As filed with the Securities and Exchange Commission on April 11,
2000
Registration No.
333-30168
SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
AMENDMENT NO.
2
TO
FORM
S-1
REGISTRATION
STATEMENT UNDER
THE SECURITIES ACT
OF 1933
MAINSPRING
COMMUNICATIONS, INC.
(Exact name of
Registrant as specified in its charter)
Delaware
(State or other
jurisdiction of
incorporation or
organization)
|
|
7389
(Primary
Standard Industrial
Classification
Code Number)
|
|
04-3314689
(I.R.S.
Employer
Identification
Number)
|
|
One Main
Street
Cambridge,
Massachusetts 02142
(617)
588-2300
(Address,
including zip code, and telephone number, including area code, of Registrant
s principal executive offices)
John M.
Connolly
Chairman,
President and Chief Executive Officer
Mainspring
Communications, Inc.
One Main
Street
Cambridge,
Massachusetts 02142
(617)
588-2300
(Name, address,
including zip code, and telephone number, including area code, of agent for
service)
Copies
to:
JOHN HESSION,
ESQ.
TESTA, HURWITZ
& THIBEAULT, LLP
125 High
Street
Boston,
Massachusetts 02110
Tel: (617)
248-7000
Fax: (617)
248-7100
|
|
KEITH F.
HIGGINS, ESQ.
ROPES &
GRAY
One
International Place
Boston,
Massachusetts 02110
Tel: (617)
951-7000
Fax: (617)
951-7050
|
|
Approximate date of
commencement of proposed sale to the public: As soon as practicable
after the effective date hereof.
If any of the securities being
registered on this form are being offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933, check the following
box. ¨
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration
statement for the same offering. ¨
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering.
¨
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering.
¨
If delivery of the prospectus is
expected to be made pursuant to Rule 434, please check the following box.
¨
DESCRIPTION OF
REGISTRATION FEE
Title of each
Class of Securities
to be Registered |
|
Amount
to be
Registered(1) |
|
Proposed Maximum
Offering Price
per Share(2) |
|
Proposed Maximum
Aggregate
Offering Price(2) |
|
Amount of
Registration Fee(3) |
|
Common Stock, $0.01
par value
per share |
|
4,025,000 |
|
$12.00 |
|
$48,300,000 |
|
$12,751.20 |
|
(1)
|
Includes shares
that the Underwriters have the option to purchase to cover
over-allotments, if any.
|
(2)
|
Estimated solely
for the purpose of computing the amount of the registration fee pursuant
to Rule 457(a).
|
(3)
|
A registration fee
of $15,312 was paid in connection with the original filing on February 11,
2000.
|
The Registrant hereby amends
this Registration Statement on such date or dates as may be necessary to
delay its effective date until the Registrant shall file a further amendment
which specifically states that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of
1933 or until this Registration Statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may
determine.
The information in
this prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an offer to sell
these securities and we are not soliciting offers to buy these securities in
any state where the offer or sale is not permitted.
PROSPECTUS
(Subject to Completion)
Issued April 12,
2000
3,500,000
Shares
[LOGO OF
MAINSPRING]
COMMON
STOCK
Mainspring
Communications, Inc. is offering 3,500,000 shares of common stock. This is
our initial public offering and no public market currently exists for our
shares. We anticipate that the initial public offering price will be between
$10 and $12 per share.
We have filed
an application for our common stock to be quoted on the Nasdaq National
Market under the symbol MSPR.
Investing in
our common stock involves risks. See Risk Factors beginning on
page 8.
PRICE
$
A SHARE
|
|
Price to
Public
|
|
Underwriting
Discounts and
Commissions
|
|
Proceeds
to
Mainspring
|
Per
Share |
|
$
|
|
$
|
|
$
|
Total |
|
$
|
|
$
|
|
$
|
Mainspring
Communications, Inc. has granted the underwriters the right to purchase up
to an additional 525,000 shares of common stock to cover
over-allotments.
The Securities and
Exchange Commission and state securities regulators have not approved or
disapproved these securities, or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal
offense.
Morgan Stanley
& Co. Incorporated expects to deliver the shares of common stock to
purchasers on
,
2000.
MORGAN STANLEY
DEAN WITTER
|
THOMAS WEISEL
PARTNERS LLC
|
,
2000
[GATEFOLD
ARTWORK]
Blue background with the heading,
Mainsprings eStrategy CONSULTING, written in black and red
letters and followed by the text, The Internet is fundamentally
reshaping the competitive dynamics of business. Companies today face the
complex task of developing effective Internet strategies that simultaneously
protect, evolve, and transform their businesses. Cut-away of three
story office building with multicolored figures outside of the building and
on each of the floors. On the roof of the building is an observatory and
four colored flags. From left to right, the first flag reads Financial
Services; the second flag reads Retail & Consumer Goods
; the third flag reads Technology, Communications & Media
; and the fourth flag reads Manufacturing. On the first
floor of the office building, from left to right, are the headings:
eSTRATEGY CONSULTING over an elevator door, Build the
Business Model, Create the Customer Experience,
Define the Solution Architecture and Commercialize the
Business Plan. On the second floor of the office building, from left
to right, are the headings: eSTRATEGY EXECUTIVE COUNCIL over an
elevator door, Proprietary Industry Research and Forum for
Exchanging Ideas & Experiences. On the third floor of the office
building, from left to right, are the headings: eSTRATEGY DIRECT
over an elevator door, Industry Analysis & Strategic Frameworks
and On-Demand Consulting Support.
[INSIDE FRONT COVER ARTWORK]
All purple background with the
statement, Mainspring is a strategy consulting firm that focuses
exclusively on developing Internet strategies.
TABLE OF
CONTENTS
Mainspring Communications, Inc. is
a Delaware corporation organized in 1996. Our principal executive offices
are located at One Main Street, Cambridge, Massachusetts 02142, and our
telephone number at that address is (617) 588-2300. Our World Wide Web site
address is http://www.mainspring.com. The web site is not part of
this prospectus. Mainspring and the coil spring logo are
registered trademarks of Mainspring Communications, Inc.
In this prospectus, the terms
Mainspring, we, us and our
refer to Mainspring Communications, Inc. and its subsidiary.
Until
, 2000 (25 days after the date of this prospectus),
all dealers that buy, sell or trade the common stock, whether or not
participating in this offering, may be required to deliver a prospectus.
This delivery requirement is in addition to the dealers obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
You should read the following
summary together with the more detailed information about Mainspring and our
common stock being sold in this offering and our financial statements and
related notes appearing elsewhere in this prospectus.
MAINSPRING
COMMUNICATIONS, INC.
Mainspring is a strategy
consulting firm that focuses exclusively on developing Internet strategies
which offer an immediate and specific plan of action. We work primarily with
Fortune 1000 companies to develop eStrategies, which we define as strategies
designed to enable a company to protect, evolve and transform its business
in the new Internet economy. Our approach integrates expertise in strategic
consulting, the Internet and targeted, discrete industries to help clients
redefine fundamental elements of their business models and achieve a
sustained competitive advantage in the new Internet economy.
We provide three integrated
service offerings: eStrategy Consulting, eStrategy Direct and eStrategy
Executive Council. eStrategy Consulting is our project-based consulting
service through which we work with our clients to develop and deliver
Internet strategies in a rapid timeframe. eStrategy Direct is our
subscription-based, online consulting service that provides our clients with
real-time access to our proprietary market analyses, as well as limited
direct access to our strategy consultants. eStrategy Executive Council is
our membership-based forum in which we bring together senior executives of
Fortune 1000 companies to exchange ideas, experiences and business practices
related to the Internet.
We are organized into four
specific industry practice areas, or vertical markets: financial services;
retail and consumer goods; technology, communications and media; and
manufacturing. We are currently working with 38 Fortune 1000 companies. Our
clients include American Express, Chase Manhattan, GE Capital, IBM, MicroAge
and New York Life. We employ over 208 professionals and are headquartered in
Cambridge, Massachusetts with an office in New York City.
OUR MARKET
OPPORTUNITY
The Internet is fundamentally
reshaping the competitive dynamics of business. As a result, companies today
face the complex task of developing effective Internet strategies that
simultaneously protect, evolve and transform their businesses.
Senior executives of Fortune 1000
companies face particular challenges in developing Internet strategies.
First, the entry of new competitors with non-traditional business models has
changed the industry landscape around which strategy must be evaluated and
implemented. Second, Internet strategy requires an integrated and
comprehensive view of business planning, customer experience and technology.
Finally, the rapid pace of change has resulted in a dramatic shortening of
the strategic planning process, as rapid time-to-market is now a critical
factor in implementing an Internet strategy.
A recent survey by Forrester
Research found that 80% of the 62 Global 2500 companies interviewed employ
independent consulting firms to develop their Internet strategies. We
believe that given the urgency and complexity associated with transforming
businesses in the Internet economy, these companies are best served by a
consulting firm with an exclusive focus on Internet strategy.
OUR
SOLUTION
We develop and deliver Internet
strategies designed to help our clients gain a competitive advantage in the
new Internet economy. The following are the key elements of the Mainspring
solution:
|
|
Pure
Internet Strategy Focus. Our pure Internet
focus allows us to continually develop our Internet expertise and provide
our clients with Internet strategies in a rapid timeframe. Our focus also
enables us to recruit highly experienced strategy consultants who want to
work on complex Internet-related engagements.
|
|
|
Immediate
and Specific Internet Strategies. We develop
eStrategies that provide our clients with an immediate and specific plan
of action. These eStrategies are comprehensive in scope and not only
address strategic issues related to our clients business, but also
ensure that the solution is technologically feasible and is consistent
with their customer and branding strategies.
|
|
|
Flexible
Service Offerings. Our three service offerings
allow our clients to choose the scope and delivery method of strategic
advice that are best suited to their needs. These services also enable our
clients to interact with us on a continuous basis while positioning us as
their ongoing strategic advisor.
|
|
|
Vertical
Market Expertise. Our targeted market focus
allows us to provide highly relevant, insightful and industry-specific
advice to our clients through each of our service offerings. In each of
our vertical markets we have hired industry experts, developed
industry-specific knowledge and created service offerings that address the
critical issues facing companies in these industries.
|
|
|
Rapid
Time to Results. Our Internet strategy focus,
disciplined methodologies and vertical market expertise enable us to
provide all of our service offerings in a rapid timeframe of an average of
four to eight weeks.
|
OUR
STRATEGY
Our objective is to be the leading
Internet strategy consulting firm for Fortune 1000 companies. Our strategies
for achieving this objective are as follows:
|
|
leverage our
business model by using the knowledge we gain from each of our service
offerings;
|
|
|
develop and expand
our client base;
|
|
|
attract and retain
high-caliber strategy consultants;
|
|
|
develop new and
further penetrate existing vertical markets; and
|
|
|
continue our
geographic expansion.
|
THE
OFFERING
Common stock
offered |
|
3,500,000
shares |
|
|
Common stock to be
outstanding after this offering |
|
17,752,553
shares |
|
|
Use of
proceeds |
|
For general
corporate purposes, including working
capital and capital expenditures related to the
expansion of our operations |
|
|
Proposed Nasdaq
National Market symbol |
|
MSPR |
SUMMARY FINANCIAL
DATA
The following summary historical
and pro forma financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and
Results of Operations and our financial statements and related notes
included elsewhere in this prospectus.
|
|
Year Ended
December 31,
|
|
|
1997
|
|
1998
|
|
1999
|
|
|
(in thousands,
except per share data) |
Statement of
Operations Data: |
Total
revenue |
|
$
84 |
|
|
$
633 |
|
|
$
7,031 |
|
Loss from
operations |
|
(5,783 |
) |
|
(5,401 |
) |
|
(13,049 |
) |
Net loss |
|
(5,427 |
) |
|
(5,163 |
) |
|
(12,694 |
) |
Basic and diluted
net loss per share |
|
$
(4.81 |
) |
|
$
(3.40 |
) |
|
$
(12.44 |
) |
Shares used in
computing basic and diluted net loss per share |
|
1,127 |
|
|
1,517 |
|
|
1,578 |
|
Unaudited pro forma
basic and diluted net loss per share |
|
|
|
|
|
|
|
$
(1.29 |
) |
Shares used in
computing unaudited pro forma basic and diluted net loss
per share |
|
|
|
|
|
|
|
9,823 |
|
Shares used in computing the pro
forma basic and diluted net loss per share have been calculated assuming the
conversion of all shares of redeemable convertible preferred stock
outstanding as of December 31, 1999 into common stock as if the shares had
converted immediately upon issuance.
The pro forma column in the
balance sheet data below gives effect to the exercise of the warrant to
purchase Series X preferred stock and to the conversion of these shares and
all shares of redeemable convertible preferred stock outstanding as of
December 31, 1999 into common stock upon the closing of this offering. The
pro forma as adjusted column also gives effect to the sale of 3,500,000
shares of common stock in this offering at an assumed initial public
offering price of $11.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses
payable by us.
|
|
As of December
31, 1999
|
|
|
Actual
|
|
Pro
Forma
|
|
Pro Forma
As Adjusted
|
|
|
(in
thousands) |
Balance Sheet
Data: |
Cash, cash
equivalents and short-term investments |
|
$
33,607 |
|
|
$33,607 |
|
$68,462 |
Working
capital |
|
27,405 |
|
|
27,405 |
|
62,260 |
Total
assets |
|
36,529 |
|
|
36,529 |
|
71,384 |
Total redeemable
convertible preferred stock |
|
58,509 |
|
|
|
|
|
Total stockholders
equity (deficit) |
|
(30,114 |
) |
|
28,395 |
|
63,250 |
RECENT DEVELOPMENT
First Quarter
Results of Operations:
The following presents our
unaudited financial results for the three months ended March 31, 1999 and
2000.
|
|
Our total revenue
increased to $5.0 million for the three months ended March 31, 2000, as
compared to $749,000 for the three months ended March 31,
1999.
|
|
|
Our gross margin
increased to $1.6 million for the three months ended March 31, 2000, as
compared to $122,000 for the three months ended March 31,
1999.
|
|
|
Our net loss
increased to $6.4 million for the three months ended March 31, 2000, as
compared to $1.4 million for the three months ended March 31,
1999.
|
ADDITIONAL
INFORMATION
Except as set forth in the
financial statements and related notes or as otherwise indicated, all
information in this prospectus:
|
|
assumes no exercise
of the underwriters over-allotment option;
|
|
|
reflects the
exercise of the warrant to purchase Series X preferred stock and the
conversion of all outstanding shares of our preferred stock into shares of
common stock; and
|
|
|
reflects the
filing, as of the closing of the offering, of our amended and restated
certificate of incorporation and the adoption of our amended and restated
by-laws implementing provisions under Description of Capital Stock
Delaware Law and Our Charter and By-Law Provisions; Anti-Takeover
Effects.
|
You should consider carefully
the following risks and all of the other information in this prospectus
before you decide to buy our common stock. If any of the following risks
actually occur, our business, financial condition or results of operations
would likely suffer. In such case, the trading price of our common stock
could decline and you may lose all or part of your
investment.
Risks Related To
Our Business
If we do not recruit and
retain experienced strategy professionals, who are currently in high demand,
we may not be able to grow our business
Our future success depends in
large part on our ability to hire and retain experienced Internet strategy
professionals. There is currently a shortage of skilled professionals in the
Internet professional services industry, and we expect this shortage to
continue. We compete intensely with other companies to recruit and hire from
this limited pool of professionals. The experienced strategy professionals
that we recruit and hire often command high salaries, and those high
salaries may adversely affect our net income. We may also have difficulty
attracting and hiring our desired number of qualified professionals after
the offering since some may perceive that the stock option component of
their compensation package is no longer as valuable. If we cannot hire and
retain new personnel, or if a significant number of our current employees
leave, we may be unable to meet our business plans and may fail to complete
existing projects or bid for new projects of similar scope and revenue. Even
if we retain our current employees, our management must continually recruit
talented professionals in order for our business to grow. Any inability to
hire or retain employees would cause our business to suffer.
We have a history of
operating losses and expect to incur losses in the
future
We experienced a net loss of $12.7
million for 1999 and a cumulative net loss of $25.0 million for the period
from inception through December 31, 1999. We expect to continue to incur
increasing expenses related to hiring and training, sales and marketing,
infrastructure development and general and administrative functions as we
expand our business. As a result, we will need to generate significant
revenues to achieve profitability. We cannot be certain whether or when this
will occur because of the significant risks and uncertainties that affect
our business. In addition, we have not yet generated cash from operations
and because we plan to continue to expand and develop our business, we may
fail to generate cash from operations in the future.
The loss of a large client
could significantly reduce our revenues
We derive a significant portion of
our revenues from large clients. In 1999, our five largest clients
collectively accounted for approximately 31% of our revenues. We may not
sustain the volume of work that we currently perform for these clients, and
there is a risk that they may not retain us in the future. Any cancellation,
deferral or significant reduction in the work performed for these clients or
a significant number of our other smaller clients could materially and
adversely affect our revenues.
Because we have operated for
only two years in the consulting services business, our financial statements
may not be adequate to evaluate our future success
Because we were formed in 1996 and
did not offer consulting services until 1998, we have a limited operating
history upon which you can evaluate our business. The limited amount of
information about us and the limited period during which we have provided
our consulting services makes it more difficult for you to predict whether
or not we will be successful. You should evaluate our chances of financial
and operational success in light of the risks, uncertainties, expenses,
delays and difficulties associated with starting a new business, many of
which may be beyond our control. We compete in a relatively new market known
as the Internet professional services market. Because this market is new and
rapidly evolving, we do not know if there will be sustainable demand for our
service offerings and, as a result, we face many uncertainties.
We depend on our key
personnel and their relationships, and the loss of their services may
adversely affect our ability to attract and retain
clients
We believe that our success will
depend on the continued employment of our senior management team and other
key personnel. Because we are a consulting services business, our revenue is
highly dependent on the quality of the strategy professionals we recruit and
hire. The revenue generated by these strategy professionals is often
dependent on their relationships with clients. This dependence is
particularly important to our business because these relationships are a
critical part of obtaining and maintaining client engagements. If one or
more members of our senior management team or other key personnel were
unable or unwilling to continue in their present positions, our business
could be seriously harmed. In addition, if any of our key personnel join a
competitor or form a competing company, some of our clients might choose to
use the services of that competitor or those of a new company.
Because our market is highly
competitive with low barriers to entry, new entrants could emerge to capture
market share from us
We compete in the relatively new
and intensely competitive Internet professional services market. We expect
competition to intensify as the market evolves. We compete with large
strategic consulting firms, Internet professional services firms, strategic
consulting practices of large information technology consulting firms, and
the in-house information technology, marketing and design departments of our
clients. Many of our competitors have longer operating histories, larger
client bases, longer relationships with clients, greater brand or name
recognition and significantly greater financial, technical, marketing and
public relations resources than we have. As a result, our competitors may be
in a stronger position to respond quickly to new or emerging technologies
and client requirements.
There are relatively few barriers
preventing competitors from entering our market. As a result, new market
entrants pose a threat to our business. Existing or future competitors may
develop or offer services that are comparable or superior to ours at a lower
price, which could harm our business.
If we do not manage our
growth effectively, our revenues may decline or we may not be able to
generate revenue at all
A key part of our strategy is to
grow rapidly by hiring more personnel and opening new offices, which may
continue to strain our resources. Our recent growth has placed, and will
continue to place, increased demands on our managerial and operational
resources. We cannot assure you that our managers will be able to manage our
growth effectively or open new offices efficiently. To manage future growth,
our management must continue to improve our operational and financial
systems, procedures and controls and expand, train and manage our employee
base. If our systems, procedures and controls are inadequate to support our
operations, our expansion would be halted, and we could lose our opportunity
to gain significant market share. In addition, if not managed effectively,
these increased demands may adversely affect the services we provide to our
existing clients. Any inability to manage growth effectively could harm our
business.
Because our revenues are
generated on a project-by-project basis and are unpredictable, our revenue
expectations may not be met and our stock price may fall
We derive our revenues primarily
from fees for services generated on a project-by-project basis. These
projects vary in size and scope, as well as in the fee charged for our
services. A client that accounts for a significant portion of our revenues
in a given period may not generate a similar amount of revenues, if any, in
subsequent periods. In addition, after we complete a project, we have no
assurance that a client will retain us in the future. Because our revenues
are difficult to estimate, we may not meet the expectations of securities
analysts or investors, and our stock price may fall.
