and overall user experience. To enable our clients to
visualize their solutions very early in the development process, we use rapid
prototyping techniques
41
including wireframe models, storyboards, use cases and logic trees. Because our
engagement managers communicate with our clients about each prototype
delivered, our clients are integral to the development process and provide
critical feedback to enhance the solutions we deliver. After delivering a
functional prototype, we continually enhance the solution through a process we
refer to as "protocycling," in which we deliver to clients a rapidly developed
series of upgrades to the proposed solution that provide increasing levels of
functionality for review by our clients.
Integrate. As the project progresses, various elements each in development
must be brought together to form the complete solution. In addition to
connecting the design and branding elements to underlying applications and
source code, the client's desired business applications must also be integrated
with its existing databases, systems and networks. This integration is a vital
step in the creation of robust e-business solutions and requires constant
testing and performance evaluation to ensure viability.
Test. As each iteration of development is complete, we test the resulting
system for functionality, performance and scalability. Testing may also include
focus groups of target users or other methods to evaluate responses to the
solution's design and navigation concepts. Ultimately, being able to evaluate
performance at various stages of an engagement before it is deployed helps us
to create reliable, scalable solutions and increase client satisfaction.
Deploy. Once the project is ready for deployment, the delivery team works
closely with the client to secure an appropriate production environment. A
secure transition of the solution to an internal or external production
environment is essential in a timely launch of the solution. Our team works
closely with the client during this transition phase and conducts all necessary
training for ongoing maintenance processes. Additionally, our team also works
with the client throughout the rollout of the solution to create a successful
launch.
Evolve. After the solution is deployed, our engagement manager works with
the client to measure success and create a plan for ongoing development
requirements. This plan provides for the evolution of the solution through
future enhancements that might add business functionality, implement broadband
or wireless applications, incorporate new technologies or modify infrastructure
requirements. Our team also conducts an internal project review to capture
lessons learned, best practices and experiences with new technologies for our
corporate knowledge repository.
Knowledge Management
Through the development of hundreds of e-business solutions, we have gained
expertise and knowledge on issues ranging from branding trends to application
standards. We have created systems for knowledge management that currently
utilize our corporate intranet and existing databases. These systems include an
electronic filing cabinet with project histories, technologies used and contact
information. In addition, our intranet provides access to white papers
developed by our technologists and a library of reusable frameworks to assist
in the development of specific applications. To make our shared experiences
more widely available, we are evolving this system into a fully-automated,
searchable knowledge repository that will house detailed project case studies,
best practices and lessons learned from past experiences. This repository will
provide us the ability to continue to grow and support new team members with
the benefit of our prior work experience.
We are developing a cutting-edge development lab that will constitute
another essential element of our knowledge management initiative. A vital
aspect of the lab will be a wireless and broadband content delivery testing
center for use in evaluating various technologies and applications that must
adapt to the proliferation of personal computing devices. Additionally, the lab
will be equipped with a network center that can support the validation of
systems performance and availability models for large-scale distributed network
architectures.
Through our center of excellence program, a company-wide initiative that
combines formal training and development programs with an online community
provides personal support to professionals in each of the
42
various disciplines within Iconixx, we enhance knowledge sharing and creative
and collaborative problem solving. This program affords new staff members the
ability to enhance their capabilities by working with experts in various
emerging technologies, it also creates a virtual professional community to
share information, discuss trends, establish corporate standards and identify
resources required to maintain our competitive edge.
Sales and Marketing
We market and sell our services to organizations that are introducing,
repositioning or expanding their e-business capabilities. We work to align our
sales and marketing activities with our organizational strengths, particularly
in those vertical industries for which we have developed significant expertise,
and we conduct these activities on both national and regional-office levels. In
addition, we work with many of the industry's leading technology providers,
including Asera, Versata, pcorder.com and Trilogy. These partners provide us
with a steady stream of lead generation and sales support for quality
engagements.
As of April 30, 2000, we had 34 sales and marketing professionals. We are
continuing to build a high-quality sales and marketing organization. These
professionals understand the complexity and urgency of each prospective client
engagement and the range of services we can offer through our end-to-end
solution. Our quota-driven sales approach relies on sales teams, as opposed to
individuals, to market and sell our end-to-end services. Corporate-level sales
activities include strategy and forecasting, handling of national and
international accounts, strategic-partner programs and maintenance of the
corporate proposal database. Specific lead-generation and qualification,
negotiation, contracting, and sales-support activities are managed at the
regional-office level. To increase our percentage of winning proposals, we
assign cross-disciplinary capture teams to develop sales strategies, conduct
background research and develop proposals tailored to the prospective client's
needs.
Our corporate marketing efforts are focused on building the Iconixx brand
and raising awareness of our firm, capabilities and clients. Corporate-level
activities include national advertising, industry analyst and media relations,
corporate web site management, trade show presence, executive speaking
engagements and collateral development. Regional-office marketing efforts
include participation in local media outreach, local networking events and
recruitment advertising.
Clients
We enjoy long-standing relationships of more than five years with our
clients, which range from Global 1000 companies to emerging growth companies,
most of which engage us for more than one project. We have significant
experience in four vertical industry segments: telecommunications, financial
services, energy and utilities, and information technology/dot-coms. During
1999, on a pro forma basis giving effect to our recent acquisitions, we derived
approximately 57.4% of our revenues from Sprint. If we were to lose Sprint as a
client, our revenues and operating results would significantly decline.
The following is a representative list of our clients:
Adelphia Communications GEICO Corporation Redbricks.com, LLC
Cable and Wireless USA, GE Information Services Riggs Bank, NA
Inc. Host Marriott Sallie Mae, Inc.
Columbia Energy Group Corporation Schlumberger, Ltd.
Corvis Corporation IDG World Expo N.F. Smith &
Crestline Capital The Loewen Group Associates, LP
Corporation Marriott International, Sprint
Dealer Solutions, LLC Inc. TotalFinaElf
DXP Enterprises, Inc. Novartis Crop URHere.com
Fannie Mae Protection USWest Information
Financial Passport, One World Networks Technologies
Inc. Potomac Electric Power Wrenchead.com, Inc.
Friedman Billings Company
Ramsey
43
Case Studies
Sprint
Challenge: Sprint, a global telecommunications company serving more than 20
million businesses and residential customers, desired to develop a single
intelligent network to provide customers with high-speed Internet access as
well as integrated voice, video and data services. Sprint also wanted to equip
this network with tools allowing customers to allocate bandwidth dynamically to
meet their changing needs according to a usage-based fee structure.
Iconixx Solution: Sprint engaged us to assist in the design, development and
testing of this next-generation, Integrated On-Demand Network, or ION. We
developed and deployed an ION solution characterized by "dial-tone" quality and
capable of meeting the highly demanding operational parameters of the
telecommunications industry. Our solution achieved Sprint's scalability,
availability and throughput requirements. Specifically, we designed and
developed an integrated network-management framework, based on a multi-tiered
architecture featuring distributed databases and objects and deployed over
hundreds of operational nodes.
Our involvement in ION, which began during the technical-concept definition
phase, is ongoing and expanding beyond network technology-intensive services.
Sprint has engaged us to develop a web-centric user interface for ION
provisioning, customer support, and maintenance and a web-centric service layer
above their already-built network for composite services on demand such as
rapid video. We are providing interface design, experience-engineering
consultation focused on "look and feel" issues, and assisting as required with
middleware and other software solutions. A second initiative is underway to
develop a customer-facing, web-enabled solution for delivering ION
functionality and capability through Sprint's services and applications
framework. The applications will provide increased customer control for service
provisioning and monitoring. In addition, Sprint has expanded the scope of our
engagement into development of wireless and security applications.
Iconixx Results: ION is the first integrated voice/video/data network
offering made available to businesses, allowing customers to combine many
services into one intelligent system. The network is providing new efficiencies
and capabilities for customers like Communication Supply Corporation, the
largest privately owned communications distributor in the United States, which
estimates that its headquarters and operating units have experienced a 35%
reduction in overall network costs since migrating to ION. Further flexibility
and efficiencies are expected to occur when dynamic bandwidth allocation is
made available in October 2000.
URHere.com
Challenge: URHere.com is an e-travel company whose value proposition is to
provide travelers with relevant and customized information where they need it
and when they need it. URHere needed to solidify its e-business model to
establish itself as a leading e-travel company with strong brand positioning
and compelling web and wireless applications to provide personalized concierge
services and distribution of editorial and advertiser content.
Iconixx Solution: We were selected by URHere because of our combination of
wireless technology expertise and creative skills in the branding area. Using
those skills, we designed and built a functioning "proof of concept" web site
complete with searchable maps and geography-based "electronic concierge
services" that can be accessed through both data-ports and wireless devices.
The site incorporates a branding strategy including a distinctive logo that
supports the URHere customer value proposition and business model. When
launched, this site will allow travelers in unfamiliar environments to receive
pertinent information, make travel selections and build an itinerary based on a
personal profile and up to the minute selection queries.
Iconixx Results: Within three weeks of being awarded the project, we
demonstrated our facility with wireless technologies by building an application
of the URHere concept capable of delivering customized
44
content anytime, anywhere. Through the use of the application we created,
URHere was able to demonstrate their concept to existing and potential
investors and strategic partners.
Redbricks.com
Challenge: Redbricks.com, founded in 1999 by a group of real estate and
mortgage-loan professionals, planned to become a destination portal for
commercial real-estate owners and developers. The Redbricks plan was to
facilitate quick loan structuring through applications to over 20 lenders,
produce property-specific market reports and maps and provide local and
national industry news.
Iconixx Solution: We provided end-to-end e-business services, including
business and technology strategy, including the integration with a proprietary
workflow transaction system, branding, and development of the entire interface
and systems development for the Redbricks web site. Our solution included the
establishment of Redbricks' desired loan marketplace, featuring a proprietary
tracking system developed by ellora.com that keeps borrowers informed of all
lender and service-provider activities until closing; property search;
presentation of third-party, syndicated news and other content; vendor research
capabilities; and user personalization services.
Iconixx Results: In March 2000, the Redbricks web site won the Most
Innovative Commercial Web Site award at the Inman Real Estate Connect 2000
conference. The site has allowed Redbricks to garner the necessary additional
funding to build phase two of its web site with expanded capabilities and to
increase the promotion of the company brand.
Wrenchead.com
Challenge: Wrenchead.com approached us with its vision to build an e-
commerce site for the sale of automotive parts and accessories. Wrenchead
needed to develop a comprehensive e-business plan and corporate identity that
would allow it to attract the capital required to build and expand its web
presence. Once funding was received, rapid web site development and launch
would be required.
Iconixx Solution: We provided an end-to-end e-business solution to
Wrenchead, beginning with strategy planning consultation. Our services included
concept development and competitive analysis, followed by corporate identity
and branding, as well as project planning and funding assistance. After
Wrenchead received an initial venture-capital infusion, we quickly launched a
prototype web site to promote the brand and collect customer information. We
then defined the site functionality, selected technology, and planned the
infrastructure--which was designed to eliminate down time, while leveraging
redundant capacity to improve overall performance.
Iconixx Results: In less than 12 weeks we developed and launched a robust e-
commerce solution, complete with an engaging user interface, customer
registration and personalization, and a database able to accommodate a 300,000-
part inventory cross-referenced to every automobile model manufactured since
1964. Our comprehensive e-business solutions enabled Wrenchead to develop and
attain its business goals, by attracting initial venture-capital funding and
launching an attractive, robust e-commerce web site. Wrenchead has since become
a top online merchant of auto parts and accessories. The company subsequently
received investments totaling over $120.0 million.
People and Culture
We believe our employees embody the intelligence, skills, creativity and
rapid response required to help our clients transform their businesses on the
Internet. As of March 31, 2000 we had 480 professionals, including 80
independent consultants. Our professionals are not represented by a collective
bargaining unit, and we believe our relationships with our professionals are
excellent.
45
Recruiting and Retention
Our ability to attract and retain talented professionals is vital to our
continued growth. We intend to continue to attract and retain experienced
professionals in the areas of business strategy, design, development and
programming, network architecture, engagement management and emerging
technologies. To realize our anticipated future growth, we are aggressively
recruiting professionals who have relevant experience, leading- edge technical
skills and an innovative mindset. We use multiple sources to identify potential
candidates, including Internet career sites, job fairs, professional recruiters
and placement agencies and an employee referral program.
Our ability to retain our employees is strengthened by our culture, clear
career progression, strong financial rewards, including excellent benefits and
stock options, structured job training and effective internal communications.
We place a strong emphasis on continued professional development in areas as
diverse as graphic design trends, new and emerging technologies, management
skills and leadership training. Our training programs are both internal and
external and range from small working groups of experienced technical
professionals who share knowledge of various languages and programs within the
organization to encouraging enthusiastic designers to register for upcoming
national seminars on the latest design trends.
All of these factors, combined with the high caliber of client work, help us
recruit and retain valuable professionals. In addition, we have created skill-
focused centers of excellence in all of our regional locations. The director of
each center is responsible, through internal promotions, transfers and new
hires, for helping to nurture and promote the skills represented by that
center. We believe this program encourages individual career mentoring.
Culture
We describe our culture as "seriously cool," in that we combine the serious
mission-critical business challenges of our clients with a cool and casual work
environment and interpersonal interactions within the company. This creates an
opportunity for our team members to work in a fun, casual environment while
making significant contributions to the success of our clients. At Iconixx,
employees have the opportunity to work on challenging, complex e-business
projects for high-visibility clients. Our employees' develop and deploy
cutting-edge technologies and third-party products, resulting in advanced e-
business solutions.
Our culture supports a wide range of professional interests among our
employees--a natural result of hiring professionals with different skill sets,
interests and personalities. To meet our corporate goal of providing clients
with end-to-end e-business solutions, we employ three distinct types of
professionals: strategists, designers and engineers. They work closely together
in cross-functional project teams to take full advantage of the expertise of
each team member.
We believe our future success depends on our ability to maintain an overall
corporate culture of excellence that accepts and nurtures the development and
growth of employees with a wide range of expertise. We intend to provide a
variety of opportunities for employees to continue developing their skills,
ranging from informal lunchtime classes to attendance at leading industry
conferences, seminars and workshops. In addition, we support after-hours
employee activities that nurture the corporate culture, including company
sports teams and participation in local charitable projects.
Competition
As Iconixx delivers Internet-related solutions meeting a broad range of
client needs, competition in our marketspace is intense. In addition to
prospective clients' internal information systems departments, our competitors
include:
. large systems integrators and outsourcing firms;
. consulting arms of the "Big Five" accounting firms;
46
. network services firms;
. full service e-business solutions providers;
. e-business technology solutions providers; and
. creative e-business solutions providers.
Many of these businesses have longer operating histories and significantly
greater financial, technical, marketing and managerial resources than we do. In
addition, our markets have relatively low barriers to entry. We expect to
continue to face competition from new market entrants. Competition in our
market is based primarily on the following factors:
. Internet expertise and talent;
. quality, pricing and speed of service delivery;
. client references;
. integrated strategy, technology and creative design services; and
. vertical industry knowledge.
Many of these competitive factors are outside of our control. These factors
include our competitors' hiring and retention of senior staff, development of
software that is competitive with our products and services and response to
client needs.
Based on our skills, the projects that we have built, feedback and
references from satisfied clients, our engagement approach and our
methodologies, we believe we compete favorably.
Intellectual Property
Our success is partially dependent upon our leading-edge proprietary
technology and information. We rely upon a combination of copyright, trademark
and trade secret laws and confidentiality procedures to protect our proprietary
technology and information. We generally enter into nondisclosure agreements
with our employees, contractors, consultants, distributors and corporate
partners and limit access to and distribution of our software, documentation
and other proprietary information.
In our normal course of business, we develop software applications for
specific client engagements. From time to time, we sell ownership of the
software to the client on completion of the engagement, although we generally
retain a license for limited uses. Issues relating to ownership of and rights
to use software applications and frameworks can be complicated. We may become
involved in disputes that affect our ability to sell or use similar
applications and frameworks we created for particular clients. A successful
claim could subject us to significant liability that would have a material
adverse effect on our liquidity and capital resources. In addition, even the
successful defense of a claim could require us to incur substantial costs and
result in diversion of our management's efforts and damage to our brand
perception by our clients.
In addition, we sometimes agree to enter into contracts which contain
restrictive provisions that prohibit us from performing the same or
substantially similar services or developing similar products for our clients'
competitors. These restrictive provisions generally last for the term of our
contract and may remain in effect for up to two years after the completion of
the project. These restrictive provisions reduce the number of our prospective
clients and our sources of revenues.
Facilities
Our executive offices are currently located at 8300 Boone Boulevard, Vienna,
Virginia. Our main office is located in approximately 80,000 square feet of
leased office space in Bethesda, Maryland. We anticipate
47
moving our executive offices to this space in 2001. Our lease in Bethesda has a
term of seven years and expires in 2007. We maintain additional offices in
Bethesda, Maryland; New York, New York; Atlanta, Georgia; Austin and Houston,
Texas; Kansas City, Kansas; Denver, Colorado; Los Angeles and San Diego,
California; and Paris, France. We lease all of our office space in each of
these cities. We expect that we may need additional space as we expand our
business. We believe that we will be able to obtain additional space as needed.
Legal Proceedings
There are no material pending legal proceedings to which we or any of our
subsidiaries are a party or of which any of our property or any property of any
of our subsidiaries is the subject.
48
MANAGEMENT
Directors, Executive Officers and Key Employees
The following table shows information about each of our directors, executive
officers and key employees as of April 30, 2000.
Name Age Position
Stuart C. Johnson............... 57 Chairman, President, Chief Executive
Officer and Director
Graham B. Perkins............... 51 Vice President, Chief Financial Officer,
Secretary and Treasurer
President of Network Architecture and
John R. McDougall............... 60 Consulting
Leo C. Mullen................... 51 President of Eastern Region
D. Derrik Deyhimi............... 33 President of Western Region
David T. Fu..................... 43 Vice President of Business Development
Jason H. Levine................. 33 Vice President, General Counsel and
Assistant Secretary
Thomas B. Modly................. 39 Vice President of Corporate Development
Matthew B. Walker............... 39 Vice President and Chief Technology Officer
William K. Stephens............. 56 Vice President of Sales and Marketing
Carolyn T. Jenkins.............. 33 Vice President of Human Resources
Christopher Clark............... 34 Vice President and Chief Business Strategy
Officer
Patricia A. Withers............. 51 Director of Administration and Assistant
Secretary
Carl J. Rickertsen.............. 40 Director
Robert E. Michalik.............. 31 Director
Phillip G. Norton............... 56 Director
Stuart C. Johnson has served as our Chairman, President, Chief Executive
Officer and a director since August 1999. From September 1998 through August
1999, Mr. Johnson was the Chairman, President and Chief Executive Officer of
Empyrean Group, Inc., which we acquired in September 1999. From July 1997
through October 1998, he was a business consultant for S.C. Johnson &
Associates. From April 1995 through July 1997, Mr. Johnson served in a variety
of executive positions at Bell Atlantic and companies affiliated with Bell
Atlantic, most recently as President of Bell Atlantic's Business and
Information Services Group. He also served as Chairman and Chief Executive
Officer of Bell Atlantic Video Services Company and helped found Bell Atlantic
Network Integration Company. Mr. Johnson is a director of PowerCerv Corp.
Graham B. Perkins has served as our Vice President, Chief Financial Officer,
Treasurer and Secretary since August 1999. From September 1998 through August
1999, Mr. Perkins served as Chief Financial Officer, Vice President, Treasurer
and Secretary of Empyrean Group. From January 1993 through September 1998, Mr.
Perkins served in various executive positions at Bell Atlantic and companies
affiliated with Bell Atlantic, including as Vice President of International
Finance and Chief Financial Officer of the International Telecom Group at Bell
Atlantic. He also held roles as Chief Financial Officer of Bell Atlantic
International, Chief Financial Officer of Large Business and Information
Services Group, and Vice President and Chief Financial Officer of Bell Atlantic
Video Services.
John R. McDougall has served as President of our Network Architecture and
Consulting division since August 1999. Mr. McDougall founded Business Solutions
Group, LLC, the predecessor of our company and served as our President from
September 1995 through August 1999. From September 1993 through September 1995,
he was Vice President and General Manager, Information Technology Consulting
for SECOR International, Inc. He also served as Executive Vice President of The
Titan Corporation, a high technology, commercial and government systems
engineering company.
49
Leo C. Mullen has served as the president of our Eastern Region since
November 1999. From May 1994 through November 1999, Mr. Mullen was the
President and Chief Executive Officer of IconixGroup, Inc., which we acquired
in November 1999.
D. Derrik Deyhimi has served as President of our Western Region since April
2000. In March 1997, Mr. Deyhimi co-founded Enterprise Works, LLC, where he
served as President and Chief Executive Officer from July 1997 through March
2000. We acquired Enterprise Works in March, 2000. From January 1995 through
March 1997, Mr. Deyhimi was a director and served as Executive Vice President
and Chief Technology Officer of BSI Consulting, Inc.
David T. Fu has served as our Vice President of Business Development since
August 1999. From November 1998 through August 1999, Mr. Fu served as Vice
President of Empyrean Group. From February 1994 through November 1998, Mr. Fu
was a Managing Director of Galway Partners, LLC, where he was involved in the
formation of new business ventures in the financial and technology industries.
His prior experience also includes business development and management roles at
Bell Atlantic Video Services, Network Management Inc. and IBM.
Jason H. Levine has served as our Vice President and General Counsel since
April 2000, and served as our Vice President of Strategic Projects from August
1999 through April 2000. From September 1998 through August 1999, Mr. Levine
served as Director of Corporate Development for Empyrean Group. From August
1994 through September 1998, Mr. Levine managed his own financial consulting
practice focusing on profitability management for small and medium-sized
entities. Mr. Levine's experience also includes positions at Tucker Anthony and
Merrill Lynch, where he executed debt structuring and refinancing, financial
analysis, investment management, due diligence and securities registration.
Thomas B. Modly has served as our Vice President of Corporate Development
since August 1999. From October 1998 through August 1999, Mr. Modly was the
Vice President of Corporate Development for Empyrean Group. From April 1996
through October 1998, Mr. Modly worked as a strategic consultant for Oxford
Associates, where he advised large companies on sales and marketing strategies.
From June 1992 through April 1996, Mr. Modly was Director of Corporate
Development for UNC Incorporated, where he focused on strategic planning,
corporate development and mergers and acquisitions.
Matthew B. Walker has served as our Chief Technology Officer since August
1999. From February 1999 through August 1999, Mr. Walker was the Chief
Technology Officer of Empyrean Group. From April 1998 through February 1999,
Mr. Walker was Senior Vice President and Chief Technology Officer of 24/7 Media
Inc., where he was responsible for software product development and strategic
sales opportunities. Mr. Walker was also one of the founders of Intelligent
Interactions Corp., an Internet technology firm, and served as its Chief
Technology Officer from February 1995 through April 1998, when it was acquired
by 24/7 Media. Mr. Walker has also held senior level positions with Oracle.
William K. Stephens has served as our Vice President of Sales and Marketing
since November 1999. From April 1995 through November 1999, Mr. Stephens served
as Chief Development Officer of IconixGroup, which we acquired in November
1999. Prior to joining IconixGroup, Mr. Stephens was President and Chief
Executive Officer of PRC Realty Systems, a provider of on-line real estate
information. He has also held senior level and international assignments with
Oracle, Martin Marietta and IBM.
Christopher Clark has served as our Vice President and Chief Business
Strategy Officer since April 2000. From January 1994 through March 2000, Mr.
Clark was Chairman and Chief Executive Officer of Internet Information
Services, Inc., which we acquired in March 2000.
Carolyn T. Jenkins has served as our Vice President of Human Resources since
April 2000. From January 1998 through April 2000, Ms. Jenkins served as the
Vice President of Human Resources and Operations for EnterpriseWorks, which we
acquired in March 2000. From August 1997 through January 1998, Ms. Jenkins
50
was a technical recruiter for Smith & Associates. From April 1996 through July
1997, Ms. Jenkins was a technical recruiter and account representative for
Robert Half, Int'l., an employment contracting agency. From February 1994
through April 1996, Ms. Jenkins worked as an independent contractor assisting
start-up companies with the development of their business and marketing plans.
Patricia A. Withers has served as a Director of Administration and Assistant
Secretary since August 1999. From September 1998 through August 1999, Ms.
Withers was the Director of Administration for the Empyrean Group. From June
1993 through August 1998 she was a Project Manager for Learning Tree
International, a provider of information technology training courses and
products.
Carl J. Rickertsen has served as one of our directors and as a member of our
compensation committee since August 1999. Mr. Rickertsen has been a partner in
Thayer Capital Partners since September 1994. Mr. Rickertsen acted as a private
financial consultant from 1993 through August 1994 and was a partner at Hancock
Park Associates, a private equity investment firm based in Los Angeles, from
1989 to 1993. Mr. Rickertsen currently serves as a director of e-Plus, Inc.,
Global Vacation Group, Inc., Colorado Prime, Inc. and SAGA SYSTEMS, Inc.
Robert E. Michalik has served as one of our directors and as a member of our
audit and compensation committees since August 1999. Mr. Michalik has been a
Vice President at Thayer Capital Partners since August 1996. From August 1995
through August 1996, Mr. Michalik was an associate at UBS Capital Corporation.
Mr. Michalik currently serves as a director of IESI Corporation, Primary
Investors, L.L.C., Renaissance Interactive Holding Corporation and is Chairman
of Bikeshop.com, Inc.
Phillip G. Norton has served as one of our directors and as Chairman of our
audit committee since October 1999. Mr. Norton has served as the Chairman,
Chief Executive Officer and President of e-Plus, Inc. since January 1993.
Nomination of Directors
Some of our stockholders have the right to nominate members of our board of
directors under the terms of a stockholders agreement we entered into with
them. Under the terms of the stockholders agreement, all parties are required
to vote their shares for the nominated directors. These rights terminate upon
the completion of this offering. Specifically, Thayer ITECH Holdings, LLC has
the right to nominate three members to our board of directors, and the
following members of senior management have the right to nominate one member to
our board of directors: Stuart C. Johnson, Graham B. Perkins, Thomas B. Modly,
Jason H. Levine, Matthew B. Walker, Patricia A. Withers, William K. Stephens
and David T. Fu. One position on the board of directors is reserved for our
Chief Executive Officer. The director designees of Thayer ITECH Holdings are as
follows: Carl J. Rickertsen; Robert E. Michalik; and Phillip G. Norton.
As of April 30, 2000, the director nominee of management had not been
selected.
There are no family relationships among any of our directors or executive
officers.
Terms of Directors
Our board of directors currently consists of four directors. Upon completion
of this offering, the board of directors will be expanded to directors and
divided into three classes, with each class serving for a different term of
three years. At each annual meeting of the stockholders, successors to those
directors whose terms are expiring will be elected by our stockholders.
Directors in whose terms will expire in 2001 are , and . Directors
whose terms will expire in 2002 are , and . Directors whose terms
will expire in 2003 are , and .
Committees of the Board of Directors
Our board of directors has established an audit committee and a compensation
committee. The audit committee is responsible for reviewing and supervising the
preparation of our financial statements in cooperation with our independent
public accountants. The members of the audit committee are Phillip G. Norton
and Robert E. Michalik.
