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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20789
PRIMIX SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3249618
(State of Incorporation) (I.R.S. Employer Identification No.)
One Arsenal Marketplace,
Watertown, MA 02472
(Address of principal executive offices)
Telephone: (617) 923-6500
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information incorporated
by reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 18, 1999 was $14,352,897.
The number of shares of the registrant's Common Stock, par value $.001 per
share, outstanding on March 18, 1999 was 14,575,411.
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STATEMENTS MADE OR INCORPORATED INTO THIS FORM 10-K INCLUDE A NUMBER OF
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934. FORWARD LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS
CONTAINING THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTATIONS," "INTENDS,"
"FUTURE," AND WORDS OF SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEFS,
EXPECTATIONS OR INTENTIONS REGARDING THE COMPANY'S FUTURE PERFORMANCE. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE
FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE ARE DISCUSSED IN THE SECTION ENTITLED "CERTAIN FACTORS THAT MIGHT
AFFECT FUTURE RESULTS" ON PAGE 16 OF THIS ANNUAL REPORT.
PART I
ITEM 1. BUSINESS
Primix Solutions Inc. ("Primix" or the "Company"), a Delaware corporation,
was incorporated in January 1994. Since its inception, Primix has helped
organizations use information technology to solve business problems and
capitalize on new business opportunities. Primix' customers include large,
globally recognized corporations in the Financial Services, Manufacturing, High
Technology, Energy, Retail, Telecommunications and Healthcare sectors. These
customers have in common significant investments made over time in disparate
information systems, and a desire to improve their business processes through
the combination of existing systems and new technologies.
During the first quarter of 1998, the Company unified its software
products and consulting services business units into a single consulting
services organization focused on delivering "e-Business" solutions.
E-Business encompasses a wide variety of business processes in which Internet
technologies are used to more effectively manage relationships between
customers, vendors, suppliers, distributors and employees, and thereby
increase sales, reduce costs, improve productivity and/or promote customer
loyalty.
Companies wishing to leverage the potential of e-Business often face a
mix of strategic, technical, and creative challenges for which they require
outsourced services. In competing to deliver those services, large,
well-established professional services firms - such as management
consultancies, systems integrators and advertising agencies - face great
operational and cultural challenges in trying to address the unique
inter-disciplinary requirements of such projects.
By contrast, Primix was at the optimal stage of development by the end
of 1998 to begin to narrow its focus on the e-Business opportunity. Having
made strategic investments in developing the Company's fixed-time /
fixed-price delivery methodology, corporate identity, consulting, and sales
organizations, Primix added executives with deep experience in cross-media
brand development, Web site design, and strategic and business process
consulting to its management team during the first quarter of 1999. This
expertise - added to the Company's established strength in e-Business
consulting, systems integration and solution development - has allowed the
Company to build a balanced approach to strategy, design and technology on a
foundation of technical excellence.
On December 31, 1998, Primix acquired Advis, Inc., a privately held
Boston-based e-Business consulting company, which augmented the depth and
breadth of the Company's capabilities in developing highly advanced systems
architectures that support e-Business solutions. In addition to adding
approximately 25 highly skilled technical consultants, the Advis acquisition
brought valuable existing customer relationships.
Primix now brings together:
o the strategic insight of a management consulting firm,
o the creative talent and graphic design expertise of an advertising agency,
and
o the technical depth of a systems integrator
to help clients define, develop and deploy e-Business solutions that deliver
real business results.
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Market Opportunity
The development of the Internet - a ubiquitous "network of networks" governed by
universally accepted technical standards - presents opportunities and threats to
most businesses.
Companies use the Internet to
o Increase sales, through the development of new channels, new customers,
and new offerings
o Cut costs, by automating business processes, and streamlining flows of
work and information
o Improve productivity, by focusing most valuable assets on most valuable
functions
o Promote loyalty, by changing the economics of customer service
o Establish a competitive advantage, through any of the above.
Forrester Research, Inc., a technology industry research firm, estimates the
market for Internet and electronic commerce services will grow from $5.4 billion
in 1998 to $32.7 billion by 2002. International Data Corp., another technology
industry research firm, forecasts that the market for Internet and electronic
commerce services worldwide will grow from $4.6 billion in 1997 to $43.7 billion
by 2002. These projections represent a compound annual growth rate of more than
55% over these periods. The Company believes organizations are increasingly
searching for a single-source professional services firm that can deliver
integrated strategic, technical and creative design skills coordinated to
deliver Internet-based business solutions.
For this reason, the Company believes that there is a strong demand for
consulting services that help companies to develop e-Business strategies and to
design and implement innovative e-Business solutions that transform key business
processes and provide competitive advantage. The Company further believes that
few companies today have the combination of expertise in e-Business strategy
development, creative design and on-line branding, and complex system
integration required for building such solutions.
Consulting Services Approach
Primix' methodology for managing complex projects within a
fixed-price/fixed-time service model is called Straight-Through Enterprise
Processing, or STEP(TM). The STEP methodology takes into consideration the
business relationships that companies have with internal and external groups and
how these relationships are mediated by e-Business solutions that in turn
integrate with existing ERP and legacy systems. STEP is the product of
investments that the Company has made in both software development and
consulting processes and it guides every aspect of the Company's consulting
engagements.
Primix delivers solutions through a series of incremental, well-defined steps.
Each has clearly identified objectives, processes and deliverables, and each
results in a fixed-price/fixed-time proposal for the next step. This approach
enables both Primix and the client to keep project costs and time under tight
control. STEP(TM) is designed specifically for e-Business. It includes
sophisticated processes for building consensus across inter-departmental teams,
and incorporates input from application users. It addresses the unique technical
requirements of e-Business solutions, such as cross-enterprise design,
development, testing and deployment. STEP also requires that key client IT staff
play a major role in the development process to ensure self-sufficiency after
the solution is complete.
STEP consists of six segments, including the following:
--------------------------------------------------------------------------
STEP Purpose
Strategy Identify and prioritize e-Business opportunities
--------------------------------------------------------------------------
Scope Define specific e-Business solutions
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Design Define detailed technical specifications
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Develop Build and test the solution
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Deploy Launch the solution to its target audience
--------------------------------------------------------------------------
Audit Measure the business results of the solution
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Clients may begin an engagement with Primix in one of three ways within the STEP
methodology, depending on their needs:
o Strategy STEP(TM) -- for clients interested in exploring the relative
value of e-Business opportunities broadly before committing to a specific
solution development initiative;
o Scope STEP(TM) -- for clients wishing to implement a specific e-Business
application;
o QuickStart(TM) -- for clients that seek an e-Commerce solution that
enables them to sell their products over the Web following a standard
search, selection, and payment process.
Strategy STEP
During the Strategy STEP, Primix works with representatives of diverse groups
within the client organization to explore the relative business value of the
entire spectrum of e-Business initiatives. Deliverables of the Strategy STEP
include:
Business Situation Analysis: During the Business Situation Analysis,
Primix works to develop an understanding of the client's business
objectives, market dynamics, competitive landscape, corporate mission and
goals, and near term objectives.
Brand Network Analysis(TM): The Brand Network Analysis looks first to
understand the set of relationships that define the client's business,
within and beyond the boundaries of the traditional organization. Having
identified the client's network of relationships with suppliers,
employees, distribution channels, customers and other key constituents,
Primix examines which relationships are best strengthened, optimized or
extended through e-Business solutions.
Architecture Review: The Architecture Review examines the client's current
IT infrastructure and relevant business processes to develop an
understanding of the environment into which new applications will be
introduced. Primix proposes specific structural, technical, and/or
business process improvements to these core systems that would deliver
positive returns on investment based on a quantitative and qualitative
cost/benefit analysis.
e-Business RoadMap(TM): The e-Business RoadMap is a proprietary tool used
to evaluate the relative business impact and importance of the many types
of applications that fall under the umbrella of e-Business including
Customer Relationship Management, Supply Chain Management, e-Commerce,
Brand Management, and Knowledge Management.
Application Briefs: A maximum of three Application Briefs are developed
that define the business impact, high-level functional and technical
specifications of individual e-Business applications.
The result of the Strategy STEP is a prioritized list of e-Business applications
that will create the most value for the client's business, including detailed
functional and technical descriptions. The Strategy STEP also builds consensus
among cross-functional client team members, and empowers them to secure the
approval of their executive management.
Scope STEP
For clients wishing to proceed with a specific e-Business application, Primix
offers the option of moving directly to the Scope STEP. "Scoping" is the method
by which aspects of an application are explored, defined and agreed upon,
including the following:
o Strategic objectives for the proposed solution
o Initial business case
o Prioritized user requirements
o Creative and design ideas for achieving the desired impact on users
o Preliminary process flows and system architecture
The primary deliverables of the Scope STEP include:
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Project Brief: The Project Brief describes an overall mission for the
project, specific business objectives, the end-user target profile,
desired on-line brand identity, present systems architecture, technical
requirements, and other necessary inputs for the joint Primix/client
development team.
Scope of Work: The Scope of Work document reflects a high-level functional
and technical specification for the project in the context of the client's
present IT architecture. It defines the application for subsequent phases
of the project.
The Scope STEP(TM) ensures that participants from different departments, inside
and outside the client's organization, share a common vision for the business
benefits and functional requirements of the solution. Studies show and Primix
believes that building consensus before solution implementation begins is the
most important element in ensuring project success.
After the completion of the Scope STEP, the following segments of the STEP
methodology guide solution implementation and measure the solution's success.
Design - Having reached consensus on the business objectives of the application
and defined the high level creative and technical ideas that define it, the
Design STEP details specifics of the application and its implementation.
Develop - Next, the solution is built according to its Design and tested to meet
performance and usability requirements.
Deploy - The completed solution is integrated with the client's existing systems
environment. Primix ensures that the solution is stable and providing business
value to the client.
Audit - After a pre-determined period of time has passed after solution
deployment, Primix evaluates its business performance. The Audit deliverable is
a report on performance against the success metrics defined in the Scope phase,
and includes a set of specific recommendations to the client on how to improve
their return on investment. The Audit STEP(TM) is a free service to Primix
customers. It reflects the Company's passion to deliver business results and
commitment to building long-term business relationships.
QuickStart(TM) (STEP Implementation Option)
QuickStart is an implementation option that condenses the segments of the
STEP methodology to produce a customized e-Commerce on-line sales solution
built around an established functional and technical core. Use of a
QuickStart core reduces the time, expense, and risk associated with an
e-Commerce initiative. Through QuickStart, a fully integrated e-Commerce
solution defined during a Scope STEP(TM) is delivered in less than 90-days.
The user interface of the finished solution is completely customized to the
needs of the client's business, target users, and brand identity, and custom
system integration is performed to ensure that selling transactions map to
the client's back-end systems.
The QuickStart approach to e-Commerce solution development provides users with
the ability to search for products from a catalog or hierarchical grouping, fill
up a "shopping basket" of selected items, and pay for products via secure credit
card transaction or existing purchase order. It includes the ability to provide
promotional, preferred customer or volume discounts and to enable on-line
customers to check the status of their orders through standard shipping
companies such as FedEx and United Parcel Service. The solution also provides
administrative controls that enable the client to manage user access, measure
site usage, track buying patterns, and maintain product catalog content.
Primix believes that the STEP methodology will evolve as the Company continues
to refine its process for developing e-Business solutions. Primix further
believes that few service companies are capable of delivering e-Business
solutions that incorporate strategy, creative design and on-line branding, and
complex system integration and that, consequently, there is no commonly accepted
business model for doing so. Primix believes that to be successful, it will need
to create innovative business practices that facilitate collaboration with
client organizations and partners through all phases of the development cycle.
Strategic Relationships
To reach a broad potential customer base, the Company believes that it must
develop partnerships with software and hardware vendors, and complementary
consulting services companies. Software and hardware vendors that advance the
objectives of Primix customers include those that provide e-Business
infrastructures, development tools, platforms and applications. Increasingly,
packaged software applications are emerging that address client needs for
standard e-Business processes. Primix intends to partner with these vendors, as
appropriate, to deliver solutions efficiently and cost effectively
5
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to its clients. Consulting partners that fit with Primix' partnering strategy
are those that either provide strategic consulting services but not
implementation services, or services that do not overlap with Primix services.
Many consulting firms, hardware vendors and software vendors currently offer
e-Business solutions and therefore the Company believes that even partners may
be competitors at times, depending on the circumstance. This duality of partner
relationships is common in the high technology field.
Competition
The market for consulting is intensely competitive. Primix expects competition
to persist and intensify in the future. Primix has experienced and expects to
continue to experience increased competition from current and future
competitors, many of whom have significantly greater financial, technical,
marketing resources, name recognition and customer base. Primix's current and
potential competitors include, among others: consulting divisions of leading
software system providers and hardware manufacturers; solution services
companies; and software vendors whose packaged applications can be used or
customized to support e-Business processes.
Primix's competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or devote greater resources to
the promotion and sale of their consulting services than the Company. Also, the
Company's current and potential competitors generally have greater financial or
management resources, name recognition, or more extensive customer bases that
could be leveraged, thereby potentially limiting Primix's market share. Primix
expects to face additional competition as other established and emerging firms
enter the market for customized e-Business system integration services.
Increased competition could result in price reductions, fewer consulting
engagements, reduced gross margins and loss of market share, any of which could
materially and adversely affect the Company's business, operating results and
financial condition. In addition, current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with third parties, thereby increasing the ability to address the needs of
Primix's prospective customers. Such competition could materially and adversely
affect Primix's ability to obtain and retain support for its services. There can
be no assurance that Primix will be able to compete successfully against current
and future competitors, and the failure to do so could have a material adverse
effect upon the Company's business, operating results and financial condition.
The principal factors affecting the market for Primix's services are expertise
in vertical market and horizontal process strategies, creative design and
on-line branding capabilities, system integration and implementation skills,
price, customer support, and project management. The failure to compete
successfully could have a material adverse effect upon the Company's business,
operating results and financial condition.
Research and Development
Historically, the Company has made substantial investments in product
development and technology integration. The Company believes that its investment
in developing proprietary technology has resulted in considerable expertise in
software development methodologies, back-end integration techniques, and
Internet application development tools, as well as the intrinsic value of the
technology itself. This expertise serves to differentiate Primix from other
companies offering solution services. The Company's expenditures for research
and development of its former software products during 1996, 1997 and 1998 were
$3,529,000, $2,167,000 and $424,000, respectively.
Proprietary Rights
Primix relies on a combination of trademark, copyright and trade secret laws,
employee and third-party nondisclosure agreements and other means to protect
its proprietary rights in its technology and intellectual property. The
Company has filed applications for registration of its various trademarks.
There can be no assurance that any trademark or patent applications will
result in registered trademarks or issued patents or that, if issued, such
trademarks or patents would be upheld if challenged.
There can be no assurance that the Company's competitors will not independently
develop technologies or methodologies that are substantially equivalent or
superior to the Company's technology or methodologies, or that the measures
taken by the Company to protect its proprietary rights will be adequate to
prevent misappropriation of its technology or methodologies or independent
development by others of similar technology or methodologies. In addition, the
laws of various countries in which the Company's services may be sold may not
protect the Company's intellectual property rights to the same extent as the
laws of the United States.
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There can be no assurance that third parties will not assert intellectual
property infringement claims against the Company or that any such claims will
not require the Company to enter into royalty arrangements or result in costly
litigation. The Company is not the subject of any legal action alleging the
infringement of any copyright or trademark rights of any person or of any
violation of trade secrets or other proprietary rights claimed by any third
party relating to the Company or the Company's technology or methodologies, nor
is the Company aware of any threatened litigation with regard thereto. However,
the computer software market is characterized by frequent and substantial
intellectual property litigation. Intellectual property litigation is complex
and expensive, and the outcome of such litigation is difficult to predict.
The Company believes that, due to the rapid pace of technological innovation,
its ability to establish and maintain a position of leadership in the industry
is dependent more upon the skills of its consulting and development personnel
than upon the legal protections afforded to its existing technology and
methodology.
Employees
As of March 18, 1999, Primix had a total of 90 employees. The Company's
future success depends in significant part upon the continued service of its key
technical, consulting, and senior management personnel, and its continuing
ability to attract and retain highly qualified technical, services, and
managerial personnel. Competition for highly qualified personnel is intense, and
there can be no assurance that the Company will be able to retain its technical
and managerial employees or that it will be able to attract and retain such
personnel in the future. None of the Company's employees is represented by a
labor union. The Company has not experienced any work stoppages and considers
its relations with its employees to be generally good.
In order for Primix to fully exploit the market opportunity for its
services, an effective planning and management process is required. The
industry's rapid rate of change has placed, and is expected to continue to
place, a significant strain on managerial, operational and financial resources.
Many of the Company's consulting staff were only recently hired. To manage
potential future growth, Primix must continue to implement and improve its
operational and financial systems and to expand, train and manage its employee
base. The Company's future operating results also will depend on its ability to
expand and train its sales and marketing organizations and implement and manage
new distribution channels to penetrate different and broader markets. Currently
the Company has only six sales personnel. If Primix is unable to manage growth
effectively, the Company's business, operating results and financial condition
could be materially adversely affected.
ITEM 2. PROPERTIES
The Company leases approximately 26,000 square feet of office space in
Watertown, Massachusetts under a five-year lease agreement which commenced in
March 1996. Depending on its future growth, if any, the Company may need to
expand its existing facilities or obtain additional space prior to the end of
1999. Management believes that adequate facilities for expansion will be
available, if necessary, at competitive rates.
The Company leased a satellite office during August of 1998 in Morristown,
New Jersey which extends through August 1999.
In connection with the Advis acquisition, the Company assumed two leases
for office space in Boston, Massachusetts which expire August 2002. The Company
currently subleases one of the locations through May of 1999. The Company has
not yet finalized its plans with respect to the use of this space. In the event
the Watertown office can not accommodate the Company's growth during 1999, this
space should provide adequate resources to accommodate such growth.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its operations, the Company is subject to
performance under contracts and has certain legal actions and contingencies
pending. However, in management's opinion, no such outstanding matters should
have a material adverse effect on the Company's financial position, results
of operations or cash flows.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders through solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company's Common Stock, $.001 par value ("Common Stock"), has been
traded on the NASDAQ National Market ("Nasdaq") since the Company's initial
public offering on July 3, 1996 and currently trades under the symbol "PMIX."
The following table sets forth the high and low of the closing bid prices for
the Company's Common Stock as reported by Nasdaq for the periods indicated:
Market Prices(1)
----------------------------
1997 Fiscal Quarters High Low
- -------------------------------- ---- ---
First ............................ $8.88 $1.94
Second ........................... $2.69 $1.63
Third ............................ $3.06 $2.44
Fourth ........................... $2.88 $1.56
Market Prices(1)
----------------------------
1998 Fiscal Quarters High Low
- -------------------------------- ---- ---
First ............................ $2.75 $1.09
Second ........................... $4.78 $2.19
Third ............................ $3.09 $1.75
Fourth ........................... $2.38 $1.38
- ----------
(1) The prices listed reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
Holders
The number of record holders of the Company's Common Stock as of March 18,
1999 was approximately 129.
Dividends
The Company did not pay cash dividends on its Common Stock during the
years ended December 31, 1998 and December 31, 1997. The Company does not intend
to pay cash dividends on its Common Stock in the foreseeable future.