Because we derive a
substantial portion of our revenues from fixed fee contracts, we may lose
money if we misjudge the time and resources necessary to complete the
project
We derive a substantial portion of
our revenues from fixed-fee contracts. If we misjudge the time and resources
necessary to complete a project, we may incur a loss in connection with the
project.
Our quarterly revenues and
operating results are likely to vary unpredictably, which may cause the
market price of our common stock to decline
We expect our quarterly revenues
and operating results to be volatile and difficult to predict from quarter
to quarter. Factors that may cause our results to fluctuate
include:
|
|
the amount and
timing of demand by our clients for Internet professional
services;
|
|
|
cancellations or
reductions in the scope of major projects;
|
|
|
unanticipated
variations in the size, budget, number or progress toward completion of
our engagements;
|
|
|
the introduction of
new services by us or our competitors;
|
|
|
changes in our
pricing policies or those of our competitors;
|
|
|
the efficiency with
which we utilize our employees, including our ability to transition
employees from completed to new engagements;
|
|
|
the cost of
attracting and retaining experienced personnel;
|
|
|
our ability to
manage our operating costs; and
|
|
|
the timing and cost
of new office expansion.
|
Because a high percentage of our
expenses, such as employee and facilities costs, is fixed, any of the
factors listed above could cause significant variations in our operating
results in any given quarter. If our results in any future period fall below
the expectations of securities analysts or investors, the market price of
our common stock could fall.
Actual and perceived
conflicts of interest may restrict us in obtaining new
clients
Actual and perceived conflicts of
interest are inherent in our industry. We sometimes decline to accept
potential clients because of actual or perceived conflicts of interest with
our existing clients. In addition, potential clients may choose not to
retain us for reasons of actual or perceived conflicts of interest. Some
clients have conditioned their purchase of our services on our agreement not
to perform services for their competitors for a specified period of time. If
we decide not to perform services for a particular clients
competitors, or are restricted from doing so, or if potential clients in an
industry choose not to retain us because of actual or perceived conflicts,
our revenues from that industry segment may decline
significantly.
If we fail to successfully
promote our brand name, our operating margins and rate of growth may
decline
We believe that establishing
strong name recognition is critical to attracting and expanding our client
base as well as attracting experienced employees. To promote our brand name,
we plan to increase our marketing expenses, which may cause our operating
margins to decline. Moreover, our brand may be closely associated with the
business success or failure of some of our high-profile clients, many of
whom are pursuing unproven business models in competitive markets. As a
result, the failure or difficulties of one of our high-profile clients may
damage our brand. If we fail to successfully promote our brand name, our
operating margins and rate of growth may decline.
If we do not protect our
knowledge base and intellectual capital, our revenues may be
reduced
We must preserve our knowledge
base and intellectual capital as confidential and proprietary in order to
create a competitive advantage in the Internet professional services
industry. We cannot guarantee that the steps we have taken to protect our
proprietary rights will be adequate to deter misappropriation of our
intellectual property. In addition, we may not be able to detect
unauthorized use of our intellectual property and take appropriate steps to
enforce our rights. While we generally own all of the intellectual property
we develop in the course of our client engagements, we cannot assure you
that we will not share ownership with clients in the future in unique
circumstances.
If third parties infringe or
misappropriate our trade secrets, copyrights, trademarks or other
proprietary information, our business could be seriously harmed. In
addition, although we believe that our proprietary rights do not infringe
the intellectual property rights of others, other parties may assert
infringement claims against us or claim that we have violated their
intellectual property rights. Such claims, even if not true, could result in
significant legal and other costs and may be a distraction to management.
Further, protection of intellectual property in many foreign countries is
weaker and less reliable than in the United States, so if our business
expands into foreign countries, the risks associated with protecting our
intellectual property will increase.
We may be subject to
lawsuits as a result of our attempts to hire experienced people, which may
result in substantial costs to us
Our strategy of rapid growth often
requires us to hire experienced professionals from our competitors, and
these individuals may be subject to noncompetition agreements with their
former employers. As we hire new employees from our current or potential
competitors, we have and may continue to become a party to one or more
lawsuits involving the former employment of one of our employees and a
violation of these noncompetition covenants. Any future litigation against
us or our employees, regardless of the outcome, may result in substantial
costs and expenses to us, may impair our ability to recruit employees, and
may divert managements attention away from the operation of our
business.
Our failure to meet our
clients expectations could result in negative publicity and losses and
could subject us to liability for the services we
provide
Many of the services we provide
are critical to the operations of our clients businesses. As our
client engagements become larger and more complex, we face increased
management and consulting challenges and greater risk of mistakes. Any
failure on our part to deliver these services in accordance with our clients
expectations could result in:
|
|
delayed or lost
client revenues;
|
|
|
adverse client
reactions;
|
|
|
additional
expenditures to correct the problem; and
|
While our agreements with clients
often limit our liability to damages arising from our rendering of services,
we cannot assure you that these provisions will be enforceable in all
instances or would otherwise protect us from liability. Although we carry
general liability insurance coverage, our insurance may not cover all
potential claims to which we are exposed or may not be adequate to indemnify
us for all liability that may be imposed. The successful assertion of one or
more claims against us could harm our business.
Our business will be
negatively affected if we do not keep up with the Internets rapid
technological changes, evolving industry standards and changing client
requirements
The Internet professional services
industry is characterized by rapidly changing technology, evolving industry
standards and changing client needs. Accordingly, our future success will
depend, in part, on our ability to keep pace with these changes and advise
our clients according to the most up-to-date commercial and technological
information available. We may be unable, for technological or other reasons,
to provide strategic consulting services that keep pace with these changes.
Among the most important challenges facing us is the need to:
|
|
effectively
incorporate leading technologies in our strategic advice;
|
|
|
continue to develop
our strategic and technical expertise;
|
|
|
respond to emerging
industry standards and other technological changes;
|
|
|
enhance our current
service offerings; and
|
|
|
develop new
services that meet changing customer needs.
|
We cannot assure you that we will
succeed in effectively meeting these challenges in a timely and
cost-effective manner. Any failure to do so could harm our
business.
Our success depends on
increased adoption of the Internet as a means for
commerce
Our future success depends
primarily on Fortune 1000 companies needing strategic advice on conducting
business over the Internet. If commerce on the Internet does not continue to
grow, or grows slower than expected, the Internet would be a less important
means of commerce for our existing and potential clients. As a result, the
demand for our consulting services would decrease, our growth would decline
and our business would be seriously harmed. Consumers and businesses may
reject the Internet as a viable commercial medium for a number of reasons,
including:
|
|
potentially
inadequate network infrastructure;
|
|
|
delays in the
development of Internet enabling technologies and performance
improvements;
|
|
|
delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity;
|
|
|
delays in the
development of technology necessary to effect secure transmission of
confidential information;
|
|
|
increased
government regulation resulting in material burdens on Internet
use;
|
|
|
changes in, or
insufficient availability of, telecommunications services to support the
Internet; and
|
|
|
failure of
companies to meet their customers expectations in delivering goods
and services over the Internet.
|
Risks Related to
this Offering
Our stock price may be
volatile and may result in substantial losses for investors purchasing
shares in the offering
The market price of our common
stock is likely to be highly volatile. The stock market in general, and the
market for Internet-related stocks in particular, has been highly volatile.
This volatility often has been unrelated to the operating performance of
particular companies. We cannot assure you that our common stock will trade
at the same levels as other Internet-related stocks or that Internet-related
stocks in general will sustain their current market prices. We also cannot
assure you that an active public market for our securities will develop or
continue after this offering.
In addition, the trading price of
our common stock could be subject to wide fluctuations in response
to:
|
|
our perceived
prospects;
|
|
|
variations in our
operating results and our achievement of key business targets;
|
|
|
changes in
securities analysts recommendations or earnings
estimates;
|
|
|
differences between
our reported results and those expected by investors and securities
analysts;
|
|
|
announcements of
new contracts or service offerings by us or our competitors;
|
|
|
market reaction to
any acquisitions, joint ventures or strategic investments announced by us
or our competitors; and
|
|
|
general economic or
stock market conditions unrelated to our operating
performance.
|
In the past, securities class
action litigation has often been instituted against companies following
periods of volatility in the market price of their securities. This type of
litigation could result in substantial costs and a diversion of management
attention and resources.
Concentration of ownership
may limit your ability to influence corporate matters
Immediately following this
offering, our executive officers, directors and significant shareholders
collectively will own approximately 58.2% of the outstanding shares of our
common stock. If these shareholders choose to act or vote together, they
will have the power to control the election of our directors, and the
approval of any other action requiring the approval of our shareholders,
including any amendments to our certificate of incorporation and mergers or
sales of substantially all of our assets. In addition, without the consent
of these shareholders, we could be prevented from entering into transactions
that could be beneficial to us or our other shareholders. Also, third
parties could be discouraged from making a tender offer or bid to acquire us
at a price per share that is above the then-current market
price.
We may need to raise
additional capital, which may not be available to us, and which may, if
raised, dilute your ownership interest in us
We expect that our net proceeds
from this offering will be sufficient to meet our working capital and
capital expenditure needs for at least the next 18 months. After that, we
may need to raise additional funds, and we cannot be certain that we will be
able to obtain additional financing on favorable terms or at all. If we need
additional capital and cannot raise it on acceptable terms, we may not be
able to:
|
|
create new service
offerings and expand into new vertical markets;
|
|
|
enhance our
infrastructure;
|
|
|
hire, train and
retain employees;
|
|
|
keep up with
technological advances;
|
|
|
respond to
competitive pressures or unanticipated requirements; or
|
|
|
pursue acquisition
opportunities.
|
Our failure to do any of these
things could restrict our growth, hinder our ability to compete and
seriously harm our financial condition. Additionally, if we are able to
raise additional funds through equity financings, your ownership interest in
us will be diluted.
The sale of a substantial
number of shares of our common stock in the public market could adversely
affect the market price, which could negatively impact your investment in
us
Following this offering, a portion
of our shares of common stock will be eligible for sale in the public
market. Sales or the expectation of sales of a large number of shares of our
common stock in the public market could adversely affect the prevailing
market price of our common stock. See Shares Eligible for Future Sale
for a more detailed description of the restrictions on selling shares
of our common stock after this offering.
Our directors and officers and the
holders of substantially all of our shares of common stock have agreed not
to sell or transfer shares of our capital stock without the consent of
Morgan Stanley & Co. Incorporated during the period ending 180 days
after the date of this prospectus. Upon the expiration of this 180-day
period, or upon Morgan Stanleys earlier consent to waive these
restrictions, these holders may choose to sell a substantial number of
shares of our common stock in the public market, which could depress the
market price of our common stock.
Our management has broad
discretion over the use of the net proceeds from this offering and you may
not agree with how they use them
Our management has significant
flexibility in applying the net proceeds we receive in this offering.
Because the proceeds are not required to be allocated to any specific
investment or transaction, you cannot determine the value or appropriateness
of our managements application of the proceeds.
The value of your investment
in our common stock will be immediately and substantially
diluted
If you purchase common stock in
this offering, you will pay more for your shares than the amount paid by
existing stockholders. As a result, the value of your investment based on
the book value of our net tangible assets will be less than the amount you
pay for shares of common stock in this offering. In addition, the total
amount of our capital will be less than what it would have been had you and
all of the existing stockholders and optionees paid the same amount per
share of common stock as you will pay in this offering.
Our charter documents could
make it more difficult for a third party to acquire us, which could depress
our stock price
Our certificate of incorporation
and by-laws are designed to make it difficult for a third party to acquire
control of us, even if a change in control would be beneficial to
stockholders. For example, upon completion of this offering our certificate
of incorporation will authorize our board of directors to issue up to
25,000,000 shares of undesignated preferred stock. Without stockholder
approval, the board of directors has the authority to attach special rights,
including voting and dividend rights, to this preferred stock. With these
rights, preferred stockholders could make it more difficult for a third
party to acquire our company. The existence of these rights could limit the
price that investors might be willing to pay in the future for shares of our
common stock and could deprive you of the opportunity to receive a premium
for your common stock as part of a sale.
Our by-laws do not permit any
person other than the board of directors, the chairman of the board of
directors or the president to call special meetings of the stockholders. In
addition, a stockholders proposal for an annual meeting must be
received within a specified period in order to be placed on the agenda.
Because stockholders do not have the power to call meetings and are subject
to timing requirements in submitting stockholder proposals for consideration
at an annual or special meeting, any third-party takeover not supported by
the board of directors would be subject to significant delays and
difficulties. See Description of Capital Stock for a more
detailed description of the terms of our charter documents that could hinder
a third partys attempt to acquire control of Mainspring.
SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains
forward-looking statements that involve substantial known and unknown risks
and uncertainties. In some cases you can identify these statements by
forward-looking words such as anticipate, believe,
could, estimate, expect, intend,
may, should, will and would
or similar words. You should read statements that contain these words
carefully because they discuss our future expectations, contain projections
of our future results of operations or of our financial position or state
other forward-looking information. We believe that it is
important to communicate our future expectations to our investors. However,
there may be events in the future that we are not able to accurately predict
or control. The factors listed above in the section captioned Risk
Factors, as well as any cautionary language in this prospectus,
provide examples of risks, uncertainties and events that may cause our
actual results to differ materially from the expectations we describe in our
forward-looking statements. Before you invest in our common stock, you
should be aware that the occurrence of the events described in these risk
factors and elsewhere in this prospectus could have a material adverse
effect on our business, results of operations and financial position. We are
under no duty to update any of the forward-looking statements after the date
of this prospectus.
We estimate that the net proceeds
from our sale of 3,500,000 shares of common stock in this offering will be
approximately $34.9 million, assuming an initial public offering price of
$11.00 per share and after deducting estimated underwriting discounts and
commissions and offering expenses.
The principal purposes of this
offering are to establish a public market for our common stock, to increase
our visibility in the marketplace, to facilitate future access to public
capital markets, to provide liquidity to existing stockholders and to obtain
additional working capital.
We have no specific plans for the
precise allocation of the net proceeds of this offering. The amount and
timing of any expenditures will vary depending on a number of factors,
including the amount of cash generated by our operations, competitive and
technological developments, future changes in our business objectives, and
the rate of growth of our business. Although we have no specific
acquisitions planned, we may use a portion of the net proceeds to acquire
businesses, products or technologies that are complementary to our business.
Pending these uses, we plan to invest the net proceeds in short-term,
investment grade, interest-bearing securities.
We have never declared or paid any
cash dividends on our common stock and do not anticipate paying any cash
dividends in the foreseeable future. Pursuant to the terms of our credit
facility, we are unable to pay dividends without first obtaining the written
consent of our bank. We currently intend to retain future earnings, if any,
to finance the expansion and growth of our business. Any decision to pay
cash dividends after this offering will be at the discretion of our board of
directors after taking into account such factors as our financial condition,
operating results, current and anticipated cash needs, plans for expansion
and restrictions in our financing agreements.
INDUSTRY SURVEYS
AND SOURCES
This prospectus includes
statistical data regarding our company, the Internet and the industries in
which we compete. Such data are based on our records or are taken or derived
information published or prepared by various sources, including
International Data Corporation, a provider of market and strategic
information for the information technology industry, and Forrester Research,
Inc., an independent research firm offering products and services that
assess the effect of technology on businesses.
The following table sets forth our
capitalization as of December 31, 1999. The pro forma information gives
effect to 229,744 shares of Series X convertible preferred stock issued on
March 1, 2000 upon the exercise of the outstanding warrant and the
conversion of these shares and our outstanding redeemable convertible
preferred stock upon the closing of this offering. The pro forma as adjusted
information also gives effect to our sale of 3,500,000 shares of common
stock in this offering at an assumed initial public offering price of $11.00
per share, after deducting estimated underwriting discounts and commissions
and offering expenses payable by us. The outstanding share information
excludes 2,655,298 shares of common stock issuable upon exercise of
outstanding options as of December 31, 1999 at a weighted average exercise
price of $1.62 per share.
|
|
As of December
31, 1999
|
|
|
Actual
|
|
Pro
Forma
|
|
Pro Forma
As Adjusted
|
Redeemable
convertible preferred stock: |
Series A1,205,884 shares issued and outstanding, actual;
no
shares issued or
outstanding, pro forma and pro forma as
adjusted |
|
$
6,401,185 |
|
|
$
|
|
|
$
|
|
Series B896,159 shares issued and outstanding, actual; no
shares issued or
outstanding, pro forma and pro forma as
adjusted |
|
8,749,579 |
|
|
|
|
|
|
|
Series C225,103 shares issued and outstanding, actual; no
shares issued or
outstanding, pro forma and pro forma as
adjusted |
|
3,138,168 |
|
|
|
|
|
|
|
Series D1,315,790 shares issued and outstanding, actual;
no
shares issued or
outstanding, pro forma and pro forma as
adjusted |
|
7,486,552 |
|
|
|
|
|
|
|
Series E4,400,001 shares issued and outstanding, actual;
no
shares issued or
outstanding, pro forma and pro forma as
adjusted |
|
31,766,987 |
|
|
|
|
|
|
|
Series X460,000 shares authorized, actual; no shares
issued
or outstanding,
actual, pro forma and pro forma as
adjusted |
|
|
|
|
|
|
|
|
|
Series X convertible preferred stock warrants |
|
966,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total redeemable
convertible preferred stock |
|
58,508,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity (deficit): |
Preferred stockundesignated, $0.01 par value; 6,497,063
shares
authorized, actual, no shares issued or outstanding;
25,000,000
shares authorized, no shares issued or
outstanding, pro
forma and pro forma as adjusted |
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 25,000,000 shares authorized;
1,895,970 shares
issued and 1,891,970 shares outstanding,
actual;
250,000,000 shares authorized, 14,256,553 shares
issued and
14,252,553 shares outstanding, pro forma;
250,000,000
shares authorized, 17,756,553 shares issued
and 17,752,553
shares outstanding, pro forma as adjusted |
|
18,960 |
|
|
142,566 |
|
|
177,566 |
|
Additional paid-in capital |
|
2,747,777 |
|
|
61,132,842 |
|
|
95,952,842 |
|
Deferred compensation |
|
(7,516,519 |
) |
|
(7,516,519 |
) |
|
(7,516,519 |
) |
Treasury stock, at cost |
|
(2,480 |
) |
|
(2,480 |
) |
|
(2,480 |
) |
Accumulated deficit |
|
(25,361,430 |
) |
|
(25,361,430 |
) |
|
(25,361,430 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit) |
|
(30,113,692 |
) |
|
28,394,979 |
|
|
63,249,979 |
|
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
$
28,394,979 |
|
|
$
28,394,979 |
|
|
$
63,249,979 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 1999, our pro
forma net tangible book value was $28.4 million, or $1.99 per share. Pro
forma net tangible book value per share is determined by dividing our
tangible net book value (tangible assets less total liabilities), by the
number of shares of common stock outstanding, in each case after giving
effect to the exercise of the outstanding warrant to purchase 229,744 shares
of Series X preferred stock and the conversion of all shares of Series A
preferred stock, Series B preferred stock, Series C preferred stock, Series
D preferred stock, Series E preferred stock and Series X preferred stock
into common stock. After giving effect to our sale of the 3,500,000 shares
of common stock in this offering at an assumed initial public offering price
of $11.00 per share, and after deducting estimated underwriting discounts
and commissions and offering expenses payable by us, our adjusted pro forma
net tangible book value would have been $63.2 million, or $3.56 per share.
This represents an immediate increase in pro forma net tangible book value
of $1.57 per share to existing stockholders and an immediate dilution of
$7.44 per share to new investors purchasing shares of common stock in this
offering. The following table illustrates this dilution on a per share
basis:
Assumed initial
public offering price per share |
|
|
|
$11.00 |
Pro forma net tangible book
value per share as of December 31, 1999 |
|
1.99 |
|
|
Increase in pro forma net
tangible book value per share attributable to new investors |
|
1.57 |
|
|
|
|
|
|
|
Pro forma net
tangible book value per share after this offering |
|
|
|
3.56 |
|
|
|
|
|
Dilution per share
to new investors |
|
|
|
$
7.44 |
|
|
|
|
|
The following table summarizes on
a pro forma basis as of December 31, 1999 the number of shares of common
stock purchased from Mainspring, the total consideration paid, and the
average price per share paid by our existing stockholders and to be paid by
new investors in this offering at an assumed initial public offering price
of $11.00 per share, and before deducting estimated underwriting discounts
and commissions and offering expenses payable by us:
|
|
Shares
Purchased
|
|
Total
Consideration
|
|
Average Price
Per Share
|
|
|
Number
|
|
Percent
|
|
Amount
|
|
Percent
|
Existing
stockholders |
|
14,252,553 |
|
80.3 |
% |
|
$53,466,261 |
|
58.1 |
% |
|
$
3.75 |
New
investors |
|
3,500,000 |
|
19.7 |
|
|
38,500,000 |
|
41.9 |
|
|
11.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
17,752,553 |
|
100.0 |
% |
|
$91,966,261 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foregoing tables excludes
2,655,298 shares of common stock issuable upon exercise of outstanding
options as of December 31, 1999 at a weighted average exercise price of
$1.62 per share.