51
The compensation committee is responsible for administering our stock option
plan, which is described below, and for reviewing and approving all
compensation arrangements for our executive officers. The members of the
compensation committee are Robert E. Michalik, Carl J. Rickertsen and Stuart C.
Johnson.
None of the members of the audit committee or the compensation committee
perform the same function for any other entity whose executive officers serve
on our board of directors.
Compensation Committee Interlocks and Insider Participation
The three members of our compensation committee are as follows: Robert E.
Michalik, Carl J. Rickertsen and Stuart C. Johnson. Robert E. Michalik is an
officer of Thayer ITECH Holdings and TC Management Partners IV, and Carl J.
Rickertsen is a member of the limited liability company that ultimately
controls both of these companies. As described below in "Related Party
Transactions," Thayer ITECH Holdings entered into a series of agreements with
us in August 1999, including agreements for the purchase of our stock, a
stockholders agreement and a registration rights agreement. A Thayer ITECH
Holdings affiliate, TC Management Partners IV, LLC, also entered into a
professional services agreement with us that requires us to pay quarterly fees
and other fees connected to the completion of debt or equity financings. Stuart
C. Johnson is our Chairman, President and Chief Executive Officer and has
served in those positions since August 1999.
Director Compensation
We currently have no plan for the compensation of our directors. We are in
the process of finalizing a plan to compensate our directors.
Executive Compensation
The following table presents a summary of compensation paid to our chief
executive officer and each of our other four most highly compensated executive
officers whose salary and bonus exceeded $100,000 during the year ended
December 31, 1999. In compiling this table, we have included amounts paid to
these executives as executive officers of the companies we have acquired since
January 1, 1999.
Summary Compensation Table
Annual Long-Term
Compensation Compensation
----------------- ------------
Restricted All Other
Name and Principal Positions Year Salary Bonus Stock Awards Compensation
Stuart C. Johnson(1)(2)....... 1999 $180,000 $ 94,000 -- $29,191
Chairman, President and Chief
Executive Officer
Christopher Clark............. 1999 174,000 208,500 -- --
Vice President and Chief
Business Strategy Officer
Leo C. Mullen................. 1999 285,600 34,000 -- --
President of Eastern Region
William K. Stephens(3)........ 1999 275,000 10,000 $18,750 --
Vice President of Sales and
Marketing
D. Derrik Deyhimi............. 1999 200,000 70,000 -- --
President of Western Region
- --------
(1) As of December 31, 1999, Mr. Johnson held shares of restricted stock
worth $ , assuming only for the purpose of calculating this value that
the value of a share of restricted stock on December 31, 1999 was $ , the
assumed initial public offering price. These shares vest as follows:
52
25% vest following the executive's first anniversary of employment and the
remainder vests at a rate of approximately 2.08% per month for the next
three years. Mr. Johnson holds these shares through his limited partnership
interest in the Stuart C. Johnson Family Limited Partnership. Mr. Johnson's
children, as general partners, share voting and investment power over these
shares.
(2) All other compensation consists of transaction fees paid to Mr. Johnson
pursuant to the Professional Services Agreement between Iconixx and TC
Management Partners dated August 12, 1999.
(3) Mr. Stephens received $18,750 of compensation through his purchase from
the company of 125,000 shares of restricted stock at a per share price of
$0.10 when such shares were deemed to have a fair market value of $0.25
per share. As of December 31, 1999, Mr. Stephens held shares of
restricted stock worth $ , assuming only for the purpose of
calculating this value that the value of a share of restricted stock on
December 31, 1999 was $ , the assumed initial public offering price.
These shares vest as follows: 25% vest following the executive's first
anniversary of employment and the remainder vests at a rate of
approximately 2.08% per month for the next three years.
Option Grants in Last Fiscal Year
No options were granted to, exercised by or owned by any of the named
executive officers during 1999.
Executive Long-Term Incentive Plan
The following table presents information related to restricted common stock
that is subject to performance based vesting purchased by our chief executive
officer and each of our other most highly compensated executive officers whose
salary and bonus exceeded $100,000 during the fiscal year ended December 31,
1999. These shares are only eligible for vesting upon a sale of our company,
or after the completion of this offering. Vesting will occur after the
completion of this offering, if at all, only upon the occurrence of one of the
following measuring events: the executive's death; the executive's permanent
disability; the executive's termination without cause; or the second
anniversary of the completion of this offering, assuming a public market
continues to exist for our stock. The number of shares that vest upon the
occurrence of one of the measuring events is based on Thayer ITECH Holdings'
return on its investment. Thayer ITECH Holdings' return on its investment is
determined by the value of Thayer ITECH Holdings' Iconixx stock and any cash
Thayer ITECH Holdings has received from the sale or redemption of Iconixx
stock on the applicable measurement date. If the shares have not already
vested, all shares will vest on the eighth anniversary of their grant,
regardless of Thayer ITECH Holdings' return.
Long-Term Incentive Plans--
Awards in Fiscal Year Ended December 31, 1999
Estimated Future Payouts
------------------------------------
Threshold (1) Target (2) Maximum (3)
Number of Maturation (number of (number of (number of
Name Shares Period shares) shares) shares)
Stuart C. Johnson.... 1,514,375 8 years 378,594 946,485 1,514,375
Christopher Clark.... -- -- -- -- --
Leo C. Mullen........ -- -- -- -- --
William K. Stephens.. 125,000 8 years 31,250 78,125 125,000
D. Derrik Deyhimi.... -- -- -- -- --
- --------
(1) Threshold relates to a 25.00% return on Thayer ITECH Holdings' investment.
(2) Target relates to a 32.50% return on Thayer ITECH Holdings' investment.
(3) Maximum relates to a 40.00% return on Thayer ITECH Holdings' investment.
53
1999 Stock Option Plan
The Board of Directors and our stockholders approved the 1999 Stock Option
Plan of Iconixx Corporation on October 29, 1999. The plan was amended on
December 15, 1999 and again on April 26, 2000. The purpose of the 1999 Stock
Option Plan is to enable us and our affiliates to attract, retain and motivate
their employees and service providers by providing for or increasing the
proprietary interests of such persons in our company.
Under the 1999 Stock Option Plan, a number of shares of common stock equal
to 7% of our issued and outstanding shares of common stock is reserved for
issuance. No more than 2,000,000 shares of stock in total may be issued
pursuant to incentive stock options. At April 30, 2000, there were 2,721,690
shares of common stock available for grant under the 1999 Stock Option Plan. At
April 30, 2000, there were 170 participants in the 1999 Stock Option Plan.
Administration. The 1999 Stock Option Plan is administered by our
Compensation Committee. Subject to the terms of the plan, the Compensation
Committee may select participants to receive awards, determine the types of
awards and terms and conditions of awards, and interpret provisions of the
plan. The term of each stock option is fixed by the Compensation Committee and
may not exceed 10 years from the date of grant. The Compensation Committee
determines at what time or times each option may be exercised and the period of
time, if any, after retirement, death, disability or termination of employment
during which options may be exercised. Options may be made exercisable in
installments. The exercisability of options may be accelerated by the
Compensation Committee. The interpretation and construction by the Compensation
Committee of any term or provision of the plan or of any option granted under
it is final, unless otherwise determined by the Board in which event the
determination by the Board shall be final. The Committee may from time to time
adopt rules and regulations for carrying out the plan and, subject to the
provisions of the plan, may prescribe the form or forms of the instruments
evidencing any option granted under the plan.
Amendment and Termination. The Board of Directors may alter, amend, suspend
or terminate the 1999 Stock Option Plan at any time, provided that no such
action shall deprive an optionee, without the optionee's consent, of any option
granted to the optionee pursuant to the plan or of any of the optionee's rights
under such option. Amendments will be submitted for stockholder approval to the
extent required by the Internal Revenue Code or other applicable laws.
Eligible Persons. The persons eligible to be considered for the grant of
options under the 1999 Stock Option Plan are any persons regularly employed on
a full-time or part-time basis by us or an affiliate and any consultant or
advisor to us or an affiliate who renders bona fide services to us or an
affiliate other than in connection with the offer or sale of securities in a
capital raising transaction.
Options. The 1999 Stock Option Plan permits the granting of options to
purchase shares of common stock intended to qualify as incentive stock options
under the Internal Revenue Code and stock options that do not qualify as
incentive stock options.
The exercise price of each stock option intended to be an incentive stock
option may not be less than 100% of the fair market value of our common stock
on the date of grant. In the case of persons holding 10% or more of our
outstanding and issued shares of common stock who receive incentive stock
options, the exercise price may not be less than 110% of the fair market value
of our common stock on the date of grant. Options not intended to be incentive
stock options may have exercise prices of no less than the par value of our
common stock on the date of grant. An exception to these requirements is made
for options that we grant in substitution for options held by employees of
companies that we acquire. In such a case the exercise price is adjusted to
preserve the economic value of the employee's stock option from his or her
former employer.
Effect of Specified Corporate Transactions. Change of control transactions
involving us, such as a sale of the company, may cause awards granted under the
1999 Stock Option Plan to vest, unless the awards are continued or substituted
for in connection with the change of control transaction.
54
Adjustments for Stock Dividends and Similar Events. In the event of a
reorganization, recapitalization, stock split, reverse stock split, stock
dividend or the like, the Compensation Committee will make appropriate
adjustments in the number and/or kind of shares or securities for which options
may thereafter be granted under the 1999 Stock Option Plan and for which
options then outstanding under the plan may thereafter be exercised. Any such
adjustment in outstanding options will be made without changing the aggregate
exercise price applicable to the unexercised portions of such options.
Plan Duration. Options may not be granted under the 1999 Stock Option Plan
more than 10 years after the date of the adoption of the plan.
401(k) Plans
We sponsor the Iconixx Web Development 401(k) Profit Sharing Plan and the
Iconixx Systems Engineering, Inc. 401(k) Profit Sharing Plan, both defined
contribution plans intended to qualify under Section 401 of the Internal
Revenues Code. Under the Iconixx Web Development plan, employees who are at
least 21 years old and U.S. residents are generally eligible to participate.
Participants may make pre-tax contributions to the plan of up to 15% of their
eligible earnings, so long as these contributions do not exceed the statutorily
prescribed annual limit. Each participant is fully vested as to his or her
contributions and the investment earnings. We may make matching contributions
to the plan. Each participant is vested in our contributions and the
corresponding investment earnings after six years of service. Contributions by
the participants or Iconixx to the plan, and the income earned on these
contributions, are generally not taxable to the participants until withdrawn.
Contributions by us are generally deductible when made. Participant and company
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
Under the Iconixx Systems Engineering plan, employees who are U.S. residents
are generally eligible to participate. Participants may make pre-tax
contributions to the plan of up to 15% of their eligible earnings, so long as
these contributions do not exceed the statutorily prescribed annual limit. Each
participant is fully vested in his or her contributions and the investment
earnings. We may make matching contributions to the plan. Each participant who
has provided at least 500 hours of service is vested as to our contributions
and the corresponding investment earnings at a rate of 20% per year.
Contributions by the participants or Iconixx to the plan, and the income earned
on these contributions, are generally not taxable to the participants until
withdrawn. Contributions by us are generally deductible when made. Participant
and company contributions are held in trust as required by law. Individual
participants may direct the trustee to invest their accounts in authorized
investment alternatives.
Employment Agreements
We have entered into executive employment agreements with Stuart C. Johnson,
Christopher Clark, Leo C. Mullen, William K. Stephens, and D. Derrik Deyhimi.
Each agreement has an initial term of three years. Except for Mr. Deyhimi's
agreement, each agreement automatically renews for successive one-year periods,
unless we or the executive provides notice to terminate the employment
relationship. Except for Mr. Clark, who is entitled to receive an annual base
salary of $175,000, each executive is entitled to receive an annual base salary
of $180,000. Commencing with the fiscal year 2000, each executive is eligible
to receive a bonus of up to 120% of his annual base salary.
If we terminate Messrs. Johnson's, Stephens', Mullen's or Deyhimi's
employment without cause, or if they terminate their employment for good
reason, each of these executives is entitled to receive severance equal to one
year's annual base salary, plus, with respect to Messrs. Johnson and Stephens,
pro-rated bonus payments based on the bonus paid to the executive for the
previous fiscal year. If we terminate Mr. Clark's employment without cause, he
is entitled to receive severance equal to the greater of nine month's salary
and the salary for the period from his termination date to the first
anniversary of his employment agreement.
55
We can terminate Mr. Johnson's employment for "performance cause."
Performance cause means that he has failed to achieve a minimum acceptable
financial performance for the company for any one-year period as determined by
our board of directors. If Mr. Johnson is terminated for performance cause, we
will continue to pay him a monthly portion of his annual base salary for a
period of six months.
Each executive employment agreement requires that the executive protect our
proprietary and confidential information, and prohibits the executive from
competing with us for a period of time following his termination.
Messrs. Clark, Mullen and Deyhimi have each agreed to pay liquidated damages
to us if they are terminated with cause or if they voluntarily terminate their
employment with us without good reason during the three-year initial term of
their agreements. Except for Mr. Clark's agreement, which provides for
liquidated damages of between $100,000 and $300,000, the amount of liquidated
damages for each executive ranges from $150,000 to $350,000. The precise amount
of liquidated damages would vary based on the number of years of service of the
executive with our company at the time of termination. Those executives have
also pledged shares of our capital stock to secure their obligations to pay the
liquidated damages under the executive employment agreements.
Limitation of Liability and Indemnification Matters
Upon the completion of this offering, our amended and restated certificate
of incorporation will provide that our directors will not be liable for
monetary damages to us or our stockholders for any breach of fiduciary duties
to the fullest extent permitted by Delaware law. Such limitation of liability
does not affect the availability of equitable remedies such as injunctive
relief or rescission.
In addition, our amended and restated certificate of incorporation and
bylaws will require us to indemnify our directors and officers to the fullest
extent permitted by Delaware law. At present, we are not aware of any pending
or threatened material litigation or proceeding involving any director or
officer where indemnification will be required or permitted. We believe that
the provisions in our amended and restated certificate of incorporation and
bylaws are necessary to attract and retain qualified persons as directors and
officers.
56
RELATED PARTY TRANSACTIONS
Recapitalization Agreement
Under the terms of a recapitalization agreement dated August 11, 1999,
Thayer ITECH Holdings purchased 58,378.378 shares of our common stock from BSG
Holdings, Inc., our sole stockholder at that time, for an aggregate purchase
price of $21,600,000. As part of the recapitalization agreement, we borrowed
$10,000,000 under a $40,000,000 revolving credit facility we obtained in a
transaction arranged by Thayer ITECH Holdings. We used the proceeds of the loan
to redeem 27,027.027 shares of common stock from BSG Holdings for $370.00 per
share. Following the redemption we amended and restated our certificate of
incorporation to provide for the exchange of each share of our outstanding
common stock immediately prior to the effective time of the recapitalization
for 185 shares of our common stock and 0.3515 shares of our preferred stock. In
connection with the recapitalization, we incurred costs of $652,000 for non-
recurring transaction costs, including fees related to the professional
services agreement with TC Management Partners, IV, LLC and Thayer ITECH
Holdings' expenses associated with the negotiation and execution of the
recapitalization and related agreements.
John R. McDougall, the President of our Network, Architecture and Consulting
Division, was the President of our company at the time of the recapitalization.
Mr. McDougall and his wife also beneficially owned, and continue to own, 70% of
BSG Holdings. As a result, Mr. McDougall and his wife received $22,119,895 from
the redemption of BSG Holdings' stock. BSG Holdings now owns 2,700,000 shares
of our common stock and 5,130 shares of our preferred stock.
Thayer Equity Purchase
Under an equity purchase agreement dated August 12, 1999, Thayer ITECH
Holdings purchased 19,200,000 shares of our common stock at a purchase price of
$0.10 per share. Under the equity purchase agreement, Thayer ITECH Holdings
also agreed to purchase, at our request, up to 36,480 shares of our preferred
stock at a purchase price of $1,000 per share. Thayer ITECH Holdings, together
with its affiliate TC ITECH, LLC, purchased all 36,480 of those preferred
shares between November 1999 and March 2000.
Under an equity purchase agreement dated March 22, 2000, Thayer ITECH
Holdings purchased an additional 3,000,000 shares of our common stock at $1.30
per share and an additional 16,100 shares of our preferred stock at a purchase
price of $1,000 per share. We paid Thayer ITECH Holdings' expenses associated
with the execution and negotiation of the equity purchase agreements. We also
agreed to pay the future expenses of Thayer ITECH Holdings that arise from the
modification or enforcement of the equity purchase and related agreements.
Professional Services Agreement
In connection with the recapitalization and Thayer ITECH Holdings'
investments, we entered into a professional services agreement dated August 12,
1999 with TC Management Partners IV, LLC, an affiliate of Thayer ITECH
Holdings. In accordance with this agreement, TC Management received a one-time
payment of $370,000 upon the closing of the recapitalization. TC Management is
also entitled to receive a quarterly management fee of $50,000 and an
investment fee equal to 1% of the consideration received by us in connection
with any debt or equity financing, excluding this offering. TC Management
agreed to assign 15% of all fees it receives from any future equity financing
to us on behalf of Messrs. Johnson, Perkins, Walker, Fu, Modly and Levine and
Ms. Withers. Under this agreement, we have paid TC Management a total of
$741,432 in connection with debt and equity financings and our executives
approximately $130,841. The professional services agreement terminates upon the
completion of this offering.
57
Stockholders Agreement
In connection with the recapitalization and Thayer ITECH Holdings'
investments, we have entered into a stockholders agreement with Thayer ITECH
Holdings, members of our management and the other stockholders of our company.
The stockholders agreement provides, among other things, that our board of
directors will consist of five members, of which Thayer ITECH Holdings has the
right to nominate three, members of our management one, and one position is
reserved for our chief executive officer. Under the terms of the stockholders
agreement, all parties are required to vote their shares for the nominated
directors. The stockholders agreement terminates upon the completion of this
offering, except for a provision that prohibits all parties to the agreement
from selling their company stock in a public sale for a period of 120 days
beginning on the effective date of this offering.
Registration Rights Agreement
In connection with the recapitalization and Thayer ITECH Holdings'
investments, we entered into a registration rights agreement with Thayer ITECH
Holdings, members of our management team who purchased common stock pursuant to
employment agreements and stockholders of our operating companies who received
shares of our common stock in connection with our acquisition of their
companies. For details regarding the terms of this agreement, see "Shares
Eligible for Future Sale."
Loans to Executives
We have loaned Messrs. Fu, Modly and Levine the following amounts to
purchase shares of our common stock:
Executive Loan Amount
David T. Fu.................................................... $161,142
Thomas B. Modly................................................ 136,143
Jason H. Levine................................................ 132,392
The loans are full recourse, and each of these officers has pledged a
portion of their common stock holdings as collateral for the loan. The interest
rate for each loan is the lesser of 9.00% and the highest rate permitted by
applicable law, which interest compounds monthly. Each of these officers must
repay the outstanding balance and accrued interest according to an amortization
schedule that terminates on August 31, 2003.
Note in Favor of an Executive
In connection with the acquisition of IconixGroup, we issued convertible
promissory notes in the amounts of $1,211,429 to each of Leo C. Mullen and his
wife, Helene Patterson. Interest on these obligations accrues at 10% annually,
payable quarterly. We must pay the full principal amount and any accrued
interest of both of these notes no later than May 5, 2005. Upon 60 days notice
of this offering, Mr. Mullen and Ms. Patterson can each request that we convert
their note into shares of our common stock based on the offering price or that
we repay the outstanding balance of their note, with our senior lender's
consent, within five days after the completion of this offering.
58
Executive Stock Purchases
The following executives purchased restricted shares of our common stock as
follows:
Number of Shares Aggregate
Name of Executive of Common Stock Purchase Price
Stuart C. Johnson.......................... 3,028,571 $337,142
Graham B. Perkins.......................... 1,328,571 167,142
David T. Fu................................ 1,428,571 177,142
Jason H. Levine............................ 1,041,071 138,392
Thomas B. Modly............................ 1,278,571 162,142
Matthew B. Walker.......................... 1,278,571 162,142
We have a limited right to repurchase the shares of common stock purchased
by these executives upon termination of their employment with us. The
repurchase price per share depends on whether the restricted shares of common
stock have vested. The repurchase price for unvested shares equals the lower of
the Executive's purchase price or the fair market value for each share of our
common stock at the time of termination. The repurchase price for each vested
share equals the fair market value at the time of termination. If we do not
exercise our right to repurchase all of the restricted shares within 60 days
after the executive's termination, then Thayer ITECH Holdings has the right to
repurchase the executive's restricted shares on the same terms. Our and Thayer
ITECH Holdings' repurchase rights with respect to vested shares terminate upon
the completion of this offering.
For each executive, one-half of the executive's shares vest as follows: 25%
vest following the executive's first anniversary of employment with us and the
remainder vests at a rate of approximately 2.08% per month for the next three
years. All of these shares vest upon a sale of the company and 20% vest
automatically if the executive is terminated without cause. If the executive is
terminated for cause prior to the earlier of the fourth anniversary of the
applicable employment agreement or the effective date of this offering, then
all of that executive's restricted shares will be deemed to be unvested shares.
For each executive, the other half of the executive's restricted shares are
only eligible for vesting upon a sale of our company, or after the completion
of this offering. Vesting will occur after the completion of this offering, if
at all, only upon the occurrence of one of the following measuring events: the
executive's death; the executive's permanent disability; the executive's
termination without cause; or the second anniversary of the completion of this
offering, assuming a public market continues to exist for our stock. The number
of shares that vest upon the occurrence of one of the measuring events is based
on Thayer ITECH Holdings' return on its investment. Thayer ITECH Holdings'
return on its investment is determined by the value of our stock held by Thayer
ITECH Holdings and any cash Thayer ITECH Holdings has received from the sale or
redemption of our stock on the applicable measurement date. If the shares have
not already vested, all shares will vest on the eighth anniversary of their
grant, regardless of Thayer ITECH Holdings' return.
59
PRINCIPAL STOCKHOLDERS
The following table shows the number and percentage of outstanding shares of
our common stock that were owned as of April 30, 2000 and that will be owned
immediately following this offering by:
. each person who we know to be the beneficial owner of more than 5% of our
outstanding common stock;
. each of our directors and each of the executive officers named in the
summary compensation table; and
. all of our directors and executive officers as a group.
As of April 30, 2000, there were 53,957,606 shares of common stock
outstanding. Following this offering, we will have shares of common stock
outstanding. None of our stockholders will sell shares in this offering.
Unless indicated otherwise below, the address for each stockholder is c/o
Iconixx Corporation, 8300 Boone Boulevard, Suite 250, Vienna, VA 22182. Except
as indicated below, the persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially owned
by them.
Percentage of
Shares Outstanding
Number of Shares ------------------------------
Name Beneficially Owned Before Offering After Offering
Thayer ITECH Holdings,
L.L.C. (1)..............
BSG Holdings, Inc. (2)...
Stuart C. Johnson (3)....
Christopher Clark (4)....
Leo C. Mullen (5)........
D. Derrik Deyhimi........ 989,313
William K. Stephens...... 250,000
Phillip G. Norton........
Robert Michalik..........
Carl J. Rickertsen.......
All directors and
executive officers as a
group (8 persons)(6)....
- --------
* Less than one percent.
(1) Includes shares of common stock that Thayer ITECH Holdings will receive
upon the conversion of 73,100 shares of our preferred stock, assuming
conversion based on an assumed initial public offering price of $ per
share. Includes 190,581 shares of common stock beneficially owned by TC
ITECH, L.L.C. and shares of common stock that TC ITECH will receive
upon the conversion of 362,100 shares of our preferred stock held by TC
ITECH. TC ITECH is an affiliate of Thayer ITECH Holdings by virtue of the
common control of Thayer Equity Investors IV, L.P. The address for Thayer
ITECH Holdings is 1455 Pennsylvania Avenue, NW, Washington, DC 20004.
(2) Includes shares of common stock that BSG Holdings, Inc. will receive
upon the conversion of 5,130 shares of our preferred stock, assuming
conversion based on an assumed initial public offering price of $ per
share. Mr. McDougall is the co-trustee of two trusts that own 70% of BSG
Holdings, and he shares voting and investment power over these shares with
his wife. The address of BSG Holdings is 284 S. Main Street, Suite 700,
Alpharetta, GA 30004.
(3) Mr. Johnson holds these shares through his limited partnership interest in
the Stuart C. Johnson Family Limited Partnership. Mr. Johnson's children,
as general partners, share voting and investment power over these shares.
(4) Includes shares of common stock that Mr. Clark will receive upon the
conversion of 1,443 shares of our preferred stock, assuming conversion
based on an assumed inital public offering price of $ per share. Includes
39,375 shares of Mr. Clark's common stock and 145.6875 shares of preferred
stock are
60
held in trust for the benefit of Mr. Clark's children, with Mr. Clark's
mother-in-law as trustee. Mr. Clark does not have voting or investment
power over these shares and disclaims beneficial ownership.
(5) The number of shares owned includes shares of common stock that Mr.
Mullen will receive upon the conversion of 1,535,100 shares of preferred
stock, assuming conversion based on an assumed initial public offering
price of $ per share. Mr. Mullen holds these shares through Mullen
Patterson, LLC and shares investment and voting control over them with his
wife. Includes shares of common stock that Mr. Mullen has the right to
receive upon the conversion of a convertible promissory note, and
shares of common stock that his wife has the right to receive upon the
conversion of a convertible promissory note.
(6) Includes shares of common stock issuable upon conversion of
outstanding preferred stock and convertible promissory notes based on an
assumed initial public offering price of $ per share.
61
DESCRIPTION OF CAPITAL STOCK
General
Our currently authorized capital stock consists of 99,850,000 shares of
common stock, par value $.01 per share, and 150,000 shares of preferred stock,
par value $.01 per share.
As of April 30, 2000, there were 53,957,606 shares of common stock
outstanding held by 36 stockholders of record, and 89,103.076 shares of our
preferred stock outstanding held by 17 stockholders of record. Upon the closing
of this offering, each share of preferred stock will convert into shares of
common stock. Based on the number of shares of common stock outstanding on
April 30, 2000 and the conversion of the preferred stock, upon completion of
this offering, we will have outstanding shares of common stock. In
addition, as of April 30, 2000 there were outstanding stock options to purchase
a total of 1,055,342 shares of common stock at a weighted average exercise
price of $0.68 per share.
Common Stock
Each common stockholder of record is entitled to one vote for each
outstanding share of our common stock owned by that stockholder on every matter
properly submitted to the stockholders for their vote. After satisfaction of
the dividend rights of holders of preferred stock, holders of common stock are
entitled to any dividend declared by the board of directors out of funds
legally available for this purpose, and, after the payment of liquidation
preferences to holders of preferred stock, holders of common stock are entitled
to receive, on a pro rata basis, all our remaining assets available for
distribution to the stockholders in the event of our liquidation, dissolution
or winding up. Holders of common stock do not have any preemptive right to
become subscribers or purchasers of additional shares of any class of our
capital stock. The outstanding shares of common stock are, and the shares of
common stock offered in this offering will be, when issued and paid for, fully
paid and non-assessable. The rights, preferences and privileges of holders of
common stock may be adversely affected by the rights of the holders of shares
of any series of preferred stock that we may designate and issue in the future.