Recent Sales of Unregistered Securities
In connection with the acquisition of Advis, Inc., a Boston-based
e-Business consulting company, on December 31, 1998, the Company issued
171,000 shares of Common Stock to David W. Buck, the sole stockholder of
Advis. Such shares were valued at $1.875 per share, the fair market value of
the Common Stock on such date. Such shares were issued pursuant to Section
4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D
promulgated thereunder. See Note 2 to the financial statements.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Financial Statements of the Company, including the
Notes thereto, included elsewhere in this Annual Report. The consolidated
statements of operations data set forth below for the fiscal years ended
December 31, 1996, 1997 and 1998, and the consolidated balance sheet data as
of December 31, 1997 and 1998, are derived from the Company's audited
financial statements which have been audited by Arthur Andersen LLP,
independent public accountants, and which are included elsewhere in this
report. The consolidated statements of operations data for the period from
inception (January 19, 1994) to December 31, 1994 and for the year ended
December 31, 1995, as well as the consolidated balance sheet data as of
December 31, 1994, 1995, and 1996 are derived from audited consolidated
financial statements not included in this Annual Report on Form 10-K. The
historical results may not be indicative of the results of operations to be
expected in the future.
<TABLE>
<CAPTION>
January 19 ,1994 Year Ended Year Ended Year Ended Year Ended
(inception) to December 31, December 31, December 31, December 31,
December 31, 1994 1995 1996 1997 1998
----------------- ---- ---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Consulting and education services .... $ -- $ 3,919 $ 5,098 $ 4,399 $ 4,605
Software license and maintenance ..... -- 2,151 8,106 1,248 211
------- ------- -------- -------- --------
Total revenues ................. -- 6,070 13,204 5,647 4,816
Cost of Revenues:
Consulting and education services .... -- 2,684 4,001 4,494 5,145
Software license and maintenance ..... -- 717 1,517 638 45
------- ------- -------- -------- --------
Total cost of revenues ......... -- 3,401 5,518 5,132 5,190
Gross profit (loss) ............ -- 2,669 7,686 515 (374)
Operating Expenses:
Selling, general and administrative .. 286 2,108 10,565 5,845 5,026
Research and development ............. 894 3,182 3,529 2,167 424
Restructuring charge ................. -- -- -- 1,782 --
Compensation to former chief executive
officer ........................... -- -- 6,794 227 --
------- ------- -------- -------- --------
Total operating expenses ....... 1,180 5,290 20,888 10,021 5,450
------- ------- -------- -------- --------
Operating loss ................. (1,180) (2,621) (13,202) (9,506) (5,824)
Interest (Expense) Income, net ............. -- (77) 953 1,885 1,622
------- ------- -------- -------- --------
Loss before provision for income taxes (1,180) (2,698) (12,249) (7,621) (4,202)
Provision for Income Taxes ................. -- -- 95 15 --
------- ------- -------- -------- --------
Net loss ............................. $(1,180) $(2,698) $(12,344) $ (7,636) $ (4,202)
======= ======= ======== ======== ========
Basic and Diluted Net Loss per Common
Share .................................. $ (.15) $ (.28) $ (1.03) $ (.52) $ (.29)
======= ======= ======== ======== ========
Shares Used in Computing Net Loss per
Common Share ............................ 7,933 9,492 12,560 14,560 14,398
======= ======= ======== ======== ========
<CAPTION>
December31,
------------------------------------------------------------------
1994 1995 1996 1997 1998(1)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable
securities ....................... $-- $ 105 $40,050 $33,713 $26,693
Working capital (deficit) ........... (932) (1,967) 36,471 31,836 26,511
Total assets ........................ 63 2,626 46,151 36,266 33,155
Stockholders' equity (deficit) ...... (868) (2,804) 39,737 33,405 29,617
</TABLE>
(1) The Company acquired Advis, Inc. on December 31, 1998. Accordingly,
amounts are not comparable to prior years reported herein. The total
consideration consisted of: 171,000 shares of the Company's common
stock, which was valued at $1.875 per share, the fair market value of
the stock, a note payable of $203,748 paid in January 1999 and the
assumption of $1,593,536 of net liabilities. Included in the net
liabilities are accounts receivable of $637,805, prepaid expenses and
other current assets of $38,899 and computer and office equipment of
$55,816. In December 1998, the Company advanced Advis $1,543,174 to
satisfy certain obligations. This advance is included in the net
liabilities acquired. See Note 2 of the Consolidated Financial
Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview:
The Company was incorporated in January 1994. Since its inception, Primix
has helped organizations build applications that integrate and extend disparate
information systems. In the past, Primix focused on developing and marketing its
application development products, along with implementation services.
During 1997, there was a change in control of the Company. Avix Ventures,
L.P. ("Avix") purchased a majority interest in the Company from a group of the
Company's principal shareholders. Two senior executives resigned, and Lennart
Mengwall, a principal at Avix with 30 years of experience in the information
technology industry, was thereafter appointed the new Chairman and,
subsequently, Chief Executive Officer of the Company. New management immediately
undertook a comprehensive review of the Company's strategy and operations. As a
result of this review, the Company took steps to reduce expenses, including
reducing Primix's workforce by approximately 39%. At the same time, the Company
was re-organized into two distinct business units: the Consulting Services Group
(CSG) and the Software Products Group (SPG). The Company believed that a
re-organization into two separate business units would allow each business to
focus on its core competencies.
During the first quarter of 1998, the Company unified its software
products and consulting services business units into a single consulting
services organization focused on delivering "e-Business" solutions. E-Business
encompasses a wide variety of business processes in which Internet technologies
are used to more effectively manage relationships between customers, vendors,
suppliers, distributors and employees, and thereby increase sales, reduce costs,
improve productivity and/or promote customer loyalty.
Companies wishing to leverage the potential of e-Business often face a
mix of strategic, technical, and creative challenges for which they require
outsourced services. In competing to deliver those services, large,
well-established professional services firms - such as management
consultancies, systems integrators and advertising agencies - face great
operational and cultural challenges in trying to address the unique
inter-disciplinary requirements of such projects.
By contrast, Primix was at the optimal stage of development by the end
of 1998 to begin to narrow its focus on the e-Business opportunity. Having
made strategic investments in developing the Company's fixed-time /
fixed-price delivery methodology, corporate identity, consulting, and sales
organizations, Primix added executives with deep experience in cross-media
brand development, Web site design, and strategic and business process
consulting to its management team during the first quarter of 1999. This
expertise which added to the Company's established strength in e-Business
consulting, systems integration and solution development, has allowed the
Company to build a balanced approach to strategy, design and technology on a
foundation of technical excellence.
On December 31, 1998, Primix acquired Advis, Inc., a privately held
Boston-based e-Business consulting company, which augmented the depth and
breadth of the Company's capabilities in developing highly advanced systems
architectures that support e-Business solutions. In addition to adding
approximately 25 highly skilled technical consultants, the Advis acquisition
brought valuable existing customer relationships.
Primix now brings together:
o the strategic insight of a management consulting firm
o the creative talent and graphic design expertise of an advertising agency,
and
o the technical depth of a systems integrator
to help clients define, develop and deploy e-Business solutions that deliver
real business results.
As a result of the Company's significant transition during 1998,
management can not currently anticipate future revenue levels. However,
management does anticipate incurring significant expenses as the Company
continues to grow its sales, creative, strategy and consulting staff.
11
<PAGE>
The Company has a limited operating history upon which to base an
evaluation of the Company and its prospects. The Company and its prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in early stages of development, particularly companies
in new and rapidly evolving markets and technologies. To address these risks,
the Company must, among other things, grow the consulting business, respond to
competitive developments, successfully adjust the Company's strategy to changes
in the marketplace, identify channels for the Company's services, continue to
attract, retain and motivate qualified management and other employees, and
remain knowledgeable with new and emerging technologies. There can be no
assurance that the Company will be successful in addressing such risks. The
Company has achieved only limited revenues to date and its ability to generate
significant revenues is subject to substantial uncertainty. The limited
operating history of the Company makes the prediction of future results of
operations difficult and therefore, there can be no assurance that the Company
will sustain revenue growth or achieve profitability. The Company has incurred
net losses since inception and expects to continue to incur losses on a
quarterly basis for the foreseeable future. Due to all of the foregoing factors,
it is possible that in some future quarter, the Company's operating results may
be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock may be materially adversely
affected.
Results of Operations:
The following table sets forth certain operational data as a percentage of
total revenues for the years ended December 31, 1996, 1997, and 1998:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
Consulting and education services ............ 39% 78% 96%
Software license and maintenance ............. 61 22 4
---- ---- ----
Total revenues ......................... 100 100 100
Cost of Revenues:
Consulting and education services ............ 30 80 107
Software license and maintenance ............. 12 11 1
---- ---- ----
Total cost of revenues ................. 42 91 108
Gross profit (loss) .................... 58 9 (8)
Operating Expenses:
Selling, general and administrative .......... 80 104 104
Research and development ..................... 26 38 9
Restructuring charge ......................... -- 32 --
Compensation to former chief executive officer 51 4 --
---- ---- ----
Total operating expenses ............... 157 177 113
Operating loss ......................... (99) (168) (121)
Interest (Expense)/Income, net ..................... 7 33 34
---- ---- ----
Loss before provision for income taxes ....... (92) (135) (87)
Provision for Income Taxes ......................... 1 -- --
---- ---- ----
Net loss ..................................... (93)% (135)% (87)%
==== ==== ====
</TABLE>
1998 Compared to 1997
Revenues:
Total revenues decreased by $831,000 to $4,816,000 in 1998 from $5,647,000
in 1997. The decrease was due to decreases in the volume of sales of the
Company's software products, offset by an increase in consulting revenue. For
the fiscal year ended December 31, 1998, software license and maintenance
revenues represented 4% of total revenues with the remaining 96% derived from
consulting and education services, compared with 22% and 78%, respectively, for
the comparable prior year.
In early 1998, the Company made a decision to unify its two business units
into a single consulting services organization focused on delivering business
and information technology solutions on a fixed-price/fixed-time basis. As a
result, the Company will not market its stand alone software product offerings.
Accordingly, the Company does not
12
<PAGE>
anticipate future revenues to be generated from software product sales. The
Company believes that this focus will allow Primix to more effectively leverage
its core competencies to deliver maximum value to its customers. The Company's
management can not currently anticipate revenue levels for the business. The
Company had no re-sales of third-party software license and maintenance revenues
in 1998, compared to $121,000 in 1997.
Gross Loss:
Total gross loss decreased by $889,000 to a gross loss of
$374,000 in 1998 from gross profit of $515,000 in 1997. The cost of
consulting and education services consists primarily of consulting and
education personnel salaries, related costs and fees to third-party service
providers. For the year ended December 31, 1998, total gross margin decreased
to a gross loss percentage of 8% of total revenues from a gross margin of 9%
of total revenues for the prior year. The gross loss percentage for
consulting and education services revenues in 1998 was 12% and the gross
margin for software license and maintenance revenues was 79%, compared with a
gross loss percentage of 2% and a gross margin of 49%, respectively, for the
prior year. The decrease in total gross margin from the prior year is
primarily attributable to a decrease in software revenues as a percentage of
total revenues, since software revenues have higher profit margins. The
decrease in gross loss percentage for consulting and education services
revenue compared to the prior year is attributable to increased salary, wage
and benefit costs associated with an increase in the average number of
consultants from 1997 to 1998. Management can not currently anticipate gross
profit levels for 1999 as the Company has recently modified its business
strategy.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses consist primarily of
payroll costs related to executive management, finance, administration, sales
and marketing personnel, and costs for advertising, marketing and related
administrative support. Selling, general and administrative expenses
decreased to $5,026,000 for the year ended December 31, 1998 from $5,845,000
for the prior year, representing 104% of total revenues for each year. The
decrease in expenses is directly related the reduction of salary, wages and
benefit costs associated with a reduction of the headcount of the selling,
general and administrative group.
Research and Development Expenses:
Research and development expenses decreased to $424,000 for the
year ended December 31, 1998 from $2,167,000 for the prior year, representing
9% and 38% of total revenues, respectively. The decrease from 1997 to 1998
was the result of the Company's change in focus at the end of the first
quarter 1998, which resulted in the Company discontinuing its research and
development efforts. As a result of the Company's shift in focus during 1998,
the Company does not anticipate significant expenses associated with the
research and development efforts associated with the Company's former
software product offerings.
Interest Income, Net:
For the year ended December 31, 1998, the Company recorded net
interest income of $1,622,000. The interest income is derived from interest
earned on the unused net proceeds received by the Company from its initial
public offering in July 1996. For the year ended December 31, 1997, the Company
recorded net interest income of $1,885,000. Interest income decreased from 1997
to 1998 as a result of the Company's declining cash and investment balances.
1997 Compared to 1996
Revenues:
Total revenues decreased by $7,557,000 to $5,647,000 in 1997 from
$13,204,000 in 1996. The decrease was due primarily to decreases in the volume
of sales of the Company's software products. For the fiscal year ended December
31, 1997, software license and maintenance revenues represented 22% of total
revenues with the remaining 78% derived from consulting and education services,
compared with 61% and 39%, respectively, for the comparable prior year. In early
1997, the Company changed its direct sales strategy to a solutions-based model
due to the failure to obtain repeatable software product sales. The Company's
revenues were negatively impacted as the Company transitioned to this new model.
During the second quarter of 1997, a change in the Company's senior executive
management combined with the departure of two senior executives and a reduction
in force caused the Company to again evaluate its approach to selling its
products and services. As a result, the Company separated into two business
units, the Software Products Group and
13
<PAGE>
the Consulting Services Group. During the second half of 1997, the two business
units focused on developing their individual core competencies. The Company's
revenues remained relatively flat through each quarter of 1997. The resale of
third-party software license and maintenance revenues decreased by $1,639,000 to
$121,000 in 1997 from $1,760,000 in 1996.
Gross Profit:
Total gross profit decreased by $7,170,000 to $515,000 in 1997 from
$7,685,000 in 1996. The cost of software license and maintenance revenues
consists of the cost of software and maintenance purchased for resale from a
third-party vendor, distribution costs and product support costs. See Note
4(b) of the Notes to the Consolidated Financial Statements. The cost of
consulting and education services consists primarily of consulting and
education personnel salaries, related costs and fees to third-party service
providers. For the year ended December 31, 1997, total gross margin decreased
to 9% of total revenues from 58% of total revenues for the prior year. The
gross margin for software license and maintenance revenues in 1997 was 49%
and the gross loss percentage for consulting and education services revenues
was 2%, compared with 81% and 22%, respectively, for the prior year. The
decrease in total gross margin from the prior year is primarily attributable
to a decrease in software revenues as a percentage of total revenues, since
software revenues have higher profit margins. The decrease in gross margin
for software license and maintenance revenues compared to the prior year is
attributable to the higher levels of fixed cost of facilities and equipment
as a percentage of software license and maintenance revenues. The decrease in
gross margin for consulting and education services from the prior year is
attributable to an increase in fixed costs of facilities and equipment
allocated to the consulting group and the cost associated with the continued
use of third-party service providers as a percentage of consulting and
education services revenues.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses consist primarily of payroll
costs related to executive management, finance, administration, sales and
marketing personnel, and costs for advertising, marketing and related
administrative support. Selling, general and administrative expenses decreased
to $5,845,000 for the year ended December 31, 1997 from $10,565,000 for the
comparable prior year, representing 104% and 80% of total revenues of such
years, respectively. The decrease of $4,720,000 in 1997 from 1996 reflects the
Company's reduced headcount as a result of the Company's restructuring plan
implemented during 1997.
Research and Development Expenses:
Research and development expenses primarily consist of payroll-related
costs, fees to independent contractors and purchases of technology. To date, the
Company has expensed all internal software development costs as incurred.
Research and development expenses decreased to $2,167,000 for the year ended
December 31, 1997 from $3,529,000 for the comparable prior year, representing
38% and 26% of total revenues, respectively. The decrease in research and
development expenses is attributable to the decrease in headcount as a result of
the Company's execution of its restructuring plan during 1997.
Restructuring Charge:
On June 9, 1997, the Company announced that it had implemented a plan (the
"Restructuring Plan") to restructure the Company's operations. The Restructuring
Plan included write-offs and write-downs of certain assets and included accruing
the costs related to a significant reduction in the Company's work force. The
implementation of the Restructuring Plan resulted in a one time charge of
$1,782,000. See Note 1(k) of Notes to the Consolidated Financial Statements.
Compensation to Former Chief Executive Officer:
In connection with the 960,000 shares of Common Stock purchased by the
Company's former Chief Executive Officer (the "Former CEO") in 1996 (see Note 7
of Notes to the Consolidated Financial Statements), the Company agreed
14
<PAGE>
to loan the Former CEO up to $2,560,000 for payment of his anticipated income
tax liability resulting from such purchase. The Company funded $2,507,000 under
the loan agreement in April 1997. The loan was secured by a first priority
pledge of the purchased shares. In June 1997, the Former CEO surrendered the
purchased shares in satisfaction of the loan. For the three months ended June
30, 1997, the Company has recorded an expense of $227,000 to reflect the
difference between the amount of the loan and the market value of the shares
surrendered to the Company. The Company has classified the shares acquired as
treasury stock with an initial carrying value of $2,280,000.
Interest Income, Net:
For the year ended December 31, 1997, the Company recorded net interest
income of $1,885,000. The interest income is derived from interest earned on the
unused net proceeds received by the Company from its initial public offering in
July 1996. For the year ended December 31, 1996, the Company recorded net
interest income of $953,000.
Liquidity and Capital Resources:
In July 1996, the Company completed its initial public offering ("IPO") of
3,750,000 shares of its Common Stock, of which 3,000,000 shares were sold by the
Company and 750,000 shares were sold by certain of the Company's stockholders.
The public offering price was $16.00 per share and the net proceeds to the
Company were approximately $43,256,000, net of underwriting discounts,
commissions and other offering costs. Upon the consummation of the IPO, all
outstanding shares of the Company's preferred stock were automatically converted
into Common Stock. The Company used a portion of the proceeds for the repayment
of a $2,000,000 note payable to a bank.
The Company's operating activities utilized cash and cash equivalents of
approximately $5,267,000 for the year ended December 31, 1998.
The Company's investing activities provided cash and cash equivalents
of approximately $21,062,000 for the year ended December 31, 1998. The net
maturity of short-term marketable securities provided cash and cash
equivalents of $22,908,000. The cash provided through the net maturity of
short-term marketable securities was offset by uses of cash from the funding
of a loan to an officer of the Company, cash outflows associated with the
acquisition of Advis, Inc. and purchases of property and equipment.
The Company's financing activities provided cash and cash equivalents
of approximately $93,000 for the year ended December 31, 1998, from the
exercise of stock options and purchases made under the employee stock
purchase plan.
The Company currently anticipates that the existing cash, cash equivalents
and marketable securities balances will be sufficient to meet its anticipated
working capital and capital expenditure requirements for at least the next
twelve months. Thereafter, the Company may need to raise additional funds. The
Company may in the future seek to expand its business through possible
acquisitions. The Company, however, has no commitments or agreements with
respect to any future acquisition and no assurances can be given with respect to
the likelihood or financial or business effect, of any future acquisition.
Future acquisitions could be financed by internally generated funds, bank
borrowings, public offerings or private placements of equity or debt securities,
or a combination of the foregoing. There can be no assurance that additional
financing will be available when needed on terms favorable to the Company or at
all.