To the extent these options are
exercised, there will be further dilution to new investors in the net
tangible book value of their shares.
The selected financial data set
forth below should be read along with our financial statements and related
notes and Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this
prospectus. The statement of operations data for the years ended December
31, 1997, 1998 and 1999, and the balance sheet data as of December 31, 1998
and 1999, are derived from audited financial statements that have been
audited by PricewaterhouseCoopers LLP, independent accountants, and are
included elsewhere in this prospectus. The statement of operations data for
the period from inception through December 31, 1996, and the balance sheet
data as of December 31, 1996 and 1997, have been derived from audited
financial statements that have been audited by PricewaterhouseCoopers LLP,
independent accountants, and are not included in this prospectus. The
historical results are not necessarily indicative of the operating results
to be expected in the future.
|
|
Period from
Inception
through
December 31,
1996
|
|
Year Ended
December 31,
|
|
|
|
1997
|
|
1998
|
|
1999
|
|
|
(in thousands,
except share and per share data) |
Statement of
Operations Data: |
Revenue: |
Consulting |
|
$
|
|
|
$
|
|
|
$
178 |
|
|
$
6,277 |
|
Subscriptions |
|
|
|
|
84 |
|
|
455 |
|
|
754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
|
|
84 |
|
|
633 |
|
|
7,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenue: |
Consulting (exclusive of $895 of
stock-based
compensation in 1999) |
|
|
|
|
|
|
|
139 |
|
|
3,272 |
|
Subscriptions (exclusive of $154
of stock-based
compensation in 1999) |
|
|
|
|
784 |
|
|
994 |
|
|
1,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
|
|
784 |
|
|
1,133 |
|
|
4,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
|
|
(700 |
) |
|
(500 |
) |
|
2,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
Research and development
(exclusive of $8 of
stock-based compensation in 1999) |
|
825 |
|
|
2,205 |
|
|
993 |
|
|
1,801 |
|
Selling, general and
administrative (exclusive of
$838 of stock-based compensation in 1999) |
|
1,012 |
|
|
2,878 |
|
|
3,908 |
|
|
11,746 |
|
Stock-based compensation
employees and
consultants |
|
|
|
|
|
|
|
|
|
|
1,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
1,837 |
|
|
5,083 |
|
|
4,901 |
|
|
15,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
operations |
|
(1,837 |
) |
|
(5,783 |
) |
|
(5,401 |
) |
|
(13,049 |
) |
Interest income,
net |
|
110 |
|
|
356 |
|
|
238 |
|
|
355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
(1,727 |
) |
|
(5,427 |
) |
|
(5,163 |
) |
|
(12,694 |
) |
Accretion of
preferred stock to redemption value |
|
|
|
|
|
|
|
|
|
|
(6,941 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
attributable to common stockholders |
|
$(1,727 |
) |
|
$
(5,427 |
) |
|
$
(5,163 |
) |
|
$
(19,635 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
net loss per share |
|
$
(3.35 |
) |
|
$
(4.81 |
) |
|
$
(3.40 |
) |
|
$
(12.44 |
) |
Shares used in
computing basic and diluted net loss per
share |
|
515,119 |
|
|
1,127,348 |
|
|
1,516,656 |
|
|
1,577,881 |
|
|
|
|
As of December
31,
|
|
|
1996
|
|
1997
|
|
1998
|
|
1999
|
|
|
(in
thousands) |
Balance Sheet
Data: |
Cash, cash
equivalents and short-term investments |
|
$
9,773 |
|
|
$
7,430 |
|
|
$
2,975 |
|
|
$
33,607 |
|
Total
assets |
|
10,219 |
|
|
8,404 |
|
|
4,040 |
|
|
36,529 |
|
Total long-term
debt |
|
221 |
|
|
424 |
|
|
148 |
|
|
8 |
|
Redeemable
convertible preferred stock |
|
11,090 |
|
|
13,870 |
|
|
13,870 |
|
|
58,509 |
|
Total stockholders
equity (deficit) |
|
(1,792 |
) |
|
(7,261 |
) |
|
(12,655 |
) |
|
(30,114 |
) |
MANAGEMENTS
DISCUSSION AND ANALYSIS
OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following
discussion and analysis of our financial condition and results of operations
together with Selected Financial Data and our financial
statements and related notes appearing elsewhere in this prospectus. This
discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of factors, including, but not limited to, those set forth under
Risk Factors and elsewhere in this prospectus.
Overview
Mainspring is an eStrategy
consulting firm that focuses exclusively on developing Internet strategies
primarily for Fortune 1000 companies. We provide three integrated service
offerings, eStrategy Consulting, eStrategy Direct and eStrategy Executive
Council. In 1998, we began providing strategy consulting services, hiring
business development professionals and administrative personnel, and
building an operational infrastructure. Our number of full-time employees
grew from 33 at December 31, 1997 to 139 at December 31, 1999. Our revenue
grew from approximately $84,000 in 1997 to approximately $7.0 million in
1999. Our net loss increased from approximately $5.4 million in 1997 to
approximately $12.7 million in 1999.
Each of our offerings is priced on
a stand-alone basis. Our eStrategy Consulting services are priced on a
fixed-time, fixed-fee basis. Revenue for our eStrategy Consulting services
is recognized on a percentage-of-completion method of accounting based on
the ratio of costs incurred to total estimated costs. We generally base our
initial pricing for an engagement on the size, duration and complexity of
the initial project. Given our relationships with our clients, a typical
engagement will extend beyond the initial project to include additional
follow-on projects and each will be priced separately. Because of the
short-term nature of our projects and our ability to price discrete
follow-on projects subsequent to our initial project, we believe our risks
under fixed-fee contracts are limited. Provisions for estimated losses on
uncompleted projects are recognized in the period in which losses become
probable and can be reasonably estimated. Revenue from eStrategy Consulting
services excludes reimbursable expenses charged to clients. For our
eStrategy Consulting service we generally bill a portion of our fees upon
the signing of an agreement and the remainder upon completion of the
engagement.
Our eStrategy Direct and eStrategy
Executive Council services are both subscription-based offerings. Revenue
for our eStrategy Direct and eStrategy Executive Council services is
recognized ratably over the term of the contract, generally 12 months. For
our eStrategy Direct and eStrategy Executive Council service offerings, we
bill our clients in full upon the signing of an agreement with
us.
To date, our revenue has been
derived primarily from providing our eStrategy Consulting services. During
1999, 89% of our revenue was derived from eStrategy Consulting, and 11% was
derived from our eStrategy Direct and eStrategy Executive Council offerings.
We expect that eStrategy Consulting will continue to account for a major
portion of our total revenue in the foreseeable future. Our revenue from
eStrategy Consulting will be driven primarily by the number and scope of our
eStrategy Consulting engagements and by the number of our strategy
consultants. We also expect that our revenue from eStrategy Direct and
eStrategy Executive Council will increase over time and will be driven
primarily by the number of subscriptions to these services that we
sell.
In 1999, five clients accounted
for approximately 31% of our total revenue, with no individual client
accounting for more than 10% of revenue. Our revenue from any single client
will vary from period to period, however, we expect that customer
concentration will continue for the foreseeable future. To the extent that
any significant client uses less of our services or terminates its
relationship with us, our revenue could decline substantially. As a result,
the loss of any significant client could seriously harm our business and
results of operations. In the year ended December 31, 1999, substantially
all of our revenue was generated within North America and was denominated in
U.S. dollars.
Consulting cost of revenue
consists primarily of compensation and benefits of our employees engaged in
the delivery of eStrategy Consulting. Subscriptions cost of revenue consists
primarily of compensation and benefits of our employees engaged in the
delivery of our eStrategy Direct and eStrategy Executive Council services.
Our consulting margins will vary in the future. These margins are affected
by trends in utilization, defined as the percentage of professional services
employees time that is billed to clients, and by our ability to
accurately estimate costs associated with our fixed price offerings. Any
significant decline in fees billed to clients, the loss of a significant
client, inaccurate estimates of consulting engagement costs or acceleration
of hiring in advance of new business, would materially adversely affect our
consulting margins. The costs associated with our eStrategy Direct and
eStrategy Executive Council do not vary significantly as the number of
clients using these services increases. Accordingly, the margins associated
with these services would be adversely affected if we sell these offerings
to fewer clients.
Research and development expenses
primarily relate to the development of new service offerings, enhancement of
our online services and continued expansion of our intellectual capital.
These expenses consist of compensation and related personnel cost,
allocations of facilities and depreciation costs and third party consulting.
We expect these costs to vary in the future depending on the nature and
extent of our activities related to developing new services and web site
features, and the scope of our collaboration agreements with partners
associated with these activities.
Selling, general and
administrative expenses consist of salaries, commissions and related
expenses for personnel in sales, marketing and administrative functions,
professional services fees, occupancy and facilities costs, and other
general corporate expenses. We expect selling, general and administrative
expenses to increase as we expand our direct sales force, increase
investments in our knowledge management and information technology
infrastructure, open new offices, increase our recruiting and training
efforts and incur additional costs related to the growth of our business and
operation as a public company.
Stock-based compensation consists
of expenses arising from option grants. We have recorded aggregate deferred
compensation totaling $8.8 million in connection with certain stock option
grants through December 31, 1999. We will recognize stock-based compensation
expenses over a period ending December 31, 2003, which is the end of the
vesting period for the related options. Stock-based compensation represents
the difference between the exercise price of options to purchase common
stock granted to our employees and the fair value of these shares as of the
date of grant, as subsequently determined for financial reporting purposes.
These expenses also include the fair value of options granted to
non-employees as of the date of grant, as subsequently determined for
financial reporting purposes. These fair values were determined in
accordance with Accounting Principles Board Opinion No. 25 and Statement of
Financial Accounting Standards No. 123.
Results of
Operations
Comparison of 1997, 1998 and
1999
Revenue from consulting services
was first recognized in 1998 and totaled $178,000. This revenue increased to
$6.3 million in 1999. The increase in consulting revenue was the result of
growing demand for eStrategy consulting services and increases in the size
and number of our client engagements and in the number of our billable
consultants. Revenue from subscriptions was first recognized in 1997 and
totaled $84,000. Subscriptions revenue increased to $455,000 in 1998 and to
$754,000 in 1999. Substantially all of the increase in subscription revenue
in 1998 was due to an increase in the number of clients. For 1999,
approximately $182,000 of the increase was due to an increase in the number
of clients subscribing to the eStrategy Direct service. The remainder,
$117,000 of the increase, was due to the launch of eStrategy Executive
Council, our second subscription-based offering.
In 1997, we were developing our
consulting offerings and therefore had no revenue or cost of revenue from
consulting services. Cost of revenue from consulting services was $139,000
in 1998 and increased to $3.3 million in 1999. These increases were due to
Mainsprings strategy of increasing the rate of hiring in anticipation
of future growth as well as higher strategy consultant salaries and
benefits. Cost of revenue for subscriptions was $784,000 in 1997, $994,000
in 1998 and $1.4 million in 1999. These increases were due to the hiring of
additional professionals to support the eStrategy Direct and eStrategy
Executive Council subscription services. Total cost of revenue from
subscriptions has exceeded subscription revenues since 1997. We expect this
trend to continue for the near term.
Research and development.
Our research and development expenses were $2.2
million in 1997 and decreased to $993,000 in 1998, due to the completion of
a significant portion of the research, design, development and testing
activities of our eStrategy Direct service in 1997. In 1999, our research
and development expenses increased to $1.8 million, of which $1.7 million
was attributable to the establishment of and costs associated with our
strategic alliance with Bain & Company. This strategic alliance required
Bain & Company to perform research and development work for Mainspring
that focused on challenges posed by the Internet economy to companies within
specific vertical markets, including apparel, consumer electronics and
grocery retailing.
Selling, general and
administrative. Selling, general and
administrative expenses were $2.9 million in 1997, $3.9 million in 1998 and
$11.7 million in 1999. The increase from 1997 to 1998 was attributable to an
increase in the number of our sales and marketing professionals as well as
increased facilities, depreciation, travel and recruiting costs. The
increase in selling, general and administrative cost from 1998 to 1999 was
primarily due to approximately $4.2 million in increased compensation and
related personnel cost. We increased the number of our selling, general and
administrative employees by 150% during this period. In addition, marketing
campaigns and branding expenditures accounted for approximately $1.5 million
of the increase. The remainder of the increase was attributable to the
following: $398,000 to recruiting, $566,000 to travel, $442,000 to
facilities, $182,000 to information technology services, $53,000 to
depreciation and $528,000 to other miscellaneous expenses.
Stock-based compensation.
We did not incur any stock-based compensation
expenses in 1997 or in 1998. Stock-based compensation expenses were $1.9
million in 1999. Of this amount, the following amounts were excluded from
the respective line items: $895,000 from consulting cost of revenue,
$154,000 from subscriptions cost of revenue, $8,000 from research and
development expenses, and $838,000 from selling, general and administrative
expenses. As of December 31, 1999, the balance in deferred compensation, a
component of stockholders equity, was $7.5 million. This amount is
being amortized ratably over the vesting periods of the applicable stock
options, typically four years, with 30% vesting on the first anniversary of
the grant date and the balance vesting on a monthly basis so that 20% of the
options vest in each of years two and three and 30% in year four. We expect
that the average charge to stock-based compensation expenses for each of
2000, 2001, 2002 and 2003 for options granted in 1999 will be approximately
$1.9 million.
Interest income, net.
Interest income, net is interest earned on our invested
cash and cash equivalents, net of interest expense we incurred on our
borrowings. Our interest income, net was $355,000 in 1997, $238,000 in 1998,
and $354,000 in 1999. The increases and decreases in interest income, net
are a result of varying balances of available funds for investing, offset by
interest expense incurred on the equipment term notes. Our borrowings
consist of term notes used to fund purchases of equipment.
Provision for income taxes.
From inception through December 31, 1999, we
incurred net losses for federal and state tax purposes. We have not
recognized any tax provision or benefit. As of December 31, 1999, we had
approximately $21.0 million of federal and state net operating loss
carryforwards to offset future taxable income which expire in varying
amounts beginning in 2001. Given our limited operating history, losses
incurred to date, and the difficulty in accurately forecasting our future
results, we believe it is more likely than not, as defined by generally
accepted accounting principles, that the net deferred tax asset will not be
realized. Accordingly, a 100% valuation allowance has been
recorded.
Quarterly Results
of Operations
The following tables set forth a
summary of our unaudited quarterly operating results for each of the four
quarters ended December 31, 1999 in absolute dollars and as a percentage of
our revenue in each quarter. These data have been derived from our unaudited
interim financial statements which, in our opinion, have been prepared on
substantially the same basis as the audited financial statements contained
elsewhere in this prospectus and include all normal recurring adjustments
necessary for a fair presentation of the financial information for the
periods presented. These unaudited quarterly results should be read along
with our financial statements and notes thereto included elsewhere in this
prospectus. The operating results in any quarter are not necessarily
indicative of the results that may be expected for any future
period.
|
|
Three Months
Ended
|
|
|
March 31,
1999
|
|
June 30,
1999
|
|
September 30,
1999
|
|
December 31,
1999
|
Statement of
Operations Data: |
|
(dollars in
thousands) |
Revenue: |
Consulting |
|
$
632 |
|
|
$
1,358 |
|
|
$
1,777 |
|
|
$
2,510 |
|
Subscriptions |
|
117 |
|
|
160 |
|
|
209 |
|
|
268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
749 |
|
|
1,518 |
|
|
1,986 |
|
|
2,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenue: |
Consulting |
|
373 |
|
|
642 |
|
|
764 |
|
|
1,493 |
|
Subscriptions |
|
254 |
|
|
383 |
|
|
214 |
|
|
515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
627 |
|
|
1,025 |
|
|
978 |
|
|
2,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin |
|
122 |
|
|
493 |
|
|
1,008 |
|
|
770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
Research and
development |
|
23 |
|
|
81 |
|
|
605 |
|
|
1,092 |
|
Selling, general and
administrative |
|
1,484 |
|
|
1,716 |
|
|
2,919 |
|
|
5,627 |
|
Stock-based compensation
employees and
consultants |
|
27 |
|
|
134 |
|
|
1,040 |
|
|
694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
1,534 |
|
|
1,931 |
|
|
4,564 |
|
|
7,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
operations |
|
(1,412 |
) |
|
(1,438 |
) |
|
(3,556 |
) |
|
(6,643 |
) |
Interest income,
net |
|
47 |
|
|
65 |
|
|
42 |
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$(1,365 |
) |
|
$(1,373 |
) |
|
$(3,514 |
) |
|
$(6,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percentage
of Revenue: |
Revenue: |
Consulting |
|
84 |
% |
|
89 |
% |
|
89 |
% |
|
90 |
% |
Subscriptions |
|
16 |
|
|
11 |
|
|
11 |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
100 |
|
|
100 |
|
|
100 |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenue: |
Consulting |
|
50 |
|
|
42 |
|
|
38 |
|
|
54 |
|
Subscriptions |
|
34 |
|
|
25 |
|
|
11 |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
84 |
|
|
67 |
|
|
49 |
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin |
|
16 |
|
|
33 |
|
|
51 |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
Research and
development |
|
3 |
|
|
5 |
|
|
31 |
|
|
39 |
|
Selling, general and
administrative |
|
198 |
|
|
113 |
|
|
147 |
|
|
202 |
|
Stock-based compensation
employees and
consultants |
|
3 |
|
|
9 |
|
|
52 |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
204 |
|
|
127 |
|
|
230 |
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
operations |
|
(188 |
) |
|
(94 |
) |
|
(179 |
) |
|
(239 |
) |
Interest income,
net |
|
6 |
|
|
4 |
|
|
2 |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
(182 |
)% |
|
(90 |
)% |
|
(177 |
)% |
|
(232 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue.
Our revenue increased in each of the quarters presented. These
increases were attributable to growing demand for our services, the
increases in the size and number of our client engagements, the increase in
the number of our billable consultants and the introduction of eStrategy
Executive Council in the second quarter of 1999.
Cost of Revenue.
Our cost of revenue generally increased due to increases in
consulting cost of revenue. As a percentage of revenue, however, cost of
revenue fluctuated significantly, reflecting the fact that new strategy
consultants are often not billable, and therefore do not generate revenue,
in the same quarter in which they are hired. For example, in the fourth
quarter, our consulting cost of revenue increased significantly relating to
the hiring of additional strategy consultants in anticipation of future
revenue.
Operating Expenses.
Our operating expenses increased in absolute dollars in
each of the quarters presented. The increase in research and development
costs in the fourth quarter were attributable to the establishment of and
costs associated with our strategic alliance with Bain & Company.
Selling, general and administrative expenses increased during the quarters
presented as a result of increased costs related to compensation, marketing
and branding initiatives, technology infrastructure and the establishment of
our knowledge management system. These costs were more significant in the
third and fourth quarters. In addition, our selling, general and
administrative expenses increased as a result of additional costs related to
expanded facilities, depreciation, travel and recruiting. Stock-based
compensation expenses fluctuate from quarter to quarter depending on the
number of stock options vested each quarter as compared to the prior
quarter.
Liquidity and
Capital Resources
From inception through December
31, 1999, we funded our operations primarily through the private sale of
equity securities and borrowings. Net proceeds from the sale of redeemable
convertible preferred stock from inception through December 31, 1999 totaled
$50.6 million.
As of December 31, 1999, we had
approximately $33.6 million in cash, cash equivalents and short-term
investments.
We have term notes related to the
purchase of capital equipment with Silicon Valley Bank. Borrowings under
these notes bear interest at the banks prime rate plus .5%. These
agreements require that we maintain certain financial ratios and levels of
tangible net worth and liquidity. As of December 31, 1999, borrowings under
these notes were approximately $140,000.
Cash used in operations for 1997,
1998 and 1999 was $(5.0) million, $(3.9) million and $(5.0) million,
respectively. Cash used in operations decreased from 1997 to 1998 as a
result of a lower net loss and increases primarily in accounts payable,
accrued expenses and deferred revenue that more than offset increases in
accounts receivable. Cash used in operations increased from 1998 to 1999
principally as a result of increased investments in infrastructure, branding
and personnel costs which resulted in a higher net loss, as well as
increases in accounts receivable and unbilled revenue. These increases were
offset by increases in accrued expenses and accounts payable.