Preferred Stock
Holders of preferred stock prior to the completion of this offering are
entitled to cumulative dividends at the rate of 15% per year. Any dividend
payable for each share of preferred stock will cease to accrue on the earlier
of our liquidation, or its conversion into our common stock. Upon the
completion of this offering, each share of preferred stock will be converted
into common stock at a conversion rate equal to $1,000 plus accrued dividends,
divided by the offering price.
Upon the completion of this offering, our amended and restated certificate
of incorporation will allow us to issue, without stockholder approval,
preferred stock having rights senior to those of the common stock. Our board of
directors will be authorized, without further stockholder approval, to issue up
to shares of preferred stock in one or more series, and to fix the rights,
preferences, privileges and restrictions of any series of preferred stock,
including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, and to fix the number of shares
constituting any series and the designations of these series.
Our future issuance of any preferred stock may have the effect of delaying
or preventing a change in control. Our future issuance of any preferred stock
could decrease the amount of earnings and assets available for distribution to
the holders of common stock or could adversely affect the rights and powers,
including voting rights, of the holders of common stock. The future issuance of
any preferred stock could also have the effect of decreasing the market price
of the common stock.
62
Anti-Takeover Provisions
General
Upon completion of this offering, our amended and restated certificate of
incorporation and bylaws will contain some limited provisions that are intended
to enhance the likelihood of continuity and stability in the composition of our
board of directors and in the policies formulated by our board of directors. In
addition, provisions of Delaware law may hinder or delay an attempted takeover
our company other than through negotiation with our board of directors. These
provisions could have the effect of discouraging attempts to acquire us or
remove incumbent management even if some or a majority of our stockholders
believe this action to be in their best interest, including attempts that might
result in the stockholders' receiving a premium over the market price for the
shares of common stock held by stockholders.
Classified Board
Our amended and restated certificate of incorporation will provide for the
division of our board of directors into three classes of directors, serving
staggered three-year terms. Our certificate of incorporation will also provide
that the approval of the holders of at least two-thirds of the shares entitled
to vote and the approval of a majority of our entire board of directors will be
necessary for the alteration, amendment or repeal of sections of our
certificate of incorporation relating to the election and classification of our
board of directors, limitation of director liability, indemnification and the
vote requirements for these amendments to our certificate of incorporation.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company.
Removal of Directors; Vacancies
Our amended and restated certificate of incorporation will provide that
directors may be removed only for cause. In addition, vacancies and newly
created directorships resulting from any increase in the size of the board of
directors may be filled only by the affirmative vote of a majority of the
directors then in office, even if they do not constitute a quorum, or by a sole
remaining director. These provisions will prevent stockholders from removing
incumbent directors without cause and filling the resulting vacancies with
their own nominees.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust.
Listing
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the trading symbol "ICXX."
63
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect our common stock's prevailing market price. Upon completion of
this offering, we will have outstanding shares of our common stock,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options. Of these shares, all of the shares sold in this
offering will generally be freely tradable without restriction or further
registration under the Securities Act.
The remaining shares of common stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under
Securities Act Rule 144 or 701. We summarize these rules below.
Rule 144
Under Rule 144, shares of common stock will be freely tradable 90 days
after this offering closes. Sales of these shares of common stock will be
limited under lock-up agreements with the underwriters and a stockholders
agreement with our company. In general, under Rule 144, beginning 90 days after
the closing of this offering, a person who has owned shares of our common stock
for at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also governed by manner of sale provisions and
notice requirements, and current public information about Iconixx must be
available.
Under Rule 144(k), no shares of common stock will be freely tradable after
the completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases shares of our common
stock from us in connection with a compensatory stock or option plan or other
written agreement is eligible to resell those shares 90 days after the
effective date of this offering in reliance on Rule 144, but without compliance
with some of the restrictions, including the holding period, contained in Rule
144.
Registration Rights
Upon the completion of this offering, Thayer ITECH Holdings or a majority of
the holders of shares who are parties to a registration rights agreement with
us generally have the right to require us to register their shares under the
Securities Act as follows:
. up to two times on Form S-1 at our expense;
. an unlimited number of times on Form S-1 at their expense; and
. up to four times on Forms S-2 or S-3 or any other short-form registration
at our expense.
The holders of approximately shares of common stock, assuming conversion of
all of our outstanding preferred stock, will be entitled to require us to
register their shares under the Securities Act. In addition, we are required to
register these stockholders' shares at our expense at any time we register
shares of our common stock for our own account.
64
Stock Options
As soon as practicable after this offering, we intend to file a registration
statement under the Securities Act covering shares of common stock reserved
for issuance under our 1999 Stock Option Plan. As of April 30, 2000, options to
purchase 1,055,342 shares of common stock were outstanding. The registration
statement is expected to be filed and become effective as soon as practicable
after the effective date of this offering. Accordingly, shares registered under
this registration statement will, provided options have vested and Rule 144
volume limitations applicable to our affiliates are complied with, be available
for sale in the open market shortly after this offering closes, and in the case
of our officers, directors and stockholders who have entered into lock-up
agreements, after the 180-day lock-up agreements expire.
Lock-Up Agreements
Each of us, our executive officers and directors and substantially all of
our stockholders have agreed, subject to exceptions, not to (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock or (ii) enter into any swap or other arrangement that transfers
all or a portion of the economic consequences associated with the ownership of
any common stock (regardless of whether any of the transactions described in
clause (i) or (ii) is to be settled by the delivery of common stock, or such
other securities, in cash or otherwise) for a period of 180 days after the date
of the final prospectus for this offering without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation. However, 25% of the shares
of common stock subject to the restrictions described above will be released
from these restrictions if the last reported sale price of the common stock on
the Nasdaq National Market is at least twice the offering price for 20 of the
30 consecutive trading days ending on the last trading day of the 90-day period
after the date of the final prospectus. These shares will be released on the
later to occur of the 90-day period after the date of the final prospectus and
the second trading day after the first public release of our quarterly results.
An additional 25% of the shares subject to the restrictions described above
will be released from these restrictions if the last reported sale price of the
common stock on the Nasdaq National Market is at least twice the offering price
for 20 of the 30 consecutive trading days ending on the last trading day on the
135-day period after the date of the final prospectus.
All of our existing stockholders are parties to a stockholders agreement
under which they are prohibited from selling their stock in a public sale for a
period of 120 days after the effective date of this offering.
65
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated as
of , 2000, the underwriters named below, who are represented by Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc., Banc of
America Securities LLC and DLJdirect Inc., the "underwriters," have severally
agreed to purchase from us the respective number of shares of common stock
shown opposite their names below.
Number of
Underwriters Shares
Donaldson, Lufkin & Jenrette Securities Corporation..............
Bear, Stearns & Co. Inc..........................................
Banc of America Securities LLC...................................
DLJdirect Inc....................................................
---
Total..........................................................
===
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
included in this offering are subject to approval of legal matters by their
counsel and to customary conditions, including the effectiveness of the
registration statement, the continuing correctness of our representations, the
listing of the common stock for quotation on the Nasdaq National Market and no
occurrence of an event that would have a material adverse effect on us. The
underwriters are obligated to purchase and accept delivery of all the shares of
common stock, other than those covered by the over-allotment option described
below, if they purchase any of the shares of common stock.
The underwriters propose to offer initially some of the shares of common
stock directly to the public at the public offering price on the cover page of
this prospectus and some of the shares of common stock to dealers, including
the underwriters, at the initial public offering price less a concession not in
excess of $ per share. The underwriters may allow, and these dealers may re-
allow, a concession not in excess of $ per share to other dealers. After the
initial offering of the common stock to the public, the representatives of the
underwriters may change the public offering price and these concessions. The
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares of common stock.
No Exercise Full Exercise
Per share........................................ $ $
Total.......................................... $ $
We estimate expenses related to this offering will be $ million.
Iconixx has granted to the underwriters an option, exercisable within 30
days after the date of the underwriting agreement, to purchase up to
additional shares of common stock at the initial public offering price less
underwriting fees. The underwriters may exercise this option solely to cover
over-allotments, if any, made in connection with the offering. To the extent
that the underwriters exercise this option, each underwriter will become
obligated, subject to conditions, to purchase a number of additional shares
approximately proportionate to that underwriter's initial purchase commitment.
66
Iconixx has agreed to indemnify the underwriters against specified
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make in respect of any of
those liabilities.
At our request, the underwriters have reserved for sale up to shares of
common stock offered by this prospectus for sale at the initial public offering
price to our employees, officers and directors and other persons designated by
us. The number of shares of common stock available for sale to the general
public will be reduced to the extent these individuals purchase or confirm for
purchase, orally or in writing, these reserved shares. Any reserved shares not
purchased or confirmed for purchase will be offered by the underwriters to the
general public on the same basis as the other shares offered by this
prospectus.
Other than in the United States, no action has been taken by Iconixx or the
underwriters that would permit a public offering of the shares of common stock
offered by this prospectus in any jurisdiction where action for that purpose is
required. The shares of common stock offered through this prospectus may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements associated with the offer and sale of any
the shares of common stock offered through this prospectus be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of that jurisdiction. You
should inform yourself and observe any restrictions relating to the offering of
the common stock and the distribution of this prospectus. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any shares
of common stock included in this offering in any jurisdiction where that would
not be permitted or legal.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation, is facilitating the distribution of the shares sold in this
offering over the Internet. Some of the underwriters and their affiliates
engage in transactions with, and perform services for, Iconixx and its
affiliates, and have engaged in and may in the future engage in commercial and
investment banking and other transactions with Iconixx and its affiliates.
We entered into a web site development agreement in October of 1999 with
Bear, Stearns & Co. Inc., one of the representatives of the underwriters. The
agreement provides for our development and design of a new navigational system
and interface for various pages comprising Bear, Stearns & Co. Inc.'s "Client
Toolkit" web site. The agreement provides for continuing work on a time and
materials basis at our customary rates.
We entered into a Business Loan and Security Agreement and related
promissory note on August 12, 1999 with First Union Commercial Corporation and
Bank of America, N.A., an affiliate of Banc of America Securities LLC, one of
the representatives of the underwriters. The agreement created a revolving
credit facility under which we can borrow up to $40.0 million. Bank of America,
N.A. agreed to loan us up to $20.0 million under the revolving credit facility.
As of April 30, 1999, we had borrowed approximately $13.0 million under the
revolving credit facility of which $6.5 million is borrowed from Bank of
America, N.A. As described in "Use of Proceeds," we intend to pay in full the
outstanding balance on the revolving credit facility upon completion of this
offering.
Stabilization
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot the offering, creating a
syndicate short position. The underwriters may bid for and purchase shares of
common stock in the open market to cover a syndicate short position or to
stabilize the price of the common stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if Donaldson, Lufkin & Jenrette Securities Corporation repurchases
previously distributed common stock in syndicate covering transactions, in
stabilization transactions or otherwise if Donaldson, Lufkin & Jenrette
Securities Corporation receives a report that indicates that the clients of
such syndicate members have purchased the common stock and immediately resold
the shares for a profit. These activities may stabilize or maintain the market
price of the common stock above independent market levels. The underwriters are
not required to engage in these activities, may end any of these activities at
any time, and in any event will discontinue these activities no later than 30
days after the closing of this offering.
67
Pricing of the Common Stock
Prior to this offering, there has been no established trading market for our
common stock. The initial public offering price of our common stock will be
determined by negotiation between Iconixx and the representatives of the
underwriters. The factors to be considered in determining the initial public
offering price will include:
. the history of and the prospects for the industry in which Iconixx
competes;
. Iconixx's past and present operations;
. Iconixx's historical results of operations;
. Iconixx's prospects for future earnings;
. the recent market prices of securities of generally comparable companies;
and
. the general condition of the securities markets at the time of this
offering.
68
LEGAL MATTERS
Hogan & Hartson L.L.P., Washington, D.C., will pass upon the validity of the
issuance of the shares being offered. Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C., Boston, Massachusetts, will act as counsel for the underwriters.
EXPERTS
The financial statements and schedules included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION ABOUT ICONIXX CORPORATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
common stock being offered. This prospectus contains all information about
Iconixx and our common stock that would be material to an investor. The
registration statement includes exhibits and schedules to which you should
refer for additional information about us. You may inspect a copy of the
registration statement and the exhibits and schedules to the registration
statement without charge at the offices of the Securities and Exchange
Commission at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549. You
may obtain copies of all or any part of the registration statement from the
Public Reference Section of the SEC, 450 Fifth Street, Washington, D.C. 20549
upon the payment of the prescribed fees. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains a web site at www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants like us that
file electronically with the SEC.
We intend to furnish holders of our common stock with annual reports
containing audited financial statements certified by an independent public
accounting firm and make available quarterly reports containing unaudited
condensed financial information for the first three fiscal quarters of each
fiscal year.
69
INDEX TO FINANCIAL STATEMENTS
Iconixx Corporation, formerly Business Solutions Group, LLC
Report of Independent Public Accountants.................................. F-3
Consolidated Balance Sheets as of December 31, 1998 and 1999 and March 31,
2000 (unaudited)......................................................... F-4
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998, and 1999 and for the Three Months Ended March 31, 1999 and
2000 (unaudited)......................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1997, 1998, and 1999 and for the Three Months Ended
March 31, 2000 (unaudited)............................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998, and 1999 and for the Three Months Ended March 31, 1999 and
2000 (unaudited)......................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
Empyrean Group, Inc. (A Development Stage Company)
Report of Independent Public Accountants.................................. F-24
Balance Sheets as of December 31, 1998 and August 31, 1999................ F-25
Statements of Operations From Inception (February 12, 1998) to December
31, 1998 and for the Eight Months Ended August 31, 1999.................. F-26
Statements of Stockholders' Equity (Deficit) From Inception (February 12,
1998) to December 31, 1998 and for the Eight Months Ended August 31,
1999..................................................................... F-27
Statements of Cash Flows From Inception (February 12, 1998) to December
31, 1998 and for the Eight Months Ended August 31, 1999.................. F-28
Notes to Financial Statements ............................................ F-29
The Invisions Group, Ltd. and Subsidiary
Report of Independent Public Accountants.................................. F-32
Consolidated Balance Sheets as of June 30, 1998 and 1999, and September
30, 1999 (unaudited)..................................................... F-33
Consolidated Statements of Operations for the Years Ended June 30, 1998
and 1999, and for the Three Months Ended September 30, 1998 and 1999
(unaudited).............................................................. F-34
Consolidated Statements of Stockholders' Equity for the Years Ended June
30, 1998 and 1999, and for the Three Months Ended September 30, 1999
(unaudited).............................................................. F-35
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998
and 1999, and for the Three Months Ended September 30, 1998 and 1999
(unaudited).............................................................. F-36
Notes to Consolidated Financial Statements ............................... F-37
Lead Dog Design, Inc.
Report of Independent Public Accountants.................................. F-45
Balance Sheets as of December 31, 1998 and 1999........................... F-46
Statements of Operations for the Years Ended December 31, 1998 and 1999... F-47
Statements of Stockholders' Equity for the Years Ended December 31, 1998
and 1999................................................................. F-48
Statements of Cash Flows for the Years Ended December 31, 1998 and 1999... F-49
Notes to Financial Statements ............................................ F-50
EnterpriseWorks, LLC
Report of Independent Public Accountants.................................. F-56
Balance Sheets as of December 31, 1998 and 1999........................... F-57
Statements of Operations for the Years Ended December 31, 1998 and 1999... F-58
Statements of Members' Equity for the Years Ended December 31, 1998, and
1999..................................................................... F-59
Statements of Cash Flows for the Years Ended December 31, 1998, and 1999.. F-60
Notes to Financial Statements ............................................ F-61
F-1
Internet Services Division of Internet Information Services, Inc.
(A Fully Integrated Business of IIS, Inc.)
Report of Independent Public Accountants................................. F-67
Balance Sheets as of December 31, 1998 and 1999.......................... F-68
Statements of Operations and Changes in Division Equity (Deficit) for the
Years Ended December 31, 1998 and 1999.................................. F-69
Statements of Cash Flows for the Years Ended December 31, 1998 and 1999.. F-70
Notes to Financial Statements ........................................... F-71
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Iconixx Corporation:
We have audited the accompanying consolidated balance sheets of Iconixx
Corporation (formerly Business Solutions Group, LLC) as of December 31, 1998
and 1999, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Iconixx Corporation as of
December 31, 1998 and 1999, 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.
Arthur Andersen LLP
Vienna, Virginia
May 9, 2000
F-3
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
As of December
31,
--------------- As of March
1998 1999 31, 2000
(Unaudited)
Assets
Current assets:
Cash and cash equivalents....................... $1,261 $ 1,537 $ 4,639
Accounts receivable, net........................ 5,773 6,139 10,217
Prepaid expenses and other current assets....... 34 302 1,403
------ -------- --------
Total current assets.......................... 7,068 7,978 16,259
------ -------- --------
Property and equipment, net....................... 82 1,231 3,975
Intangible assets, net............................ -- 29,094 81,895
Other assets...................................... -- 813 857
------ -------- --------
Total assets.................................. $7,150 $ 39,116 $102,986
====== ======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable................................ $3,547 $ 3,659 $ 4,264
Accrued liabilities............................. 309 2,479 6,900
------ -------- --------
Total current liabilities..................... 3,856 6,138 11,164
------ -------- --------
Long-term liabilities:
Credit facility................................. -- 6,500 13,800
Convertible subordinated notes payable.......... -- 2,650 2,650
Due to former IconixGroup shareholders.......... -- 1,050 1,050
Deferred income taxes........................... -- 2,631 2,250
------ -------- --------
Total long-term liabilities................... -- 12,831 19,750
------ -------- --------
Total liabilities............................. 3,856 18,969 30,914
------ -------- --------
Class A convertible preferred stock, $0.01 par
value, $1,000 liquidation value, 150,000 shares
authorized; 51,156 and 88,556 shares issued and
outstanding in 1999 and 2000, respectively;
aggregate liquidation preference plus accrued and
unpaid dividends of $53,322, and $92,846,
respectively..................................... -- 53,322 92,846
------ -------- --------
Commitments and contingencies (Note 15)
Stockholders' equity (deficit):
Common stock, $0.01 par value; 99,850,000 shares
authorized; 18,500,000, 50,387,500, and
58,855,713 shares issued and 18,500,000,
45,187,500, and 53,855,713 outstanding as of
1998, 1999 and 2000, respectively.............. 185 504 589
Additional paid-in capital...................... -- 4,554 27,300
Notes receivable--stockholders.................. -- (325) (414)
Treasury stock, 5,200,000 and 5,000,000 shares
at cost as of 1999 and 2000, respectively...... -- (10,302) (10,282)
Deferred compensation........................... -- (1,175) (1,447)
Retained earnings (accumulated deficit)......... 3,109 (26,431) (36,520)
------ -------- --------
Total stockholders' equity (deficit).......... 3,294 (33,175) (20,774)
------ -------- --------
Total liabilities and stockholders' equity
(deficit).................................... $7,150 $ 39,116 $102,986
====== ======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months
Year Ended December 31, Ended March 31,
----------------------- ----------------
1997 1998 1999 1999 2000
(Unaudited)
Revenues........................... $18,568 $49,898 $48,978 $14,053 $ 14,026
Cost of revenues................... 14,932 40,525 39,300 11,639 9,535
------- ------- ------- ------- --------
Gross profit....................... 3,636 9,373 9,678 2,414 4,491
Operating expenses:
Selling, general and
administrative.................. 689 3,170 5,189 795 5,211
Depreciation and amortization.... 24 28 1,918 24 3,188
Loss on divestiture of operating
division........................ -- -- 419 419 --
------- ------- ------- ------- --------
Total operating expenses....... 713 3,198 7,526 1,238 8,399
------- ------- ------- ------- --------
Income (loss) from operations...... 2,923 6,175 2,152 1,176 (3,908)
Interest expense................... -- -- (335) -- (256)
Interest and other income.......... 30 125 154 30 58
------- ------- ------- ------- --------
Income before provision (benefit)
for income taxes.................. 2,953 6,300 1,971 1,206 (4,106)
Provision (benefit) for income
taxes............................. -- -- 4 -- (371)
------- ------- ------- ------- --------
Net income (loss).................. 2,953 6,300 1,967 1,206 (3,735)
Dividends on Class A convertible
preferred stock................... -- -- 2,166 -- 6,354
------- ------- ------- ------- --------
Net income (loss) attributable to
common stockholders............... $ 2,953 $ 6,300 $ (199) $ 1,206 $(10,089)
======= ======= ======= ======= ========
Basic and diluted net income (loss)
per share......................... $ 0.16 $ 0.34 $ (0.01) $ 0.07 $ (0.22)
======= ======= ======= ======= ========
Weighted average common shares
outstanding....................... 18,500 18,500 28,281 18,500 46,433
======= ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated statements.
F-5
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
Class A
Convertible
Preferred
Stock
--------------
Amount Shares
Balance,
December 31,
1996............ $ -- --
Net income...... -- --
Distribution to
stockholders.... -- --
------- ------
Balance,
December 31,
1997............ -- --
Net income...... -- --
Distribution to
stockholders.... -- --
------- ------
Balance,
December 31,
1998............ -- --
Net income...... -- --
Distribution to
stockholders.... -- --
Repurchase of
common stock
together with
recapitalization
costs........... -- --
Preferred stock
dividend........ 25,650 25,650
Issuance of
common stock and
preferred stock
for cash........ 20,400 20,400
Issuance of
stock in
connection with
acquisition of
Empyrean Group,
Inc............. 1,639 1,639
Issuance of
stock in
connection with
acquisition of
IconixGroup,
Inc............. 3,467 3,467
Deferred
compensation
upon issuance of
stock options .. -- --
Repurchase of
officer shares,
net............. -- --
Interest accrued
net of
payments........ -- --
Amortization of
deferred
compensation.... -- --
Accrued
dividends on
preferred
stock........... 2,166 --
------- ------
Balance,
December 31,
1999............ 53,322 51,156
Net loss
(unaudited)..... -- --
Issuance of
common stock and
preferred stock
in connection
with acquisition
of Lead Dog
Design, Inc.
(unaudited)..... 3,000 3,000
Issuance of
common stock and
preferred stock
for cash
(unaudited)..... 32,180 32,180
Issuance of
common stock in
connection with
acquisition of
EnterpriseWorks,
LLC
(unaudited)..... -- --
Issuance of
common stock and
preferred stock
in connection
with acquisition
of Internet
Information
Services, Inc.
(unaudited)..... 2,220 2,220
Deferred
compensation
upon issuance of
stock options
(unaudited)..... -- --
Repayments on
notes
receivable-
stockholders,
net of interest
accrual of $4
(unaudited)..... -- --
Amortization of
deferred
compensation
(unaudited)..... -- --
Accrued
dividends on
preferred stock
and value of
beneficial
common stock
purchase right
(unaudited)..... 2,124 --
------- ------
Balance, March
31, 2000
(unaudited)..... $92,846 88,556
======= ======
Stockholders' Equity (Deficit)
-----------------------------------------------------------------------------------------------------------
Retained Total
Common Stock Additional Notes Treasury Stock Earnings Stockholders'
----------------- Paid-In Receivable- --------------------- Deferred (Accumulated Equity
Amount Shares Capital Stockholders Amount Shares Compensation Deficit) (Deficit)
Balance,
December 31,
1996............ $185 18,500,000 $ -- $ -- $ -- -- $ -- $ 146 $ 331
Net income...... -- -- -- -- -- -- -- 2,953 2,953
Distribution to
stockholders.... -- -- -- -- -- -- -- (1,468) (1,468)
------ ---------- ---------- ------------ --------- ----------- ------------ ------------ -------------
Balance,
December 31,
1997............ 185 18,500,000 -- -- -- -- -- 1,631 1,816
Net income...... -- -- -- -- -- -- -- 6,300 6,300
Distribution to
stockholders.... -- -- -- -- -- -- -- (4,822) (4,822)
------ ---------- ---------- ------------ --------- ----------- ------------ ------------ -------------
Balance,
December 31,
1998............ 185 18,500,000 -- -- -- -- -- 3,109 3,294
Net income...... -- -- -- -- -- -- -- 1,967 1,967
Distribution to
stockholders.... -- -- 190 -- -- -- -- (3,321) (3,131)
Repurchase of
common stock
together with
recapitalization
costs........... -- -- -- -- (10,282) (5,000,000) -- (370) (10,652)
Preferred stock
dividend........ -- -- -- -- -- -- -- (25,650) (25,650)
Issuance of
common stock and
preferred stock
for cash........ 292 29,200,000 2,628 (321) -- -- -- -- 2,599
Issuance of
stock in
connection with
acquisition of
Empyrean Group,
Inc............. 9 862,500 77 -- -- -- -- -- 86
Issuance of
stock in
connection with
acquisition of
IconixGroup,
Inc............. 18 1,825,000 438 -- -- -- -- -- 456
Deferred
compensation
upon issuance of
stock options .. -- -- 769 -- -- -- (769) -- --
Repurchase of
officer shares,
net............. -- -- 452 -- (20) (200,000) (435) -- (3)
Interest accrued
net of
payments........ -- -- -- (4) -- -- -- -- (4)
Amortization of
deferred
compensation.... -- -- -- -- -- -- 29 -- 29
Accrued
dividends on
preferred
stock........... -- -- -- -- -- -- -- (2,166) (2,166)
------ ---------- ---------- ------------ --------- ----------- ------------ ------------ -------------
Balance,
December 31,
1999............ 504 50,387,500 4,554 (325) (10,302) (5,200,000) (1,175) (26,431) (33,175)
Net loss
(unaudited)..... -- -- -- -- -- -- -- (3,735) (3,735)
Issuance of
common stock and
preferred stock
in connection
with acquisition
of Lead Dog
Design, Inc.
(unaudited)..... 10 1,000,000 1,290 -- -- -- -- -- 1,300
Issuance of
common stock and
preferred stock
for cash
(unaudited)..... 30 3,000,000 4,110 (145) 20 200,000 -- -- 4,015
Issuance of
common stock in
connection with
acquisition of
EnterpriseWorks,
LLC
(unaudited)..... 39 3,868,213 10,442 -- -- -- -- -- 10,481
Issuance of
common stock and
preferred stock
in connection
with acquisition
of Internet
Information
Services, Inc.
(unaudited)..... 6 600,000 2,333 -- -- -- -- -- 2,339
Deferred
compensation
upon issuance of
stock options
(unaudited)..... -- -- 341 -- -- -- (341) -- --
Repayments on
notes
receivable-
stockholders,
net of interest
accrual of $4
(unaudited)..... -- -- -- 56 -- -- -- -- 56
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- -- -- 69 -- 69
Accrued
dividends on
preferred stock
and value of
beneficial
common stock
purchase right
(unaudited)..... -- -- 4,230 -- -- -- -- (6,354) (2,124)
------ ---------- ---------- ------------ --------- ----------- ------------ ------------ -------------
Balance, March
31, 2000
(unaudited)..... $589 58,855,713 $27,300 $(414) $(10,282) (5,000,000) $(1,447) $(36,520) $(20,774)
====== ========== ========== ============ ========= =========== ============ ============ =============
The accompanying notes are an integral part of these consolidated statements.