Inflation
The Company does not believe that its financial performance has been or
will be materially affected by inflation.
Year 2000 Readiness:
The following statements under this section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
Historically, certain computer programs have been written using two digits
rather than four digits, to identify the applicable year. This could lead, in
many cases, to a computer's recognition of a date using "00" as 1900 rather than
the year 2000. This phenomenon could result in significant computer system
failures or miscalculations, and is generally referred to as the "Year 2000"
problem or issue.
The Company is currently in the process of assessing its exposure from the
Year 2000 problem, and has established a response to that exposure. Generally,
the Company has Year 2000 exposure in the following areas: (i) financial and
15
<PAGE>
management operating computer systems used to manage the Company's business,
(ii) microprocessors and other equipment used by the Company ("embedded chips")
and (iii) computer systems used by third parties; in particular financial
institutions, vendors and suppliers of the Company.
As of December 31, 1998, the Company completed an inventory of its
financial and management operating systems and made a preliminary
determination of which programs were or were not Year 2000 compliant. Prior
to June 30, 1999, the Company intends to test each significant program which
is believed to be Year 2000 compliant and to remediate all significant
programs that are not Year 2000 compliant. In some cases, Year 2000 issues
will be corrected in the development of new programs, which enhance or
provide new functionality to these financial and management operating
systems. While the Company has not undertaken any independent verification
and review, the Company estimates that the incremental cost of this
remediation effort should not exceed $30,000, including capital cost for new
computers and related equipment. This amount does not include costs for
computer software developed in order to provide or improve functionality. The
Company expects to substantially complete Year 2000 testing and remediation
on its financial and management operating systems by June 30, 1999.
The Company has begun an inventory and assessment of its exposure to
embedded chips in its facilities or equipment used in those facilities and
capability of the vendors of such equipment to successfully remediate Year 2000
problems in equipment with embedded chips.
The Company began in the fourth quarter of 1998 to interview third
parties, vendors and suppliers of the Company to determine their exposure to
Year 2000 issues, their anticipated risks and responses to those risks.
If the Company is unsuccessful in completing remediation of non-compliant
systems, correcting embedded chips and vendors or suppliers cannot rectify Year
2000 issues, the Company could incur additional costs. The cost to develop
alternative methods of managing its business and replacing non-compliant
equipment may be substantial. The Company is in the process of establishing a
contingency plan in the event of noncompliance by its vendors and suppliers and
expects to complete this contingency plan by June 30, 1999.
The preceding "Year 2000 Readiness Disclosure" contains various
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Section 27A Securities Act of 1933. These
forward-looking statements represent the Company's beliefs or expectations
regarding future events. When used in the "Year 2000 Readiness Disclosure," the
words "believes," "expects," "estimates" and similar expressions are intended to
identify forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it will complete the
modification and testing phases of its Year 2000 project plan as well as its
Year 2000 contingency plans; and its estimated cost of achieving Year 2000
readiness. All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from the
projected results. Factors that may cause these differences include, but are not
limited to, the availability of qualified personnel and other information
technology resources; the ability to identify and remediate all date sensitive
lines of computer code or to replace embedded computer chips in affected systems
or equipment; and the actions of governmental agencies or other third parties
with respect to Year 2000 problems.
Certain Factors That May Affect Future Results
Statements made or incorporated into this Form 10-K include a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward
looking statements include, without limitation, statements containing the words
"anticipates," "believes," "expects," "intends," "future," and words of similar
import which express management's beliefs, expectations or intentions regarding
the Company's future performance. The Company's actual results could differ
materially from its historical results and from those set forth in the
forward-looking statements and may fluctuate between operating periods. Factors
that might cause such differences and fluctuations include the following: the
Company's ability to efficiently consolidate the operations of its newly
acquired subsidiary, Advis, Inc., the success of the Company's new business
strategy, the Company's ability to retain its sales and consulting staff, the
Company's ability to close sales, risks related to the management of growth, the
Company's ability to attract, train and retain qualified personnel, development
and promotional expenses related to the introduction of new service offerings,
changes in technology and industry standards, limited operating history, changes
in the market for the Company's services, the rate of acceptance of the
Company's services, dependence of the Company's business on the Internet,
increased competition, changing of pricing policies by the Company or its
competitors, the timing of receipt of orders from major customers, development
of Internet and
16
<PAGE>
Intranet products or enhancements by vendors of existing client/server or legacy
software systems that compete with the Company's consulting services, dependence
on key personnel, proprietary technology and the inherent difficulties in
protecting intellectual property, dependence on third-party technology, and
exposure for product and professional services liability. The market price of
the Company's Common Stock has been, and in the future will likely be, subject
to significant fluctuations in response to variations in quarterly operating
results and other factors, such as announcements of technological innovations or
new products by the Company or its competitors, or other events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company owns financial instruments that are sensitive to market
risks as part of its investment portfolio. The investment portfolio is used
to preserve the Company's capital until it is required to fund operations.
All of these market-risk sensitive instruments are classified as
held-to-maturity and are not held for trading purposes. The Company does not
own derivative financial instruments in its investment portfolio. The
investment portfolio contains instruments that are subject to the risk of a
decline in interest rates.
Interest Rate Risk--The Company's investment portfolio includes
investment grade debt instruments. These bonds are subject to interest rate
risk, and could decline in value if interest rates fluctuate. Due to the
short duration and conservative nature of these instruments, the Company does
not believe that it has a material exposure to interest rate risk.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Primix Solutions Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants ............................. 19
Consolidated Balance Sheets as of December 31, 1997 and 1998 ......... 20
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 ................................... 21
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the Years Ended
December 31, 1996, 1997 and 1998 ................................... 22
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1997 and 1998 ....................... 23
Notes to Consolidated Financial Statements ........................... 24
18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Primix Solutions Inc.:
We have audited the accompanying consolidated balance sheets of Primix
Solutions Inc. (formerly OneWave, Inc.) (a Delaware corporation) as of December
31, 1997 and 1998, and the related consolidated statements of operations,
redeemable convertible preferred stock and stockholders' equity (deficit) and
cash flows for the years ended December 31, 1996, 1997 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Primix
Solutions Inc. as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for the years ended December 31, 1996, 1997 and
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 18, 1999
19
<PAGE>
Primix Solutions Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1998
------------ ------------
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 1) .............................. $ 10,804,064 $ 26,692,678
Marketable securities (Note 1) .................................. 22,908,833 --
Accounts receivable, less reserve of $50,000 and $92,000 at
December 31, 1997 and 1998, respectively ..................... 783,471 2,871,225
Prepaid expenses and other current assets ....................... 201,298 443,054
------------ ------------
Total current assets ...................................... 34,697,666 30,006,957
------------ ------------
Property and Equipment, at cost (Note 1):
Computer and office equipment ................................... 2,309,907 2,431,586
Furniture and fixtures .......................................... 480,599 488,374
Leasehold improvements .......................................... 59,964 59,964
------------ ------------
2,850,470 2,979,924
Less--Accumulated depreciation and amortization ................. 1,281,924 2,159,363
------------ ------------
Net property and equipment ................................ 1,568,546 820,561
------------ ------------
Other Assets:
Goodwill (Note 1) ............................................... -- 2,177,809
Notes receivable from related party (Note 5) .................... -- 150,000
------------ ------------
Total other assets ........................................ -- 2,327,809
------------ ------------
Total assets .............................................. $ 36,266,212 $ 33,155,327
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of capital lease obligation (Note 7) ............ $ -- $ 82,643
Accounts payable ................................................ 799,856 964,839
Accrued expenses ................................................ 1,570,275 2,161,597
Note payable to related party (Note 1) .......................... -- 203,748
Deferred revenue (Note 1) ....................................... 490,819 83,628
------------ ------------
Total current liabilities ................................. 2,860,950 3,496,455
------------ ------------
Capital lease obligation, net of current portion (Note 7) ............. -- 41,821
------------ ------------
Total liabilities ......................................... 2,860,950 3,538,276
------------ ------------
Commitments (Note 7)
Stockholders' Equity (Note 2):
Preferred stock, $1.00 par value--
Authorized--5,000,000 shares
Issued--no shares ......................................... -- --
Common stock, $.001 par value
Authorized 50,000,000 shares
Issued 15,068,164 and 15,239,164 shares at December 31,
1997 and 1998, respectively ............................... 15,069 15,240
Additional paid-in capital ...................................... 58,906,123 59,179,890
Treasury stock (Note 2) ......................................... (1,656,676) (1,516,556)
Accumulated deficit ............................................. (23,859,254) (28,061,523)
------------ ------------
Total stockholders' equity ................................ 33,405,262 29,617,051
============ ============
Total liabilities and stockholders' equity ................ $ 36,266,212 $ 33,155,327
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
20
<PAGE>
Primix Solutions Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues (Note 1):
Consulting and education services ..................... $ 5,098,402 $ 4,399,267 $ 4,605,116
Software license and maintenance ...................... 8,106,049 1,247,942 210,921
------------ ------------ ------------
Total revenues .................................. 13,204,451 5,647,209 4,816,037
------------ ------------ ------------
Cost of Revenues (Note 1):
Consulting and education services ..................... 4,001,376 4,494,000 5,145,104
Software license and maintenance ...................... 1,517,532 637,882 44,926
------------ ------------ ------------
Total cost of revenues .......................... 5,518,908 5,131,882 5,190,030
------------ ------------ ------------
Gross profit (loss) ............................. 7,685,543 515,327 (373,993)
------------ ------------ ------------
Operating Expenses:
Selling, general and administrative ................... 10,564,948 5,844,454 5,026,308
Research and development (Note 1) ..................... 3,528,799 2,167,334 424,123
Restructuring charge (Note 1) ......................... -- 1,782,298 --
Compensation to former chief executive officer (Note 8) 6,793,696 227,472 --
------------ ------------ ------------
Total operating expenses ........................ 20,887,443 10,021,558 5,450,431
------------ ------------ ------------
Operating loss .................................. (13,201,900) (9,506,231) (5,824,424)
Interest Income, net ........................................ 953,284 1,884,584 1,622,155
------------ ------------ ------------
Loss before provision for income taxes .......... (12,248,616) (7,621,647) (4,202,269)
Provision for Income Taxes .................................. 95,331 14,936 --
------------ ------------ ------------
Net loss ........................................ $(12,343,947) $ (7,636,583) $ (4,202,269)
============ ============ ============
Basic and Diluted Net Loss per Common Share (Note 1) ........ $ (1.03) $ (.52) $ (.29)
============ ============ ============
Shares Used in Computing Net Loss per Common Share .......... 12,560,185 14,560,222 14,397,873
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
21
<PAGE>
Primix Solutions Inc.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
------------------------------
Redeemable
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
--------------------- ---------------------- ---------------
Number Number Number
of Carrying of $1.00 of
Shares Value Shares Par Value Shares
------ ----- ------ --------- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ............................... -- -- -- -- 10,803,030
Issuance of Series B redeemable convertible
preferred stock at $5.54 per share, net of issuance
costs of $600,000 ..................................... 1,332,127 7,379,984 -- -- --
Compensation expense to former chief executive
officer ............................................... -- -- -- -- --
Issuance of note receivable from former chief
executive officer ..................................... -- -- -- -- --
Issuance of Series C convertible preferred stock
at $5.00 per share, net of issuance costs of $30,000 .. -- -- 1,200,000 1,200,000 --
Repurchase and retirement of common stock $7.50
per share ............................................. -- -- -- -- (800,000)
Issuance of common stock at $16.00 per share
related to initial public offering, net of issuance
costs of $4,744,000 ................................... -- -- -- -- 3,000,000
Conversion of redeemable convertible preferred
stock and convertible preferred stock into common stock (1,332,127) (7,379,984) (1,200,000) (1,200,000) 1,688,074
Compensation expense related to stock options ........... -- -- -- -- --
Issuance of common stock from stock option
exercises ............................................. -- -- -- -- 216,592
Deferred compensation adjustment related to
termination of stock options .......................... -- -- -- -- --
Net loss ................................................ -- -- -- -- --
---------- ---------- ---------- ---------- ---------
Balance, December 31, 1996 ............................... -- -- -- -- 14,907,696
Adjustment to note receivable from former chief
executive officer ..................................... -- -- -- -- --
Surrender of shares in satisfaction of note
receivable from former chief executive officer ........ -- -- -- -- --
Issuance of common stock from stock option
exercises ............................................. -- -- -- -- 132,675
Issuance of common stock for employee stock
purchase plan ......................................... -- -- -- -- 27,793
Net loss ................................................ -- -- -- -- --
---------- ---------- ---------- ---------- ---------
Balance, December 31, 1997 ............................... -- -- -- -- 15,068,164
Issuance of common stock from stock option
exercises ............................................. -- -- -- -- --
Issuance of common stock for employee stock
purchase plan ......................................... -- -- -- -- --
Issuance of common stock for the purchase of
Advis, Inc. ........................................... -- -- -- -- 171,000
Net loss ................................................ -- -- -- -- --
---------- ---------- ---------- ---------- ---------
Balance, December 31, 1998 ............................... -- $ -- -- $ -- 15,239,164
========== =========== ========== =========== ==========
<CAPTION>
Stockholders' Equity (Deficit)
------------------------------
Note
Receivable
Common Stock Treasury Stock from
------------ --------------------- Former
Additional Chief
$0.001 Number of Paid-in Executive
Par Value Shares Amount Capital Officer
--------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31,1995 ................................ $ 10,803 -- -- $ 1,230,597 --
Issuance of Series B redeemable convertible
preferred stock at $5.54 per share, net of issuance
costs of $600,000 ..................................... -- -- -- (600,000) --
Compensation expense to former chief executive
officer ............................................... -- -- -- 6,793,696 --
Issuance of note receivable from former chief
executive officer ..................................... -- -- -- -- (2,560,000)
Issuance of Series C convertible preferred stock
at $5.00 per share, net of issuance costs of $30,000 .. -- -- -- 4,770,000 --
Repurchase and retirement of common stock $7.50
per share ............................................. (800) -- -- (5,999,200) --
Issuance of common stock at $16.00 per share
related to initial public offering, net of issuance
costs of $4,744,000 ................................... 3,000 -- -- 43,253,000 --
Conversion of redeemable convertible preferred
stock and convertible preferred stock into common stock 1,688 -- -- 8,578,296 --
Compensation expense related to stock options ........... -- -- -- -- --
Issuance of common stock from stock option
exercises ............................................. 217 -- -- 603,949 --
Deferred compensation adjustment related to
termination of stock options .......................... -- -- -- (125,425) --
Net loss ................................................ -- -- -- -- --
------- --------- ---------- ---------- ------------
Balance, December 31, 1996 ............................... 14,908 -- -- 58,504,913 (2,560,000)
Adjustment to note receivable from former chief
executive officer ..................................... -- -- -- -- 52,528
Surrender of shares in satisfaction of note
receivable from former chief executive officer ........ -- 960,000 (2,280,000) -- 2,507,472
Issuance of common stock from stock option
exercises ............................................. 133 (261,448) 620,939 277,611 --
Issuance of common stock for employee stock
purchase plan ......................................... 28 (1,004) 2,385 123,599 --
Net loss ................................................ -- -- -- -- --
------- --------- ---------- ---------- ------------
Balance, December 31, 1997 ............................... 15,069 697,548 (1,656,676) 58,906,123 --
Issuance of common stock from stock option
exercises ............................................. -- (12,371) 29,381 (1,021) --
Issuance of common stock for employee stock
purchase plan ......................................... -- (46,627) 110,739 (45,666) --
Issuance of common stock for the purchase of
Advis, Inc. ........................................... 171 -- -- 320,454 --
Net loss ................................................ -- -- -- -- --
------- --------- ---------- ----------- ------------
Balance, December 31, 1998 ............................... $15,240 638,550 (1,516,556) $59,179,890 $ --
======= ========= ========== =========== ============
<CAPTION>
Stockholders' Equity (Deficit)
------------------------------
Total
Stockholders'
Deferred Accumulated Equity
Compensation Deficit (Deficit)
------------ ------- ---------
<S> <C> <C> <C>
Balance, December 31, 1995 ............................... $(166,594) $ (3,878,724) $ (2,803,918)
Issuance of Series B redeemable convertible
preferred stock at $5.54 per share, net of issuance
costs of $600,000 ..................................... -- -- (600,000)
Compensation expense to former chief executive
officer ............................................... -- -- 6,793,696
Issuance of note receivable from former chief
executive officer ..................................... -- -- (2,560,000)
Issuance of Series C convertible preferred stock
at $5.00 per share, net of issuance costs of $30,000 .. -- -- 5,970,000
Repurchase and retirement of common stock $7.50
per share ............................................. -- -- (6,000,000)
Issuance of common stock at $16.00 per share
related to initial public offering, net of issuance
costs of $4,744,000 ................................... -- -- 43,256,000
Conversion of redeemable convertible preferred
stock and convertible preferred stock into common stock -- -- 7,379,984
Compensation expense related to stock options ........... 41,169 -- 41,169
Issuance of common stock from stock option
exercises ............................................. -- -- 604,166
Deferred compensation adjustment related to
termination of stock options .......................... 125,425 -- --
Net loss ................................................ -- (12,343,947) (12,343,947)
-------- ----------- ------------
Balance, December 31, 1996 ............................... -- (16,222,671) 39,737,150
Adjustment to note receivable from former chief
executive officer ..................................... -- -- 52,528
Surrender of shares in satisfaction of note
receivable from former chief executive officer ........ -- -- 227,472
Issuance of common stock from stock option
exercises ............................................. -- -- 898,683
Issuance of common stock for employee stock
purchase plan ......................................... -- -- 126,012
Net loss ................................................ -- (7,636,583) (7,636,583)
-------- ----------- ------------
Balance, December 31, 1997 ............................... -- (23,859,254) 33,405,262
Issuance of common stock from stock option
exercises ............................................. -- -- 28,360
Issuance of common stock for employee stock
purchase plan ......................................... -- -- 65,073
Issuance of common stock for the purchase of
Advis, Inc. ........................................... -- -- 320,625
Net loss ................................................ -- (4,202,269) (4,202,269)
-------- ------------ ------------
Balance, December 31, 1998 ............................... $ -- $(28,061,523) $ 29,617,051
======== ============ ============
</TABLE>
22
<PAGE>
Primix Solutions Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss ................................................................... $(12,343,947) $ (7,636,583) $ (4,202,269)
Adjustments to reconcile net loss to net cash used in operating activities--
Depreciation and amortization ............................................ 670,200 1,104,225 877,439
Compensation expense to former chief executive officer ................... 6,793,696 227,472 --
Compensation expense related to stock options ............................ 41,169 -- --
Non-cash restructuring charge ............................................ -- 1,304,235 --
Changes in operating assets and liabilities --
Accounts receivable .................................................... 124,800 1,000,270 (1,449,949)
Inventories ............................................................ (11,900) -- --
Prepaid expenses and other current assets .............................. (534,402) 523,071 23,969
Due from affiliates .................................................... (55,402) 55,402 --
Accounts payable ....................................................... 878,865 (654,584) (316,170)
Due to affiliates ...................................................... (2,938,086) -- --
Accrued expenses ....................................................... 1,213,002 (467,452) 207,216
Deferred revenues ...................................................... 269,758 (57,511) (407,191)
------------ ------------ ------------
Net cash used in operating activities ............................... (5,892,247) (4,601,455) (5,266,955)
------------ ------------ ------------
Cash Flows from Investing Activities:
(Purchases)/ sales of marketable securities, net ........................... (27,181,222) 4,272,389 22,908,833
Purchases of property and equipment ........................................ (3,451,742) (252,589) (73,638)
Loan to former chief executive officer ..................................... -- (2,507,472) --
Purchase of Advis .......................................................... -- -- (1,623,059)
Increase in other assets ................................................... (321,065) -- (150,000)
------------ ------------ ------------
Net cash (used in)/provided by investing activities ................. (30,954,029) 1,512,328 21,062,136
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from (payments on) long-term debt to stock holders ................ (1,000,000) -- --
Proceeds from secured note payable to a bank ............................... 2,000,000 -- --
Payments on secured note payable to a bank ................................. (2,000,000) -- --
Net proceeds from issuance of common stock ................................. 43,256,000 -- --
Payment for the repurchase of common stock ................................. (6,000,000) -- --
Net proceeds from issuance of preferred stock .............................. 12,749,984 -- --
Proceeds from the exercise of stock options ................................ 604,166 898,683 28,360
Proceeds from common stock purchased through employee stock purchase plan .. -- 126,012 65,071
------------ ------------ ------------
Net cash provided by/(used in) financing activities ................. 49,610,150 1,024,695 93,433
------------ ------------ ------------
Net Increase/(Decrease) in Cash and Cash Equivalents .......................... 12,763,874 (2,064,432) 15,888,614
Cash and Cash Equivalents, beginning of period ................................ 104,622 12,868,496 10,804,064
------------ ------------ ------------
Cash and Cash Equivalents, end of period ...................................... $ 12,868,496 $ 10,804,064 $ 26,692,678
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest ................................... $ 79,191 $ 8,071 $ --
============ ============ ============
Cash paid for income taxes ................................................. $ 70,125 $ 21,984 $ 40,259
============ ============ ============
Supplemental Disclosure of Noncash Financing Activities:
Conversion of preferred stock into common stock ............................ $ 8,579,984 $ -- $ --
============ ============ ============
Issuance of note receivable from former chief executive officer ............ $ 2,560,000 $ 52,528 $ --
============ ============ ============
Acquisition of shares for satisfaction of note receivable .................. $ -- $ 2,507,472 $ --
============ ============ ============
Acquisition of Advis, Inc. (Note 2)
Fair value of assets acquired ........................................ $ -- $ -- $ 732,520
Liabilities assumed and incurred ...................................... -- -- (2,034,954)
Common stock issued ................................................... -- -- (320,625)
------------ ------------ ------------
Cash paid for acquisition ............................................. $ -- $ -- $ 1,623,059
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
23
<PAGE>
Primix Solutions Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations and Significant Accounting Policies
(a) Organization
Primix Solutions Inc. (formerly OneWave, Inc.) ("Primix" or "the
Company"), a Delaware corporation, was incorporated in January 1994. Since its
inception, Primix has helped organizations build applications that integrate and
extend disparate information systems. In the past, Primix has focused on
developing and marketing its application development products, along with
implementation services. During 1998, the Company unified its software products
and consulting services business units into a single consulting services
organization focused on delivering "e-Business" solutions. e-Business
encompasses a wide variety of business processes in which Internet technologies
are used to more effectively manage relationships between customers, vendors,
suppliers, distributors and employees, and thereby increase sales, reduce costs,
improve productivity and/or promote customer loyalty. For fiscal years 1997 and
1998, the Company's principal market for its products was North America. On
December 31, 1998, the Company acquired Advis, Inc. (see Note 2).
