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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1998
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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CONLEY, CANITANO & ASSOCIATES, INC.
(Exact Name of Registrant as Specified in Its Charter)
OHIO 34-1375019 7373
(State or Other Jurisdiction of (I.R.S. Employer (Primary Standard Industrial
Incorporation or Organization) Identification Number) Classification Code Number)
CCAI RENAISSANCE CENTRE
5800 LANDERBROOK DRIVE
MAYFIELD HEIGHTS, OHIO 44124
TELEPHONE: (440) 684-6600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
PAUL A. FARMER
CHIEF FINANCIAL OFFICER
CCAI RENAISSANCE CENTRE
5800 LANDERBROOK DRIVE
MAYFIELD HEIGHTS, OHIO 44124
TELEPHONE: (440) 684-6600
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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Copies to:
DAVID P. PORTER, ESQ. ELLEN B. CORENSWET, ESQ.
JONES, DAY, REAVIS & POGUE BABAK YAGHMAIE, ESQ.
NORTH POINT, 901 LAKESIDE AVENUE BROBECK, PHLEGER & HARRISON LLP
CLEVELAND, OHIO 44114 1633 BROADWAY, 47TH FLOOR
NEW YORK, NEW YORK 10019
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, 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. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1)(2) REGISTRATION FEE
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Common Stock, without par value per share............... $62,291,672 $18,376.05
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(2) Includes shares that the Underwriters have the option to purchase solely to
cover over-allotments, if any.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED , 1998
PROSPECTUS
, 1998
[ ] SHARES
[CCAI LOGO]
CONLEY, CANITANO & ASSOCIATES, INC.
COMMON STOCK
Of the shares (the "Shares") of common stock, no par value (the
"Common Stock"), being offered hereby (the "Offering"), shares are
being sold by Conley, Canitano & Associates, Inc. ("CCAi" or the "Company") and
shares are being sold by certain shareholders (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Shareholders.
Prior to the Offering, there has been no public market for the Shares. It
is currently anticipated that the initial offering price will be between
$ and $ per share. See "Underwriting" for information relating
to the factors considered in determining the initial public offering price.
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "CCAI."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8 FOR INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(3)
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Per Share........................... $ $ $ $
Total (3)........................... $ $ $ $
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(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses estimated at $ , payable by the Company.
(3) The Company and certain Selling Shareholders have granted to the
Underwriters a 30-day option to purchase up to an aggregate of
additional shares at the Price to Public less Underwriting Discounts and
Commissions, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to the Company and Proceeds to the Selling
Shareholders will be $ , $ , $ and $ , respectively.
See "Principal and Selling Shareholders" and "Underwriting."
The Shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of the Shares will be made in New York, New York, on or
about , 1998.
DONALDSON, LUFKIN & JENRETTE
BANCAMERICA ROBERTSON STEPHENS
LEHMAN BROTHERS
MCDONALD & COMPANY
SECURITIES, INC.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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This Prospectus includes forward-looking statements, which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to uncertainties and other factors
that could cause actual results to differ materially from such statements. These
uncertainties and other factors include, but are not limited to, those discussed
in "Risk Factors" and elsewhere in this Prospectus. The words "believe,"
"expect," "anticipate," "project" and similar expressions identify forward-
looking statements. These forward-looking statements speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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CCAi and FIRM are trademarks of the Company. This Prospectus also includes
names, trademarks, service marks and registered trademarks and service marks of
companies other than the Company.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the financial statements and Notes thereto included
elsewhere in this Prospectus. The Common Stock offered hereby involves a high
degree of risk. See "Risk Factors" beginning on page 8. Unless otherwise
indicated, all information contained in this Prospectus: (i) assumes no exercise
of the Underwriters' over-allotment option; (ii) reflects the conversion of all
of the outstanding shares of the Company's Convertible Preferred Stock, $0.01
par value per share (the "Convertible Preferred Stock") into 2,504,000 shares of
Common Stock and 250,400 shares of Series A Redeemable Preferred Stock, $0.01
par value per share (the "Redeemable Preferred Stock"), all to be effected
immediately prior to the consummation of the Offering; (iii) reflects a 10-for-1
split of the Company's Common Stock and an increase in the Company's authorized
Common Stock and preferred stock due to the adoption on July 24, 1998 of the
Company's Second Amended Restated Articles of Incorporation (the "Articles of
Incorporation"). Unless otherwise indicated, the terms "Company" and "CCAi"
refer to Conley, Canitano & Associates, Inc.
THE COMPANY
CCAi is a leading provider of rapid implementations of Enterprise Resource
Planning ("ERP") applications. CCAi also offers its clients a comprehensive
range of related services, including post-implementation and platform
independent services, such as network and Windows NT support, custom application
development, mainframe and legacy application support, Year 2000 compliance and
remote support. The Company's services are primarily targeted at middle market
organizations, or divisions of larger organizations, with annual revenues
between $200 million and $2.5 billion. The Company's rapid ERP implementation
services enable its clients to reduce the length and risks of implementations,
lower overall costs and achieve early realization of ERP-related benefits. The
Company provides its services to clients across a broad spectrum of industries,
including aerospace, automotive, chemical process, communications, consumer
products, energy, financial and professional services, health care, industrial,
publishing, retail and technology. CCAi's clients include Aluminum Company of
America, BP America Inc., Brush Wellman Inc., Dow Chemical Co., Eaton
Corporation, General Motors Corporation ("GM"), Goodyear Tire & Rubber Co.,
KeyCorp, Master Builders, Inc. and OfficeMax, Inc.
CCAi has established strategic relationships with leading software
application vendors, hardware vendors and other information technology ("IT")
service providers, including multinational consulting firms. For example, the
Company has a relationship with SAP America, Inc. ("SAP") dating from 1989 and
has been an SAP National Implementation Partner since 1994. In addition, the
Company is a member of SAP's National Advisory Board and was involved in the
development of SAP's AcceleratedSAP methodology ("ASAP"), which has become an
industry standard for rapid SAP implementations. In 1997, the Company became one
of SAP's first ASAP Partners and has since become one of the first organizations
to certify 100 consultants in the ASAP methodology. Also, CCAi has been an
Oracle Corporation ("Oracle") Alliance Member since 1997 and utilizes its own
rapid implementation methodology, known as Fast Implementation Roadmap
Methodology ("FIRM"), for Oracle ERP applications. In 1998, CCAi was named by
Compaq Computer Corporation ("Compaq") as one of its first regional
configuration support centers to provide rapid implementation and related
services in connection with R/3PAQ, a preconfigured ERP solution jointly
developed by Compaq and SAP. In addition, the Company has been an integral
member of implementation teams managed by Andersen Consulting LLP ("Andersen
Consulting"), Electronic Data Systems Corporation ("EDS"), Ernst & Young LLP
("Ernst & Young") and SAP.
The successful implementation of ERP applications requires extensive
resources, specific software expertise, end-user training and significant
ongoing modifications to support an organization's evolving business processes.
Organizations are increasingly using third-party service providers to implement
ERP applications in order to reduce the length and risks of implementations,
lower overall costs and achieve early realization of ERP-related benefits.
According to Forrester Research, Inc., a market research company, the worldwide
market for ERP applications and services totaled approximately $15 billion in
1997 and is projected to grow to approximately $32 billion by 2000, representing
a compound annual growth rate of approximately 29%. In addition, according to
industry sources, for every dollar spent on ERP applications, four to six
dollars are spent on ERP
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implementation and related services. The Company believes that a large portion
of this market is represented by middle market organizations and that the need
for third-party ERP implementation and related services is particularly acute
among these organizations. Middle market organizations expect timely and
substantial economic returns from their ERP investments and are particularly
sensitive to the risk of cost overruns and delays associated with poorly managed
ERP implementations. In addition, these organizations are under growing pressure
from their Fortune 500 customers to rapidly implement compatible ERP
applications.
CCAi is a "company of employees" and has adopted a business model focused
on establishing and maintaining long-term relationships with its employees. The
Company believes, in a resource constrained industry, it distinguishes itself
from its competitors by recruiting and retaining consultants with both practical
business and relevant IT experience, thereby enhancing the Company's ability to
identify industry-specific business issues and develop practical IT solutions to
address such issues. CCAi's consultants who perform ERP implementations
generally have 10 to 15 years of business or IT experience, including three to
five years of ERP implementation experience.
The Company's objective is to be a leading provider of IT solutions to the
middle market by continuing to deliver rapid ERP implementations and related
services. CCAi intends to achieve this objective by (i) expanding its base of
highly skilled employees and promoting an entrepreneurial culture; (ii)
leveraging its existing strategic relationships and seeking new relationships
with leading developers of complementary enterprise-wide applications; (iii)
broadening its presence in targeted geographic regions; (iv) expanding its
service offerings; and (v) pursuing strategic acquisitions. The Company recently
completed the acquisition of Kelly-Levey & Associates, Inc. ("KLA"), a
Kentucky-based provider of ERP implementation services, which enabled the
Company to acquire a staff of highly skilled ERP consultants, obtain additional
recruiting and sales and marketing opportunities, gain ERP implementation
expertise in the automotive and financial services industries and enhance its
presence in the Cincinnati market.
The Company is an Ohio corporation formed in 1983 and maintains its
principal executive office at the CCAi Renaissance Centre, 5800 Landerbrook
Drive, Mayfield Heights, Ohio 44124. The Company's telephone number is (440)
684-6600.
THE OFFERING
Common Stock offered by the Company......................... shares
Common Stock offered by the Selling Shareholders............ shares
Common Stock to be outstanding after the Offering........... shares (1)
Use of Proceeds............................................. To redeem all outstanding shares
of Redeemable Preferred Stock
for approximately $15.8 million,
to repay indebtedness of
approximately $8.3 million and
for general corporate purposes,
including working capital. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol...................... CCAI
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(1) Excludes (i) 64,734 shares of Common Stock subject to outstanding
compensatory options as of June 30, 1998 issued in connection with the KLA
acquisition (the "KLA Options"); (ii) 195,266 shares of Common Stock subject
to outstanding warrants as of June 30, 1998 issued in connection with the
KLA acquisition (the "KLA Warrants"); (iii) 320,200 shares of Common Stock
subject to options outstanding under the Company's 1997 Equity and
Performance Incentive Plan (the "1997 Equity and Performance Plan"); (iv)
1,022,850 additional shares of Common Stock reserved for issuance under the
1997 Equity and Performance Plan; and (v) additional shares of
Common Stock anticipated to be reserved for issuance pursuant to the
Company's Employee Stock Purchase Plan (the "Purchase Plan"). See
"Management -- Employee Benefits Plans" and Notes 11 and 12 of Notes to
Financial Statements.
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SUMMARY FINANCIAL DATA
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
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PRO FORMA PRO FORMA
1995 1996 1997 1997(1) 1997 1998 1998(1)
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF INCOME
DATA:
Revenues............... $ 11,107 $ 17,994 $ 32,218 $ 40,672 $ 14,334 $ 22,024 $ 24,437
Cost of revenues....... 6,985 10,978 19,222 25,539 8,191 13,327 14,712
Gross profit........... 4,122 7,016 12,996 15,133 6,144 8,697 9,725
Income from
operations........... 380 1,134 3,706 2,151 1,888 2,212 2,190
Net income (prior to
accretion)........... 165 591 2,124 765 1,080 1,190 1,066
Net income per share
(prior to accretion):
Basic................ $ $ $ $ $ $ $
Diluted.............. $ $ $ $ $ $ $
Net income per share:
Basic................ $ $ $ $ $ $ $
Diluted.............. $ $ $ $ $ $ $
Weighted average shares
outstanding:
Basic................
Diluted..............
AS OF JUNE 30, 1998
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ACTUAL AS ADJUSTED
(UNAUDITED) (UNAUDITED)(2)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,009 $
Working capital (deficit)................................. (3,157)
Total assets.............................................. 21,002
Line of credit............................................ 8,285
Redeemable securities..................................... 18,197
Total shareholders' equity (deficit)...................... (12,331)
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(1) The pro forma statements of summary financial data for the year ended
December 31, 1997 and for the six months ended June 30, 1998 are presented
as if the acquisition of KLA had been consummated as of January 1, 1997. See
"Unaudited Pro Forma Statements of Operations Data" and Notes thereto.
(2) As adjusted to give effect to (i) the conversion of all outstanding shares
of Convertible Preferred Stock into 2,504,000 shares of Common Stock and
250,400 shares of Redeemable Preferred Stock immediately prior to the
consummation of the Offering; (ii) the sale of shares of Common
Stock offered hereby at an assumed initial public offering price of $
per share, after deducting estimated underwriting discounts and commissions
and Offering expenses payable by the Company; and (iii) the application of
the estimated net proceeds of the Offering, including the redemption of the
250,400 shares of Redeemable Preferred Stock. See "Use of Proceeds" and
"Capitalization."
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RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the shares
of Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those contained in the forward-looking statements.
Factors that may cause such differences include, but are not limited to, those
discussed below as well as those discussed elsewhere in this Prospectus.
Dependence on SAP and Other Relationships. The Company has historically
derived, and expects to continue to derive, a significant portion of its
revenues from implementations of SAP's ERP applications and related services.
For the three years ended December 31, 1995, 1996 and 1997 and for the six
months ended June 30, 1998, approximately 55%, 69%, 75% and 77%, respectively,
of CCAi's revenues were derived from engagements in which the Company
implemented SAP applications. CCAi's future success depends largely on its
continued relationship with SAP, including its continued status as an SAP
National Implementation Partner and as an ASAP Partner. CCAi's status as an SAP
National Implementation Partner is awarded by SAP on an annual basis pursuant to
contract. To achieve such status, CCAi was required to demonstrate: (i) customer
satisfaction with the Company's SAP-related services; (ii) expertise with SAP
software; and (iii) an employee base containing an appropriate number of
SAP-experienced consultants. CCAi's current contract with SAP expires on
December 31, 1998. Annual renewal of CCAi's contract and its National
Implementation Partner status is subject to SAP's review of the Company's
performance according to certain criteria, including: (i) customer satisfaction;
(ii) number and scope of engagements completed; and (iii) thoroughness of
consultant training. There can be no assurance that the Company's contract and
its National Implementation Partner status will be renewed or amended by SAP on
terms acceptable to the Company, if at all.
The Company has recently established a strategic relationship with Oracle
and has been an Oracle Alliance Member since 1997. CCAi's future success in its
Oracle-related services depends on its continued relationship with Oracle and
its continued status as an Oracle Alliance Member. This status is awarded by
Oracle pursuant to contract and may be terminated by Oracle upon 30 days' notice
to the Company. The Company also maintains relationships with software and
hardware vendors and other IT service providers, such as multinational
consulting firms. These relationships, whether contractual or otherwise, may be
terminated by either party with little or no notice. There can be no assurance
that CCAi's relationship with Oracle or with these other vendors and IT service
providers will continue under terms acceptable to the Company, if at all.
If CCAi's relationship with SAP, Oracle or the other organizations with
which the Company maintains strategic relationships deteriorates, or if SAP,
Oracle or one of the other organizations with which the Company maintains
strategic relationships elects to compete directly with the Company, the
Company's business, operating results and financial condition could be
materially adversely affected. Moreover, in the event that the demand for such
organizations' products and services lessens or fails to grow, the Company's
business, operating results and financial condition could be materially
adversely affected. The Company also intends to pursue other strategic
relationships with leading client/server software solution providers. There can
be no assurance that CCAi will be successful in establishing relationships with
the vendors of such software or that such relationships will be successful once
established. The Company's failure to establish or maintain any such
relationships could materially adversely affect the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business -- The
CCAi Solution" and " -- Competition."
Recruiting and Retaining Consultants. CCAi's business entails the delivery
of professional IT services, and its success depends in large part upon its
ability to recruit, motivate and retain highly skilled consultants with the
functional and technical skills and experience necessary to deliver the
Company's services. Because there is a limited pool of such qualified employee
candidates, competition for such consultants is intense and is likely to remain
so. There can be no assurance that the Company will be able to recruit, motivate
and retain sufficient numbers of highly skilled consultants in the future. A
failure to do so could materially adversely affect the Company's business,
operating results and financial condition, including its ability to secure and
complete engagements. See "Business -- Human Resources" and "-- Competition."
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Management of Growth. CCAi has experienced, and expects to continue to
experience, rapid growth that has challenged, and may continue to challenge, the
Company's managerial and other resources. Between June 30, 1997 and June 30,
1998, the number of consultants employed by the Company increased to 245 from
167, and further significant increases are anticipated. In addition, the
Company's revenues increased 53.6% from $14.3 million for the six months ended
June 30, 1997 to $22.0 million for the six months ended June 30, 1998. The
Company has recently opened offices in Dallas and Cincinnati and plans to open
additional offices over the next 12 months. The Company's inability to generate
sufficient additional revenues to offset the costs associated with such
expansion, or to successfully integrate these offices into the Company's
operations, could materially adversely affect the Company's business, operating
results and financial condition. CCAi's success in managing its growth will
depend on its ability to continue to enhance its operating, financial and
managerial resources and to recruit, motivate and retain its expanding work
force. If CCAi is unable to manage growth effectively, the quality of the
Company's services, its ability to retain key employees and its business,
operating results and financial condition could be materially adversely
affected. Moreover, there can be no assurance that CCAi's business will continue
to grow. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Strategy" and "-- Human Resources."
Variability and Seasonality of Quarterly Operating Results. CCAi's revenues
and operating results are subject to significant variation from
quarter-to-quarter as a result of a number of factors, including employee
hiring, consultant billing and utilization rates, the mix, size and timing of
client engagements commenced and completed during a quarter, the number of
billable days in a quarter, the timing of office and service expansion and the
timing of expenditures. Because a high percentage of CCAi's expenses are
relatively fixed, a variation in the number of engagements or the timing of the
initiation or the completion of such engagements, particularly at or near the
end of any quarter, can cause significant variations in operating results from
quarter-to-quarter and could result in losses to the Company. In addition,
CCAi's engagements are generally terminable by the client without penalty.
Unanticipated termination of an engagement, a client's decision not to proceed
to the next phase of an engagement as anticipated by the Company, completion
during a quarter of several engagements without the deployment of consultants to
new engagements or expansion of existing engagements could result in the
Company's underutilization of employees and could, therefore, materially
adversely affect the Company's business, operating results and financial
condition. To the extent that increases in the number of employees do not result
in corresponding increases in revenues, the Company's business, operating
results and financial condition could be materially adversely affected. Further,
it is difficult for the Company to forecast the timing of revenues because
engagement cycles depend on factors such as the size and scope of engagements
and circumstances specific to particular clients. Because the Company derives
revenues only when its consultants are billing on engagements, its business,
operating results and financial condition are materially adversely affected due
to vacations, training schedules, sick days, holidays, inclement weather or
other similar events. For example, the Company has historically generated lower
margins during the second and fourth quarters of the year due to a lower number
of billable days resulting from training schedules and the number of vacations
and holidays in those quarters. Given all of the foregoing, the Company believes
that quarter-to-quarter comparisons of its operating results are not necessarily
meaningful, and that such results for one quarter should not be relied upon as
an indication of future performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Demand for IT consulting services is also significantly affected by the
general level of economic activity. When economic activity slows, clients may
delay or cancel plans that involve the hiring of IT consultants. The Company is
unable to predict the level of economic activity at any particular time, and
fluctuations in the general economy could materially adversely affect the
Company's business, operating results and financial condition.
Acquisition of KLA. The Company acquired KLA in April 1998. For the six
months ended June 30, 1998, KLA accounted for approximately $2.4 million, or 11%
of the Company's revenues. The success of the acquisition will depend on a
number of factors, including the Company's ability to integrate the business and
operations of KLA with those of the Company, to retain certain key employees
formerly employed by KLA and to preserve and expand the business and operations
of KLA. There can be no assurance that the Company will be able to successfully
integrate and operate the business of KLA or that it will not experience losses
as a result of the acquisition. Failure to achieve the anticipated benefits of
the acquisition or to successfully integrate the
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operations of KLA could materially adversely affect the business, operating
results and financial condition of the Company. Moreover, goodwill as a result
of the KLA acquisition is being amortized by the Company on a straight-line
basis over 20 years. In accordance with Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, the Company will continually
evaluate whether later events and circumstances have occurred that indicate the
remaining goodwill may warrant revision. There can be no assurance that the
Company will not be required to undertake such revisions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Risks of Acquisition Strategy. The Company intends to further expand its
business and operations by pursuing acquisitions of complementary ERP
implementation and IT consulting businesses. The timing, size and success of the
Company's acquisition efforts and the associated capital commitments cannot be
predicted. CCAi expects to face competition for acquisition candidates, which
may limit the number of acquisition opportunities available to the Company and
may lead to higher purchase prices or transaction costs. There can be no
assurance that CCAi will be able to identify, acquire or profitably manage
additional businesses or successfully integrate any acquired businesses without
substantial costs, including costs in pursuing and negotiating with acquisition
candidates, delays in consummating such acquisitions or other operational or
financial difficulties. In addition, such a strategy involves a number of other
risks, including failure of the acquired businesses to achieve expected results,
diversion of management's attention and resources to acquisitions, failure to
retain key clients or personnel of the acquired businesses and risks associated
with unanticipated events, liabilities or contingencies. Client dissatisfaction
or performance problems relating to an acquired business could negatively affect
the reputation of CCAi as a whole. Acquisitions accounted for under the purchase
method of accounting may result in substantial annual noncash amortization
charges for goodwill and other intangible assets in the Company's statements of
operations. In addition, the Company could be obligated to make substantial cash
payments related to any such acquisition. There can be no assurance that the
Company will derive any value or benefit from any such payments. If CCAi is
unable to acquire complementary ERP implementation and IT consulting businesses
on reasonable terms or successfully integrate and manage acquired companies, or
if performance problems occur at acquired companies, CCAi's business, operating
results and financial condition may be materially adversely affected. See "Use
of Proceeds" and "Business -- Growth Strategy."
Rapid Technological Change; Dependence on New Solutions. The IT industry is
characterized by rapid technological change, evolving industry standards,
changing client preferences and new and frequent product and service
introductions. CCAi's continued success is dependent in part on its ability to
stay abreast of such continuing changes. There can be no assurance that CCAi
will be successful in identifying and addressing these developments on a timely
basis or that, if CCAi does identify and address such developments, CCAi will be
successful in the marketplace. In addition, there can be no assurance that
products, technologies or services developed or offered by others will not
render the Company's services noncompetitive. CCAi's failure to identify and
address these developments could materially adversely affect the Company's
business, operating results and financial condition.
Highly Competitive Information Technology Services Industry. The market for
CCAi's services is highly competitive. CCAi believes that its principal
competitors include the internal information systems groups of its prospective
clients, IT consulting companies, systems integration firms and the consulting
divisions of software applications vendors, some of which are also clients of
the Company. Many of CCAi's competitors have longer operating histories, possess
greater industry and name recognition and have significantly greater financial,
technical and marketing resources than the Company. In addition, there are
relatively low barriers to entry into CCAi's market, and the Company has faced,
and expects to continue to face, additional competition from new entrants into
its market, including new entrants operating offshore who may have lower fixed
operating costs than the Company and new entrants who may develop new or
innovative means of delivering IT services.
CCAi believes that the principal competitive factors in its market include
quality of service, speed of development and implementation, price, engagement
management capability, technical and business expertise and reputation. The
Company believes it competes favorably with respect to such factors. The Company
believes its ability to compete also depends in part on a number of competitive
factors outside its control. These include
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the ability of its competitors to recruit, motivate and retain project managers
and other senior professionals, develop services that are competitive with the
Company's services and respond to customer needs. There can be no assurance that
the Company will be able to compete successfully with its competitors. See
"Business -- The CCAi Solution" and "-- Competition."
Engagement Risks. Many of CCAi's engagements are critical to the operations
of its clients' businesses and provide benefits that may be difficult to
quantify. The Company's inability to meet a client's expectations in any
engagement, especially in performing mission and time critical projects such as
Year 2000 compliance services, could have a material adverse effect on the
client and, therefore, could give rise to claims against the Company or damage
the Company's reputation, which could in turn materially adversely affect the
Company's business, operating results and financial condition. In addition, most
of the Company's contracts are terminable by its clients with little or no
notice to the Company and without penalty. The cancellation or a significant
change in the scope of engagements could materially adversely affect the
Company's business, operating results and financial condition.
The Company faces increased pressure to undertake engagements on a
fixed-fee basis, instead of on a time and materials basis. The failure of the
Company to complete a fixed-fee engagement within budget could expose the
Company to risks associated with cost overruns, which could materially adversely
affect the Company's business, operating results and financial condition. These
risks may be heightened if the Company acts as a subcontractor on a fixed-fee
engagement because of its limited ability to control engagement variables and to
negotiate directly with the client.
Concentration of Revenues. Since its inception, the Company has derived a
significant portion of its revenues from a relatively limited number of clients.
For example, for the years ended December 31, 1995, 1996 and 1997 and for the
six months ended June 30, 1998, the Company's 10 largest clients accounted for
approximately 51%, 43%, 39% and 40% of its revenues, respectively. For the six
months ended June 30, 1998, one of the Company's clients accounted for 12% of
revenues. There can be no assurance that these clients will continue to hire the
Company for additional engagements or do so at the same revenue levels. Clients
engage the Company on an engagement-by-engagement basis, and a client can
generally terminate a contract with little or no notice to the Company and
without penalty. The loss of any such client, or a reduction in the scope of
engagements undertaken for such a client, could materially adversely affect the
Company's business, operating results and financial condition. In addition,
there can be no assurance that the portion of the Company's revenues
attributable to a relatively limited number of clients will not increase in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Clients and Representative Engagements."
Reliance on Key Executives. The success of CCAi has been highly dependent
upon certain key executives and senior managers, particularly the Company's
founders, Nicholas A. Canitano, Kenneth L. Conley, Karen M. Conley and Annette
M. Canitano (collectively, the "Founders"). None of these individuals has
entered into an employment agreement with CCAi, and there is no guarantee that
any of these individuals will continue his or her employment with the Company.
The loss of the services of any of these persons for any reason could materially
adversely affect the Company's business, operating results and financial
condition. See "Management."
Government Regulation of Immigration. The Company recruits certain of its
IT professionals from countries outside the United States to avail itself of the
best available consulting talent and, therefore, must comply with the
immigration laws in the countries in which it operates, particularly in the
United States and Canada. There is a limit on the number of new H-1B permits
that may be approved in any year. In years in which this limit is reached, the
Company may be unable to obtain enough H-1B permits to meet its requirements. If
the Company were unable to obtain H-1B permits for its employees in sufficient
quantities or at a sufficient rate, the Company's business, operating results
and financial condition could be materially adversely affected. Furthermore,
Congress and administrative agencies with jurisdiction over immigration matters
have periodically expressed concerns over the levels of legal and illegal
immigration into the U.S. These concerns have often resulted in proposed
legislation, rules and regulations aimed at reducing the number of work permits
that may be issued. Any changes in such laws and regulations that make it more
difficult to hire foreign nationals or that limit
11
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the ability of the Company to retain employees who are foreign nationals could
require the Company to incur additional unexpected labor costs and other
expenses and limit the Company's ability to implement its expansion strategy.
Any such restrictions or limitations on the Company's ability to hire
professionals from countries outside the United States could materially
adversely affect the Company's business, operating results and financial
condition. See "Business -- Human Resources."
Significant Influence of Principal Shareholders. Upon consummation of the
Offering, the executive officers and directors of the Company and their
affiliates will beneficially own approximately % of the outstanding shares
of Common Stock, and the Founders will beneficially own approximately % of
the outstanding shares of Common Stock. While there is no agreement among the
executive officers and directors of the Company regarding the voting of their
Common Stock, if voted together, they will effectively control the outcome of
any matters requiring shareholder approval, including the election of the
members of the Board of Directors. Such influence could materially adversely
affect the market price of the Common Stock or delay or prevent a change in
control of the Company. See "Principal and Selling Shareholders."
Dependence on Intellectual Property Rights. CCAi's success is dependent
upon certain methodologies and other proprietary intellectual property rights.
Software developed by the Company for a client is typically assigned to the
client. CCAi also independently develops certain foundation and application
software products, or software "tools" that remain the property of the Company.
CCAi relies upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright and trademark laws to protect its
proprietary rights and the proprietary rights of third parties from whom the
Company licenses intellectual property. CCAi enters into confidentiality
agreements with its employees and limits distribution of proprietary
information. There can be no assurance that the steps taken by CCAi in this
regard will be adequate to deter misappropriation of the Company's proprietary
information, that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights or that such steps
will prevent the Company's employees from using intellectual property belonging
to others. Although CCAi believes its services do not infringe on the
intellectual property rights of others and it has all rights necessary to
utilize the intellectual property employed in its business, the Company is
subject to the risk of claims alleging infringement of third-party intellectual
property rights, including the rights of its clients. Any such claims could
require CCAi to expend significant resources in litigation, pay damages, cease
using infringing intellectual property, develop non-infringing intellectual
property or acquire licenses to the intellectual property that is the subject of
asserted infringement. See "Business -- Intellectual Property Rights."