F-6
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
Year Ended December 31, March 31,
-------------------------- -------------------
1997 1998 1999 1999 2000
(Unaudited)
Cash flows from operating
activities:
Net income (loss)............ $ 2,953 $ 6,300 $ 1,967 $ 1,206 $ (3,735)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities--
Depreciation and
amortization............... 24 28 1,918 24 3,188
Stock-based compensation.... -- -- 46 -- 69
Deferred income tax
benefit.................... -- -- (103) -- (471)
Changes in operating assets
and liabilities, net of
effect of business
combinations:
Accounts receivable........ (2,341) (3,368) 1,530 (3,762) 722
Prepaid expenses and other
current assets............ 174 (18) (5) (417) (363)
Accounts payable........... 1,144 1,904 (568) 588 240
Accrued liabilities and
other..................... 29 162 831 81 1,872
Deferred revenue........... -- -- 130 3,435 65
------- ------- -------- -------- ---------
Net cash provided by
operating activities..... 1,983 5,008 5,746 1,155 1,587
------- ------- -------- -------- ---------
Cash flows from investing
activities:
Acquisition of property and
equipment................... (53) (78) (656) (34) (1,387)
Cash paid in connection with
business combinations, net
of cash acquired............ -- -- (19,762) -- (40,653)
------- ------- -------- -------- ---------
Net cash used in investing
activities............... (53) (78) (20,418) (34) (42,040)
------- ------- -------- -------- ---------
Cash flows from financing
activities:
Distributions paid........... (1,468) (4,822) (3,131) (1,532) --
Net borrowings under credit
facility.................... -- -- 6,500 -- 7,300
Cash paid for financing
costs....................... -- -- (744) -- --
Issuance of common stock for
cash........................ -- -- 2,595 -- 4,015
Issuance of convertible
preferred stock for cash.... -- -- 20,400 -- 32,180
Payment on notes receivable--
stockholders................ -- -- -- -- 60
Repurchase of common stock
and recapitalization costs.. -- -- (10,672) -- --
------- ------- -------- -------- ---------
Net cash (used in)
provided by financing
activities............... (1,468) (4,822) 14,948 (1,532) 43,555
------- ------- -------- -------- ---------
Net increase (decrease) in
cash and cash equivalents.... 462 108 276 (411) 3,102
Cash and cash equivalents at
beginning of period.......... 691 1,153 1,261 1,261 1,537
------- ------- -------- -------- ---------
Cash and cash equivalents at
end of period................ $ 1,153 $ 1,261 $ 1,537 $ 850 4,639
======= ======= ======== ======== =========
Cash paid for interest........ $ -- $ -- $ 283 $ -- $ 256
======= ======= ======== ======== =========
Supplemental disclosure of
noncash investing and
financing activities:
Stock dividends on Class A
convertible preferred
stock....................... $ -- $ -- $ 27,816 $ -- $ 2,124
Stock issued in connection
with business combinations.. -- -- 5,648 -- 19,340
The accompanying notes are an integral part of these consolidated statements.
F-7
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
1. Business Description:
Iconixx Corporation (the "Company," a Delaware corporation, formerly
Business Solutions Group, LLC), is an Internet services company formed to
develop and deliver end-to-end e-business solutions leveraging emerging
broadband and wireless technologies to enable clients to create value over the
Internet. Services provided include e-business strategy, business process
planning, web design, commerce applications and broadband systems engineering
services. The Company is headquartered in Vienna, Virginia, and has locations
across the United States and in Europe.
In November 1999, the Company changed its name to Iconixx Corporation
concurrent with its acquisition of IconixGroup, Inc. (see Note 5). Subsequent
to December 31, 1999, the Company has completed three additional acquisitions,
which have expanded the Company's web development and consulting services (see
Note 5).
The Company's operations are subject to certain risks and uncertainties,
including the susceptibility of the Company's services to rapid technological
change, increased competition from existing service providers and new entrants,
lack of an operating history, existence of fixed price contracts, realizability
of intangible assets and government regulations.
2. Summary of Significant Accounting Policies and Practices:
Unaudited Interim Financial Statements
The accompanying consolidated balance sheet as of March 31, 2000, and the
accompanying consolidated statements of operations and cash flows for the three
months ended March 31, 1999 and 2000, are unaudited. The unaudited consolidated
financial statements include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of such financial statements. The data disclosed in the notes to
the financial statements for these periods, are unaudited. The results of
operations for the three months ended March 31, 2000, are not necessarily
indicative of the results expected for the entire fiscal year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
F-8
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Equity Investment
The equity method of accounting is used to account for investments over
which the Company has significant influence and consolidation is not required
(see Note 7).
Revenue Recognition
Revenues from consulting and information technology development services,
and the related labor costs, are recognized when the services are performed.
Revenues from time and materials contracts are recognized based on fixed hourly
rates for direct labor hours expended. Revenues from fixed-price contracts are
recognized on the percentage-of-completion method, with costs and estimated
profits recorded as work is performed.
Cost of Revenues
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Direct labor costs and related expenses are included in cost of revenues based
on billable hours; costs related to unbillable time are included in selling,
general and administrative expenses. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in contract performance and estimated profitability,
including final contract settlements, may result in revisions to costs and
revenues and are recognized in the period in which the revisions are
determined. Unbilled receivables on contracts are comprised of costs, plus
earnings on certain contracts in excess of actual billings on such contracts.
Cash received in excess of costs incurred is classified as deferred revenue.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are recorded using the
straight-line method over the estimated useful lives of the individual assets
as follows: furniture and fixtures, five to ten years; and office equipment,
three to five years. Leasehold improvements are amortized over the lesser of
the estimated useful life of the asset or the remaining lease term.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," the Company reviews its recorded goodwill, other
intangibles and long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When deemed necessary, goodwill and other intangibles are assessed
for possible impairment based upon a number of factors, including turnover of
the acquired workforce and the undiscounted value of expected future operating
cash flows in relation to the Company's net investment in each subsidiary. The
Company recognizes an impairment loss when the sum of the expected future cash
flows is less than the carrying amount of the asset. The measurement of the
impairment losses to be recognized is based upon the difference between the
fair value and the carrying amount of the assets. The Company has not recorded
a provision for impairment of long-lived assets or intangible assets associated
with its acquired businesses.
F-9
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
Internal Use Computer Software
In accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," the Company will capitalize
costs related to software and implementation in connection with its internal
use software systems. Such costs are amortized principally over three years.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and credit facilities. In
management's opinion, the carrying amounts of these financial instruments
approximate their fair value at December 31, 1999.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is generally recognized based on the difference, if any, on
the date of grant between the fair value of the Company's stock and the amount
an employee must pay to acquire the stock.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. SFAS No. 133, as
amended, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000, and management has not yet determined its effect on the
Company's financial statements or disclosures.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB No.
101"), "Revenue Recognition in Financial Statements", which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. This bulletin outlines the basic criteria that
must be met to recognize revenue and provides guidance for disclosure related
to revenue recognition policies. In March 2000, the SEC issued SAB No. 101A--
Amendment: Revenue Recognition in Financial Statements ("SAB No. 101A") which
amends the transition provisions of SAB No. 101 until the second fiscal quarter
for registrants with a fiscal year beginning after December 15, 1999. We will
apply the accounting and disclosures of SAB No. 101 during the fiscal quarter
ending June 30, 2000. Our management believes that the impact of SAB No. 101
and SAB No. 101A will not have a material effect on our financial position or
results of operations.
Income Taxes
Until August 1999, the Company elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under the provisions, the Company
did not pay corporate income taxes on its taxable income. Instead, the
shareholders were liable for individual income taxes on their respective shares
of the Company's taxable income. Accordingly, there is no provision for income
taxes in the accompanying financial statements for periods prior to August
1999. In August 1999, the Company became a C corporation and therefore, became
subject to Federal and state income taxes.
F-10
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Business Concentration and Credit Risk
During 1997, 1998, and 1999, the Company had one customer in the
telecommunications industry that accounted for approximately 98.0, 93.0 and
93.0 percent, of revenues and 100.0, 91.0 and 39.0 percent of accounts
receivable, respectively. This telecommunications customer is currently in the
process of being acquired. The Company's Master Service Agreement with this
customer expires at the time of completion of the contract orders issued
thereunder. The current contract orders expire in December 2000. The Company's
management believes that this relationship will continue and that the present
terms of the Master Service Agreement will be extended, however, there can be
no assurances such extensions will occur. The loss of this customer would have
a material adverse effect on the Company's operations. Had the 1999 and 2000
acquisitions, as described in Note 5, occurred on January 1, 1999, this
customer would have accounted for approximately 57.4 percent and 43.7 percent
of pro forma revenues for the year ended December 31, 1999 and the three months
ended March 31, 2000, respectively. Substantially all net revenues were earned
from customers in the United States.
Earnings Per Share
SFAS No. 128 "Earnings Per Share," requires the presentation of basic and
diluted earnings per share. Basic net income (loss) per share is computed by
dividing income (loss) attributable to common stockholders by the weighted
average number of common shares outstanding for the period. The diluted net
income (loss) per share data is computed using the weighted average number of
common shares outstanding plus the dilutive effect of common stock equivalents,
unless the common stock equivalents are antidilutive.
The Company has 905,000 and 1,146,692 stock options outstanding as of
December 31, 1999 and March 31, 2000 respectively. In addition, the Company has
$2.6 million in subordinated convertible notes payable and $92.8 million in
Class A Convertible Preferred Stock, including accrued dividends, which are
convertible into shares of common stock upon a qualified initial public
offering at the initial public offering price.
Pro Forma Net Income (Loss)
The following unaudited pro forma income data for the year ended December
31, 1999, include a provision for federal and state income taxes as if the
Company had been a C corporation for the year presented. The effective income
tax rate reflects the combined federal and state income taxes at an assumed
rate of 38.6 percent. The following summarizes this pro forma income data (in
thousands):
Year Ended
December
31, 1999
(Unaudited)
Income before income taxes....................................... $1,971
Pro forma tax provision ......................................... 1,495
------
Pro forma net income ............................................ $ 476
======
F-11
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
The effective tax rate, on a pro forma basis, is higher than the federal
statutory rate of 34.0% primarily due to state and local income taxes and
nondeductible amortization of certain intangible assets.
3. Stockholders' Equity:
Recapitalization
On August 12, 1999, the Company was recapitalized ("the Recapitalization")
pursuant to an agreement between the Company, its existing shareholder, BSG
Holdings Inc. ("BSG Holdings"), Business Solutions Group, Inc. and Thayer ITECH
Holdings, LLC ("Thayer"). Prior to the Recapitalization, the Company had
100,000 shares of issued and outstanding common stock, all of which were owned
by BSG Holdings. Pursuant to the Recapitalization, the Company redeemed an
aggregate of 27,027 shares (5,000,000 after stock split) of common stock for
$10.0 million from BSG Holdings and Thayer purchased 58,378 shares for $21.6
million in cash subject to certain adjustments and escrow holdbacks as
described in the Recapitalization Agreement. The redemption was financed with
$10.0 million in borrowings under the Company's credit facility (see Note 12).
Following the redemption, the Company amended and restated its Certificate
of Incorporation to authorize two classes of capital stock: common stock with a
par value of $0.01 per share and the Preferred Stock (see Note 4) with a par
value of $0.01 per share and a liquidation value of $1,000 per share. At that
time, each issued and outstanding share of capital stock was converted into 185
shares of common stock and 0.3515 shares of Preferred Stock. The conversion
into Preferred Stock was accounted for as a noncash dividend in August 1999,
and the conversion into common stock was accounted for as a stock split. All
share and per share amounts have been restated to reflect this common stock
split.
The Recapitalization may give rise to additional tax basis and if such basis
is affirmed, the benefit will be credited directly to equity.
Fees incurred in connection with the Recapitalization of approximately
$652,000 are reflected in the accompanying statement of stockholders' equity
(deficit) as a distribution for amounts paid to Thayer (see Note 7) and as cost
of treasury shares for professional fees to acquire the shares.
Equity Purchase Agreement
On August 12, 1999, the Company entered into an equity purchase agreement
with Thayer which provided for the Company to sell 57,000 shares of Preferred
Stock for $57.0 million or $1,000 per share and 30 million shares of common
stock for $3.0 million or $0.10 per share, to Thayer. As part of the
Recapitalization, discussed above, 20,520 shares of Preferred Stock and 10.8
million shares of common stock were sold to Thayer. Subsequent to the
Recapitalization, in August 1999 Thayer purchased the additional 19,200,000
shares of common stock for $1.9 million. In November 1999, to finance part of
the acquisition of IconixGroup (see Note 5), the Company sold 20,400 shares of
Preferred Stock for $20.4 million. In March 2000, to finance the acquisition of
Lead Dog Design, Inc. ("Lead Dog") and EnterpriseWorks, LLC ("EnterpriseWorks")
(see Note 5), the Company sold the remaining 16,080 shares of Preferred Stock
for $16.1 million. Also in March 2000, the Company entered into an additional
equity purchase agreement with Thayer, providing for 16,100 shares of
F-12
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
Preferred Stock for $16.1 million or $1,000 per share and 3,000,000 shares of
common stock for $3.9 million or $1.30 per share. In March 2000, the Company
recorded a dividend on the Preferred Stock of approximately $4.3 million
resulting from the right to purchase common stock at a discount from its fair
value. All amounts under the second equity purchase agreement were sold to
Thayer in March 2000 related to the EnterpriseWorks and Internet Information
Services, Inc. ("IIS") acquisitions (see Note 5), with an additional $2.0
million in cash received by the Company for working capital purposes. Both of
the equity agreements place restrictions on, among other things, dividends, the
redemption and issuance of debt and equity securities, acquisitions, sales of
assets and related party transactions. Such restrictions will terminate upon
the occurrence of certain events, including the closing of a qualified initial
public offering (as defined in the agreements).
On April 10, 2000, the Company completed a stock rights offering to the
existing stockholders of the Company. A total of 101,893 shares of common stock
were purchased at $1.30 per share and 547 shares of Preferred Stock were
purchased at $1,000 per share. The Company will recognize a dividend for the
excess of the fair value of the common stock over the $1.30 purchase price.
Stock Option Plan
The Company adopted the 1999 Stock Option Plan (the "Stock Option Plan") to
assist the Company in attracting and retaining qualified employees, directors,
consultants and advisors. The Stock Option Plan, as amended, provides for the
issuance of stock options for up to 7 percent of the outstanding shares of
common stock of the Company. Options granted under the Stock Option Plan may be
either incentive stock options ("ISOs") or nonstatutory stock options ("NSOs").
Options issued under the Stock Option Plan have a maximum term of ten years
from the date of grant.
In December 1999, after the Company had completed the acquisition of
IconixGroup, Inc. (see Note 5), the Company granted NSOs to employees to
purchase 905,100 shares of common stock at an exercise price of $0.45 per share
when the fair value was approximately $1.30 (as determined by an independent
appraisal), resulting in deferred compensation at the date of grant of
approximately $769,000. The options vest under two different schedules over a
four-year period. Compensation expense recognized during 1999 for these options
totaled approximately $16,000. Had compensation cost for the plan been
determined based on the estimated fair value of the options at the grant dates
consistent with the method of SFAS No. 123, pro forma net loss attributable to
common stockholders would have been approximately $854,000 or a net loss of
$0.03 per share for 1999. The weighted-average fair value of the options
granted by the Company during 1999 based on the Black-Scholes option pricing
model is estimated to be $0.97 per option assuming the following: no dividend
yield, risk-free interest rate of 5.0 percent, an expected term of the options
of four years and an expected volatility of 45.0 percent.
In March 2000, in connection with the EnterpriseWorks acquisition (see Note
5), the Company granted stock options to certain employees as of the date of
closing of the acquisition to purchase 241,592 shares of common stock. The fair
value of the common stock as of the grant date exceeded the exercise price of
$1.30, resulting in deferred compensation at the date of the grant of
approximately $341,000. These options vest over a one-year period.
F-13
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
The following summarizes option activity during 1999:
Weighted-
Number Average
of Exercise
Shares Price
Granted in 1999............................................ 905,100 $0.45
Cancelled in 1999.......................................... -- --
------- -----
Options outstanding, December 31, 1999..................... 905,100 $0.45
======= =====
Options exercisable, December 31, 1999..................... -- $ --
======= =====
In April 2000, the Company approved the issuance of additional options to
purchase approximately 1,842,000 shares of common stock.
4. Class A Convertible Preferred Stock:
Holders of Class A Convertible Preferred Stock (the "Preferred Stock") are
entitled to dividends to be paid in additional Preferred Stock at a rate of
15.0 percent per annum. The Preferred Stock carries a liquidation preference
equal to the liquidation value ($1,000 per share) plus any accrued but unpaid
dividends. The Company, at the option of the holders, may be required to redeem
shares of Preferred Stock upon completion of a qualified initial public
offering ("IPO"). Upon any redemption, the redemption price shall be the
liquidation value plus any accrued but unpaid dividends. In the event that the
Company effects a qualified IPO, all outstanding Preferred Stock not previously
redeemed shall be converted into common stock at a rate equal to the
liquidation value plus any accrued but unpaid dividends divided by the per
share IPO price.
On May 9, 2000, in connection with a planned IPO, Thayer agreed to waive its
right to require the Company to redeem its shares of Preferred Stock provided
that the IPO closes on or before December 31, 2000. As a result, no holder of
Preferred Stock has a right to require the Company to redeem its shares of
Preferred Stock prior to the closing of the planned IPO, provided the IPO
closes on or before December 31, 2000.
5. Acquisitions:
1999 Acquisitions
On September 1, 1999, the Company acquired all of the issued and outstanding
capital stock of Empyrean Group, Inc. ("EGI"), which is based in Vienna,
Virginia, for approximately $1.7 million. The Company issued 1,639 shares of
Preferred Stock and 862,500 shares of common stock as consideration for the
transaction.
On November 2, 1999, the Company acquired all of the issued and outstanding
common stock of IconixGroup, Inc. ("IconixGroup"), which is based in Bethesda,
Maryland, and provides web development and print services. The aggregate
purchase price was approximately $26.0 million, plus transaction costs,
consisting of $19.0 million in cash, $2.7 million in convertible subordinated
notes payable (see Note 13), $365,000 in assumed debt, $456,250 in common stock
(1,825,000 shares valued at $0.25 per share), and $3.5 million in Preferred
Stock (3,467.5 shares $0.01 par value with a $1,000 liquidation value per
share).
F-14
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
Allocation of Purchase Consideration
The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the recognized purchase price has been allocated,
based on preliminary estimates of fair value, to the tangible assets acquired
and liabilities assumed and, with the advice of independent valuation experts,
to the identifiable intangible assets, as of the acquisition dates. The Company
has recorded identifiable intangibles on the 1999 Acquisitions, as follows (in
thousands):
Appraised Value Useful Life
Customer lists................................... $4,450 3 years
Assembled workforce.............................. 1,400 3 years
As of December 31, 1999, the purchase price in excess of identified tangible
and intangible assets and liabilities assumed in the amount of $25,071,000 was
allocated to goodwill. As a result of the early stage of development of the
internet and electronic commerce, the dynamics of this rapidly evolving
industry and the expectation of increasing competition, the recorded goodwill
is being amortized on a straight-line basis over three years, the estimated
period of its benefit.
The following unaudited pro forma consolidated amounts give effect to the
1999 acquisitions as if they had occurred on January 1, 1998, by consolidating
the results of operations of the 1999 acquisitions with the results of the
Company for the years ended December 31, 1998 and 1999. The pro forma amounts
do not purport to be indicative of the results of operations that would have
been achieved had the transactions been in effect for the periods presented and
should not be construed as being representative of future results of operations
(in thousands).
Year Ended
December 31,
-----------------
1998 1999
Revenues.................................................. $58,889 $ 58,728
Net loss attributable to common stockholders.............. (8,973) (12,890)
Basic and diluted net loss per share...................... (0.42) (0.43)
2000 Acquisitions
On March 10, 2000, the Company acquired all of the outstanding common stock
of Lead Dog, a New York-based provider of Internet design, development and
strategy and multimedia creations primarily for financial services,
entertainment and healthcare industries. The aggregate purchase price was
approximately $14.3 million, plus transaction costs, consisting of $10.0
million paid in cash, $1.3 million paid in the form of 1,000,000 shares of
common stock, and $3.0 million paid in the form of 3,000 shares of Iconixx
Class A Preferred Stock.
On March 23, 2000, the Company acquired substantially all of the assets and
assumed certain liabilities of EnterpriseWorks, a Houston-based provider of
web-based information technology solutions, including e-business, customer
care, sales force automation and infrastructure design services. The aggregate
purchase price was approximately $27.5 million, plus transaction costs,
consisting of $17.0 million paid in cash and $10.5 million paid in the form of
3,868,213 shares of common stock.
F-15
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
On March 24, 2000, the Company acquired certain assets and assumed certain
liabilities of IIS, a Bethesda, Maryland-based provider of Internet, extranet
and intranet consulting, integration and support services primarily to Fortune
1000 businesses and government and not-for-profit organizations. The aggregate
purchase price was approximately $17.6 million, plus transaction costs,
consisting of $13.0 million paid in cash, $2.4 million paid in the form of
600,000 shares of common stock, and $2.2 million paid in the form of 2,220
shares of Preferred Stock.
6. Divestiture of Operating Division:
On February 1, 1999, the Company entered into an agreement to transfer
certain division assets to two former employees in return for the cancellation
of their employment agreements with respect to the management of the division.
The Company incurred $419,000 in expenses related to the termination of these
agreements. Revenues for the division for the years ended December 31, 1997,
1998, and 1999, were approximately $101,000, $3,378,000, and $566,000,
respectively. Operating loss for the same periods from the division was
approximately $(9,000), $(1,774,000), and $(407,000), respectively.
7. Related-Party Transactions:
Amounts due to officers of the Company totaled $40,310 as of December 31,
1998 and are presented in accrued liabilities in the accompanying balance
sheets. These amounts are non-interest-bearing and due on demand.
The Company had a 25.0 and 33.0 percent interest in Melange Solutions, LLC
("Melange") as of December 31, 1998 and 1999, respectively. This investment
which totaled approximately $10,000 at December 31, 1998 and 1999, was included
in "other assets" in the accompanying balance sheets. Melange is a limited
liability company that was formed for software product development purposes and
to provide information technology consulting services. Melange is currently
acting as a subcontractor for the Company. Payments made to Melange for
contract services totaled approximately $431,000 and $793,000 in 1998 and 1999,
respectively. On April 10, 2000, Melange finalized dissolution proceedings with
the Delaware Secretary of State. Management believes that the dissolution of
Melange will not have a material impact on the Company's financial statements.
The Company holds notes receivable from several officers of the Company in
the aggregate amount of $325,000 and $414,000 as of December 31, 1999 and March
31, 2000, respectively, which relate to the issuance of stock. These notes
receivable bear interest at a rate of 9.0 percent, with annual payments
required until maturity in 2003. Such amounts have been classified as a
component of stockholders' equity (deficit) on the accompanying balance sheets.
As part of the acquisition of IconixGroup (see Note 5), the Company acquired
the right to certain net operating loss carryforwards, valued on a tax-effected
basis at approximately $1.1 million. To the extent these net operating losses
are utilized by the Company for a tax benefit, corresponding amounts will be
paid to the sellers of IconixGroup as additional purchase price. As of December
31, 1999, a deferred tax asset has been recorded related to these net operating
losses (see Note 15), with a corresponding liability classified as due to
former IconixGroup shareholders on the accompanying balance sheet.
F-16
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
Thayer (see Note 3) provides certain financial advisory and management
services to the Company under a professional services agreement. The agreement
is to continue until the earlier of (i) the date that Thayer ceases to hold
certain ownership percentages and (ii) an IPO of not less than $30.0 million.
Under the terms of the agreement, the Company is to pay Thayer (i) an annual
management fee of $200,000, paid quarterly; (ii) a fee equal to 1.0 percent of
amounts received by the Company in connection with any equity or debt
financing; and (iii) reimbursement of travel and out-of-pocket expenses.
Additionally, the agreement required the Company to pay Thayer $370,000 upon
closing the Recapitalization in August 1999. Under the agreement, approximately
$680,000 was paid to Thayer in 1999 of which approximately $90,000 is included
in selling, general and administrative expenses, $370,000 is reflected as a
distribution to Thayer as part of the Recapitalization and approximately
$220,000 is included in direct acquisition costs for the 1999 Acquisitions.
8. Accounts Receivable:
Accounts receivable consisted of the following (in thousands):
December 31,
------------- March 31,
1998 1999 2000
(Unaudited)
Accounts receivable............................... $5,773 $5,729 $10,160
Unbilled accounts receivable...................... -- 496 859
Allowance for doubtful accounts................... -- (86) (802)
------ ------ -------
Accounts receivable, net........................ $5,773 $6,139 $10,217
====== ====== =======
9. Property and Equipment:
Property and equipment consisted of the following (in thousands):
December
31,
------------ March 31,
1998 1999 2000
(Unaudited)
Computers and equipment............................ $ 74 $ 947 $2,436
Furniture and fixtures............................. 77 125 698
Leasehold improvements............................. -- 319 1,114
---- ------ ------
151 1,391 4,248
Accumulated depreciation and amortization.......... (69) (160) (273)
---- ------ ------
Property and equipment, net........................ $ 82 $1,231 $3,975
==== ====== ======
F-17
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
10. Intangible Assets:
Intangible assets consisted of the following (in thousands):
December 31, March 31,
1999 2000
(Unaudited)
Customer lists..................................... $ 4,450 $13,000
Assembled workforce................................ 1,400 3,900
Goodwill........................................... 25,071 69,857
------- -------
30,921 86,757
Accumulated amortization........................... (1,827) (4,862)
------- -------
Intangible assets, net........................... $29,094 $81,895
======= =======
11. Accrued Liabilities:
Accrued liabilities consisted of the following (in thousands):
December 31,
------------- March 31,
1998 1999 2000
(Unaudited)
Accrued compensation............................... $ 200 $ 696 $2,579
Accrued bonuses.................................... 69 522 743
Deferred revenue................................... 40 317 593
Other accrued liabilities.......................... -- 944 2,985
----- ------- ------
Accrued liabilities.............................. $ 309 $ 2,479 $6,900
===== ======= ======
12. Credit Facility:
On August 12, 1999, the Company entered into a revolving credit facility
with two commercial lenders (the "credit facility"). The facility provides
borrowings of up to $40,000,000, bears interest at the Company's option (the
lender's base rate plus a defined percentage or LIBOR plus 2.0 percent), and
matures on August 11, 2004. For the period from August 12, 1999 to December 31,
1999, the average interest rate, average month-end borrowings and highest
balance were 7.46 percent, $7,900,000 and $10,000,000, respectively. As of
December 31, 1999, borrowings on the credit facility totaled $6,500,000.
The Company also incurred arrangement and commitment fees in connection with
securing the credit facility, totaling $700,000 as well as other direct costs
that were capitalized and are being amortized over the life of the credit
facility based on the effective interest method. Deferred financing costs are
included in other assets on the accompanying consolidated balance sheet and
$51,680 of related amortization is included in interest expense on the
accompanying consolidated statement of operations for the year ended December
31, 1999. A fee for unused credit amounts may also be incurred on a quarterly
basis, based on a pricing schedule determined by the agreement. The credit
facility also includes certain restrictive covenants which require the Company,
among other things, to maintain minimum levels of earnings before interest,
taxes, and depreciation
F-18
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
and amortization ("EBITDA"), ratios of total debt to EBITDA, total debt to
capitalization, and places limits on capital expenditure. As of December 31,
1999, the Company was in compliance with all of its covenants.