Cash provided by (used in)
investing activities for 1997, 1998 and 1999 was $(2.0) million, $2.2
million and $(28.3) million, respectively, which included purchases of
property and equipment of $640,000, $92,000 and $797,000 in 1997, 1998 and
1999, respectively. Cash flow provided by investing activities increased
from 1997 to 1998 primarily as a result of proceeds from the sale of
short-term investments exceeding purchases of short-term investments in
1998. From 1998 to 1999, cash used in investing activities increased as a
result of purchases of short-term investments exceeding proceeds from the
sale of short-term investments in 1999.
Cash flows provided by (used in)
financing activities for 1997, 1998 and 1999 were $3.2 million, $(513,000)
and $36.5 million, respectively. Cash flows from financing activities
decreased from 1997 to 1998 as a result of our issuance of redeemable
convertible preferred stock and long-term debt in 1997, offset by the
repayments of
long-term debt. The increase from 1998 to 1999 reflects the receipt of net
proceeds from the sale of redeemable convertible preferred stock offset by
the repayments of long-term debt.
We believe that the net proceeds
from this offering, together with our current cash, cash equivalents and
short-term investments, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least the next 18
months. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt
securities. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to those accruing to holders of common stock, and the term of this
debt could impose restrictions on our operations. The sale of additional
equity or convertible debt securities could result in additional dilution to
our stockholders. We cannot be certain that additional financing will be
available in amounts or on terms acceptable to us, if at all. If we are
unable to obtain this additional financing, we may be required to reduce the
scope of our planned service offerings, sales and marketing efforts, which
could harm our business, financial condition and operating
results.
Market Risk
Disclosure
We do not currently use derivative
financial instruments. At December 31, 1999, we had an investment portfolio
of fixed income securities, excluding those classified as cash and cash
equivalents, of $27.7 million. These securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if
market interest rates increase. The portfolio consisted of U.S. Treasury
bills with a weighted-average maturity of less than one year. These
available-for-sale securities are subject to interest rate risk and will
fall in value if market interest rates increase. If market interest rates
were to increase immediately and uniformly by 10% from levels at December
31, 1999, the fair market value of the portfolio would decline by an
immaterial amount. We would not expect our operating results or cash flows
to be affected to any significant degree by the effect of a sudden change in
market interest rates on our securities portfolio.
Recently Issued
Relevant Accounting Pronouncements
In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards, or SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. The new standard establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 133, as amended, is effective for Mainspring beginning January 1, 2001.
We do not expect SFAS No. 133 to have a material effect on our consolidated
financial position or results of operations.
Overview
Mainspring is a strategy
consulting firm that focuses exclusively on developing Internet strategies
which offer an immediate and specific plan of action. We work primarily with
Fortune 1000 companies to develop eStrategies, which we define as strategies
designed to enable a company to protect, evolve and transform its business
and achieve a sustained competitive advantage in the new Internet economy.
Our approach integrates expertise in strategic consulting, the Internet and
targeted, discrete industries to help clients redefine fundamental elements
of their business models including product and service offerings,
distribution channels, organizational structures and branding
strategies.
We provide three integrated
service offerings: eStrategy Consulting, eStrategy Direct and eStrategy
Executive Council. eStrategy Consulting is our project-based consulting
service through which we work with our clients to develop and deliver
Internet strategies in a rapid timeframe. In providing our eStrategy
Consulting services, we use a proprietary approach that focuses on building
business models, creating customer experiences, defining technology solution
architectures and commercializing eStrategy plans. By working with our
clients to understand and integrate each of these dimensions within the
context of their business, we help them address the complex strategic issues
they face in the new Internet economy. eStrategy Direct is our
subscription-based, online consulting service that provides our clients with
real-time access to our proprietary market and business model analyses, case
studies and interactive forums, as well as limited direct access to our
strategy consultants. eStrategy Executive Council is our membership-based,
online and in-person forum in which we bring together senior executives of
Fortune 1000 companies to exchange ideas, experiences and business practices
related to the Internet. As part of this service, we develop and deliver
specific proprietary analyses on emerging Internet business issues. Because
each of our offerings relates to developing and evaluating Internet
strategies, we can capitalize on the expertise and knowledge we gain in one
service offering to provide our other services more rapidly and effectively.
In addition, these service offerings provide us with a unique way of
continually interacting with our clients and allow us to develop and
maintain long term relationships with them.
Industry
Background
The Internet is fundamentally
reshaping the competitive dynamics of business. Companies today face the
complex task of developing effective Internet strategies that simultaneously
protect, evolve and transform their businesses. In particular, companies
must rethink the way they interact with their customers and suppliers and
develop strategies that leverage their traditional assets and capitalize on
the Internets ability to provide a competitive advantage, deliver
operating efficiencies, enhance customer satisfaction and increase market
penetration.
Senior executives of Fortune 1000
companies face particular challenges in developing Internet strategies.
First, the entry of new competitors with non-traditional business models has
changed the industry landscape around which strategy is evaluated and
implemented. Second, Internet strategy requires an integrated and
comprehensive view of business planning, customer experience and technology.
Finally, the rapid pace of change has resulted in a dramatic shortening of
the strategic planning process, as rapid time-to-market is now a critical
factor in implementing an Internet strategy.
Given the urgency and complexity
associated with transforming their businesses in the Internet economy,
companies are increasingly relying on independent consulting firms to
develop Internet strategies. International Data Corporation estimates that
spending on Internet consulting services will grow from $425 million in 1998
to $4.4 billion in 2003. We believe, however, that few of todays
traditional consulting firms possess the expertise and focus required to
respond to the unique challenges posed by the Internet economy. For example,
at a time when rapid delivery times are required, traditional strategy
consulting firms continue to engage in lengthy consulting projects often
lasting several months. The typical outcome of these engagements is
generally a report that focuses on industry dynamics and broad strategic
trends, but lacks strategies that can be immediately
implemented. Although the emerging class of Internet professional services
firms offers Internet strategy consulting as part of an end-to-end solution,
they are often more focused on technology or creative design and lack the
strategic and industry specific expertise demanded by clients. A recent
survey by Forrester Research interviewed vice presidents and directors of 62
of the Global 2500 companies and found that 72% chose their vendors because
they were best of breed rather than end-to-end service
providers.
To address the business challenges
of the new Internet economy, we believe that senior executives of Fortune
1000 companies need a strategy consulting firm that combines expertise in
Internet strategy development with a comprehensive, industry-specific
understanding of how the Internet affects traditional business models. These
executives also need strategic advice that can be delivered quickly, and an
advisor with whom they can interact on a continuous basis.
The Mainspring
Solution
We develop and deliver Internet
strategies designed to help our clients gain a competitive advantage in the
new Internet economy. The following are the key elements of the Mainspring
solution:
Pure Internet Strategy
Focus. We focus exclusively on strategy
consulting relating to the Internet. Our pure Internet focus allows us to
continually develop and enhance our expertise in and knowledge of the
Internet economy. As a result, we believe we provide our clients with
Internet strategies that are best suited to their needs and delivered to
them in a rapid timeframe. We also believe our exclusive strategy focus
allows us to develop objective solutions without a bias towards implementing
any particular technology. Finally, our focus enables us to recruit highly
experienced strategy consultants who want to work with senior executives on
complex Internet-related engagements and seek the energy and excitement of a
new company with innovative approaches.
Immediate and Specific Internet
Strategies. Our objective in each engagement is
to create a comprehensive eStrategy that provides our clients with an
immediate and specific plan of action. Our clients demand Internet
strategies that can be rapidly deployed rather than voluminous reports and
analyses that may be difficult to implement. The Internet strategies we
develop are comprehensive in scope and not only address strategic issues
related to a clients organizational structure, operations and
financial model, but also ensure that the solution is technologically
feasible and is consistent with the clients customer and branding
strategies. A key point of differentiation relative to our competitors is
our ability to deliver an eStrategy that makes specific recommendations for
immediate implementation.
Flexible Service Offerings.
Our three distinct service offerings allow our
clients to choose the scope and delivery method of strategic advice that are
best suited to their needs. Our eStrategy Consulting services allow clients
to engage us for complex projects that will provide them with extensive and
dedicated interaction with our strategy consultants. Our eStrategy Direct
service allows our clients to access strategic advice on a real-time basis
through online access to our in-depth knowledge base of Internet strategy
analysis and through direct interaction with our strategy consultants.
Finally, our eStrategy Executive Council allows our clients to share ideas
and experiences and discuss emerging Internet business issues with a group
of their peers. These services enable our clients to interact with us on a
continuous basis while positioning us as their ongoing strategic
advisor.
Vertical Market Expertise.
Our targeted market focus allows us to provide
highly relevant, insightful and industry-specific advice to our clients
through each of our service offerings. We currently focus on the following
vertical markets: financial services; retail and consumer goods; technology,
media and communications; and manufacturing. In each of these markets we
have hired industry experts, developed industry-specific knowledge and
created service offerings that address the critical issues facing companies
in these industries. We have also structured our direct sales and marketing
organizations to promote our service offerings in these target vertical
markets. By taking a vertical market approach, we have developed a
substantive base of industry-specific expertise that can be accessed by our
strategy consultants and our clients.
Rapid Time to Results. Our Internet strategy
focus, disciplined methodologies and vertical market expertise enable us to
provide all of our service offerings in a rapid timeframe. By leveraging the
intellectual capital we gain in each of our service offerings, we are able
to deliver Internet strategies in an average of four to eight weeks, rather
than the several months required by traditional consulting firms. In
addition, our eStrategy Direct and eStrategy Executive Council provide our
clients with ongoing real-time strategic advice that enables them to
accelerate decision making on specific Internet strategy issues.
The Mainspring
Strategy
Our objective is to be the leading
Internet strategy consulting firm for Fortune 1000 companies. Our strategies
for achieving this objective are as follows:
Leverage Our Business Model.
Our ability to capture and leverage the knowledge we
gain through each of our integrated eStrategy service offerings allows us to
continuously expand our knowledge base, build our intellectual capital and
improve the quality and speed of services we provide our clients. In
addition, our eStrategy Direct service and eStrategy Executive Council
provide us with an effective way of introducing potential clients to
Mainspring through the initial sale of lower-priced, subscription-based
offerings. With the investments we have already made in our eStrategy Direct
service and eStrategy Executive Council, we believe we can rapidly gain new
clients and sell additional services to our existing clients while
minimizing additional investments in personnel and technology
infrastructure.
Develop and Expand Our Client
Base. We currently serve 38 Fortune 1000
companies and expect to continue developing this existing client base by
expanding the scope of current engagements and generating additional
follow-on engagements. We believe that as we deliver successful consulting
engagements for particular clients and as their strategies evolve, we are
able to obtain follow-on engagements to address new issues and additional
lines of business within the clients organizations. In addition, we
intend to expand our client base by targeting new clients and increasing our
investment in our direct sales model, including the addition of new sales
professionals. We also intend to continue to build Mainsprings brand
awareness and reputation as the partner of choice in Internet business
strategy through aggressive and innovative marketing.
Attract and Retain High-Caliber
Strategy Consultants. We focus on creating and
maintaining a culture that encourages innovation, creativity, teamwork,
growth, integrity and quality. We intend to continue to attract, develop,
and retain a diverse, talented work force through significant internal
growth. Consulting professionals have joined Mainspring from traditional
strategy consulting firms, Internet professional services firms and the
targeted vertical industries in which we have expertise. We believe that
professionals are attracted to Mainspring because of our exclusive focus on
Internet business strategy and the opportunity to work on engagements where
they can see the immediate application of their work. To enhance
professional development, we provide in-depth orientation and training,
conduct ongoing workshops, and offer career development forums that sharpen
skills and foster the exchange of knowledge and experience.
Develop New and Further
Penetrate Existing Vertical Markets. We intend to
expand our business by developing intellectual capital and expertise in new
target markets. In addition, we plan to further segment our current vertical
markets to increase the depth, quality and relevancy of our services. For
example, we have segmented our financial services practice to focus on
commercial banking, insurance, brokerage and consumer finance. In deciding
on which market segments to focus, we conduct substantial upfront market
analysis and research and hire professionals with relevant expertise and
relationships. These activities allow us to identify key business issues and
opportunities within these industries, and develop a base of intellectual
capital. Following our initial work, our business development team uses our
base of knowledge to establish credibility and begin building relationships
with potential target accounts.
Continue Our Geographic
Expansion. We intend to offer our services
through a network of offices located throughout the United States. We are
currently headquartered in Cambridge, Massachusetts and have an office in
New York City. We plan to open offices in Chicago and San Francisco within
the next 12 months. We also plan
to open an office in Europe in the near future. We intend to staff our new
offices with strategy consultants, as well as sales and marketing personnel
and recruiting professionals. We believe our geographic expansion will allow
us to better serve the local needs of our existing and potential clients,
focus our sales and marketing efforts and reduce the travel required of our
consulting professionals.
Services
We believe our three integrated
service offerings, eStrategy Consulting, eStrategy Direct and eStrategy
Executive Council, offer our clients the broadest and most comprehensive
range of Internet strategy consulting services available. These offerings
provide us with access to a broad client base in which we can identify
clients strategic needs and provide them with considerable flexibility
in selecting the eStrategy consulting services they want. Because of the
integrated nature of our services, the use of one service typically creates
opportunities for us to provide the other two services. Each of our
offerings is priced on a stand-alone basis. Our eStrategy Consulting
services are priced on a fixed-time, fixed-fee basis while our eStrategy
Direct and eStrategy Executive Council are subscription-based
offerings.
eStrategy Consulting is our
project-based consulting service. In delivering this service, we utilize a
team of highly experienced consultants who currently have an average of six
years of Internet and/or strategic consulting experience. The experience of
our consultants is further enhanced by our proprietary market analyses,
Internet business frameworks and vertical market expertise. Our goal on each
project is to develop and deliver Internet strategies in a rapid timeframe
and our consulting projects typically last six to eight weeks.
Mainsprings approach to
eStrategy provides the fundamental basis for all our consulting work. Our
approach is comprehensive and is focused on building business models,
creating customer experiences, defining technology solution architectures
and commercializing eStrategy plans. This approach enables our clients to
address complex strategy issues that span new business, customer and
technology requirements. The following highlights the key elements of our
eStrategy approach:
Building the Business Model:
Building the business model includes defining
the business opportunity, estimating the necessary investment required,
building a preliminary launch plan and defining key business performance
measures. In building the business model, we:
|
|
perform an
assessment to review current Internet capabilities and identify
organizational constraints;
|
|
|
execute a
competitive market assessment, identify market opportunity by analyzing
customer and market segments;
|
|
|
develop new product
and service offerings, incorporating market, price, distribution channels,
and differentiation;
|
|
|
identify sources of
revenue, cost models and capital investment needed to support the business
model; and
|
|
|
document
operational model including business process flows, target organizational
structure and criteria for selection of strategic partners.
|
Creating the Customer
Experience: As the business strategy drives the
future direction of the business, there must also be a complementary
creative strategy that defines the customer experience. In creating the
customer experience, we:
|
|
create customer
segment profiles and model how changes in these profiles result in new
opportunities;
|
|
|
establish an online
brand by identifying new and existing brand issues and principles and
establishing core business values;
|
|
|
identify customer
needs beyond an initial web site transaction by addressing evolving
requirements;
|
|
|
lay the visual
foundation of the user interface based on the online branding principles,
customer profile, and existing offline look-and-feel of a clients
business; and
|
|
|
analyze the impact
of the online brand on the offline brand to understand how the customer
experience may change.
|
Defining the Technology
Solution Architecture: The business model in the
Internet economy is enabled and potentially altered by a set of technologies
that form the technology solution architecture for the model. The definition
of a business plan for the Internet economy requires not only innovation of
new business models but also a clear understanding of the technology
solution architecture needed to implement the new business model. If the
technology solution architecture is not defined and tested while the
eStrategy is being developed, our clients may risk delay, failure, or lack
of understanding of the true costs of implementing the business model. In
defining the technology solution architecture, we:
|
|
develop an
understanding of the features and limits of a clients existing
technology infrastructure to determine feasibility of
implementation;
|
|
|
define the
technology solution architecture including the application, data and
technology requirements necessary to support the business model;
and
|
|
|
build a cost model
that reflects technology-related expenses associated with implementing the
business model.
|
Commercializing the eStrategy
Plan: The successful commercialization of an
eStrategy plan requires defining the appropriate organizational structure,
marketing plan, success metrics, launch plans and key partnerships. In
commercializing the eStrategy plan, we:
|
|
develop a rollout
strategy that includes a business risk mitigation plan, technical
timelines, market communications strategies, and a technology
plan;
|
|
|
refine the
financial approach and success metrics including target profit model,
economics of the business model, and summary cost models;
|
|
|
evaluate capability
gaps and identify, screen, and perform due diligence on potential
partners; and
|
|
|
develop
organizational structure by identifying organizational characteristics,
including governance, roles and responsibilities.
|
eStrategy Direct is a
subscription-based service that provides clients with ongoing access to
Mainsprings analysis and, on a select basis, industry-focused strategy
consultants. Clients purchase the service for their particular vertical
market and receive online access to over 15 in-depth industry- or
issue-focused studies per year. Each study typically includes analysis of
customer needs, industry competitors, technologies and vendors, economic
models and strategic decision-making frameworks. Clients also receive 12 to
18 articles per year on current industry events, known as Executive
Briefings, or on innovative business models of other companies, known
as Cases-in-Point. All studies and articles are delivered
electronically via Mainsprings web site or e-mail. Clients also
receive up to 25 hours of interaction with eStrategy Direct consultants by
phone, e-mail, or in-person.
We believe the eStrategy Direct
service supplements our clients Internet strategy development work by
providing continuous support in evaluating Internet business issues,
changing customer needs, and new competitive trends. The eStrategy Direct
continuous service model also allows Mainspring to build strong client
relationships and maintain and enhance brand and service awareness with
clients.
|
|
eStrategy
Executive Council
|
Through membership in our
eStrategy Executive Council, we bring together senior executives of Fortune
1000 companies in an exclusive online and in-person forum for exchanging
ideas and experiences in support of
accelerating their Internet business readiness. We work with Council members
to identify key Internet business issues and develop proprietary surveys and
analyses. We also sponsor online and quarterly face-to-face meetings of
Council members to exchange leading business practices and pragmatic,
experience-based advice. The Councils agenda for these meetings is
largely driven by the members themselves. Recent topics have included
selecting the appropriate organizational models, managing distribution
channel conflict issues and structuring partnership
arrangements.
To support the ability for Council
members to make timely decisions, Mainspring has implemented a proprietary
knowledge sharing process that allows Council members to request advice from
other members on an ad hoc basis. Members make their requests directly to
Mainspring, which in turn distributes the request anonymously to other
Council members by e-mail. Members with relevant experience respond to the
request and, if appropriate, communicate directly with the originating
member. Council members join on an annual basis for a membership fee of
$30,000. As of March 31, 2000, there were 62 eStrategy Executive Council
members.
Clients
We have performed eStrategy
services for 148 companies. Our clients are primarily Fortune 1000 companies
in four targeted markets. We launched our financial services practice in the
second quarter of 1998, our retail and consumer goods practice in the third
quarter of 1999, our technology, communications and media practice in the
fourth quarter of 1999 and our manufacturing practice in the first quarter
of 2000. To date, a majority of our clients have been in the financial
services market. Because of the strategic nature of the engagements that we
perform for many of our clients, we have agreed to keep some clients
identities confidential. The following is a partial list of our current
clients that we believe is representative of our overall client
base:
ABN AMRO Bank
N.V.
The Advest Group,
Inc.
American Century
Services Corporation
American Express
Company
Capital Resource
Partners
Caterpillar
Inc.
The Chase Manhattan
Corporation
Dain Rauscher
Incorporated
The Dime Savings
Bank of New York, FSB
EC Cubed,
Inc.
Ernst & Young
LLP
First Union
Corporation
FleetBoston
Financial
GE Capital
Corporation
Guitar Center,
Inc.
IBM
Corporation
Integrated Process
Technologies, LLC
|
|
John Wiley &
Sons, Inc.
Landmark
Communications, Inc.
The McGraw-Hill
Companies, Inc.
Merrill Lynch &
Co., Inc.
MicroAge,
Inc.