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, OneWave Securities Corporation and
Advis, Inc. Inter-company accounts and transactions are eliminated in
consolidation.
(c) Use of Estimates in the Preparation of the Financial Statements
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
statments and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 97-2 (SOP 97-2), Software Revenue Recognition. The
Company formerly generated software and maintenance revenues from licensing the
24
<PAGE>
rights to use its software products and the resale of software products licensed
from a related party (see Note 4b). The Company currently generates service
revenues from the sale of consulting and education services.
25
<PAGE>
Revenues from software license fees are recognized upon delivery, net of
estimated returns, provided there are no significant post-delivery obligations,
and payment is due within one year and is probable of collection. If acceptance
is required, software license revenues are recognized upon customer acceptance.
Maintenance revenues are deferred at the time of billing and are recognized
ratably over the term of the support period, which is typically one year.
Revenues from consulting and education services are recognized upon
customer acceptance or over the period in which services are provided if
customer acceptance is not required and the revenues are fixed and determinable.
Revenues from fixed price consulting contracts are recognized primarily on the
percentage of completion method. The cumulative impact of any revision in
estimates of the percent complete is reflected in the period in which the
changes become known. Losses on projects in progress are recognized when known.
Deferred revenues primarily relate to prepaid maintenance and consulting
services fees.
Cost of software license and maintenance revenues consists of the cost of
software and maintenance purchased for resale from a related party; distribution
costs; and support personnel costs. Cost of consulting and education services
consists primarily of consulting and support personnel salaries and related
costs and fees to third party service providers.
(e) Cash and Cash Equivalents
The Company classifies all short-term, highly liquid investments with
original maturities of three months or less as cash equivalents. The Company
held the following cash and cash equivalents at December 31:
1997 1998
----------- -----------
Corporate debt instruments .............. $ 4,987,460 $13,957,907
Cash and money market accounts .......... 5,816,604 12,734,771
----------- -----------
$10,804,064 $26,692,678
(f) Marketable Securities
Marketable securities consist of marketable financial instruments with
original maturities greater than 90 days. The Company has established guidelines
relative to concentration, maturities, and credit ratings that maintain safety
and liquidity.
In accordance with Statement of Financial Accounting Standard No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"), the Company has classified its investments in marketable securities as
"Held-to-Maturity" Securities. Accordingly, marketable securities as of December
31, 1997 are recorded at amortized cost, which approximates market. The Company
had no investments in marketable securities at December 31, 1998.
The Company held the following marketable securities at December 31, 1997:
1997
----
U.S. Government and Government Agency Securities
(average maturity of 116 days at December 31, 1997) ........... $ 7,288,889
Commercial Paper (average maturity of 62 days at
December 31, 1997) ............................................ 15,619,944
-----------
$22,908,833
-----------
26
<PAGE>
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
expense is computed using the straight-line method over the estimated useful
lives of the assets (three to five years).
(h) Research and Development and Software Development Costs
In accordance with SFAS No. 86, Accounting for the Costs of Software To
Be Sold, Leased or Otherwise Marketed, the Company has evaluated the
establishment of technological feasibility of its various products during the
development phase. Due to the dynamic changes in the market, the Company
concluded that it could not determine technological feasibility until a fully
functional working model is complete. The time period during which costs
could be capitalized from the point of reaching technological feasibility
until the time of general product release was very short, and consequently,
the amounts that could be capitalized were generally not material to the
Company's financial position or result of operations. Therefore, the Company
charged all internally generated research and development expenses to
operations in the period incurred. The Company is no longer developing
software products for sale.
Since inception, the Company has incurred various charges associated
with the purchase of third party developed technology. During 1996, the
Company contracted with a third party to develop applications to be
integrated with the Company's existing product. The Company capitalized
$321,065 of cost associated with the development of this product. The Company
amortized the cost of this product over its expected useful life of fifteen
months. The Company recorded amortization expense of $64,200 and $107,000 for
the years ended December 31, 1996 and 1997, respectively. The unamortized
cost of $149,865, was charged to expense in connection with the Company's
restructuring in 1997 (see Note 1(l )). Research and development expenses for
the year ended December 31, 1996 included $450,000 of expenses related to the
purchase of technology.
(i) Post-retirement Benefits
The Company has no obligations for post-retirement benefits.
(j) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that potentially subject the Company to
concentrations of credit risk are accounts receivable, cash equivalents and
marketable securities. During the year ended December 31, 1997, three new
customers represented concentrations of credit risk with respect to revenue and
accounts receivable. These customers accounted for approximately 26%, 11% and 9%
of total revenues and 58%, 8% and 24% of the December 31, 1997 accounts
receivable balance. During the year ended December 31, 1998, four new customers
represented concentrations of credit risk with respect to revenue and accounts
receivable. These customers accounted for approximately 35%, 20%, 10% and 6% of
total revenues and 11%, 29%, 17% and 12% of the December 31, 1998 accounts
receivable balance.
In the years ended December 31, 1996, 1997 and 1998, sales outside the
United States accounted for approximately 10%, 3%, and 1% of total revenues,
respectively. To reduce accounts receivable credit risk, the Company routinely
assesses the financial strength of its customers and, as a consequence, believes
that its accounts receivable credit risk exposure is limited. The Company
maintains an allowance for potential credit losses but has not experienced any
significant losses related to individual customers or groups of customers in any
particular industry or geographic area. To reduce cash equivalent and marketable
securities credit risk, the Company invests in highly liquid U.S. Government and
commercial paper
27
<PAGE>
obligations with maturities of less than one year. The Company limits the amount
of holdings with any one particular financial institution or government agency.
(k) Net Loss per Common Share
In 1997, the Company adopted Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earnings Per
Share, effective December 15, 1997. Basic net loss per share is computed by
dividing reported earnings available to common stockholders by the weighted
average common shares outstanding, with no consideration given for any
potentially dilutive securities. Diluted net loss per share is the same as
basic net loss per share because the inclusion of common stock issuable
pursuant to stock options and warrants (number of antidilutive shares were
805,896, 138,777 and 305,520 as of December 31, 1996, 1997 and 1998,
respectively) would be antidilutive.
The calculations of basic and diluted net loss per common share are as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss ................................. $(12,343,947) $ (7,636,583) $ (4,202,269)
Discount on preferred stock .............. (630,000) -- --
------------ ------------ ------------
Net loss applicable to common stockholders $(12,973,947) $ (7,636,583) $ (4,202,269)
============ ============ ============
Weighted average common shares outstanding
12,560,185 14,560,222 14,397,873
============ ============ ============
Basic and diluted net loss per share ..... $ (1.03) $ (.52) $ (.29)
============ ============ ============
</TABLE>
(l) Restructuring Charge
On June 9, 1997, the Company announced that it had implemented a plan (the
"Plan") to restructure the Company's operations. The Plan included write-offs
and writedowns of certain assets and included accruing the costs related to a
significant reduction in the Company's work force. The implementation of the
Plan resulted in a one time charge of $1,782,298. Included in accrued expenses
as of December 31, 1997 is $187,112 of liabilities related to the restructuring
charge. The liability was paid in full during 1998.
The following are the significant components of the charge for
restructuring:
Write-off and writedown of assets to net realizable value ....... $1,117,124
Employee severance, benefits and related costs .................. 650,035
Other ........................................................... 15,139
----------
$1,782,298
28
<PAGE>
(m) Goodwill
Goodwill related to the Advis acquisition will be amortized on a
straight-line basis over 10 years. No amortization expense was taken on this
goodwill during 1998 as the acquisition occurred on the last day of the year. In
the future, the Company will evaluate whether changes have occurred that would
require revision of the remaining estimated useful life of the assigned goodwill
or render the goodwill not recoverable. The Company will measure the potential
impairment of recorded goodwill by the undiscounted value of expected future
operating cash flows in relation to its net capital investment in the
subsidiary.
(n) Comprehensive Income
During 1998, the Company adopted SFAS No. 130, Reporting of
Comprehensive Income. Comprehensive income refers to the change in an
entity's equity during a period, exclusive of investment by and distributions
to owners. Comprehensive income includes net income and other comprehensive
income items. The Company has no other comprehensive income items as defined
in SFAS No. 130 and, therefore, net income is equal to comprehensive income
and no other additional disclosure is required.
(o) Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes standards
for the way that public business enterprises report information and operating
segments in annual and interim financial statements and requires that
enterprises report selected information about operating segments in financial
reports issued to stockholders. Th Company adopted this statement in the year
ended December 31, 1998. Based on a review of SFAS No. 131, the Company
believes that currently operates in one segment.
(p) New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. The
statement is effective for the year ended December 31, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. The
Company does not expect adoption of this statement to have a material impact
on its consolidated financial position or result of operations.
2. Acquisition of Advis, Inc.
On December 31, 1998, the Company acquired Advis, Inc., a privately
held Boston based e-Business consulting company, which augmented the depth
and breadth of the Company's capabilities in developing highly advanced
systems architectures that support e-Business solutions.
The total consideration consisted of: 171,000 shares of the Company's
common stock, which was valued at $1.875 per share, the fair market value of
the stock, a note payable of $203,748 paid in January 1999 and the assumption
of $1,593,536 of net liabilities. Included in the net liabilities are accounts
receivable of $637,805, prepaid expenses and other current assets of $38,899
and computer and office equipment of $55,816. In December 1998, the Company
advanced Advis $1,543,174 to satisfy certain obligations. This advance is
included in the net liabilities acquired. The transaction has been accounted
for as a purchase in accordance with Accounting Principles Board Opinion
No. 16, Business Combinations. The excess purchase price over the net assets
acquired of $2,117,909 has been recorded as goodwill and will be amortized over
its estimated useful life of 10 years. The Company will include the results of
Advis' operations effective January 1, 1999.
3. Stockholders' Equity (Deficit)
(a) Authorized Capital Stock
As of December 31, 1998, the Company's authorized capital stock consisted
of 50,000,000 shares of common stock, $.001 par value per share, and 5,000,000
shares of preferred stock, $1.00 par value per share.
(b) Common Stock
In April 1996, the Company repurchased and retired 800,000 shares of
common stock for $6,000,000.
In July 1996, the Company completed an initial public offering of its
common stock. The Company issued 3,000,000 shares at $16.00 per share for net
proceeds of $43,256,000.
(c) Conversion of Series B Redeemable Convertible Preferred Stock
In March 1996, the Company issued 1,332,127 shares of Series B redeemable
convertible preferred stock at $5.54 per share, less offering costs of $600,000
for net proceeds of $6,779,984. Upon
29
<PAGE>
consummation of the Company's initial public offering, all outstanding shares of
redeemable convertible preferred stock were converted into 888,080 shares of
common stock.
(d) Conversion of Series C Convertible Preferred Stock
In April 1996, the Company issued 1,200,000 shares of Series C convertible
preferred stock at a price of $5.00 per share, less offering costs of $30,000,
for net proceeds of $5,970,000. Upon consummation of the Company's initial
public offering, all outstanding shares of Series C preferred stock were
converted into 799,994 shares of common stock.
(e) Treasury Stock
In April 1997, the Company funded $2,507,000 under a loan agreement
with its then Chief Executive Officer. The loan was secured by a first
priority pledge of 960,000 shares of the Company's common stock. In June
1997, the then Chief Executive Officer resigned from the Company and
surrendered these shares in satisfaction of the loan agreement. The market
price of $2.375 on the date the shares were surrendered was used to determine
the cost of the treasury stock. The 960,000 shares were classified as
treasury stock with a total cost of $2,280,000. The $227,000 difference
between the amount of the loan and the cost of the treasury stock was
recorded as a charge to operations and is classified as compensation to
former chief executive officer. As of December 31, 1998, the Company has
issued approximately 321,000 shares from treasury for the Company's employee
stock option and the employee stock purchase plans.
(f) Stock Split
On May 20, 1996, the Company effected a 2-for-3 reverse stock split. The
accompanying financial statements have been retroactively restated for the stock
split.
(g) Stock Options
1995 Stock Plan
The Company has a stock plan (the 1995 Plan) that provides for the
issuance of incentive stock options (ISOs), non-qualified stock options and
shares of common stock. Under the terms of the 1995 Plan, non-qualified
options may be granted at a price not less than the lesser of (i) the book
value per share of common stock as of the end of the fiscal year of the
Company immediately preceding the date of such grant, or (ii) 50% of the fair
market value per share of common stock on the date of such grant and, in the
case of ISOs, not less than the fair market value per share at the date of
grant. In 1995, the Company granted an option to purchase 40,000 shares of
common stock to an employee at an exercise price of $.015 per share. The
difference between the estimated fair market value of the common stock and
the aggregate exercise price of $179,400 was recorded as deferred
compensation at the date of grant. During 1995 and 1996, the Company recorded
compensation expense related to these options in the amount of $12,806 and
$41,169, respectively. The remaining balance of deferred compensation was
reversed upon the cancellation of all unvested stock options during 1996. All
other options have been granted at exercise prices that represent the fair
market value of the common stock at the time of the grant and accordingly the
Company has not recorded any compensation on these option grants.
1996 Stock Plan
On May 17, 1996, the Board of Directors and stockholders approved the
Company's 1996 Stock Plan (the 1996 Plan). Each non-employee director will
receive an initial option grant to purchase 7,000 shares of common stock, at the
then fair market value, when such director is first appointed to the Board of
Directors. In addition, each non-employee director will receive an option grant
to purchase 1,700 shares of common stock, at the then fair market value, on each
January 1 that such director is a member of the Board of Directors.
30
<PAGE>
The Company has reserved 4,150,000 shares of common stock for issuance
under the 1995 Plan and the 1996 Plan. As of December 31, 1998, there were
approximately 1,785,330 shares available for grant. Generally, the options
granted under both Plans vest equally over four years and expire after ten
years.
The following table summarizes incentive and non-qualified stock option
activity under the 1995 and 1996 Stock Plans:
<TABLE>
<CAPTION>
Weighted
Average
Number Price Price
of Shares per Share per Share
--------- --------- ---------
<S> <C> <C> <C>
Outstanding, December 31, 1995 .. 1,219,533 $.015-4.50 $ 3.90
Options granted ................. 2,457,648 7.50-16.00 10.53
Options exercised ............... (216,592) .015-13.13 4.25
Options canceled ................ (850,245) 1.50-16.00 8.01
---------- ------------ ------
Outstanding, December 31, 1996 .. 2,610,344 1.50-16.00 10.42
---------- ------------ ------
Exercisable, December 31, 1996 .. 782,563 1.50-13.75 8.21
---------- ------------ ------
Options granted ................. 2,356,250 1.94-2.88 2.36
Options exercised ............... (394,121) 1.50-7.50 2.28
Options canceled ................ (3,676,271) 1.50-16.00 6.44
---------- ------------ ------
Outstanding, December 31, 1997 .. 896,202 1.50-16.00 2.97
---------- ------------ ------
Exercisable, December 31, 1997 .. 115,444 1.50-16.00 3.40
---------- ------------ ------
Options granted ................. 1,070,300 1.25-3.06 2.11
Options exercised ............... (12,371) 1.50-2.50 2.29
Options canceled ................ (212,547) 1.25-16.00 3.01
---------- ------------ ------
Outstanding, December 31, 1998 .. 1,741,584 1.25-16.00 2.46
========== ============ ======
Exercisable, December 31, 1998 .. 282,187 $1.25-16.00 $ 2.96
========== ============ ======
</TABLE>
The following detail pertains to outstanding options of the Company at December
31, 1998:
<TABLE>
<CAPTION>
Exercise Price Weighted Average Weighted Average
Number of Range per Share Exercise Price per Number of Exercise Price per
Shares Outstanding Share Outstanding Shares Exercisable Share Exercisable
----------- ----------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
96,278 $ 1.25-$1.60 $ 1.34 37,943 $ 1.44
1,604,574 1.60-3.20 $ 2.36 214,729 $ 2.63
23,332 3.20-4.80 $ 4.50 21,665 $ 4.50
3,400 6.40-8.00 $ 7.81 850 $ 7.81
14,000 14.40-16.00 $16.00 7,000 $16.00
--------- ------------ ------ ------- ------
1,741,584 $1.25-$16.00 $ 2.46 282,187 $ 2.96
--------- ------------ ------ ------- ------
</TABLE>
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 requires the measurement of the fair
value of stock options, including stock purchase plans, or warrants granted
to employees to be included in the statement of operations or disclosed in
the notes to financial statements. The Company has determined that it will
continue to account for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123. The Company has computed the pro forma
disclosures required under SFAS No. 123 for options granted in 1996, 1997,
and 1998 using the Black-Scholes option pricing model prescribed by SFAS No.