13. Convertible Subordinated Notes Payable:
In connection with the acquisition of IconixGroup, the Company issued
$2,650,000 in convertible subordinated notes payable to the former
shareholders. The notes bear interest at 10.0 percent per annum, with interest
payments due quarterly. The notes are convertible into shares of common stock
upon an initial public offering at the IPO price. The notes mature and are
payable in full on May 3, 2005.
14. Segment Reporting:
In late 1998, the Company started a professional staffing business as a
separate division, and began operating as two reportable segments: telecom
consulting services ("Telecom") and Professional Services Division ("PSD").
During 1999 after the acquisition of IconixGroup (see Note 5), the Company
began operating another reportable segment: Web and Other Related Services
("Web").
Currently the Company only operates two reported segments, Telecom and Web,
as it divested the PSD segment on February 1, 1999 (see Note 6). Telecom
includes operations related to the Company's provision of systems engineering
and network architecture services using wireless and broadband technologies.
Web includes the operations related to the Company's provision of web strategy,
design and development, as well as technical consulting and development of web-
related applications. The accounting principles of the segments are the same as
those applied in the consolidated financial statements. The evaluation of
segment's performance is based on the accumulation of revenues and specific
costs identified to the segment's operations. No amounts of overhead generated
by the corporate management team are allocated to the segments and are
presented as "Other" below.
The following is a summary of information about each of the Company's
reportable segments that is used by the Company to measure the segment's
operations (in thousands):
Year Ended December 31, 1998
-----------------------------
Telecom PSD Consolidated
Revenues....................................... $46,520 $ 3,378 $49,898
Depreciation and amortization.................. 28 -- 28
Interest income (expense), net................. 125 -- 125
Segment income (loss).......................... 8,074 (1,774) 6,300
Year Ended December 31, 1999
---------------------------------------------
Telecom Web PSD Other Consolidated
Revenues..................... $46,588 $ 1,824 $ 566 $ -- $48,978
Depreciation and
amortization................ 18 1,673 -- 227 1,918
Interest income (expense),
net......................... 87 3 -- (271) (181)
Segment income (loss)........ 5,928 (1,638) (407) (1,916) 1,967
Three Months Ended March 31, 1999
------------------------------------
Telecom PSD Consolidated
Revenues............................... $ 13,487 $ 566 $14,053
Depreciation and amortization.......... 24 -- 24
Interest income (expense), net......... 30 -- 30
Segment income (loss).................. 1,613 (407) 1,206
F-19
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
Three Months Ended March 31, 2000
------------------------------------------
Telecom Web Other Consolidated
Revenues......................... $9,930 $ 4,096 $ -- $14,026
Depreciation and amortization.... 12 2,703 473 3,188
Interest income (expense), net... -- -- (198) (198)
Segment income (loss)............ 1,319 (2,345) (2,709) (3,735)
15. Commitments and Contingencies:
Senior Management Agreement
The Company reserved shares pursuant to a Senior Management Agreement dated
August 12, 1999, between the Company and certain executives of the Company,
whereby 10,000,000 shares of common stock were reserved for issuance to the
executives. In connection with the Recapitalization, the Company issued all
10,000,000 restricted shares to the executives at $0.10 per share, the fair
value as of that date. The shares vest based upon both the passage of time and
the performance of the Company. 5,000,000 of the shares vest ratably at 25.0
percent per year ("Time Vesting Shares"). The other 5,000,000 shares become
fully vested after eight years, which may be accelerated based upon the
performance of the Company, as defined in the agreements ("Performance Vesting
Shares").
In October 1999, upon separation by one executive, the Company repurchased
562,500 shares of unvested shares at the original cost of $0.10 per share.
Pursuant to a separation agreement with this executive, the Company permitted
the executive to vest in 112,500 shares of previously unvested Performance
Vesting Shares, and as a result, the Company recorded approximately $17,000 of
compensation expense related to these shares.
Of the 562,500 shares repurchased, 362,500 shares were sold to executives in
November 1999 for $0.10 per share, at which the fair value was determined to be
$1.30 per share. The Company recorded $435,000 of deferred compensation at the
date of sale, and, through December 31, 1999, recognized approximately $13,000
of compensation expense. The October 1999 repurchase of officer shares is
reflected net of the shares sold in November 1999 in the accompanying
consolidated statements of stockholders' equity (deficit). The remaining
200,000 shares repurchased were sold to executives in February 2000 for $1.30
per share.
Retirement Plan
During 1998, the Company terminated its defined benefit pension plan and
distributed all funds to the participants. Net pension costs associated with
the plan totaled approximately $136,000 for 1998. The Company currently
operates a defined contribution plan.
In 1999, the Company established a deferred compensation 401(k) tax savings
plan (the "Plan"). Contributions up to statutory limits could be made by
eligible employees on a voluntary basis. The Company has the option to make
discretionary contributions to the Plan. The Company made no discretionary
contributions for the year ended December 31, 1999.
F-20
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
In connection with the acquisition of IconixGroup, the Company added another
401(k) tax savings plan (the "Matching Plan"). Contributions up to statutory
limits could be made by eligible employees on a voluntary basis. The Company
matches 50.0 percent of the first 6.0 percent of employee contributions.
Operating Leases
The Company leases office space and office equipment under cancelable and
noncancelable operating leases with terms varying between 1 and 10 years.
Future minimum lease payments under all operating leases at December 31, 1999,
were as follows (in thousands):
earYEnded December 31,
2000............................................................... $ 936
2001............................................................... 777
2002............................................................... 670
2003............................................................... 660
2004............................................................... 580
Thereafter......................................................... 3,097
------
$6,720
======
Rent expenses under all operating leases were approximately $94,000 and
$301,400 for 1998 and 1999, respectively.
The Company has subleased certain office space to a customer for a two-year
period beginning in 1999. Future minimum rental amounts to be received under
this noncancelable lease are $68,200, $74,400, and $6,200 for 1999, 2000, and
2001, respectively.
Letters of Credit
The Company has issued letters of credit under its credit facility in the
amount of $500,000 in 1999 and an additional $525,000 in April 2000 as
guarantees under current and future office space and construction.
Litigation
The Company is periodically a party to disputes arising from normal business
activities. In the opinion of management, resolution of these matters will not
have a material adverse effect on the financial position or future operating
results of the Company and adequate provisions for any potential losses have
been made in the accompanying financial statements.
16. Income Taxes:
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined using the currently enacted tax rates to
apply to taxable income in the period in which the deferred tax asset or
liability is expected
F-21
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
to be settled or realized. The 1999 Acquisitions gave rise to significant
differences between financial reporting and tax bases of certain assets. In
connection with the acquisition of IconixGroup, the Company acquired a net
operating loss carryforward ("NOL") of approximately $2.7 million, which can be
used to offset future taxable income, subject to certain annual limitations.
The estimated tax benefit from the NOL carryforward is approximately $1.1
million and expires in 2019. See Note 7 for related amounts due to the selling
stockholders of IconixGroup.
The sources of and differences between the financial accounting and tax
bases of the Company's assets and liabilities, which give rise to the net
deferred tax liability as of December 31, 1999, are as follows (in thousands):
December 31, March 31,
1999 2000
(Unaudited)
Deferred tax assets:
Net operating loss carryforward...................... $ 848 $ 796
Accrued expenses..................................... 101 137
Allowance for doubtful accounts...................... 33 262
Intangible assets.................................... -- 114
Other................................................ 46 59
Deferred tax liabilities:
Intangible assets.................................... (3,442) (3,138)
Other................................................ (83) (80)
------- -------
Net deferred tax liability......................... $(2,497) $(1,850)
======= =======
The net deferred tax liability is presented on the accompanying balance
sheets as $134,000 and $400,000 in other current assets and $2,631,000 and
$2,250,000 in long-term liabilities, respectively.
The components of the provision (benefit) for income taxes during the period
ended December 31, 1999, are as follows (in thousands):
December 31, March 31,
1999 2000
(Unaudited)
Current:
Federal.............................................. $ 9 $ 2
State................................................ 98 98
----- -----
Total.............................................. 107 100
Deferred:
Federal.............................................. (84) (384)
State................................................ (19) (87)
----- -----
Total.............................................. (103) (471)
----- -----
Income tax provision (benefit)..................... $ 4 $(371)
===== =====
F-22
ICONIXX CORPORATION
(Formerly Business Solutions Group, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and March 31, 2000
(Information as of March 31, 2000 and for the Three Months
Ended March 31, 1999 and 2000 is Unaudited)
The provision (benefit) for income taxes differed from the amounts computed
at the statutory rate, as follows (in thousands):
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
(Unaudited)
Provision (benefit) for income taxes computed at
federal statutory rate of 34.0%................ $ 670 $(1,396)
Income during period which Company was an S
Corporation.................................... (1,019) --
State income taxes, net of federal deduction.... 107 107
Nondeductible amortization of certain intangible
assets......................................... 484 816
Other, net...................................... (238) 102
------- -------
Total......................................... $ 4 $ (371)
======= =======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment.
F-23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Empyrean Group, Inc.:
We have audited the accompanying consolidated balance sheets of Empyrean
Group, Inc. (a Delaware Corporation, formerly Brightlight Solutions Integration
Company) as of December 31, 1998, and August 31, 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows from
inception (February 12, 1998) to December 31, 1998, and the eight months ended
August 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. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Empyrean Group, Inc. as of
December 31, 1998, and August 31, 1999, and the results of its operations and
its cash flows from inception (February 12, 1998) to December 31, 1998, and the
eight months ended August 31, 1999, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Vienna, Virginia
February 11, 2000
F-24
EMPYREAN GROUP, INC.
(A Development Stage Company)
BALANCE SHEETS
(in thousands, except share and per share data)
As of As of
December 31, August 31,
1998 1999
Assets
Current assets:
Cash and cash equivalents........................... $ 967 $ 69
Prepaid expenses and other current assets........... 31 31
------ -------
Total current assets.............................. 998 100
------ -------
Property and equipment, net........................... 57 54
Deposits.............................................. 51 51
------ -------
Total assets...................................... $1,106 $ 205
====== =======
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable.................................... $ 26 $ 13
Accrued liabilities................................. 41 404
------ -------
Total current liabilities......................... 67 417
------ -------
Commitments and contingencies (Note 6)
Redeemable preferred stock, liquidation value $1.00
per share, 8,000,000 shares authorized; 1,500,000
shares issued and outstanding; aggregate liquidation
preference plus accrued and unpaid dividends of
$1,532 and $1,613, respectively...................... 1,532 1,613
------ -------
Stockholders' equity (deficit):
Common stock, $0.01 par value; 15,000,000 shares
authorized; 2,106,000 shares issued and
outstanding........................................ 21 21
Additional paid in capital.......................... 23 23
Accumulated deficit................................. (537) (1,869)
------ -------
Total stockholders' equity (deficit).............. (493) (1,825)
------ -------
Total liabilities and stockholders' equity
(deficit)........................................ $1,106 $ 205
====== =======
The accompanying notes are an integral part of these statements.
F-25
EMPYREAN GROUP, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(in thousands)
From Inception
(February 12,
1998) to Eight Months Accumulated
December 31, Ended August Since
1998 31, 1999 Inception
Operating expenses:
Selling, general and
administrative..................... $ 512 $ 1,253 $ 1,765
Depreciation and amortization....... 4 8 12
----- ------- -------
Total operating expenses.......... 516 1,261 1,777
----- ------- -------
Loss from operations.................. (516) (1,261) (1,777)
Other income:
Interest income..................... 11 10 21
----- ------- -------
Loss before provision for income
taxes................................ (505) (1,251) (1,756)
Provision for income taxes............ -- -- --
----- ------- -------
Net loss.............................. (505) (1,251) (1,756)
Divendends on preferred stock......... 32 81 113
----- ------- -------
Net loss attributable to common
stockholders......................... $(537) $(1,332) $(1,869)
===== ======= =======
The accompanying notes are an integral part of these statements.
F-26
EMPYREAN GROUP, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
From Inception (February 12, 1998) to December 31, 1998, and For the
Eight Months Ended August 31, 1999
(in thousands)
Stockholders' Equity (Deficit)
-------------------------------------------------------
Losses That Have
Preferred Accumulated Total
Stock Common Stock Additional During the Stockholders'
------------- ------------- Paid-In Development Equity
Amount Shares Amount Shares Capital Stage (Deficit)
Balance, February 12,
1998 (Inception)....... $ -- -- $-- -- $-- -- $ --
Issuance of common
stock................ -- -- 21 2,106 14 -- 35
Issuance of preferred
stock................ 1,500 1,500 -- -- -- -- --
Accrued dividends on
preferred stock...... 32 -- -- -- -- (32) (32)
Stock-based
compensation......... -- -- -- -- 9 -- 9
Net loss.............. -- -- -- -- -- (505) (505)
------ ----- ---- ----- ---- ------- -------
Balance, December 31,
1998................... 1,532 1,500 21 2,106 23 (537) (493)
Net loss.............. -- -- -- -- -- (1,251) (1,251)
Accrued dividends on
preferred stock...... 81 -- -- -- -- (81) (81)
------ ----- ---- ----- ---- ------- -------
Balance, August 31,
1999................... $1,613 1,500 $ 21 2,106 $ 23 $(1,869) $(1,825)
====== ===== ==== ===== ==== ======= =======
The accompanying notes are an integral part of these statements.
F-27
EMPYREAN GROUP, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(in thousands)
From Inception
(February 12, 1998) Eight Months Accumulated
to December 31, Ended August 31, Since
1998 1999 Inception
Cash flows from operating
activities:
Net loss................... $ (505) $(1,251) $(1,756)
Adjustments to reconcile
net loss to net cash used
in operating activities--
Depreciation and
amortization............ 4 8 12
Stock compensation....... 9 -- 9
Changes in operating
assets and liabilities,
net of noncash items:
Increase in deposits
and prepaid expenses.. (82) -- (82)
Increase (decrease) in
accounts payable...... 26 (13) 13
Increase in accrued
expenses.............. 41 363 404
------ ------- -------
Net cash used in
operating
activities.......... (507) (893) (1,400)
------ ------- -------
Cash flows from investing
activities:
Acquisition of property and
equipment................. (61) (5) (66)
------ ------- -------
Net cash used in
investing
activities.......... (61) (5) (66)
------ ------- -------
Cash flows from financing
activities:
Cash received from sale of
preferred stock........... 1,500 -- 1,500
Cash received from capital
contribution.............. 35 -- 35
------ ------- -------
Net cash provided by
financing
activities.......... 1,535 -- 1,535
------ ------- -------
Net increase (decrease) in
cash and cash equivalents... 967 (898) 69
Cash and cash equivalents at
beginning of period......... -- 967 --
------ ------- -------
Cash and cash equivalents at
end of period............... $ 967 $ 69 $ 69
====== ======= =======
The accompanying notes are an integral part of these statements.
F-28
EMPYREAN GROUP, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, and August 31, 1999
1. Business Description:
Empyrean Group, Inc. ("EGI" or the "Company") was incorporated under the
name Brightlight Solutions Integration Company on February 12, 1998, under the
laws of the state of Delaware. The Company changed its name to Empyrean Group,
Inc. in September 1998. EGI is headquartered in Vienna, Virginia.
The Company was in the development stage, had limited operating history, and
had not recognized revenues to date. Since its inception, the Company's
operations consisted of raising capital and hiring a management team. The
Company's operations are subject to certain risks and uncertainties, including
among others, current and potential competitors with greater resources and
longer operating histories; rapidly changing technology; and dependence on key
management personnel.
On September 1, 1999, all of the Company's issued and outstanding capital
stock was acquired by Iconixx Corporation (formerly, Business Solutions Group,
LLC), for approximately $1,725,000. Iconixx Corporation issued 1,639 shares of
Class A Convertible Preferred stock and 862,500 shares of common stock as
consideration for the transaction.
2. Summary of Significant Accounting Policies and Practices:
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is recorded using the straight-line method over
the estimated useful lives of the individual assets as follows: furniture and
fixtures, five years; and computer equipment, three years. Leasehold
improvements are amortized over the lesser of the estimated useful life of the
asset or the remaining lease term.
Development Costs
Development costs are charged to expense as incurred and are included in
selling, general and administrative expenses.
F-29
EMPYREAN GROUP, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998, and August 31, 1999
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable and accounts payable. In management's opinion,
due to the short-term nature of these instruments, the carrying amounts of
these financial instruments approximate their fair value at August 31, 1999.
Redeemable Preferred Stock
Holders of Class A Convertible Preferred stock (the "Preferred stock") are
entitled to cumulative cash dividends at a rate of 8 percent per annum. The
Preferred stock carries a liquidation preference equal to the liquidation value
($1.00 per share) plus any accrued but unpaid dividends. The Company, may be
required to convert shares of Preferred stock into shares of common stock upon
completion of a qualified initial public offering ("IPO"). Upon any conversion,
the conversion price shall be the liquidation value. At anytime following five
years from the first issuance of Preferred stock, the holders of a majority of
the outstanding shares of Preferred stock may request redemption of all, but
not less than all, of the Preferred stock. The redemption price shall be equal
to the liquidation value plus all accrued and unpaid dividends.
Income Taxes
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized. Through August 31, 1999,
the Company incurred losses and has recorded a valuation allowance against the
related deferred tax asset.
3. Property and Equipment:
Property and equipment consists of the following (in thousands):
December 31, August 31,
1998 1999
Computer equipment...................................... $19 $21
Furniture and fixtures.................................. 37 40
Leasehold improvements.................................. 5 5
--- ---
61 66
Accumulated depreciation................................ (4) (12)
--- ---
Property and equipment, net........................... $57 $54
=== ===
4. Accrued Liabilities:
Accrued liabilities consisted of the following (in thousands):
December 31, August 31,
1998 1999
Accrued compensation.................................... $ 37 $179
Accrued bonuses......................................... -- 223
Other accrued liabilities............................... 4 2
---- ----
Accrued liabilities................................... $ 41 $404
==== ====
F-30
EMPYREAN GROUP, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998, and August 31, 1999
5. Stock Option Plan:
The Company adopted the 1998 Stock Option Plan (the "Plan") to promote long-
term growth and profitability of the Corporation by (i) providing key people
with incentives to improve stockholder value and to contribute to the growth
and financial success of the Corporation, and (ii) enabling the Corporation to
attract, retain and reward the best-available persons for positions of
substantial responsibility. The Plan provides for the issuance up to 1,000,000
shares of common stock of the Company. Participation in the Plan shall be open
to all employees, officers, directors and consultants of the Company, or any
affiliate of the Company, as may be selected by the Administrator from time to
time. Options granted under the Stock Option Plan may be either incentive stock
options ("ISOs") or nonstatutory stock options ("NSOs"). The Company accounts
for options granted to employees in accordance with APB Opinion No. 25.
During 1998, options to purchase 810,900 shares were granted to Company
employees at the estimated fair value with an exercise price of $0.10 per
share. The options vest over a five-year period. Had compensation expense for
the plan been determined based on the estimated fair value of the option at the
grant dates consistent with SFAS No. 123, net loss for the period ended
December 31, 1999 would have been approximately $498,000. The weighted-average
fair value of the options granted by the Company during 1998 is estimated to be
$0.10 per option assuming the following: no dividend yield, risk-free interest
rate of 5.0 percent, an expected term of the options of four years and an
expected volatility of 45.0 percent. In connection with the acquisition, the
Plan was terminated and all options were forfeited.
6. Commitments and Contingencies:
Operating Lease
The Company leases office space under cancelable and noncancelable operating
leases. Future minimum lease payments for the four months ended December 31,
1999 are approximately $36,000. Future minimum lease payments under all
operating leases for other periods, are as follows (in thousands):
Year Ended August 31,
2000.................................................................. $112
2001.................................................................. 115
2002.................................................................. 19
----
$246
====
Rent expense under all operating leases was approximately $27,000 and
$73,000 for 1998 and the eight months ended August 31, 1999, respectively.
Litigation
The Company is periodically a party to disputes arising from normal business
activities. In the opinion of management, resolution of these matters will not
have a material adverse effect on the financial position or future operating
results of the Company and adequate provision for any potential losses have
been made in the accompanying financial statements.
F-31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of The Invisions Group, Ltd.:
We have audited the accompanying consolidated balance sheets of The
Invisions Group, Ltd. (a Maryland corporation), and subsidiary as of June 30,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Invisions Group, Ltd., and subsidiary as of June 30, 1998 and 1999, and the
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Vienna, Virginia
March 3, 2000
F-32
THE INVISIONS GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
As of June
30, As of
------------- September 30,
1998 1999 1999
(Unaudited)
Assets
Current assets:
Cash............................................. $ 153 $ 374 $ 124
Accounts receivable, less allowance of $19,000,
$50,000 and $100,000, respectively.............. 2,473 1,827 1,812
Unbilled receivables............................. 171 340 328
Prepaid expenses and other current assets........ 90 47 167
------ ------ ------
Total current assets........................... 2,887 2,588 2,431
Property and equipment, net........................ 564 439 454
------ ------ ------
Total assets................................... $3,451 $3,027 $2,885
====== ====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................. $ 992 $ 200 $ 613
Accrued liabilities.............................. 1,080 1,015 588
Line of credit................................... -- 350 175
Current portion of long-term debt................ 42 54 55
------ ------ ------
Total current liabilities...................... 2,114 1,619 1,431
------ ------ ------
Long-term debt, net of current portion............. 215 155 141
Deferred tax liability............................. 172 82 27
------ ------ ------
Total liabilities.............................. 2,501 1,856 1,599
------ ------ ------
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $0.01 par value; 1,500,000 shares
authorized, 831,250 issued and outstanding as of
June 30, 1998, 1999 and September 30, 1999,
respectively.................................... 8 8 8
Additional paid-in capital....................... 225 225 225
Retained earnings................................ 717 938 1,053
------ ------ ------
Total stockholders' equity..................... 950 1,171 1,286
------ ------ ------
Total liabilities and stockholders' equity..... $3,451 $3,027 $2,885
====== ====== ======
The accompanying notes are an integral part of these consolidated statements.
F-33
THE INVISIONS GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Three Months
Year Ended Ended
June 30, September 30,
-------------- --------------
1998 1999 1998 1999
(Unaudited)
Net revenues.................................... $8,852 $9,165 $1,403 $2,760
Cost of revenues................................ 4,909 4,086 626 1,230
------ ------ ------ ------
Gross profit.................................... 3,943 5,079 777 1,530
Operating expenses:
Selling, general and administrative........... 3,551 4,400 1,064 1,245
Depreciation and amortization................. 200 270 66 75
------ ------ ------ ------
Total operating expenses.................... 3,751 4,670 1,130 1,320
------ ------ ------ ------
Income (loss) from operations................... 192 409 (353) 210
------ ------ ------ ------
Other income (expense), net:
Other income, net............................. 18 6 1 6
Interest expense, net......................... (40) (35) (7) (8)
------ ------ ------ ------
Total other expense, net.................... (22) (29) (6) (2)
------ ------ ------ ------
Income (loss) before income taxes............... 170 380 (359) 208
Income tax provision (benefit).................. 79 159 (140) 93
------ ------ ------ ------
Net income (loss)............................... $ 91 $ 221 $ (219) $ 115
====== ====== ====== ======
The accompanying notes are an integral part of these consolidated statements.
F-34
THE INVISIONS GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended June 30, 1998 and 1999, and
Three Months Ended September 30, 1999 (Unaudited)
(in thousands, except share amounts)
Common Stock Additional
-------------- Paid-In Retained
Shares Amount Capital Earnings Total
Balance, June 30, 1997.............. 831,250 $ 8 $225 $ 626 $ 859
Net income........................ -- -- -- 91 91
------- ---- ---- ------ ------
Balance, June 30, 1998.............. 831,250 8 225 717 950
Net income........................ -- -- -- 221 221
------- ---- ---- ------ ------
Balance, June 30, 1999.............. 831,250 8 225 938 1,171
Net income (unaudited)............ -- -- -- 115 115
------- ---- ---- ------ ------
Balance, September 30, 1999
(unaudited)........................ 831,250 $ 8 $225 $1,053 $1,286
======= ==== ==== ====== ======
The accompanying notes are an integral part of these consolidated statements.
F-35
THE INVISIONS GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months
Ended
Year Ended September
June 30, 30,
------------ -------------
1998 1999 1998 1999
(Unaudited)
Cash flows from operating activities:
Net income (loss)............................... $ 91 $ 221 $ (219) $ 115
Adjustments to reconcile net income to net cash
flows provided by (used in) operating
activities--
Depreciation and amortization................. 200 270 66 75
Loss on sale of property and equipment........ -- 16 -- --
Deferred income taxes......................... (116) (198) -- (46)
Changes in assets and liabilities:
Accounts receivable, net.................... (615) 646 1,023 15
Unbilled receivables........................ 95 (169) (136) 12
Prepaid expenses and other current assets... (63) 56 (47) (129)
Accounts payable............................ 442 (792) (60) 381
Accrued liabilities......................... 127 30 (773) (395)
----- ----- ------ -----
Net cash flows provided by (used in)
operating activities..................... 161 80 (146) 28
----- ----- ------ -----
Cash flows used for investing activities:
Purchases of property and equipment............. (292) (194) (75) (90)
Proceeds from sale of property.................. -- 33 -- --
----- ----- ------ -----
Net cash flows used in investing
activities............................... (292) (161) (75) (90)
----- ----- ------ -----
Cash flows provided by financing activities:
Proceeds from long-term debt.................... 281 -- 250 --
Proceeds from short-term borrowing.............. 600 350 -- 100
Proceeds from shareholder loans................. -- 100 -- --
Payments on short-term borrowing................ (600) -- (12) (275)
Principal payments on shareholder loans......... -- (100) -- --
Principal payments on long-term debt............ (219) (48) -- (13)
----- ----- ------ -----
Net cash flows provided by (used in)
financing activities..................... 62 302 238 (188)
----- ----- ------ -----
Net change in cash................................ (69) 221 17 (250)
Cash, beginning of period......................... 222 153 153 374
----- ----- ------ -----
Cash, end of period............................... $ 153 $ 374 $ 170 $ 124
===== ===== ====== =====
Supplemental disclosure of cash flow information:
Cash paid for interest.......................... $ 26 $ 45 $ 7 $ 8
===== ===== ====== =====
Cash paid for taxes............................. 156 209 78 245
===== ===== ====== =====
The accompanying notes are an integral part of these consolidated statements.
F-36
THE INVISIONS GROUP, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1999
(Information as of September 30, 1999, and for the Three Months
Ended September 30, 1998 and 1999 is Unaudited)
1. Business Description
The Invisions Group, Ltd., and its subsidiary IconixGroup, Inc.
(collectively the "Company") are providers of Internet and print media
professional services. The Company provides customers with web engineering,
digital branding, and print media services. The Company is headquartered in
Bethesda, Maryland.
In October 1998, the Company completed an IRC Section 368B reorganization,
in which all assets, liabilities, and operations were transferred into
IconixGroup, Inc., a wholly owned subsidiary of The Invisions Group, Ltd., from
the former parent company and its subsidiary. Prior periods' balances are
stated to reflect the reorganization.