Morgan Stanley Dean
Witter
National Penn
Bank
New York Life
Insurance Company
Ohio Casualty
Corporation
PepsiCo,
Inc.
Phoenix Investment
Partners, Ltd.
Putnam Mutual Funds
Corp.
Royal Bank of
Canada
Sun Life Assurance
Company of Canada
U.S.
Bancorp
Wachovia
Corporation
|
|
Case
Studies
The following case studies were
selected as representative of the nature and complexity of the business
problems that our clients ask us to address. The case studies also are
representative of our approach to problems and the outcomes of our
engagements.
Client Description.
New York Life is a Fortune 100 company and a worldwide
leader in life insurance. New York Lifes core products are life,
annuities, long-term care and asset management. New York Lifes goal is
to project these strengths into the high growth international
markets.
Client Challenge.
Mainspring was engaged to help develop a broad-based
Internet strategy to better position New York Life in the Internet economy.
Although New York Life has had an Internet presence since 1996, the
newyorklife.com site needed to be upgraded to reflect emerging strategies
and services. In addition, the companys various existing Internet
initiatives needed to be fully integrated across all the companys
business units to produce a cohesive look to the many different audiences
that visit the Company sites.
Mainspring Approach and
Deliverable. In the course of 90 days, Mainspring
used the eStrategy approach and worked with a company wide work group to
develop an overall strategic business vision as well as identify specific
initiatives that would protect and enhance the companys strategic
position. The key Internet-based initiatives identified ranged from
improving customer self-service on the web to enhancing the interaction and
lead generation of the career agency force. We are currently assisting in
the development of a roll out across the company. In addition, Mainspring is
working with New York Life to identify, select and begin negotiations with a
variety of strategic partners to drive traffic to New York Lifes
site.
Key Outcomes.
We believe New York Lifes eStrategy will enable it to
deliver significant flexibility, convenience and value to customers while
enhancing its career agents ability to more effectively sell and
manage client relationships. Following our initial engagement, we continue
to work with New York Life on further developing e-commerce initiatives that
will help transform the business, decrease costs and address new online
customer segments and product demands. In addition, we are helping to
develop strategies to enhance the companys internal Internet
capabilities. In addition to these eStrategy consulting services, New York
Life participates in our eStrategy Executive Council and subscribes to our
eStrategy Direct service.
Client Description.
MicroAge, Inc. is a Fortune 500 company and a global
provider of efficient technology solutions. MicroAge has a portfolio of
information technology companies that deliver technology solutions through
multi-vendor integration services and distribute computing solutions to
large organizations and computer resellers worldwide. MicroAge does business
in more than 46 countries and offers over 20,000 products from more than 500
suppliers backed by a suite of technical, financial, logistics, and account
management services.
Client Challenge.
MicroAge had been experiencing a dramatic decline in market
capitalization due to intense competition and the emergence of
Internet-based distribution models in its industry. New entrants were
altering the traditional relationship MicroAge had with its customers. As a
result, the CEO and his senior management team saw the need to transform the
company to maintain and improve its position in the new competitive
environment.
Mainspring Approach and
Deliverable. Mainspring utilized the eStrategy
approach and conducted an eight-week, two-phase engagement designed to
assess MicroAges capabilities, refine their e-commerce strategy and
clarify specific product directions. The initial phase focused on exploring
a number of high-growth opportunities and on building high-level business
cases for two types of virtual distribution businesses. For each
of these opportunities, Mainspring led the effort to quantify the market
opportunity, evaluate the competitive environment, define the value
proposition, and demonstrate the economic impact on MicroAge customers
business processes. Following this initial phase, MicroAge then selected one
area of focus and Mainspring created an in-depth business execution plan and
financial model.
Key Outcomes. As a result of working with
Mainspring, MicroAge chose to develop an Internet-based, portal solution for
facilitating core business processes. MicroAges board of directors has
also decided to fund this new Internet portal initiative and we continue to
provide eStrategy consulting services to implement the plan with the
company.
Client Description.
Carlson Companies is a leading travel and hospitality
services company with operations in more than 140 countries and 165,000
people employed under its brands. In 1998, sales under Carlson brands
reached $22 billion. Carlson-owned and related brands include Regent
International Hotels; Radisson Hotels & Resorts; Country Inns &
Suites By Carlson; T.G.I. Fridays; Radisson Seven Seas Cruises;
Carlson Wagonlit Travel; Thomas Cook Travel and Financial Services; and
Carlson Marketing Group. The company was founded in the loyalty/reward
business in 1938 as the Gold Bond Trading Stamp company.
Client Challenge.
Due to their focus on consumer and customer loyalty,
Carlson recognized that the Internet would afford companies the opportunity
to redefine relationships with customers. Carlson wanted to develop a
winning Internet strategy by capitalizing on the opportunity to define
customer loyalty for the on-line hospitality market. The strategy required
taking advantage of Carlsons market leadership position, strong
customer base, competence in relationship-based marketing and expertise in
developing and managing programs to enhance customer loyalty.
Mainspring Approach and
Deliverable. We utilized our eStrategy approach
to analyze the on-line hospitality market opportunity in the travel,
financial services and retail industries and define the appropriate product
and service offerings. In the next phase of eStrategy development we
developed the go-to-market strategy addressing Carlsons
ability to attract, retain, sell to and support customers online through an
online community. In addition, the Mainspring team assisted in the
identification of potential partners from both online and traditional
markets and assisted Carlson in the development of a partnership structure,
launch plan, and infrastructure required for implementing its new online
presence.
Key Outcomes.
The result of the project was an eStrategy plan that would
assist Carlson in bringing together consumers and potential partners, and
assist Carlson in creating the opportunity for an Internet online community
that is based on customer loyalty and provides an interface to products and
services on the Web. We continue to provide eStrategy consulting services to
Carlson.
Sales and
Marketing
We have developed a direct sales
model that is comprised of dedicated business development and marketing
professionals that market and sell our services primarily to Fortune 1000
companies. Our business development professionals are organized into teams
along each of our four vertical markets and are primarily responsible for
making sales calls to potential clients. Our marketing professionals focus
on creating brand recognition for Mainspring broadly, as well as within our
targeted industries.
Our sales and marketing process is
structured to maximize the efforts of our business development and marketing
professionals and strategy consultants to more effectively penetrate a
targeted pipeline of key prospects and clients. Our sales process starts
with our business development professionals who identify prospects, initiate
contact, qualify leads, determine who key decision makers are, set up
initial meetings and assist in the development of project proposals. Our
senior strategy consultants are deployed typically at the end of the process
and meet with executives at pre-qualified prospect companies to determine
their needs and define the appropriate approach. Our typical sales cycle is
eight to ten weeks. Ongoing client interaction and account growth is managed
by both the business development professionals and consultants.
Our marketing function is fully
integrated with and supports our direct sales model. During 1999 our
marketing organization successfully tested several marketing initiatives in
an effort to develop our brand recognition and increase our ability to
generate business leads. As a result of our success, we will further expand
and roll-out some of these initiatives in 2000 including:
|
|
Mainspring events
that expose potential and existing clients to our industry and Internet
expertise;
|
|
|
industry forum
speaking opportunities;
|
|
|
online briefings
that enable potential and existing clients to interact online with
Mainspring strategy consultants focused on key Internet business
issues;
|
|
|
media relations
efforts with industry press, business press, and analysts;
|
|
|
advertising
programs that run nationally and regionally in targeted media outlets;
and
|
|
|
direct mail
programs targeted at industry executives offering our insights into their
business and industries.
|
We maintain our client contacts
and corresponding business development and marketing information in a
central database management system. Our marketing and business development
professionals use this information to identify new opportunities for sales,
monitor renewal dates of subscription offerings, measure marketing program
return on investment and project monthly, quarterly and annual
sales.
Strategic
Relationship with Bain
On September 2, 1999, we entered
into a strategic alliance with Bain & Company, a strategy consulting
firm, to jointly develop intellectual capital that we expect will allow us
to more quickly penetrate new industries. We have worked together on
specific research and analysis projects focused on the challenges that
companies face within specific vertical markets in the new Internet economy.
For example, together we recently completed a broad study of the apparel,
consumer electronics, and groceries retailing markets from which we have
developed strategic recommendations on how retailers can build successful
business models that integrate offline and online capabilities. In addition,
E-Squam Investors I, L.P., an affiliate of Bain responsible for making
e-commerce investments for partners of Bain & Company, has made a less
than 1% equity investment in us.
Agreements with
Investment Firms
In February 2000, we entered into
agreements with Chase Capital Partners and Capital Resource Partners. Under
each agreement, we will provide Internet strategy due diligence on Chase and
Capital Resource investments. In addition, we will also work directly with
Chase and Capital Resource partners and senior executives among their
portfolio companies to identify business opportunities created by the
Internet.
Competition
The Internet professional services
market includes many participants and is intensely competitive. We compete
against:
|
|
large strategic
management consulting firms such as McKinsey & Company, Boston
Consulting Group and Booz, Allen & Hamilton;
|
|
|
Internet
professional services firms such as Diamond Technology Partners, Scient,
Viant, Sapient and marchFIRST;
|
|
|
strategic
consulting practices of large information technology consulting firms such
as Andersen Consulting, PricewaterhouseCoopers and KPMG;
|
|
|
Internet
professional services groups of large technology companies such as IBM;
and
|
|
|
internal strategy
management and information technology departments.
|
Many of our competitors have
longer operating histories, larger installed client bases, greater brand
recognition and significantly greater financial, technical, marketing and
public relations resources than us.
We believe the principal
competitive factors in our industry are:
|
|
quality of services
and strategic expertise;
|
|
|
vertical market
knowledge;
|
|
|
reputation and
experience of professionals delivering services;
|
|
|
time required to
deliver Internet strategies;
|
|
|
effectiveness of
sales and marketing efforts;
|
|
|
value of our
services compared to the price of such services;
|
|
|
project management
capabilities; and
|
|
|
ability to provide
services on a broad geographic basis.
|
There are relatively low barriers
to entry into our business. We have no patented or other proprietary
technology that would preclude or inhibit competitors from entering the
Internet strategy consulting market. Therefore, we must rely on the skill of
our personnel and the quality of our client service to differentiate us from
our potential competitors. We expect to face additional competition from new
entrants into the market in the future. We cannot be sure that existing or
future competitors will not develop or offer superior services or services
that have greater customer acceptance than the services we
offer.
We believe that we presently
compete successfully in these areas but may be unable to compete
successfully in the future due to the evolution of the market for our
services. In addition, some of our competitors may develop superior services
that have greater customer acceptance than the services we
offer.
Mainspring
People
We recognize that our success is
critically linked to our ability to attract, develop and retain talented and
motivated people who want to influence the impact of the Internet on
businesses. As such, we view a strong human resource function as an
important strategic component. We believe that the combination of
intellectual challenge, Fortune 1000 clients and a dynamic work environment
enhance our ability to build an outstanding professional team.
Recruiting. We have
developed an internal recruiting staff of ten which focuses on recruiting
professionals from other firms as well as from top universities and graduate
schools. To supplement our recruiting staff, we have developed an internal
affiliate program that rewards employees who are successful in recruiting
experienced professionals with cash or common stock options.
Training. We have a formal
assimilation and training program for all new employees that addresses our
culture, methodologies and business processes. To supplement our training
program, we are forming an online and in-person learning forum for all
employees. We have also developed a performance management and development
system, a mentorship program and a 360-degree performance evaluation
program.
Culture. Our sole focus on
Internet strategy allows us to offer employees a platform for developing as
Internet business professionals. Working in focused teams, our professionals
provide services that have a significant impact on our clients
businesses. Consequently, we are able to offer challenging career
opportunities and exposure to the experiences and skill sets required to
build successful Internet businesses. We also have an environment that
encourages teamwork, fosters creativity, and supports employee growth and
flexible working conditions.
To reinforce our overarching
human resource strategy, we are building a culture based on a common set of
corporate values:
|
|
Acuity.
The ability to see the competitive environment clearly and thus to
anticipate and respond to evolving needs.
|
|
|
Agility. The ability to adapt simultaneously to
differing business environments.
|
|
|
Unity. Teamwork, knowledge sharing, and
communication.
|
|
|
Integrity. Open, honest and direct
communication.
|
|
|
Balance. A work environment that provides employees
with career challenges while respecting the necessary balance between work
and home.
|
Knowledge
Management
We continue to develop knowledge
management systems and processes to efficiently capture, organize and
deliver our intellectual capital. Knowledge management capabilities are a
fundamental part of our strategy for accelerating the delivery of eStrategy
consulting services. Our knowledge management systems and staff provide the
link among our services that ensures project teams have easy access to the
knowledge they need, when they need it. Our knowledge management is also
responsible for ensuring the confidentiality of proprietary client
information generated through our consulting work.
Our knowledge management systems
are designed to archive a wide range of information, including:
|
|
Consulting Deliverables. Consulting project documents
and deliverables, proposals, eStrategy Direct analyses, eStrategy
Executive Council reports.
|
|
|
External
Resources. Market data, web site links, library holdings and
third-party research.
|
|
|
Internal
Resources. Methodologies and tools, document templates, training
materials, sales contacts and research contacts, competitive intelligence,
policies and procedures, people and projects.
|
Our knowledge management staff
works as a team to develop our core knowledge management systems and
processes. Each knowledge management specialist is also affiliated with a
specific industry practice and works closely with the strategy consultants
in that practice to capture the knowledge gained, properly and consistently
archive new information, and ensure project teams can efficiently find the
knowledge required.
Intellectual
Property
We seek to protect our
intellectual property through a combination of trademark, patent, service
mark, copyright and trade secret laws. We enter into confidentiality
agreements with all employees and use our best efforts to limit access to
and distribution of confidential information generated from within our
business or disclosed by third parties. In addition, we have entered into
non-competition agreements with all employees which prohibit them from
working for a competitor of Mainspring for a period of one year following
termination of employment.
We consider the frameworks,
methodologies and expertise generated through our three service offerings to
be our intellectual property. Our contracts with clients generally provide
that we retain ownership of all intellectual property developed in our
client engagements and that our clients may use this intellectual capital
for internal business purposes only. Although we believe that our
intellectual property has significant value, we also believe that due to the
rapid business changes that characterize the Internet economy, the
innovative skills, strategy expertise and creativity of our personnel may be
more important than our intellectual property.
We pursue the protection of our
trademarks in the United States and in several foreign jurisdictions. We
have registered trademarks in the U.S. and in several foreign jurisdictions
for the MAINSPRING mark and the COIL SPRING logo, and we have pending
registration applications in other foreign jurisdictions. We have filed a
U.S. provisional patent application covering our invention of a computerized
knowledge brokerage system which is used to deliver consulting online in our
eStrategy Executive Council and eStrategy Direct service
offerings.
Policing unauthorized use of our
copyrighted material and marks is difficult and expensive. In addition, it
is possible that our competitors will adopt product or service names similar
to ours, thereby impeding our ability to build brand identity and possibly
leading to customer confusion. We may be subject to legal proceedings and
claims from time to time relating to the intellectual property of others in
the ordinary course of our business. We may incur substantial expenses in
defending against these third party infringement claims, regardless of their
merit.
Facilities
We are headquartered in Cambridge,
Massachusetts. We have leased approximately 63,000 square feet, of which we
currently occupy approximately 19,000 square feet. Our lease expires five
years from the date the landlord delivers the additional 44,000 square feet,
which we currently expect to be July 1, 2000. We have also leased and
currently occupy office space in New York City totaling 22,000 square feet.
This lease expires in January 2010.
Employees
As of March 31, 2000, we had a
total of 208 full-time employees, of which 175 were based at our
headquarters in Cambridge, Massachusetts. Our future success will depend in
part on our ability to attract, retain, and motivate highly qualified
strategy consulting and management personnel, for whom competition is
intense. Our employees are not represented by any collective bargaining
unit. We believe our relations with our employees are good.
Legal
Proceedings
We are not currently a party to
any material legal proceedings.
As is typical for companies in our
business, we are from time to time the subject of lawsuits. These legal
proceedings may be covered under insurance policies or indemnification
agreements. Based upon information presently available, we believe that the
final outcome of such proceedings should not materially and adversely affect
our business, financial condition or results of operations.
Executive
Officers, Directors and Other Key Employees
The executive officers, directors
and other key employees of Mainspring and their ages and positions as of
April 1, 2000 are as follows:
Name
|
|
Age
|
|
Position
|
Executive
Officers and Directors |
John M.
Connolly |
|
47 |
|
Chairman of the
Board, President and Chief Executive
Officer |
Mark A.
Verdi |
|
33 |
|
Chief Financial
Officer, Senior Vice President, Finance
and Operations, Secretary, Treasurer and Director |
Michael J.
Armano |
|
48 |
|
Chief People
Officer, Senior Vice President |
Joseph L.
Gagnon |
|
39 |
|
Senior Vice
President, eStrategy Consulting and New
York Office General Manager |
Ruth M.
Habbe |
|
45 |
|
Senior Vice
President, Marketing |
Randall S.
Hancock |
|
35 |
|
Senior Vice
President, eStrategy Direct and eStrategy
Executive Council |
Eric R.
Pelander |
|
44 |
|
Senior Vice
President, Business Development and
Industry Practices |
S. Ming
Tsai |
|
38 |
|
Senior Vice
President, eStrategy Consulting |
Bruce A. Barnet
(1)(2) |
|
54 |
|
Director |
Lawrence P.
Begley |
|
44 |
|
Director |
Anthony P. Brenner
(2) |
|
42 |
|
Director |
Jerome D. Colonna
(1) |
|
36 |
|
Director |
William S. Kaiser
(1)(2) |
|
44 |
|
Director |
Paul A. Maeder
(2) |
|
46 |
|
Director |
Brian
Nairn |
|
50 |
|
Director |
|
Other Key
Employees |
|
|
|
|
Ian J.
Ball |
|
37 |
|
Senior Vice
President, eStrategy |
Ellen G.
Carberry |
|
40 |
|
Senior Vice
President, Business Development |
Julie M.
Donahue |
|
41 |
|
Senior Vice
President, eStrategy |
Frank F.
Britt |
|
33 |
|
Vice President,
Entrepreneur-in-Residence |
Charles E.
Carney |
|
37 |
|
Vice President,
Chief Technology Officer |
Mark J.
Hernon |
|
37 |
|
Vice President and
General Manager, Manufacturing
Practice |
George T.
Kivel |
|
41 |
|
Vice President,
eStrategy Financial Services |
George E.
Pohle |
|
37 |
|
Vice President and
General Manager, Technology,
Communications and Media Practice |
Lee A.
Spirer |
|
33 |
|
Vice President and
General Manager, Financial
Services Practice |
(1)
|
Member of the Audit
Committee
|
(2)
|
Member of
Compensation Committee
|
|
Executive
Officers and Directors
|
John M. Connolly founded
Mainspring and has served as its Chairman, President and Chief Executive
Officer since its inception in April 1996. From 1993 to 1996, Mr. Connolly
served as Chairman, Chief Executive Officer and President of ITP Media
Group. From 1989 to 1992, Mr. Connolly served as President and CEO of Course
Technology, Inc., a leading publisher of educational materials that he
co-founded in 1989; Course Technology, Inc. was acquired by the Thomson
Corporation in December 1992. Mr. Connolly received a Bachelor of Arts from
St. Norberts College. Mr. Connolly serves as a director of Student
Advantage, Inc.
Mark A. Verdi joined
Mainspring in August 1996 as its Chief Financial Officer, Senior Vice
President, Finance and Operations, Secretary and Treasurer. In 1999, Mr.
Verdi was elected to its board of directors. From 1994 to 1996, Mr. Verdi
attended Harvard Business School. From 1988 to 1994, Mr. Verdi worked in the
Entrepreneurial Services Center for the Price Waterhouse High Technology
Group, serving as senior manager in 1994. Mr. Verdi received a Bachelor of
Science from the University of Vermont and graduated from the Harvard
Business School as a Baker Scholar. Mr. Verdi is a Certified Public
Accountant.
Michael J. Armano joined
Mainspring in March 2000 as Chief People Officer, Senior Vice President.
From 1993 to 2000, Mr. Armano worked at The Boston Consulting Group, most
recently as the worldwide director of human resources. From 1990 to 1993,
Mr. Armano served as the director of human resources for Fidelity
Investments. Mr. Armano received a Bachelor of Science from Suffolk
University.