123. The weighted average assumptions used for 1996, 1997, and 1998 are as
follows:
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate.......... 5.97%-6.69% 5.80%-6.40% 4.18%-5.63%
Expected dividend yield.......... -- -- --
Expected life.................... 5 years 5 years 5 years
Expected volatility.............. 70% 100% 100%
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models
31
<PAGE>
require the input of highly subjective assumptions including expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The total fair value of the options granted during 1996, 1997, and 1998
was computed as approximately $14,030,000, $4,392,000, and $1,793,000,
respectively. Of these amounts approximately $4,941,000, $1,355,000, and
$1,177,000 would have been charged to operations for the years ended December
31, 1996, 1997, and 1998, respectively. The remaining amount would be
amortized over the remaining vesting periods. The resulting pro forma
compensation expense may not be representative of the amount to be expected
in future years as pro forma compensation expense may vary based upon the
number of options granted and cancelled.
The pro forma net loss and pro forma basic and diluted net loss per common
share presented below have been computed assuming no tax benefit. The effect of
a tax benefit has not been considered since a substantial portion of the stock
options granted are incentive stock options and the Company does not anticipate
a future deduction associated with the exercise of these stock options.
The pro forma effect of SFAS No. 123 for the years ended December 31,
1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------- -------------------------- ------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss attributable to common
stockholders................... $(12,973,947) $(17,914,947) $(7,636,583) $(8,991,583) $(4,202,269) $(5,379,269)
Basic and diluted net loss per
common share................... $(1.03) $(1.43) $(.52) $(.62) $(.29) $(.37)
</TABLE>
(i) Warrants
In February 1996, the Company issued a warrant to purchase 23,333 shares
of common stock at a price of $8.31 per share in connection with a financing
agreement. The warrant is exercisable in whole or in part, at any time on or
before February 15, 2003.
(j) Employee Stock Purchase Plan
On May 17, 1996, the stockholders approved the Company's Employee Stock
Purchase Plan (ESPP). The Company has reserved 150,000 shares for issuance under
the ESPP. The ESPP permits eligible employees of the Company to purchase common
stock through payroll deductions of up to 10% of their total compensation. The
price of common stock purchased under the ESPP is 85% of the lower of the fair
market value of the common stock on the first or last day of each six-month
purchase period. During 1997 and 1998, the Company issued 28,797 and 46,627
shares of common stock under the ESPP, respectively.
4. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, a deferred tax asset or
liability is measured by the enacted tax rates expected to be in effect when the
differences between the financial statement and tax bases of assets and
liabilities reverse.
As of December 31, 1998, the Company had available net operating loss
carryforwards of approximately $25,956,000 to reduce future federal and state
income taxes, if any. These carryforwards expire through 2018 and are subject to
review and possible adjustment by the Internal Revenue Service.
32
<PAGE>
The Tax Reform Act of 1986 contains provisions that may limit the amount of net
operating loss carryforwards that the Company may utilize in any one year in the
event of certain cumulative changes in ownership over a three year period in
excess of 50%, as defined. The Company has completed several financings since
it's inception and believes that an ownership change as defined by The Tax
Reform Act of 1986 has occurred. The Company has not yet determined the extent
of any net operating loss carryforward limitations.
The approximate income tax effect of each type of temporary difference and
carryforward is as follows:
1997 1998
------------ ------------
Net operating loss carryforwards ... $ 8,640,000 $ 10,376,000
Other temporary differences ........ 1,010,000 980,000
Credit carryforwards ............... 247,000 217,000
------------ ------------
9,897,000 11,573,000
Valuation allowance ................ (9,897,000) (11,573,000)
------------ ------------
Net deferred tax asset ............. $ -- $ --
============ ============
It is the Company's objective to become a profitable enterprise and to
realize the benefits of its deferred tax assets. However, in evaluating the
realizability of these deferred tax assets, management has considered the
Company's short operating history, the volatility of the market in which it
competes, and the operating losses incurred to date, and believes that, given
the significance of this evidence, a full valuation reserve against its deferred
tax asset is required as of December 31, 1997 and 1998, respectively.
5. Related-Party Transactions
(a) Cambridge Technology Group, Inc.
During the first two months of 1996, the Company shared office space with
Cambridge Technology Group, Inc. (CTGroup), a company under the control of a
then significant stockholder of the Company. CTGroup charged the Company for a
portion of certain common costs incurred in addition to any specific items paid
by CTGroup on the Company's behalf. These costs were allocated based on head
count or actual cost incurred. For the year ended December 31, 1996, CTGroup
charged the Company $117,442 for these costs.
During 1996, the Company sold software and services to CTGroup amounting
to $100,000. In addition, during 1996, the CTGroup assigned its rights under
certain contracts, to the Company. The Company recorded revenue of $100,000 for
the performance of education and consulting services and the delivery of
software licenses and maintenance services under these contracts.
In March 1996, the Company purchased computer equipment from CTGroup for
$125,000.
In September 1996, the Company obtained third party software licenses from
CTGroup in exchange for certain source code rights previously purchased from
Open Environment Corporation (Note 4(b)). The source code rights were originally
purchased with the intent of embedding the technology into certain of the
Company's future products. The software licenses received and the source code
rights given were deemed to be of equal value. In 1996, the Company recorded
software license revenue of approximately $412,000 from the subsequent resale of
software licenses acquired in this exchange.
The Company believes that the transactions described above were at terms
no less favorable than the Company would have obtained from unaffiliated third
parties.
33
<PAGE>
In June 1997, Avix Ventures, L.P. (Avix) purchased all outstanding shares
then held by the significant stockholders affiliated with CTGroup. Accordingly,
effective June 1997, CTGroup was not considered a related party.
(b) Open Environment Corporation
In 1995, the Company entered into a reseller agreement with Open
Environment Corporation (OEC) to license software developed by OEC, an entity
that was founded by individuals that were formerly significant stockholders of
the Company. During the years ended December 31, 1996 and 1997 the Company
generated software license and maintenance revenues of $1,759,639 and $121,013,
respectively, from the resale of OEC products and services. Total expenses
relating to purchases of OEC software and OEC software bundled with the
Company's product and related maintenance contracts totaled $837,675 and $57,288
in the years ended December 31, 1996 and 1997, respectively. In addition, the
Company subcontracted consulting services from OEC totaling $153,622 in 1996.
The Company believes that the transactions described above were at terms
no less favorable than the Company would have obtained from unaffiliated third
parties.
In November 1996, OEC was acquired by Borland International, Inc. To the
best of the Company's knowledge, as a result of the acquisition, no stockholder
of the Company holds a significant ownership interest in the combined entity.
Accordingly, effective November 1996, OEC was not considered a related party.
(c) Internet Business Solutions, Incorporated
During 1996, the Company generated revenues from unrelated entities of
$2,920,000 of software licenses and $514,450 of consulting services to develop
vertical applications in conjunction with Internet Business Solutions, Inc.
(IBS). IBS provided up to 100% of the funding of the purchase of software
licenses and consulting services in return for certain rights in the developed
applications. IBS was wholly-owned by certain of the Company's then significant
stockholders at the time these transactions were initiated. Subsequently, IBS
received additional equity funding from Samsung Corporation.
In June 1997, Avix purchased all outstanding shares then held by the
significant stockholders which controlled Internet Business Solutions,
Incorporated. Accordingly, effective June 1997, Internet Business Solutions,
Incorporated was not considered a related party.
(d) Note Receivable
In February 1998, the Company loaned $150,000 to one of the Company's
executive officers. The loan is due to the Company on December 31, 1999.
Interest is payable quarterly at an annual rate of 6.5%. The loan is secured by
100,000 shares of common stock of the Company owned by the executive officer.
(e) Avix Ventures, L.P.
The Company's Chairman and Chief Executive Officer is a general partner
of Avix Associates, L.P., which is in turn the general partner of Avix
Ventures, L.P., a principal stockholder of the Company. The Chairman and
Chief Executive Officer received no compensation for the services he provided
to the Company during 1997 and 1998.
34
<PAGE>
6. Employee Benefit Plan
The Company's employees participate in an employee benefit plan under
Section 401(k) of the Internal Revenue Code. The plan is available to
substantially all employees. The plan allows for employees to make contributions
up to a specified percentage of their compensation. For all participants with
greater than one year of continuous service, the Company contributes 25% of the
first 6% of employees' pay contributed to the plan. Previously, the Company's
employees were eligible to participate in a plan sponsored by CTGroup. The
Company contributed approximately $53,500, $58,200, and $38,000 under these
plans during the years ended December 31, 1996, 1997, and 1998, respectively.
Advis has a separate 401(k) profit sharing plan which covers substantially
all employees who meet minimum service requirements. As of January 1, 1999, all
Advis employees meeting the minimum service requirements are eligible to
participate in the Company's 401(k) plan. The Company intends to merge the
assets of the Advis plan with their plan during April of 1999.
7. Lease Commitments
The Company leases its office facilities and certain office equipment
under operating leases expiring at various dates through 2001. Rental expense
amounted to approximately $389,000, $590,000 and $483,000 for the years ended
December 31, 1996, 1997, and 1998, respectively. In connection with the
acquisition of Advis (note 1), the Company is responsible for Advis' lease of
its office facility which expires in August of 2002. Prior to the acquisition,
Advis subleased a portion of their office facility through May of 1999.
In addition, the Company acquired certain equipment under capital leases
in the Advis acquisition. The leases expire at various times through January,
2001 and bear interest at a rates of between 14% and 16%.
The following is a summary of future minimum payments under operating
leases and under capitalized leases as of December 31, 1998:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------------------------------
<S> <C> <C>
1999 . $ 82,643 $ 673,083
2000 . 58,715 634,978
2001 . 262 256,741
2002 . -- 116,084
-------- ----------
Total minimum lease payments 141,620 $1,680,886
----------
Amount representing interest 17,156
--------
Total..... $124,464
--------
</TABLE>
8. Compensation to Former Chief Executive Officer
In January 1996, a then significant stockholder of the Company entered
into an agreement with the Company's former Chief Executive Officer (CEO)
under which the former CEO purchased 960,000 shares of the Company's common
stock held by the stockholder at a price of $1.50 per share. To fund the
purchase, the former CEO entered into a $1,440,000 note payable agreement
with the stockholder. The note payable accrued interest at 6.56% per annum
and provided for full recourse against the former CEO. At the time of this
sale transaction, the fair market value of the Company's common stock was
$7.50 per share. The Company recorded the aggregate difference between the
fair market value of the common stock and the price paid by the former CEO,
$5,760,000, in compensation to former chief executive for the year ended
December 31, 1996. In connection with this purchase, the Company agreed to
loan the former CEO up to $2,560,000 which represented the former CEO's
estimated tax liability resulting from the compensation on the purchase of
shares at less than fair market value. The Company recorded this commitment
as a note receivable from executive officer in the accompanying statements of
redeemable convertible preferred stock and stockholders' equity (deficit).
35
<PAGE>
The Company funded $2,507,000 under the loan agreement in April 1997. The
loan was secured by a first priority pledge of the purchased shares. In June
1997, the former CEO surrendered the purchased shares in satisfaction of the
loan. For the year ended December 31, 1997, the Company recorded an expense of
$227,000 to reflect the difference between the amount of the loan and the market
value of the shares surrendered to the Company. The Company has classified the
shares acquired as treasury stock.
In connection with the employment of the former CEO, the former CEO
received a nonrefundable $1,000,000 cash payment from a significant
stockholder in January 1996. The Company believes the nature of this payment
to be a sign-on bonus. Accordingly, the Company has recorded a $1,000,000
charge to compensation to former chief executive officer in the accompanying
statement of operations for the year ended December 31, 1996 with a
corresponding contribution to additional paid-in capital.
Also in connection with the employment of the former CEO, the same
significant stockholder agreed to reimburse the former CEO for any potential
decline in value (from January 1996 to the date of exercise) for certain stock
appreciation rights held by the former CEO in an unrelated company. At the time
this agreement was entered into, the unrealized appreciation on the stock
appreciation rights was approximately $4,400,000. The stock appreciation rights
were exercised by the former CEO in September 1996. The value of the stock of
the unrelated company had declined to the extent that the stockholder is
required to reimburse the former CEO approximately $34,000. The Company recorded
this charge to compensation to former chief executive officer in the
accompanying statement of operations for the year ended December 31, 1996, with
a corresponding contribution to additional paid-in capital.
36
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information Regarding Directors
Set forth below is certain information regarding the Directors of the
Company based on information furnished by them to the Company.
Director
Name Age Since
------------------------------------ --- -----
Class I--Term Expires 2000
Ofer Nemirovsky..................... 39 March 1996
Lennart Mengwall.................... 56 May 1997
Class II--Term Expires 2001
Kevin Azzouz........................ 39 May 1997
Class III--Term Expires 1999
Robert Hedges....................... 41 October 1998
- ----------
The principal occupation and business experience for at least the last
five years of each Director of the Company is set forth below.
Lennart Mengwall has served as Chairman of the Board, Chief Executive
Officer and President since May 1997. Mr. Mengwall formerly served as the
Chairman and Chief Executive Officer of Quest Development Corp. from 1989 to
1993. Mr. Mengwall is presently a general partner of Avix Associates, L.P.,
which is in turn the general partner of Avix Ventures, L.P., a principal
stockholder of the Company.
Kevin Azzouz has served as a Director of the Company since May 1997. Mr.
Azzouz formerly served as the President of Quest Development Corp. from 1989 to
1994. From 1994 to March 1996, Mr. Azzouz served as the President and Chief
Operating Officer of Arcada Software. Mr. Azzouz is presently a general partner
of Avix Associates, L.P., which is in turn the general partner of Avix Ventures,
L.P., a principal stockholder of the Company.
Robert Hedges has served as a Director of the Company since October ,
1998. Mr. Hedges is the Managing Director of the Retail Distribution Group at
Fleet Financial Group ("Fleet"). From 1995 to 1997, Mr. Hedges served as
Fleet's Director of Direct Financial Services Group. From 1993 to 1995, Mr.
Hedges was the Head of Consumer Banking at Shawmut Bank. Mr. Hedges also
serves as a director of NYCE.
Ofer Nemirovsky has served as a Director of the Company since March
1996. Mr. Nemirovsky is a Managing Director of HarbourVest Partners, LLC and
Hancock Venture Partners, Inc. ("HVP"). Prior to joining HVP in 1986, Mr.
Nemirovsky held various computer sales and marketing positions at
Hewlett-Packard. He is currently a director of Ultimate Software and Paradigm
Geophysical and several privately held companies.
37
<PAGE>
Information Regarding Executive Officers
Set forth below is certain information regarding each of the current
executive officers of the Company including their principal occupation and
business experience for at least the last five years.
Name Age Position
- ---------------------------- --- --------
Lennart Mengwall ........... 56 Chairman of the Board and Chief Executive
Officer
Joseph W. Seebach .......... 37 Executive Vice President
David W. Chapman............ 35 Chief Financial Officer, Treasurer
and Secretary
The principal occupation and business experience for the last five years
of the Company's executive officers, other than such officers who also served as
Directors, is set forth below.
Joseph W. Seebach joined the Company as Senior Vice President in July 1997
and assumed the position of President of Software Products Group in October
1997. After the Company consolidated its operations to one business unit, Mr.
Seebach was appointed to Senior Vice President of Sales & Marketing and most
recently to the position of Executive Vice President. Prior to joining the
Company, Mr. Seebach served as General Manager, Consumer Products Division of
Seagate Software from January 1997 to July 1997, Vice President, Strategic
Accounts of Seagate Software from 1996 to 1997, Vice President, Strategic
Business of Arcada Software from 1994 to 1996 and Director of Software
Development and Director of OEM Sales of Quest Development Corp. from 1993 to
1994.
David W. Chapman was appointed as the Company's Chief Financial Officer
in March 1998 and had previously served as the Controller of the Company
since September 1995. Mr. Chapman was appointed as Secretary of the Company
in February 1998. From December 1993 to August 1995, Mr. Chapman was the
38
<PAGE>
Accounting Manager of Astrum International. Mr. Chapman also held various
positions with the accounting firm of Deloitte & Touche from 1988 to 1993. Mr.
Chapman has been a certified public accountant since 1991.
Each of the officers holds his respective office until the regular annual
meeting of the Board of Directors following the annual meeting of stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal.
The Company's directors and executive officers and their principal
occupations are set forth below:
Name Principal Occupation
---- --------------------
Kevin Azzouz.............. Partner, Avix Associates, L.P.
Robert Hedges............. Managing Director, Retail Distribution Group,
Fleet Financial Group
Ofer Nemirovsky........... Managing Director, HVP Partners, LLC
Lennart Mengwall.......... Chairman and Chief Executive Officer, Primix
Solutions Inc. and Partner, Avix
Associates, L.P.
Joseph Seebach............ Vice President of Sales and Marketing, Primix
Solutions Inc.
David Chapman............. Chief Financial Officer, Treasurer and
Secretary, Primix Solutions Inc.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who own more than 10% of the
Company's outstanding shares of Common Stock (collectively, "Section 16
Persons"), to file initial reports of ownership and reports of changes in
ownership with the Commission and Nasdaq. Section 16 Persons are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain Section 16 Persons that no Section
16(a) reports were required for such persons, the Company believes that
during its fiscal year 1998, the Section 16 Persons complied with all Section
16(a) filing requirements applicable to them, with the exception of Robert
Hedges, who did not timely file Form 3 and Stephen Levy, Kevin Azzouz, and
Ofer Nemirovsky, who did not timely file Forms 5 with respect to the annual
grant of options to purchase 1,700 shares of Common Stock on January 1, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
Directors who are officers or employees of the Company receive no
compensation for service as Directors. Generally, Directors who are not
officers or employees of the Company receive such compensation for their
services as the Board may from time to time determine. Each of Ofer
Nemirovsky, former Director Stephen Levy and Robert Hedges (a "Non-Employee
Directors") received fees of $18,950, $19,550 & $1,250, respectively for
meetings attended during the Company's last fiscal year. In addition, Mr.
Nemirovsky and Mr. Levy were each granted a option to purchase 7,000 shares
of Common Stock at an exercise price of $12.00 per share. Mr. Hedges has been
granted an option to purchase 7,000 shares of Common Stock at an exercise
price of $1.813 per share. Each continuing Non-Employee Director also
automatically receives on January 1 of each year an option to purchase 1,700
shares of Common Stock at an exercise price per share equal to the fair
market value of the underlying Common Stock as determined under the 1996
Stock Plan. Each of these options vest annually in equal installments over a
39
<PAGE>
four-year period and expires ten years from the date of grant. All Directors are
reimbursed for expenses incurred in connection with attendance at meetings.