The Company's operations are subject to certain risks and uncertainties,
including the susceptibility of the Company's services to rapid technological
change, increased competition from existing service providers and new entrants,
lack of a significant operating history, existence of fixed price contracts,
government regulations, and dependence upon key members of the management team.
In November 1999, all of the Company's outstanding common stock was acquired
by Iconixx Corporation for approximately $26.0 million. Purchase consideration
was paid in the form of $19.0 million in cash, $2.7 million in convertible
subordinated notes payable, $365,000 in assumed debt, $456,250 in common stock
and $3.5 million in Iconixx Class A preferred stock.
2. Summary of Significant Accounting Policies and Practices:
Unaudited Interim Financial Information
The financial information as of September 30, 1999, and for the three months
ended September 30, 1998 and 1999, is unaudited but includes all adjustments,
consisting only of normal recurring adjustments, that the Company's management
considers necessary for a fair presentation of the Company's operating results
and cash flows for such periods. Results for the three-month period ended
September 30, 1999, are not necessarily indicative of results to be expected
for the full fiscal year of 2000 or for any future period.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
The Invisions Group, Ltd., and its wholly owned operating subsidiary,
IconixGroup, Inc. All material intercompany accounts and transactions have been
eliminated upon consolidation.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
F-37
THE INVISIONS GROUP, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999
(Information as of September 30, 1999, and for the Three Months
Ended September 30, 1998 and 1999 is Unaudited)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Revenue Recognition
Revenues from consulting and information technology development services,
and the related labor costs, are recognized when the services are performed.
Revenues from time and materials contracts are recognized based on fixed hourly
rates for direct labor hours expended. Revenues from fixed-price contracts are
recognized on the percentage-of-completion method, with costs and estimated
profits recorded as work is performed.
Cost of Revenues
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Direct labor costs and related expenses are included in cost of revenues based
on billable hours; costs related to unbillable time are included in selling,
general and administrative expenses. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in contract performance and estimated profitability,
including final contract settlements, may result in revisions to costs and
revenues and are recognized in the period in which the revisions are
determined. Unbilled receivables on contracts are comprised of costs, plus
earnings on certain contracts in excess of contractual billings on such
contracts. Cash received in excess of costs incurred is classified as deferred
revenue.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," the Company reviews its long-lived assets and identifiable
assets to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount should be addressed. Impairment
is measured by comparing the carrying value to the estimated undiscounted
future cash flows expected to result from the use of the assets and their
eventual dispositions. The Company recognizes an impairment loss when the sum
of the expected future cash flows is less than the carrying amount of the
asset. The measurement of the impairment loss to be recognized is based upon
the difference between the fair value and carrying amount of the assets. The
Company has not recorded a provision for impairment of long-lived assets.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and credit facilities. In
management's opinion, the carrying amounts of these financial instruments
approximate their fair value at June 30, 1999.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or income tax returns. Under this method,
deferred tax liabilities
F-38
THE INVISIONS GROUP, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999
(Information as of September 30, 1999, and for the Three Months
Ended September 30, 1998 and 1999 is Unaudited)
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Business Concentrations and Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of accounts receivable. The Company performs
periodic evaluations of its customer base and establishes allowances for
estimated credit losses.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform with the current period presentation.
3. Property and Equipment:
Property and equipment are stated at cost, net of accumulated depreciation
and amortization, and consist of the following (in thousands):
June 30,
------------
1998 1999
Equipment...................................................... $ 853 $ 928
Leasehold improvements......................................... 340 341
Accumulated depreciation and amortization...................... (629) (830)
----- -----
Property and equipment, net.................................. $ 564 $ 439
===== =====
Equipment depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, ranging from three to five years.
Leasehold improvements are depreciated over the lesser of the life of the lease
or their useful lives.
4. Accrued Liabilities:
Accrued liabilities consisted of the following (in thousands):
June 30,
-------------
1998 1999
Accrued compensation.......................................... $ 48 $ 192
Accrued bonuses............................................... 362 303
Accrued professional fees..................................... -- 20
Deferred revenue.............................................. 218 235
Accrued taxes................................................. 95 206
Other accrued liabilities..................................... 357 59
------ ------
Accrued liabilities......................................... $1,080 $1,015
====== ======
F-39
THE INVISIONS GROUP, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999
(Information as of September 30, 1999, and for the Three Months
Ended September 30, 1998 and 1999 is Unaudited)
5. Short-Term Borrowing:
In March 1997, the Company entered into a $250,000 short-term line of credit
arrangement. The line of credit had an interest rate of prime plus 0.5 percent
(9.0 percent at June 30, 1998) and the Company paid no commitment fee on the
unused balance. No amount was outstanding as of June 30, 1998. This line of
credit was collateralized by the assets of the Company and was personally
guaranteed by the Company's majority stockholders.
In May 1999, the Company entered into a $500,000 short-term line of credit
arrangement. The line of credit bears an interest rate of prime (7.75 percent
at June 30, 1999) and the Company pays a commitment fee of 0.375 percent on the
unused balance. The amount outstanding at June 30, 1999 was $350,000. This line
of credit is collateralized by the assets of the Company and is personally
guaranteed by the Company's majority stockholders.
The credit agreement requires the Company to maintain certain monthly
financial covenants, which include tangible net worth, current ratio, leverage
ratio, and interest coverage ratio, as defined in the credit agreement.
In connection with the acquisition by Iconixx Corporation, these lines of
credit were extinguished.
During the year ended, June 30, 1999, the Company received a shareholder
loan totaling $100,000 that was paid in full as of June 30, 1999. In connection
with the loan, the Company paid interest at a rate of 7.8 percent.
6. Long-Term Debt:
Long-term debt consisted of the following (in thousands):
June 30,
---------
1998 1999
Equipment note........................................................ $257 $209
Less--Current portion................................................. 42 54
---- ----
$215 $155
==== ====
The note is due in December 2002 and the interest rate at June 30, 1999 was
8.75 percent.
Future minimum payments of debt (exclusive of interest payments and short-
term borrowings) are as follows (in thousands):
Year Ended June 30,
2000.................................................................. $ 54
2001.................................................................. 58
2002.................................................................. 64
2003.................................................................. 33
Thereafter............................................................ --
----
Total............................................................... $209
====
F-40
THE INVISIONS GROUP, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999
(Information as of September 30, 1999, and for the Three Months
Ended September 30, 1998 and 1999 is Unaudited)
In August 1999, the Company entered into a ten-year lease agreement for
office space which commenced on December 15, 1999. The minimum annual rent is
approximately $525,000 and will be adjusted each subsequent year.
In September 1999, the Company amended its existing line of credit
arrangement, which increased the borrowing limit to $1,000,000 and extended the
expiration date to October 31, 2000. The amended line of credit also changed
its tangible net worth, current ratio, leverage ratio, and interest coverage
ratio covenants.
In connection with the acquisition by Iconixx Corporation, this debt was
extinguished.
7. Income Taxes:
The following table is a summary of the significant components of the
deferred tax assets and liabilities (in thousands):
June 30,
------------
1998 1999
Deferred tax asset:
Vacation....................................................... $ 8 $ 40
Depreciation................................................... -- 26
Other.......................................................... 18 58
----- -----
26 124
----- -----
Deferred tax liability:
Cash to accrual adjustment..................................... (258) (172)
Other.......................................................... (35) (21)
----- -----
(293) (193)
----- -----
Deferred tax liability, net.................................. $(267) $ (69)
===== =====
The Company's current deferred tax asset is included in prepaid expenses and
other current assets in the accompanying consolidated balance sheets.
The components of the income tax provision included in the statements of
operations consist of the following (in thousands):
Year Ended
June 30,
------------
1998 1999
Current:
Federal........................................................... $ 155 $ 284
State............................................................. 40 73
Deferred tax benefit.............................................. (116) (198)
----- -----
Income tax provision.............................................. $ 79 $ 159
===== =====
F-41
THE INVISIONS GROUP, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999
(Information as of September 30, 1999, and for the Three Months
Ended September 30, 1998 and 1999 is Unaudited)
The statutory federal income tax rate, reconciled to the effective income
tax rate provision is as follows (in thousands):
Year
Ended
June 30,
---------
1998 1999
Statutory federal income tax rate.................................... $52 $129
State income taxes, net of federal income tax effect................. 8 20
Non-deductible expenses.............................................. 19 10
--- ----
Total.............................................................. $79 $159
=== ====
8. Stock Option Plan:
In January 1999, the Company adopted a stock option plan, which provides for
the grant of incentive and nonqualified stock options to employees, board
members and consultants. Under the terms of the plan, the Company may issue up
to 168,750 options to acquire one share of common stock each. Options vest over
a three and one-half to four-year period and are exercisable over a ten-year
period from the date of grant. Upon a change in control of the Company, as
defined by the plan, all issued options vest and are immediately exercisable.
As of June 30, 1999, 144,550 options had been issued under the plan and 24,200
options were available for future issuance.
The Company grants stock options with exercise prices at least equal to the
then fair market value of the Company's common stock. Shares from the exercise
of options carry a right of first refusal buy back provision in which the
Company may repurchase shares.
The following table summarizes the Company's stock option activity:
Exercise Weighted-
Number Price Average
of Options Per Share Exercise Price
Outstanding at June 30, 1998............. -- $ -- $ --
Options granted........................ 144,550 6-18 8.43
Options exercised...................... -- -- --
Options cancelled...................... 1,250 6 6
------- ----- -----
Outstanding at June 30, 1999............. 143,300 $6-18 $8.43
======= ===== =====
As of June 30, 1999, none of the outstanding options to purchase shares of
common stock were exercisable. The weighted-average remaining contractual life
of options outstanding at June 30, 1999, was approximately 9.6 years.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 defines a "fair
value based method" of accounting for an employee stock option or similar
equity instrument. Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period.
SFAS No. 123 allows an entity to continue to use the intrinsic value method
of accounting for options granted under qualified plans for employees as
defined by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and management has elected to do so. Under the
intrinsic
F-42
THE INVISIONS GROUP, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999
(Information as of September 30, 1999, and for the Three Months
Ended September 30, 1998 and 1999 is Unaudited)
value method, compensation cost is the excess, if any, of the fair value of the
stock at grant date or other measurement date over the amount an employee must
pay to acquire the stock. However, entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma disclosures of net income,
as if the fair value based method of accounting had been applied. Accordingly,
if the Company had used the fair value accounting provisions of SFAS No. 123,
the pro forma net income for June 30, 1999, would not have differed materially
from that reported.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants: no dividend yield, zero percent volatility, risk-free interest rate of
6 percent and estimated lives of ten years.
In connection with the acquisition by Iconixx Corporation, the Company
repurchased all of the outstanding stock options for $2.6 million, for which
the Company recorded compensation expense prior to the consummation of the
acquisition by Iconixx Corporation.
9. Stockholders' Agreement:
Prior to fiscal 1998, the Company entered into a Corporate Stock Agreement
with its employee stockholders that contained certain formula buyback
provisions described below. Effective in fiscal year 1999, the Company entered
into a new Corporate Stock Agreement and terminated its old agreement with the
employee stockholders. The new agreement contains fair value buyback
provisions, also described below. In addition, the Company granted options to
three employee stockholders and three other employees that if exercised require
the Company to execute the same buyback provisions contained in the new
Corporate Stock Agreement.
The prior Corporate Stock Agreement's buyback provisions required that upon
termination of employment, death, or disability, remaining stockholders be
given the option to purchase all shares held by the withdrawing, deceased, or
disabled stockholder. If the remaining stockholders did not elect to purchase
the shares of the withdrawing, deceased, or disabled stockholder, the Company
was required to purchase those shares at a formula price based upon the
Company's earnings. The formula redemption price per share, whether purchased
by other existing stockholders or by the Company, was calculated as the sum of
"Adjusted Earnings" for the three preceding completed fiscal years, divided by
total shares outstanding. Adjusted Earnings for any fiscal year was defined as
taxable income, plus bonuses in excess of authorized salaries, plus deferred
compensation plan contributions allocable to that fiscal year.
The Company accounted for shares issued to three stockholder employees under
variable plan accounting through fiscal 1998. Accordingly, the Company re-
measured the value of the stock outstanding at the end of each period by
recording compensation expense and a corresponding increase in additional paid-
in capital. Cumulative compensation expense recorded under variable plan
accounting through June 30, 1998 was $110,072. No compensation expense was
recorded in connection with shares issued to the Company's two founders.
The new Corporate Stock Agreement replaced the formula buyback provisions
with fair value provisions. In the event of termination of employment, death,
or disability, the Company may at its option, repurchase the withdrawing,
deceased, or disabled employee's shares at fair market value. Before the
Company may exercise
F-43
THE INVISIONS GROUP, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1999
(Information as of September 30, 1999, and for the Three Months
Ended September 30, 1998 and 1999 is Unaudited)
its option to repurchase the shares, other remaining shareholders have a first
option to purchase the shares at the same fair market price.
Also under the new agreement, if an employee shareholder wishes to transfer
shares to another individual or entity, the remaining shareholders or the
Company may purchase the shares under the same fair value terms. If an employee
shareholder wishes to sell shares, the other remaining shareholders or the
Company may elect to purchase those shares at the same bona fide offer price
received by the selling employee shareholder from a third party.
Under the terms of the new agreement, the Company accounted for its shares
and options outstanding under fixed plan accounting in accordance with
provisions of APB No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no associated compensation expense was recorded during fiscal year
1999.
10. Commitments and Contingencies:
Operating Leases
The Company leases various office spaces and equipment for periods ranging
from approximately one to eight years. Future minimum lease payments under
these operating leases are as follows:
Year Ended June 30,
2000.............................................................. $152,331
2001.............................................................. 32,204
2002.............................................................. 2,116
Thereafter........................................................ --
--------
Total........................................................... $186,651
========
Rent expense charged to operations during the years ended June 30, 1998 and
1999, was approximately $284,000 and $270,000, respectively.
Litigation
The Company is periodically a party to disputes arising from normal business
activities. In the opinion of management, resolution of these matters will not
have a material adverse effect on the financial position or future operating
results of the Company and adequate provision for any potential losses have
been made in the accompanying financial statements.
11. Profit-sharing Plan:
The Company has a profit sharing plan covering all U.S. employees who are at
least 21 years of age. Employees are eligible to join the plan on their date of
hire. The Company makes discretionary contributions to the plan based on
Company profitability. Company contributions vest over a six-year period. The
Company's contribution to the plan was approximately $220,000 for the year
ended June 30, 1998, and $0 for the year ended June 30, 1999. On July 1, 1999,
the Company added a 401(k) savings feature to the plan and changed the plan
year-end to December 31. For the period July 1, 1999 through December 31, 1999,
the Company matched 50.0 percent of the first 6.0 percent of employee
contributions.
F-44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Lead Dog Design, Inc.:
We have audited the accompanying balance sheets of Lead Dog Design, Inc. (a
New York Corporation) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lead Dog Design, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Vienna, Virginia
March 11, 2000
F-45
LEAD DOG DESIGN, INC.
BALANCE SHEETS
(in thousands, except share amounts)
As of
December
31,
-----------
1998 1999
Assets
Current assets:
Cash and cash equivalents........................................ $245 $ 106
Accounts receivable, net......................................... 132 897
---- ------
Total current assets........................................... 377 1,003
Property and equipment, net........................................ 160 395
Other assets....................................................... 22 138
---- ------
Total assets................................................... $559 $1,536
==== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................................. $ 2 $ 44
Accrued liabilities.............................................. 110 348
Due to related parties........................................... 30 8
---- ------
Total current liabilities...................................... 142 400
Long-term liabilities:
Deferred rent.................................................... 23 26
---- ------
Total liabilities.............................................. 165 426
---- ------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, no par value, 200 shares authorized, 160.6 and 200
shares issued and outstanding in 1998 and 1999, respectively.... 9 494
Retained earnings................................................ 385 616
---- ------
Total stockholders' equity..................................... 394 1,110
---- ------
Total liabilities and stockholders' equity..................... $559 $1,536
==== ======
The accompanying notes are an integral part of these statements.
F-46
LEAD DOG DESIGN, INC.
STATEMENTS OF OPERATIONS
(in thousands)
Year Ended
December 31,
-------------
1998 1999
Net revenues..................................................... $1,425 $3,959
Cost of revenues................................................. 539 1,416
------ ------
Gross profit................................................... 886 2,543
Operating expenses:
Selling, general and administrative............................ 442 1,882
Depreciation and amortization.................................. 52 93
------ ------
Total operating expenses..................................... 494 1,975
------ ------
Income from operations before provision for income taxes......... 392 568
Provision for local income taxes................................. 36 72
------ ------
Net income................................................... $ 356 $ 496
====== ======
The accompanying notes are an integral part of these statements.
F-47
LEAD DOG DESIGN, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1999
(in thousands, except share amounts)
Common Stock Total
------------- Retained Stockholders'
Amount Shares Earnings Equity
Balance, December 31, 1997................ $ 9 160.60 $ 29 $ 38
Net income.............................. -- -- 356 356
---- ------ ----- ------
Balance, December 31, 1998................ 9 160.60 385 394
Net income.............................. -- -- 496 496
Issuance of common stock for cash....... 150 2.99 -- 150
Issuance of common stock as
compensation........................... 335 36.41 -- 335
Distributions to stockholders........... -- -- (265) (265)
---- ------ ----- ------
Balance, December 31, 1999................ $494 200.00 $ 616 $1,110
==== ====== ===== ======
The accompanying notes are an integral part of these statements.
F-48
LEAD DOG DESIGN, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
December
31,
------------
1998 1999
Cash flows from operating activities:
Net income..................................................... $ 356 $ 496
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization................................ 52 93
Warrants received............................................ -- (95)
Stock compensation........................................... -- 335
Loss on investment........................................... -- 7
Changes in operating assets and liabilities:
Accounts receivable........................................ (52) (766)
Deposits and other......................................... (11) (18)
Accounts payable........................................... (10) 42
Accrued expenses........................................... 51 116
Provision for deferred revenue............................. -- 73
Deferred taxes............................................. 2 49
Deferred rent.............................................. 23 2
----- -----
Net cash provided by operating activities................ 411 334
----- -----
Cash flows from investing activities:
Acquisition of property and equipment.......................... (171) (326)
Purchase of investments........................................ (5) (10)
----- -----
Net cash used in investing activities.................... (176) (336)
----- -----
Cash flows from financing activities:
Distributions paid............................................. -- (265)
Issuance of common stock for cash.............................. -- 150
Repayment of amounts due to related-parties loans.............. -- (22)
Borrowings from related party.................................. 9 --
----- -----
Net cash provided by (used in) financing activities...... 9 (137)
----- -----
Net increase (decrease) in cash and cash equivalents............. 244 (139)
Cash and cash equivalents at beginning of year................... 1 245
----- -----
Cash and cash equivalents at end of year......................... $ 245 $ 106
===== =====
Supplemental disclosure of cash flow information:
Cash paid for interest......................................... $ -- $ --
===== =====
Cash paid for income taxes..................................... 1 59
===== =====
Non-cash transactions:
Stock warrants received in lieu of cash for services
performed..................................................... $ -- $ 95
===== =====
The accompanying notes are an integral part of these statements.
F-49
LEAD DOG DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. Business Description:
Lead Dog Design, Inc. (the "Company," a New York Subchapter S corporation),
is an Internet services company that provides e-business strategy, business
process planning, web design, commerce applications and broadband systems
engineering services. The Company is headquartered in New York City, New York.
The Company's operations are subject to certain risks and uncertainties,
including the susceptibility of the Company's services to rapid technological
change, increased competition from existing service providers and new entrants,
lack of significant operating history, existence of fixed price contracts,
government regulations, and dependence upon key members of the management team.
On March 10, 2000, all of the outstanding common stock of the Company was
sold to Iconixx Corporation. Purchase consideration was paid in the form of
$10.0 million in cash, 1,000,000 shares of Iconixx common stock, and $3.0
million paid in the form of 3,000 shares of Iconixx Class A preferred stock.
2. Summary of Significant Accounting Policies and Practices:
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States equires 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Investments
The equity method of accounting is used to account for investments over
which the Company has significant influence (see Note 3).
Investments at December 31, 1999, are principally stock warrants received
from customers for services rendered and are presented in "other assets" on the
accompanying balance sheet. The Company accounts for its investments under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Under SFAS
115, the Company classifies its equity securities as available-for-sale.
Under SFAS 115, available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses on available-for-sale securities are
excluded from earnings and are reported as a separate component of
stockholders' equity until realized. Dividend and interest income are
recognized when earned. Realized gains and losses for securities classified as
available-for-sale are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
Revenue Recognition
Revenues from consulting and information technology development services,
and the related labor costs, are recognized when the services are performed.
Revenues from time and materials contracts are recognized based on fixed hourly
rates for direct labor hours expended. Revenues from fixed-price contracts are
recognized
F-50
LEAD DOG DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
on the percentage-of-completion method based on labor hours, with costs and
estimated profits recorded as work is performed.
Cost of Revenues
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Direct labor costs and related expenses are included in cost of revenues based
on billable hours; costs related to unbillable time are included in selling,
general, and administrative expenses. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in contract performance and estimated profitability,
including final contract settlements, may result in revisions to costs and
revenues and are recognized in the period in which the revisions are
determined. Unbilled receivables on contracts are comprised of costs, plus
earnings on certain contracts in excess of contractual billings on such
contracts. Cash received in excess of costs incurred is classified as deferred
revenue.
During 1999, the Company entered into agreements with four customers whereby
the Company received equity securities as payment for services rendered. These
arrangements accounted for approximately 5.0 percent of the Company's revenues.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are recorded using the double-
declining balance method over the estimated useful lives of the individual
assets as follows: software, three years; furniture and fixtures, five to ten
years; and computers and equipment, three to ten years. Leasehold improvements
are amortized over the lesser at the estimated useful life of the asset or the
remaining lease term.
Impairment of Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Company reviews its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company recognizes an impairment loss when the sum of the expected future cash
flows is less than the carrying amount of the asset. The measurement of the
impairment losses to be recognized is based upon the difference between the
fair value and the carrying amount of the assets. The Company has not recorded
a provision for impairment of long-lived assets.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, and accounts payable. In management's
opinion, the carrying amounts of these financial instruments approximate their
fair value at December 31, 1999.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is generally recognized based on the difference, if any, on
the date of grant between the fair value of the Company's stock and the amount
an employee must pay to acquire the stock.
F-51
LEAD DOG DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Income Taxes
The Company elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under the provisions, the Company did not pay federal or
state income taxes on its taxable income. Instead, the stockholders were liable
for individual income taxes on their respective shares of the Company's federal
and state taxable income. Accordingly, there is no provision for federal and
state income taxes in the accompanying financial statements. However, the
Company was subject to New York City income taxes.
New York City income taxes are accounted for using an asset and liability
approach that requires the recognition of taxes payable or refundable for the
current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of current and deferred tax
liabilities and assets are based on provisions of the enacted tax law; the
effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
Business Concentration and Credit Risk
The following table summarizes the revenues and accounts receivable from
clients in excess of 10.0 percent of total revenues and accounts receivable:
Revenues for the Accounts
Year Ended Receivable as of
December 31, December 31,
1999 1999
Company A.................................. 28% 11%
Company B.................................. 18 *
Company C.................................. * 13
- --------
* Represents less than 10.0% of total
3. Related-Party Transactions:
Amounts due to officers of the Company totaled approximately $30,000 and
$8,000 at December 31, 1998 and 1999, respectively, and are presented as "Due
to related parties" in the accompanying balance sheets. These amounts are non-
interest-bearing and due on demand.
In January 1999 the Company granted 36.41 shares of the Company's common
stock to a member of senior management and recorded compensation expense of
$335,000.
The Company has a 33.0 percent interest in P2K Design.com, LLC ("P2K"). This
investment, which approximated $8,300 at December 31, 1999, was included in
"other assets" in the accompanying balance sheet. P2K is a limited liability
company that was formed to provide Internet design and consulting services for
the healthcare industry.
F-52
LEAD DOG DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
On November 1, 1999, the Company sold 2.99 shares of its common stock for
$150,000 to a family member of the majority stockholders. The transaction was
valued by management at its estimated fair value at the date of the transaction
which approximates an arms length transaction.
4. Accounts Receivable:
Accounts receivable consisted of the following (in thousands):
December
31,
------------
1998 1999
Accounts receivable............................................... $150 $1,038
Unbilled accounts receivable...................................... -- 70
Accounts receivable from affiliates............................... -- 2
Allowance for doubtful accounts................................... (18) (213)
---- ------
Accounts receivable, net........................................ $132 $ 897
==== ======
5. Property and Equipment:
Property and equipment consisted of the following (in thousands):
December
31,
-----------
1998 1999
Computers and equipment............................................ $162 $ 328
Furniture and fixtures............................................. 77 142
Leasehold improvements............................................. 4 55
Software........................................................... -- 46
---- -----
243 571
Accumulated depreciation and amortization.......................... (83) (176)
---- -----
Property and equipment, net...................................... $160 $ 395
==== =====
6. Other Assets:
Other assets consisted of the following (in thousands):
December
31,
---------
1998 1999
Deposits............................................................. $ 17 $ 35
Investment in P2K.................................................... -- 8
Stock warrants from customer......................................... -- 95
Other investments.................................................... 5 --
---- ----
Other assets....................................................... $ 22 $138
==== ====
F-53
LEAD DOG DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
7. Accrued Liabilities:
Accrued liabilities consisted of the following (in thousands):
December
31,
---------
1998 1999
Accrued city taxes................................................... $ 2 $ 51
Deferred revenue..................................................... -- 73
Accrued commissions.................................................. 5 26
Other accrued liabilities............................................ 103 198
---- ----
Accrued liabilities................................................ $110 $348
==== ====
8. Commitments and Contingencies:
On June 7, 1999, the Company entered into a revolving credit facility with a
commercial lender (the "Facility"). The Facility provides borrowings of up to
$200,000 and bears interest at the lender's prime rate plus 1.0 percent (9.5
percent at December 31, 1999). The Company has not used the line and has no
borrowings outstanding at December 31, 1999.
In connection with the acquisition by Iconixx Corporation, the Facility was
extinguished.
Operating Leases
The Company leases office space and office equipment under cancelable and
noncancelable operating leases, with various expirations through 2004. Future
minimum lease payments under all operating leases at December 31, 1999, were as
follows (in thousands):
YeraEnded December 31,
2000................................................................. $220
2001................................................................. 213
2002................................................................. 198
2003................................................................. 121
2004................................................................. 1
----
$753
====
Rent expense under all operating leases was approximately $32,373 and
$139,071 for 1998 and 1999, respectively.
Litigation
The Company is periodically a party to disputes arising from normal business
activities. In the opinion of management, resolution of these matters will not
have a material adverse effect on the financial position or future operating
results of the Company and adequate provision for any potential losses have
been made in the accompanying financial statements.
9. Income Taxes:
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined using the currently enacted tax rates to
apply to taxable income in the period in which the deferred tax asset or
liability is expected to be settled or realized.