Year 2000 Compliance. Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date code
field, and were not designed to account for the upcoming change in the century.
As a result, such systems and applications could fail or create erroneous
results unless corrected so that they can process dates in the Year 2000 and
beyond. The Company and its clients rely on their systems, applications and
devices in operating and monitoring all major aspects of their businesses,
including financial systems (such as general ledger, accounts payable and
accounts receivable modules), customer services, infrastructure, embedded
computer chips, networks and telecommunications equipment and end products. The
Company and its clients also rely directly and indirectly, on external systems
of business enterprises such as customers, suppliers, creditors, financial
organizations, and of governmental entities, both domestic and international,
for accurate exchange of data. Despite the Company's efforts to address the Year
2000 impact on its internal systems and the systems of its clients, the Company
has not fully identified such impact or whether it can resolve such impact
without disruption of its business or without incurring significant expense.
Based on the information currently available, the Company believes that the
costs associated with the Year 2000 issue, and the consequences of incomplete or
untimely resolution of the Year 2000 issue, will not have a material adverse
effect on its business, operating results and financial condition in any given
year. However, there can be no assurance that the Company, or its clients, will
not encounter unexpected costs or disruption in their businesses as a result of
the Year 2000 issue. In addition, even if the internal system of the Company are
not materially affected by the Year 2000 issue, the Company's business,
operating results and financial condition could be materially adversely affected
through disruption in the operation of the enterprises with which the Company
interacts.
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12
No Prior Public Market; Possible Volatility of Stock Price. Prior to the
Offering, there has been no public market for the Common Stock, and there is no
assurance an active trading market will develop or be sustained after the
Offering. The initial public offering price will be determined through
negotiations among the Company and the representatives of the Underwriters and
may not be indicative of the market price of the Common Stock after the
Offering. The trading price of the Common Stock is likely to be highly volatile
and may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results, announcements of technological
innovations, new products or new contracts by the Company or its competitors,
developments with respect to patents, copyrights or proprietary rights,
conditions and trends in the IT consulting industry, changes in financial
estimates by securities analysts, general market conditions and other factors.
In addition, the public equity markets from time to time have experienced
significant price and volume fluctuations that particularly have affected the
stock prices of technology companies. These broad market fluctuations, as well
as shortfalls in sales or earnings as compared with securities analysts'
expectations, changes in such analysts' recommendations or projections and
general economic and market conditions, may materially adversely affect the
market price of the Common Stock. See "Underwriting."
Certain Anti-Takeover Effects. Certain provisions of the Articles of
Incorporation and Amended and Restated Code of Regulations (the "Code of
Regulations"), as well as Ohio statutes, may be deemed to have certain
anti-takeover effects. Such provisions, including those providing for the
possible issuance of preferred stock, and the division of the Company's Board of
Directors into two classes of directors, may make it more difficult for other
persons, without the approval of the Company's Board of Directors, to make a
tender offer or acquisitions of substantial amounts of the Common Stock or to
launch other takeover attempts that a shareholder might consider to be in such
shareholder's best interest. These provisions could limit the price that certain
investors might be willing to pay in the future for shares of Common Stock. See
"Description of Capital Stock -- Certain Articles of Incorporation and Code of
Regulations Provisions and Ohio Law; Anti-Takeover Provisions."
Shares Eligible for Future Sale; Registration Rights Agreements. Sales of
significant amounts of Common Stock in the public market after the Offering or
the perception that such sales will occur could materially adversely affect the
market price of the Common Stock or the future ability of the Company to raise
capital through an offering of its equity securities. Of the
shares of Common Stock to be outstanding upon completion of the Offering, the
shares offered hereby will be eligible for immediate sale in the
public market without restriction unless such Shares are purchased by
"affiliates" of the Company within the meaning of Rule 144 ("Rule 144") under
the Securities Act of 1933, as amended (the "Securities Act").
The remaining shares of Common Stock held by existing
shareholders upon completion of the Offering will be "restricted securities" as
that term is defined in Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under the Securities Act. Directors, officers and certain
shareholders of the Company holding an aggregate of shares of
Common Stock have agreed that they will not sell, directly or indirectly, any
Common Stock without the prior consent of Donaldson, Lufkin & Jenrette
Securities Corporation for a period of 180 days from the date of this Prospectus
(the "Lock-up Agreements"). Subject to these Lock-up Agreements, additional
shares of Common Stock will be available for sale in the public market (subject
in the case of shares held by affiliates in compliance with certain volume
restrictions) as follows: (i) shares will be available for
immediate sale in the public market on the date of this Prospectus; (ii)
shares will be eligible for sale 90 days after the date of this
Prospectus; (iii) shares will be eligible for sale upon the
expiration of the Lock-Up Agreements 180 days after the date of this Prospectus;
and (iv) shares will be eligible for sale under Rule 144 upon the
expiration of the applicable one-year holding periods.
Following the date of this Prospectus, the Company intends to register on
one or more registration statements on Form S-8 approximately
shares of Common Stock issuable under the 1997 Equity and Performance Plan and
the Purchase Plan (collectively, the "Stock Plans"). Of the
shares of Common Stock issuable under the Stock Plans, 320,200 shares are
subject to outstanding options as of June 30, 1998, none of which will be
exercisable at the time of the Offering. The Company also has reserved 195,266
shares of Common Stock for issuance upon exercise of the KLA Warrants and 64,734
shares of Common Stock for issuance upon exercise of the KLA Options.
13
13
Upon completion of the Offering, the holders of shares
of Common Stock will be entitled to certain registration rights with respect to
such shares. If such holders, by exercising their registration rights, cause a
large number of shares of Common Stock to be registered and sold in the public
market, such sales could have an adverse effect on the market price of the
Common Stock. In addition, if the Company is required, pursuant to such
registration rights, to include shares held by such persons in a registration
statement, which the Company files to raise additional capital, the inclusion of
such shares could adversely affect the Company's ability to raise needed
capital. See "Certain Transactions," "Management -- Employee Benefit Plans,"
"Shares Eligible for Future Sale," and "Principal and Selling Shareholders."
Significant Unallocated Net Proceeds. The principal purposes of the
Offering are to obtain additional working capital, create a public market for
the Common Stock, provide liquidity to the Company's shareholders, enhance the
Company's ability to use its Common Stock as a means of recruiting, motivating
and retaining key employees and facilitate the Company's future access to public
equity markets. A substantial portion of the anticipated net proceeds of the
Offering has not been designated for specific uses. CCAi expects to use the net
proceeds from the Offering for: (i) redemption of all outstanding shares of
Redeemable Preferred Stock for approximately $15.8 million; (ii) repayment in
full of existing indebtedness of approximately $8.3 million; and (iii) general
corporate purposes, including working capital. Although the Company has no
plans, commitments or agreements with respect to any material acquisitions as of
the date of this Prospectus, the Company may seek acquisitions of businesses or
service offerings that are complementary to those of the Company, and a portion
of the net proceeds may be used for such acquisitions. Accordingly, the Company
will have significant flexibility in applying the net proceeds of the Offering.
See "Use of Proceeds."
Dilution. Investors participating in the Offering will incur immediate and
substantial dilution of net tangible book value per share of $ from the
assumed initial public offering price. To the extent outstanding options to
purchase shares of Common Stock are exercised, there will be further dilution to
investors participating in the Offering. There can be no assurance that the
Company will not require additional funds to support its working capital
requirements or for other purposes, in which case the Company may seek to raise
such additional funds through public or private equity financing or from other
sources. There can be no assurance that such additional financing will be
available or that, if available, such financing will be obtained on terms
favorable to the Company and would not result in additional dilution of the
Company's shareholders. See "Dilution."
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USE OF PROCEEDS
The net proceeds to CCAi from the sale of the shares offered
by the Company pursuant to the Offering are estimated to be approximately
$ million ($ million if the Underwriters' over-allotment
option is exercised in full), at an assumed offering price of $ per share
after deducting the estimated underwriting discounts and commissions and
Offering expenses payable by the Company. The principal purposes of the Offering
are to obtain additional working capital, create a public market for the Common
Stock, provide liquidity to the Company's shareholders, enhance the Company's
ability to use its Common Stock as a means of attracting, motivating and
retaining key employees and facilitate the Company's future access to public
equity markets. CCAi expects to use the net proceeds from the Offering: (i) to
redeem all outstanding shares of Redeemable Preferred Stock for approximately
$15.8 million; (ii) to repay in full existing indebtedness of approximately $8.3
million; and (iii) for general corporate purposes, including working capital.
The Company may also use a portion of the net proceeds to fund acquisitions of
complementary businesses or service offerings. Although the Company may
periodically review potential acquisition opportunities, there are no current
agreements with respect to any such transactions. Pending such uses, the Company
intends to invest the net proceeds from the Offering in short-term,
investment-grade, interest-bearing securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Company will not receive any of the proceeds from the sale of Common
Stock by the Selling Shareholders. See "Principal and Selling Shareholders."
DIVIDEND POLICY
The Company has never declared or paid any dividends. The Company does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The Company currently intends to retain future earnings to fund the
development and growth of its business. The payment of dividends in the future,
if any, will be at the discretion of the Board of Directors.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 and as adjusted to give effect to (i) the conversion of all outstanding
shares of Convertible Preferred Stock into 2,504,000 shares of Common Stock and
250,400 shares of Redeemable Preferred Stock immediately prior to the
consummation of the Offering, (ii) the redemption of the 250,400 outstanding
shares of Redeemable Preferred Stock to be effected immediately upon
consummation of the Offering, (iii) the amendment to the Articles of
Incorporation adopted by the Company's Board of Directors and shareholders
increasing the number of authorized shares of preferred stock and Common Stock,
(iv) the sale of shares offered hereby at an assumed initial public
offering price of $ per share, after deducting estimated underwriting discounts
and commissions and Offering expenses payable by the Company and (v) the
application of the estimated net proceeds of the Offering. See "Use of
Proceeds." The information set forth below should be read in conjunction with
the Financial Statements and related Notes thereto included elsewhere in this
Prospectus:
AS OF JUNE 30, 1998
--------------------------
ACTUAL AS ADJUSTED
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
Line of credit.............................................. $ 8,285 $
Redeemable securities....................................... 18,197
Shareholders' equity (deficit):
Preferred stock(1)
Common stock(1)(2)..................................... 8
Additional paid-in capital............................. 359
Retained earnings (accumulated deficit)................ (12,338)
Less: note receivable from shareholder................. (359)
-------- -------
Total shareholders' equity (deficit)................. (12,331)
-------- -------
Total capitalization.............................. $ 5,866 $
======== =======
- ---------------
(1) In July 1998, the Company's shareholders granted approval to increase
authorized shares of stock as follows:
Preferred Stock, voting, $0.01 par value.................... 500,800
Preferred Stock, non-voting, no par value................... 5,000,000
Preferred Stock, voting, no par value....................... 5,000,000
Common Stock, no par value.................................. 45,000,000
(2) Excludes (i) 64,734 shares of Common Stock subject to the KLA Options, (ii)
195,266 shares subject to the KLA Warrants, (iii) 320,200 shares of Common
Stock subject to options outstanding under the 1997 Equity and Performance
Plan; (iv) 1,022,850 additional shares of Common Stock reserved for issuance
pursuant to the 1997 Equity and Performance Plan; and (v)
additional shares of Common Stock anticipated to be reserved for issuance
pursuant to the Purchase Plan. See "Management -- Employee Benefits Plans"
and Notes 11 and 12 of Notes to Financial Statements.
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DILUTION
As of June 30, 1998, the net tangible book value (deficit) of the Company
was $ or $ per share of Common Stock. Net tangible book value
per share is equal to the Company's total tangible assets less total
liabilities, divided by the total number of shares of Common Stock outstanding.
After giving effect to the sale by the Company of the shares of
Common Stock offered hereby at an assumed initial public offering price of
$ per share, and after deducting the underwriting discounts and commissions
and estimated Offering expenses payable by the Company, the pro forma net
tangible book value of the Company as of June 30, 1998 would have been
$ million, or $ per share of Common Stock. This represents an
immediate increase in net tangible book value of $ per share of Common Stock
to existing shareholders and an immediate dilution of $ per share to new
shareholders. The following table illustrates this dilution on a per share
basis.
Assumed initial public offering price per share............. $
-----
Net tangible deficit per share before the Offering........ $ ()
Increase per share attributable to new investors..........
-----
Pro forma net tangible book value per share after the
Offering..................................................
-----
Dilution per share to new investors......................... $
=====
The following table summarizes, on a pro forma basis as of June 30, 1998,
the difference between the existing shareholders and new shareholders with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price paid per share by
existing shareholders and by new shareholders:
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
Existing shareholders...................... % $ % $
New shareholders...........................
-------- ----- -------- -----
Total............................ 100.0% $ 100.0%
======== ===== ======== =====
The foregoing tables and calculations assume no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options or
warrants. As of June 30, 1998, there were 64,734 shares of Common Stock subject
to the KLA Options; 195,266 shares of Common Stock subject to the KLA Warrants;
320,200 shares of Common Stock subject to options outstanding under the 1997
Equity and Performance Plan; 1,022,850 additional shares of Common Stock
reserved for issuance pursuant to such plan; and additional
shares of Common Stock anticipated to be reserved for issuance pursuant to the
Purchase Plan. See "Management -- Employee Benefit Plans," and "Shares Eligible
for Future Sale."
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SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and the Company's financial
statements and Notes thereto included elsewhere in this Prospectus. The
Statements of Income Data presented below for each of the years in the three
year period ended December 31, 1997 and the Balance Sheet Data, for the years
ended December 31, 1996 and 1997, have been derived from the Company's financial
statements included elsewhere in this Prospectus, which have been audited by
PricewaterhouseCoopers LLP, whose report with respect thereto is included
elsewhere in this Prospectus. The Balance Sheet Data as of December 31, 1995 and
1994 has been derived from audited financial statements not included herein. The
Balance Sheet Data as of December 31, 1993 and June 30, 1998 and the Statements
of Income Data for the ten months ended December 31, 1993, for the year ended
December 31, 1994 and for each of the six months ended June 30, 1997 and 1998
have been derived from the unaudited financial statements of the Company. In the
opinion of management, the unaudited financial statements include all
adjustments (consisting only of normal and recurring adjustments) necessary for
a fair presentation of its financial position and operating results for such
periods. The selected financial data for the six months ended June 30, 1998 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1998 or any other future period. See the financial statements and
the related Notes thereto included elsewhere in the Prospectus.
TEN MONTHS
ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31,(1) ----------------------------------------
1993 1994 1995
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF INCOME DATA:
Revenues................ $4,559 $ 6,149 $ 11,107
Cost of revenues........ 2,968 3,977 6,985
------ ----------- -----------
Gross profit............ 1,591 2,172 4,122
Selling, general and
administrative
expenses.............. 1,428 2,066 3,038
Incentive
compensation.......... 258 216 678
Acquisition
compensation.......... -- -- --
Depreciation and
amortization.......... 39 22 26
------ ----------- -----------
(Loss) income from
operations............ (134) (132) 380
Interest income......... 1 0 3
Interest expense........ (27) (40) (38)
------ ----------- -----------
(Loss) income before
provision for income
taxes................. (160) (172) 345
(Benefit from) provision
for income taxes...... (69) (80) 180
------ ----------- -----------
Net (loss) income....... $ (91) $ (92) $ 165
====== =========== ===========
Accretion to redemption
value of redeemable
securities............ -- -- --
------ ----------- -----------
Net (loss) income
available to common
shareholders.......... $ (91) $ (92) $ 165
====== =========== ===========
Net (loss) income per
share:
Basic................. $ $ $
Diluted............... $ $ $
Weighted average shares
outstanding:
Basic.................
Diluted...............
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ----------------------------------------
1997 1997 1998
1996 (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF INCOME DATA:
Revenues................ $ 17,994 $ 32,218 $ 14,334 $ 22,024
Cost of revenues........ 10,978 19,222 8,190 13,327
----------- ----------- ----------- -----------
Gross profit............ 7,016 12,996 6,144 8,697
Selling, general and
administrative
expenses.............. 4,204 6,555 2,980 4,357
Incentive
compensation.......... 1,647 2,700 1,259 1,591
Acquisition
compensation.......... -- -- -- 362
Depreciation and
amortization.......... 31 35 17 175
----------- ----------- ----------- -----------
(Loss) income from
operations............ 1,134 3,706 1,888 2,212
Interest income......... 6 20 8 15
Interest expense........ (88) (107) (56) (132)
----------- ----------- ----------- -----------
(Loss) income before
provision for income
taxes................. 1,052 3,619 1,840 2,095
(Benefit from) provision
for income taxes...... 461 1,495 760 905
----------- ----------- ----------- -----------
Net (loss) income....... $ 591 $ 2,124 $ 1,080 $ 1,190
=========== =========== =========== ===========
Accretion to redemption
value of redeemable
securities............ -- (93) -- (227)
----------- ----------- ----------- -----------
Net (loss) income
available to common
shareholders.......... $ 591 $ 2,031 $ 1,080 $ 963
=========== =========== =========== ===========
Net (loss) income per
share:
Basic................. $ $ $ $
Diluted............... $ $ $ $
Weighted average shares
outstanding:
Basic.................
Diluted...............
- ---------------
(1) Reflects a change in the Company's fiscal year to the calendar year
effective as of December 31, 1993.
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AS OF DECEMBER 31, AS OF
---------------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 66 $ 109 $ 100 $ 362 $ 2,174 $ 2,009
Working capital (deficit)...... 11 (142) (170) 429 2,119 (3,157)
Total assets................... 1,175 1,164 2,054 3,697 7,712 21,002
Line of credit................. -- -- -- -- 698 8,285
Redeemable securities.......... -- -- -- -- 15,970 18,197
Total shareholders' equity
(deficit).................... 59 (33) (25) 723 (13,294) (12,331)
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS DATA
The following Unaudited Pro Forma Statements of Operations Data gives pro
forma effect to the acquisition of KLA by CCAi on April 8, 1998. The Unaudited
Pro Forma Statements of Operations Data for the year ended December 31, 1997 and
for the six months ended June 30, 1998 combine the historical statements of
income of CCAi and the historical statements of operations of KLA as if the
acquisition had been completed on January 1, 1997. The Unaudited Pro Forma
Statement of Operations Data for the six months ended June 30, 1998 reflects the
last full quarter of KLA operations prior to being acquired by CCAi on April 8,
1998. This pro forma data should be read in conjunction with the respective
historical financial statements (including Notes thereto) of CCAi and KLA,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Notes to Unaudited Pro Forma Statements of Operations Data
presented below and other financial information of CCAi and KLA appearing
elsewhere herein.
The pro forma adjustments reflecting the consummation of the KLA
acquisition are based on the purchase method of accounting, available financial
information and certain estimates and assumptions set forth in the Notes to the
Unaudited Pro Forma Statements of Operations Data. The Unaudited Pro Forma
Statements of Operations Data reflects CCAi's best estimates; however, the
actual financial position and results of operations may differ significantly
from the pro forma amounts reflected herein due to various factors, including,
without limitation, access to additional information and changes in value. The
pro forma adjustments do not reflect any operating efficiencies or cost savings
that may be achievable with respect to the combined business of CCAi and KLA.
The following data is not necessarily indicative of the future financial
position or operating results of the combined businesses or the financial
position or operating results of the combined businesses had the acquisition
occurred at the beginning of 1997.
SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------------
KLA
THREE
MONTHS
YEAR ENDED DECEMBER 31, 1997 ENDED
--------------------------------------------------- MARCH 31,
PRO FORMA PRO FORMA CCAI 1998 PRO FORMA PRO FORMA
CCAI KLA ADJUSTMENTS COMBINED HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
HISTORICAL HISTORICAL (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues............. $32,218 $8,726 $ (272)(1) $40,672 $ 22,024 $2,570 $(157)(1) $ 24,437
Cost of revenues..... 19,222 6,589 (272)(1) 25,539 13,327 1,542 (157)(1) 14,712
------- ------ ------- ------- -------- ------ ----- ---------
Gross profit......... 12,996 2,137 -- 15,133 8,697 1,028 -- 9,725
Selling, general and
administrative
expenses........... 6,555 2,238 (818)(2) 7,975 4,357 925 (250)(2) 5,032
Incentive
compensation....... 2,700 -- -- 2,700 1,591 -- -- 1,591
Acquisition
compensation....... -- -- 1,825(3,4) 1,825 362 -- 263(3,4) 625
Depreciation and
amortization....... 35 74 373(5) 482 175 19 93(5) 287
------- ------ ------- ------- -------- ------ ----- ---------
Income (loss) from
operations......... 3,706 (175) (1,380) 2,151 2,212 84 (106) 2,190
Transaction costs.... -- -- -- -- -- 302 (302)(6) --
Net interest
expense............ 88 28 469(7) 585 117 4 120(7) 241
------- ------ ------- ------- -------- ------ ----- ---------
19
19
SIX MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------
KLA
THREE
MONTHS
YEAR ENDED DECEMBER 31, 1997 ENDED
--------------------------------------------------- MARCH 31,
PRO FORMA PRO FORMA CCAI 1998 PRO FORMA PRO FORMA
CCAI KLA ADJUSTMENTS COMBINED HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
HISTORICAL HISTORICAL (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income (loss) before
provision for
(benefit from)
income taxes....... 3,619 (204) (1,849) 1,566 2,095 (222) 76 1,949
Provision for
(benefit from)
income taxes....... 1,495 (64) (630)(8) 801 905 (83) 61(8) 883
------- ------ ------- ------- -------- ------ ----- ---------
Net income (loss).... $ 2,124 $ (140) $(1,219) $ 765 $ 1,190 $ (139) $ 15 $ 1,066
======= ====== ======= ======= ======== ====== ===== =========
Accretion to
redemption value of
redeemable
securities......... (93) -- -- (92) (227) -- -- (227)
------- ------ ------- ------- -------- ------ ----- ---------
Net income (loss)
available to common
shareholders....... $ 2,031 $ (140) $(1,219) $ 673 $ 963 $ (139) $ 15 $ 839
======= ====== ======= ======= ======== ====== ===== =========
Net income per share:
Basic.............. $ $
Diluted............ $ $
Weighted average
shares outstanding:
Basic.............. $ $
Diluted............ $ $
- ---------------
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS DATA:
(1) Reflects eliminating entries for purposes of combining CCAi and KLA.
(2) Reflects the elimination of KLA expenses, which consist of the salary
related to an officer of KLA who was not retained by CCAi and certain
nonrecurring travel expenses incurred by KLA officers and employees, that
will no longer be incurred as a result of the KLA acquisition.
(3) Reflects pro forma adjustment to acquisition compensation in the amount of
$0.3 million and $0.1 million for the year ended December 31, 1997 and for
the six months ended June 30, 1998, respectively, for the amortization of
$0.5 million of compensation expense resulting from the issuance of the KLA
Options. The expense associated with the KLA Options is amortized on a
straight-line basis over the 24 month vesting period for such options. In
connection with the Offering, the KLA Options will fully vest and the
unamortized balance will be included in acquisition compensation. See Note
12 of Notes to Financial Statements.
(4) Reflects pro forma adjustment to acquisition compensation in the amount of
$1.6 million and $0.1 million for the year ended December 31, 1997 and for
the six months ended June 30, 1998, respectively, for bonus retention pool
payments to an escrow account for KLA employees retained by CCAi. See Note
12 of Notes to Financial Statements.
(5) Reflects the pro forma increase in amortization expenses associated with the
amortization of goodwill of $7.5 million resulting from the KLA acquisition,
on a straight-line basis over 20 years.
(6) Reflects transaction costs, which consist of professional services expenses,
incurred by KLA resulting from the KLA acquisition. Transaction costs
incurred by CCAi are included in goodwill. Amortization of goodwill is
included in depreciation and amortization.
(7) Reflects the pro forma increase in interest expense associated with the
borrowings by CCAi in connection with the KLA acquisition. The borrowings
are assumed to have an interest rate of 8.5%.
(8) Reflects pro forma adjustments to provision for (benefit from) income taxes
assuming an effective income tax rate of 51.1% and 45.3% for the year ended
December 31, 1997 and for the six months ended June 30, 1998, respectively.
The difference between the effective income tax rate from the federal
statutory rate is primarily due to nondeductible goodwill amortization and,
to a lesser extent, state taxes.
20
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section of this Prospectus contains certain forward-looking
statements that involve substantial risks and uncertainties. When used in this
section, the words "anticipate," "believe," "estimate," and "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results,
performance or achievements expressed in, or implied by, these forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
CCAi is a leading provider of rapid implementations of ERP applications.
CCAi also offers its clients a comprehensive range of related services,
including post-implementation and platform independent services, such as network
and Windows NT support, custom application development, mainframe and legacy
application support, Year 2000 compliance and remote support. The Company's
services are primarily targeted at middle market organizations, or divisions of
larger organizations, with annual revenues between $200 million and $2.5
billion. The Company's rapid ERP implementation services enable its clients to
reduce the length and risks of implementations, lower overall costs and achieve
early realization of ERP-related benefits. The Company provides its services to
clients across a broad spectrum of industries, including aerospace, automotive,
chemical process, communications, consumer products, energy, financial and
professional services, health care, industrial, publishing, retail and
technology.
From its inception through 1989, CCAi was engaged in the implementation of
mainframe and minicomputer software applications, as well as the development of
custom applications and software products for mainframe and minicomputer
systems. In 1989, the Company participated in one of the first mainframe SAP
implementations in the U.S. and thereafter continued to provide its clients with
mainframe ERP implementations and related services for SAP applications
throughout the early 1990s. With the advent of client/server architecture and
the availability of affordable personal computers, the Company began to develop
custom applications for client/server environments and subsequently began to
participate in SAP client/server ERP implementations undertaken by larger IT
service providers at Fortune 500 companies.
Since 1994, when the Company became an SAP National Implementation Partner,
CCAi has differentiated itself by developing expertise as a provider of rapid
ERP implementation services and developing its own rapid implementation
methodology. The Company was involved in the development of SAP's ASAP
methodology, which has become an industry standard for rapid SAP
implementations. In 1997, CCAi became one of SAP's first ASAP Partners and has
since become one of the first organizations to certify 100 consultants in the
ASAP methodology. Also during 1997, the Company expanded its ERP implementation
capabilities by becoming an Oracle Alliance Member and has since developed its
own proprietary rapid implementation methodology, known as FIRM, for Oracle ERP
applications. Since 1997, the Company has increasingly undertaken the management
of engagements for middle market clients. With the continuing growth in demand
for ERP solutions among middle market organizations, the Company has focused on
providing rapid ERP implementations and related services for such organizations.
In 1998, the Company was one of the first organizations named by Compaq as a
regional configuration support center to provide rapid implementation and
related services in connection with R/3PAQ, a preconfigured ERP solution jointly
developed by Compaq and SAP.
In April 1998, the Company purchased all of the capital stock of KLA. The
Company paid $3.9 million in cash, issued the KLA Warrants and agreed to make
additional cash payments of (i) $3.4 million, subject to certain revenue targets
and contribution margins during the two-year period following the acquisition
and (ii) $1.1 million in three equal annual installments beginning April 1999.
In addition, the Company agreed to grant the KLA Options and to pay $3.5 million
in retention bonuses at certain intervals to an escrow account which benefits
former KLA employees who remain employees of the Company at such intervals.
Goodwill from the KLA acquisition is being amortized on a straight-line basis
over 20 years. In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, the Company
21
21
will continually evaluate whether later events and circumstances have occurred
that indicate the acquired goodwill may warrant revision. See Note 12 of Notes
to Financial Statements.
The Company generates revenues by providing professional services for ERP
implementations and platform independent services. Revenues are recognized as
services are performed. The Company's ERP implementation services are typically
billed at a higher rate than its other services. The Company undertakes
engagements in a variety of roles, including: (i) as the lead consulting firm on
its own engagements; (ii) as a lead consulting firm on a part of larger
engagements undertaken by multinational IT consulting firms or other large
service providers or (iii) as an integral member of a joint engagement team on
such engagements. The Company provides services to its clients predominantly on
a time and materials basis pursuant to written contracts, which can be
terminated with little or no notice, typically not more than 30 days, and
without penalty. The Company typically bills on a bi-weekly basis to monitor
client satisfaction and manage its outstanding accounts receivable balances.