Executive Compensation
The following sections set forth and describe the compensation paid or
awarded to the Company's Chief Executive Officer and the other most highly
compensated executive officers who earned in excess of $100,000 during fiscal
year 1998 ("named executive officers").
Summary Compensation. The following summary compensation table sets forth
information concerning compensation for services rendered in all capacities
awarded to, earned by or paid to the Company's Chief Executive Officer and the
other named executive officers during each of the fiscal years ended December
31, 1998, December 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
Awards
Securities
Underlying All Other
Annual Compensation Options(#) Compensation($)(1)
----------------------------------- ---------- ------------------
Name and Principal Position Year(1) Salary($) Bonus($)
- ---------------------------------------------- ------- --------- --------
<S> <C> <C> <C> <C> <C>
Lennart Mengwall, Chairman of the Board,
Chief Executive Officer and President ..... 1998 -- -- -- --
1997 -- -- -- --
Joseph W. Seebach, Executive Vice President . 1998 161,654 62,560 -- --
1997 83,078 75,000 350,000 --
David W. Chapman, Chief Financial Officer,
Treasurer and Secretary (2) ............. 1998 112,654 16,705 -- 1,940
Peter Marton, President of Consulting Services
Group (3) ................................ 1998 194,615 -- 275,000 1,500
</TABLE>
- ----------
(1) Represents Company contributions to the Company's 401(k) plan on behalf of
the executives.
(2) Mr. Chapman was not an executive officer of the Company during 1997.
(3) Mr. Marton joined the Company during 1998 and resigned from the Company
in February 1999. In connection with the termination of employment of
Mr. Marton, his unvested options to purchase 275,000 shares were cancelled
immediately upon termination of employment on February 15, 1999.
Option Grants. The following table sets forth certain information
concerning the individual grant of options to purchase Common Stock of the
Company to the named executive officers of the Company who received options
during Fiscal 1998.
40
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
-------------------------------------------------------
Percent of
Total
Options Potential Realizable
Number of Granted Exercise Value at Assumed
Securities to Rates Appreciation for
Underlying Employees or Base Option Term(1)
Options in Fiscal Price -------------------
Name Granted(#) Year ($/Sh) Expiration Date 5%($) 10%($)
- ------------------------------ --------- ---- ------ ----------------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Peter Marton (2).............. 275,000 26% $2.50 February 15, 1999 -- --
</TABLE>
(1) This column shows the hypothetical gain or option spreads of the options
granted based on assumed annual compound stock appreciation rates of 5%
and 10% for the exercise price of such options over the full 10-year term
of the options. The 5% and 10% assumed rates of appreciation are mandated
by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
(2) In connection with the termination of employment of Mr. Marton, his
unvested options to purchase 275,000 shares were cancelled immediately
upon termination of employment on February 15, 1999.
Option Exercises and Option Values. The following table sets forth
information concerning the number of underlying shares and value of unexercised
options to purchase Common Stock of the Company held by the named executive
officers as of December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at December 31, 1998 at December 31, 1998 (1)
-------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Joseph Seebuch.......... 78,125 171,875 -- --
Peter Marton............ -- 275,000 -- --
David Chapman........... 13,438 29,069 -- --
</TABLE>
(1) Based on the last reported sale price on the Nasdaq National Market on
December 31, 1998 less the option exercise price. As of December 31, 1998
there were no options held by officers of the Company for which the
exercise price of the option was in excess of the market price.
Employment Agreements with Executive Officers
The Company has entered into letter agreements with each of its executive
officers (other than Lennart Mengwall, the Company's Chairman and Chief
Executive Officer), providing for base salary, bonus, incentive compensation and
relocation expense reimbursement, as applicable.
The letter agreement with Joseph Seebach dated July 8, 1997 provides
for certain severance benefits, including base salary for one year and the
acceleration of certain options, in the event of a termination of employment
within eighteen months of a change of control. In the event Mr. Seebach is
terminated without cause at any time during the initial 24 months of
employment, he is entitled to receive his base salary and continued vesting
of his options for the duration of such 24 months period or six months after
termination, whichever is later. Under an agreement dated February 26, 1998,
David W. Chapman is entitled to receive his base salary for six months after
termination of his employment for any reason other than gross misconduct.
Under the Company's standard Employee Agreement, each of the executives is
subject to provisions concerning the ownership, use and disclosure of the
Company's confidential information and intellectual property, and a one-year
restriction on competition with the Company following termination of employment
for any reason.
Compensation Committee Interlocks and Insider Participation
Since May 10, 1996 all executive officer compensation decisions have been
made by the Compensation Committee or the full Board of Directors. The
Compensation Committee reviews and makes recommendations regarding the
compensation for top management and key employees of the Company, including
salaries and bonuses. No member of the Compensation Committee is an officer of
the Company. The current members of the Compensation Committee are Ofer
Nemirovsky and Kevin Azzouz.
41
<PAGE>
Kevin Azzouz was the Acting Chief Executive Officer, President and Treasurer
of the Company from June 1997 to October 1997. No member of the Compensation
Committee is an officer of the Company. All Directors participated in
deliberations of the Company's Board of Directors concerning executive
compensation during the Company's fiscal year 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to the best knowledge and belief of the
Company, certain information regarding the beneficial ownership of the Company's
Common Stock as of the date indicated by (i) each person known by the Company to
be the beneficial owner of more than 5% of the outstanding Common Stock as of
December 31, 1998, (ii) each of the Company's Directors as of March 18, 1999,
(iii) each of the named executive officers as of March 18, 1999 and (iv) the
Company's executive officers and Directors as a group as of March 18, 1999.
Ownership(2)
<TABLE>
<CAPTION>
Name of Beneficial Owner(1) Beneficial
- --------------------------- -----------------------
Shares(1) Percent
--------- -------
<S> <C> <C>
Avix Ventures, L.P.(3) ....................................... 7,748,871 53.2%
160 West 66th Street
New York, NY 10023
Officers and Directors:
Lennart Mengwall(4) .......................................... 8,023,871 55.1%
Joseph W. Seebach(5) ......................................... 265,775 1.8%
David W. Chapman(6) .......................................... 19,718 *
Robert Hedges ................................................ -- *
Ofer Nemirovsky(7) ........................................... 486,228 3.3%
Kevin Azzouz(8) .............................................. 7,748,871 53.2%
All directors and executive officers as a group (6 persons)(9) 8,795,592 59.8%
</TABLE>
* Represents less than 1% of the outstanding shares.
(1) Information with respect to beneficial owners of more than 5% of the
outstanding shares of Common Stock is based solely on information provided
to the Company and reported to the Commission on Schedules 13G filed as of
February 17, 1998.
(2) All percentages have been determined as of March 18, 1999, in accordance
with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. As
of March 18, 1999, a total of approximately 14,575,411 shares of Common
Stock were issued and outstanding and options to acquire a total of
380,463 shares of Common Stock were exercisable within 60 days.
(3) As reported on Schedule 13D/A filed with the Securities and Exchange
Commission on June 24, 1997 by Avix Ventures, L.P., of which Avix
Associates, L.P. is the general partner, of which Lennart Mengwall and
Kevin Azzouz are general partners.
(4) Represents 7,748,871 shares held by Avix Ventures, L.P. and 275,000 shares
beneficially owned by Mr. Mengwall. Mr. Mengwall is a general partner
of Avix Associates, L.P., the general partner of Avix Ventures, L.P.
(5) Includes 109,375 shares which Mr. Seebach may acquire upon exercise of
stock options within 60 days of March 18, 1999.
42
<PAGE>
(6) Includes 19,618 shares which Mr. Chapman may acquire upon exercise of
stock options within 60 days of March 18, 1999.
(7) Includes (i) 457,280 shares held by Hancock Venture Partners IV-Direct
Fund L.P. and 24,067 shares held by Falcon Ventures II, L.P., the
respective general partners of which Mr. Nemirovsky is a general partner,
but as to which Mr. Nemirovsky disclaims beneficial ownership and (ii)
4,881 shares of which Mr. Nemirovsky may acquire upon exercise of a stock
option within 60 days after March 18, 1999.
(8) Represents shares held by Avix Ventures, L.P. Mr. Azzouz is a general
partner of Avix Associates, L.P., the general partner of Avix Ventures,
L.P. Mr. Azzouz is a general partner of Avix Associates, L.P., the general
partner of Avix Venture, L.P.
(9) Includes 133,874 shares which may be acquired upon exercise of stock
options within 60 days of March 18, 1999.
MARKET VALUE
On December 31, 1998, the closing price of a share of the Company's Common
Stock on the Nasdaq National Market was $1.875.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 3, 1998, the Company issued a promissory note in the amount of
$150,000 to Joseph W. Seebach, the Company's Vice President of Sales &
Marketing. The promissory note is secured by a perfected, first priority
security interest in 100,000 shares of the Company's common stock owned by Mr.
Seebach. The promissory note is payable on December 31, 1999. The promissory
note bears interest at a rate of six and one-half percent per annum.
43
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
Reference is made to the Index set forth on page 17 of this Annual Report on
Form 10-K.
(a)(2) Financial Statements Schedules:
Page
----
Schedule II--Valuation and Qualifying Accounts.............. S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and therefore have
been omitted.
(a)(3) Exhibits. Exhibits 10.1 through 10.3 and 10.26 through 10.30
constitute all of the management contracts and compensation plans and
arrangements of the Company required to be filed as exhibits to this Annual
Report. The following is a complete list of Exhibits filed or incorporated by
reference as part of this Annual Report.
Exhibit
No. Description
--- -----------
3.1 Third Amended and Restated Certificate of Incorporation(2)
3.2 Amended and Restated By-laws(2)
4.1 Specimen Common Stock Certificate(6)
10.1 1995 Stock Plan, as amended(1)
10.1A Form of Incentive Stock Option Agreement under the 1995
Stock Plan(4)
10.1B Form of Non-Qualified Stock Option Agreement under the 1995
Stock Plan(4)
10.2 1996 Stock Plan, as amended(2)
10.2A Form of Incentive Stock Option Agreement under the 1996
Stock Plan(4)
10.2B Form of Non-Qualified Stock Option Agreement under the 1996
Stock Plan(4)
10.3 Employee Stock Purchase Plan(2)
10.4 Lease for One Arsenal Marketplace, Watertown, Massachusetts(1)
10.5 Source Code License Agreement dated as of August 8, 1995 between
the Company and InterGroup Technologies, Inc.(2)
10.6 Software License Agreement dated as of August 8, 1995 between
the Company and InterGroup Technologies, Inc.(2)
44
<PAGE>
10.6A Agreements dated as of May 21, 1996 and May 22, 1996 amending the
Source Code License Agreement and Software License Agreement
between the Company and InterGroup Technologies, Inc.(2)
10.7 Source Code License Agreement dated as of February 8, 1996
between the Company and Mentor Communications Limited(2)
10.8 Software License Agreement dated as of August 10, 1995
between the Company and Mystic River Software, Inc.(2)
10.9 Joint Marketing Agreement effective as of February 27, 1996 between
the Company and Hewlett-Packard Company(2)
10.10 Warrant Purchase Agreement dated as of February 16, 1996 between
the Company and SSB Investments, Inc.(2)
10.11 Common Stock Purchase Warrant dated as of February 16, 1996
issued to SSB Investments, Inc.(2)
10.12 Series B Convertible Preferred Stock Purchase Agreement
dated February 27, 1996 between the Company and Hewlett-Packard
Company(1)
10.13 Amendment to Series B Convertible Preferred Stock Purchase
Agreement dated as of March 6, 1996 between the Company and
Hewlett-Packard Company(1)
10.13 Amendment No. 1 to Series B Convertible Preferred Stock Purchase
Agreement dated as of June 7, 1996 between the Company and
Hewlett-Packard Company(3)
10.14 Series B Convertible Preferred Stock Purchase Agreement dated
March 6, 1996 among the Company and the purchasers named therein(1)
10.15 Registration Rights Agreement dated March 6, 1996 among the
Company and the investors named therein(1)
10.16 Series C Convertible Preferred Stock Purchase Agreement dated as
of March 29, 1996 among the Company and the purchasers
named therein(1)
10.17 Registration Rights Agreement dated as of March 29, 1996 among
the Company and the investors named therein(1)
10.18 Stock Purchase Agreement dated as of April 22, 1997 by and among
Avix Ventures, L.P. and the named Sellers therein(5)
10.19* Letter agreement dated as of July 8, 1997 by and between the
Company and Joseph Seebach.
10.20* Promissory Note for $150,000 dated as of February 3, 1998 from
Joseph Seebach for the benefit of the Company.
10.21* Stock Pledge Agreement dated as of February 3, 1998 by and between
the Company and Joseph Seebach.
10.22* Letter agreement dated as of February 9, 1998 by and between the
Company and Peter Marton.
10.23* Severance Agreement dated as of February 26, 1998 by and
between the Company and David W. Chapman.
45
<PAGE>
10.24 Agreement and Plan of Merger dated as of December 31, 1998
by and among the Company, Advis Acquisition Corporation,
Advis, Inc. and David S. Buck. (7)
21* List of Subsidiaries
23* Consent of Arthur Andersen LLP
27.1* Financial Data Schedule for (current) fiscal year ended DEC-31-1998
- ----------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on May 22, 1996 (File
No. 333-04235) and incorporated herein by reference thereto.
(2) Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
June 13, 1996 (File No. 333-04235) and incorporated herein by reference
thereto.
(3) Filed as an exhibit to Amendment No. 2 to the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
June 25, 1996 (File No. 333-04235) and incorporated herein by reference
thereto.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 28, 1997 (File No.
000-20789) and incorporated herein by reference thereto.
(5) Filed as an exhibit to Schedule 13D filed with the Securities and Exchange
Commission on May 2, 1997 (File No. 005-47827) and incorporated herein by
reference thereto.
(6) Filed as an exhibit to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on September 22, 1998.
(7) Filed as an exhibit to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 14, 1999.
* Filed herewith.
A COPY OF ANY EXHIBIT TO THIS ANNUAL REPORT MAY BE OBTAINED WITHOUT CHARGE
BY WRITTEN REQUEST TO THE COMPANY'S SECRETARY, DAVID W. CHAPMAN, PRIMIX
SOLUTIONS, INC., ONE ARSENAL MARKETPLACE, WATERTOWN, MA 02472.
(b) Reports on Form 8-K. The Registrant did not file any reports on Form
8-K during the last quarter of the period covered by this Annual Report.
(c) Exhibits. The response to this portion of Item 14 is submitted as a
separate section of this Annual Report beginning on page 44.
(d) Financial Statement Schedules. The response to this portion of Item 14
is submitted as a separate section of this Annual Report beginning on page S-1.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRIMIX SOLUTIONS INC.
Date: March 30, 1999
By: /s/ Lennart Mengwall
------------------------------------
Lennart Mengwall
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman, President and
/s/ LENNART MENGWALL Chief Executive Officer
- ------------------------------ (Principal Executive March 30, 1999
Lennart Mengwall Officer & Director)
Chief Financial Officer,
/s/ DAVID W. CHAPMAN Treasurer and Secretary
- ------------------------------ (Principal Financial and March 30, 1999
David W. Chapman Accounting Officer)
/s/ KEVIN AZZOUZ
- ------------------------------ Director March 30, 1999
Kevin Azzouz
/s/ ROBERT HEDGES
- ------------------------------ Director March 30, 1999
Robert Hedges
/s/ OFER NEMIROVSKY
- ------------------------------ Director March 30, 1999
Ofer Nemirovsky
</TABLE>
47
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Primix Solutions Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated balance sheets of Primix Solutions Inc. as of December 1997 and
1998 and the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders' equity (deficit) and cash flows
for the years ended December 31, 1996, 1997, and 1998, included in this Form
10-K, and have issued our report thereon dated February 18, 1999. Our audits
were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The attached schedule is the responsibility of the
Company's management and is presented for the purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 18, 1999
S-1
<PAGE>
Schedule II
PRIMIX SOLUTIONS INC.
VALUATION OF QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Bad Debt Balance at
Allowance for Doubtful Accounts Beginning Period Expense Recoveries Write-offs End of Period
- ------------------------------- ---------------- ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996 $100,000 $260,000 $-- $(77,000) $283,000
Year ended December 31, 1997 283,000 260,000 (233,000) -- 50,000
Year ended December 31, 1998 50,000 42,000 -- -- 92,000
</TABLE>
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Restructuring reserve Beginning Period Expense Payments Other End of Period
- ------------------------------- ---------------- ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996 $-- $-- $-- $-- $--
Year ended December 31, 1997 -- 665,000 (478,000) -- 187,000
Year ended December 31, 1998 187,000 -- (187,000) -- --
</TABLE>
S-2
<PAGE>
Primix Solutions Inc.
EXHIBIT INDEX
Listed and indexed below are all Exhibits filed as part of this Report.
Certain Exhibits are incorporated by reference to documents previously filed by
the Company with the Securities and Exchange Commission pursuant to Rule 12b-32
under the Securities Exchange Act of 1934, as amended.
Exhibit
No. Description
3.1 Third Amended and Restated Certificate of Incorporation(2)
3.2 Amended and Restated By-laws(2)
4.1 Specimen Common Stock Certificate(6)
10.1 1995 Stock Plan, as amended(1)
10.1A Form of Incentive Stock Option Agreement under the 1995
Stock Plan(4)
10.1B Form of Non-Qualified Stock Option Agreement under the 1995
Stock Plan(4)
10.2 1996 Stock Plan, as amended(2)
10.2A Form of Incentive Stock Option Agreement under the 1996
Stock Plan(4)
10.2B Form of Non-Qualified Stock Option Agreement under the 1996
Stock Plan(4)
10.3 Employee Stock Purchase Plan(2)
10.4 Lease for One Arsenal Marketplace, Watertown, Massachusetts(1)
10.5 Source Code License Agreement dated as of August 8, 1995 between
the Company and InterGroup Technologies, Inc.(2)
10.6 Software License Agreement dated as of August 8, 1995 between the
Company and InterGroup Technologies, Inc.(2)
10.6A Agreements dated as of May 21, 1996 and May 22, 1996 amending the
Source Code License Agreement and Software License Agreement
between the Company and InterGroup Technologies, Inc.(2)
10.7 Source Code License Agreement dated as of February 8, 1996 between
the Company and Mentor Communications Limited(2)
10.8 Software License Agreement dated as of August 10, 1995 between the
Company and Mystic River Software, Inc.(2)
10.9 Joint Marketing Agreement effective as of February 27, 1996 between
the Company and Hewlett-Packard Company(2)
10.10 Warrant Purchase Agreement dated as of February 16, 1996 between
the Company and SSB Investments, Inc.(2)
10.11 Common Stock Purchase Warrant dated as of February 16, 1996 issued
to SSB Investments, Inc.(2)
50
<PAGE>
10.12 Series B Convertible Preferred Stock Purchase Agreement dated
February 27, 1996 between the Company and Hewlett-Packard
Company(1)
10.13 Amendment to Series B Convertible Preferred Stock Purchase
Agreement dated as of March 6, 1996 between the Company and
Hewlett-Packard Company(1)
10.13 Amendment No. 1 to Series B Convertible Preferred Stock Purchase
Agreement dated as of June 7, 1996 between the Company and
Hewlett-Packard Company(3)
10.14 Series B Convertible Preferred Stock Purchase Agreement dated
March 6, 1996 among the Company and the purchasers named therein(1)
10.15 Registration Rights Agreement dated March 6, 1996 among the Company
and the investors named therein(1)
10.16 Series C Convertible Preferred Stock Purchase Agreement dated as of
March 29, 1996 among the Company and the purchasers
named therein(1)
10.17 Registration Rights Agreement dated as of March 29, 1996 among the
Company and the investors named therein(1)
10.18 Stock Purchase Agreement dated as of April 22, 1997 by and among
Avix Ventures, L.P. and the named Sellers therein(5)
10.19* Letter agreement dated as of July 8, 1997 by and between the
Company and Joseph Seebach.