F-54
LEAD DOG DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
The sources of and differences between the financial accounting and tax
basis of the Company's assets and liabilities that give rise to the net
deferred tax liability are as follows (in thousands):
December
31,
----------
1998 1999
Deferred tax assets:
Allowance for doubtful accounts.................................. $ (4) $(19)
Accounts payable, accrued liabilities, and other................. (14) (40)
Deferred tax liabilities:
Accounts receivable.............................................. 20 98
Other............................................................ -- 12
---- ----
$ 2 $ 51
==== ====
The components of the provision for income taxes are as follows (in
thousands):
Year
Ended
December
31,
---------
1998 1999
Local taxes:
Current............................................................. $34 $23
Deferred............................................................ 2 49
--- ---
Provision for income taxes........................................ $36 $72
=== ===
The provision for income taxes differed from the amounts computed at the
statutory rate, as follows (in thousands):
Year Ended
December
31,
------------
1998 1999
Income tax computed at federal statutory rate..................... $ 133 $ 268
Less impact of federal S corporation election..................... (133) (268)
City income taxes................................................. 35 70
Other, net........................................................ 1 2
----- -----
$ 36 $ 72
===== =====
F-55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EnterpriseWorks, LLC:
We have audited the accompanying balance sheets of EnterpriseWorks, LLC (the
"Company"), as of December 31, 1998 and 1999, and the related statements of
operations, members' equity, and cash flows for the years ended December 31,
1998 and 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. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EnterpriseWorks, LLC, as of
December 31, 1998 and 1999, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Vienna, Virginia
March 23, 2000
F-56
ENTERPRISEWORKS, LLC
BALANCE SHEETS
(in thousands)
As of
Assets December 31,
--------------
1998 1999
Current assets:
Cash and cash equivalents.................................... $ 337 $ 132
Accounts receivable net of allowance of $58 and $46 at
December 31, 1998 and 1999, respectively.................... 843 2,706
Receivables from employees................................... 21 14
Prepaid expenses and other current assets.................... 41 96
------ ------
Total current assets....................................... 1,242 2,948
Property and equipment, net.................................... 387 775
Other assets................................................... 25 43
------ ------
Total assets............................................... $1,654 $3,766
====== ======
Liabilities and Members' Equity
Current liabilities:
Revolving line of credit..................................... $ 199 $ 263
Accounts payable............................................. 144 181
Accrued liabilities.......................................... 444 1,512
Current portion of long-term debt............................ 99 239
Current portion of capital lease obligation.................. 5 52
------ ------
Total current liabilities.................................. 891 2,247
Long-term liabilities:
Notes payable, less current portion.......................... 261 325
Capital lease obligation, less current portion............... 11 40
Other long-term liabilities.................................. -- 38
------ ------
Total long-term liabilities................................ 272 403
------ ------
Total liabilities.......................................... 1,163 2,650
------ ------
Commitments and contingencies (Note 7)
Members' equity:
Capital--
Voting units............................................... 800 800
Nonvoting units............................................ -- 2,126
Deferred compensation........................................ -- (1,926)
Retained earnings (accumulated deficit)...................... (309) 116
------ ------
Total members' equity...................................... 491 1,116
------ ------
Total liabilities and members' equity...................... $1,654 $3,766
====== ======
The accompanying notes are an integral part of these statements.
F-57
ENTERPRISEWORKS, LLC
STATEMENTS OF OPERATIONS
(in thousands)
Year Ended
December 31,
--------------
1998 1999
Net revenues.................................................... $3,953 $9,643
Cost of revenues................................................ 1,645 4,035
------ ------
Gross profit................................................ 2,308 5,608
Operating expenses:
Selling, general and administrative........................... 2,323 4,456
Depreciation and amortization................................. 33 199
------ ------
Total operating expenses.................................... 2,356 4,655
Income (loss) from operations................................... (48) 953
Interest expense................................................ 7 59
------ ------
Income (loss) before provision for taxes........................ (55) 894
Provision for taxes............................................. -- 65
------ ------
Net (loss) income......................................... $ (55) $ 829
====== ======
The accompanying notes are an integral part of these statements.
F-58
ENTERPRISEWORKS, LLC
STATEMENTS OF MEMBERS' EQUITY
For the Years Ended December 31, 1998 and 1999
(in thousands)
Retained
Capital Earnings
---------------- Deferred (Accumulated
Voting Nonvoting Compensation Deficit) Total
Balance, December 31, 1997.. $500 $ -- $ -- $(254) $ 246
Capital contributions..... 300 -- -- -- 300
Net loss.................. -- -- -- (55) (55)
---- ------ ------- ----- ------
Balance, December 31, 1998.. 800 -- -- (309) 491
Distributions to members... -- -- -- (404) (404)
Issuance of non-voting
units...................... -- 2,126 (2,126) -- --
Amortization of deferred
compensation............... -- -- 200 -- 200
Net income................. -- -- -- 829 829
---- ------ ------- ----- ------
Balance, December 31, 1999.. $800 $2,126 $(1,926) $ 116 $1,116
==== ====== ======= ===== ======
The accompanying notes are an integral part of these statements.
F-59
ENTERPRISEWORKS, LLC
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
December 31,
--------------
1998 1999
Cash flows from operating activities:
Net (loss) income............................................ $ (55) $ 829
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities--
Depreciation and amortization.............................. 33 199
Stock-based compensation................................... -- 200
Changes in assets and liabilities, net of non-cash items:
Accounts receivable...................................... (554) (1,856)
Prepaid expenses and other current assets................ (52) (73)
Accounts payable......................................... 19 37
Accrued liabilities...................................... 373 665
Other liabilities........................................ -- 38
----- -------
Net cash (used in) provided by operating activities.... (236) 39
Cash flows from investing activities:
Acquisition of property and equipment........................ (397) (483)
----- -------
Net cash used in investing activities.................. (397) (483)
Cash flows from financing activities:
Capital contributions from members........................... 300 --
Net proceeds from line of credit............................. 199 64
Proceeds from long-term debt................................. 360 327
Repayment of long-term debt.................................. -- (122)
Repayment of capital lease obligations....................... (1) (30)
----- -------
Net cash provided by financing activities.............. 858 239
----- -------
Increase (decrease) in cash and cash equivalents............... 225 (205)
Cash and cash equivalents at beginning of year................. 112 337
----- -------
Cash and cash equivalents at end of year....................... $ 337 $ 132
===== =======
Cash paid for interest......................................... $ 7 $ 59
===== =======
The accompanying notes are an integral part of these statements.
F-60
ENTERPRISEWORKS, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. Business Description:
EnterpriseWorks, LLC (the "Company"), was organized as a limited liability
company in the state of Texas on July 1, 1997. The Company provides consulting
and software development services to its customers and is headquartered in
Houston, Texas.
The Company is a majority-owned subsidiary of a privately held holding
company with investments in distribution, manufacturing, and service
businesses.
The Company's operations are subject to certain risks and uncertainties,
including the susceptibility of the Company's services to rapid technological
change, increased competition from existing service providers and new entrants,
lack of a significant operating history, existence of fixed price contracts,
government regulations, and dependence upon key members of the management team.
On March 23, 2000 substantially all of the net assets of the Company were
sold to Iconixx Corporation. Purchase consideration was paid in the form of
$17.0 million in cash and 3,868,213 shares of Iconixx common stock.
2. Summary of Significant Accounting Policies and Practices:
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the individual assets when placed into service as follows:
Furniture and fixtures............................................... 3 years
Computers and equipment.............................................. 3 years
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.
Taxes
As the Company is a limited liability company, the Company is not subject to
federal income taxes. All earnings are reported by the owners for federal
income tax purposes. However, the Company is subject to state taxes and has
accrued $65,670 for state taxes as of December 31, 1999.
F-61
ENTERPRISEWORKS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Revenue Recognition
Revenues from consulting and information technology development services,
and the related labor costs, are recognized when the services are performed.
Revenues from time and materials contracts are recognized based on fixed hourly
rates for direct labor hours expended. Revenues from fixed-price contracts are
recognized on the percentage-of-completion method, with costs and estimated
profits recorded as work is performed.
Cost of Revenues
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Direct labor costs and related expenses are included in cost of revenues based
on billable hours; costs related to unbillable time are included in selling,
general, and administrative expenses. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in contract performance and estimated profitability,
including final contract settlements, may result in revisions to costs and
revenues and are recognized in the period in which the revisions are
determined. Unbilled receivables on contracts are comprised of costs, plus
earnings on certain contracts in excess of contractual billings on such
contracts. Cash received in excess of costs incurred is classified as deferred
revenue.
Impairment of Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets to be Disposed Of," the Company reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company recognizes an
impairment loss when the sum of the expected future cash flows is less than the
carrying amount of the asset. The measurement of the impairment loss recognized
is based upon the difference between the fair value and the carrying amount of
the asset. The Company has not recorded a provision for impairment of long-
lived assets.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and credit facilities. In
management's opinion, the carrying amounts of these financial instruments
approximate their fair value at December 31, 1999.
Business Concentration of Credit Risk
Financial instruments which subject the Company to concentrations of credit
risk consist principally of trade receivables. The Company's policy is to
evaluate each customer's financial condition and determine the amount of credit
to be extended. The Company does not, as a matter of policy, require collateral
on credit granted to customers. Sales to the Company's top three customers
accounted for approximately 30.0 and 46.0 percent of 1999 and 1998 revenues,
respectively. At December 31, 1999, three customers represented 47.0 percent of
the Company's accounts receivable balance, and at December 31, 1998, three
customers represented 61.0 percent of the Company's accounts receivable
balance.
F-62
ENTERPRISEWORKS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
3. Debt:
December 31,
------------------
1998 1999
The Company has a $360,000 note payable to a commercial
bank ("Term 1"). The note was entered into by the Company
on December 17, 1998, and matures on December 17, 2001,
at which point all accrued and unpaid interest and
principal are due. Interest accrues on a monthly basis at
the bank's prime rate (7.75 and 8.50 percent at December
31, 1998 and 1999, respectively). Principal and interest
payments are due monthly on the 17th of the month. The
note is secured by all accounts receivable and fixed
assets of the Company and is guaranteed by the Company's
parent. The Company accrued and paid interest related to
the note of approximately $25,000 and $1,000 for the
years ending December 31, 1998 and 1999, respectively.... $360,000 $262,000
The Company has a $120,000 note payable to a commercial
bank ("Term 2"). The note was entered into by the Company
on April 29, 1999, and matures on January 29, 2002, at
which point all accrued and unpaid interest and principal
are due. Interest accrues on a monthly basis at the
bank's prime rate (8.50 percent at December 31, 1999).
Principal and interest payments are due monthly on the
29th of the month. The note is secured by all accounts
receivable and fixed assets of the Company and is
guaranteed by the Company's parent. The Company accrued
and paid interest related to the note of approximately
$6,000 for the year ending December 31, 1999............. -- 100,000
The Company has a $350,000 note payable to a commercial
bank ("Term 3"). The note was entered into by the Company
on September 2, 1999, and matures on June 2, 2002, at
which point all accrued and unpaid interest and principal
are due. Interest accrues on a monthly basis at the
bank's prime rate (8.50 percent at December 31, 1999).
Principal and interest payments are due monthly on the
2nd of the month. The note is secured by all accounts
receivable and fixed assets of the Company and is
guaranteed by the Company's parent. The Company accrued
and paid interest related to the note of approximately
$8,000 for the year ending December 31, 1999. The Company
drew the final $143,000 of the note subsequent to year-
end...................................................... -- 202,000
-------- --------
Total................................................... 360,000 564,000
Less--Current maturities.................................. (99,000) (239,000)
-------- --------
Long-term notes payable................................. $261,000 $325,000
======== ========
The notes payable were not assumed by Iconixx Corporation as a result of the
acquisition.
The Company's original revolving line of credit with a commercial bank ("Old
LOC"), entered into on July 10, 1998, provided for a revolving credit facility
not to exceed $650,000 or 80.0 percent of accounts receivable. Interest accrued
on a monthly basis at the bank's prime rate (7.75 percent and 8.50 percent at
December 31, 1998 and 1999, respectively). The Old LOC was secured by the
Company's accounts receivable and was guaranteed by the Company's parent. The
Old LOC matured on December 17, 1999. The Company incurred and paid
approximately $18,000 and $5,000 of interest expense during 1999 and 1998,
respectively, related to the Old LOC.
Concurrent with the termination of the Old LOC on December 17, 1999, the
Company entered into another revolving line of credit with a commercial bank
("New LOC").
The New LOC provides for a revolving credit facility not to exceed
$1,500,000. Interest accrues on a monthly basis at the bank's prime rate (8.50
percent at December 31, 1999). The New LOC is secured by the
F-63
ENTERPRISEWORKS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Company's accounts receivable and property and equipment and is secured by the
Company's parent. The New LOC matures on December 12, 2000. At December 31,
1999, the Company had approximately $1,237,000 available for use on the New
LOC. The Company incurred approximately $1,000 of interest expense during 1999
related to the New LOC.
The Company's New LOC agreement contains various restrictive covenants,
which among other things, require that the Company maintain a minimum tangible
net worth of $650,000 until June 29, 2000 and $750,000 from June 30, 2000 to
December 12, 2000. In addition, the Company must maintain a debt service
coverage ratio of at least 1.25 on a cumulative twelve-month basis. The New LOC
was not assumed by Iconixx Corporation as a result of the acquisition.
Scheduled maturities of debt are as follows (in thousands):
Year Ended December 31,
2000...................................................................... $239
2001...................................................................... 277
2002...................................................................... 48
----
$564
====
4. Members' Equity:
Members' equity consists of 8,500,000 voting units as of December 31, 1999.
In December 1999, the Company's Board of Directors authorized the issuance of
1,275,000 nonvoting membership units ("Nonvoting units") to selected employees
in exchange for 1,225,000 units under the Company's Unit Appreciation Rights
bonus program (see Note 9). Similar to the units exchanged, the Nonvoting units
vest over a five-year period beginning December 31, 1999. As a result of the
issuance of the Nonvoting units, the Company recorded deferred compensation of
$2,126,000 (the estimated fair value of the units at the date of grant), which
is classified on the balance sheet as a reduction to equity. The Company
amortized $200,000 of compensation expense related to the units that had vested
as of December 31, 1999.
In connection with the acquisition by Iconixx Corporation (see Note 1), the
Company recognized compensation expense related to the acceleration of vesting
on the unvested units.
5. Profit-Sharing Plan:
The Company participates in a 401(k) profit-sharing plan and trust (the
"Plan"). All employees of the Company are eligible to participate upon
employment with the Company. Participants may elect to contribute up to 15.0
percent of their salaries to the Plan, and the Company makes discretionary
contributions. Participants immediately vest 100.0 percent in their own
contributions and vest in employer discretionary contributions over a seven-
year period starting at the end of the third year of service. Total 401(k)
employer discretionary contributions were $75,573 and $126,188 in 1998 and
1999, respectively.
In connection with the acquisition by Iconixx Corporation, the Plan was
terminated.
6. Related-Party Transactions:
The Company had approximately $1,138,000 and $1,280,000 in revenue,
excluding reimbursable expenses, from a commonly controlled affiliate during
1998 and 1999, respectively. The Company prices services to the entity at a
slight discount as compared to unaffiliated entities.
F-64
ENTERPRISEWORKS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
The amounts included in the Company's accounts receivable balance from the
same affiliate were approximately $144,000 and $245,000 at December 31, 1998
and 1999, respectively.
The Company has an agreement with an affiliated entity in which the Company
pays the entity $3,500 a month for certain administrative services. Fees under
the agreement were $42,000 for each of the years ending December 31, 1998 and
1999.
The Company accrued $403,450 of distributions payable to the members as of
December 31, 1999.
In addition, in December 1998, the Company purchased approximately $179,000
of fixed assets from an affiliated entity. The purchase price approximated the
assets' fair value.
7. Property and Equipment:
Property and equipment consists of the following (in thousands):
December
31,
------------
1998 1999
Computers and equipment........................................... $314 $ 831
Furniture and fixtures............................................ 70 130
Leasehold improvements............................................ 36 46
---- ------
420 1,007
Accumulated depreciation and amortization......................... (33) (232)
---- ------
Property and equipment, net..................................... $387 $ 775
==== ======
The Company purchased two software programs in 1999. Both software programs
were not installed as of December 31, 1999, and are presented in fixed assets.
8. Commitments and Contingencies:
Leases
The Company leases office space and office equipment under several
noncancelable operating leases that expire in various years through 2002. Rent
expense under such operating leases was approximately $154,300 in 1998 and
$197,943 in 1999. In 1999, the Company leased computer equipment under a
capital lease with a cost of approximately $80,000. In 1998, the Company leased
office equipment under capital leases with a cost of $16,200. The future
minimum lease payments under capital leases and noncancelable operating leases
with initial terms of one year or more are as follows (in thousands):
Capital Operating
Year Ended December 31, Leases Leases
2000.......................................................... $ 60 $ 278
2001.......................................................... 42 282
2002.......................................................... -- 277
2003.......................................................... -- 276
2004.......................................................... -- 23
----- ------
Total payments.............................................. $ 102 $1,136
======
Less--Amount representing interest............................ (10)
-----
Present value of net minimum lease payments................. $ 92
=====
Depreciation of capital lease assets is included in depreciation expense.
F-65
ENTERPRISEWORKS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Litigation
The Company is from time-to-time the subject of, or involved in, judicial
proceedings. Management and legal counsel believe that any liability or loss
resulting from such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
9. Unit Appreciation Rights:
The Company instituted a unit appreciation right bonus program ("UAR") on
July 23, 1998. Participants of the program, and the number of units granted to
each participant, are determined by the Board of Directors, as are each
respective participant's UAR grants. Granted units do not represent any
ownership interest in the Company, nor hold any voting power. The exercise
price for granted units is based upon the adjusted book value per share, as
defined. Units vest on an individual participant basis. The Company records a
liability for the adjusted book value of units granted and outstanding, with a
corresponding charge to compensation expense. UAR expense and the related
liability were $38,220 for the year ended December 31, 1999. No expense or
liability was recorded in 1998 because the adjusted book value at the date of
grant was greater than the adjusted book value at December 31, 1998.
In March 2000, the Company repurchased all outstanding unit appreciation
rights from participants for approximately $704,000. As a result of the
repurchase, the Company recognized $666,000 in additional compensation expense.
F-66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders
Internet Information Services, Inc.:
We have audited the accompanying balance sheets of the Internet Services
Division (the "Division") of Internet Information Services, Inc., ("IIS") as of
December 31, 1998 and 1999, and the related statements of operations and
changes in division equity (deficit), and cash flows for the years ended
December 31, 1998 and 1999. These financial statements are the responsibility
of the Division'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. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Division, at December
31, 1998 and 1999, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1999, in conformity with accounting
principles generally accepted in the United States.
The Division is a fully integrated business of IIS; consequently, as
indicated in Note 1, these financial statements have been derived from the
consolidated financial statements and accounting records of IIS, and reflect
significant assumptions and allocations. Moreover, as indicated in Note 1, the
Division relies on IIS for administrative, management and other services. The
financial position, results of operation and cash flows of the Division could
differ from those that would have resulted had the Division operated
autonomously or as an entity independent from IIS.
Arthur Andersen LLP
Vienna, Virginia
March 24, 2000
F-67
THE INTERNET SERVICES DIVISION OF
INTERNET INFORMATION SERVICES, INC.
(A Fully Integrated Business of IIS, Inc.)
BALANCE SHEETS
(in thousands)
As of
December 31,
--------------
1998 1999
Assets
Current assets:
Accounts receivable, net...................................... $ 896 $1,640
Prepaid expenses and other assets............................. 53 37
------ ------
Total current assets........................................ 949 1,677
Property and equipment, net..................................... 148 150
------ ------
Total assets................................................ $1,097 $1,827
====== ======
Liabilities and Division Equity (Deficit)
Current liabilities:
Accounts payable.............................................. $ 434 $ 291
Accrued compensation and benefits............................. 148 357
Notes payable................................................. 868 807
------ ------
Total liabilities........................................... 1,450 1,455
------ ------
Commitments and contingencies (Note 9)
Division equity (deficit)....................................... (353) 372
------ ------
Total liabilities and division equity (deficit)............. $1,097 $1,827
====== ======
The accompanying notes are an integral part of these statements.
F-68
THE INTERNET SERVICES DIVISION OF
INTERNET INFORMATION SERVICES, INC.
(A Fully Integrated Business of IIS, Inc.)
STATEMENTS OF OPERATIONS AND CHANGES IN DIVISION EQUITY (DEFICIT)
(in thousands)
Year Ended
December 31,
--------------
1998 1999
Net revenues.................................................... $4,850 $7,193
Cost of revenues................................................ 2,354 3,564
------ ------
Gross profit................................................ 2,496 3,629
Operating expenses:
Selling, general and administrative........................... 2,461 3,104
Depreciation and amortization................................. 67 71
------ ------
Total operating expenses.................................... 2,528 3,175
------ ------
Operating (loss) income......................................... (32) 454
Interest expense................................................ 42 75
------ ------
Income (loss) before provision for income taxes................. (74) 379
Provision for income taxes...................................... -- --
------ ------
Net (loss) income........................................... (74) 379
Net advanced (to) from IIS.................................. (272) 127
Amortization of deferred compensation........................... -- 219
Division equity (deficit), beginning of year.................... (7) (353)
------ ------
Division equity (deficit), end of year.......................... $ (353) $ 372
====== ======
The accompanying notes are an integral part of these statements.
F-69
THE INTERNET SERVICES DIVISION OF
INTERNET INFORMATION SERVICES, INC.
(A Fully Integrated Business of IIS, Inc.)
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
December 31,
--------------
1998 1999
Cash flows from operating activities:
Net (loss) income ........................................... $ (74) $ 379
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities--
Depreciation and amortization.............................. 67 71
Stock-based compensation................................... -- 219
Changes in operating assets and liabilities:
Accounts receivable...................................... 303 (744)
Prepaid expenses and other assets........................ 3 16
Accounts payable......................................... (500) (143)
Accrued expenses......................................... 67 209
------ ------
Net cash (used in) provided by operating activities.... (134) 7
------ ------
Cash flows from investing activities:
Acquisition of property and equipment........................ (78) (73)
------ ------
Net cash used in investing activities.................. (78) (73)
Cash flows from financing activities:
Repayment of stockholders note payable....................... 2 298
Proceeds from line of credit................................. 482 (359)
Advances from (to) IIS....................................... (272) 127
------ ------
Net cash provided by financing activities.............. $ 212 $ 66
------ ------
Net change in cash..................................... $ -- $ --
====== ======
The accompanying notes are an integral part of these statements.
F-70
THE INTERNET SERVICES DIVISION OF
INTERNET INFORMATION SERVICES, INC.
(A Fully Integrated Business of IIS, Inc.)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. Business Description and Basis of Presentation:
Internet Information Services, Inc. ("IIS") was incorporated in the State of
Maryland in 1993. During 1998 and from January 1 through April 1, 1999, IIS
operated an Internet services division and a computer hardware reselling
division. Effective April 1, 1999, the net assets of the computer hardware
reselling division were transferred to a newly formed, wholly owned subsidiary
of IIS.
On March 24, 2000, IIS entered into an agreement to sell the majority of the
assets and liabilities of its Internet services division (the "Division") to
Iconixx Corporation. The Division focuses on Internet-based projects and
provides services such as integration of disparate systems, e-commerce
application development, and e-commerce infrastructure.
As an integrated business of IIS, the Division did not prepare separate
financial statements in accordance with accounting principles generally
accepted in the United States in the normal course of operations. Accordingly,
the accompanying financial statements have been derived by extracting the
assets, liabilities, revenues and expenses of IIS from the consolidated assets,
liabilities, revenue and expenses directly attributable to IIS as well as
allocations deemed reasonable by management to present the financial position,
results of operations and cash flows of the Division on a stand-alone basis.
The allocation methodologies have been described within the respective
footnotes and management considers the allocations to be reasonable. The
financial position, results of operations and cash flows of IIS are
management's best estimate of those that may have been achieved had the
Division operated autonomously or as an entity independent of IIS. The Division
operates in one business segment.
The Division's operations are subject to certain risks and uncertainties,
including the susceptibility of IIS' services to rapid technological change,
increased competition from existing service providers and new entrants, lack of
a significant operating history, government regulations, and dependence upon
key members of the management team.
On March 24, 2000, substantially all of the net assets of the Division were
sold to Iconixx Corporation. Purchase consideration was paid in the form of
$13.0 milion paid in cash, 600,000 shares of Iconixx common stock, and $2.2
million paid in the form of 2,220 shares of Iconixx Class A Preferred Stock.
2. Summary of Significant Accounting Policies and Practices:
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The most significant assumptions and
estimates relate to the allocation of certain operating and overhead expenses.
Actual results could differ from those estimates.
Cash Flows
IIS does not maintain separate cash accounts and all cash receipts and
disbursements are made through IIS' cash management system. For purposes of the
statements of cash flows, all transactions between IIS and the Division have
been accounted for as having been settled in cash at the time the transaction
was recorded by IIS.
F-71
THE INTERNET SERVICES DIVISION OF
INTERNET INFORMATION SERVICES, INC.
(A Fully Integrated Business of IIS, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Revenue Recognition
Revenues from consulting services, and the related labor costs, are
recognized when the services are performed. The Division currently operates on
time and materials contracts and revenues are recognized based on fixed hourly
rates for direct labor hours expended.
Cost of Revenues
Cost of revenues includes all direct and labor costs related to contract
performance and does not include any related depreciation expense. Direct labor
costs and related expenses are included in cost of revenues based on billable
hours; costs related to unbillable time are included in selling, general, and
administrative expenses. Unbilled receivables on contracts are comprised of
costs, plus earnings on certain contracts in excess of contractual billings on
such contracts.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are recorded using the double-
declining balance method over the estimated useful lives of the individual
assets as follows: furniture, five years and computer equipment, three years.
Software depreciation is recorded using the straight-line method over three
years.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," the Division reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Division recognizes an impairment loss
when the sum of the expected future cash flows is less than the carrying amount
of the asset. The measurement of the impairment losses recognized is based upon
the difference between the fair value and the carrying amount of the asset. The
Division has not recorded a provision for impairment of long-lived assets.
Fair Value of Financial Instruments
The Division's financial instruments consist primarily of accounts
receivable and accounts payable. In management's opinion, the carrying amounts
of these financial instruments approximate their fair value at December 31,
1999.
Income Taxes
In 1998, IIS was taxed pursuant to subchapter C of the Internal Revenue
Code. As such, income taxes for the Division are accounted for using an asset
and liability approach that requires the recognition of taxes
F-72
THE INTERNET SERVICES DIVISION OF
INTERNET INFORMATION SERVICES, INC.
(A Fully Integrated Business of IIS, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in
IIS' financial statements or tax returns. The measurement of current and
deferred tax liabilities and assets are based on provisions of the enacted tax
law. The measurement of deferred tax assets is reduced, if necessary, by the
amount of any tax benefits that, based on available evidence, are not expected
to be realized. Income taxes were allocated to the Division using the separate
return method.
In 1999, IIS elected to be taxed pursuant to subchapter S of the Internal
Revenue Code ("S corporation"). In lieu of Corporate income taxes, the
shareholders of an S corporation are taxed on their proportionate share of IIS'
taxable income. Therefore, no provision for income taxes has been included in
the accompanying 1999 financial statements of the Division.