Substantially all of the Company's revenues are derived from clients located in
the U.S. and Canada. Revenues generated in connection with SAP implementations
and related services for the years ended December 31, 1995, 1996 and 1997 and
for the six months ended June 30, 1998 accounted for approximately 55%, 69%, 75%
and 77%, of revenues, respectively. Revenues derived from services provided to
the Company's 10 largest clients for the years ended December 31, 1995, 1996 and
1997 and for the six months ended June 30, 1998, were approximately 51%, 43%,
39% and 40% of revenues, respectively. During each of the years ended December
31, 1995, 1996 and 1997, none of the Company's clients individually accounted
for 10% or more of the Company's revenues. For the six months ended June 30,
1998, one of the Company's clients accounted for 12% of revenues. See "Risk
Factors -- Dependence on SAP and Other Relationships" and "-- Concentration of
Revenues."
Gross profit is derived from revenues less the cost of revenues, which
includes salaries, bonuses and benefits paid to consultants. The Company's
financial performance is primarily based upon billing margin (billable hourly
rate less the consultant's hourly cost) and personnel utilization rates
(billable hours divided by paid hours). Generally, clients are billed for
expenses incurred by the Company on the clients' behalf. To date, the Company
has been able to maintain its billing margins by offsetting increases in
salaries with increases in its hourly rates. Because most of the Company's
engagements are billed on a time and materials basis, increases in its cost of
revenues are generally passed along to the Company's clients. In addition, the
Company closely monitors and attempts to control expenses that are not passed
through to its clients.
The Company continuously monitors its engagements in order to effectively
manage billing and utilization rates. Actual billing rates are established on an
engagement-by-engagement basis. Over the last three years, the Company's average
hourly billing rate has steadily increased. The growth in average hourly billing
rates reflects both an increase in billing rates and a shift towards a higher
percentage of billable hours related to ERP implementations, which command
higher billing rates. The Company assigns consultants to engagements according
to the size, duration, status and degree of complexity of each engagement.
Selling, general and administrative expenses consists of salaries,
benefits, training and travel expenses and other promotional costs. These
expenses are associated with the Company's development of new business and with
the Company's management, finance, marketing and administrative activities.
Incentive compensation consists of amounts paid for non-consultant
discretionary bonuses, sales commissions and company-wide profit sharing to
employees who provide exceptional service to clients or the Company. Incentive
compensation expenses have a large variable component relating to revenue and
profit and, therefore vary based upon the Company's ability to achieve its
operating objectives.
Acquisition compensation consists of bonus retention pool payments to be
made by the Company in connection with the KLA acquisition. In addition,
amortization of the $0.5 million of compensation attributed to the KLA Options
is included in acquisition compensation and is being amortized over the 24 month
vesting period of the options. As a result of the Offering, the KLA Options will
fully vest and, accordingly, the unamortized balance of the compensation will be
charged to acquisition compensation in the quarter in which the Offering is
consummated.
The Company's income tax rates vary from the federal statutory rate of 34%
predominately due to state and local taxes and nondeductible meal expenses. The
decrease in the Company's effective tax rate for the year ended
22
22
December 31, 1996 relative to the year ended December 31, 1995 was predominantly
due to nondeductible goodwill amortization and meal expenses becoming a smaller
percentage of taxable income. The effective income tax rate for the six months
ended June 30, 1998 reflects nondeductible goodwill amortization.
RESULTS OF OPERATIONS
The following table sets forth the Statements of Income Data of the
Company, expressed as a percentage of revenues for the periods indicated:
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- --------------
1995 1996 1997 1997 1998
STATEMENTS OF INCOME DATA:
Revenues......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................................. 62.9 61.0 59.7 57.1 60.5
----- ----- ----- ----- -----
Gross profit................................ 37.1 39.0 40.3 42.9 39.5
Selling, general and administrative expenses..... 27.4 23.4 20.3 20.8 19.8
Incentive compensation........................... 6.1 9.2 8.4 8.8 7.2
Acquisition compensation......................... -- -- -- -- 1.6
Depreciation and amortization.................... 0.2 0.1 0.1 0.1 0.8
----- ----- ----- ----- -----
Income from operations...................... 3.4 6.3 11.5 13.2 10.1
Interest income.................................. 0.0 0.0 0.1 0.0 0.0
Interest expense................................. (0.3) (0.5) (0.4) (0.4) (0.6)
----- ----- ----- ----- -----
Income before provision for income taxes.... 3.1 5.8 11.2 12.8 9.5
Provision for income taxes....................... 1.6 2.6 4.6 5.3 4.1
----- ----- ----- ----- -----
Net income.................................. 1.5% 3.2% 6.6% 7.5% 5.4%
===== ===== ===== ===== =====
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues. Revenues increased 53.6% to $22.0 million for the six months
ended June 30, 1998 from $14.3 million for the six months ended June 30, 1997.
This increase was predominantly due to the increase in ERP implementation
services provided to clients and an increase in the average billing rate. The
increase in services was made possible through the increase in the number of
consultants to 245 at June 30, 1998 from 167 at June 30, 1997.
Gross Profit. Gross profit increased 41.6% to $8.7 million for the six
months ended June 30, 1998 from $6.1 million for the six months ended June 30,
1997. Gross margin decreased to 39.5% for the six months ended June 30, 1998
from 42.9% for the six months ended June 30, 1997. The dollar increase was the
result of increased revenues, partially offset by increased cost of revenues.
The decrease in gross margin was primarily due to lower consultant utilization
in the six months ended June 30, 1998 resulting from the time devoted to the KLA
acquisition.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 46.2% to $4.4 million for the six months ended
June 30, 1998 from $3.0 million for the six months ended June 30, 1997. As a
percentage of revenues, such expenses decreased to 19.8% for the six months
ended June 30, 1998 from 20.8% for the six months ended June 30, 1997. The
dollar increase was predominantly due to the increased salaries, benefits and
training and travel expenses needed to support the increase in revenues. The
decrease in selling, general and administrative expenses as a percentage of
revenues was primarily due to an increase in revenues.
Incentive Compensation. Incentive compensation increased 26.3% to $1.6
million for the six months ended June 30, 1998 from $1.3 million for the six
months ended June 30, 1997. As a percentage of revenues, such expenses decreased
to 7.2% for the six months ended June 30, 1998 from 8.8% for the six months
ended June 30, 1997. The dollar increase in incentive compensation was due to
the increase in revenues. The decrease in
23
23
incentive compensation as a percent of revenues was primarily related to reduced
incentive compensation payable to the Founders since October 1997.
Acquisition Compensation. Acquisition compensation in the six months ended
June 30, 1998 includes $0.3 million related to the KLA retention pool and
$63,500 for compensation amortization related to the KLA Options. The KLA
acquisition was completed in April 1998.
Depreciation and Amortization. Depreciation and amortization increased to
$0.2 million for the six months ended June 30, 1998 from $16,400 for the six
months ended June 30, 1997. The increase was primarily due to $93,200 of
goodwill amortization related to the KLA acquisition. The remaining increase was
the result of depreciation associated with furniture, equipment and leasehold
improvements acquired in conjunction with the Company's relocation to new
corporate facilities in January 1998.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Revenues increased 79.1% to $32.2 million for the year ended
December 31, 1997 from $18.0 million for the year ended December 31, 1996. This
increase was predominantly due to the increase in ERP implementation services
provided to clients and an increase in the average billing rate. The increase in
services was made possible through the increase of consultants to 191 at
December 31, 1997 from 122 at December 31, 1996.
Gross Profit. Gross profit increased 85.3% to $13.0 million for the year
ended December 31, 1997 from $7.0 million for the year ended December 31, 1996.
Gross margin increased to 40.3% for the year ended December 31, 1997 from 39.0%
for the year ended December 31, 1996. Both the dollar and percentage increases
were the result of increased revenues, partially offset by increased cost of
revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 55.9% to $6.6 million for the year ended
December 31, 1997 from $4.2 million for the year ended December 31, 1996. As a
percentage of revenues, such expenses decreased to 20.3% for the year ended
December 31, 1997 from 23.4% for the year ended December 31, 1996. The dollar
increase was predominantly due to the increased salaries, benefits and training
and travel expenses needed to support the increase in revenues. The decrease in
selling, general and administrative expenses as a percentage of revenues was
primarily due to an increase in revenues.
Incentive Compensation. Incentive compensation increased 63.9% to $2.7
million for the year ended December 31, 1997 from $1.6 million for the year
ended December 31, 1996. As a percentage of revenues, such expenses decreased to
8.4% for the year ended December 31, 1997 from 9.2% for the year ended December
31, 1996. The dollar increase in incentive compensation was due to the increase
in revenues. The decrease in incentive compensation as a percentage of revenues
was primarily due to the increase in revenues and to a lesser extent the reduced
compensation payable to the Founders.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Revenues increased 62.0% to $18.0 million for the year ended
December 31, 1996 from $11.1 million for the year ended December 31, 1995. This
increase was predominantly due to the increase in ERP implementation services
provided to clients and an increase in the average billing rate. The increase in
services was made possible through the increase of consultants to 122 at
December 31, 1996 from 100 at December 31, 1995.
Gross Profit. Gross profit increased 70.2% to $7.0 million in the year
ended December 31, 1996 from $4.1 million for the year ended December 31, 1995.
Gross margin increased to 39.0% for the year ended December 31, 1996 from 37.1%
for the year ended December 31, 1995. Both the dollar and percentage increases
were the result of increased revenues, partially offset by increased cost of
revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 38.4% to $4.2 million for the year ended
December 31, 1996 from $3.0 million for the year ended December 31, 1995. As a
percentage of revenues, such expenses decreased to 23.4% for the year ended
December 31, 1996
24
24
from 27.4% for the year ended December 31, 1995. The dollar increase was
predominantly due to increased salaries, benefits and training and travel
expenses needed to support the increase in revenues. The decrease in selling,
general and administrative expenses as a percentage of revenues was primarily
due to an increase in revenues.
Incentive Compensation. Incentive compensation increased 142.9% to $1.6
million for the year ended December 31, 1996 from $0.7 million for the year
ended December 31, 1995. As a percentage of revenues, such expenses increased to
9.2% for the year ended December 31, 1996 from 6.1% for the year ended December
31, 1995. Both the dollar and percentage increases were the result of increased
revenues.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly operating
results for each of the quarters for the years ended December 31, 1996 and 1997
and for the six months ended June 30, 1998. In management's opinion, this
unaudited information has been prepared on the same basis as the audited
financial statements and includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the information for
the quarters presented when read in conjunction with the financial statements
and Notes thereto included elsewhere in this Prospectus. The Company believes
that quarter-to-quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
QUARTERS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
(IN THOUSANDS)
(UNAUDITED)
Revenues............. $3,926 $3,943 $4,822 $5,302 $6,535 $7,799 $8,871 $9,013
Cost of revenues..... 2,255 2,550 2,826 3,347 3,548 4,643 5,181 5,850
------ ------ ------ ------ ------ ------ ------ ------
Gross profit......... 1,671 1,393 1,996 1,955 2,987 3,156 3,690 3,163
Selling, general and
administrative
expenses........... 838 936 1,194 1,236 1,380 1,600 1,949 1,626
Incentive
compensation....... 433 286 337 591 601 658 932 509
Acquisition
compensation....... -- -- -- -- -- -- -- --
Depreciation and
amortization....... 7 7 7 9 8 8 9 10
------ ------ ------ ------ ------ ------ ------ ------
Income from
operations......... 393 164 458 119 998 890 800 1,018
Interest income...... 1 1 2 2 4 4 5 7
Interest expense..... (18) (26) (23) (21) (35) (21) (31) (20)
------ ------ ------ ------ ------ ------ ------ ------
Income before
provisions for
income taxes....... 376 139 437 100 967 873 774 1,005
------ ------ ------ ------ ------ ------ ------ ------
Provision for income
taxes.............. 165 61 192 43 399 361 320 415
------ ------ ------ ------ ------ ------ ------ ------
Net income........... $ 211 $ 78 $ 245 $ 57 $ 568 $ 512 $ 454 $ 590
====== ====== ====== ====== ====== ====== ====== ======
QUARTERS ENDED
-------------------
MAR. 31, JUNE 30,
1998 1998
(IN THOUSANDS)
(UNAUDITED)
Revenues............. $9,902 $12,122
Cost of revenues..... 5,762 7,565
------ -------
Gross profit......... 4,140 4,557
Selling, general and
administrative
expenses........... 2,017 2,340
Incentive
compensation....... 984 607
Acquisition
compensation....... -- 362
Depreciation and
amortization....... 24 151
------ -------
Income from
operations......... 1,115 1,097
Interest income...... 7 8
Interest expense..... (12) (120)
------ -------
Income before
provisions for
income taxes....... 1,110 985
------ -------
Provision for income
taxes.............. 471 434
------ -------
Net income........... $ 639 $ 551
====== =======
25
25
The following table sets forth certain unaudited quarterly operating
results as a percentage of revenues, as applicable, for each of the quarters for
the years ended December 31, 1996 and 1997 and for the six months ended June 30,
1998:
QUARTERS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
(UNAUDITED)
Revenues............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..... 57.4 64.7 58.6 63.1 54.3 59.5 58.4 64.9
----- ----- ----- ----- ----- ----- ----- -----
Gross profit......... 42.6 35.3 41.4 36.9 45.7 40.5 41.6 35.1
Selling, general and
administrative
expenses........... 21.4 23.7 24.8 23.3 21.1 20.5 22.0 18.0
Incentive
compensation....... 11.0 7.3 7.0 11.1 9.2 8.4 10.5 5.7
Acquisition
compensation....... -- -- -- -- -- -- -- --
Depreciation and
amortization....... 0.2 0.1 0.1 0.2 0.1 0.2 0.1 0.1
----- ----- ----- ----- ----- ----- ----- -----
Income from
operations......... 10.0 4.2 9.5 2.3 15.3 11.4 9.0 11.3
Interest income...... 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1
Interest expense..... (0.4) (0.7) (0.4) (0.4) (0.5) (0.3) (0.3) (0.3)
----- ----- ----- ----- ----- ----- ----- -----
Income before
provisions for
income taxes....... 9.6 3.5 9.1 1.9 14.8 11.2 8.8 11.1
Provision for income
taxes.............. 4.2 1.5 4.0 0.8 6.1 4.6 3.7 4.6
----- ----- ----- ----- ----- ----- ----- -----
Net income........... 5.4% 2.0% 5.1% 1.1% 8.7% 6.6% 5.1% 6.5%
===== ===== ===== ===== ===== ===== ===== =====
QUARTERS ENDED
-------------------
MAR. 31, JUNE 30,
1998 1998
(UNAUDITED)
Revenues............. 100.0% 100.0%
Cost of revenues..... 58.2 62.4
----- -----
Gross profit......... 41.8 37.6
Selling, general and
administrative
expenses........... 20.4 19.3
Incentive
compensation....... 9.9 5.0
Acquisition
compensation....... -- 3.0
Depreciation and
amortization....... 0.2 1.3
----- -----
Income from
operations......... 11.3 9.0
Interest income...... 0.0 0.1
Interest expense..... (0.1) (1.0)
----- -----
Income before
provisions for
income taxes....... 11.2 8.1
Provision for income
taxes.............. 4.8 3.6
----- -----
Net income........... 6.4% 4.5%
===== =====
The Company's quarter-to-quarter increase in revenues was primarily due to
increased business activity. This increase was predominantly due to the increase
in ERP implementation services provided to clients and an increase in the
average billing rate. Cost of revenues increased due to the growing number of
consultants needed to support the growing demand for the Company's services.
Variable utilization rates and average billing rates cause quarterly
fluctuations in cost of revenues as a percent of revenues. For the quarters
ended June 30, 1996, December 31, 1996, June 30, 1997, December 31, 1997 and
June 30, 1998, gross margins were adversely affected by lower utilization rates.
Lower utilization rates during the second and fourth quarters are primarily due
to a lower number of billable days resulting from training schedules and the
number of vacations and holidays in those quarters. Utilization rates may
continue to cause gross margins to vary in the future based on factors such as
training schedules, vacations, sick days, holiday schedules, recruiting
requirements, start-up of new engagements and administrative requirements of the
Company's employees.
Selling, general and administrative expenses have increased in absolute
dollars over the quarters presented due to increased salaries, benefits,
training and travel expenses and other promotional costs. Selling, general and
administrative expenses have varied from quarter-to-quarter as a percent of
revenues primarily due to the timing of training or promotional conferences
attended by Company personnel.
CCAi's revenues and operating results are subject to significant variation
from quarter-to-quarter as a result of a number of factors, including employee
hiring, consultant billing and utilization rates, the mix, size and timing of
engagements commenced and completed during a quarter, the number of billable
days in a quarter, the timing of office and service expansion, training
schedules and the timing of expenditures. Because a high percentage of CCAi's
expenses are relatively fixed, a variation in the number of engagements or the
timing of the initiation or the completion of engagements, particularly at or
near the end of any quarter, can cause significant
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variations in operating results from quarter-to-quarter and could result in
losses to the Company. In addition, CCAi's engagements are generally terminable
by the client without penalty.
Unanticipated termination of an engagement, a client's decision not to
proceed to the next phase of an engagement as anticipated by the Company,
completion during a quarter of several client engagements without the deployment
of consultants to new engagements or expansion of existing engagements could
result in the Company's underutilization of employees and could, therefore,
materially adversely affect the Company's business, operating results and
financial condition. To the extent that increases in the number of consultants
do not result in corresponding increases in revenues, the Company's business,
operating results and financial condition could be materially adversely
affected. Further, it is difficult for the Company to forecast the timing of
revenues because engagement cycles depend on factors such as the size and scope
of assignments and circumstances specific to particular clients. Because the
Company derives revenues only when its consultants are billing on engagements,
its business, operating results and financial condition are materially adversely
affected due to vacations, training schedules, holidays, inclement weather or
other similar events. For example, the Company has generated lower operating
margins during the second and fourth quarters of the year due to a lower number
of billable days resulting from training schedules and the number of vacations
and holidays in those quarters. Given all of the foregoing, the Company believes
that quarter-to-quarter comparisons of its operating results of preceding
quarters are not necessarily meaningful, and that such results for one quarter
should not be relied upon as an indication of future performance.
Demand for IT consulting services is also significantly affected by the
general level of economic activity. When economic activity slows, clients may
delay or cancel plans that involve the hiring of IT consultants. The Company is
unable to predict the level of economic activity at any particular time, and
fluctuations in the general economy could materially adversely affect the
Company's business, operating results and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its operations primarily through internally
generated funds. Working capital needs have been periodically supplemented by
borrowings under the Company's revolving credit facilities. Working capital
(deficit) was $0.4 million, $2.1 million and ($3.2) million at December 31, 1996
and 1997 and June 30, 1998, respectively. Excluding the amount outstanding under
the Company's revolving credit facility, working capital at June 30, 1998 was
$5.1 million.
Net cash provided by (used in) operating activities was $0.2 million, $2.1
million and ($1.6) million for the years ended December 31, 1996 and 1997 and
for the six months ended June 30, 1998, respectively. The increase in cash
provided by operating activities in 1997 compared to 1996 was primarily the
result of the $1.5 million increase in net income and due to increases in
accruals and other current liabilities, partially offset by an increase in
accounts receivable. The decrease in net cash provided by operating activities
for the six months ended June 30, 1998 was primarily the result of a decrease in
accounts payable and an increase in accounts receivable.
Net cash used in investing activities was $51,700, $0.4 million and $4.9
million for the years ended December 31, 1996 and 1997 and for the six months
ended June 30, 1998, respectively. In April 1998, the Company completed the KLA
acquisition with a net cash outlay of $3.9 million. See Note 12 of Notes to
Financial Statements. During the year ended December 31, 1997 and the six months
ended June 30, 1998, net cash used in investing activities reflected the
Company's use of $0.4 million and $0.9 million, respectively, of funds for
furniture, equipment and leasehold improvements in a new corporate facility.
In April 1998, in order to finance the KLA acquisition, the Company
refinanced its then existing revolving credit facility with a line of credit
from Fleet National Bank ("Fleet Bank"). The Fleet Bank line of credit permits
the Company to borrow up to $15 million and is collateralized by substantially
all of CCAi's assets. Borrowings under the line of credit are limited to two and
one-half times the Company's latest aggregated four quarters' earnings before
interest, taxes, depreciation, amortization and other non-cash expenses. The
interest rate is LIBOR to the extent the Company borrows funds for a certain
period of time, and the bank's prime rate (8.5% at June 30, 1998) plus up to
0.75%, on the remaining outstanding balance. The line of credit contains various
financial and operating covenants and restricts, among other things, the
Company's ability to incur additional indebtedness, sell or transfer assets or
make investments and pay dividends. At June 30, 1998, $8.3 million was
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outstanding under the Fleet Bank line of credit. The Company intends to use a
portion of the net proceeds of the Offering to repay amounts outstanding under
the line of credit. See "Use of Proceeds" and Note 4 of Notes to Financial
Statements.
Net cash provided by financing activities totaled $0.1 million, $0.1
million and $6.3 million for the years ended December 31, 1996 and 1997 and for
the six months ended June 30, 1998, respectively. In October 1997, the Company
sold certain shares of Common Stock and Convertible Preferred Stock for an
aggregate purchase price of $17.5 million ($15.9 million, net of $1.6 million of
transaction expenses). Contemporaneously with such sale, the Company paid $15.9
million to purchase shares of Common Stock from affiliates of the Founders. See
"Certain Transactions" and Note 9 of Notes to Financial Statements
The Company believes that the proceeds from the sale of the Shares offered
hereby together with the cash provided from the operations will be sufficient to
meet the Company's working capital and capital expenditure requirements for at
least the next 12 months. At June 30, 1998, the Company had no material
commitments for capital expenditures. To the extent the Company is unable to
fund its operations from cash flows, the Company may need to obtain financing
from external sources in the form of either additional equity or indebtedness.
There can be no assurance that additional financing will be available at all, or
that, if available, such financing will be obtainable on terms favorable to the
Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128 ("SFAS 128") Earnings per Share, which changes the method of
calculating earnings per share. SFAS 128 requires the presentation of "basic"
earnings per share and "diluted' earnings per share on the face of the income
statement. Basic earnings per share is computed by dividing the net income
available to common shareholders by the weighted average shares of outstanding
common stock. The calculation of diluted earnings per share is similar to basic
earnings per share except that the denominator includes dilutive common stock
equivalents such as stock options and warrants. The statement is effective for
financial statements for periods ending after December 15, 1997 and has been
adopted by the Company in the quarter ended December 31, 1997. The Company
adopted SFAS No. 128 for all periods reported herein.
In June 1997, the FASB issued Statement No. 130 ("SFAS 130"), Reporting
Comprehensive Income, and No. 131 ("SFAS 131"), Disclosures about Segments of an
Enterprise and Related Information. SFAS 130 establishes standards for reporting
comprehensive income and SFAS 131 establishes standards for reporting
information about operating segments. In February 1998, the FASB issued
Statement No. 132 ("SFAS 132"), Employers' Disclosures about Pension and Other
Postretirement Benefits. SFAS 132 establishes standards for reporting
information regarding disclosures about pensions and other postretirement
benefits. The Company is required to adopt these statements in 1998. In June
1998, the FASB issued Statement No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes standards for reporting
derivative instruments and hedging activities. The Company does not believe the
adoption of the above SFAS statements will have a significant impact on the
Company's financial statements or related disclosures.
YEAR 2000 COMPLIANCE
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date code field, and were not
designed to account for the upcoming change in the century. As a result, such
systems and applications could fail or create erroneous results unless corrected
so that they can process dates in the Year 2000 and beyond. The Company and its
clients rely on their systems, applications and devices in operating and
monitoring all major aspects of their businesses, including financial systems
(such as general ledger, accounts payable and accounts receivable modules),
customer services, infrastructure, embedded computer chips, networks and
telecommunications equipment and end products. The Company and its clients also
rely directly and indirectly, on external systems of business enterprises such
as customers, suppliers, creditors, financial organizations, and of governmental
entities, both domestic and international, for accurate exchange of data.
Despite the Company's efforts to address the Year 2000 impact on its internal
systems and the systems of its clients, the Company has not fully identified
such impact or whether it can resolve such impact
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without disruption of its business or without incurring significant expense.
Based on the information currently available, the Company believes that the
costs associated with the Year 2000 issue, and the consequences of incomplete or
untimely resolution of the Year 2000 issue, will not have a material adverse
effect on its business, operating results and financial condition in any given
year. However, there can be no assurance that the Company, or its clients, will
not encounter unexpected costs or disruption in their businesses as a result of
the Year 2000 issue. In addition, even if the internal system of the Company are
not materially affected by the Year 2000 issue, the Company's business,
operating results and financial condition could be materially adversely affected
through disruption in the operation of the enterprises with which the Company
interacts.
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BUSINESS
CCAi is a leading provider of rapid implementations of ERP applications.
CCAi also offers its clients a comprehensive range of related services,
including post-implementation and platform independent services, such as network
and Windows NT support, custom application development, mainframe and legacy
application support, Year 2000 compliance and remote support. The Company's
services are primarily targeted at middle market organizations, or divisions of
larger organizations, with annual revenues between $200 million and $2.5
billion. The Company's rapid ERP implementation services enable its clients to
reduce the length and risks of implementations, lower overall costs and achieve
early realization of ERP-related benefits.
CCAi has established numerous strategic relationships with leading software
application vendors, hardware vendors and other IT service providers, including
multinational consulting firms. The Company has a relationship with SAP dating
from 1989 and has been an SAP National Implementation Partner since 1994. In
addition, the Company is a member of SAP's National Advisory Board and was
involved in the development of ASAP, which has become an industry standard for
rapid SAP implementations. In 1997, the Company became one of SAP's first ASAP
Partners and has since become one of the first organizations to certify 100
consultants in SAP's ASAP methodology. Also, CCAi has been an Oracle Alliance
Member since 1997 and utilizes its own rapid implementation methodology, known
as FIRM, for Oracle ERP applications. In addition, the Company has been an
integral member of implementation teams managed by Andersen Consulting, EDS,
Ernst & Young and SAP. In 1998, the Company was one of the first organizations
named by Compaq as a regional configuration support center to provide rapid
implementation and related services in connection with R/3PAQ, a preconfigured
ERP solution jointly developed by Compaq and SAP.
CCAi is a "company of employees" and has adopted a business model focused
on establishing and maintaining long-term relationships with its employees. The
Company believes, in a resource constrained industry, it distinguishes itself
from its competitors by recruiting and retaining consultants with practical
business and relevant IT experience, which enhance the Company's ability to
identify industry-specific business issues and develop practical IT solutions to
address such issues. CCAi's consultants who perform ERP implementations
generally have 10 to 15 years of business or IT experience, including three to
five years of ERP implementation experience.
INDUSTRY BACKGROUND
Today's global business environment is rapidly changing due to increased
competition, deregulation and technological advances. In this environment,
organizations are constantly assessing the need for fundamental improvements in
such core business functions as product development, service delivery,
manufacturing, human resources, finance and accounting. To meet this need and
succeed in the marketplace, organizations are increasingly turning to IT
solutions that can be easily adapted to changing business requirements in order
to improve the quality of products and services, shorten time to market and
reduce costs. As a result, IT-related decisions have become mission critical
within an organization's overall strategy.
Recent technological advancements have caused many organizations to migrate
from legacy mainframe systems running proprietary software to open systems and
scalable client/server architectures based on personal computers using local and
wide area networks, running shared databases and packaged software applications.
For many organizations, an integral part of this migration is the implementation
of complementary, fully-integrated, enterprise-wide applications developed and
marketed by leading vendors such as SAP and Oracle. ERP applications address
enterprise-wide management needs, including product development, distribution
and logistics, finance and accounting, human resources and electronic data
interchange. ERP applications greatly enhance operational efficiencies by
enabling an organization to access and utilize information across the
enterprise. Moreover, when implemented successfully, ERP applications enable the
cost-effective redesign of critical business processes.
According to International Data Corp., a market research company, the
worldwide market for IT services is estimated to be $250 billion in 1997 and is
projected to increase to over $370 billion by 2000. According to industry
sources, the demand for ERP applications and services represent two of the
fastest growing segments of
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this market. According to Forrester Research, Inc., a market research company,
the worldwide market for ERP applications and services totaled approximately $15
billion in 1997 and is projected to grow to approximately
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$32 billion by 2000, representing a compound annual growth rate of approximately
29%. In addition, according to industry sources, for every dollar spent on ERP
applications, four to six dollars are spent on ERP implementation and related
services. The Company believes that a large portion of this growth is
represented by middle market companies.
The successful implementation of ERP applications requires extensive
resources, specific software expertise, end-user training and significant
ongoing modifications to support an organization's evolving business processes.