Joseph L. Gagnon joined
Mainspring in October 1999 as Senior Vice President, eStrategy Consulting
and New York Office General Manager. From 1989 to 1999, Mr. Gagnon worked at
Ernst & Young, most recently as a partner in Ernst & Youngs
global eCommerce practice from 1996 to 1999. From 1992 to 1996, Mr. Gagnon
held numerous leadership positions in Ernst & Youngs Center for
Technology Enablement. Mr. Gagnon received a Bachelor of Arts from Fordham
University.
Ruth M. Habbe joined
Mainspring in October 1997 as Senior Vice President, Marketing. From 1994 to
1997, Ms. Habbe served as Vice President, Marketing of Forrester Research, a
technology research firm. For 1993, Ms. Habbe served as Vice President,
Marketing of Imagery Software. Ms. Habbe received a Bachelor of Arts from
the University of Massachusetts.
Randall S. Hancock joined
Mainspring in September 1998 as Senior Vice President, eStrategy Direct and
eStrategy Executive Council. From 1994 to 1998, Mr. Hancock served as
director of the Gemini Strategic Research Group, a unit of Gemini
Consulting, formerly known as the MAC Group, which he founded in 1994. From
1991 to 1993, Mr. Hancock served as a strategy consultant at Gemini
Consulting. Mr. Hancock received a Bachelor of Arts from Harvard University
and an MBA with distinction from the J.L. Kellogg School at Northwestern
University.
Eric R. Pelander joined
Mainspring in January 2000 as Senior Vice President, Business Development
and Industry Practices. From 1991 to 1999, Mr. Pelander was a partner at
Ernst & Young, most recently as managing director of Strategic Advisory
Services from 1996 to 1999. Mr. Pelander received a Bachelor of Arts from
the College of William and Mary and an MBA from the Harvard Business
School.
S. Ming Tsai joined
Mainspring in October 1999 as Senior Vice President, eStrategy Consulting.
From 1997 to 1999, Mr. Tsai was a partner at Ernst & Young, leading its
eCommerce strategy practice. From 1987 to 1997, Mr. Tsai was a senior
manager with the Boston Consulting Group where he focused on general
business and eCommerce strategies. From 1982 to 1987, Mr. Tsai was a senior
consultant with Andersen Consulting, working as a technology specialist in
online transaction systems. Mr. Tsai received a Bachelor of Science from
Yale University and an MBA with honors from Columbia Business
School.
Bruce A. Barnet has served
as a director of Mainspring since December 1996. Mr. Barnet is currently a
private investor and advisor in Internet businesses. From 1996 to 1999, Mr.
Barnet was President and CEO of Cahners Business Information. From 1990 to
1996, Mr. Barnet was the President and CEO of Cowles Enthusiast Media. Mr.
Barnet completed his undergraduate work at Yale University and received an
MBA from Columbia University. Mr. Barnet serves as a director for General
Cigar Co.
Lawrence P. Begley was
nominated as a director of Mainspring in March 2000 and will be appointed
immediately prior to the closing of this proposed offering. Since March
2000, Mr. Begley has served as Executive Vice President and Chief Financial
Officer of CCBN.COM, Inc. From 1999 to 2000, Mr. Begley served as Executive
Vice President, Chief Financial Officer and Director of Razorfish Inc., an
electronic business professional services firm. Mr. Begley was Executive
Vice President, Chief Financial Officer and Director of i-Cube, Inc. from
1996 until Razorfish acquired i-Cube in November 1999. Before joining
i-Cube, Mr. Begley was employed by The Boston Consulting Group, an
international management consulting firm, where he served
as Chief Financial Officer and Treasurer from 1990 to 1996. Mr. Begley is a
Certified Public Accountant and earned a BSBA from Boston College and an MBA
from Babson College.
Anthony P. Brenner has
served as a director of Mainspring since November 1999. Since 1998, Mr.
Brenner has been a managing director and partner at Crosslink Capital, Inc.,
formerly Omega Ventures of Robertson Stephens & Company. From 1994 to
1997, Mr. Brenner also served as senior managing director of Advanta
Partners, a venture capital firm affiliated with Advanta Corporation, a
financial services company. Mr. Brenner received a Bachelor of Arts from
Yale University and an MBA from Stanford University. Mr. Brenner currently
serves as a director for Careside, Inc. and Eloquent, Inc.
Jerome D. Colonna has
served as a director of Mainspring since December 1996. Since 1996, Mr.
Colonna has served as a partner at Flatiron Partners, LLC, a venture capital
firm that he co-founded in 1996. From 1995 to 1996, Mr. Colonna served as a
partner at CMG@Ventures, a venture capital investment firm that he
co-founded in 1995. From 1985 to 1995, Mr. Colonna served in various
positions with CMP Media, Inc., a technology publishing firm, including
Editorial Director, Interactive Media Group. Mr. Colonna received a Bachelor
of Arts degree from Queens College, City University of New York. Mr. Colonna
currently serves on the boards of directors at TheStreet.com and iXL
Inc.
William S. Kaiser has
served as a director of Mainspring since June 1996. Mr. Kaiser has been a
general partner of Greylock Equity Limited Partnership since 1994. Mr.
Kaiser received a Bachelor of Science from the Massachusetts Institute of
Technology and an MBA from the Harvard Business School. Mr. Kaiser currently
serves on the boards of Clarus Corporation, Open Market Inc., Red Hat, Inc.
and Student Advantage, Inc.
Paul A. Maeder has served
as a director of Mainspring since June 1996. Mr. Maeder is Managing General
Partner of Highland Capital Partners, a venture capital firm that he
co-founded in 1988. From 1984 to 1987, Mr. Maeder was a General Partner at
Charles River Ventures. Mr. Maeder received a Bachelor of Science from
Princeton University, a Masters in Mechanical Engineering from Stanford
University, and an MBA from the Harvard Business School.
Brian Nairn has served as a
director of Mainspring since September 1999. Mr. Nairn currently serves as
President and Chief Operating Officer of Cahners Business Information. He
joined Cahners in 1996 as Executive Vice President in charge of Business
Publications. From 1991 to 1996, Mr. Nairn held a number of senior positions
at Advanstar Communications, most recently as president of the Publishing
Division from 1994 to 1996.
Ian J. Ball joined
Mainspring in March 2000 as Senior Vice President, eStrategy. From 1997 to
2000, Mr. Ball was a partner with CSC Consulting, most recently as the
senior partner and vice president-in-charge of eStrategy. From 1988 to 1997,
Mr. Ball was a partner with Kalchas, an international strategy consulting
firm that was acquired by CSC Consulting in 1997. Mr. Ball received a
Bachelor of Science with honors from Bristol University.
Ellen G. Carberry joined
Mainspring in September 1996 as Senior Vice President, Business Development.
From 1994 to 1996, Ms. Carberry was director of business development at AT
&T New Media Services, formerly Interchange and Ziff-Davis Interactive.
Ms. Carberry was senior manager of Electronic Publishing Franchises for AT
&T from 1994 to 1995. From 1993 to 1994, Ms. Carberry was the assistant
to the President and CEO of Production Group International, Inc., an event
and communications agency. Ms. Carberry received a Bachelor of Arts from
Georgetown University.
Julie M. Donahue joined
Mainspring in June 1998 as Senior Vice President, eStrategy. From 1997 to
1998, Ms. Donahue was CEO of Venture Forward, a Division of The Chasm Group
which she founded in 1997. From 1995 to 1997, Ms. Donahue was a principal
consultant with The Chasm Group, an education consulting firm focused on
helping high tech companies achieve market leadership. Ms. Donahue received
a Bachelor of Science in Economics from the University of
Pennsylvania.
Frank F. Britt joined
Mainspring in March 2000 as Vice President, Entrepreneur-in-Residence. From
1999 to 2000, Mr. Britt was an independent Internet strategy consultant.
From 1996 to 1999, Mr. Britt served as Vice President of Marketing and
Merchandising at Streamline.com. From 1990 to 1996, Mr. Britt was with
Andersen Consulting, most recently as a Senior Manager, where he worked in
the Consumer Products Strategic Services practice. Mr. Britt received a
Bachelor of Science from Syracuse University.
Charles E. Carney joined
Mainspring in April 2000 as Vice President, Chief Technology Officer. From
1999 to 2000, Mr. Carney was chief information officer and chief technology
officer at Mullen Advertising. From 1992 to 1999, Mr. Carney was employed by
Ernst & Young, most recently as senior manager, electronic commerce. Mr.
Carney received a Bachelor of Science from Northeastern University and a
Ph.D. from the Massachusetts Institute of Technology.
Mark J. Hernon joined
Mainspring in January 2000 as Vice President and General Manager,
Manufacturing Practice. From 1987 to 1999, Mr. Hernon was employed by
Deloitte Consulting, most recently as a partner in 1999. Mr. Hernon received
a Bachelor of Science, a Masters in Industrial Engineering, and an MBA from
Rensselaer Polytechnic Institute.
George T. Kivel joined
Mainspring in February 1998 as Vice President, eStrategy Financial Services.
From 1995 to 1998, Mr. Kivel served as director of consulting services for
The Tower Group, an international taxation and information technology
consulting firm. Mr. Kivel received a Bachelor of Arts from Harvard
University.
George E. Pohle joined
Mainspring in October 1999 as Vice President and General Manager,
Technology, Communications and Media Practice. From 1998 to 1999, Mr. Pohle
was senior director, strategy and business development at Lucent
Technologies. From 1994 to 1998, Mr. Pohle was a principal with Gemini
Consulting, serving as its head of U.S. strategy from 1997 to 1998. Mr.
Pohle received a Bachelor of Science from The Johns Hopkins University and
an MBA from INSEAD.
Lee A. Spirer joined
Mainspring in November 1999 as Vice President and General Manager, Financial
Services Practice. From 1994 to 1999, Mr. Spirer was employed by Booz-Allen
and Hamilton, most recently as a principal since 1996. Mr. Spirer received a
Bachelor of Arts from Brandeis University and an MBA from The Wharton
School.
Election Of
Executive Officers And Directors
Our executive officers are elected
by the board of directors on an annual basis and serve until their
successors are duly elected and qualified or their earlier resignation or
removal. All of the current directors were elected as our directors under a
shareholders agreement which will terminate upon the closing of this
offering. There are no family relationships among any of our executive
officers or directors.
Board
Committees
The board of directors has
appointed a compensation committee consisting of Messrs. Barnet, Brenner,
Kaiser and Maeder. The compensation committee reviews and evaluates the
compensation and benefits of all our officers, reviews general policy
matters relating to compensation and benefits of our employees and makes
recommendations concerning these matters to the board of directors. The
compensation committee also administers our stock option and incentive and
stock purchase plans. Please turn to the section titled Equity
Plans for more information on our stock option and incentive and stock
purchase plans.
The board of directors has also
appointed an audit committee consisting of Messrs. Barnet, Colonna and
Kaiser. The audit committee reviews, with our independent auditors, the
scope and timing of their audit services and any other services they are
asked to perform, the auditors report on our consolidated financial
statements following completion of their audit, and our policies and
procedures with respect to internal accounting and financial controls. In
addition, the audit committee will make annual recommendations to the board
of directors for the appointment of independent auditors for the ensuing
year.
Director
Compensation
Our directors do not currently
receive any cash compensation for their services as members of our board of
directors, although directors are reimbursed for reasonable out-of-pocket
expenses incurred in connection with their attendance at board of directors
and committee meetings. Directors are currently eligible to participate in
Mainsprings 1996 Omnibus Stock Plan and will be eligible to
participate in Mainsprings 2000 Non-Employee Director Stock Option
Plan. For additional information about options, please turn to the headings
titled Equity Plans and Certain Transactions.
Compensation
Committee Interlocks And Insider Participation
The compensation committee is
comprised of Messrs. Barnet, Brenner, Kaiser and Maeder. Messrs. Barnet,
Brenner, Kaiser and Maeder are not and have never been employees of
Mainspring. Messrs. Brenner, Kaiser and Maeder are managing members and/or
general partners of affiliates of Mainspring that have made significant
equity investments in Mainspring. See Certain Transactions for
more information on these investments. No executive officer of Mainspring
serves as a member of the board of directors or compensation committee of
any entity that has one or more executive officers serving as a member of
Mainsprings board of directors or compensation committee. No such
interlocking relationship has existed in the past. Prior to the formation of
the compensation committee in January 1997, Mainsprings full board of
directors (which included Mr. Connolly, chief executive officer of
Mainspring) was responsible for the functions of a compensation committee
and made decisions concerning executive officer compensation.
Executive
Compensation
The following table sets forth the
compensation information for our Chief Executive Officer and our four other
highest-paid executive officers, whose total salary and bonus exceeded
$100,000, for services rendered in all capacities to us during the year
ended December 31, 1999.
|
|
|
|
Long Term
Compensation
|
|
|
Annual
Compensation
|
|
Securities
Underlying
Options
|
Name and
Principal Position
|
|
Salary
|
|
Bonus
|
John M.
Connolly |
|
$172,290 |
|
|
$100,000 |
|
350,000 |
Chairman, President and Chief Executive Officer |
|
|
|
|
|
|
|
Joseph L.
Gagnon |
|
75,000 |
(1) |
|
200,000 |
|
172,500 |
Senior Vice President, eStrategy Consulting and New York Office
General Manager |
|
|
|
|
|
|
|
Ruth M.
Habbe |
|
163,913 |
|
|
107,500 |
|
10,000 |
Senior Vice President, Marketing |
|
|
|
|
|
|
|
Randall S.
Hancock |
|
147,451 |
|
|
105,000 |
|
41,084 |
Senior Vice President, eStrategy Direct and eStrategy Executive
Council |
|
|
|
|
|
|
|
Mark A.
Verdi |
|
144,863 |
|
|
125,000 |
|
10,000 |
Chief Financial Officer, Senior Vice President, Finance and
Operations,
Secretary and Treasurer |
|
|
|
|
|
|
|
(1)
|
Reflects salary
paid to Mr. Gagnon from October 1, 1999, his first day of employment,
through December 31, 1999.
|
|
|
Option Grants
in Last Fiscal Year
|
The following table sets forth
each grant of stock options during 1999 to each of the named executive
officers. No stock appreciation rights were granted during the fiscal year.
Upon a change of control of Mainspring, 50% of the unvested stock options of
Messrs. Connolly, Gagnon, Hancock and Ms. Habbe become immediately
exercisable and all of Mr. Verdis unvested stock options become
immediately exercisable. Each of
the options has a ten-year term, except for certain incentive stock options
granted to Mr. Connolly, subject to earlier termination in the event the
holder ceases providing services to us.
The percentage numbers are based
on options to purchase an aggregate of 1,938,234 shares of common stock
granted to our employees under our 1996 Omnibus Stock Plan during 1999. The
exercise price was equal to the fair market value of our common stock as
valued by the board of directors on the date of grant. The exercise price
may be paid in cash, in shares of our common stock valued at fair market
value on the exercise date or through a cashless exercise procedure as long
as this procedure would not cause us to recognize compensation expense for
financial reporting purposes. We may also finance the option exercise by
accepting a full recourse note from the optionee equal to the exercise price
for the purchased shares, together with any federal and state income tax
liability incurred by the optionee in connection with such
exercise.
The potential realizable value is
calculated based on a ten-year term of the option at the time of grant,
except with respect to certain incentive stock options granted to Mr.
Connolly, which is calculated based on a five-year term. Stock price
appreciation of 5% and 10% is assumed because of SEC rules and does not
represent our prediction of our stock price performance. The potential
realizable values at 5% and 10% appreciation are calculated by assuming that
the assumed initial public offering price of $11.00 per share appreciates at
the indicated rate for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day of its term at the
appreciated price.
|
|
Individual
Grants
|
|
Potential
Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Option Term
|
Name
|
|
Number of
Securities
Underlying
Options
Granted
|
|
% of Total
Options
Granted to
Employees
in 1999
|
|
Exercise
Price
($/Sh)
|
|
Expiration
Date
|
|
|
|
|
|
5%
|
|
10%
|
|
John M.
Connolly |
|
221,425 |
|
11.4 |
% |
|
$2.20 |
|
10/1/04 |
|
$2,621,472 |
|
$3,435,544 |
|
|
128,575 |
|
6.6 |
|
|
2.00 |
|
10/1/09 |
|
2,046,636 |
|
3,411,245 |
Joseph L.
Gagnon |
|
172,500 |
|
8.9 |
|
|
2.00 |
|
9/13/09 |
|
2,745,828 |
|
4,576,626 |
Ruth M.
Habbe |
|
10,000 |
|
0.5 |
|
|
2.00 |
|
7/27/09 |
|
159,178 |
|
265,312 |
Randall S.
Hancock |
|
1,600 |
|
*
|
|
|
2.50 |
|
12/21/09 |
|
24,669 |
|
41,650 |
|
|
39,484 |
|
2.0 |
|
|
5.00 |
|
12/31/09 |
|
510,048 |
|
929,105 |
Mark A.
Verdi |
|
10,000 |
|
0.5 |
|
|
2.00 |
|
7/27/09 |
|
159,178 |
|
265,312 |
|
Option
Exercises and Year-End Holdings
|
The following table sets forth
information concerning stock option exercises during 1999 by each of the
named executive officers and the number and value of unexercised options
held by them as of December 31, 1999. The heading Vested refers
to shares no longer subject to repurchase by us, and the heading
Unvested refers to shares subject to repurchase by us, in each
case as of December 31, 1999.
Aggregate Option
Exercises In 1999 And Fiscal Year-End Option Values
|
|
Shares
Acquired
on Exercise
|
|
Value
Realized(1)
|
|
Number of
Securities
Underlying Unexercised
Options at Year-End
|
|
Value of
Unexercised
in-the-Money Options at
Year-End(2)
|
Name
|
|
|
|
Vested
|
|
Unvested
|
|
Vested
|
|
Unvested
|
John M.
Connolly |
|
|
|
$
|
|
50,000 |
|
300,000 |
|
$440,000 |
|
$2,665,715 |
Joseph L.
Gagnon |
|
|
|
|
|
50,000 |
|
122,500 |
|
450,000 |
|
1,102,500 |
Ruth M.
Habbe |
|
74,036 |
|
139,188 |
|
|
|
93,908 |
|
|
|
960,965 |
Randall S.
Hancock |
|
|
|
|
|
56,754 |
|
141,912 |
|
586,099 |
|
1,300,107 |
Mark A.
Verdi |
|
96,118 |
|
155,753 |
|
9,062 |
|
77,950 |
|
95,584 |
|
801,862 |
(1)
|
These values have
been calculated by determining the difference between the exercise price
per share and the fair market value on the date of exercise.
|
(2)
|
These values have
been calculated by determining the difference between the exercise price
per share and the assumed initial public offering price of $11.00 per
share.
|
Equity
Plans
1996 Omnibus Stock Plan.
Mainsprings 1996 Omnibus Stock Plan was
adopted by the board of directors and approved by the stockholders on June
7, 1996. A total of 3,926,908 shares of common stock have been reserved for
issuance under the 1996 Stock Plan. Under the 1996 Stock Plan, Mainspring
was authorized to grant options to purchase shares of common stock intended
to qualify as incentive stock options as defined under Section 422 of the
Internal Revenue Code of 1986 to employees and non-qualified stock options
and restricted stock to directors, officers and other employees and
consultants of Mainspring. Options granted under the 1996 Stock Plan are
exercisable within ten years of the grant date or, in the case of incentive
stock options granted to an employee owning stock possessing more than 10%
of the total combined voting power of all classes of stock of Mainspring,
not more than five years after the grant date. Options granted under the
1996 Stock Plan generally become exercisable according to the following
schedule: 30% by the first anniversary of the date of grant, then monthly
such that an additional 20% become exercisable by the second anniversary,
20% by the third anniversary and 30% by the fourth anniversary. As of
December 31, 1999, options to purchase 4,259,046 shares had been granted
under the 1996 Stock Plan. Of that amount, options to purchase 2,655,298
shares of Mainspring common stock remain outstanding as of December 31, 1999
are exercisable at prices ranging from $.17 to $5.00 per share.
2000 Stock Option and Incentive
Plan. Mainsprings 2000 Stock Option and
Incentive Plan, or 2000 Option Plan, was adopted by the Board of Directors
on February 9, 2000 and approved by the stockholders on March 29, 2000. A
total of 5,000,000 shares of common stock have initially been reserved for
issuance under the 2000 Option Plan. The 2000 Option Plan provides that the
number of shares authorized for issuance will automatically increase
annually by 8% of the outstanding number of shares of common stock, and the
number of shares of common stock issuable pursuant to the exercise of
outstanding options, up to a maximum of an additional 5,000,000 shares of
common stock per year. Under the terms of the 2000 Option Plan, Mainspring
is authorized to grant incentive stock options, non-qualified options, stock
awards or direct purchases of common stock available for employees,
officers, directors and consultants of Mainspring.