Business Concentration and Credit Risk
The following tables summarize the approximate revenues and accounts
receivable from customers in excess of 10.0 percent of total revenues and
accounts receivable as of December 31, 1998 and 1999:
Revenues for
the Year Ended
-----------------
1998 1999
Customer A............................................... 70% 52%
Customer B............................................... 12 *
Accounts Receivable
-------------------
1998 1999
Customer A............................................ 23% 66%
- --------
* Represents less than 10% of total
3. Accounts Receivable:
Accounts receivable consisted of the following (in thousands):
December 31,
--------------
1998 1999
Accounts receivable............................................. $ 924 $ 1,031
Unbilled accounts receivable.................................... 7 649
Allowance for doubtful accounts................................. (35) (40)
----- -------
Accounts receivable, net........................................ $ 896 $ 1,640
===== =======
F-73
THE INTERNET SERVICES DIVISION OF
INTERNET INFORMATION SERVICES, INC.
(A Fully Integrated Business of IIS, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
4. Property and Equipment:
Property and equipment consisted of the following (in thousands):
December 31,
--------------------
1998 1999
Computers and equipment................................. $ 61 $ 135
Furniture and fixtures.................................. 103 29
Hardware................................................ 136 185
Software................................................ 37 61
--------- ---------
337 410
Accumulated depreciation and amortization............... (189) (260)
--------- ---------
Property and equipment, net........................... $ 148 $ 150
========= =========
5. Notes Payable:
December 31,
--------------------
1998 1999
Note payable to a bank prime rate plus 0.75 percent per
annum (9.25 percent at December 31, 1998), principal
and interest payable monthly, expires December 31,
1999, secured by Division customer receivables......... $ 16,000 $ --
Note payable to a bank prime rate plus 0.75 percent per
annum (8.75 percent at December 31, 1998), principal
and interest payable monthly, expires June 30, 1999,
secured by Division customer receivables............... 300,000 --
Note payable to a bank at bank prime rate plus 0.75
percent per annum (9.25 percent at December 31, 1999),
principal and interest payable monthly, expires
November 30, 2000, secured by Division customer
receivables............................................ -- 214,000
Note payable to IIS stockholders at 9.00 percent per
annum, principal and interest payable on demand........ -- 300,000
Non interest bearing note payable to IIS stockholders
payable on demand...................................... 2,000 --
IIS's revolving credit facility provides for a revolving
credit facility not to exceed $550,000 and $650,000 as
of December 31, 1998 and 1999, respectively. The credit
agreement bears interest at the bank's prime rate plus
1.00 percent and 0.75 percent, respectively, per annum
(8.75 and 9.25 percent at December 31, 1998 and 1999,
respectively), matures on May 1, 2000, and is secured
by Division receivables................................ 550,000 293,000
--------- ---------
Total notes payable................................... 868,000 807,000
--------- ---------
Less--Current maturities................................ (868,000) (807,000)
--------- ---------
Long-term notes payable............................... $ -- $ --
========= =========
At December 31, 1998 and 1999, IIS had $0 and $356,292 available for use on
the line of credit. IIS's revolving credit agreement contains various
restrictive covenants, which among other things, require that IIS maintain a
minimum tangible net worth.
F-74
THE INTERNET SERVICES DIVISION OF
INTERNET INFORMATION SERVICES, INC.
(A Fully Integrated Business of IIS, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
IIS incurred and paid approximately $41,503 and $74,888 of interest expense
during 1998 and 1999, respectively. These amounts have been reflected in the
accompanying financial statements of the Division.
6. Stock Option Plan:
IIS adopted the 1997 Stock Option Plan (the "Stock Option Plan") as an
incentive to encourage stock ownership by officers and directors and executive
and professional employees of IIS. The Stock Option Plan provides for the
issuance of stock options not to exceed 800,000 shares of common stock of the
Company. Options granted under the Stock Option Plan may be either incentive
stock options ("ISOs") or nonqualified stock options. Options issued under the
Stock Option Plan have a maximum term of ten years from the date of grant. IIS,
and therefore the Division, account for options granted in accordance with APB
Opinion No. 25.
During 1998 and 1999, options to purchase 200,000 and 387,321 shares,
respectively, were granted to Division employees at an exercise price of $1.00
per share. During 1999 the estimated fair value of the options granted was
$2.80, resulting in deferred compensation at the date of grant of approximately
$361,137, recorded in Division Equity. Options granted during 1998 had exercise
prices equal to or greater than fair value. The options vest over a three-year
period. Compensation expense recognized during 1999 totaled approximately
$218,614. Had compensation cost for the plan been determined based on the
estimated fair value of the options at the grant dates consistent with the
method of SFAS No. 123, net income would have been approximately $468,988. The
weighted-average fair value of the options granted by the Division during 1998
and 1999, is estimated to be $0.43 and $2.80, respectively, per option based on
the Black-Scholes option pricing model assuming the following: no dividend
yield, risk-free interest rate of 5.0 percent, an expected term of the options
of four years and an expected volatility of 45.0 percent.
In connection with the acquisition by Iconixx Corporation, the Division
repurchased all of the outstanding stock options, for which the Division
recorded $863,000 of additional compensation expense prior to the consummation
of the acquisition by Iconixx Corporation.
7. Profit-Sharing Plan:
The Division participates in a 401(k) profit-sharing plan and trust (the
"Plan"). All employees of the Division are eligible to participate upon
employment. Participants may elect to contribute up to 15.0 percent of their
salaries to the Plan. Employees are 20.0 percent vested at the end of their
third year and incrementally vest at the rate of 20.0 percent per year until
fully vested at the end of the sixth year of employment. In connection with the
acquisition by Iconixx Corporation, the Plan was terminated.
8. Related-Party Transactions:
IIS provided financing and performed certain internet services to a business
owned by the majority stockholder of IIS. Costs incurred by IIS totaled
approximately $41,000 and such costs were reimbursed by the majority
stockholder. As of December 31, 1999, approximately $7,070 is included in
prepaid expenses and other assets as amount due from a stockholder of IIS.
9. Commitments and Contingencies:
Operating Leases
IIS leases office space and office equipment under several noncancelable
operating leases that expire at various years through 2001. The Division's
lease expense under such operating leases was approximately $95,000 in 1998 and
$105,000 in 1999, which management allocated to the Division based on
headcount.
F-75
THE INTERNET SERVICES DIVISION OF
INTERNET INFORMATION SERVICES, INC.
(A Fully Integrated Business of IIS, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Future minimum lease payments under all operating leases at December 31, 1999,
were as follows (in thousands):
Year Ended December 31,
2000.................................................................. $111
2001.................................................................. 85
----
Total payments...................................................... $196
====
Litigation
IIS and the Division are periodically a party to disputes arising from
normal business activities. In the opinion of management, resolution of these
matters will not have a material adverse effect on the final position or future
operating results of IIS or the Division, and adequate provision for any
potential losses has been made in the accompanying financial statements.
10. Income Taxes:
The Division followed the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes for 1998. Deferred tax assets or
liabilities at the end of each period are determined using the currently
enacted tax rates to apply to taxable income in the period in which the
deferred tax asset or liability is expected to be settled or realized.
As the Division income before income tax provision for the year ended
December 31, 1998 was not significant, no provision for income tax was
recorded. In addition, no substantial book to tax differences existed at
December 31, 1998, and therefore, no deferred income tax asset or liability was
recorded.
11. Division Equity:
Because IIS is a fully integrated business, the Company's accounting records
do not distinguish its investment in IIS between debt and permanent capital.
The intercompany balance has been classified as Division Equity in these
financial statements as there is no debt instrument and no defined repayment
period.
F-76
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prospectus
, 2000
[LOGO OF ICONIXX]
Shares of Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
Banc of America Securities LLC
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in the prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted. The information contained in this prospectus is correct
only as of the date of this prospectus, regardless of the time of the delivery
of this prospectus or any sale of these securities.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 2000, (25 days after the date of this prospectus), all dealers that
effect transactions in these shares of common stock may be required to deliver
a prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table shows the various fees and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the common stock being registered under this registration
statement. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
Registration fee....................................................... $22,770
NASD filing fee........................................................ 9,125
Nasdaq National Market listing fee.....................................
Printing and engraving expenses........................................
Legal fees and expenses................................................
Accounting fees and expenses...........................................
Blue Sky fees and expenses (including legal fees)......................
Transfer agent and registrar fees and expenses.........................
Miscellaneous..........................................................
-------
Total................................................................ $
=======
Iconixx will bear all expenses shown above.
Item 14. Indemnification of Directors and Officers.
Upon completion of this offering, the Certificate of Incorporation and
Bylaws of the Registrant will provide for the indemnification of the
Registrant's directors and officers to the fullest extent authorized by, and
subject to the conditions set forth in the Delaware General Corporation Law
(the "DGCL"), except that the Registrant will indemnify a director or officer
in connection with a proceeding (or part thereof) initiated by the person only
if the proceeding (or part thereof) was authorized by the Registrant's Board of
Directors. The indemnification provided under the Certificate of Incorporation
and Bylaws includes the right to be paid by the Registrant the expenses
(including attorneys' fees) in advance of any proceeding for which
indemnification may be had in advance of its final disposition, provided that
the payment of those expenses (including attorneys' fees) incurred by a
director or officer in advance of the final disposition of a proceeding may be
made only upon delivery to the Registrant of an undertaking by or on behalf of
the director or officer to repay all amounts so paid in advance if it is
ultimately determined that the director or officer is not entitled to be
indemnified. According to the Bylaws, if a claim for indemnification is not
paid by the Registrant within 60 days after a written claim has been received
by the Registrant, the claimant may at any time thereafter bring an action
against the Registrant to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant will be entitled to be paid also
the expense of prosecuting the action.
As permitted by the DGCL, the Registrant's Certificate of Incorporation will
provide that directors of the Registrant shall not be liable to the Registrant
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, relating to unlawful payment of
dividends or unlawful stock purchase or redemption or (iv) for any transaction
from which the director derived an improper personal benefit. As a result of
this provision, the Registrant and its stockholders may be unable to obtain
monetary damages from a director for breach of his or her duty of care.
Under the Bylaws, the Registrant will have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Registrant, or is or was serving at the request
II-1
of the Registrant as a director, officer, employee, partner (limited or
general) or agent of another corporation or of a partnership, joint venture,
limited liability company, trust or other enterprise, against any liability
asserted against the person or incurred by the person in that capacity, or
arising out of the person's status, and related expenses, whether or not the
Registrant would have the power to indemnify the person against liability under
the provisions of the DGCL. The Registrant maintains director and officer
liability insurance on behalf of its directors and officers.
The Underwriting Agreement provides that the underwriters are obligated,
under specified circumstances, to indemnify directors, officers and controlling
persons of the Registrant against specified liabilities, including liabilities
under the Securities Act of 1933, as amended. Reference is made to the form of
Underwriting Agreement to be filed as Exhibit 1.1 hereto.
Item 15. Recent Sales of Unregistered Securities.
Since our company was recapitalized in August 1999, we have sold and issued
the following unregistered securities:
(a) On August 12, 1999, pursuant to a recapitalization agreement among
Thayer ITECH Holdings, LLC ("Thayer"), the Registrant, BSG Holdings, Inc. ("BSG
Holdings") and the stockholders of BSG Holdings (the "Recapitalization
Agreement"), the Registrant issued 58,378.378 shares of common stock, par value
$.01 per share ("Common Stock"), to Thayer for an aggregate purchase price of
$21,600,000.
(b) On August 12, 1999, pursuant to the Recapitalization Agreement, the
Registrant was recapitalized and issued (i) 10,800,000 shares of common stock
and 20,520 shares of Class A Convertible Preferred Stock, par value $.01 per
share ("Convertible Preferred Stock"), to Thayer in exchange for all of the
shares of common stock then held by Thayer and (ii) 2,700,000 shares of common
stock and 5,130 shares of Convertible Preferred Stock to BSG Holdings in
exchange for all of the shares of Common Stock then held by BSG Holdings.
(c) On August 12, 1999, pursuant to an equity purchase agreement (the
"August Thayer Purchase Agreement") between the Registrant, Thayer and an
affiliate of Thayer, TC ITECH, LLC ("TC ITECH"), the Registrant issued (i)
19,009,419 shares of Common Stock to Thayer for an aggregate purchase price of
$1,900,419 and (ii) 190,581 shares of Common Stock to TC ITECH for an aggregate
purchase price of $19,058.
(d) On August 12, 1999, in connection with entering into senior management
agreements with certain of our executive officers and key employees, the
Registrant issued an aggregate of 10,000,000 shares of Common Stock to these
employees for an aggregate consideration of $1,000,000.
(e) On September 1, 1999, in connection with the acquisition of Empyrean
Group, Inc., the Registrant issued 862,500 shares of Common Stock and 1,638.75
shares of Convertible Preferred Stock to FBR Venture Partners, LP ("FBR"), in
exchange for all of the issued and outstanding capital stock of Empyrean Group,
Inc.
(f) Between November 2, 1999 and March 22, 1999, pursuant to the August
Thayer Purchase Agreement, the Registrant issued (i) 36,117.90 shares of
Convertible Preferred Stock to Thayer for an aggregate purchase price of
$36,117,900 and (ii) 362.1 shares of Convertible Preferred Stock to TC ITECH
for an aggregate purchase price of $362,100.
(g) On November 3, 1999, in connection with the acquisition of IconixGroup,
Inc. ("IconixGroup"), the Registrant issued an aggregate of 1,825,000 shares of
Common Stock and 3,467.5 shares of Convertible Preferred Stock to the
stockholders of IconixGroup as part of the consideration for all of the issued
and outstanding capital stock of IconixGroup.
(h) On November 12, 1999, in connection with entering into a senior
management agreement with William K. Stephens, the Registrant issued 250,000
shares of Common Stock to Mr. Stephens for an aggregate purchase price of
$25,000.
(i) On November 29, 1999, pursuant to an existing senior management
agreement, the Registrant issued 112,500 shares of Common Stock to Jason H.
Levine for an aggregate purchase price of $11,250.
II-2
(j) On March 8, 2000, subject to existing senior management agreements, the
Registrant issued an aggregate of 200,000 shares of Common Stock to certain of
our executive officers and key employees for an aggregate purchase price of
$260,000.
(k) On March 10, 2000, in connection with the acquisition of Lead Dog
Design, Inc. ("Lead Dog"), the Registrant issued 1,000,000 shares of Common
Stock and 3,000 shares of Convertible Preferred Stock to the stockholders of
Lead Dog as part of the consideration for all of the issued and outstanding
capital stock of Lead Dog.
(l) On March 22, 2000, pursuant to an equity purchase agreement with Thayer,
the Registrant issued (i) 3,000,000 shares of Common Stock and (ii) 16,100
shares of Convertible Preferred Stock to Thayer for an aggregate purchase price
of $20,000,000.
(m) On March 23, 2000, in connection with the acquisition of some of the
assets of Internet Information Services, Inc. ("IIS"), the Registrant issued
600,000 shares of Common Stock and 2,220 shares of Convertible Preferred Stock
to the stockholders of IIS as part of the consideration for the asset
acquisition.
(n) On March 23, 2000, in connection with the acquisition of substantially
all of the assets for Enterpriseworks, LLC, the Registrant issued an aggregate
of 3,868,213 shares of Common Stock to the members of EnterpriseWorks, LLC as
part of the consideration for the asset acquisition.
(o) On April 17, 2000, in connection with a stock offering to some of its
existing stockholders, the Registrant issued Common Stock and Convertible
Preferred Stock to stockholders who elected to participate in the offering as
follows: 86,250 shares of Common Stock and 462.875 shares of Convertible
Preferred Stock to FBR for an aggregate consideration of $575,000; 8,343 shares
of Common Stock and 44.775 shares of Convertible Preferred Stock to Gretchen
Frederick for an aggregate consideration of $55,621; 3,650 shares of Common
Stock and 19.588 shares of Convertible Preferred Stock to Mark A. Smith for an
aggregate consideration of $24,333; 3,650 shares of Common Stock and 19.588
shares of Convertible Preferred Stock to Sidney F. Barcelona for an aggregate
consideration of $24,333.
The sales and issuances of securities in the transactions described above
were exempt from registration under the Securities Act by virtue of Section
4(2) or Rule 701 or Regulation D promulgated thereunder.
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with
any subsequent sales of any such securities. All recipients received adequate
information about Iconixx or had access, through employment or other
relationships, to such information.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
Exhibit
Number Description
- ------- -----------
1.1* Form of Underwriting Agreement
3.1* Form of Amended and Restated Certificate of Incorporation to be filed upon the
closing of this offering
3.2* Form of Amended and Restated Bylaws to be effective upon the closing of this
offering
4.1 Specimen certificate representing the Common Stock
5.1* Opinion of Hogan & Hartson L.L.P. with respect to legality of the common stock.
10.1* Iconixx Corporation 1999 Stock Option Plan, as amended
10.2* Iconixx Web Development, Inc. 401(k) Profit Sharing Plan
10.3* Iconixx Systems Engineering, Inc. 401(k) Profit Sharing Plan
10.4 Equity Purchase Agreement by and among Empyrean Group Holdings and Thayer ITECH
Holdings, L.L.C. dated August 12, 1999
II-3
10.5 Equity Purchase Agreement between Iconixx Corporation, Thayer ITECH Holdings,
L.L.C. and TC ITECH, L.L.C. dated March 22, 2000
10.6 Stockholders Agreement by and among Empyrean Group Holdings, Inc., Thayer ITECH
Holdings, L.L.C. and The Other Stockholders of Empyrean Group Holdings, Inc.
together with Joinders
10.7 Registration Rights Agreement by and among Empyrean Group Holdings, Inc., and
Thayer ITECH Holdings, L.L.C. together with Joinders
10.8 Contribution Agreement by and Among Empyrean Group Holdings, Inc. and Executives
together with Joinder and First Amendment
10.9 Form of Senior Management Agreements between Empyrean Group Holdings, Inc. and
the following executive officers:
10.9.1.1 Stuart C. Johnson schedule of material terms
10.9.1.2 Graham B. Perkins schedule of material terms
10.9.1.3 Thomas B. Modly schedule of material terms
10.9.1.4 Jason H. Levine schedule of material terms
10.9.1.5 Matthew B. Walker schedule of material terms
10.9.1.6 David T. Fu schedule of material terms
10.9.1.7 William K. Stephens schedule of material terms
10.10 Employment Agreement dated November 3, 1999 between IconixGroup, Inc. and Leo C.
Mullen
10.11 Employment Agreement dated August 12, 1999 between BSG Solutions, Inc. and John
R. McDougall
10.12 Employment Agreement dated March 23, 2000 between Iconixx Web Development, Inc.
and Christopher Clark
10.13 Employment Agreement dated March 23, 2000 between Iconixx-Houston and D. Derrik
Deyhimi
10.14 Master Services Agreement dated January 1, 1996, as amended, between
Sprint/United Management Company and Iconixx Systems Engineering, Inc. (by
assignment from its affiliate Business Solutions Group, LLC)
10.15 Recapitalization Agreement dated August 11, 1999 by and among Thayer ITECH
Holdings, L.L.C., Business Solutions Group, Inc., BSG Holdings, Inc. and The
Stockholders of BSG Holdings, Inc.
10.16 Business Loan and Security Agreement dated as of August 12, 1999 by and among
Empyrean Group Holdings, Inc., BSG Solutions, Inc. (as Borrowers), First Union
Commercial Corporation, Bank of America, N.A. (as Lenders), and First Union
National Bank (as Agent) and Bank of America (as Co-Lead Arranger)
10.17 Stock Purchase Agreement dated October 29, 1999 by and among Empyrean Group
Holdings, Inc., IconixGroup, Inc., The Invisions Group, Ltd. and The Stockholders
of The Invisions Group, Ltd.
10.18 Stock Purchase Agreement dated February 23, 2000 by and among Iconixx
Corporation, Lead Dog Design, Inc. and The Stockholders of the Lead Dog Design,
Inc.
10.19 Asset Purchase Agreement by and Among Iconixx Corporation, Iconixx-Houston, Inc.,
EnterpriseWorks, L.L.C. and Certain Members of EnterpriseWorks, L.L.C.
10.20 Professional Services Agreement dated August 12, 1999 between TC Management
Partners IV, L.L.C. and Empyrean Group Holdings, Inc.
10.21 Sublease Agreement dated April 24, 2000 between Chevy Chase Bank, F.S.B. and
Iconixx Corporation.
10.22 Web Site Development Agreement dated as of November 2, 1999 by and between Bear,
Stearns & Co. Inc. and Lead Dog Designs, Inc.
10.23 Asset Purchase Agreement by and among Iconixx Corporation, Iconixx Web
Development, Inc., Internet Information Services, Inc. and the Majority
Shareholders of Internet Information Services, Inc. dated March 23, 2000.
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2* Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
II-4
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
- --------
* To be filed by amendment.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto.
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
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-5
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 on its
behalf by the undersigned, thereunto duly authorized, in the city of Vienna,
Commonwealth of Virginia, on May 12, 2000.
ICONIXX CORPORATION
/s/ Stuart C. Johnson
By: _________________________________
Stuart C. Johnson
Chairman and Chief Executive
Officer
Each person whose signature appears below constitutes and appoints Stuart C.
Johnson and Jason H. Levine, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, from such person and in each person's name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this registration statement or any registration
statement relating to this registration statement under Rule 462 under the
Securities Act of 1933 and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of May 12, 2000 by the following
persons in the capacities indicated.
Signature Title
--------- -----
/s/ Stuart C. Johnson Chairman, President, Chief
______________________________________ Executive Officer and
Stuart C. Johnson Director (Principal
Executive Officer)
/s/ Graham B. Perkins Chief Financial Officer
______________________________________ (Principal Financial and
Graham B. Perkins Accounting Officer)
/s/ Carl J. Rickertsen Director
______________________________________
Carl J. Rickertsen
/s/ Phillip G. Norton Director
______________________________________
Phillip G. Norton
/s/ Robert Michalik Director
______________________________________
Robert Michalik
II-6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Iconixx Corporation:
We have audited, in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Iconixx Corporation
included in this registration statement and have issued our report thereon
dated May 9, 2000. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The accompanying Schedule II--
Valuation and Qualifying Accounts for Iconixx Corporation is the responsibility
of Iconixx Corporation's management and is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not a part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Vienna, Virginia
May 9, 2000
S-1
SCHEDULE II
ICONIXX CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
Additions
-------------------
Beginning Charged Ending
Balance Deductions to Expense Other(1) Balance
--------- ---------- ---------- -------- -------
Period Ending December 31,
1997
Allowance for Doubtful
Accounts................... $-- $-- $-- -- $--
Period Ending December 31,
1998
Allowance for Doubtful
Accounts................... $-- $-- $-- -- $--
Period Ending December 31,
1999
Allowance for Doubtful
Accounts................... $-- $-- $-- 86 $ 86
- --------
(1) Recorded through purchase accounting in connection with the acquisition of
IconixGroup, Inc. in accordance with APB No. 16.
S-2
Exhibit Index
Exhibit Number Description
- -------------- -----------
1.1* Form of Underwriting Agreement
3.1* Form of Amended and Restated Certificate of Incorporation to be filed upon the
closing of this offering
3.2* Form of Amended and Restated Bylaws to be effective upon the closing of this
offering
4.1 Specimen certificate representing the Common Stock
5.1* Opinion of Hogan & Hartson L.L.P. with respect to legality of the common stock.
10.1* Iconixx Corporation 1999 Stock Option Plan, as amended
10.2* Iconixx Web Development, Inc. 401(k) Profit Sharing Plan
10.3* Iconixx Systems Engineering, Inc. 401(k) Profit Sharing Plan
10.4 Equity Purchase Agreement by and among Empyrean Group Holdings and Thayer ITECH
Holdings, L.L.C. dated August 12, 1999
10.5 Equity Purchase Agreement between Iconixx Corporation, Thayer ITECH Holdings,
L.L.C. and TC ITECH, L.L.C. dated March 22, 2000
10.6 Stockholders Agreement by and among Empyrean Group Holdings, Inc., Thayer ITECH
Holdings, L.L.C. and The Other Stockholders of Empyrean Group Holdings, Inc.
together with Joinders
10.7 Registration Rights Agreement by and among Empyrean Group Holdings, Inc., and
Thayer ITECH Holdings, L.L.C. together with Joinders
10.8 Contribution Agreement by and Among Empyrean Group Holdings, Inc. and Executives
together with Joinder and First Amendment
10.9 Form of Senior Management Agreements between Empyrean Group Holdings, Inc. and
the following executive officers:
10.9.1.1 Stuart C. Johnson schedule of material terms
10.9.1.2 Graham B. Perkins schedule of material terms
10.9.1.3 Thomas B. Modly schedule of material terms
10.9.1.4 Jason H. Levine schedule of material terms
10.9.1.5 Matthew B. Walker schedule of material terms
10.9.1.6 David T. Fu schedule of material terms
10.9.1.7 William K. Stephens schedule of material terms
10.10 Employment Agreement dated November 3, 1999 between IconixGroup, Inc. and Leo C.
Mullen.
10.11 Employment Agreement dated August 12, 1999 between BSG Solutions, Inc. and John
R. McDougall
10.12 Employment Agreement dated March 23, 2000 between Iconixx Web Development, Inc.
and Christopher Clark
10.13 Employment Agreement dated March 23, 2000 between Iconixx-Houston and D. Derrik
Deyhimi
10.14 Master Services Agreement dated January 1, 1996, as amended, between
Sprint/United Management Company and Iconixx Systems Engineering, Inc. (by
assignment from its affiliate Business Solutions Group, LLC)
10.15 Recapitalization Agreement dated August 11, 1999 by and among Thayer ITECH
Holdings, L.L.C., Business Solutions Group, Inc., BSG Holdings, Inc. and The
Stockholders of BSG Holdings, Inc.
10.16 Business Loan and Security Agreement dated as of August 12, 1999 by and among
Empyrean Group Holdings, Inc., BSG Solutions, Inc. (as Borrowers), First Union
Commercial Corporation, Bank of America, N.A. (as Lenders), and First Union
National Bank (as Agent) and Bank of America (as Co-Lead Arranger)
10.17 Stock Purchase Agreement dated October 29, 1999 by and among Empyrean Group
Holdings, Inc., IconixGroup, Inc., The Invisions Group, Ltd. and The Stockholders
of The Invisions Group, Ltd.
10.18 Stock Purchase Agreement dated February 23, 2000 by and among Iconixx
Corporation, Lead Dog Design, Inc. and The Stockholders of the Lead Dog Design,
Inc.
Exhibit
Number Description
- ------- -----------
10.19 Asset Purchase Agreement by and Among Iconixx Corporation, Iconixx-Houston, Inc.,
EnterpriseWorks, L.L.C. and Certain Members of EnterpriseWorks, L.L.C.
10.20 Professional Services Agreement dated August 12, 1999 between TC Management
Partners IV, L.L.C. and Empyrean Group Holdings, Inc.
10.21 Sublease Agreement dated April 24, 2000 between Chevy Chase Bank, F.S.B. and
Iconixx Corporation
10.22 Web Site Development Agreement dated as of November 2, 1999 by and between Bear,
Stearns & Co. Inc. and Lead Dog Designs, Inc.
10.23 Asset Purchase Agreement by and among Iconixx Corporation, Iconixx Web
Development, Inc., Internet Information Services, Inc. and the Majority
Shareholders of Internet Information Services, Inc. dated March 23, 2000.
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2* Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
- --------
* To be filed by amendment.