In addition, ERP implementations and related services typically require a large
number of highly specialized consultants with industry and ERP application
knowledge necessary to successfully configure the application to the
organization's needs. Implementations also require ongoing modifications to
continuously support an organization's evolving business processes. Generally,
internal IT departments do not have the resources required to successfully
manage the complex task of implementing and supporting such industry specific IT
solutions. Moreover, external competitive pressures are driving many
organizations to focus on their critical business processes and to control
expenses, including those associated with IT. As a result, organizations are
increasingly using third-party service providers to implement ERP applications
in order to reduce the length and risks of implementations, lower overall costs
and achieve early realization of ERP-related benefits.
The Company believes the need for third-party ERP implementation and
related services is particularly acute among middle market organizations. Such
organizations are directing substantial resources to their ERP implementations
and are particularly sensitive to the risk of cost overruns and delays
associated with poorly managed ERP implementations. Such organizations expect
timely and substantial economic returns from their ERP investments in the form
of lower costs and early realization of ERP-related benefits. In addition, these
organizations are under growing pressure from their Fortune 500 customers to
rapidly implement compatible ERP solutions. As a result, middle market
organizations are selective in identifying third-party ERP implementation
partners. Large IT service providers, such as multinational consulting firms,
however, typically do not target middle market organizations, but instead focus
on system implementations and related consulting engagements with Fortune 500
companies and other large organizations. Conversely, most small IT service
providers lack sufficient breadth of services, ERP implementation expertise,
financial resources or industry knowledge to adequately address the needs of
middle market organizations.
THE CCAI SOLUTION
CCAi provides its clients with a broad range of highly specialized IT
solutions that enable the rapid and cost-effective implementation of ERP
applications and facilitate the early realization of ERP-related benefits. Key
elements of the CCAi solution include the following:
Rapid, Cost-Effective Implementations. The Company uses rapid SAP
implementation methodologies and experienced consultants to deliver on-time and
on-budget implementations. The Company's consultants combine both ERP
implementation expertise and industry knowledge to deliver rapid configurations
and implementations that address each client's particular needs. The Company has
focused on providing ERP implementation services since 1994 when it developed
its own rapid implementation methodology. More recently, CCAi was involved in
the development of SAP's ASAP methodology, which has become an industry standard
for rapid SAP implementations. CCAi utilizes the ASAP methodology for
predominantly all of the SAP implementations it manages, and the Company
believes, among SAP's National Implementation Partners, it has one of the
largest groups of certified ASAP implementation consultants. In addition, in
1997, the Company became an Oracle Alliance Member and now utilizes its own
rapid implementation methodology, known as FIRM, for Oracle ERP implementations.
Highly Skilled Functional and Technical Consultants. The Company provides
value-added ERP implementation and related services through a combination of
highly skilled functional and technical consultants. CCAi's functional
consultants typically have 10 to 15 years of business experience in areas such
as finance, accounting, logistics, manufacturing, operations and engineering,
including three to five years of ERP implementation experience. CCAi's technical
consultants typically have 10 to 15 years of IT experience, including IT
management, programming, systems analysis, application development and ERP
implementation. The Company
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assigns its consultants to engagements that leverage their industry,
implementation and technical experience to reduce ERP implementation times,
lower overall engagement costs and increase returns on ERP investments.
Strong Strategic Relationships. CCAi has strong strategic relationships
with some of the world's leading developers of software applications, hardware
vendors, and other IT service providers, such as multinational consulting firms.
The Company's relationships with organizations such as SAP, Oracle, Microsoft
Corporation ("Microsoft"), Compaq and Data General Corp. ("Data General")
provide it with early exposure to new products, services and enhancements in
implementation methodologies and enable the Company to offer its clients a
greater variety of services. For example, the Company was named by Compaq as one
of its first regional configuration support centers to provide rapid
implementation services in connection with R/3PAQ, a preconfigured ERP solution
jointly developed by Compaq and SAP. In addition, the Company's relationships
with other IT service providers offer the Company early exposure to evolving
business processes as tested and adopted in the Fortune 500 marketplace, which
in turn allows the Company to offer such services on a more cost-effective basis
to its middle market clients.
Employee Focused, Scalable Business Model. CCAi is a "company of employees"
and has adopted a scalable business model focused on supporting long-term
relationships with its employees. The Company has developed a flat, flexible and
scalable management organization designed to provide each CCAi consultant with
access to substantial administrative and practice support resources and training
and career development guidance. The Company believes it has a lower consultant
turnover rate than the industry average and accordingly is able to offer its
clients a stable team of consultants that provide superior services and greatly
enhance client satisfaction. As a result, the Company rarely utilizes
independent contractors.
Broad Range of Complementary Services. CCAi provides a broad range of
complementary services. The Company's consultants have expertise in IT services
ranging from the implementations of SAP and Oracle applications, including
interface design and development and process re-engineering, to an array of
post-implementation and platform independent services, such as network and
Windows NT support, custom application development, mainframe and legacy
application support, Year 2000 compliance, on-site knowledge transfer, systems
level technical support, network level technical and installation support and
remote support.
GROWTH STRATEGY
CCAi's objective is to be a leading provider of IT solutions to the middle
market by continuing to deliver rapid ERP implementations and related services.
CCAi's growth strategy emphasizes the following key elements:
Expand Base of Highly Skilled Employees. The Company believes significant
demand exists for its ERP implementation and related services. In order to meet
such demand, CCAi intends to continue to invest significant financial and
management resources to expand its base of highly skilled employees. By
continuing to promote and enhance a corporate culture that rewards creativity
and an entrepreneurial spirit, the Company believes it can recruit and retain
the employees required to meet its clients' growing demands. Key elements of the
Company's recruiting and retention package include competitive base salary and
incentive compensation. In addition, the Company's flexible and scalable
management organization is designed to provide consultants with administrative
and practice support resources as well as training and career development
guidance.
Leverage Strategic Relationships. The Company intends to leverage its
strategic relationships with its clients and leading software and hardware
vendors to maximize marketing and sales opportunities, refine rapid
implementation and pre-configured ERP methodologies and enhance its consultants'
relevant technical knowledge. For example, CCAi often participates with software
vendors such as SAP and Oracle in pre-sale activities and in the design of
appropriate ERP solutions. The Company intends to form similar relationships
with other software developers of complementary enterprise-wide applications,
including supply chain management, sales force automation and process control
automation. In addition, the Company intends to continue to leverage its
relationships with other IT service providers to pursue opportunities within
market segments that may not otherwise be available to the Company on its own.
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Broaden Geographic Presence. The Company intends to establish offices in
targeted geographic regions where CCAi has established a significant local
presence in terms of consultants, clients, or both. The Company has recently
opened offices in Dallas and Cincinnati and plans to open additional offices
over the next 12 months, including an office in San Francisco. CCAi believes
that establishing and maintaining local offices will help the Company recruit
and retain consultants with strong ties to local markets, as well as attracting
clients who prefer to engage a services firm with a local presence. The Company
also believes a local presence in these markets will enable it to strengthen
relationships with local representatives of SAP, Oracle and other software
application vendors, as well as hardware vendors. The Company's new offices will
be organized to provide sales, marketing and recruiting support services for its
consultants in the targeted regions.
Expand Service Offerings. The Company believes it can increase revenues
from existing clients and attract new clients by selectively expanding its
service offerings. In order to capitalize on the full advantages of
enterprise-wide capabilities, organizations are seeking complementary
applications with customer interfaces such as supply chain management, sales
force automation, customer asset management and process control automation. The
Company intends to offer additional value-added services to assist its clients
in adopting such applications. The Company also believes it can leverage its
relationships with industry-leading companies in the automotive, aerospace and
financial services industries to provide implementation and related services to
such companies' supply chain. For example, CCAi believes that its experience in
assisting in the implementation of SAP at GM provides CCAi with a competitive
advantage in obtaining implementations for GM's direct and indirect vendors. The
Company intends to offer prospective clients in such industries, particularly
suppliers of its clients, the latest in pre-configured ERP applications and
standardized implementation services for such industries.
Pursue Strategic Acquisitions. The Company intends to continue to pursue
strategic acquisitions that will provide additional well-trained, high-quality
professionals, new service offerings, additional industry expertise, a broader
client base and an expanded geographic presence. The Company recently completed
the acquisition of KLA, which enabled the Company to acquire a staff of highly
skilled ERP consultants, obtain additional recruiting and sales and marketing
opportunities, gain SAP implementation expertise in the automotive and financial
services industries, and enhance its presence in the Cincinnati market.
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SERVICES
CCAi's services are focused on reducing the time and cost associated with
implementing and integrating IT solutions. CCAi undertakes engagements in a
variety of roles including: (i) as the lead consulting firm on its own
engagements, (ii) as the lead consulting firm on a part of larger engagements
undertaken by multinational IT consulting firms or other large service providers
or (iii) as an integral member of a joint engagement team on such engagements.
In almost all cases, the Company provides its services on a time and materials
basis. The Company's services include:
CCAI SERVICES DESCRIPTION
Engagement Management - Develop engagement scope and budget
- Manage implementation engagements and budgets
Process Re-engineering - Analyze and prioritize current business
processes
- Focus clients on processes yielding greatest
business benefits
- Map to proven solutions and best business
practices
- Provide functional consulting expertise
Interface Design and Development - Analyze existing legacy applications
- Design database conversion interfaces
On-site Knowledge Transfer and Training - Create knowledge transfer programs for clients'
employees
- Develop customized training programs
- Provide product training
Systems Level Technical Support - Coordinate hardware and operating system
installations
- Provide system upgrades and configurations
- Integrate back-office products with ERP
solutions
Network Level Technical Support - Install and configure networks
- Manage installed networks
Programming Services - Provide services for full range of programming
languages, including Visual Basic, C, C++ and
COBOL
- Provide experts in use of various tools and
database products, including Access,
PowerBuilder, Developer 2000 and COOL:Gen
- Develop Internet-based applications utilizing
HTML, ActiveX and Java
- Support legacy applications
Outsourced/Remote Support - Offer support center based implementation teams
- Offer help-desk and upgrade support
- Provide platform outsourcing
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CCAi offers its clients ERP implementation and platform independent
services. The following is a description of such services:
ERP Implementation Services. The Company provides a full range of ERP
implementation services in both rapid and traditional ERP engagements. The
Company has a relationship with SAP dating from 1989 and has been an SAP
National Implementation Partner since 1994. In addition, the Company is a member
of SAP's National Advisory Board and was involved in the development of SAP's
ASAP methodology, which has become an industry standard for rapid SAP
implementations. In 1997, the Company became one of SAP's first ASAP Partners
and has since become one of the first organizations to certify 100 consultants
in the ASAP methodology. In addition to rapid implementations, the Company also
performs traditional ERP implementation engagements, which typically are
conducted over a more extended period of time, with larger teams of consultants
and greater customization.
Rapid ERP implementation has become a central focus of CCAi's service
offerings and has been a growing part of its business since 1994. Because of the
importance of rapid ERP implementations to the Company's middle market clients,
CCAi has consultants with expertise in Oracle's FastForward methodology and
SAP's ASAP methodology. The Company utilizes its own rapid implementation
methodology, known as FIRM, for Oracle ERP applications. CCAi utilizes the ASAP
methodology for predominantly all the SAP implementations it manages and
believes that, among SAP's National Implementation Partners, it has one of the
largest groups of certified ASAP consultants.
CCAi's ASAP implementations utilize SAP's five-phased ASAP approach. The
first phase, Project Preparation, provides initial planning and preparation for
SAP's R/3 implementation. The second phase, Business Blueprint, involves the
detailed documentation of the business process requirements of the client. In
the third phase, Realization, all of the business and process requirements are
implemented in two work packages. The fourth phase, Final Preparation, entails
complete testing, end-user training, system management and cut over activities
and resolution of all critical open issues. In phase five, Go Live and Support,
the project is transitioned to a live, productive operation.
Platform Independent Services. The Company provides platform independent
services both on a stand-alone basis and in conjunction with ERP
implementations. These services are designed to assist organizations in software
application design, development and maintenance across a broad spectrum of
computing environments. These services span client/server, midrange, mainframe
and Internet-based solutions. The Company's consultants and software developers
typically are engaged for part or all of the lifecycle of application
development, from requirements analysis and systems planning through coding,
testing, deployment and maintenance. The Company uses rapid prototyping and
application development tools, commercially available database software and
other standard development tools.
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The following chart details the Company's platform independent services:
CCAI SERVICES DESCRIPTION
IT Consulting - Assist organizations in reengineering business
processes
- Plan migration of clients' legacy systems to
networked, distributed, client/server
architectures
- Model core systems, including architecture,
design, gap analysis, testing and engagement
management functions
Application Development - Develop software applications in a full range
of programming languages including Visual
Basic, C, C++ and COBOL
- Design systems using rapid prototyping and
application development tools (Developer 2000
and COOL:Gen), database software (Access and
SQL Server) and standard development tools
(PowerBuilder)
- Upgrade and maintain software applications
Outsourcing, Training and Remote Support - Augment clients' internal resources with
skilled IT professionals
- Provide outsourced IT support
- Provide consulting services for Year 2000
compliance
- Support databases and operating systems
- Train clients' personnel in packaged and custom
software applications
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CLIENTS AND REPRESENTATIVE ENGAGEMENTS
CCAi provides its services to a diverse group of organizations across a
broad spectrum of industries. These clients generally have substantial recurring
requirements for IT services and products and have typically maintained ongoing,
long-term relationships with the Company. The Company had no client that
represented more than 10% of its annual revenues in each of the three years
ended December 31, 1995, 1996 and 1997, and for the six months ended June 30,
1998, one of the Company's clients accounted for 12% of the Company's revenues.
The following table presents a representative list of clients that have directly
engaged CCAi to perform a variety of IT services:
AEROSPACE AND AUTOMOTIVE CHEMICAL PROCESS COMMUNICATIONS
------------------------ ---------------- --------------
Adam Opel AG Akzo Nobel N.V. GTE Corp.
Aircraft Braking Systems Corp. Dow Chemical Co. Reltec Corp.
Aluminum Company of America Henkel Corp. Voice-Tel Enterprises, Inc.
General Motors Corporation
FINANCIAL AND PROFESSIONAL
CONSUMER PRODUCTS ENERGY SERVICES
----------------- ------ --------------------------
American Greetings Corp. BP America Inc. Andersen Consulting LLP
ChemRex, Inc. Lockheed Martin Energy Electronic Data Systems
Master Builders, Inc. Systems, Inc. Corporation
Ernst & Young LLP
KeyCorp
HEALTH CARE INDUSTRIAL PUBLISHING
----------- ---------- ----------
Medical Mutual of Ohio Aluminum Company of Antioch Publishing Co.
University Hospitals of Cleveland America Simon & Schuster Inc.
Brush Wellman Inc. Bantam Doubleday Dell Publishing
Continental General Tire Group Inc.
Inc.
Eaton Corporation
Goodyear Tire & Rubber Co.
OwensCorning
Tremco, Inc.
USS/Kobe Steel Co.
RETAIL TECHNOLOGY
------ ----------
Cole National Corp. Compaq Computer
OfficeMax, Inc. Corporation
SAP America, Inc.
Three examples of the Company's engagements include the following:
ASAP Implementation and Platform Independent Services. A manufacturer of
specialty metals and alloys, with approximately $400 million in annual revenues,
engaged CCAi to revitalize its implementation initiative. The SAP implementation
was complex because of the involvement of four service centers, two large
manufacturing plants, four specialty division sites, a mining operation and the
corporate headquarters. CCAi was engaged because of its implementation plan
using SAP's ASAP methodology and its stable team of highly-skilled consultants.
The initial implementation phase included traditional financials and logistics
modules along with more complex modules such as variant configuration, product
costing and process industry production. The client currently has five of its
facilities live on SAP and is on-time and on-budget to complete the
implementation for the entire organization by the end of 1998. CCAi also
provided the client with Year 2000 compliance services with respect to the
client's AS400 legacy system. The Company has been engaged to implement SAP in
the client's European and Asian operations and to implement additional modules
for the client's North American operations.
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SAP Implementation. CCAi successfully implemented SAP in one of the first
ASAP implementations in the Midwest. The client is a manufacturer of concrete
add mixtures and specialty sealants with approximately $250 million in annual
revenues. To support its growth strategy, the client needed to replace a
customized legacy system. CCAi was engaged to implement SAP's R/3 on a new
HP-Unix platform. Besides the standard suite of applications, this
implementation included the new environmental, health and safety module as well
as plant maintenance, quality management and process industry production
modules. Over an eight month period, eight to 10 CCAi consultants implemented
the applications on-time and on-budget, earning a performance bonus.
Oracle Implementation. An international manufacturer, with approximately
$8.7 billion in annual revenues, retained CCAi to implement their Oracle human
resource and payroll system as part of one of the largest implementation of
Oracle applications in North America. The client has 145 divisions in 28
countries and an employee base of over 49,000. The client instituted a global
ERP project to develop a "service center" concept to provide operations
consolidation, standardization and cost reductions. CCAi provided the strategy
and frame-work to design, convert and implement human resource and payroll
systems from a legacy base to a reengineered ERP process. CCAi consultants used
an innovative translation system to match and convert payroll and taxing
procedures while creating a foundation for rapid installations for successive
implementations. CCAi also developed and performed a strategic volume and stress
process to scope the impact of scaling the client's full HR/Payroll system. To
date, the implementation team has successfully integrated the ERP service center
process for more than 20 divisions and 7,000 employees.
HUMAN RESOURCES
CCAi's success depends in large part upon its ability to recruit, motivate
and retain highly skilled IT professionals. These professionals are in great
demand and are likely to remain a limited resource for the foreseeable future.
As of June 30, 1998, the Company had 289 employees, 245 of whom were
consultants. The Company believes that its employee-focused culture and
organization, including its recruiting, training, compensation, support and
mentoring programs, are directly related to its ability to recruit, train,
motivate and retain its consultants.
Recruiting. CCAi dedicates significant resources to recruiting highly
motivated and skilled consultants with functional, consulting and technology
business experience. The Company recruits and employs consultants with a range
of diverse business backgrounds, including accounting, finance, engineering,
logistics, manufacturing and operations. The technical experience of the
Company's consultants is equally wide ranging, covering areas such as IT
management, programming, systems analysis and application development. CCAi
maintains a rigorous hiring program administered by its in-house recruiters.
Before employment determinations are made, applicants are screened in a highly
selective process by several levels of management for technical skills,
functional business expertise and cultural fit.
Compensation. The Company offers competitive base salary and incentive
compensation packages. As part of their compensation package, the Company's
consultants are eligible for monthly and quarterly cash bonuses and participate
in the 1997 Equity and Performance Plan. The cash bonuses earned by the
Company's consultants are based on a percentage of the revenue the individual
consultant contributes to the Company. See "Management -- Employee Benefit
Plans."
Career Development, Support and Training. The Company focuses significant
resources on the career development of its consultants. The Company has
developed a flat, flexible and scalable management organization designed to
provide each CCAi consultant with access to substantial administrative and
practice support resources and training and career development guidance. The
Company is organized so that each consultant is mentored and supervised by two
senior consultants: a Managing Associate, who focuses on the consultant's
performance and administrative needs, and an Advisory Associate, who provides
technical expertise and guidance and focuses on the consultant's training and
career development needs. Each CCAi consultant is also assigned an Advocate
responsible for assisting the consultant with travel arrangements, time and
expense reports and other administrative matters. The Company provides an
extensive training program for its consultants focused on "best of breed"
technologies and practices. The program includes in-house instruction and
external
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training often offered in conjunction with one of the software application
vendors with whom the Company maintains a strategic relationship.
Quality Assurance. CCAi has developed a formal quality assurance program
led by a full-time quality program manager. The program, which is fully
automated, measures both client and employee satisfaction and is a tool used for
employee and manager performance reviews. The quality assurance process
commences at the beginning of an engagement. The Account Executives and project
managers assigned to a particular engagement work closely with the client to
document the clients' expectations for the engagement. Subsequently, performance
audits of each consultant assigned to such engagement are conducted every 90
days. These audits are then used in each consultant's annual performance review.
SALES AND MARKETING
CCAi markets and sells its ERP implementation and related services
predominantly in the U.S. and Canada through its network of strategic
relationships and its direct sales force. The Company's sales organization
leverages CCAi's referenceable client portfolio to acquire new clients. Multiple
engagements from current or prior clients, and the reputation of CCAi's
consultants and management, are also meaningful sources of new business for the
Company.
Strategic Relationships. The Company has established a number of formal and
informal marketing relationships with leading software and hardware vendors.
CCAi derives a substantial number of leads for new engagements from such
relationships. In addition, its strategic relationships with SAP and Oracle
involve coordinated sales and marketing efforts, as well as trade show
activities specifically targeted to the ERP implementation industry. The
Company's other strategic relationships with Compaq, Data General and Microsoft
also offer opportunities for joint marketing activities. The Company also has
strategic relationships with multinational consulting firms and other IT service
providers. These relationships give CCAi access to engagement opportunities in
geographic locations and within certain market segments that might otherwise be
unavailable to the Company.
Direct Sales. The Company's direct sales force includes account executives
who are responsible for developing, maintaining and managing long-term client
and strategic relationships. The account executives are also responsible for
identifying new engagement opportunities directly with clients or through
strategic relationships. Account executives rely on continual communications
with clients, prospective clients and the organizations with which the Company
maintains strategic relationships to build CCAi's relationships and also work
with CCAi's consultants to analyze prospective client needs and demonstrate the
Company's services.
Marketing. The Company supports its sales efforts with a comprehensive
marketing program that features its alliances with SAP, Oracle and Microsoft and
includes trade shows, contributing articles to industry publications, public
relations, ERP industry meetings and conferences, the creation of collateral
marketing materials and the Company's Internet site. The program is designed to
strengthen the CCAi brand name and generate new client and strategic
relationships.
COMPETITION
The market for CCAi's services is highly competitive. CCAi believes that
its principal competitors include the internal information systems groups of its
prospective clients, IT consulting companies, systems integration firms and the
consulting divisions of software applications vendors, some of which are also
clients of the Company. Many of CCAi's competitors have longer operating
histories, possess greater industry and name recognition and have significantly
greater financial, technical and marketing resources than the Company. In
addition, there are relatively low barriers to entry into CCAi's market, and the
Company has faced, and expects to continue to face, additional competition from
new entrants into its market, including new entrants offshore who may have lower
fixed operating costs than the Company and new entrants who may develop new or
innovative means of delivering IT services.
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CCAi believes that the principal competitive factors in its market include
quality of service speed of development and implementation, price, engagement
management capability, technical and business expertise and reputation. The
Company believes it competes favorably with respect to such factors. The Company
believes its ability to compete also depends in part on a number of competitive
factors outside its control. These include the ability of its competitors to
recruit, motivate and retain project managers and other senior professionals,
develop services competitive with the Company's services and respond to customer
needs. There can be no assurance that the Company will be able to compete
successfully with its competitors. See "Business -- The CCAi Solution" and "Risk
Factors -- Highly Competitive Information Technology Services Industry."
INTELLECTUAL PROPERTY RIGHTS
CCAi's success is dependent upon certain methodologies and other
proprietary intellectual property rights. Software developed by the Company for
a client is typically assigned to the client. CCAi also independently develops
certain foundation and application software products, or software "tools," that
remain the property of the Company. CCAi relies upon a combination of
nondisclosure and other contractual arrangements and trade secret, copyright and
trademark laws to protect its proprietary rights and the proprietary rights of
third parties from whom the Company licenses intellectual property. CCAi enters
into confidentiality agreements with its employees and limits distribution of
proprietary information. There can be no assurance that the steps taken by CCAi
in this regard will be adequate to deter misappropriation of the Company's
proprietary information, that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights or
that such steps will prevent the Company's employees from using intellectual
property belonging to others. Although CCAi believes that its services do not
infringe on the intellectual property rights of others and it has all rights
necessary to utilize the intellectual property employed in its business, the
Company is subject to the risk of claims alleging infringement of third-party
intellectual property rights, including the rights of its clients. Any such
claims could require CCAi to expend significant resources in litigation, pay
damages, cease using infringing intellectual property, develop non-infringing
intellectual property or acquire licenses to the intellectual property that is
the subject of asserted infringement. See "Risk Factors -- Dependence on
Intellectual Property Rights."
PROPERTY
The Company's corporate headquarters is located in Mayfield Heights, Ohio.
Currently, the Company's lease on these premises covers approximately 27,000
square feet and expires in January, 2003, with three renewal options for five
years each. The lease provides for payments of approximately $412,000 annually.
The Founders have a 30% ownership interest in the entity that owns the Company's
corporate headquarters. The Company believes that its properties are adequate
for its needs and suitable additional or replacement space will be available
when required on terms acceptable to the Company. See "Certain
Transactions -- Corporate Headquarters Lease."
LEGAL PROCEEDINGS
The Company is not involved in any legal proceeding that the Company's
management believes is likely to have a material adverse effect on the Company.
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MANAGEMENT
The directors, executive officers and other senior managers of the Company
and their respective ages as of June 30, 1998, and positions are as follows:
NAME AGE POSITION
Directors and Executive Officers
Nicholas A. Canitano (1)(3)............... 50 Chairman of the Board and Chief Executive
Officer
Kenneth L. Conley (2)(3).................. 54 President, Chief Operating Officer and Director
Karen M. Conley........................... 43 Executive Vice President, Treasurer and
Director
Annette M. Canitano....................... 48 Executive Vice President, Secretary and
Director
Paul A. Farmer............................ 40 Chief Financial Officer and Vice President
A. Bruce Johnston (1)(2).................. 38 Director
Kenneth T. Schiciano (1)(2)............... 35 Director
Other Senior Managers
Jack L. Rhyne............................. 51 Vice President of SAP Enterprise Systems
Ronnie K. Crumpler........................ 49 Vice President of Vertical Market Development
Timothy S. Flowers........................ 42 Vice President of Sales and Marketing
Susan V. Lebas............................ 37 Vice President of Recruiting
Timothy M. May............................ 38 Vice President of Sales and Marketing
- ---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Prior to the consummation of the Offering, the Company's Board of Directors
anticipates that it will appoint one, and possibly two, additional Directors
not affiliated with the Company. These directors would serve on either or
both the Audit Committee and the Compensation Committee and would replace
Messrs. Canitano and Conley, respectively, on such committees.
DIRECTORS AND EXECUTIVE OFFICERS
Nicholas A. Canitano is currently serving in the capacity of Chairman and
Chief Executive Officer of the Company and has held various management positions
with the Company since its inception in 1983. Prior to founding CCAi, he was
employed in a variety of information systems managerial positions.
Kenneth L. Conley is currently serving in the capacity of President and
Chief Operating Officer of the Company and has held various management positions
with the Company since its inception. Prior to founding CCAi, he was employed by
International Business Machines Corporation ("IBM") in a variety of sales and
marketing positions.
Karen M. Conley is currently serving in the capacity of Executive Vice
President and Treasurer and has held various management positions with the
Company since its inception. Prior to founding CCAi, she was employed by IBM as
a Marketing Representative.
Annette M. Canitano is currently serving in the capacity of Executive Vice
President and Secretary and has held various management positions with the
Company since its inception. Prior to founding CCAi, she was employed by a
financial services company.
Paul A. Farmer joined the Company in April 1998 as the Chief Financial
Officer and also currently serves as Vice President, Assistant Secretary and
Assistant Treasurer. Mr. Farmer is a certified public accountant and, prior to
joining CCAi, held various positions, including Chief Financial Officer, Chief
Administrative Officer, Treasurer and Secretary with TCSI Corporation, a
telecommunications software service provider, from 1993 to 1997; Vice President,
Secretary, Treasurer and Corporate Controller with Technology Solutions Company,
an IT consulting firm, from 1990 to 1993; and Senior Audit Manager with Price
Waterhouse from 1982 to 1990.
A. Bruce Johnston has served as a Director of the Company since October
1997 and has been a principal of TA Associates since January 1996. Mr. Johnston
was a Vice President of TA Associates, a venture capital firm,
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from June 1992 to December 1995. Mr. Johnston serves as Director of Expert
Software Inc., a software company, Restrac Inc., a software company, and several
privately-held companies.
Kenneth T. Schiciano has served as a Director of the Company since October
1997 and has been a principal of TA Associates since January 1995. Mr. Schiciano
was a Vice President of TA Associates, a venture capital firm, from August 1989
to December 1994. Mr. Schiciano serves as a Director of Galaxy Telecom LP, a
cable television multi-systems operator and several privately held companies.
Jack L. Rhyne joined CCAi in 1994 as the Manager of SAP Enterprise Systems
and is currently Vice President of such group. Prior to joining CCAi, Mr. Rhyne
was employed by ICI Explosives Environmental Co., a chemical and explosives
company, from 1990 to 1994 in a variety of positions including as a Technical
Project Manager implementing SAP solutions at various sites in the U.S. and
Canada. Prior to 1990, Mr. Rhyne held a variety of executive positions in
IT-related companies, OEM distributors and software development organizations.