The 2000 Option Plan is
administered by the Mainspring compensation committee. The committee selects
the individuals to whom options will be granted and determines the option
exercise price and other terms of each award, subject to the provisions of
the 2000 Option Plan. No options may be exercised following termination of
employment for cause. The term of the 2000 Option Plan is ten years, unless
sooner terminated by vote of the board of directors. As of February 11,
2000, no options had been granted under the 2000 Option Plan.
Change in Control
Provisions. The 2000 Option Plan and the 1996
Stock Plan (as amended on February 9, 2000) provide for the acceleration of
vesting in the event of a change in control of Mainspring. Generally, upon a
change in control, vesting of options or other awards will accelerate by one
year if:
|
|
the acquiring
company neither assumes or substitutes the option or award nor replaces it
with a similar award; or
|
|
|
the holder is
discharged within 12 months after the change in control, other than for
cause.
|
For this purpose,
holder is also treated as having been discharged other than for cause if the
holder resigns after being asked to relocate, after suffering a reduction in
compensation or after being demoted.
2000 Non-Employee Director
Stock Option Plan. Mainsprings 2000
Non-Employee Director Stock Option Plan, or Director Plan, was adopted by
the Board of Directors on February 9, 2000, was approved by the stockholders
on March 29, 2000, and becomes effective on the date on which Mainspring
s common stock is registered under the Securities Exchange Act. A
total of 200,000 shares of common stock have been authorized for issuance
under the Director Plan.
The Director Plan is administered
by the Mainspring compensation committee. Under the Director Plan, each
non-employee director who is or becomes a member of the board of directors
is automatically granted on the date on which the common stock becomes
registered under the Exchange Act or, if not a director on that date, the
date first elected to the board of directors, an initial option to purchase
20,000 shares of common stock, which will vest
quarterly in equal installments over four years. In addition, provided that
the director continues to serve as a member of the board of directors, each
non-employee director will be automatically granted on the first anniversary
of his or her initial option grant date and each year thereafter an option
to purchase 3,000 shares of common stock, which will vest quarterly in equal
installments over that year. All options granted under the Director Plan
will have an exercise price equal to the fair market value of the common
stock on the date of grant and a term of ten years from the date of grant.
Unexercisable options terminate when the director ceases to be a director
for any reason other than death or permanent disability. Vested options may
be exercised at any time during the option term. The term of the Director
Plan is ten years, unless sooner terminated by vote of the board of
directors. No options have been granted under the Director Plan.
2000 Employee Stock Purchase
Plan. The 2000 Employee Stock Purchase Plan, or
Stock Purchase Plan, was adopted by the board of directors on February 9,
2000, was approved by the stockholders on March 29, 2000, and becomes
effective on the date on which Mainsprings common stock is registered
under the Securities Exchange Act. The Stock Purchase Plan provides for the
issuance of up to an aggregate of 1,000,000 shares of common stock to
participating employees. The Stock Purchase Plan provides that the number of
shares authorized for issuance under the Stock Purchase Plan will
automatically increase annually by 2% of the outstanding number of shares of
common stock, up to a maximum of an additional 1,000,000 shares of common
stock per year.
The Stock Purchase Plan is
administered by the Mainspring compensation committee. All employees who
have completed three months of employment with Mainspring and whose
customary employment is more than 20 hours per week and for more than five
months in any calendar year are eligible to participate in the Stock
Purchase Plan. The right to purchase common stock under the Stock Purchase
Plan will be made available through a series of offerings. On the first day
of an offering period, Mainspring will grant to each eligible employee who
has elected in writing to participate in the Stock Purchase Plan an option
to purchase shares of common stock. The employee will be required to
authorize an amount, between 1% and 20% of the employees compensation,
to be deducted from the employees pay during the offering period. On
the last day of the offering period, the employee will be deemed to have
exercised the option, at the option exercise price, to the extent of
accumulated payroll deductions. Under the terms of the Stock Purchase Plan,
the option exercise price is an amount equal to 85% of the fair market value
of one share of common stock on either the first or last day of the offering
period, whichever is lower. No employee may be granted an option that would
permit the employees rights to purchase common stock to accrue in
excess of $25,000 in any calendar year. Options granted under the Stock
Purchase Plan terminate upon an employees voluntary withdrawal from
the plan at any time or upon termination of employment. No options have been
granted to date under the Stock Purchase Plan.
Employment
Agreement
Mainspring is currently
negotiating an employment agreement and a noncompetition, nondisclosure and
inventions agreement with John M. Connolly, its Chairman of the Board,
President and Chief Executive Officer. We expect this employment agreement
will provide for the payment of salary and bonus, will terminate on June 30,
2002 unless earlier terminated and may be extended upon mutual agreement of
the parties. In addition, we expect the employment agreement will provide
that if Mr. Connolly is terminated without just cause, as defined in the
employment agreement, Mr. Connolly will receive a severance payment equal to
twelve months salary and all unvested options will accelerate and become
exercisable for a period of twelve months following termination. Finally, in
the event of a merger or acquisition of Mainspring, if Mr.
Connolly:
|
|
is not offered
employment by the acquiring corporation in a comparable position and at a
comparable salary; or
|
|
|
is terminated at
any time for other than just cause within twelve months following the
completion of the acquisition,
|
we expect Mr.
Connolly will receive a severance payment equal to twelve months salary and
all unvested options will accelerate and become exercisable for a period of
twelve months.
401(k)
Plan
Mainspring has established a
tax-qualified 401(k) Retirement Savings Plan. All employees of Mainspring
are eligible to participate in the 401(k) Plan. Employees may generally
elect to defer up to 20% of their pre-tax compensation and Mainspring may
make matching contributions on an annual basis to the employees. To date, we
have not made any matching contributions to the 401(k) Plan.
Limitation Of
Liability And Indemnification Of Officers And Directors
Mainsprings amended and
restated certificate of incorporation provides that the directors and
officers of Mainspring shall be indemnified by Mainspring to the fullest
extent authorized by Delaware law against all expenses and liabilities
reasonably incurred in connection with their service for or on behalf of
Mainspring. The amended and restated certificate of incorporation also
provides that the directors of Mainspring will not be personally liable for
monetary damages to Mainspring for breaches of their fiduciary duty as
directors, unless they violated their duty of loyalty to Mainspring or its
stockholders, acted in bad faith, knowingly or intentionally violated the
law, authorized illegal dividends or redemptions or derived an improper
personal benefit from their action as directors. Mainspring intends to
increase its insurance which insures the directors and officers of
Mainspring against specified losses and which insures Mainspring against
specific obligations to indemnify its directors and officers.
Since our incorporation in April
1996, we have issued and sold shares of preferred stock to the following
persons and entities who are our executive officers, directors or principal
stockholders. For more detail on shares held by these purchasers, see
Principal Stockholders on page 45. Four of our directors,
Anthony Brenner, Brian Nairn, William Kaiser and Paul Maeder, are affiliates
of holders of greater than five percent of our common stock.
Preferred Stock
Issuances
Investor
|
|
Series A
Preferred
Stock
|
|
Series B
Preferred
Stock
|
|
Series C
Preferred
Stock
|
|
Series D
Preferred
Stock
|
|
Series E
Preferred
Stock
|
|
Aggregate
Purchase Price
|
Highland Capital
Partners II,
Limited Partnership |
|
551,471 |
|
90,145 |
|
20,243 |
|
436,011 |
|
430,148 |
|
$7,711,085 |
Greylock Equity
Limited Partnership |
|
551,471 |
|
90,145 |
|
20,243 |
|
436,011 |
|
430,148 |
|
7,711,085 |
Reed Elsevier
Inc. |
|
|
|
384,616 |
|
|
|
|
|
|
|
3,000,005 |
Chase Venture
Capital Associates, L.P. |
|
|
|
151,976 |
|
18,674 |
|
191,163 |
|
273,542 |
|
4,194,021 |
Crosslink(1) |
|
|
|
|
|
|
|
|
|
1,066,667 |
|
8,000,003 |
Bruce A.
Barnet |
|
|
|
|
|
|
|
26,316 |
|
20,202 |
|
251,516 |
Ruth M.
Habbe |
|
|
|
|
|
|
|
|
|
13,333 |
|
99,998 |
S. Ming
Tsai |
|
|
|
|
|
|
|
|
|
6,667 |
|
50,003 |
(1)
|
Comprised of
Crosslink Omega Ventures III, L.L.C., Crosslink Offshore Omega Ventures
III (a Cayman Islands unit trust), Omega Bayview, L.L.C. and Crosslink
Crossover Fund III, L.P.
|
Series A Financing.
On June 14, 1996, we issued an aggregate of 1,205,884
shares of Series A preferred stock to six investors, including Highland and
Greylock. The per share purchase price for our Series A preferred stock was
$3.40.
Series B Financing.
On December 4, 1996, we issued an aggregate of 896,159
shares of Series B preferred stock to ten investors, including Highland,
Greylock, Reed Elsevier and Chase. The per share purchase price for our
Series B preferred stock was $7.80.
Series C Financing.
On October 3, 1997, we issued an aggregate of 225,103
shares of Series C preferred stock to six investors, including Highland,
Greylock and Chase. The per share purchase price for our Series C preferred
stock was $12.35.
Series D Financing.
On February 8, 1999, we issued an aggregate of 1,315,790
shares of Series D preferred stock to ten investors, including Highland,
Greylock, Chase and Bruce Barnet. The per share purchase price for our
Series D preferred stock was $3.80.
Series E Financing.
On November 18, 1999, December 29, 1999 and February 10,
2000, we issued an aggregate of 4,426,668 shares of Series E preferred stock
to 23 investors, including Crosslink, Highland, Greylock, Chase, Bruce
Barnet, Ruth Habbe, Ming Tsai and E-Squam Investors I, L.P. The per share
purchase price for our Series E preferred stock was $7.50.
All of the shares of each series
of our preferred stock will automatically convert to common stock upon a
public offering of our common stock in which the aggregate proceeds equal or
exceed $15,000,000 and the price per share equals or exceeds $11.70. Our
preferred stock may also convert to common stock at any time at the option
of the holder.
In connection with the issuances
of each series of preferred stock, we have also granted registration rights
to the securityholders listed above under the terms of the Series E
Preferred Stock Purchase Agreement. See Description of Capital Stock
Registration Rights.
Common Stock
Issuances
In February 1998, one of our
founders terminated his employment with Mainspring. This founders
shares of common stock were subject to a stock restriction agreement. Under
the terms of this stock restriction agreement, we repurchased shares of his
unvested common stock at a purchase price of $.005 per share. On August 12,
1998, we repurchased an additional 379,160 shares of common stock at $.62
per share, which was the fair market value of our common stock on August 12,
1998. Also on August 12, 1998, this founder sold 415,408 shares of common
stock to certain of our investors and employees at a price of $.62 per
share, including Highland, Greylock, Reed Elsevier, John Connolly, Bruce
Barnet, Mark Verdi and Ruth Habbe.
Agreement with
Chase Capital Partners
In February 2000, we entered into
an agreement with Chase Capital Partners to provide Internet Strategy due
diligence on Chase investments. Chase Capital Partners is affiliated with
Chase Venture Capital Associates, L.P., a principal stockholder of
Mainspring.
Loans to Executive
Officers
On August 31, 1999, Ming Tsai
borrowed $200,000 from Mainspring. The loan is evidenced by a full recourse
promissory note and bears interest at a rate of 8.0%. Principal of $100,000
and accrued interest on $100,000 will be forgiven if we continue to employ
Mr. Tsai for one year. The remaining principal and interest is due on August
31, 2001. Rather than provide a signing bonus to Mr. Tsai, we offered a loan
to Mr. Tsai and agreed to forgive the portion of the loan after one year in
return for Mr. Tsais commitment to remain with Mainspring for one
year.
On March 15, 2000, Michael Armano
borrowed $225,000 from Mainspring. The loan is evidenced by a full recourse
promissory note and bears interest at a rate of 8.75%. Accrued interest will
be forgiven if we continue to employ Mr. Armano for two years. Principal of
$225,000 is due on March 15, 2002.
We believe that all of the
transactions set forth above were made on terms no less favorable to us than
could have been obtained from unaffiliated third parties. We agreed to the
material terms of each of the preferred stock issuances set forth above
after arms-length negotiations with previously unaffiliated persons.
All future transactions, including loans between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent
and disinterested directors on the board of directors, and will continue to
be on terms no less favorable to us than could be obtained from unaffiliated
third parties.
The following table sets forth
information regarding beneficial ownership of our common stock as of
April 1, 1999, and as adjusted to reflect the sale of the shares of common
stock in this offering, by:
|
|
each person who we
know to own beneficially more than 5% of our common stock;
|
|
|
each executive
officer (named in the summary compensation table under Management
Executive Compensation); and
|
|
|
all current
executive officers and directors as a group.
|
Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission, and
includes voting or investment power with respect to shares. Shares of common
stock issuable under stock options that are exercisable within 60 days after
April 1, 2000 are deemed outstanding for computing the percentage ownership
of the person holding the options, but are not deemed outstanding for
computing the percentage ownership of any other person. Unless otherwise
indicated below, to our knowledge, all persons named in the table have sole
voting and investment power with respect to their shares of common stock,
except to the extent authority is shared by spouses under applicable law.
Unless otherwise indicated, the address of each person owning more than 5%
of the outstanding shares of common stock is c/o Mainspring Communications,
Inc., One Main Street, Cambridge, Massachusetts 02142.
|
|
Shares
Beneficially
Owned
Prior to Offering
|
|
Shares
Beneficially
Owned
After Offering
|
Name and Address
of Beneficial Owner
|
|
Number
|
|
Percent
|
|
Number
|
|
Percent
|
Executive
Officers and Directors |
John M.
Connolly(1) |
|
1,154,434 |
|
8.1 |
% |
|
1,154,434 |
|
6.5 |
% |
Mark A.
Verdi(2) |
|
115,534 |
|
* |
|
|
115,534 |
|
* |
|
Bruce A. Barnet
5 Crooked Mile Road
Westport, CT 06880 |
|
112,320 |
|
* |
|
|
112,320 |
|
* |
|
Anthony P.
Brenner(3)
Crosslink Capital
555 California Street, Suite 2350
San Francisco, CA 94104 |
|
1,066,667 |
|
7.5 |
|
|
1,066,667 |
|
6.0 |
|
Jerome D. Colonna(4)
Flatiron Partners
257 Park Avenue South, 12th Floor
New York, NY 10010 |
|
225,147 |
|
1.6 |
|
|
225,147 |
|
1.3 |
|
William S. Kaiser(5)
Greylock Management
One Federal Street
Boston, MA 02110 |
|
2,717,750 |
|
19.0 |
|
|
2,717,750 |
|
15.3 |
|
Paul A. Maeder(6)
Highland Capital
2 International Place
Boston, MA 02110 |
|
2,717,750 |
|
19.0 |
|
|
2,717,750 |
|
15.3 |
|
Brian
Nairn |
|
|
|
* |
|
|
|
|
* |
|
Cahners Business Information
350 Hudson Street
New York, NY 10014 |
|
|
|
|
|
|
|
|
|
|
Joseph L.
Gagnon |
|
57,500 |
|
* |
|
|
57,500 |
|
* |
|
Ruth M.
Habbe(7) |
|
137,391 |
|
1.0 |
|
|
137,391 |
|
* |
|
Randall S.
Hancock(8) |
|
111,996 |
|
* |
|
|
111,996 |
|
* |
|
|
|
Shares
Beneficially
Owned
Prior to Offering
|
|
Shares
Beneficially
Owned
After Offering
|
Name and Address
of Beneficial Owner
|
|
Number
|
|
Percent
|
|
Number
|
|
Percent
|
Principal
Stockholders |
Highland Capital
Partners II, Limited Partnership
2 International Place
Boston, MA 02110 |
|
2,717,750 |
|
19.0 |
% |
|
2,717,750 |
|
15.3 |
% |
Greylock Equity
Limited Partnership
One Federal Street
Boston, MA 02110 |
|
2,717,750 |
|
19.0 |
|
|
2,717,750 |
|
15.3 |
|
Reed Elsevier Inc.
275 Washington Street
Newton, MA 02158 |
|
937,531 |
|
6.6 |
|
|
937,531 |
|
5.3 |
|
Chase Venture
Capital Associates, L.P.
257 Park Avenue South, 12th Floor
New York, NY 10010 |
|
1,062,378 |
|
7.4 |
|
|
1,062,378 |
|
6.0 |
|
Crosslink(9)
555 California Street, Suite 2350
San Francisco, CA 94104 |
|
1,066,667 |
|
7.5 |
|
|
1,066,667 |
|
6.0 |
|
All executive
officers and directors as a group (14 persons)(10) |
|
8,541,106 |
|
59.2 |
|
|
8,541,106 |
|
47.6 |
|
*
|
Less than 1% of the
outstanding common stock
|
(1)
|
Includes 10,000
shares owned by Mr. Connollys minor children. Also includes 50,000
shares issuable upon the exercise of options that become exercisable
within 60 days of April 1, 2000.
|
(2)
|
Includes 17,433
shares issuable upon the exercise of options that become exercisable
within 60 days of April 1, 2000. Does not include 40,000 shares owned by
Mr. Verdis parents. Mr. Verdi has voting power over such 40,000
shares which terminates upon the completion of this offering.
|
(3)
|
Comprised of
1,066,667 shares owned by the Crosslink entities. Mr. Brenner is a
managing member of Crosslink Omega III Holdings, L.L.C. and Crossover Fund
III Management, L.L.C. Crosslink Omega III Holdings, L.L.C. is the
investment manager of Crosslink Omega Ventures III, L.L.C. and Crosslink
Offshore Omega Ventures III (a Cayman Islands unit trust). Crossover Fund
III Management, L.L.C. is the general partner of Crosslink Crossover Fund
III, L.P. Mr. Brenner is a member of Omega Bayview, L.L.C. Mr. Brenner
disclaims beneficial ownership of the shares owned by the Crosslink
entities except to the extent of his proportionate pecuniary interest
therein.
|
(4)
|
Comprised of
225,147 shares owned by the Flatiron Fund LLC 98/99, Flatiron Fund, LLC
and Flatiron Associates, LLC. Mr. Colonna is a managing partner of the
managing members of the Flatiron Fund LLC 98/99 and Flatiron Fund, LLC. He
is a managing member of Flatiron Associates, LLC. Mr. Colonna disclaims
beneficial ownership of the shares owned by the Flatiron entities except
to the extent of his proportionate pecuniary interest therein.
|
(5)
|
Comprised of
2,717,750 shares owned by Greylock Equity Limited Partnership. Mr. Kaiser
is a general partner of Greylock Equity GP Limited Partnership, the
general partner of Greylock Equity Limited Partnership. Mr. Kaiser
disclaims beneficial ownership of the shares owned by Greylock except to
the extent of his proportionate pecuniary interest therein.
|
(6)
|
Comprised of
2,717,750 shares owned by Highland Capital Partners II, Limited
Partnership. Mr. Maeder is a general partner of Highland Management
Partners II Limited Partnership, the general partner of Highland Capital
Partners Limited Partnership. Mr. Maeder disclaims beneficial ownership of
the shares owned by Highland except to the extent of his proportionate
pecuniary interest therein.
|
(7)
|
Includes 18,762
shares issuable upon the exercise of options that become exercisable
within 60 days of April 1, 2000.
|
(8)
|
Includes 72,512
shares issuable upon the exercise of options that become exercisable
within 60 days of April 1, 2000.
|
(9)
|
Comprised of
Crosslink Omega Ventures III, L.L.C., Crosslink Offshore Omega Ventures
III (a Cayman Islands unit trust), Omega Bayview, L.L.C. and Crosslink
Crossover Fund III, L.P. Crosslink Omega III Holdings, L.L.C. is the
investment manager of Crosslink Omega Ventures III, L.L.C. and Crosslink
Offshore Omega Ventures III. Crossover Fund III Management, L.L.C. is the
general partner of Crosslink Crossover Fund III, L.P.
|
(10)
|
Includes an
aggregate of 158,707 shares issuable upon the exercise of options that
become exercisable within 60 days of April 1, 2000.
|
DESCRIPTION OF
CAPITAL STOCK
After the closing of this
offering, the authorized capital stock of Mainspring will consist of
250,000,000 shares of common stock, par value $.01 per share, and 25,000,000
shares of preferred stock, par value $.01 per share.