10.20* Promissory Note for $150,000 dated as of February 3, 1998 from
Joseph Seebach for the benefit
of the Company.
10.21* Stock Pledge Agreement dated as of February 3, 1998 by and between
the Company and Joseph Seebach.
10.22* Letter agreement dated as of February 9, 1998 by and between the
Company and Peter Marton.
10.23* Severance Agreement dated as of February 26, 1998 by and between
the Company and David W. Chapman.
10.24 Agreement and Plan of Merger dated as of December 31, 1998
by and among the Company, Advis Acquisition Corporation,
Advis, Inc. and David S. Buck. (7)
21* List of Subsidiaries
23* Consent of Arthur Andersen LLP
27.1* Financial Data Schedule for (current) fiscal year ended DEC-31-1998
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on May 22, 1996 (File
No. 333-04235) and incorporated herein by reference thereto.
(2) Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
June 13, 1996 (File No. 333-04235) and incorporated herein by reference
thereto.
51
<PAGE>
(3) Filed as an exhibit to Amendment No. 2 to the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
June 25, 1996 (File No. 333-04235) and incorporated herein by reference
thereto.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 28, 1997 (File No.
000-20789) and incorporated herein by reference thereto.
(5) Filed as an exhibit to Schedule 13D filed with the Securities and Exchange
Commission on May 2, 1997 (File No. 005-47827) and incorporated herein by
reference thereto.
(6) Filed as an exhibit to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on September 22, 1998.
(7) Filed as an exhibit to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 14, 1999.
* Filed herewith.
52
<PAGE>
EXHIBIT 10.19
HAND DELIVERED
July 8, 1997
Joseph W. Seebach
8 Country Squire Drive
Norfolk, MA 02056
Dear Joe:
It is my sincere pleasure to offer you the position of Senior Vice President,
Software Products Group at OneWave, Inc. The terms of our offer are as
follows:
1. START DATE. Your employment by the Company will start on July 9, 1997 (the
"Start Date").
2. SALARY. Your starting salary will be paid based on a rate of $150,000 per
year, payable twice each month in accordance with OneWave's standard
payroll practices. Your salary may be reviewed by the Company on an annual
basis.
3. CASH BONUS. During the first two years of your employment, you will be
eligible for cash bonuses with respect to successive complete calendar
quarters ("Quarters"), as follows:
a) Each bonus is paid only if the Company reports earnings per share
(EPS) in its periodic reports as filed with the SEC for any given
Quarter of $ .25 per share or greater (the "Target EPS").
b) For each quarter during which the Target EPS is met, you will be paid
a bonus (an "EPS Bonus") in the amount of $37,500 multiplied by the
number of entire Quarters during which you were employed by the
Company (including the partial Quarter ending September 30, 1997),
minus the amount of any EPS Bonus(es) previously paid. For example:
<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EPS: .10 .20 .30 .20 .25 .10 .10 .10
Bonus: $0 $0 $112.5k $0 $75k $0 $0 $0
</TABLE>
c) The final period for which you are eligible under this bonus plan is
the Quarter ending June 30, 1999; the aggregate amount of these
bonuses shall not exceed $300,000. For subsequent periods during
which you are employed, the Company will implement performance
measures providing for incentive cash compensation targeted at a
minimum of $150,000 per year. You must be employed at the end of the
Quarter to receive a bonus with respect to that quarter.
d) This bonus is not guaranteed; if the Target EPS is not met, the bonus
will not be paid.
e) Bonuses earned will be paid within 60 days from the end of the Quarter
with respect to which the Target EPS was met.
f) For purposes of this bonus plan, EPS may be adjusted by the Company in
its discretion in the event that (i) there are one-time or
extraordinary expenses, revenues or other items, or (ii) there
is any stock split, recapitalization, merger, stock offering and the
like, or (iii) the Company is no longer subject to SEC reporting
requirements.
<PAGE>
ONE WAVE CONFIDENTIAL Mr. Joseph Seebach
July 8, 1997
Page 2
4. NON-QUALIFIED STOCK OPTION. You will be granted a fully vested
Non-Qualified Stock Option ("NQSO") to purchase 100,000 shares of Stock
(the "NQSO Shares") with an exercise price equal to the last reported sale
price on the third NASDAQ trading day following announcement of Q2 '97
results (the "Initial Price"); you agree to exercise such vested option in
full within twenty business days from the Grant Date, and to purchase the
NQSO Shares.
a) The Company shall have the right and option, but not the obligation,
upon the termination of your employment by the Company, to re-purchase
the NQSO Shares from you for a per share price equal to Initial Price.
This re-purchase option may be exercised any time within 90 days from
your termination.
b) OneWave's re-purchase option applies to the full amount of the NQSO
Shares, reduced by 6,250 shares on September 30, 1997, and reduced by
another 6,250 shares on the first day following each full Quarter that
you are employed by OneWave.
c) You agree that all NQSO Shares which are subject to OneWave's
re-purchase option are restricted, and may not be assigned, sold or
transferred to any person for any reason, except to family members for
estate planning purposes. The NQSO shares will be represented by 16
certificates for 6,250 shares each, to be held by the Company and
delivered to you as and when OneWave's re-purchase option lapses.
d) You will be solely responsible for obtaining your desired tax
treatment in connection with such option and shares, including without
limitation filing an "83(b) Election" with the IRS within 30 days from
the date of exercise.
5. INCENTIVE STOCK OPTION. You will be granted an Incentive Stock Option
("ISO") for 250,000 shares, subject to annual ISO limitations imposed under
the Internal Revenue Code. Any option which cannot qualify as an ISO will
be issued as a NQSO.
a) This ISO shall vest in 16 equal quarterly installments commencing with
your date of employment.
b) This ISO shall be granted on the Grant Date, having an exercise price
equal to Initial Price.
6. RELOCATION. The Company will pay you the lump sum of $50,000 in order to
defray your relocation expenses. You are not required to account for your
use of these funds. In addition, OneWave will reimburse the reasonable
airfare, lodging, meals and local travel expenses incurred by you and your
immediate family in connection with up to three trips to the greater Boston
area to locate suitable housing. OneWave will have no other obligation
with respect to your relocation and associated costs and expenses.
7. BENEFITS. You will be eligible for all health insurance and other benefit
programs as made available to other Company officers, including:
contributory medical, dental, and life insurance, health reimbursement, a
paid vacation, and a 401(k) salary deferral program. Vacation time is
accrued after your first month of employment, you will be entitled to three
weeks for the first five years of employment, and four weeks for each year
thereafter, with rates of accrual and use based on OneWave's policies. In
addition, OneWave observes ten holidays per year. You will travel in
accordance with OneWave's policies, which have limitations on first class
travel.
<PAGE>
ONE WAVE CONFIDENTIAL Mr. Joseph Seebach
July 8, 1997
Page 3
8. TERMINATION OF EMPLOYMENT.
a) CHANGE IN CONTROL. In the event that the Company engages in or becomes
subject to a "Business Combination", as defined in Section 203 of the
Delaware General Corporation Law, and you are terminated within the
succeeding 18 months for any reason other than gross misconduct,
violation of law or unethical conduct, then:
i) you will be entitled to receive continuation of your then-current
base salary for one (1) year following termination;
ii) you will be entitled to receive cash bonuses for the then-current
and three Quarters following termination, for any such Quarter(s)
where the Target EPS is met;
iii) all unvested stock options will accelerate and become immediately
exercisable, but must be exercised within 90 days from
termination;
iv) the number of NQSO Shares to which the Company's re-purchase
option apply shall immediately be reduced to only such number of
shares as would have been covered at the expiration of one (1)
year following your termination; and
v) the Company will reimburse you for up to $35,000 of your actual
and reasonable relocation costs for your return to California.
b) TERMINATION WITHOUT CAUSE. In the event that, within 24 months
following your Start Date, your employment is terminated by OneWave
for reasons other than demonstrable lack of performance, gross
misconduct, violation of law or unethical conduct (and provided that
you are not entitled to consideration under Section 10(a) above),
then:
i) you will be entitled to receive continuation of your then-current
base salary for the "Roll-off Period", defined as the period
ending on the later of the following: (A) six months from
termination, or (B) 24 months from your Start Date;
ii) you will be entitled to receive cash bonuses during the Roll-off
Period for any Quarter(s) ending in the Roll-off Period for which
the Target EPS is met,
iii) your stock options will continue to vest during the Roll-Off
Period in accordance with their terms, but must be exercised
within 90 days from the end of the Roll-off Period;
iv) the number of NQSO Shares to which the Company's re-purchase
option apply shall continue to be reduced during the Roll-off
Period in accordance with its terms; and
v) the Company will reimburse you for up to $35,000 of your actual
and reasonable relocation costs for your return to California.
c) NO EMPLOYMENT CONTRACT. Except to the extent specifically provided
above, the Company will have no obligation or liability to you as a
result of the termination of your employment by either party for any
reason. This is not a contract of employment, and you specifically
acknowledge that you will be an employee-at-will.
On your first day of employment, you will be required to execute OneWave's
standard Employee Agreement (copy enclosed), and to provide satisfactory proof
of eligibility for employment in the United States. In this regard, please fill
out Part 1 of the attached INS Form I-9, and bring with you the documentation
required by Part 2.
<PAGE>
ONE WAVE CONFIDENTIAL Mr. Joseph Seebach
July 8, 1997
Page 4
Joe, I know that we have been in discussions since the first week of June, and
that this has taken a very long time to work out. I appreciate your patience,
and sincerely expect that your commitment will be rewarded.
Please indicate your agreement to the terms of this Offer by countersigning
where indicated below, and then return a fully executed copy to me at your
earliest convenience. We will then prepare definitive agreements regarding your
compensation.
If you any questions or concerns, please do not hesitate to contact me.
I look forward to having you on board at OneWave.
Sincerely,
/s/ Kevin Azzouz
Kevin Azzouz
President and CEO
AGREED:
/s/ Joseph W. Seebach
------------------------------------
Mr. Joseph W. Seebach
Date: 7/16/97
-------------------------------
<PAGE>
EXHIBIT 10.20
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION.
PROMISSORY NOTE
February 3, 1998
Boston, Massachusetts
US$150,000
FOR VALUE RECEIVED, the undersigned, Joseph Seebach (the "Maker"), hereby
promises to pay to the order of OneWave, Inc., a Delaware corporation (the
"PAYEE"), at such place or places as may be specified by the Payee, in lawful
money of the United States of America, the principal sum of ONE HUNDRED AND
FIFTY THOUSAND DOLLARS (US$150,000).
1. PAYMENT OF PRINCIPAL AND INTEREST. The principal sum of, and all
accrued but unpaid interest on, this Note shall be due and payable on December
31, 1999 or such earlier date as may be mutually agreed upon by the Maker and
the Payee, or as otherwise provided herein. All amounts due and owing under
this Note shall bear interest at the rate of six and one-half percent (6 1/2%)
per annum on the unpaid balance, compounded quarterly. The interest due shall
be paid within 30 days after the end of each calendar quarter. All computations
of the interest rate hereunder shall be made on the basis of a three hundred and
sixty-five (365) day year and shall be paid for the actual number of days
elapsed on which the principal sum is outstanding. This Note may be prepaid by
the Maker at any time without penalty.
2. SECURITY. This Note is secured by a perfected, first priority
security interest in 100,000 shares of the common stock of OneWave, Inc. owned
by the Maker, in accordance with the terms of that certain Stock Pledge
Agreement by and between the Maker and the Payee dated February 3, 1998 (the
"Pledge Agreement").
3. EVENTS OF DEFAULT. It shall be deemed an "Event of Default" hereunder
in the event of: (i) an assignment for the benefit of creditors or commencement
of any proceeding under any bankruptcy or insolvency law by or against the
Maker, (ii) the termination, for any reason, of the Maker's employment with the
Payee or (iii) a material breach of the Pledge Agreement by the Maker.
1
<PAGE>
4. MAXIMUM RATE OF INTEREST. All agreements between the Maker and the
Payee are hereby expressly limited so that in no contingency or event
whatsoever, whether by reason of acceleration of maturity of the indebtedness
evidenced hereby or otherwise, shall the amount paid or agreed to be paid to the
Payee for the use, forbearance or detention of the indebtedness evidenced hereby
exceed the maximum permissible under applicable law. As used herein, the term
"applicable law" shall mean the law in effect as of the date hereof, PROVIDED,
HOWEVER, that in the event there is a change in the law which results in a
higher permissible rate of interest, then this Note shall be governed by such
new law as of its effective date. If, from any circumstance whatsoever,
fulfillment of any provision hereof at the time performance of such provision
shall be due, shall involve transcending the limit of validity prescribed by
law, then the obligation to be fulfilled shall automatically be reduced to the
limit of such validity, and if from any circumstances the Payee should ever
receive as interest an amount which would exceed the highest lawful rate, such
amount in excess shall be applied first to the reduction of the principal
balance evidenced hereby.
5. WAIVERS OF CERTAIN RIGHTS. The Maker hereby expressly waives
presentment, demand, protest and notice of every kind, and assents to the
substitution, release or addition of any collateral which at any time may be
security for payment of this Note.
No delay or omission on the part of the Payee in exercising any rights
hereunder shall operate as a waiver of such rights or of any other right of the
Payee, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion.
6. EXPENSES. The Maker will pay all costs and expenses of collection,
including reasonable attorney's fees, incurred or paid by the Payee in enforcing
this Note.
7. FURTHER ASSURANCES. The Maker shall do, make, execute and deliver all
such additional and further acts, deeds, assurances and instruments as the Payee
may reasonably require to more completely vest in and assure to the Payee its
rights hereunder.
8. ASSIGNMENT; SUCCESSORS. This Note is personal and may not be assigned
by the Maker. This Note and all obligations of the Maker hereunder shall be
binding upon his heirs, executors and administrators. The Payee shall have the
right to assign this Note, without any restriction. The Payee's rights and
remedies under this Note shall inure to the benefit of its assigns and
successors by way of merger, consolidation or sale of substantially all of the
assets or stock of the Payee.
9. GOVERNING LAW. This Note shall be governed by and construed under the
laws of The Commonwealth of Massachusetts, without giving effect to the conflict
of laws principles thereof. If any provision of this Note is held to be invalid
or unenforceable by a court of competent jurisdiction, the other provisions of
this Note shall remain in full force and effect.
2
<PAGE>
WITNESS: MAKER:
JOSEPH SEEBACH
/s/ David W. Chapman /s/ Joseph Seebach
- --------------------------- ------------------------------------
PAYEE:
ONEWAVE, INC.
By: /s/ Lennart Mengwall
-------------------------
Name: Lennart Mengwall
Title: President & CEO
DOCSC\592803.1
<PAGE>
EXHIBIT 10.21
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT is made as of February 3, 1998, between Joseph
Seebach ("Pledgor") and OneWave, Inc., a Massachusetts corporation ("Pledgee").
Section 1. PLEDGE OF STOCK. Pledgor hereby pledges, assigns, grants a
first priority security interest in, and delivers to Pledgee the Stock (as
hereinafter defined), to be held by Pledgee subject to the terms and
conditions hereinafter set forth, the certificates for which, accompanied by
stock powers or other appropriate instruments of assignment thereof duly
executed by Pledgor, have been delivered to Pledgee.
Section 2. DEFINITIONS.
(a) The term "STOCK" as used herein includes the shares of capital
stock described in EXHIBIT A attached hereto and any additional shares of
stock of any corporation or company at the time pledged with Pledgee
hereunder. The term "Stock" shall further include all cash or non-cash
income from the shares of Stock pledged hereunder, all increases therein and
proceeds thereof, other than income, increases or proceeds received by
Pledgor pursuant to Section 6 hereof, and any dividend paid in respect of the
Stock in the form of additional shares of stock, options to purchase stock,
warrants or convertible securities (a "Non-Cash Dividend").
(b) The term "OBLIGATIONS" as used herein means all indebtedness,
obligations and liabilities of Pledgor to Pledgee, whether now existing or
hereafter arising, under that certain Promissory Note in the face amount of
ONE HUNDRED AND FIFTY THOUSAND DOLLARS ($150,000) made by Pledgee in favor of
Pledgor on February 3, 1998 (the "Note") and all future advances or loans
given by Pledgee to Pledgor under any other arrangements.
(c) The term "Event of Default" as used herein shall mean the
occurrence of an event of default under the Note.
Section 3. SECURITY FOR OBLIGATIONS. This Agreement and the pledge of
the Stock hereunder is made in favor of Pledgee as security for the
Obligations.
Section 4. LIQUIDATION, RECAPITALIZATION, ETC. Any sums paid upon or
with respect to any of the Stock upon the liquidation or dissolution of the
issuer thereof shall be paid over to Pledgee to be held by it as security for
the Obligations; and in case any distribution of capital shall be made on or
in respect of any of the Stock or any property shall be distributed upon or
with respect to any of the Stock pursuant to the recapitalization or
reclassification of the capital
1
<PAGE>
of the issuer thereof or pursuant to the reorganization thereof, the capital
or property so distributed shall be delivered to Pledgee to be held by it as
security for the Obligations. All sums of money and property paid or
distributed in respect of the Stock upon such a liquidation, dissolution,
recapitalization or reclassification which are received by Pledgor shall,
until paid or delivered to Pledgee, be held in trust for Pledgee as security
for the Obligations.
Section 5. WARRANTY OF TITLE. Pledgor warrants that: (a) Pledgor is
the lawful, record and beneficial owner of the Stock; (b) the Stock is not
subject to any pledge, lien, security interest, charge, option, restrictions
or other encumbrances except the security interest created by this Agreement;
(c) Pledgor has the power, authority and legal right to pledge all of such
Stock pursuant to this Agreement; (d) no person has any present or future
right (conditional, preemptive or otherwise) to acquire, vote, register or
restrict the transfer of the Stock; and (d) the execution and delivery of
this Agreement and the pledging of the Stock hereunder do not contravene any
law or any rule or regulation thereunder or any judgment, decree or order of
any tribunal, or conflict with, or result in a breach of or default under, or
give a rise of acceleration under, any agreement or instrument to which
Pledgor is a party or any of Pledgor's property is bound.
Section 6. DIVIDENDS, VOTING, ETC., PRIOR TO MATURITY. So long as no
Event of Default has occurred and is continuing, Pledgor shall be entitled to
receive all cash dividends paid in respect of the Stock, to vote the Stock
and to give consents, waivers and ratifications in respect of the Stock,
PROVIDED that no vote shall be cast, or consent, waiver or ratification given
or action taken which would be inconsistent with or violate any provisions of
this Agreement, and PROVIDED FURTHER, that upon an Event of Default, Pledgee
may cause the Stock to be transferred into its own name as collateral
security. All such rights of Pledgor to receive cash dividends shall cease in
case an Event of Default shall have occurred and be continuing. All such
rights of Pledgor to vote and give consents, waivers and ratifications with
respect to the Stock shall, at Pledgee's option, as evidenced by Pledgee
notifying Pledgor of such election, cease in case an Event of Default shall
have occurred and be continuing. In the event that a Non-Cash Dividend shall
be paid in respect of the Stock, Pledgor shall promptly deliver to Pledgee
the certificates issued in connection with such Non-Cash Dividend, if any,
together with stock powers or other appropriate instruments of assignment
thereof duly executed by Pledgor.