Ronnie K. Crumpler joined CCAi in April 1998 as part of the acquisition of
KLA and is currently the Company's Vice President of Vertical Market
Development. Prior to joining CCAi, Mr. Crumpler was Chairman of the Board and
Chief Operating Officer of KLA from November 1996 to April 1998. Prior to his
employment with KLA, Mr. Crumpler held a variety of positions with several
management consulting firms, including A.T. Kearney from January 1996 to
November 1996, Enterprise Solutions Management Consulting from June 1995 to
January 1996 and Ernst & Young from June 1993 to June 1995. Prior to this, Mr.
Crumpler served as president of a private consulting firm and held a variety of
positions with Dow Chemical Co. for 19 years.
Timothy S. Flowers joined CCAi in 1990 and is currently a Vice President of
Sales and Marketing. Prior to joining CCAi, Mr. Flowers was employed by
Automated Data Processing, Inc., a payroll services provider, from 1982 to 1989
in a variety of management and marketing positions, including Technical Support
and Implementation Manager for a variety of accounting software products.
Susan V. Lebas joined CCAi in 1987 and is currently the Vice President of
Recruiting. Prior to joining CCAi, Ms. Lebas served in a variety of industries
in an administrative capacity.
Timothy M. May joined CCAi in 1995 and is currently a Vice President of
Sales and Marketing for the Company. From 1994 to 1995, Mr. May was the Vice
President of Marketing for Enterprise Network Services, Inc., network management
provider. From 1992 to 1994, Mr. May was employed as an Area Sales Manager by
Global Software, Inc., a software company. Prior to 1992, Mr. May was employed
by IBM for 10 years in a variety of marketing positions.
BOARD OF DIRECTORS
The Company's Articles of Incorporation and Code of Regulations provide
that the Company's Board of Directors be comprised of not less than six and not
more than 16 directors. The Board is currently comprised of six members; the
Company's Board of Directors anticipates that it will appoint at least one, and
possibly two, Directors not affiliated with the Company prior to the
consummation of the Offering. The Company's Board of Directors is divided into
two classes and the Company intends to designate the terms of each of the
Directors prior to the consummation of the Offering. Each director holds office
until his or her successor is duly elected and qualified, or until such
Director's earlier death, resignation or removal.
Two of the Company's current directors, Messrs. Johnston and Schiciano,
were nominated and elected to the Company's Board of Directors as designees of
TA Associates in accordance with a voting agreement contained in the Stock
Purchase and Shareholders Agreement dated October 15, 1997. The voting
provisions of this agreement terminate upon consummation of the Offering.
Executive officers of the Company are appointed by, and serve at the discretion
of, the Board of Directors. Nicholas A. Canitano and Annette M. Canitano are
husband and wife, and Kenneth L. Conley and Karen M. Conley are husband and
wife. See "Certain Transactions."
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BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee, consisting of Messrs. Canitano,
Johnston and Schiciano, makes recommendations concerning the engagement of
independent public accountants, reviews the scope and results of the audit with
the independent public accountants, reviews the Company's annual operating
results with management and the independent accountants, considers the adequacy
of the internal accounting procedures and considers the effect of such
procedures on the accountants' independence.
The Compensation Committee, consisting of Messrs. Conley, Johnston and
Schiciano, reviews and recommends the compensation arrangements for officers and
other employees, determines the options or stock to be granted to eligible
persons under the 1997 Equity and Performance Plan and takes such other actions
as may be required in connection with the Company's compensation and incentive
plans.
Prior to the consummation of the Offering, the Company's Board of Directors
anticipates that it will appoint one, and possibly two, additional Directors not
affiliated with the Company. This director will serve on both the Audit
Committee and the Compensation Committee and will replace Messrs. Canitano and
Conley, respectively, on such committees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of the Board of Directors
are Messrs. Conley, Johnston and Schiciano. Mr. Conley is President and Chief
Operating Officer of the Company.
DIRECTOR COMPENSATION
The Code of Regulations provide that the non-employee directors may receive
compensation and expense reimbursement for serving on the Company's Board of
Directors, including committees thereof, and for other services related to a
director's membership.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
annual and long-term compensation earned for the year ended December 31, 1997
for the Company's Chief Executive Officer and the Company's three other
executive officers during 1997 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
-------------------- OPTIONS (# OF ALL OTHER
NAME AND POSITION SALARY BONUS SHARES) COMPENSATION (1)
Nicholas A. Canitano..................... $224,200 $465,935 -- $4,750
Chairman of the Board and Chief Executive
Officer
Kenneth L. Conley........................ 198,539 476,486 -- 4,750
President and Chief Operating Officer
Karen M. Conley.......................... 211,382 93,959 -- 4,750
Executive Vice President and Treasurer
Annette M. Canitano...................... 185,720 103,362 -- 4,750
Executive Vice President and Secretary
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(1) Represents matching payments under the Company's 401(k) Plan.
EMPLOYEE BENEFIT PLANS
1997 Equity and Performance Incentive Plan. Upon the consummation of the
Offering, the Company will have an aggregate of 1,420,000 shares of Common Stock
reserved for issuance under the 1997 Equity and Performance Plan, which may be
granted to directors, consultants, key employees and officers of the Company.
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The 1997 Equity and Performance Plan is administered by the Compensation
Committee and provides for awards, including restricted shares of Common Stock,
deferred shares of Common Stock and options to purchase shares of Common Stock,
including Incentive Stock Options ("ISOs") (as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code")).
The exercise price for options may be paid as follows: (i) in cash or check
payable to the Company; (ii) by actual or constructive transfer to the Company
of Common Stock owned by the optionee having a value at the time of exercise
equal to the option price and which have been held by the optionee for at least
six months; or (iii) by a combination of such methods of payment. In the case of
a stock option that is not an ISO, the exercise price per share of Common Stock
may be less than the fair market value per share of Common Stock on the date of
the grant. Any grant may provide for payment of the option price in
installments, upon terms determined by the Board of Directors, including,
without limitation, pursuant to a promissory note. ISOs to be granted under the
1997 Equity and Performance Plan must be exercised within 10 years from the date
of grant. Each option will become exercisable over a period of time as the
optionee provides services to the Company; provided, however, that each option
will accelerate in the event of a sale of a majority of the outstanding Common
Stock of the Company, a sale of substantially all of the Company's assets or
other similar transactions and events as determined by the Board of Directors of
the Company (a "Change in Control"). Each grant or sale of restricted stock will
vest over a period of not less than two years to be determined by the Board of
Directors at the date of the grant or issuance; provided, however, that the
Board of Directors of the Company may accelerate vesting upon a Change in
Control or public offering. Each grant or sale of deferred shares of Common
Stock entitles the recipient to receive Common Stock (or equivalent in other
property, including cash) upon the fulfillment of specified objectives over a
period of not less than one year, except, if the Board of Directors so
determines, each payment may be accelerated in the event of a Change in Control
or public offering.
The Board of Directors can amend or terminate the 1997 Equity and
Performance Plan at any time. In the event of any change in the capital
structure of the Company, such as a stock dividend or stock split, the Board of
Directors may make equitable adjustments to outstanding unexercised awards and
to the provisions of the 1997 Equity and Performance Plan so that the net value
of the award is not changed. If the Company becomes a party to a merger,
reorganization, liquidation or similar transaction, the Board of Directors may
make such arrangements it deems advisable regarding outstanding awards, such as
substituting new awards for outstanding awards, assuming outstanding awards or
terminating or paying for outstanding awards.
No awards were made under the 1997 Equity and Performance Plan in 1997, and
none were outstanding at December 31, 1997. At June 30, 1998, options for
320,200 shares were outstanding under the 1997 Equity and Performance Plan.
Currently, no grants or issuances under the 1997 Equity and Performance
Plan have been made to executive officers other than Paul A. Farmer. On May 11,
1998, Mr. Farmer was issued 76,950 shares of restricted Common Stock under the
1997 Equity and Performance Plan for a purchase price of $4.67 per share. See
"Certain Transactions."
401(k) Plan. The Company maintains a 401(k) profit sharing and defined
contribution plan (the "401(k) Plan"). All employees of the Company who have
reached 21 years of age and have completed six months of service are eligible to
participate in the 401(k) Plan, pursuant to which each participant may
contribute up to 15% of eligible compensation (up to a statutorily prescribed
annual limit of $10,000 in 1998). The Company currently matches contributions
made by employees to the 401(k) Plan. The amount of the match is determined at
the discretion of the Company. A profit sharing contribution may also be made
each year at the discretion of the Company. All amounts contributed by employee
participants and earnings on these contributions are fully vested at all times.
Employee participants may elect to invest their account balances in various
established funds. During 1997, each of the Named Executive Officers
participated in the 401(k) Plan as indicated in the Summary Compensation Table.
1998 Employee Stock Purchase Plan. Prior to the consummation of the
Offering, the Company intends to adopt the Purchase Plan and reserve an
aggregate of shares of Common Stock for issuance under the
Purchase Plan. Such shares may be authorized but unissued Common Stock, treasury
shares or shares of
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Common Stock purchased in the open market. The Purchase Plan will be intended to
qualify under Section 423 of the Code and will permit eligible employees of the
Company whose customary employment is a minimum of 20 hours per week to purchase
shares of Common Stock through payroll deductions of up to 10% of the employee's
gross regular earnings, provided that no employee may purchase more than
$ worth of stock in any calendar year, with the first offering period
commencing on , 1998. The price of shares of Common Stock purchased
under the Purchase Plan will be 85% of the fair market value of the Common Stock
(as calculated in the Purchase Plan). The Purchase Plan will be administered by
the Compensation Committee. The Board of Directors will be able to amend or
terminate the Purchase Plan at any time.
Other. The Company maintains customary health and benefit plans for its
employees. The Company does not maintain any defined benefit pension plans.
BONUSES
The Company grants annual bonuses to its executive officers. These bonuses
are determined by the Compensation Committee of the Board of Directors of the
Company and are based on the attainment of individual performance targets and
the financial performance of the Company.
CERTAIN TRANSACTIONS
The 1997 Transactions. In July 1997, the Company repurchased 509,130 shares
of Common Stock owned by Joseph Minadeo for an aggregate amount of $171,429. Mr.
Minadeo is the brother of Annette M. Canitano, the Company's Executive Vice
President, Secretary and a Director, and was an original investor in the
Company.
In October 1997, the Company entered into a series of transactions
(collectively, the "1997 Transactions") wherein TA Associates, including the
following affiliated groups: TA/Advent VIII L.P. and TA Venture Investors
Limited Partnership (collectively, the "TA Investors"), and McDonald & Company
Securities, Inc., including the following affiliated groups: McD Venture Capital
Fund, L.P. and GHK Investments, L.L.C. (collectively, the "McDonald Investors")
purchased a total of 250,400 shares of Convertible Preferred Stock and 1,350,000
shares of Common Stock from the Company for an aggregate purchase price of $17.5
million ($15.9 million, net of $1.6 million of transaction expenses).
Immediately prior to the consummation of the Offering, the Convertible Preferred
Stock sold by the Company in the 1997 Transactions will be converted into
2,504,000 shares of Common Stock and 250,400 shares of Redeemable Preferred
Stock. Upon consummation of the Offering, the Redeemable Preferred Stock will be
redeemed for $15.8 million, using a portion of the net proceeds from the
Offering. See "Use of Proceeds."
As part of the 1997 Transactions and under the terms of the Stock Purchase
and Shareholders Agreement, dated October 15, 1997 (the "1997 Agreement"), among
TA Investors, McDonald Investors, the Founders, NAC Enterprises, Inc., CKCK
Enterprises, Inc., Kenneth L. Conley Charitable Remainder Trust, Karen M. Conley
Charitable Remainder Trust and the Company, each of TA Investors and McDonald
Investors was granted certain demand and "piggyback" registration rights and
certain other preferential rights, including: (i) rights to participate in sales
of additional shares; and (ii) rights of first refusal and co-sale involving the
Company's securities. In addition, TA Investors, McDonald Investors, the Company
and the Founders entered into a voting agreement whereby the parties agreed to
vote all shares of the Company's capital stock held by them (and any other
securities over which the Founders exercise voting control) as to cause the
Board of Directors of the Company to include Messrs. Johnston and Schiciano (so
long as each remains in the employ of TA Associates) and one independent
director nominated by TA Associates. Except for the registration rights granted
to each of TA Investors and McDonald Investors, the preferential rights
contained in the 1997 Agreement terminate upon consummation of the Offering.
Also as part of the 1997 Transactions, the Company repurchased an aggregate
of 1,350,000 shares of Common Stock for $15.9 million from the Founders,
including: (i) 675,000 shares of Common Stock from NAC Enterprises, Inc., of
which the Annette M. Canitano Trust and the Nicholas A. Canitano Trust,
affiliates of Mr. and Mrs. Canitano, directors of the Company, are the sole
shareholders; (ii) 610,000 shares of Common Stock from CKCK Enterprises, Inc.,
of which the Karen M. Conley Trust and the Kenneth L. Conley Trust, affiliates
of
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Mr. and Mrs. Conley, directors of the Company, are the sole shareholders; (iii)
32,500 shares of Common Stock from the Kenneth L. Conley Charitable Remainder
Trust, a charitable remainder trust established by Kenneth L. Conley, a director
of the Company; and (iv) 32,500 shares of Common Stock from the Karen M. Conley
Charitable Remainder Trust, a charitable remainder trust established by Karen M.
Conley, a director of the Company.
Upon the consummation of the 1997 Transactions, the Company paid Mr.
Minadeo an additional $205,000 in accordance with the terms of certain change of
control provisions contained in the documentation of the July 1997 repurchase of
shares of Common Stock from Mr. Minadeo.
Employment Agreement. The Company is party to an "at will" employment
agreement with Paul A. Farmer, pursuant to which Mr. Farmer serves as Chief
Financial Officer and Vice President of the Company. The agreement provides for
an annual base salary of $165,000, an annual bonus up to a maximum of 50% of
base salary to be determined by the Compensation Committee, benefits under the
Company's benefit plans and payment of all reasonable relocation costs incurred
by Mr. Farmer. The agreement also provides that upon the termination of Mr.
Farmer's employment with the Company, other than for cause or retirement, the
Company shall pay Mr. Farmer an amount equal to the greater of six months'
salary, or the value of his unvested restricted stock at the time of the
termination. Mr. Farmer is also subject to noncompetition, nondisclosure and
nonsolicitation covenants.
In May 1998, Mr. Farmer was issued 76,950 shares of restricted Common Stock
under the 1997 Equity and Performance Plan. Mr. Farmer paid the purchase price
for the restricted stock by executing and delivering to the Company a promissory
note (the "Note") in the principal amount of $359,356. The Note is due and
payable on June 30, 2004, and accrues interest on the unpaid principal amount at
6% per annum until the Note is paid in full. Accrued interest is payable in June
and December of each year during the term of the Note, including June 30, 2004.
The Note also becomes due and payable six months after any date on which Mr.
Farmer ceases to be employed for any reason by the Company. See
"Management -- Employee Benefit Plans."
Loans. Various other loans have periodically been made by the Company to
the Founders. In April 1997, the Company made loans to Nicholas A. and Annette
M. Canitano and Kenneth L. and Karen M. Conley each in an amount of $44,500. In
March 1998, the Company made loans to Mmes. Canitano and Conley, each in an
amount of $64,092. Each such loan bore interest at 10% and such loans have been
repaid in full.
Corporate Headquarters Lease. The Company leases its corporate headquarters
in Mayfield Heights, Ohio, from an entity that is 30% owned by the Founders with
rental payments of approximately $412,000 annually. The term of the lease, which
commenced in January 1998, expires in January 2003 and includes three five-year
renewal options. The Company believes that the terms of the lease are no less
favorable to the Company than those that could have been obtained from an
independent third party lessor at the time the lease was executed. See
"Business -- Property."
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of July 24,
1998, after giving effect to the conversion of Convertible Preferred Stock into
shares of Common Stock, by (i) each person who is known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock; (ii) each
of the Company's executive officers; (iii) each director of the Company; and
(iv) all directors and executive officers of the Company as a group. The address
of each of the officers and directors of the Company is c/o Conley, Canitano &
Associates, Inc., CCAi Renaissance Centre, 5800 Landerbrook Drive, Mayfield
Heights, Ohio 44124.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING (1) NUMBER AFTER OFFERING
--------------------- OF SHARES --------------------
NUMBER BEING NUMBER
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES PERCENT OFFERED OF SHARES PERCENT
Nicholas A. Canitano (2)................ 1,749,000 17.8% %
Kenneth L. Conley (3)................... 1,697,750 17.3
Karen M. Conley (4)..................... 1,397,750 14.2
Annette M. Canitano (5)................. 1,349,000 13.7
Paul A. Farmer (6)...................... 76,950 *
A. Bruce Johnston (7)................... 8,960 *
Kenneth A. Schiciano (8)................ 10,560 *
TA Associates, Inc. (9)................. 3,743,890 38.1
High Street Tower, Suite 2500
125 High Street
Boston, MA 02110
McDonald & Company Securities,
Inc.(10).............................. 110,110 1.1
Other Selling Shareholders as a group
( persons)(11)....................... [ ] * [ ]
All executive officers and directors as
a group (7 persons)................... 9,822,950 64.0%
- ---------------
* Indicates beneficial ownership of less than 1.0% of the outstanding Common
Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities. Shares of Common Stock issuable upon the
exercise of stock options or exercisable within 60 days hereof are deemed
outstanding and to be beneficially owned by the person holding such option
for purposes of computing such person's percentage ownership, but are not
deemed outstanding for the purposes of computing the percentage ownership
of any other person. Except for shares held jointly with a person's spouse
or subject to applicable community property laws, or as indicated in the
footnotes to this table, each shareholder identified in the table possesses
the sole voting and disposition power with respect to all shares of Common
Stock shown as beneficially owned by such shareholder.
(2) Nicholas A. Canitano has beneficial ownership of 400,000 shares of Common
Stock held in trusts for which he is trustee and has sole power of voting
and for which Annette M. Canitano, his wife, has sole power of disposition
and 400,000 shares held in trusts for which he is trustee and has sole
power of disposition. Except as noted, the shares shown do not include
shares owned by Annette M. Canitano.
(3) Kenneth L. Conley has beneficial ownership of 300,000 shares of Common
Stock held in trust for which he is trustee and has sole power of voting
and for which Karen M. Conley, his wife, has sole power of disposition,
400,000 shares held in trusts for which he has sole power of disposition
and 125,000 shares held in trust for which he has shared power of
disposition with Karen M. Conley. Except as noted, the shares shown do not
include shares owned by Karen M. Conley.
(4) Karen M. Conley has beneficial ownership of 300,000 shares of Common Stock
held in trust for which she is trustee and has sole power of disposition
and 125,000 shares held in trusts for which she has shared power of
disposition with Kenneth L. Conley. Except as noted, the shares shown do
not include shares owned by Kenneth L. Conley.
(5) Annette M. Canitano has beneficial ownership of 400,000 shares of Common
Stock held in trusts for which she is trustee and has sole power of
disposition and for which Nicholas A. Canitano, her husband, has sole power
of voting. Except as noted, the shares shown do not include shares owned by
Nicholas A. Canitano.
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(6) All shares owned by Mr. Farmer are restricted Common Stock issued pursuant
to the Company's 1997 Equity and Performance Plan. See "Certain
Transactions."
(7) Includes 8,960 shares of Common Stock beneficially owned by Mr. Johnston
through TA Venture Investors Limited Partnership, all of which shares are
included in the 3,743,890 shares described in footnote (9) below and does
not include any shares beneficially owned by TA Associates, TA/Advent VIII
L.P. or Advent Atlantic and Pacific III, L.P., of which Mr. Johnston
disclaims beneficial ownership.
(8) Includes 10,560 shares of Common Stock beneficially owned by Mr. Schiciano
through TA Venture Investors Limited Partnership, all of which shares are
included in the 3,743,890 shares described in footnote (9) below and does
not include any shares beneficially owned by TA Associates, TA/Advent VIII
L.P. or Advent Atlantic and Pacific III, L.P., of which Mr. Schiciano
disclaims beneficial ownership.
(9) Includes shares of Common Stock beneficially owned by affiliates of TA
Associates as follows: (i) 61,980 shares held by TA Venture Investors
Limited Partnership; (ii) 3,100,070 shares held by TA/Advent VIII L.P.; and
(iii) 581,840 shares held by Advent Atlantic and Pacific III, L.P.
(10) Includes (i) 77,090 shares of Common Stock held by McDonald & Company
Securities, Inc.; (ii) 22,020 shares held by McD Venture Capital Fund,
L.P., an affiliate of McDonald & Company Securities, Inc.; and (iii) 11,000
shares held by GHK Investments, L.L.C., an affiliate of McDonald & Company
Securities, Inc.
(11) Each other Selling Shareholder beneficially owns less than 1% of the
outstanding shares of Common Stock.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the consummation of the Offering, the Articles of Incorporation will
provide that the Company may issue up to 45,000,000 shares of Common Stock, and
(i) 500,800 shares of preferred stock, par value $.01 per share, (ii) 5,000,000
shares of non-voting "preferred stock", no par value, and (iii) 5,000,000 shares
of voting preferred stock, no par value (collectively, the "Preferred Stock").
As of June 30, 1998, there were 9,822,950 shares of Common Stock issued and
outstanding which were held by 32 shareholders of record, and there were 250,400
shares of Convertible Preferred Stock issued and outstanding which were held by
six shareholders of record.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the shareholders and do not
have preemptive rights. The Articles of Incorporation do not provide for
cumulative voting for the election of directors. Subject to preferences that may
be applicable to any outstanding shares of Preferred Stock, holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors of the Company out of funds legally
available therefor. All outstanding shares of Common Stock are, and the Common
Stock to be sold in the Offering, when issued and paid for, will be, fully paid
and nonassessable. In the event of any liquidation, dissolution or winding-up of
the affairs of the Company, holders of Common Stock are entitled to share
ratably in the assets of the Company remaining after payment or provision for
payment of all of the Company's debts and obligations and liquidation payments
to holders of outstanding shares of Preferred Stock. See "Dividend Policy" and
"Description of Capital Stock -- Ohio Law and Certain Articles of Incorporation
and Code of Regulations Provisions; Anti-Takeover Effects."
PREFERRED STOCK
Shares of Preferred Stock may be issued by the Company in series with such
preferences and designations as the Board of Directors of the Company may from
time to time determine. The Board of Directors of the Company can, without
shareholder approval, issue Preferred Stock with voting, dividend, liquidation
and conversion rights, which could dilute the voting strength of the holders of
the Common Stock and may assist management in impeding a takeover or attempted
change in control. In connection with the 1997 Transactions, the Board of
Directors of the Company created the Convertible Preferred Stock. Immediately
prior to consummation of the Offering, the 250,400 issued and outstanding shares
of Convertible Preferred Stock will automatically convert into 2,504,000 shares
of Common Stock and 250,400 shares of Redeemable Preferred Stock. Upon
consummation of the Offering, all 250,400 then issued and outstanding shares of
Redeemable Preferred Stock will immediately be redeemed by the Company for
approximately $15.8 million using a portion
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of the net proceeds of the Offering. As a result, subsequent to the Offering,
there will be no shares of Preferred Stock outstanding. See "Use of Proceeds."
CERTAIN ARTICLES OF INCORPORATION AND CODE OF REGULATIONS PROVISIONS AND OHIO
LAW; ANTI-TAKEOVER EFFECTS
Certain Articles of Incorporation and Code of Regulations Provisions. The
Articles of Incorporation provide for a classified Board of Directors. Other
than those who may be expressly elected by virtue of the terms of any preferred
stock designation, the directors are divided into two classes. The directors are
elected for terms that are staggered so that the terms of one-half of the
directors expire each year. Except as may be provided in any preferred stock
designation, the Code of Regulations do not permit the shareholders to remove a
director.
The above-described provisions of the Articles of Incorporation and Code of
Regulations may have certain anti-takeover effects. Such provisions, in addition
to the provisions described below and the possible issuance of Preferred Stock
discussed above, may make it more difficult for other persons, without the
approval of the Company's Board of Directors, to make a tender offer or
acquisitions of substantial amounts of the Common Stock or to launch other
takeover attempts that a shareholder might consider to be in such shareholder's
best interests.
Ohio Law. The Company is subject to several anti-takeover provisions under
Ohio law that apply to Ohio public corporations. These provisions make it more
difficult for other persons, without the approval of the Company's Board of
Directors, to make a tender offer or acquisitions of substantial amounts of the
Common Stock or to launch other takeover attempts that a shareholder might
consider in such shareholder's best interests.
Ohio Control Share Acquisition Act. Under Ohio's Control Share Acquisition
Act (the "Acquisition Act"), any "control share acquisition" of an Ohio public
corporation may be made only with the prior authorization of the shareholders of
the corporation in accordance with the provisions of the Acquisition Act. A
"control share acquisition" is defined under the Acquisition Act to mean the
acquisition, directly or indirectly, by any person of shares of a public
corporation that, when added to all other shares of the corporation such person
owns, would entitle such person, directly or indirectly, to exercise voting
power in the election of directors within the following ranges: more than 20%,
more than 33% and a majority.
The Acquisition Act further specifies that the shareholders of the
corporation must approve the proposed control share acquisition by certain
percentages at a special meeting of shareholders at which a quorum is present.
In order to comply with the Acquisition Act, the acquiring person may only
acquire the stock of the Ohio public corporation upon the affirmative vote of:
(i) a majority of the voting power of the corporation that is represented in
person or by proxy at the special meeting; and (ii) a majority of the voting
power of the corporation that is represented in person or by proxy at the
special meeting, excluding those shares of the corporation deemed to be
"interested shares" for purposes of the Securities Act.
"Interested shares" are defined under the Securities Act to mean shares in
respect of which the voting power is controlled by any of the following persons:
(i) an acquiring person; (ii) any officer of the Ohio public corporation; and
(iii) any employee who is also a director of the corporation. "Interested
shares" also include shares of the corporation that are acquired by any person
after the date of the first public disclosure of the proposed acquisition and
prior to the record date for the applicable special meeting, if either (i) the
aggregate consideration paid by such person, and any person acting in concert
with him or her, for such shares of the Ohio public corporation exceeds $250,000
or (ii) the number of shares acquired by such person, and any person acting in
concert with him or her, exceeds 1.5% of the outstanding shares of the
corporation, or if shares are acquired after the record date for the applicable
special meeting accompanied by the voting power for such special meeting.
Ohio Merger Moratorium Act. The Company is also subject to Ohio's Merger
Moratorium Act. The Merger Moratorium Act generally prohibits a wide range of
business combinations and other transactions (including mergers, consolidations,
asset sales, loans, disproportionate distributions of property and
disproportionate issuances or transfers of shares or rights to acquire shares)
between an Ohio corporation and a person that owns beneficially (within the
meaning of the Securities Act), alone or with other related parties, shares
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representing at least 10% of the voting power of the corporation (an "Interested
Shareholder") for a period of three years after such person becomes an
Interested Shareholder, unless, prior to the date that the Interested
Shareholder became such, the directors approve either the transaction or the
acquisition of the corporation's shares that resulted in the person becoming an
Interested Shareholder. Following the three-year moratorium period, the
corporation may engage in covered transactions with an Interested Shareholder
only if, among other things, (i) the transaction receives the approval of the
holders of two-thirds of all the voting shares and the approval of the holders
of a majority of the voting shares held by persons other than an Interested
Shareholder or (ii) the remaining shareholders receive an amount for their
shares equal to the higher of the highest amount paid in the past by the
Interested Shareholder for the corporation's shares or the amount that would be
due the shareholders if the corporation were to dissolve.
Ohio Control Bid Statute. The Company is also subject to Ohio's Control Bid
Statute. Ohio's Control Bid Statute provides that no offeror may make a "control
bid" pursuant to a tender offer or a request or invitation for tenders unless,
on the day the offeror commences a control bid, it files with the Ohio Division
of Securities (the "Securities Division") and the target company certain
information in respect of the offeror, his or her ownership of the corporation's
shares and his or her plans for the corporation (including, among other things,
plans to terminate employee benefits plans, close any plant or facility or
reduce the work force). If the Securities Division determines that the offeror's
disclosures are inadequate, it must act within three calendar days from the date
of the offeror's filing to issue a suspension order. If a bid is suspended, a
hearing must be held within 10 calendar days from the date of the Securities
Division's suspension order. The hearing procedure must be completed no later
than 16 calendar days after the date on which the suspension was imposed.
A "control bid" under Ohio's Control Bid Statute is defined as the purchase
of or an offer to purchase an equity security of an issuer with certain
connections to Ohio from a resident of Ohio if (i) after the purchase of such
security, the offeror would directly or indirectly be the beneficial owner of
more than 10% of any class of the issued and outstanding equity securities of
the issuer or (ii) the offeror as the issuer, there is a pending control bid by
a person other than the issuer and the number of issued and outstanding shares
of the corporation will be reduced by more than 10%.
Fiduciary Duty Statute. Ohio law also provides for the right of the Board
of Directors to consider the interests of various constituencies, including
employees, customers, suppliers and creditors of the Company, as well as the
communities in which the Company is located, in addition to the interest of the
Company and its shareholders, in discharging their duties in determining what is
in the Company's best interests.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Generally, a director of an Ohio corporation will not be found to have
violated his fiduciary duties unless there is proof by clear and convincing
evidence that the director has not acted in good faith, in a manner such
director reasonably believes to be in or not opposed to the best interests of
the corporation, or with the care that an ordinarily prudent person in a like
position would use under similar circumstances. In general, a director is liable
for monetary damages for any action or omission as a director only if it is
approved by clear and convincing evidence that such act or omission was
undertaken either with deliberate intent to cause injury to the corporation or
with reckless disregard for the best interests of the corporation.
Under Ohio law, a corporation must indemnify its directors, as well as its
offices, employees and agents, against expenses where any such person is
successful on the merits or otherwise in defense of an action, suit or
proceeding. A corporation may indemnify such persons in actions, suits and
proceedings (including derivative suits) if the individual has acted in good
faith and in a manner that such director believes to be in or not opposed to the
best interests of the corporation. In the case of a criminal proceeding, the
individual must also have no reasonable cause to believe that his or her conduct
was unlawful. Indemnification may be made only if ordered by a court or if
authorized in a specific case upon a determination that the applicable standard
of conduct has been met. Such a determination may be made by a majority of the
disinterested directors, by independent legal counsel or by the shareholders. In
order to obtain reimbursement for expenses in advance of the final disposition
of any action, the individual must provide an undertaking to repay the amount if
it is ultimately determined that such director is not entitled to be
indemnified.
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In general, Ohio law requires that all expenses, including attorneys fees,
incurred by a director in defending any action, suit or proceeding to be paid by
the corporation as they are incurred in advance of final disposition if the
director agrees to repay such amounts if it is proved by clear and convincing
evidence that his action or omission was undertaken with deliberate intent to
cause injury to the corporation or with reckless disregard for the best
interests of the corporation and if the director reasonably cooperates with the
corporation concerning the action, suit or proceeding.
The Code of Regulations provides for indemnification, which is coextensive
with that permitted under Ohio law. These provisions do not alter a director's
liability under federal securities laws. The Code of Regulations authorizes the
Company to enter into indemnification agreements with each present and future
director and such officers, employees or agents as specified in the Code of
Regulations. The Code of Regulations also authorizes the Company to enter into
agreements to indemnify such persons to the maximum extent permitted by
applicable law.
REGISTRATION RIGHTS
Under the terms of the 1997 Agreement, at any time after the earlier of
December 31, 1998 or the effective date of an initial public offering by the
Company, the holders of at least 50% of registrable securities (as defined in
the 1997 Agreement), including any shares of Common Stock or any securities
convertible into shares of Common Stock, have the right to require the Company
to register under the Securities Act any or all of such registrable securities,
subject to the conditions and limitations contained in the 1997 Agreement. In
addition, under the terms of the 1997 Agreement, each of TA Investors and
McDonald Investors was granted demand registration rights once the Company
becomes eligible to register securities on Form S-3 under the Securities Act,
subject to conditions and limitations contained in the 1997 Agreement. Also,
each of TA Investors and McDonald Investors was granted certain "piggyback"
registration rights, subject to the conditions and limitations contained in the
1997 Agreement, at any time that the Company undertakes a public offering.
In connection with the KLA acquisition, the Company entered into Warrant
Agreements, dated April 3, 1998 (the "1998 Warrant Agreements") with each of
Ronnie Crumpler, Gary Levey and Anthony Kelly (individually, a "Warrant Holder"
and collectively, the "Warrant Holders") granting the Warrant Holders the right
to purchase an aggregate of 195,266 shares of Common Stock at $0.001 per share.
Upon consummation of the Offering, the Warrants will be exercisable until April
2008. In addition, under the 1998 Warrant Agreements, each Warrant Holder was
granted certain "piggyback" registration rights, subject to the conditions and
limitations contained in the 1998 Warrant Agreements, at any time the Company
undertakes a public offering.
Subsequent to the KLA acquisition, the Company granted the KLA Options to
certain employees of the Company formerly employed by KLA (individually, an
"Option Holder" and collectively, the "Option Holders"). Pursuant to the Option
Agreements (the "Option Agreements" and together with the 1997 Agreement and the
1998 Warrant Agreements, the "Registration Agreements"), the Option Holders were
granted options to purchase an aggregate of 64,734 shares of Common Stock at a
price of $0.001 per share. Upon the consummation of the Offering, the options
will be exercisable. In addition, each Option Holder was granted certain
"piggyback" registration rights, subject to the conditions and limitations
contained in the Option Agreements, at any time the Company undertakes a public
offering.
Pursuant to the Registration Agreements, but subject to the conditions and
limitations set forth in such agreements, the Company is required to: (i) pay
registration expenses (exclusive of underwriting discounts and commissions) in
connection with certain registrations of the Company's securities; (ii) use its
best efforts to effect such registrations; and (iii) indemnify TA Investors,
McDonald Investors, the Warrant Holders and the Option Holders, including
certain of their affiliates, against certain liabilities, including liabilities
under the Securities Act, in connection with the registration of their shares of
Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is National
City Bank in Cleveland, Ohio.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have an aggregate of
shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options or
warrants to purchase shares of Common Stock. Of these shares of Common Stock,
the shares sold in the Offering are freely tradeable without
restriction or further registration under the Securities Act, except that any
Shares held by "affiliates" of the Company, as that term is defined in Rule 144,
may generally be sold only in compliance with the limitations of Rule 144
described below.
SALES OF RESTRICTED SHARES
The remaining shares of Common Stock are deemed "restricted
securities" as defined under Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under the Securities Act. Subject to the Lock-Up Agreements
described below, additional shares of Common Stock will be available for sale in
the public market (subject in the case of shares held by affiliates to
compliance with certain volume restrictions) as follows: (i)
shares will be available for immediate sale in the public market on the date of
this Prospectus, (ii) shares will be eligible for sale 90 days
after the date of this Prospectus, (iii) shares will be eligible
for sale upon the expiration of the Lock-up Agreements 180 days after the date
of this Prospectus, and (iv) shares will be eligible for sale
under Rule 144 upon the expiration of the applicable one-year holding periods.
In general, under Rule 144, a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period commencing 90
days after the date of this Prospectus, a number of shares of Common Stock that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock (approximately shares immediately after the Offering) or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the date on which notice of such sale is filed, subject
to certain restrictions. In addition, a person, who is not deemed to have been
an affiliate of the Company at any time during the 90 days preceding a sale and
who has beneficially owned the shares proposed to be sold for at least two
years, would be entitled to sell such shares under Rule 144(k) without regard to
the volume limitations described above.
An employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701 under the Securities
Act, which permits non-affiliates to sell their Rule 701 shares without having
to comply with the public information, holding period, volume limitation or
notice provisions of Rule 144 and permits affiliates to sell their Rule 701
shares without having to comply with Rule 144's holding period restrictions, in
each case commencing 90 days after the date of this Prospectus.
EFFECT OF SALES OF SHARES
Prior to the Offering, there has been no public market for the Common
Stock, and no precise prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares of Common
Stock for sale will have on the market price of the Common Stock prevailing from
time to time. Nevertheless, sale of substantial amounts of Common Stock in the
public market could adversely effect prevailing market prices and could impair
the Company's future ability to raise capital through the sale of its equity
securities.
LOCK-UP AGREEMENTS
Each of the Company, its executive officers and directors and certain
shareholders of the Company (including the Selling Shareholders) has agreed,
subject to certain 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 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
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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 this Prospectus without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. In addition, during such period, the Company has also agreed not to
file any registration statement with respect to, and each of its executive
officers, directors and certain shareholders of Company (including the Selling
Shareholders) has agreed not to make any demand for, or exercise any right with
respect to, the registration of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock without
Donaldson, Lufkin & Jenrette Securities Corporation's prior written consent.
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UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
, 1998 (the "Underwriting Agreement"), the Underwriters named below,
who are represented by Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"), BancAmerica Robertson Stephens, Lehman Brothers Inc. and McDonald &
Company Securities, Inc. (collectively, the "Representatives"), have severally
agreed to purchase from the Company the respective number of shares of Common
Stock set forth opposite their names below.
NUMBER
UNDERWRITERS OF SHARES
Donaldson, Lufkin & Jenrette Securities Corporation.........
BancAmerica Robertson Stephens..............................
Lehman Brothers Inc.........................................
McDonald & Company Securities, Inc..........................
Total.............................................
========
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may re-allow, to certain other
dealers a concession not in excess of $ per share. After the initial
offering of the Common Stock, the public offering price and other selling terms
may be changed by the Representatives at any time without notice. The
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Company and certain shareholders of the Company have granted to the
Underwriters an option, exercisable within 30 days after the date of this
Prospectus, to purchase, from time to time, in whole or in part, up to an
aggregate of additional shares of Common Stock at the initial public
offering price less underwriting discounts and commissions. The Underwriters may
exercise such option solely to cover overallotments, if any, made in connection
with the Offering. To the extent that the Underwriters exercise such option,
each Underwriter will become obligated, subject to certain conditions, to
purchase its pro rata portion of such additional shares based on such
Underwriter's percentage underwriting commitment as indicated in the preceding
table.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
shareholders of the Company (including the Selling Shareholders) has agreed,
subject to certain 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 this Prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. In addition, during such period, the Company has also agreed not to
file any registration statement with respect to, and each of its executive
officers, directors and certain shareholders of Company
54
55
(including the Selling Shareholders) has agreed not to make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock without DLJ's prior written consent.
Prior to the Offering, there has been no established trading market for the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby will be determined by negotiation among the Company and the
Representatives. The factors to be considered in determining the initial public
offering price include the history of and the prospects for the industry in
which the Company competes, the prospects for future earnings of the Company,
the recent market prices of securities of generally comparable companies and the
general condition of the securities markets at the time of the Offering.
Other than in the United States, no action has been taken by the Company,
the Selling Shareholders or the Underwriters that would permit a public offering
of the shares of Common Stock offered hereby in any jurisdiction where action
for that purpose is required. The shares of Common Stock offered hereby may not
be offered or sold, directly or indirectly, nor may this Prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of Common Stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
Prospectus comes are advised to inform themselves about and to observe any
restrictions relating to the Offering 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 offered hereby in any jurisdiction in
which such an offer or a solicitation is unlawful.
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 overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such 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 they repurchase previously distributed Common Stock in syndicate
covering transactions, in stabilizing transactions or otherwise. 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, and may end any of these activities at any time.
LEGAL MATTERS
The legality of the issuance of the Shares offered hereby will be passed
upon for the Company by Jones, Day, Reavis & Pogue, Cleveland, Ohio. Certain
legal matters will be passed upon for the Underwriters by Brobeck, Phleger &
Harrison LLP, New York, New York.
EXPERTS
The Financial Statements of the Company as of December 31, 1996 and 1997,
and for each of the years in the three-year period ended December 31, 1997
included herein and elsewhere in the Registration Statement and the Financial
Statements of KLA as of December 31, 1996 and 1997, and for each of the years in
the two-year period ended December 31, 1997 included herein and elsewhere in the
Registration Statement, have been included herein in reliance upon the reports
of PricewaterhouseCoopers LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission Registration Statements on Form
S-1 under the Securities Act, with respect to the Shares. This Prospectus does
not contain all of the information set forth in the Registration Statements,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Stock, reference is made to
55
56
the Registration Statements, including the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract,
agreement or any other document referred to herein are not necessarily complete;
with respect to each such contract, agreement or document filed as an exhibit to
the Registration Statements, reference is made to such exhibit for a more
complete description of the matters involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Registration Statements,
including the exhibits and schedules thereto, may be inspected without charge at
the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C.
20549 and copies of either of them or any part thereof may be obtained from such
office, upon payment of the fees prescribed by the Commission. The Registration
Statements, including the exhibits and schedules thereto, are also available on
the Commission's Web site at http://www.sec.gov.
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy materials and other
information concerning the Company can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at its regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Company's Common Stock is listed in the Nasdaq
National Market, and such reports, proxy materials and other information can
also be inspected at the offices of The Nasdaq Stock Market, Inc., 1735 K
Street, N.W., Washington, D.C. 20549.
Copies of reports, proxy and information statements and other information
regarding registrants that file electronically are available on the Commission's
Web site.
56
57
CONLEY, CANITANO & ASSOCIATES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
REGISTRANT
Conley, Canitano & Associates, Inc.
Report of Independent Certified Public Accountants........ F-2
Balance Sheets -- December 31, 1996 and 1997, June 30,
1998 (unaudited) and pro forma June 30, 1998
(unaudited)............................................ F-3
Statements of Income -- For the years ended December 31,
1995, 1996 and 1997 and for the six months ended June
30, 1997 and 1998 (unaudited).......................... F-4
Statements of Shareholders' Equity (Deficit) -- For the
years ended December 31, 1995, 1996 and 1997 and for
the six months ended June 30, 1998 (unaudited)......... F-5
Statements of Cash Flows -- For the years ended December
31, 1995, 1996 and 1997 and for the six months ended
June 30, 1997 and 1998 (unaudited)..................... F-6
Notes to Financial Statements............................. F-7
BUSINESS ACQUIRED IN 1998
Kelly-Levey & Associates, Inc.
Report of Independent Certified Public Accountants........ F-16
Balance Sheets -- December 31, 1996 and 1997 and March 31,
1998 (unaudited)....................................... F-17
Statements of Operations -- For the years ended December
31, 1996 and 1997 and for the three months ended March
31, 1997 and 1998 (unaudited).......................... F-18
Statements of Shareholders' Equity (Deficit) -- For the
years ended December 31, 1996 and 1997 and for the
three months ended March 31, 1998 (unaudited).......... F-19
Statements of Cash Flows -- For the years ended December
31, 1996 and 1997 and for the three months ended March
31, 1997 and 1998 (unaudited).......................... F-20
Notes to Financial Statements............................. F-21
F-1
58
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
CONLEY, CANITANO & ASSOCIATES, INC.
We have audited the accompanying balance sheets of Conley, Canitano &
Associates, Inc. as of December 31, 1996 and 1997, and the related statements of
income, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Conley, Canitano &
Associates, Inc. as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Cleveland, Ohio
July 24, 1998
F-2
59
CONLEY, CANITANO & ASSOCIATES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, AS OF JUNE 30, 1998
------------------------- --------------------------
1996 1997 ACTUAL PRO FORMA
(NOTE 1)
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................ $ 361,692 $ 2,174,331 $ 2,009,140 $ 2,009,140
Accounts receivable, less allowance for doubtful
accounts of $110,000 in 1996, $175,000 in 1997
and $330,000 in 1998........................... 2,793,583 4,281,130 8,483,070 8,483,070
Deferred taxes................................... 154,335 383,877 520,804 520,804
Other............................................ 67,969 87,556 180,991 180,991
---------- ------------ ------------ -----------
Total current assets........................... 3,377,579 6,926,894 11,194,005 11,194,005
Goodwill, net...................................... -- -- 7,431,122 7,431,122
Property and equipment, net........................ 151,035 549,351 1,689,172 1,689,172
Other.............................................. 168,145 235,717 687,806 250,306
---------- ------------ ------------ -----------
Total assets................................... $3,696,759 $ 7,711,962 $ 21,002,105 $20,564,605
========== ============ ============ ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Line of credit................................... $ 704,417 $ 697,616 $ 8,285,000 $ 8,285,000
Current portion of long-term obligations......... -- 100,000 374,400 374,400
Accounts payable................................. 237,354 456,519 746,320 746,320
Accrued payroll, taxes and benefits.............. 1,746,630 2,773,389 4,053,806 4,053,806
Income taxes payable............................. 236,570 468,514 55,670 55,670
Other............................................ 23,819 312,306 835,695 835,695
---------- ------------ ------------ -----------
Total current liabilities...................... 2,948,790 4,808,344 14,350,891 14,350,891
Deferred taxes..................................... 24,714 31,593 35,643 35,643
Long-term obligations, less current portion........ -- 196,303 748,800 748,800
---------- ------------ ------------ -----------
Total liabilities.............................. 2,973,504 5,036,240 15,135,334 15,135,334
---------- ------------ ------------ -----------
Commitments and contingencies...................... -- -- -- --
Redeemable securities (Note 9)..................... -- 15,969,707 18,197,382 15,750,160
---------- ------------ ------------ -----------
Shareholders' equity (deficit):
Preferred stock (Note 14)........................ -- -- -- --
Common stock (Note 14)........................... 8,168 7,595 8,364 10,868
Additional paid-in capital....................... -- -- 358,587 358,587
Retained earnings (accumulated deficit).......... 715,087 (13,301,580) (12,338,206) (10,330,988)
---------- ------------ ------------ -----------
723,255 (13,293,985) (11,971,255) (9,961,533)
Less: note receivable from shareholder........... -- -- (359,356) (359,356)
---------- ------------ ------------ -----------
Total shareholders' equity (deficit)........... 723,255 (13,293,985) (12,330,611) (10,320,889)
---------- ------------ ------------ -----------
Total liabilities and shareholders' equity
(deficit).................................... $3,696,759 $ 7,711,962 $ 21,002,105 $20,564,605
========== ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-3
60
CONLEY, CANITANO & ASSOCIATES, INC.
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
Revenues.................... $11,106,864 $17,993,647 $32,218,405 $14,334,382 $22,023,760
Cost of revenues............ 6,984,763 10,978,124 19,222,072 8,190,510 13,327,091
----------- ----------- ----------- ----------- -----------
Gross profit........... 4,122,101 7,015,523 12,996,333 6,143,872 8,696,669
Selling, general and
administrative expenses... 3,037,741 4,204,124 6,554,681 2,980,208 4,357,075
Incentive compensation...... 678,000 1,647,000 2,700,000 1,259,000 1,590,579
Acquisition compensation.... -- -- -- -- 362,500
Depreciation and
amortization.............. 26,307 30,166 35,190 16,369 175,007
----------- ----------- ----------- ----------- -----------
Income from
operations........... 380,053 1,134,233 3,706,462 1,888,295 2,211,508
Interest income............. 2,745 5,809 19,532 7,543 15,262
Interest expense............ (37,408) (88,310) (107,422) (55,744) (131,446)
----------- ----------- ----------- ----------- -----------
Income before provision
for income taxes..... 345,390 1,051,732 3,618,572 1,840,094 2,095,324
Provision for income
taxes..................... 180,419 460,629 1,494,676 760,000 904,913
----------- ----------- ----------- ----------- -----------
Net income............. $ 164,971 $ 591,103 $ 2,123,896 $ 1,080,094 $ 1,190,411
=========== =========== =========== =========== ===========
Accretion to redemption
value of redeemable
securities................ -- -- (92,423) -- (227,037)
----------- ----------- ----------- ----------- -----------
Net income available to
common
shareholders......... $ 164,971 $ 591,103 $ 2,031,473 $ 1,080,094 $ 963,374
=========== =========== =========== =========== ===========
Net income per share:
Basic..................... $ $ $ $ $
Diluted................... $ $ $ $ $
Weighted average shares
outstanding:
Basic.....................
Diluted...................
The accompanying notes are an integral part of these financial statements.
F-4
61
CONLEY, CANITANO & ASSOCIATES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK NOTE
(AT STATED VALUE) ADDITIONAL RETAINED RECEIVABLE TREASURY STOCK
-------------------- PAID-IN EARNINGS FROM ------------------------
SHARES AMOUNT CAPITAL (DEFICIT) SHAREHOLDER SHARES AMOUNT
Balance, December 31, 1994......... 7,255,130 $ 8,168 $ -- $ (40,987) $ -- -- $ --
Net income......................... 164,971
--------- -------- -------- ------------ --------- ---------- -----------
Balance, December 31, 1995......... 7,255,130 8,168 -- 123,984 -- -- --
Net income......................... 591,103
--------- -------- -------- ------------ --------- ---------- -----------
Balance, December 31, 1996......... 7,255,130 8,168 -- 715,087 -- -- --
Purchase and retirement of common
stock............................ (509,130) (573) (170,856)
Treasury shares purchased.......... (1,350,000) (15,877,284)
Redeemable securities issued....... (15,877,284) 1,350,000 15,877,284
Accretion to redemption value of
redeemable securities............ (92,423)
Net income......................... 2,123,896
--------- -------- -------- ------------ --------- ---------- -----------
Balance, December 31, 1997......... 6,746,000 7,595 -- (13,301,580) -- -- --
Sale of shares to officer
(unaudited)...................... 76,950 769 358,587
Note receivable from shareholder
(unaudited)...................... (359,356)
Accretion to redemption value of
redeemable securities
(unaudited)...................... (227,037)
Net income (unaudited)............. 1,190,411
--------- -------- -------- ------------ --------- ---------- -----------
Balance, June 30, 1998
(unaudited)...................... 6,822,950 $ 8,364 $358,587 $(12,338,206) $(359,356) -- $ --
========= ======== ======== ============ ========= ========== ===========
Pro forma balance, June 30, 1998
(Note 1) (unaudited)............. 9,326,950 $ 10,868 $358,587 $(10,330,988) $(359,356) -- $ --
========= ======== ======== ============ ========= ========== ===========
TOTAL
SHAREHOLDERS'
EQUITY
(DEFICIT)
Balance, December 31, 1994......... $ (32,819)
Net income......................... 164,971
------------
Balance, December 31, 1995......... 132,152
Net income......................... 591,103
------------
Balance, December 31, 1996......... 723,255
Purchase and retirement of common
stock............................ (171,429)
Treasury shares purchased.......... (15,877,284)
Redeemable securities issued....... --
Accretion to redemption value of
redeemable securities............ (92,423)
Net income......................... 2,123,896
------------
Balance, December 31, 1997......... (13,293,985)
Sale of shares to officer
(unaudited)...................... 359,356
Note receivable from shareholder
(unaudited)...................... (359,356)
Accretion to redemption value of
redeemable securities
(unaudited)...................... (227,037)
Net income (unaudited)............. 1,190,411
------------
Balance, June 30, 1998
(unaudited)...................... $(12,330,611)
============
Pro forma balance, June 30, 1998
(Note 1) (unaudited)............. $(10,320,889)
============
The accompanying notes are an integral part of these financial statements.
F-5
62
CONLEY, CANITANO & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
Cash flows from operating
activities:
Net income.................... $ 164,971 $ 591,103 $ 2,123,896 $ 1,080,094 $ 1,190,411
Adjustments to reconcile net
income to net cash (used in)
provided by operating
activities:
Depreciation and
amortization.............. 26,307 30,166 35,190 16,369 175,007
Deferred taxes.............. (170,899) (82,556) (222,663) (56,000) (132,877)
Incentive option
amortization.............. -- -- -- -- 62,500
Change in assets and
liabilities:
Accounts receivable....... (907,218) (1,147,063) (1,487,547) (1,244,810) (2,039,983)
Other assets.............. 60,649 (58,534) (87,066) (284,630) (102,386)
Accounts payable.......... 132,139 (66,563) 219,165 322,634 (697,008)
Accrued payroll, taxes and
benefits............... 575,076 789,965 1,026,759 108,874 (193,316)
Income taxes payable...... 76,312 139,023 231,944 442,324 (314,144)
Other liabilities......... (76,498) 4,175 288,487 71,067 448,389
----------- ------------ ------------ ------------ ------------
Net cash (used in)
provided by operating
activities........... (119,161) 199,716 2,128,165 455,922 (1,603,407)
----------- ------------ ------------ ------------ ------------
Cash flows from investing
activities:
Purchase of property and
equipment................... (78,708) (51,704) (433,506) (30,876) (947,606)
Acquisition of KLA............ -- -- -- -- (3,905,259)
----------- ------------ ------------ ------------ ------------
Net cash used in
investing
activities........... (78,708) (51,704) (433,506) (30,876) (4,852,865)
----------- ------------ ------------ ------------ ------------
Cash flows from financing
activities:
Proceeds from line of
credit...................... 7,920,000 18,680,695 28,785,000 14,915,300 19,785,490
Payments on line of credit.... (7,707,688) (18,462,829) (28,791,801) (14,642,523) (13,198,106)
(Payments on) proceeds from
long-term obligations....... -- -- 296,303 -- (296,303)
Net proceeds from sale of
redeemable securities....... -- -- 15,877,284 -- --
Purchase of common stock...... -- -- (16,048,713) -- --
Other......................... (24,000) (104,104) (93) (88,999) --
----------- ------------ ------------ ------------ ------------
Net cash provided by
financing
activities........... 188,312 113,762 117,980 183,778 6,291,081
----------- ------------ ------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents.......... (9,557) 261,774 1,812,639 608,824 (165,191)
Cash and cash equivalents, at
beginning of period........... 109,475 99,918 361,692 361,692 2,174,331
----------- ------------ ------------ ------------ ------------
Cash and cash equivalents, at
end of period................. $ 99,918 $ 361,692 $ 2,174,331 $ 970,516 $ 2,009,140
=========== ============ ============ ============ ============
Supplemental disclosure of cash
flow information:
Cash paid during the period
for:
Interest.................... $ 37,711 $ 92,520 $ 108,616 $ 37,711 $ 81,446
=========== ============ ============ ============ ============
Taxes....................... $ 270,446 $ 431,009 $ 1,485,395 $ 270,446 $ 1,346,934
=========== ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
63
CONLEY, CANITANO & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
(Amounts and Disclosures at and for the Six Months
Ended June 30, 1997 and 1998 and for Pro Forma Information are Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Conley, Canitano & Associates, Inc. (the "Company") is a provider of rapid
implementations of Enterprise Resource Planning applications. The Company also
offers its clients a comprehensive range of related services. The Company
provides its services predominately in the United States and Canada. For the
years ended December 31, 1995, 1996 and 1997, approximately 55%, 69% and 75%,
respectively, of the Company's revenues were derived from engagements in which
the Company implemented SAP applications. For the six months ended June 30, 1997
and 1998, revenues derived from SAP implementations approximated 76% and 77%,
respectively. During the six months ended June 30, 1998, one of the Company's
clients accounted for approximately 12% of the Company's revenues. The Company's
results of operations include those of Kelly-Levey & Associates, Inc. ("KLA")
since April 8, 1998 (See Note 12).
Interim Unaudited Financial Information
The interim financial statements of the Company as of June 30, 1998 and for
the six month periods ended June 30, 1997 and 1998 have been prepared without
audit. These interim financial statements reflect all normal and recurring
adjustments, which in the opinion of Company management, are necessary for a
fair presentation of the financial position of the Company and its results of
operations for the interim periods set forth herein. The results for the six
months ended June 30, 1998 are not necessarily indicative of the results to be
expected for the full year.
Revenue Recognition
Revenues are primarily recognized as services are performed. Accounts
receivable includes services performed but not yet billed of $184,507 and
$417,996 as of December 31, 1996 and 1997, respectively, and $1,100,830 as of
June 30, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Cash and Cash Equivalents
The Company considers all restricted cash and money market funds with an
original maturity of three months or less to be cash equivalents. The carrying
amount of these instruments approximates fair value as of December 31, 1996 and
1997 and June 30, 1998.
All lockbox receipts are deposited in a restricted bank account and are
applied the following banking day to the asset based operating line of credit.
If no balance exists on the line of credit, the restricted cash is transferred
to the Company's unrestricted bank account the following banking day. Restricted
cash was $20,524 and $143,692 as of December 31, 1996 and 1997, respectively.
Effective April 8, 1998, there were no restrictive cash requirements.
Since 1997, the Company maintains a bank account, in accordance with a
contractual agreement with a payroll service company, to provide funding for its
current payroll wages and taxes. As of December 31, 1997 and June 30, 1998, the
restricted balance in this account was $851,819 and $714,009, respectively.
F-7
64
CONLEY, CANITANO & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Allowance for Doubtful Accounts
Management provides an allowance for doubtful accounts based on historical
experience and management's evaluation of outstanding accounts receivable.
Amounts related to doubtful accounts that were charged to expense for the
years ended December 31, 1995, 1996 and 1997 totaled $48,835, $40,000 and
$108,577, respectively, and for the six months ended June 30, 1997 and 1998
totaled $50,000 and $30,000, respectively.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repair which extend the useful life of the property and equipment are
capitalized.
Depreciation is provided using accelerated and straight-line methods over
the estimated useful lives of the assets as follows:
Furniture and fixtures........................ 10 years
Computer equipment and software............... 3 to 6 years
Leasehold improvements........................ 10 years
Goodwill
Goodwill resulting from the acquisition of KLA is amortized over 20 years
using the straight-line method. For the quarter ended June 30, 1998,
amortization expense was $93,212. The Company will continually evaluate whether
later events and circumstances have occurred that indicate the remaining
goodwill may warrant revision.