Section 7. REMEDIES. If an Event of Default shall have occurred and be
continuing, Pledgee shall thereafter have the following rights and remedies
(to the extent permitted by applicable law) in addition to the rights and
remedies of a secured party under the Uniform Commercial Code of
Massachusetts, all such rights and remedies being cumulative, not exclusive,
and enforceable alternatively, successively or concurrently, at such time or
times as Pledgee deems expedient:
2
<PAGE>
(a) if Pledgee so elects and gives notice of such election to
Pledgor, Pledgee may vote any or all shares of the Stock and give all consents,
waivers and ratifications in respect of the Stock and otherwise act with respect
thereto as though it were the outright owner thereof (Pledgor hereby irrevocably
constituting and appointing Pledgee the proxy and attorney-in-fact of Pledgor,
with full power of substitution, to do so);
(b) Pledgee may demand, sue for, collect or make any compromise or
settlement Pledgee deems suitable in respect of the Stock;
(c) Pledgee may sell, resell, assign and deliver, or otherwise
dispose of any or all of the Stock, for cash and/or credit and upon such terms
at such place or places and at such time or times and to such persons, firms,
companies or corporations as Pledgee thinks expedient, all without demand for
performance by Pledgor or any notice or advertisement whatsoever except such as
may be required by law; and
(d) Pledgee may cause all or any part of the Stock held by it to be
transferred into its name or the name of its nominee or nominees.
Pledgee may enforce its rights hereunder without any other notice and
without compliance with any other condition precedent now or hereunder
imposed by statute, rule of law or otherwise (all of which are hereby
expressly waived by Pledgor, to the fullest extent permitted by law).
Pledgor acknowledges that ten (10) calendar days' notice of any public sale
or of that date on or after which a private sale may be effected is
reasonable notice. Pledgee may buy any part or all of the Stock at any
public sale, and if any part or all of the Stock is of a type customarily
sold in a recognized market or is of the type which is the subject of
widely-distributed standard price quotations, Pledgee may buy at a private
sale and may make payments thereof by any means. Pledgee may apply the cash
proceeds actually received from any sale or other disposition of the Stock to
the reasonable expenses of retaking, holding, preparing for sale, selling and
the like, to reasonable attorneys' fees, and all legal expenses, travel and
other expenses which may be incurred by Pledgee in attempting to collect the
Obligations or to enforce this Agreement or in the prosecution or defense of
any action or proceeding related to the subject matter of this Agreement; and
then to the Obligations, and any surplus shall be paid to Pledgor.
Pledgor recognizes that Pledgee may be unable to effect a public sale of
the Stock by reason of certain prohibitions contained in the Securities Act
of 1933, as amended, but may be compelled to resort to one or more private
sales thereof to a restricted group of purchasers or to a public sale which
is restricted to residents of the Commonwealth of Massachusetts. Pledgor
agrees that any such private sales or such restricted public sales may be at
prices and other terms less favorable to the seller than if sold at public
sales and that such private sales or such restricted public sales shall not
by reason thereof be deemed not to have been made in a
3
<PAGE>
commercially reasonable manner. Pledgee shall be under no obligation to
delay a sale of any of the Stock for the period of time necessary to permit
the issuer of such securities to register such securities for public sale
under the Securities Act of 1933, as amended, even if the issuer would agree
to do so.
In all events, Pledgee shall give Pledgor not less than ten (10) calendar
days' written notice of any proposed disposition of the Stock.
Section 8. MARSHALLING. Pledgee shall not be required to marshal any
present or future security for (including but not limited to this Agreement
and the Stock pledged hereunder), or guarantees of, the Obligations, or to
resort to such security or guarantees in any particular order; and all of its
rights hereunder and in respect of such security and guarantees shall be
cumulative and in addition to all other rights, however existing or arising.
To the extent that he lawfully may, Pledgor hereby agrees that he will not
invoke any law relating to the marshalling of collateral which might cause
delay in or impede the enforcement of Pledgee's rights under this Agreement
or under any other instrument evidencing any of the Obligations or under
which any of the Obligations is outstanding or by which any of the
Obligations is secured or guaranteed, and to the extent that it lawfully may
Pledgor hereby irrevocably waives the benefits of all such laws.
Section 9. PLEDGOR'S OBLIGATIONS NOT AFFECTED. The obligations of Pledgor
hereunder shall remain in full force and effect without regard to, and shall not
be impaired by: (a) any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation or the like of Pledgee; (b) any exercise
or nonexercise, or any waiver, by Pledgee of any right, remedy, power or
privilege under or in respect of the Obligations or any of any security therefor
(including this Agreement); (c) any amendment to or modification of any
instrument (other than this Agreement) securing any of the Obligations; or (d)
the taking of additional security for, or any guaranty of, any of the
Obligations or the release or discharge or termination of any security or
guaranty for any of the Obligations; whether or not Pledgor shall have notice or
knowledge of any of the foregoing.
Section 10. TRANSFER, ETC., BY PLEDGOR. Without the prior written
consent of Pledgee, Pledgor will not sell, assign, transfer or otherwise
dispose of, grant any option with respect to, or pledge or grant any security
interest in or otherwise encumber any of the Stock or any interest therein,
except for the pledge thereof provided for in this Agreement.
Section 11. FURTHER ASSURANCES. Pledgor will, from time to time, execute
and deliver to Pledgee all such other and further instruments and documents
and take or cause to be taken all such other and further action as Pledgee
may reasonably request in order to effect and confirm more securely in
Pledgee all rights contemplated in this Agreement.
4
<PAGE>
Section 12. PLEDGEE'S EXONERATION. Under no circumstances shall Pledgee
be deemed to assume any responsibility for or obligation or duty with respect
to the Stock or any matter or proceedings arising out of or relating thereto,
other than to exercise reasonable care in the physical custody of the Stock.
Pledgee shall not be required to take any action of any kind to collect,
preserve or protect its or Pledgor's rights in the Stock or against other
parties thereto, other than to exercise reasonable care in the physical
custody of the Stock.
Section 13. NO WAIVER, ETC. No act, failure or delay by Pledgee shall
constitute a waiver of its rights and remedies hereunder or otherwise. No
single or partial waiver by Pledgee of any default or right or remedy which
it may have shall operate as a waiver of any other default, right or remedy
or of the same default, right or remedy on a future occasion. Pledgor hereby
waives presentment, notice of dishonor and protest of all instruments,
included in or evidencing any of the Obligations, and any and all other
notices and demands whatsoever (except as expressly provided herein).
Section 14. NOTICE, ETC. All communications herein provided shall be in
writing and shall be sufficient if sent by United States mail, registered or
certified, postage prepaid, delivered by messenger, overnight delivery
service or telecopier, addressed as follows:
If to Pledgor, at the address set forth below Pledgor's signature.
If to Pledgee: OneWave, Inc.
One Arsenal Marketplace, 2nd Floor
Watertown, MA 02172
Telecopier: (617) 923-6565
Attention: Chief Financial Officer
or to such other address as the party to receive any such communication or
notice may have designated by written notice to the other party.
Any notice given pursuant to this Section shall be deemed to have been
given and received when actually delivered, upon receipt of electronic
confirmation if by telecopier, one business day after dispatch by a recognized
overnight delivery service, or three business days after mailing by certified or
registered mail with proper postage affixed and return receipt requested.
Section 15. TERMINATION. This Agreement shall terminate at such time as
all of the Obligations shall have been paid in full, and upon such
termination, Pledgor shall be entitled to the return of such Stock in the
possession or control of Pledgee as has not theretofore been disposed of
pursuant to the provisions hereof and as to which Pledgee has not received
notice
5
<PAGE>
of a junior pledge, together with any moneys and other property of Pledgor at
the time held by Pledgee hereunder.
Section 16. MISCELLANEOUS PROVISIONS.
(a) Neither this Agreement nor any term hereof may be changed,
waived, discharged or terminated except by a written instrument expressly
referring to this Agreement and to the provisions so modified or limited, and
executed by the party to be charged.
(b) This Agreement is personal and may not be assigned by Pledgor.
This Agreement and all obligations of Pledgor hereunder shall be binding upon
his heirs, executors and administrators. Pledgee shall have the right to assign
this Agreement, without any restriction, and Pledgee's rights and remedies under
this Agreement shall inure to the benefit of its assigns and successors by way
of merger, consolidation or sale of substantially all of the assets or stock of
Pledgee.
(c) This Agreement and the obligations of Pledgor hereunder shall be
governed by and construed in accordance with the laws of The Commonwealth of
Massachusetts.
(d) The descriptive section headings have been inserted for
convenience of reference only and do not define or limit the provisions hereof.
If any term of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity of all other terms hereof shall be in no way
affected thereby, and this Agreement shall be construed and be enforceable as if
such invalid, illegal or unenforceable term had not been included herein.
(e) This Agreement may be executed in counterparts, each of which
shall be deemed an original and all of which together shall be deemed to be one
and the same instrument.
(f) To the extent permitted by applicable law, Pledgor hereby waives
trial by jury in any proceeding brought for the interpretation or enforcement of
this Agreement or for a determination of the rights of the parties hereunder.
Section 17. CONSENT TO JURISDICTION. PLEDGOR AND PLEDGEE IRREVOCABLY
CONSENT AND SUBMIT TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS, AND THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS IN CONNECTION WITH ANY ACTION, PROCEEDING OR CLAIM ARISING OUT
OF OR RELATING TO THIS AGREEMENT AND/OR ANY INSTRUMENT OR DOCUMENT REQUIRED
HEREBY OR INCIDENT OR COLLATERAL HERETO.
6
<PAGE>
IN WITNESS WHEREOF, Pledgor and Pledgee have caused this Agreement to be
duly executed as of the date first above written.
"PLEDGOR"
/s/ Joseph Seebach
------------------------------------
Joseph Seebach
Address: 8 Country Squire Dr.
------------------------------------
Norfolk, MA 02056
------------------------------------
"PLEDGEE"
ONEWAVE, INC.
By: /s/ Lennart Mengwall
---------------------------------
Name: Lennart Mengwall
Title: President
SPOUSE'S CONSENT:
I, as the spouse of Joseph Seebach,
acknowledge that I have read the
foregoing Stock Pledge Agreement,
that I understand the contents thereof,
and that I hereby waive any and all
rights to the Stock described therein,
to the extent such rights conflict with
rights of Pledgee thereunder.
_________________________
Name:
7
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Issuer Class of Stock Certificate Number Number of Shares
- ------ -------------- ------------------ ----------------
<S> <C> <C> <C>
OneWave, Inc. Common Stock ________ 100,000
</TABLE>
DOCSC\592817.1
<PAGE>
Peter Marton
January 15, 1999
Page 1
January 15, 1999
Peter D. Marton
4 Fairway Drive
Andover, MA 01810
Dear Peter:
This letter agreement (the "Agreement") confirms the agreement that we
have reached regarding the termination of your employment from Primix
Solutions Inc. (the "Company"). The purpose of this Agreement is to establish
an amicable arrangement for ending your employment relationship, to release
the Company from any claims that you may have against it or any related
companies, to release you from any claims that the Company or any related
companies may have against you, and to permit you to receive separation pay
and related benefits.
With those understandings and in exchange for the promises of you and
the Company set forth below, you and the Company agree as follows:
1. TERMINATION
Your employment with the Company will terminate effective February 15,
1999 (the "Termination Date"). To the extent that the Company has not already
done so, the Company shall pay to you on the Termination Date all base salary
accrued to and including the Termination Date and 1.25 days of vacation pay,
constituting all accrued but unused vacation pay due to you to and including
the Termination Date.
2. SEVERANCE PAY
The Company shall mail a check to you in the amount of $120,000.00, less
applicable taxes and withholdings the Company determines to be required for
tax purposes. The check shall be made payable to you. The Company shall mail
the check within five (5) business days of February 15, 1999.
<PAGE>
Peter Marton
January 15, 1999
Page 2
3. BENEFITS
Your eligibility to participate in the Company's health and dental plans
ceases on or after the Termination Date in accordance with the terms and
conditions of each of the health and dental plans, subject to your rights to
continue certain benefits in accordance with and subject to the law known as
COBRA. The Company agrees to pay all COBRA payments for the period beginning
on February 15, 1999 and concluding on October 15, 1999. You will be notified
of your rights under COBRA within thirty (30) days after the Termination Date.
4. CONSULTING FEES
Beginning on February 16, 1999, the Company and you agree that the Company
will be obligated to pay you for two months of consulting fees, at a rate of
$20,000 per month. The fees will be paid to you in the lump sum of $40,000,
less applicable taxes and withholdings the Company determines to be required
for tax purposes. The Company shall mail the check within five (5) business
days of February 15, 1999. The consulting fees paid to you will be
non-refundable, unless you materially breach the terms of this agreement. The
scope of services rendered shall be agreed upon between you and Lennart
Mengwall, the Company's Chairman and Chief Executive Officer. You will have
no obligation to perform consulting services to the Company under this
agreement. Your election to not perform consulting services under this
agreement does not release the Company from its obligation to pay the
consulting fees as defined herein.
5. EXPENSE REIMBURSEMENT
The Company shall reimburse you for any job-related expenses you incurred
through the Termination Date or as a result of consulting work you perform for
the Company, consistent with the Company's expense reimbursement policy. In
order to receive reimbursement for any such expenses, you must submit any and
all expense reports in writing to David Chapman, Chief Financial Officer
prior to May 15, 1999.
6. CLAIMS
You on the one hand and the Company and any of its affiliates,
subsidiaries, predecessors, successors, and assigns of each of them, and the
current and former officers, directors, employees and agents of each of the
foregoing (any and all of which are referred to as the "Company and its
Related Parties") on the other hand agree voluntarily to release and
discharge each other generally from all charges, complaints, claims,
promises, agreements, causes of action, damages, and debts of any nature
whatsoever, known or unknown, up to the date of this Agreement, which either
you or the Company and its Related Parties have, claim
<PAGE>
Peter Marton
January 15, 1999
Page 3
to have, ever had, or ever claimed to have had against the other.
Notwithstanding anything in the preceding sentence to the contrary, this
mutual general release shall not be construed to limit your right to enforce
this Agreement.
7. STOCK OPTIONS
You acknowledge and agree that none of the Stock Options granted to
you pursuant to March 13, 1998 Incentive Stock Option Agreement and March 13,
1998 Non-Qualified Stock Option Agreement entered into between you and the
Company have vested as of the Termination Date. The Stock Options therefore
terminated as of the Termination Date. You do not have any claim or
entitlement to the Company's stock.
8. NOTICES, ACKNOWLEDGMENTS AND OTHER TERMS
You are advised to consult with an attorney before signing this
Agreement.
This Agreement is the entire agreement between you and the Company and,
with the exception of the March 23, 1998 Employee Agreement, all previous
agreements, or promises between you and the Company are superseded, null, and
void.
You acknowledge that you have been given the opportunity, if you so desired,
to consider this Agreement for twenty-one (21) days before executing it. If
not signed by you and returned to me so that I receive it within twenty-one
(21) days of your receipt of the Agreement, this Agreement will no be valid.
In the event that you execute and return this Agreement within less than
twenty-one (21) days or the date of its delivery to you, you acknowledge that
such decision was entirely voluntary and that you had the opportunity to
consider this Agreement for the entire twenty-one (21) day period. The
Company acknowledges that for a period of seven (7) days from the date of the
execution of this Agreement (the "Revocation Period"), you shall retain the
right to revoke this Agreement by written notice that I receive before the
end of such period. Provided that this Agreement is not revoked pursuant to
the preceding sentence, you and the Company agree that this Agreement shall
become effective and enforceable on the date immediately following the last
day of the Revocation Period (the "Effective Date").
By signing this Agreement, you acknowledge that you are doing so
voluntarily. You also acknowledge that you are not relying on any
representations by me or any other representative of the Company concerning
the meaning of any aspect of this Agreement.
In the event of any dispute, this Agreement will be construed as a
whole, will be interpreted in accordance with its fair meaning, and will not
be construed strictly for or against either you or the Company. The law of
Massachusetts will govern any dispute about this Agreement, including any
interpretation or enforcement of this Agreement, without giving effect to the
conflict of laws provisions of Massachusetts law. In the event that any
provision or portion of a provision of this Agreement shall be determined to
be unenforceable, the
<PAGE>
Peter Marton
January 15, 1999
Page 4
remainder of this Agreement shall be enforced to the fullest extent possible
as if such provision or portion of a provision were not included. This
Agreement may be modified only by a written agreement signed by you and an
authorized representative of the Company.
If you agree to these terms, please sign and date below and return this
Agreement to me within the time limitation set forth above.
Sincerely,
PRIMIX SOLUTIONS, INC
By: /s/ Lennart Mengwall
--------------------
Accepted and agreed to: Lennart Mengwall,
Chairman & Chief Executive Officer
/s/ Peter D. Marton 1.15.99
- ------------------- --------------------
Peter D. Marton Date
<PAGE>
Exhibit 10.23
SEVERANCE AGREEMENT
BETWEEN:
ONEWAVE, INC. & DAVID W. CHAPMAN
Should OneWave, Inc (or its successor company) terminate your employment for any
reason other than gross misconduct, change your job responsibilities without
your consent or change your base salary without your consent, OneWave will pay
you a severance package that includes 6 months of base pay and continued medical
and dental benefits coverage. Additionally, at the time of termination, OneWave
will honor and pay any outstanding bonuses. All benefits will commence
immediately upon termination.
/s/ Lennart Mengwall
- --------------------------------------------------------------------------------
Lennart Mengwall, Chairman, President & CEO Signature February 26, 1998
/s/ David W. Chapman
- --------------------------------------------------------------------------------
David W. Chapman February 26, 1998
<PAGE>
EXHIBIT 21
PRIMIX SOLUTIONS INC
LIST OF SUBSIDIARIES
---------------------
The following is a list of all subsidiaries of Primix Solutions Inc., and their
jurisdiction of incorporation, and the names under which they do business:
<TABLE>
<CAPTION>
Name(s) under Which
Subsidiary Jurisdiction of Incorporation Subsidiary Does Business
- ---------- ----------------------------- ------------------------
<S> <C> <C>
Advis, Inc. Delaware Advis, Inc.
OneWave Securities Massachusetts OneWave Securities
Corporation Corporation
</TABLE>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-09101.
/S/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIALS IN 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 26,693
<SECURITIES> 0
<RECEIVABLES> 2,963
<ALLOWANCES> (92)
<INVENTORY> 0
<CURRENT-ASSETS> 30,007
<PP&E> 2,980
<DEPRECIATION> 2,159
<TOTAL-ASSETS> 33,155
<CURRENT-LIABILITIES> 3,496
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 29,602
<TOTAL-LIABILITY-AND-EQUITY> 33,155
<SALES> 4,816
<TOTAL-REVENUES> 4,816
<CGS> 0
<TOTAL-COSTS> 5,190
<OTHER-EXPENSES> 10,640
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,202)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,202)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,202)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