Income Taxes
Deferred income tax assets and liabilities are provided for temporary
differences between the financial reporting and the tax basis of the Company's
assets and liabilities. These deferred taxes are measured by the provisions of
currently enacted tax laws. Valuation allowances have been established when
necessary to reduce tax assets to the amount expected to be realized.
Earnings Per Share
Computations of basic and diluted earnings per share of common stock have
been made in accordance with the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), Earnings
Per Share. Under SFAS No. 128, basic earnings per share excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding for the period. The weighted average
number of common shares for the basic earnings per common share calculation
includes (i) all Common Stock outstanding during each period presented, (ii) all
Common Stock options and warrants issued within one year prior to the initial
public filing with a price below the estimated initial public offering price,
reduced by the number of shares which could be purchased with proceeds from the
exercise of the options and warrants and (iii) the Common Stock issuable upon
the conversion of the Company's Convertible Preferred Stock. Diluted earnings
per share assumes conversion of the Convertible Preferred Stock, the elimination
of any Preferred Stock dividend requirement and the issuance of Common Stock for
all other potentially dilutive equivalent shares outstanding.
F-8
65
CONLEY, CANITANO & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Earnings per common share ("EPS") were computed as follows:
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
Net income................................. $ 164,971 $ 591,103 $ 2,123,896 $ 1,080,094 $ 1,190,411
Accretion to redemption value.............. -- -- (92,423) -- (227,037)
----------- ----------- ----------- ----------- -----------
Net income available to common
shareholders............................. $ 164,971 $ 591,103 $ 2,031,473 $ 1,080,094 $ 963,374
=========== =========== =========== =========== ===========
Basic EPS:
Weighted average common shares
outstanding............................
=========== =========== =========== =========== ===========
Earnings per share....................... $ $ $ $ $
=========== =========== =========== =========== ===========
Diluted EPS:
Weighted average common shares
outstanding............................
Shares applicable to dilutive options and
warrants...............................
----------- ----------- ----------- ----------- -----------
Shares applicable to diluted earnings....
=========== =========== =========== =========== ===========
Earnings per share....................... $ $ $ $ $
=========== =========== =========== =========== ===========
Fair Value of Financial Instruments
The Company's financial instruments consist principally of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses and other
liabilities, a line of credit, and long-term debt. The fair value of these
financial instruments approximates their carrying value.
Accretion to Redemption Value of the Redeemable Securities
As more fully discussed in Note 9, redeemable securities includes 250,400
shares of Convertible Preferred Stock and 1,350,000 shares of Common Stock with
put rights. The 250,400 shares of Convertible Preferred Stock are convertible
into 250,400 shares of Redeemable Preferred Stock and 2,504,000 shares of Common
Stock with put rights, which can be exercised at various times after 2001, 2002
and 2003. All such rights terminate upon the consummation of the proposed
initial public offering of the Company's Common Stock (the "Offering").
Accretion to redemption value represents accretion to the redemption dates
utilizing the interest method from October 1997 (See Note 9).
Redeemable securities also includes warrants exercisable into 195,265.98
shares of Common Stock and compensatory options exercisable into 64,734.02
shares of Common Stock issued by the Company in connection with the KLA
acquisition (See Note 12). These warrants and compensatory options may be put to
the Company for an aggregate of $2,000,000. All such put rights terminate upon
the consummation of the Offering. The warrants are exercisable 24 months after
the closing of the KLA acquisition or upon the consummation of the Offering. The
acquisition compensation expense related to the compensatory options is being
amortized over a 24 month vesting period. The compensatory options vest upon the
consummation of the Offering.
Total accretion for the year ended December 31, 1997 and for the six months
ended June 30, 1998 was $92,423 and $227,037, respectively.
Unaudited Pro Forma Balance Sheet
In conjunction with the Offering, all of the 250,400 shares of Convertible
Preferred Stock will convert into 2,504,000 shares of Common Stock and 250,400
shares of Redeemable Preferred Stock (See Note 9). The unaudited pro forma
balance sheet as of June 30, 1998 reflects the reclassification of the 1,350,000
shares of Common Stock included in the redeemable securities to shareholders
equity as a result of the termination of the
F-9
66
CONLEY, CANITANO & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
put rights and as a result of the conversion of the Convertible Preferred Stock
into 2,504,000 shares of Common Stock and 250,400 shares of Redeemable Preferred
Stock. The unaudited pro forma balance sheet assumes the redemption of the
250,400 shares of the Redeemable Preferred Stock to be redeemed upon the
consummation of the Offering for $62.90 per share.
2. NOTES RECEIVABLE
The Company has a $359,356 promissory note receivable due from an officer
of the Company. The note was issued in exchange for Restricted Stock (See Note
11) and is treated as a non-cash item for purposes of the statements of cash
flow. Interest at 6% per annum and principal are due and payable on June 30,
2004. The note provides for accelerated payment if the officer ceases to be
employed by the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
AS OF DECEMBER 31, AS OF
---------------------- JUNE 30,
1996 1997 1998
Furniture and fixtures.......................... $198,682 $ 382,130 $ 871,434
Computer equipment.............................. 452,389 491,871 715,030
Leasehold improvements.......................... 12,334 222,910 295,796
-------- ---------- ----------
663,405 1,096,911 1,882,260
Less: accumulated depreciation.................. 512,370 547,560 193,088
-------- ---------- ----------
Property and equipment, net..................... $151,035 $ 549,351 $1,689,172
======== ========== ==========
4. LINE OF CREDIT
Prior to April 8, 1998, the Company had a $2,500,000 bank line of credit
expiring May 31, 1998. Interest was payable monthly at the bank's prime rate
(8.25% and 8.5% at December 31, 1996 and 1997, respectively) plus 1.75% through
December 31, 1996 and 1.5% thereafter.
On April 8, 1998, the Company refinanced the line of credit with a line of
credit/term note from another bank simultaneously with the acquisition of KLA
(See Note 12). The line of credit/term note is collateralized by substantially
all the Company's assets. The borrowings are limited to the lessor of
$15,000,000 or a multiple of 2.5 times the latest aggregated four quarters'
EBITDA as defined in the agreement. The interest rate is LIBOR (5.6875% at June
30, 1998) plus 2.25% or the bank's prime rate (8.5% at June 30, 1998) plus up to
0.75%. The line of credit/term note contains various covenants that restrict,
among other things, the Company's ability to incur additional indebtedness, sell
or transfer assets, make investments and pay dividends and requires the Company
to meet various financial covenants. The line of credit/term note converts to a
term note to the extent the balance exceeds $5,000,000 on June 30, 1999. The
term portion then matures as follows: 5% quarterly on September 30, 1999 through
June 30, 2000; 5.83% quarterly on September 30, 2000 through June 30, 2001;
6.66% quarterly on September 30, 2001 through June 30, 2002; 7.51% quarterly on
September 30, 2002 through March 31, 2003; and the remainder on June 30, 2003.
5. LONG-TERM OBLIGATIONS
On September 25, 1997, the Company entered into a variable rate note
agreement with a bank for up to $700,000 at the bank's prime rate (8.5% at
December 31, 1997). Interest only was paid on this note through March 31, 1998
in accordance with the terms of the note. The Company repaid the note in April
1998.
F-10
67
CONLEY, CANITANO & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As part of the KLA acquisition, the Company agreed to pay $1,123,200 to one
of the KLA majority shareholders in three equal annual installments of $374,400
beginning on April 3, 1999.
6. INCOME TAXES
The provision for income taxes is as follows:
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- -------------------------
1995 1996 1997 1997 1998
Current:
Federal............... $ 274,915 $425,378 $1,331,956 $636,000 $ 846,255
State and local....... 76,403 117,807 385,383 180,000 191,535
--------- -------- ---------- -------- -----------
351,318 543,185 1,717,339 816,000 1,037,790
Deferred................ (170,899) (82,556) (222,663) (56,000) (132,877)
--------- -------- ---------- -------- -----------
$ 180,419 $460,629 $1,494,676 $760,000 $ 904,913
========= ======== ========== ======== ===========
The Company estimates the effective income tax rate quarterly using
annualized estimated financial data. The estimated effective income tax rate for
the six months ended June 30, 1997 and 1998 was 41.3% and 43.2%, respectively.
The effective income tax rate for the six months ended June 30, 1998 reflects
nondeductible goodwill amortization. A reconciliation of the provision for
income taxes at the federal statutory rate to that included in the Statements of
Income is as follows:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1995 1996 1997
Tax at federal statutory rate............................... 34.0% 34.0% 34.0%
Increases in taxes resulting from:
State income taxes, net of federal benefit................ 6.8 6.2 6.1
Meals and entertainment................................... 7.3 3.6 1.1
Other..................................................... 4.1 0.0 0.1
---- ---- ----
52.2% 43.8% 41.3%
==== ==== ====
The components of the net deferred tax asset are comprised of the
following:
AS OF DECEMBER 31, AS OF
-------------------- JUNE 30,
1996 1997 1998
Gross deferred tax assets:
Allowance for doubtful accounts.................. $ 44,550 $ 70,875 $ 133,025
Accrued compensation and benefits................ 107,112 232,002 294,802
Other............................................ 2,673 81,000 92,977
-------- -------- ---------
Deferred tax assets...................... 154,335 383,877 520,804
-------- -------- ---------
Gross deferred tax liability:
Depreciation..................................... (24,714) (31,593) (35,643)
-------- -------- ---------
Deferred tax liability................... (24,714) (31,593) (35,643)
-------- -------- ---------
Deferred tax asset, net............................ $129,621 $352,284 $ 485,161
======== ======== =========
F-11
68
CONLEY, CANITANO & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. PROFIT SHARING AND 401(k) SAVINGS PLAN
The Company maintains a qualified cash or deferred compensation plan under
section 401(k) of the Internal Revenue Code (the "401(k) Plan") that covers
substantially all the employees of the Company. Under the 401(k) Plan, the
Company may make a matching contribution as well as a discretionary
contribution. The Company's contributions totaled $84,250, $303,124 and
$596,121, for the years ended December 31, 1995, 1996 and 1997, respectively,
and totaled $140,555 and $317,502 for the six months ended June 30, 1997 and
1998, respectively.
8. COMMITMENTS AND CONTINGENCIES
As of June 30, 1998, the Company leased office space and certain equipment
under various noncancelable operating leases. Lease payments for the years ended
December 31, 1995, 1996 and 1997, were $175,154, $253,132 and $357,608,
respectively, and $185,942 and $299,826 for the six months ended June 30, 1997
and 1998, respectively. On January 3, 1997, the Company entered into an
additional office lease, with a leasing company partially owned by affiliates of
the Company's management and principal shareholders. This lease extends through
December 31, 2002. The lease provides for three successive renewal periods of 60
months each at the Company's option. The monthly lease payment will be adjusted
prior to each annual anniversary date of the lease based on increases in the
consumer price index. The maximum annual increase is 2%. Future minimum lease
payments required under all operating leases are as follows:
1998 (6 months)................................ $ 293,359
1999........................................... 573,432
2000........................................... 550,554
2001........................................... 558,950
2002........................................... 567,514
----------
$2,543,809
==========
9. REDEEMABLE SECURITIES
On October 15, 1997, the Company's Amended and Restated Articles of
Incorporation ("Articles") were amended to authorize 500,800 shares of $0.01 par
value Preferred Stock.
On October 15, 1997, the Company purchased 1,350,000 shares of its Common
Stock from certain shareholders for $15,877,284. These shares and 250,400 shares
of Convertible Preferred Stock were then simultaneously issued for $17,501,806
($15,877,284, net of $1,624,522 of related expenses). The Company accounted for
this transaction using the cost method.
The 250,400 shares of Convertible Preferred Stock have certain voting and
other rights and privileges set forth in the Company's Articles. On or after
October 15, 2001 and October 15, 2002, 50% and 100% of the shares, respectively,
can be redeemed by the Company at the option of the holders for the greater of
$69.89 per share or their fair market value as provided for in the Articles.
Holders of Convertible Preferred Stock are entitled to receive dividends, if
declared by the Board of Directors, on an equal basis with the holders of Common
Stock. In connection with the Offering, the 250,400 shares of Convertible
Preferred Stock automatically convert into 2,504,000 shares of Common Stock and
250,400 shares of Redeemable Preferred Stock, and the Redeemable Preferred Stock
will be redeemed for $62.90 per share.
The 1,350,000 shares of Common Stock may be put back to the Company on or
after October 15, 2003, if the Company has not completed an offering, for the
greater of $0.4541 per share or fair market value.
The authorized Preferred Stock also includes 250,400 shares of Redeemable
Preferred Stock that contain similar voting and liquidation preferences as the
Convertible Preferred Stock. The Redeemable Preferred Stock
F-12
69
CONLEY, CANITANO & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
will pay cumulative dividends at the per share rate per annum of 7% of $62.90.
None of the Redeemable Preferred Stock has been issued.
Redeemable securities also includes warrants exercisable into 195,265.98
shares of Common Stock and compensatory options exercisable into 64,734.02
shares of Common Stock issued by the Company in connection with the KLA
acquisition (See Note 12). These warrants and compensatory options may be put to
the Company for an aggregate of $2,000,000. All such put rights terminate upon
the consummation of the Offering. The warrants are exercisable 24 months after
the closing of the KLA acquisition or upon the consummation of the Offering. The
acquisition compensation expense related to the compensatory options is being
amortized over a 24 month vesting period. The compensatory options vest upon the
consummation of the Offering.
10. COMMON STOCK
In July 1997, the Company purchased 509,130 shares of its Common Stock from
a shareholder for $171,429. The Company subsequently retired these shares.
In October 1997, the Company effected a 6,364.151-for-1 common stock split.
In addition, in July 1998, the Company effected a 10-for-1 common stock split.
All share and per share amounts herein have been restated to reflect such stock
splits (See Note 14).
11. STOCK OPTIONS AND WARRANTS
During October 1997, the Company and its shareholders adopted the 1997
Equity and Performance Incentive Plan (the "Plan") to attract and retain
directors, officers, employees and consultants. Under the terms of the Plan,
1,420,000 shares of the Company's Common Stock are available for grant. Future
grants, and the provisions thereof, are at the discretion of the Company's Board
of Directors.
On May 11, 1998 options were granted under the Plan to purchase 320,200
shares of Common Stock. Options vest evenly over a five-year period. On each
anniversary date of the grant 20% of the options may be exercised.
In May 1998, an officer of the Company was granted 76,950 shares of
Restricted Stock under the Plan at a purchase price of $4.67 per share. The
officer paid for the shares with a promissory note (See Note 2).
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees and related interpretations in accounting for its
stock option plan and has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), Accounting for Stock-
Based Compensation. Had compensation cost been determined based on the estimated
fair value at the grant date consistently with the provisions of SFAS No. 123,
net income and net income per share would have been reduced to the pro forma
amounts indicated below:
FOR THE
SIX MONTHS ENDED
JUNE 30, 1998
----------------
Net income available to common shareholders -- as
reported.................................................. $963,374
Net income available to common shareholders -- pro forma.... $943,335
Net income per share -- as reported:
Basic..................................................... $
Diluted................................................... $
Net income per share -- pro forma:
Basic..................................................... $
Diluted................................................... $
F-13
70
CONLEY, CANITANO & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant and restricted share is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for the grant: dividend yield of 0%;
expected volatility of 47%; risk-free interest rate of 6%; and expected lives of
the options of five years from the date of vesting.
All options had an exercise price of $4.67 per share on the date of grant.
A summary of the status of stock options is presented below:
FOR THE SIX MONTHS
ENDED JUNE 30, 1998
-----------------------------
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
Outstanding, beginning of period...................... -- $ --
Granted............................................... 320,200 4.67
Exercised and converted............................... -- --
Forfeited............................................. -- --
--------- -----
Outstanding, end of period............................ 320,200 4.67
Options available for grant, end of period............ 1,022,850 --
--------- -----
Options exercisable, end of period.................... -- --
========= =====
Redeemable securities also includes warrants exercisable into 195,265.98
shares of Common Stock and compensatory options exercisable into 64,734.02
shares of Common Stock issued by the Company in connection with the KLA
acquisition (See Note 12). The warrants and compensatory options are exercisable
at $0.001 per share of Common Stock 24 months after the closing of the KLA
acquisition or upon the consummation of the Offering. The acquisition
compensation expense related to the compensatory options is being amortized over
a 24 month vesting period. The compensatory options vest upon the consummation
of the Offering.
12. KLA ACQUISITION
On April 8, 1998, the Company purchased all of the outstanding capital
stock of KLA for a purchase price consisting of $3,551,812 in cash, the issuance
of warrants to purchase 195,265.98 shares of Common Stock and certain other
consideration. Of the total consideration, $3,376,800 is subject to certain
revenue targets and contribution margins during the two-year period following
April 8, 1998 and $1,123,200 is payable in three equal annual installments
beginning April 3, 1999. In addition, the Company agreed to grant the KLA
compensatory options and to pay $3,500,000 in retention bonuses at certain
intervals to an escrow account which benefits former KLA employees who remain
employees of the Company at such intervals. The purchase price has been
allocated as follows:
Assets acquired............................................. $2,377,840
Liabilities assumed......................................... (3,373,715)
Goodwill.................................................... 7,524,334
Compensatory options........................................ 500,000
Earn-out liability.......................................... (1,123,200)
----------
5,905,259
Less: non-cash warrants and options......................... 2,000,000
----------
Cash paid for acquisition................................... $3,905,259
==========
Compensatory options are amortized on a straight-line basis over their 24
month vesting period. Amortization expense for the quarter ended June 30, 1998
was $62,500 and is included in acquisition compensation. In
F-14
71
CONLEY, CANITANO & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
connection with the Offering, the compensatory options will fully vest, and the
unamortized balance will be included in acquisition compensation.
The Company is obligated to make the $3,500,000 retention bonus payments to
the escrow account as follows:
October 3, 1998............................................. $ 700,000
April 3, 1999............................................... 875,000
April 3, 2000............................................... 875,000
October 3, 2000............................................. 1,050,000
----------
$3,500,000
==========
Compensation expense for these retention bonuses is recorded as the bonuses
are earned. Compensation expense for the six months ended June 30, 1998 was
$300,000 and is included in acquisition compensation.
13. RELATED PARTY TRANSACTIONS
The Company has a $359,356 promissory note receivable due from an officer
of the Company (See Note 2).
In July 1997, the Company purchased 509,130 shares of its Common Stock from
a related party (See Note 10).
On October 15, 1997, the Company purchased 1,350,000 shares of its Common
Stock from certain majority shareholders. Simultaneously, the Company issued
1,350,000 shares of its Common Stock and 250,400 shares of Convertible Preferred
Stock (See Note 9).
The Company leases office space from a company owned partially by the
Company's management and principal shareholders (See Note 8).
14. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company's Board of Directors
authorized management of the Company to file a Registration Statement with the
Securities and Exchange Commission to sell up to shares of the
Company's Common Stock in the Offering. CCAi expects to use the net proceeds
from the Offering to redeem all outstanding shares of Redeemable Preferred Stock
(See Note 9), to repay in full existing indebtedness (See Note 4) and for
general corporate purposes, including working capital. The Company may also use
a portion of the net proceeds to fund acquisitions of complementary businesses
and service offerings. Although the Company may periodically review potential
acquisition opportunities, there are no current agreements with respect to any
such transactions. Pending their application as described above, the proceeds
will be invested in short-term, investment grade, interest-bearing securities.
In July 1998, the Company effected a 10-for-1 stock split of its Common
Stock (See Note 10).
In July 1998, the Company's shareholders granted approval to increase
authorized shares of stock as follows:
Preferred Stock, voting, $.01 par value..................... 500,800
Preferred Stock, non-voting, no par value................... 5,000,000
Preferred Stock, voting, no par value....................... 5,000,000
Common Stock, no par value.................................. 45,000,000
F-15
72
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE OWNERS
KELLY-LEVEY & ASSOCIATES, INC.
We have audited the accompanying balance sheets of Kelly-Levey &
Associates, Inc. as of December 31, 1996 and 1997, and the related statements of
operations, shareholders' 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kelly-Levey & Associates,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
On April 8, 1998, all of the Kelly-Levey & Associates, Inc. common stock
was acquired by Conley, Canitano & Associates, Inc. (See Note 8).
PricewaterhouseCoopers LLP
Cleveland, Ohio
June 8, 1998
F-16
73
KELLY-LEVEY & ASSOCIATES, INC.
BALANCE SHEETS
AS OF DECEMBER 31,
---------------------- AS OF MARCH 31,
1996 1997 1998
(UNAUDITED)
ASSETS
Current assets:
Cash................................................ $ 53,997 $ 175,647 $ --
Accounts receivable, less allowance for doubtful
accounts of $125,000 in 1998..................... 881,861 1,764,297 2,424,880
Deferred taxes...................................... 50,000
Other............................................... -- 12,219 39,515
-------- ---------- ----------
Total current assets........................ 935,858 1,952,163 2,514,395
Property and equipment, net........................... 32,652 262,125 266,481
Deferred taxes........................................ -- 16,000 48,700
Other................................................. 4,009 10,951 1,914
-------- ---------- ----------
Total assets................................ $972,519 $2,241,239 $2,831,490
======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit...................................... $ -- $ 298,491 $1,000,000
Accounts payable.................................... 40,799 447,223 1,012,287
Accrued payroll, taxes and benefits................. 676,205 1,418,802 878,225
Income taxes payable................................ 47,699 -- --
Other............................................... -- 1,134 --
-------- ---------- ----------
Total current liabilities................... 764,703 2,165,650 2,890,512
Shareholders' equity (deficit):
Common stock, no par value, authorized 1,000,000
shares, issued and outstanding 321,200 shares at
December 31, 1996, issued 329,550 and outstanding
322,850 shares at December 31, 1997 and issued
331,900 shares and outstanding 325,200 shares at
March 31, 1998................................... 2,000 23,787 28,487
Retained earnings (deficit)......................... 205,816 66,189 (73,122)
Treasury stock, 6,700 shares at cost................ -- (14,387) (14,387)
-------- ---------- ----------
Total shareholders' equity (deficit)........ 207,816 75,589 (59,022)
-------- ---------- ----------
Total liabilities and shareholders' equity
(deficit)................................. $972,519 $2,241,239 $2,831,490
======== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-17
74
KELLY-LEVEY & ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS FOR THE THREE
ENDED DECEMBER 31, MONTHS ENDED MARCH 31,
------------------------ --------------------------
1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
Revenues.................................. $3,950,547 $8,725,687 $1,818,648 $2,569,778
Cost of revenues.......................... 2,726,417 6,589,101 1,433,534 1,542,057
---------- ---------- ---------- ----------
Gross profit............................ 1,224,130 2,136,586 385,114 1,027,721
Selling, general and administrative
expenses................................ 838,618 2,238,370 428,926 924,843
Depreciation.............................. 26,663 73,649 17,500 18,780
---------- ---------- ---------- ----------
Income (loss) from operations........... 358,849 (175,433) (61,312) 84,098
Transaction costs......................... -- -- -- 301,991
Interest expense.......................... -- 28,163 15,901 4,118
---------- ---------- ---------- ----------
Income (loss) before provision for
(benefit from) income taxes.......... 358,849 (203,596) (77,213) (222,011)
Provision for (benefit from) income
taxes................................... 153,063 (63,969) (28,500) (82,700)
---------- ---------- ---------- ----------
Net income (loss)....................... $ 205,786 $ (139,627) $ (48,713) $ (139,311)
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-18
75
KELLY-LEVEY & ASSOCIATES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
(AT STATED VALUE) RETAINED TREASURY STOCK TOTAL
----------------- EARNINGS ----------------- SHAREHOLDERS'
SHARES AMOUNT (DEFICIT) SHARES AMOUNT EQUITY (DEFICIT)
Balance, December 31, 1995..... 321,200 $ 2,000 $ 52,530 -- $ -- $ 54,530
Dividends...................... (52,500) (52,500)
Net income..................... 205,786 205,786
------- ------- --------- ----- -------- ---------
Balance, December 31, 1996..... 321,200 2,000 205,816 -- -- 207,816
Sale of common shares to
employees.................... 8,350 21,787 21,787
Treasury shares purchased from
employees.................... 6,700 (14,387) (14,387)
Net loss....................... (139,627) (139,627)
------- ------- --------- ----- -------- ---------
Balance, December 31, 1997..... 329,550 23,787 66,189 6,700 (14,387) 75,589
Sale of common shares to
employees (unaudited)........ 2,350 4,700 4,700
Net loss (unaudited)........... (139,311) (139,311)
------- ------- --------- ----- -------- ---------
Balance, March 31, 1998
(unaudited).................. 331,900 $28,487 $ (73,122) 6,700 $(14,387) $ (59,022)
======= ======= ========= ===== ======== =========
The accompanying notes are an integral part of these financial statements.
F-19
76
KELLY-LEVEY & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
----------------------- --------------------------
1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss)........................ $205,786 $ (139,627) $(48,713) $ (139,311)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation.......................... 26,663 73,649 17,500 18,780
Deferred taxes........................ -- (16,000) (28,500) (82,700)
Change in assets and liabilities:
Accounts receivable................. (762,402) (882,436) (254,299) (660,583)
Other assets........................ (1,057) (19,161) 2,000 (18,259)
Accounts payable.................... (3,846) 406,424 314,030 565,064
Accrued payroll, taxes and
benefits......................... 587,814 742,597 79,852 (540,577)
Income taxes payable................ 47,699 (47,699) (47,699) --
Other liabilities................... -- 1,134 -- (1,134)
-------- ----------- -------- -----------
Net cash provided by (used in)
operating activities........... 100,657 118,881 34,171 (858,720)
-------- ----------- -------- -----------
Cash flows from investing activities:
Purchase of property and equipment....... (59,315) (303,122) (55,667) (23,136)
-------- ----------- -------- -----------
Net cash used in investing
activities..................... (59,315) (303,122) (55,667) (23,136)
-------- ----------- -------- -----------
Cash flows from financing activities:
Proceeds from line of credit............. -- 5,079,300 350,000 1,867,539
Payments on line of credit............... -- (4,780,809) (350,000) (1,166,030)
Purchase of common stock................. -- (14,387) -- --
Proceeds from sale of common stock....... -- 21,787 -- 4,700
Dividends paid........................... (52,500) -- -- --
-------- ----------- -------- -----------
Net cash (used in) provided by
financing activities........... (52,500) 305,891 -- 706,209
-------- ----------- -------- -----------
Net (decrease) increase in cash............ (11,158) 121,650 (21,496) (175,647)
Cash, at beginning of period............... 65,155 53,997 53,997 175,647
-------- ----------- -------- -----------
Cash, at end of period..................... $ 53,997 $ 175,647 $ 32,501 $ --
======== =========== ======== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest.............................. $ -- $ 26,024 $ 15,901 $ 4,263
======== =========== ======== ===========
Taxes................................. $ 57,048 $ 4,730 $ 47,699 $ --
======== =========== ======== ===========
The accompanying notes are an integral part of these financial statements.
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KELLY-LEVEY & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
(Amounts and Disclosures at March 31, 1998 and for the Three Months
Ended March 31, 1997 and 1998 are Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Kelly-Levey & Associates, Inc. ("KLA") is a Kentucky-based provider of
Enterprise Resource Planning implementation services. KLA provides services to
clients predominately in the United States. Substantially all of KLA's revenues
are derived from services provided as a contractor or a subcontractor to
Electronic Data Systems Corporation ("EDS") and its affiliates for the years
ended December 31, 1996 and 1997 and for the three months ended March 31, 1997
and 1998.
Interim Unaudited Financial Information
The interim statements of operations, shareholders' equity (deficit) and
cash flows of KLA for the three month periods ended March 31, 1997 and 1998 have
been prepared without audit. These interim financial statements reflect all
normal and recurring adjustments, which in the opinion of KLA management, are
necessary for a fair presentation of the financial position of KLA and its
results of operations for the interim periods set forth herein. The results for
the three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year.
Revenue Recognition
Revenues are primarily recognized as services are performed. Accounts
receivable includes services performed but not yet billed of $354,460 and
$43,325 as of December 31, 1996 and 1997, respectively, and $331,804 as of March
31, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Allowance for Doubtful Accounts
Management provides an allowance for doubtful accounts based on historical
experience and management's evaluation of outstanding receivables.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repair which extend the useful life of the property and equipment are
capitalized.
Depreciation is provided using accelerated and straight-line methods over
the estimated useful lives of the assets as follows:
Furniture and fixtures............................ 5 years
Equipment......................................... 3 years
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KELLY-LEVEY & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Deferred income tax assets and liabilities are provided for temporary
differences between the financial reporting and the tax basis of KLA's assets
and liabilities. These deferred taxes are measured by the provisions of
currently enacted tax laws. Valuation allowances have been established when
necessary to reduce tax assets to the amount expected to be realized.
Fair Value of Financial Instruments
KLA's financial instruments consist principally of cash, accounts
receivable, accounts payable, accrued expenses and other liabilities, a line of
credit and long-term debt. The fair value of these financial instruments
approximates their carrying value.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
AS OF DECEMBER 31, AS OF
------------------- MARCH 31,
1996 1997 1998
Furniture and fixtures.............................. $10,764 $ 32,062 $ 32,063
Equipment........................................... 52,551 334,375 357,510
------- -------- --------
63,315 366,437 389,573
Less: accumulated depreciation...................... 30,663 104,312 123,092
------- -------- --------
Property and equipment, net......................... $32,652 $262,125 $266,481
======= ======== ========
3. LINE OF CREDIT
As of March 31, 1998, KLA had a $1,000,000 bank line of credit. Interest
was payable monthly at the lending bank's prime rate (8.5% at December 31, 1997
and March 31, 1998), plus 0.75%. Borrowings under the line of credit were due on
demand, were personally guaranteed by the shareholders and were collateralized
by substantially all assets of KLA. The line of credit contained restrictive
terms and covenants which imposed certain maintenance of asset requirements.
This line of credit was repaid and cancelled (See Note 8).
4. INCOME TAXES
The provision for (benefit from) income taxes is as follows:
FOR THE THREE
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
Current:
Federal................................ $125,966 $(38,721) $ -- $ --
State and Local........................ 27,097 (9,248) -- --
-------- -------- -------- --------
153,063 (47,969) -- --
Deferred................................. -- (16,000) (28,500) (82,700)
-------- -------- -------- --------
$153,063 $(63,969) $(28,500) $(82,700)
======== ======== ======== ========
KLA estimates the effective income tax rate quarterly using annualized
estimated financial data. The estimated effective income tax rate for the three
months ended March 31, 1997 and 1998 was 37.3% and 32.6%,
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KELLY-LEVEY & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respectively. A reconciliation of the provision for (benefit from) income taxes
at the federal statutory rate to that included in the Statements of Operations
is as follows:
FOR THE YEARS
ENDED
DECEMBER 31,
---------------
1996 1997
Tax (benefit) at federal statutory rate..................... 34.0% (34.0)%
Increases (reductions) in taxes resulting from:
State income taxes, net of federal benefit................ 4.9 (4.5)
Meals and entertainment................................... 3.6 5.6
Other..................................................... .2 1.4
----- ------
42.7% (31.5)%
===== ======
The components of deferred tax assets and liabilities are comprised of the
following:
AS OF
DECEMBER 31, AS OF
------------------ MARCH 31,
1996 1997 1998
Deferred tax assets:
Allowance for doubtful accounts..................... $ -- $ -- $50,000
Operating loss carryforwards........................ -- 14,600 47,300
Other............................................... -- 1,400 1,400
------- ------- -------
Deferred tax assets......................... $ -- $16,000 $98,700
======= ======= =======
Operating loss carryforwards are available through December 2017.
5. PROFIT SHARING AND 401(K) SAVINGS PLAN
KLA maintains a qualified cash or deferred compensation plan under section
401(k) of the Internal Revenue Code that covers substantially all the employees
of KLA. Under the Plan, KLA may make a matching contribution as well as a
discretionary contribution. KLA's contributions totaled $46,263 and $344,285 for
the years ended December 31, 1996 and 1997, respectively, and $75,000 for the
three months ended March 31, 1997. No contributions were made during the three
months ended March 31, 1998.
6. COMMITMENTS AND CONTINGENCIES
As of March 31, 1998, KLA leased office space and certain equipment under
various noncancelable operating leases. Lease expense for the years ended
December 31, 1996 and 1997 was $7,931 and $37,510, respectively, and for the
three months ended March 31, 1997 and 1998 was $6,171 and $14,250, respectively.
Future minimum lease payments required under all operating leases are as
follows:
1998 (9 months)................................. $ 71,052
1999............................................ 68,126
2000............................................ 55,088
2001............................................ 17,459
--------
$211,725
========
8. SUBSEQUENT EVENT
On April 8, 1998, Conley, Canitano & Associates, Inc. purchased all of the
capital stock of KLA.
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- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................ 5
Risk Factors.............................. 8
Use of Proceeds........................... 15
Dividend Policy........................... 15
Capitalization............................ 16
Dilution.................................. 17
Selected Financial Data................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 21
Business.................................. 30
Management................................ 41
Certain Transactions...................... 45
Principal and Selling Shareholders........ 47
Description of Capital Stock.............. 48
Shares Eligible for Future Sale........... 52
Underwriting.............................. 54
Legal Matters............................. 55
Experts................................... 55
Additional Information.................... 55
Index to Consolidated Financial
Statements.............................. F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
____________SHARES
[CCAI LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
BANCAMERICA ROBERTSON STEPHENS
LEHMAN BROTHERS
MCDONALD & COMPANY
SECURITIES, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of estimated expenses to be incurred by the Company
in connection with the issuance and distribution of the Common Shares being
registered hereby.
SEC registration fee........................................ $
NASD filing fee.............................................
NASDAQ National Market listing fee..........................
Printing engraving, postage and mailing costs...............
Accounting fees and expenses................................
Legal fees and expenses.....................................
Transfer agent fees and expenses............................
Miscellaneous expenses......................................
--------
Total............................................. $
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Code of Regulations, consistent with that permitted by the General
Corporation Law of the State of Ohio, as the same may be amended from time to
time, contains provisions eliminating a director's personal liability for
monetary damages resulting from certain breaches of fiduciary duty. These
provisions do not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief, such as an injunction or recision, in
the event of a breach of a director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws. The Company believes
that these provisions will assist the Company in attracting and retaining
qualified individuals to serve as directors.
Section 1701.13(E) of the Ohio Revised Code provides as follows:
(E)(1) A corporation may indemnify or agree to indemnify any person who was
or is a party or is threatened to be made a party, to any threatened, pending,
or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of the
corporation, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, member, manager, or
agent of another corporation, domestic or foreign, nonprofit or for profit,
limited liability company, or a partnership, joint venture, trust, or other
enterprise, against expenses, including attorneys' fees, judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit, or proceeding, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, if he had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgement, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of it self, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any person who was or
is a party, or is threatened to be made a party, to any threatened, pending, or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, member,
manager, or agent of another corporation, domestic or foreign, nonprofit or for
profit, limited liability company, or a partnership, joint venture, trust, or
other enterprise, against expenses, including attorney's fees, actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit, if he
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acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
shall be made in respect of any of the following:
(a) Any claim, issue, or matter as to which such person is adjudged to
be liable for negligence or misconduct in the performance of his duty to
the corporation unless, and only to the extent that, the court of common
pleas or the court in which such action or suit was brought determines,
upon application, that, despite the adjudication of liability, but in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court of common pleas or
such other court shall deem proper;
(b) Any action or suit in which the only liability asserted against a
director is pursuant to section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, member,
manager, or agent has been successful on the merits or otherwise in defense of
any action, suit, or proceeding referred to in division (E)(1) or (2) of this
section, or in defense of any claim, issue, or matter therein, he shall be
indemnified against expenses, including attorney's fees, actually and reasonably
incurred by him in connection with the Securities Action, suit, or proceeding.
(4) Any indemnification under division (E)(1) or (2) of this section,
unless ordered by a court, shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
trustee, officer, employee, member, manager, or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
division (E)(1) or (2) of this section. Such determination shall be made as
follows:
(a) By a majority vote of a quorum consisting of directors of the
indemnifying corporation who were not and are not parties to or threatened
with any such action, suit, or proceeding referred to in division (E)(1) or
(2) of this section;
(b) If the quorum described in division (E)(4) (a) of this section is
not obtainable or if a majority vote of a quorum of disinterested directors
so directs, in a written opinion by independent legal counsel other than an
attorney, or a firm having associated with it an attorney, who has been
retained by or who has performed services for the corporation or any person
to be indemnified within the past five years;
(c) By the shareholders;
(d) By the court of common pleas or the court in which the Securities
Action, suit, or proceeding referred to in division (E)(1) or (2) of this
section was brought.
Any determination made by the disinterested directors under division (E)(4)
(a) or by independent legal counsel under division (E)(4)(b) of this section
shall be promptly communicated to the person who threatened or brought the
Securities Action or suit by or in the right of the corporation under division
(E)(2) of this section, and within ten days after receipt of such notification,
such person shall have the right to petition the court of common pleas or the
court in which such action or suit was brought to review the reasonableness of
such determination.
(5)(a) Unless at the time of a director's act or omission that is the
subject of an action, suit, or proceeding refereed to in division (E)(1) or (2)
of this section, the articles or the regulations of a corporation state, by
specific reference to this division, that the provisions of this division do not
apply to the corporation and unless the only liability asserted against a
director in an action, suit, or proceeding referred to in divisions (E)(1) and
(2) of this section is pursuant to section 1701.95 of the Revised Code,
expenses, including attorney's fees, incurred by a director in defending the
Securities Action, suit, or proceeding shall be paid by the corporation as they
are incurred, in advance of the final disposition of the Securities Action,
suit, or proceeding upon receipt of an undertaking by or on behalf of the
director in which be agrees to do both of the following:
(i) Repay such amount if it is proved by clear and convincing evidence
in a court of competent jurisdiction that his action or failure to act
involved an act or omission undertaken with deliberate intent to cause
injury to the corporation or undertaken with reckless disregard for the
best interests of the corporation;
(ii) Reasonably cooperate with the corporation concerning the
Securities Action, suit, or proceeding.
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(b) Expenses, including attorney's fees, incurred by a director, trustee,
officer, employee, member, manager, or agent in defending any action, suit, or
proceeding referred to in division (E)(1) or (2) of this section, may be paid by
the corporation as they are incurred, in advance of the final disposition of the
Securities Action, suit, or proceeding, as authorized by the directors in the
specific case, upon receipt of an undertaking by or on behalf of the director,
trustee, officer, employee, member, manager, or agent to repay such amount, if
it ultimately is determined that he is not entitled to be indemnified by the
corporation.
(6) The indemnification authorized by this section shall not be exclusive
of, and shall be in addition to any other rights granted to those seeking
indemnification under the articles or the regulations, any agreement, a vote of
shareholders or disinterested directors, or otherwise, both as to action in
their official capacities and as to action in another capacity while holding
their offices or positions, and shall continue as to a person who has ceased to
be a director, trustee, officer, employee, or agent and shall inure to the
benefit of the heirs, executors, and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish similar
protection, including, but not limited to, trust funds, letters of credit, or
self-insurance, on behalf of or for any person who is or was a director,
officer, employee, member, manager, or agent of the corporation, or is or was
serving at the request of the corporation as a director, trustee, officer,
employee, or agent of another corporation, domestic or foreign, nonprofit or for
profit, limited liability company, or a partnership, joint venture, trust, or
other enterprise, against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
this section. Insurance may be purchased from or maintained with a person in
which the corporation has a financial interest.
(8) The authority of a corporation to indemnify persons pursuant to
division (E)(1) or (2) of this section does not limit the payment of expenses as
they are incurred, indemnification, insurance, or other protection that may be
provided pursuant to divisions (E)(5), (6), and (7) of this section. Divisions
(E) (1) and (2) of this section do not create any obligation to repay or return
payments made by the corporation pursuant to division (E)(5), (6), or (7).
(9) As used in division (E) of this section, "corporation" includes all
constituent entities in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director, officer, employee,
trustee, member, manager, or agent of such a constituent entities, or is or was
serving at the request of such constituent entity as a director, trustee,
officer, employee, trustee, member, manager, or agent of another corporation,
domestic or foreign, nonprofit or for profit, limited liability company, or
partnership, joint venture, trust, or other enterprise, shall stand in the same
position under this section with respect to the new or surviving corporation as
would if he had served the new or surviving corporation in the same capacity.
Prior to the consummation of the Offering, the Company anticipates it will
obtain directors' and officers' liability insurance that covers certain
liabilities and expenses of the Company's directors and officers.
In addition, Section 30 of the Code of Regulations provides that expenses
incurred in defending a civil, criminal or administrative action, suit or
proceeding will be paid by the Company in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of the director, officer, employee or agent to repay such amount.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of the Company, which were not registered under the
Securities Act, have been issued or sold by the Company within the past three
years, except as follows:
(a) On October 15, 1997 the Company sold to TA Investors 243,246
shares of Convertible Preferred Stock for an aggregate purchase price of
approximately $17 million, and 1,311,430 shares of Common Stock for an
aggregate purchase price of approximately $1,311. These transactions were
undertaken in reliance upon the exemption from the registration
requirements of the Securities Act afforded by Section 4(2) of the
Securities Act.
(b) On October 15, 1997 the Company sold to McDonald Investors 7,154
shares of Convertible Preferred Stock for an aggregate purchase price of
approximately $500,000, and 38,570 shares of Common
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Stock for an aggregate purchase price of approximately $38. These
transactions were undertaken in reliance upon the exemption from the
registration requirements of the Securities Act afforded by Section 4(2) of
the Securities Act.
(c) Pursuant to the terms of the 1998 Warrant Agreements, on April 3,
1998 the Company granted the Warrant Holders the right to purchase an
aggregate of 195,264 shares of Common Stock at an exercise price of $0.001
per share. Upon consummation of the Offering, the KLA Warrants will be
exercisable. These transactions were undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded
by Section 4(2) of the Securities Act.
(d) Pursuant to the terms of the Option Agreements , on April 3, 1998
the Company granted employees of the Company previously employed by KLA
options to purchase an aggregate of 64,700 shares of Common Stock at an
exercise price of $0.001 per share. Upon the consummation of the Offering,
the KLA Options will be exercisable. These transactions were undertaken in
reliance upon the exemption from the registration requirements of the
Securities Act afforded by Rule 701 promulgated under the Securities Act.
(e) On May 11, 1998, the Company issued Paul A. Farmer 76,950 shares
of restricted Common Stock under the 1997 Equity and Performance Plan. Mr.
Farmer paid the purchase price for the restricted stock by executing and
delivering to the Company a promissory note in the principal amount of
$359,356. The note is due and payable on June 30, 2004, and accrues
interest on unpaid principal at 6% per annum until paid in full. These
transactions were undertaken in reliance upon the exemption from the
registration requirements of the Securities Act afforded by Rule 701
promulgated under the Securities Act.
(f) On May 11, 1998, the Company granted options to purchase 320,200
shares of Common Stock under the 1997 Equity and Performance Plan. These
options vest 20% each year over a five-year period. These transactions were
undertaken in reliance upon the exemption from the registration
requirements of the Securities Act afforded by Rule 701 promulgated under
the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
1* Form of Underwriting Agreement between the Company and
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc., BancAmerica Robertson Stephens and McDonald &
Co. Securities, Inc.
3.1 Second Amended and Restated Articles of Incorporation of the
Company.
3.2 Amended and Restated Code of Regulations of the Company.
5* Opinion of Jones, Day, Reavis & Pogue as to the validity of
the securities being offered.
10.1 Employment Agreement, dated April 3, 1998, between the
Company and Ronnie Crumpler.
10.2 Employment Agreement, dated April 3, 1998, between the
Company and Gary Levey.
10.3 Form of Employment Agreement, among the Company and certain
employees previously employed by Kelly-Levey & Assoc., Inc.
10.4 Noncompetition Agreement, dated April 3, 1998, between the
Company and Anthony Kelly.
10.5 Employment Agreement, dated April 23, 1998, between the
Company and Paul A. Farmer.
10.6 Restricted Stock Agreement, dated May 11, 1998, between the
Company and Paul A. Farmer.
10.7 Form of Warrant Agreement, between the Company and Ronnie
Crumpler.
10.8 Form of Warrant Agreement, between the Company and Gary
Levey.
10.9 Form of Warrant Agreement, between the Company and Anthony
Kelly.
10.10 Warrant Escrow Agreement, dated April 3, 1998, among the
Company and Ronnie Crumpler, Gary Levey and Anthony Kelly.
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EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.11 Form of Option Agreement, among the Company and certain
employees previously employed by Kelly-Levey & Assoc., Inc.
10.12 Kelly-Levey & Assoc., Inc. Retention Incentive Bonus Plan,
dated April 3, 1998.
10.13 Form of Retention Incentive Bonus Plan Agreement 1998, among
certain former employees, Kelly-Levey & Assoc., Inc. and the
Company.
10.14 Retention Incentive Bonus Plan Escrow Agreement, dated April
3, 1998, among the Company and Kelly-Levey & Assoc., Inc,
Burke & Company, P.L.L., Anthony Kelly, Gary Levey, Ronnie
Crumpler, Trevor Montgomery, Rob Petersen and Don Kirby.
10.15 Earnout Agreement, dated April 3, 1998, among the Company,
Kelly-Levey & Assoc., Inc., Anthony Kelly, Gary Levey and
Ronnie Crumpler.
10.16* Earnout Escrow Agreement, dated April 3, 1998, among the
Company, Kelly-Levey & Assoc., Burke & Company, P.L.L. (as
representative of the shareholders), Anthony Kelly, Gary
Levey and Ronnie Crumpler.
10.17 1997 Stock Purchase and Shareholders Agreement, dated
October 15, 1997, among the Company, Annette M. Canitano,
Nicholas A. Canitano, Karen M. Conley, Kenneth L. Conley,
NAC Enterprises, Inc., CKCK Enterprises, Inc., Kenneth L.
Conley Charitable Remainder Trust, Karen M. Conley
Charitable Remainder Trust, TA/Advent VIII L.P., Advent
Atlantic and Pacific III L.P., TA Venture Investors Limited
Partnership, Kenneth T. Schiciano, A. Bruce Johnston,
McDonald & Company Securities, Inc., McD Venture Capital
Fund, L.P. and GHK Investments, L.L.C.
10.18 Form of the Company's Incentive Stock Option Agreement.
10.19* Amended and Restated Share Redemption and Purchase
Agreement, dated July 1, 1997, among the Company, Karen M.
Conley, Nicholas A. Canitano, Annette Canitano and Joseph
Minadeo.
10.20 Agreement, dated October 15, 1997, among the Company,
Annette M. Canitano, Nicholas A. Canitano, Karen M. Conley,
Kenneth L. Conley, NAC Enterprises, Inc., CKCK Enterprises,
Inc., Kenneth L. Conley Charitable Remainder Trust, Karen M.
Conley Charitable Remainder Trust, TA/Advent VIII, L.P.,
Advent Atlantic and Pacific L.P., TA Venture Investors
Limited Partnership, Kenneth T. Schiciano, A. Bruce
Johnston, McDonald & Company Securities, Inc., McD Venture
Capital Fund, L.P., GHK Investments, L.L.C. and Joseph
Minadeo.
10.21 Stock Redemption Agreement, dated October 15, 1997, between
the Company and NAC Enterprises, Inc.
10.22 Stock Redemption Agreement, dated October 15, 1997, between
the Company and CKCK Enterprises, Inc.
10.23 Stock Redemption Agreement, dated October 15, 1997, between
the Company and Kenneth L. Conley Charitable Remainder
Trust.
10.24 Stock Redemption Agreement, dated October 15, 1997, between
the Company and Karen M. Conley Charitable Remainder Trust.
10.25 The Company's 1997 Equity and Performance Incentive Plan,
dated October 15, 1997.
10.26 First Amendment to the Company's Equity and Performance
Incentive Plan, dated July 21, 1998.
10.27* The Company's 401(k) Plan and Trust, dated December 2, 1996.
10.28* First Amendment to the Company's 401(k) Plan and Trust,
dated April 3, 1998.
10.29* Amendment No. 2 to the Company's 401(k) Plan and Trust,
dated April 3, 1998.
10.30 Form of the Company's Employee Stock Purchase Plan.
10.31 Loan Agreement, dated April 7, 1998, between the Company and
Fleet National Bank.
10.32* Lease Agreement, dated January 3, 1997, between the Company
and Place Renaissance, Ltd.
II-5
86
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.33 R-3 National Implementation Partner Agreement, dated April
2, 1996, between the Company and SAP America, Inc.
10.34* Oracle Alliance Agreement, dated , 1997,
between the Company and Oracle Corp.
10.35 Form of Indemnification Agreement for directors and
officers.
10.36 Amendment to Amended and Restated Share Redemption and
Purchase Agreement, among the Company, Karen M. Conley,
Nicholas A. Canitano, Annette M. Canitano and Joseph
Minadeo.
11* Statement regarding computation of per share earnings.
23.1* Consent of Jones, Day, Reavis & Pogue (included with Exhibit
5).
23.2 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney.
27* Financial Data Schedule.
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules
All financial statement schedules are omitted because they are either not
applicable or the required information is included in the financial statements
or notes thereto appearing elsewhere in this Registration Statement.
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 Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in said Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company 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 Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as a part of this
registration statement in reliance upon Rule 430A and contained in form of
prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-6
87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunder duly authorized, in the City of Cleveland, State of
Ohio, on July 24, 1998.
CONLEY, CANITANO & ASSOCIATES, INC.
By: /s/ PAUL A. FARMER*
------------------------------------
Paul A. Farmer
Chief Financial Officer and Vice
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* President, Chief Operating Officer and July 24, 1998
- --------------------------------------------- Director
Kenneth L. Conley
/s/ PAUL A. FARMER Chief Financial Officer and Vice July 24, 1998
- --------------------------------------------- President
Paul A. Farmer
* Executive Vice President, Treasurer and July 24, 1998
- --------------------------------------------- Director
Karen M. Conley
* Executive Vice President, Secretary and July 24, 1998
- --------------------------------------------- Director
Annette M. Canitano
/s/ NICHOLAS A. CANITANO Chief Executive Officer, Chairman of the July 24, 1998
- --------------------------------------------- Board and Director
Nicholas A. Canitano
/s/ KENNETH T. SCHICIANO Director July 24, 1998
- ---------------------------------------------
Kenneth T. Schiciano
/s/ A. BRUCE JOHNSTON Director July 24, 1998
- ---------------------------------------------
A. Bruce Johnston
* The undersigned by signing his name hereto, does sign and execute this
Registration Statement pursuant to the Powers of Attorney executed by the
above-named officers and directors of the Company and which have been filed
with the Securities and Exchange Commission on behalf of such officers and
directors.
By: /s/ PAUL A. FARMER
---------------------------------------------------------
Paul A. Farmer
as Attorney-in-Fact
II-7
88
EXHIBIT INDEX
PAGINATION
BY
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER DESCRIPTION OF DOCUMENT SYSTEM
1* Form of Underwriting Agreement between the Company and
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc., BancAmerica Robertson Stephens and McDonald &
Co. Securities, Inc.
3.1 Second Amended and Restated Articles of Incorporation of the
Company.
3.2 Amended and Restated Code of Regulations of the Company.
5* Opinion of Jones, Day, Reavis & Pogue as to the validity of
the securities being offered.
10.1 Employment Agreement, dated April 3, 1998, between the
Company and Ronnie Crumpler.
10.2 Employment Agreement, dated April 3, 1998, between the
Company and Gary Levey.
10.3 Form of Employment Agreement, among the Company and certain
employees previously employed by Kelly-Levey & Assoc., Inc.
10.4 Noncompetition Agreement, dated April 3, 1998, between the
Company and Anthony Kelly.
10.5 Employment Agreement, dated April 23, 1998, between the
Company and Paul A. Farmer.
10.6 Restricted Stock Agreement, dated May 11, 1998, between the
Company and Paul A. Farmer.
10.7 Form of Warrant Agreement, between the Company and Ronnie
Crumpler.
10.8 Form of Warrant Agreement, between the Company and Gary
Levey.
10.9 Form of Warrant Agreement, between the Company and Anthony
Kelly.
10.10 Warrant Escrow Agreement, dated April 3, 1998, among the
Company and Ronnie Crumpler, Gary Levey and Anthony Kelly.
10.11 Form of Option Agreement, among the Company and certain
employees previously employed by Kelly-Levey & Assoc., Inc.
10.12 Kelly-Levey & Assoc., Inc. Retention Incentive Bonus Plan,
dated April 3, 1998.
10.13 Form of Retention Incentive Bonus Plan Agreement, dated
April 3, 1998, among certain former employees, Kelly-Levey &
Assoc., Inc. and the Company.
10.14 Retention Incentive Bonus Plan Escrow Agreement, dated April
3, 1998, among the Company and Kelly-Levey & Assoc., Inc,
Burke & Company, P.L.L., Anthony Kelly, Gary Levey, Ronnie
Crumpler, Trevor Montgomery, Rob Petersen and Don Kirby.
10.15 Earnout Agreement, dated April 3, 1998, among the Company,
Kelly-Levey & Assoc., Inc., Anthony Kelly, Gary Levey and
Ronnie Crumpler.
10.16* Earnout Escrow Agreement, dated April 3, 1998, among the
Company, Kelly-Levey & Assoc., Burke & Company, P.L.L. (as
representative of the shareholders), Anthony Kelly, Gary
Levey and Ronnie Crumpler.
10.17* 1997 Stock Purchase and Shareholders Agreement, dated
October 15, 1997 by and among the Company, Annette M.
Canitano, Nicholas A. Canitano, Karen M. Conley, Kenneth L.
Conley, NAC Enterprises, Inc., CKCK Enterprises, Inc.,
Kenneth L. Conley Charitable Remainder Trust, Karen M.
Conley Charitable Remainder Trust, TA/Advent VIII L.P.,
Advent Atlantic and Pacific III L.P., TA Venture Investors
Limited Partnership, Kenneth T. Schiciano, A. Bruce
Johnston, McDonald & Company Securities, Inc., McD Venture
Capital Fund, L.P. and GHK Investments, L.L.C.
10.18 Form of the Company's Incentive Stock Option Agreement.
10.19* Amended and Restated Share Redemption and Purchase
Agreement, dated July 1, 1997, among the Company, Karen M.
Conley, Nicholas A. Canitano, Annette M. Canitano and Joseph
Minadeo.
89
EXHIBIT INDEX -- CONTINUED
PAGINATION
BY
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER DESCRIPTION OF DOCUMENT SYSTEM
10.20 Agreement, dated October 15, 1997, among the Company,
Annette M. Canitano, Nicholas A. Canitano, Karen M. Conley,
Kenneth L. Conley, NAC Enterprises, Inc., CKCK Enterprises,
Inc., Kenneth L. Conley Charitable Remainder Trust, Karen M.
Conley Charitable Remainder Trust, TA/Advent VIII, L.P.,
Advent Atlantic and Pacific L.P., TA Venture Investors
Limited Partnership, Kenneth T. Schiciano, A. Bruce
Johnston, McDonald & Company Securities, Inc., McD Venture
Capital Fund, L.P., GHK Investments, L.L.C. and Joseph
Minadeo.
10.21 Stock Redemption Agreement, dated October 15, 1997, between
the Company and NAC Enterprises, Inc.
10.22 Stock Redemption Agreement, dated October 15, 1997, between
the Company and CKCK Enterprises, Inc.
10.23 Stock Redemption Agreement, dated October 15, 1997, between
the Company and Kenneth L. Conley Charitable Remainder
Trust.
10.24 Stock Redemption Agreement, dated October 15, 1997, between
the Company and Karen M. Conley Charitable Remainder Trust.
10.25 The Company's 1997 Equity and Performance Incentive Plan,
dated October 15, 1997.
10.26 First Amendment to the Company's Equity and Performance
Incentive Plan, dated July 21, 1998.
10.27* The Company's 401(k) Plan and Trust, dated December 2, 1996.
10.28* First Amendment to the Company's 401(k) Plan and Trust,
dated April 3, 1998.
10.29* Amendment No. 2 to the Company's 401(k) Plan and Trust,
dated April 3, 1998.
10.30 Form of the Company's Employee Stock Purchase Plan.
10.31 Loan Agreement, dated April 7, 1998, between the Company and
Fleet National Bank.
10.32* Lease Agreement, dated January 3, 1997, between the Company
and Place Renaissance, Ltd.
10.33 R-3 National Implementation Partner Agreement, dated April
2, 1996, between the Company and SAP America, Inc.
10.34* Oracle Alliance Agreement, dated , 1997,
between the Company and Oracle Corp.
10.35 Form of Indemnification Agreement for directors and
officers.
10.36 Amendment to Amended and Restated Share Redemption and
Purchase Agreement, among the Company, Karen M. Conley,
Nicholas A. Canitano, Annette M. Canitano and Joseph
Minadeo.
11* Statement regarding computation of per share earnings.
23.1* Consent of Jones, Day, Reavis & Pogue (included with Exhibit
5).
23.2 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney.
27* Financial Data Schedule.
- ---------------
* To be filed by amendment.