The following summary description
of Mainsprings capital stock is qualified by reference to the
provisions of applicable law and to Mainsprings amended and restated
certificate of incorporation and amended and restated by-laws, filed as
exhibits to the registration statement of which this prospectus is a
part.
Common
Stock
As of December 31, 1999, there
were 1,891,970 shares of common stock outstanding held by 55 stockholders of
record. Based upon the number of shares outstanding as of that date and
giving effect to the following transactions, there will be 17,752,553 shares
of common stock outstanding after this offering:
|
|
the issuance of the
3,500,000 shares of common stock offered by Mainspring in this
offering;
|
|
|
the issuance of
229,744 shares of Series X preferred stock pursuant to the exercise of an
outstanding warrant; and
|
|
|
the conversion of
all shares of Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock, Series E preferred stock and
Series X preferred stock into common stock.
|
In addition, as of December 31,
1999, there were outstanding stock options for the purchase of a total of
2,655,298 shares of common stock.
Holders of common stock are
entitled to one vote for each share held on all matters submitted to a vote
of stockholders. Holders of common stock do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares
present in person or by proxy at the meeting and entitled to vote in such
election. Holders of common stock are entitled to receive ratably dividends,
if any, as may be declared by the board of directors out of funds legally
available for payment of dividends, subject to any preferential dividend
rights of outstanding preferred stock. Upon the liquidation, dissolution or
winding up of Mainspring, the holders of common stock are entitled to
receive ratably the net assets of Mainspring available after the payment of
all debts and other liabilities of Mainspring, subject to the prior rights
of any outstanding preferred stock. Holders of the common stock have no
preemptive, subscription, redemption or conversion rights, nor are they
entitled to the benefit of any sinking fund. The rights, powers, preferences
and privileges of holders of common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock which Mainspring may designate and issue in the
future.
Preferred
Stock
Our board of directors will be
authorized, subject to any limitations prescribed by law and without further
stockholder approval, to issue from time to time up to an aggregate of
25,000,000 shares of preferred stock, in one or more series. Each series of
preferred stock shall have the number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges
as shall be determined by the board of directors, which may include, among
others, dividend rights, voting rights, redemption and sinking fund
provisions, liquidation preferences, conversion rights and preemptive
rights.
The stockholders of Mainspring
have granted the board of directors authority to issue the preferred stock
and to determine its rights and preferences in order to eliminate delays
associated with a stockholder vote on specific issuances. The rights of the
holders of common stock will be subject to the rights of holders of any
preferred stock issued in the future. The issuance of preferred stock
provides desirable flexibility in connection
with possible acquisitions and other corporate purposes. However, the
preferred stock, if issued, could adversely affect the voting power or other
rights of the holders of common stock, and could make it more difficult for
a third-party to acquire, or discourage a third-party from attempting to
acquire, a majority of the outstanding voting stock of Mainspring.
Mainspring has not, to date, issued any shares of such preferred stock and
has no present plans to issue any shares of preferred stock.
Delaware Law And
Our Charter And By-Law Provisions; Anti-Takeover Effects
Upon completion of this offering,
Mainspring will be subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a business combination with an
interested stockholder for a period of three years after the
date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. A business combination includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to exceptions, an interested stockholder is
a person who, together with affiliates and associates, owns, or within the
prior three years did own, 15% or more of Mainsprings outstanding
voting stock.
Mainsprings amended and
restated certificate of incorporation and by-laws to be effective on the
closing of this offering provide that
|
|
directors may be
removed only for cause by the vote of the holders of at least two-thirds
of the shares of our capital stock entitled to vote; and
|
|
|
any vacancy on the
board of directors, however occurring, including a vacancy resulting from
an enlargement of the board, may be filled by vote of a majority of the
directors then in office.
|
The limitations on the removal of
directors and the procedures for the filling of vacancies could make it more
difficult for a third party to acquire, or discourage a third party from
acquiring, Mainspring.
The certificate of incorporation
and by-laws to be effective on the closing of this offering also provide
that, after the closing of the offering:
|
|
any action required
or permitted to be taken by the stockholders at an annual meeting or
special meeting of stockholders may only be taken if it is properly
brought before such meeting and may not be taken by written action in lieu
of a meeting; and
|
|
|
special meetings of
the stockholders may only be called by the Chairman of the board of
directors, the President, or by the board of directors. Our by-laws will
also provide that, in order for any matter to be considered properly
brought before a meeting, a stockholder must comply with the
requirements regarding advance notice to us.
|
The foregoing provisions could
have the effect of delaying until the next stockholders meeting stockholder
actions which are favored by the holders of a majority of the outstanding
voting securities of Mainspring. These provisions may also discourage
another person or entity from making a tender offer for Mainsprings
common stock. As a result, such person or entity, even if it acquired a
majority of the outstanding voting securities of Mainspring, would be able
to take action as a stockholder, such as electing new directors or approving
a merger, only at a duly called stockholders meeting, and not by written
consent.
The General Corporation Law of
Delaware provides that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporations
certificate of incorporation or by-laws, unless a corporations
certificate of incorporation or by-laws, as the case may be, requires a
greater percentage. Mainsprings amended and restated certificate of
incorporation requires the affirmative vote of the holders of at least 75%
of the shares of capital stock of Mainspring issued and outstanding and
entitled to vote to amend or repeal any of the foregoing provisions of the
amended and restated certificate of incorporation. Mainsprings amended
and restated by-laws may be amended or repealed by a majority vote of the
board of directors except
for provisions relating to the board of directors which may only be amended or
repealed by the affirmative vote of the holders of at least two-thirds of
the shares of capital stock issued and outstanding and entitled to vote. The
amended and restated by-laws may also be amended or repealed by the
affirmative vote of the holders of at least two-thirds of the shares of
capital stock of Mainspring issued and outstanding and entitled to vote.
This two-thirds stockholder vote would be in addition to any separate class
vote that might in the future be required in accordance with the terms of
any series of preferred stock that might be outstanding at the time any such
amendments are submitted to stockholders.
Registration
Rights
After this offering, the holders
of approximately 12,773,050 shares of outstanding common stock will be
entitled to rights with respect to the registration of these shares under
the Securities Act. The holders of registration rights are those investors
that purchased shares of our Series A, Series B, Series C, Series D, Series
E and Series X preferred stock. Under the terms of the agreements between us
and the holders of these registrable securities, if we propose to register
any of our securities under the Securities Act, either for our own account
or for the account of other security holders exercising registration rights,
the holders are entitled to notice of the registration and are entitled to
include these shares in the registration. Some of the stockholders
benefiting from these rights may also require us to file a registration
statement under the Securities Act at our expense with respect to their
shares of common stock, and we are required to use reasonable efforts to
effect a registration. Further, holders may require us to file additional,
short-form registration statements on Form S-3 at our expense. These rights
are subject to conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares included in that
registration and our right not to effect a requested registration more than
once in any six-month period.
Transfer Agent And
Registrar
The transfer agent and registrar
for the common stock will be ChaseMellon Shareholder Services,
LLC.
SHARES ELIGIBLE
FOR FUTURE SALE
Upon completion of this offering,
based on the number of shares outstanding as of December 31, 1999,
Mainspring will have 17,752,553 shares of common stock outstanding, and
outstanding options and warrants for an additional 2,655,298 shares of
common stock. Of these shares, the 3,500,000 shares, and 4,025,000 shares if
the over-allotment option is exercised in full, to be sold in this offering
will be freely tradable without restriction or further registration under
the Securities Act. However, any shares purchased by affiliates of
Mainspring may generally be sold in compliance with the limitations of Rule
144 described below, and shares reserved for sale to our directors,
officers, employees and related persons will also be subject to a lock-up
agreement for 180 days after the offering.
Sales Of
Restricted Shares
The remaining 14,252,553 shares of
common stock outstanding upon completion of this offering are deemed
restricted shares under Rule 144 or Rule 701 under the
Securities Act. Of these shares 13,459,198 shares will be subject to
lock-up agreements described below on the effective date of this
offering. Upon expiration of the lock-up agreements, a total of 9,622,806
shares will become eligible for sale subject to the limitations of either
Rule 144 or Rule 701.
Days After Date
of
This Prospectus
|
|
Approximate
Shares
Eligible for
Future Sale
|
|
Comment
|
On
effectiveness |
|
3,548,098 |
|
Freely tradable
sold in offering or salable
under Rule 144(k) |
90 days after
effectiveness |
|
83,812 |
|
Shares salable
under Rule 144 or 701 |
180 days after
effectiveness
(expiration of lock-up) |
|
9,622,806 |
|
Shares salable
under Rule 144, 144(k) or 701 |
More than 180 days
after effectiveness |
|
4,656,412 |
|
Salable under Rule
144 or 144(k) on various dates |
Certain of the shares listed in
the foregoing table as not salable until 180 days after effectiveness may
become salable earlier as described below under Lock-up Agreements.
In general, under Rule 144, a
person (or persons whose shares are aggregated), including an affiliate, who
has beneficially owned shares for at least one year, is entitled to sell,
within any three-month period, a number of such shares that does not exceed
the greater of (1) 1% of the then outstanding shares of common stock
(approximately 177,526 shares immediately after this offering), or (2) the
average weekly trading volume in the common stock in the over-the-counter
market during the four calendar weeks preceding the date on which notice of
such sale is filed, provided that the company satisfies the requirements
concerning available of public information, manner of sale and notice of
sale. In addition, our affiliates must comply with the requirements of Rule
144, other than the one-year holding period requirement, in order to sell
shares of common stock which are not restricted securities.
Under Rule 144(k), a person who is
not an affiliate and has not been an affiliate for at least three months
prior to the sale, and who has beneficially owned shares for at least two
years, may resell such shares without compliance with the foregoing
requirements. In meeting the one-and two-year holding periods described
above, a holder of shares can include the holding periods of a prior owner
who was not an affiliate. The one-and two-year holding periods described
above do not begin to run until the full purchase price or other
consideration is paid by the person acquiring the shares from the issuer or
any affiliate of the issuer. Rule 701 provides that currently outstanding
shares of common stock acquired under our employee stock plans, and shares
of common stock acquired upon exercise of presently outstanding options
granted under these plans, may be resold beginning 90 days after the date of
this prospectus:
|
|
by persons, other
than affiliates, subject only to the manner-of-sale provisions of Rule
144, and
|
|
|
by affiliates under
Rule 144 without compliance with its one-year minimum holding period
requirement, subject to some limitations.
|
Options
Shares of common stock acquired
upon the exercise of currently outstanding options issued in accordance with
Rule 701 may be resold by persons, other than affiliates, beginning 90 days
after the date of this prospectus, subject only to the manner of sale
provisions of Rule 144, and by affiliates under Rule 144, without compliance
with its one-year minimum holding period. As of the date of this prospectus,
the board of directors has authorized an aggregate of up to 9,126,908 shares
of common stock for issuance pursuant to Mainsprings stock option
plans. At December 31, 1999, 546,627 shares of common stock were issuable
pursuant to outstanding vested options or pursuant to other rights granted
under Mainsprings various stock option plans, of which approximately
4,000 shares are not subject to lock-up agreements with the underwriters and
will be eligible for sale in the public market in accordance with Rule 701
beginning 90 days after the date of this prospectus; 2,108,671 shares of
common stock are issuable pursuant to outstanding options that are not yet
exercisable; and 7,061,466 shares of common stock are available for future
grants under Mainsprings stock option and stock purchase
plans.
Mainspring intends to file one or
more registration statements on Form S-8 under the Securities Act
approximately 90 days after the date of this prospectus to register all
shares of common stock which are issuable pursuant to Mainsprings
stock option and stock purchase plans. These registration statements are
expected to become effective upon filing. Shares covered by the registration
statements will be eligible for sale in the public markets.
Lock-Up
Agreements
Mainspring, its executive officers
and directors, and substantially all of our stockholders have agreed not to
sell or transfer their shares of common stock, or to engage in hedging
transactions with respect to the common stock, without the prior written
consent of Morgan Stanley & Co. Incorporated for a period of 180 days
from the date of this prospectus. In addition, for a period of 180 days from
the date of this prospectus, Mainspring has agreed that its Board of
Directors will not consent to any offer for sale, sale or other disposition,
or any transaction which is designed or could be expected to result in the
disposition by any person, directly or indirectly, of any shares of common
stock without the prior written consent of Morgan Stanley & Co.
Incorporated. Morgan Stanley & Co. Incorporated in its sole discretion
may release for sale in the public market all or any portion of the shares
subject to the lock-up agreements. Please turn to the section titled
Underwriters for more information on the lock-up
agreements.
Registration
Rights
Upon completion of this offering,
the holders of approximately 12,773,050 shares of common stock will be
entitled to various rights with respect to the registration of these shares
under the Securities Act. Registration of these shares under the Securities
Act would result in these shares becoming freely tradable without
restriction under the Securities Act immediately upon the effectiveness of
the registration, except for shares purchased by affiliates. For additional
information on registration rights, please turn to the section titled
Description of Capital StockRegistration Rights.
Effects of Sales
of Shares
Prior to this offering, there has
been no public market for the common stock of Mainspring. We can make no
predictions as to the effect, if any, that market sales of shares of common
stock prevailing from time to time, or the availability of shares for future
sale, may have on the market price for our common stock. Sales of
substantial amounts of common stock, or the perception that these sales
could occur, could adversely affect prevailing market prices for our common
stock and could impair our future ability to obtain capital through an
offering of equity securities.
Under the terms and subject to the
conditions contained in an underwriting agreement dated the date of this
prospectus, the underwriters named below for whom Morgan Stanley & Co.
Incorporated, Chase Securities Inc, Thomas Weisel Partners LLC and
FAC/Equities, a division of First Albany Corporation, are acting as
representatives, have severally agreed to purchase, and Mainspring has
agreed to sell to them, the respective number of shares of common stock set
forth opposite the names of the underwriters below:
Name
|
|
Number
of Shares
|
Morgan Stanley
& Co. Incorporated |
|
|
Chase Securities
Inc. |
|
|
Thomas Weisel
Partners LLC |
|
|
FAC/Equities, a
division of First Albany Corporation |
|
|
|
|
|
Total |
|
3,500,000 |
|
|
|
The underwriters are offering the
shares of common stock subject to their acceptance of the shares from us and
subject to prior sale. The underwriting agreement provides that the
obligations of the several underwriters to pay for and accept delivery of
the shares of common stock offered in this offering are subject to the
approval of various legal matters by their counsel and to various other
conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered in this offering, other than those covered by
the over-allotment option described below, if any such shares are
taken.
The underwriters initially propose
to offer part of the shares of common stock directly to the public at the
initial public offering price set forth on the cover page of this prospectus
and part to dealers at a price that represents a concession not in excess of
$ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to
other dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by
the representatives.
Mainspring has granted to the
underwriters an option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate of 525,000 additional shares of
common stock at the initial public offering price set forth on the cover
page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares
of common stock offered in this offering. To the extent the option is
exercised, each underwriter will become obligated to purchase approximately
the same percentage of the additional shares of common stock as the number
set forth next to that underwriters name in the preceding table bears
to the total number of shares of common stock set forth next to the names of
all underwriters in the preceding table. If the underwriters
over-allotment option is exercised in full, the total price to public would
be $
, the total underwriters discounts and commissions would be $
,
and the total proceeds to us would be $
.
We estimate expenses payable by us
in connection with this offering, other than underwriting discounts and
commissions referred to above, will be approximately $950,000.
The underwriters have informed us
that they do not intend sales to discretionary accounts to exceed five
percent of the total number of shares of common stock offered by
them.
At our request, the underwriters
have reserved for sale, at the initial public offering price, up to 10% of
the shares of common stock offered in this offering for our directors,
officers, employees and related persons. The number of shares of common
stock available for sale to the general public will be reduced to the extent
those individuals purchase the reserved shares. Any reserved shares which
are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered by this
prospectus.
We have applied for the
quotation of our common stock on the Nasdaq National Market under the symbol
MSPR.
Mainspring, our directors and
executive officers and other securityholders have each agreed that, without
the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the underwriters, during the period ending 180 days after the date of
this prospectus, it will not directly or indirectly:
|
|
offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into
or exercisable or exchangeable for Mainsprings common stock;
or
|
|
|
enter into any swap
or other arrangement that transfers to another, in whole or in part, any
of the economic consequences of ownership of Mainsprings common
stock;
|
whether any
transaction described above is to be settled by delivery of shares of common
stock or such other securities, in cash or otherwise.
The restrictions described in the
previous paragraph do not apply to:
|
|
the sale of the
shares to the underwriters;
|
|
|
the issuance by
Mainspring of restricted stock awards under Mainsprings existing
employee benefit plans or of shares of common stock upon the exercise of
an option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing; or
|
|
|
the grant of
options to officers, directors, employees, consultants or advisors
provided such options are not exercisable prior to the end of the lock-up
period.
|
In addition, our officers,
directors and stockholders have agreed that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, neither he, she, nor it will, during the period ending 180
days after the date of the prospectus, make any demand for, or exercise any
right with respect to, the registration of any shares of common stock or any
security convertible into or exercisable or exchangeable for common
stock.
In order to facilitate the
offering of the common stock, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot in connection with the
offering, creating a short position in the common stock for their own
account. In addition, to cover over-allotments or to stabilize the price of
the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering, if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any
time.
We and the underwriters have
agreed to indemnify each other against liabilities in connection with this
offering, including liabilities under the Securities Act.
We issued to Morgan Stanley Dean
Witter Equity Funding, Inc., an affiliate of Morgan Stanley & Co.
Incorporated, 26,667 shares of our Series E preferred stock as payment for
placement services provided by Morgan Stanley to us in connection with the
private placement of shares of our Series E preferred stock. The shares
issued to Morgan Stanley are convertible into an aggregate of 26,667 shares
of common stock.
Pricing of the
Offering
Prior to this offering, there has
been no public market for the shares of our common stock. Consequently, the
initial public offering price for the shares of our common stock was
determined by negotiations among us and the representatives. Among the
factors to be considered in determining the initial public offering price
are:
|
|
our future
prospects and the future prospects of our industry in general;
|
|
|
our record of
operations and our current financial position;
|
|
|
the experience of
our management;
|
|
|
our revenue,
earnings and other financial and operating information in recent periods;
and
|
|
|
the price-earnings
ratios, price-revenue ratios, market prices of securities and financial
and operating information of companies engaged in activities similar to
ours.
|
The estimated initial public
offering price range set forth on the cover page of this prospectus is
subject to change as a result of market conditions and other
factors.
Due to the fact that one of the
representatives of the underwriters was organized within the last three
years, we are providing you the following information. Thomas Weisel
Partners LLC, one of the representatives of the underwriters, was organized
and registered as a broker-dealer in December 1998. Since December 1998,
Thomas Weisel Partners has been named as lead or co-manager of, or as a
syndicate member in, numerous public offerings of equity securities. Thomas
Weisel Partners does not have any material relationship with us or any of
our officers, directors or other controlling persons, except with respect to
its contractual relationship with us pursuant to the underwriting agreement
entered into in connection with this offering.
The validity of the issuance of
the shares of common stock to be issued in this offering will be passed upon
for Mainspring by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts. Legal matters for the underwriters will be passed upon by
Ropes & Gray, Boston, Massachusetts.
The financial statements as of
December 31, 1998 and 1999 and for each of the three years in the period
ended December 31, 1999 included in this prospectus and the financial
statement schedules included in the Registration Statement have been so
included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND
MORE INFORMATION
We have filed with the SEC a
registration statement, including exhibits, schedules and amendments. This
prospectus is a part of the registration statement and includes all of the
information which we believe is material to an investor considering whether
to make an investment in our common stock. We refer you to the registration
statement for additional information about us, our common stock and this
offering, including the full texts of the exhibits, some of which have been
summarized in this prospectus. After this offering, we will be subject to
the informational requirements of the Securities Exchange Act. We will be
required to file annual and quarterly reports, proxy statements and other
information with the SEC.
You can inspect and copy our
registration statement, reports and other information at the SECs
Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549. You
may obtain information about the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
Internet site that contains our registration statement, reports and other
information. The address of the SECs Internet site is
http://www.sec.gov.
We intend to furnish our
stockholders annual reports containing financial statements audited by our
independent accountants.
MAINSPRING
COMMUNICATIONS, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
Report of
Independent Accountants |
|
F-2 |
|
|
Consolidated
Balance Sheet at December 31, 1998 and 1999 |
|
F-3 |
|
|
Consolidated
Statement of Operations for the years ended December 31, 1997, 1998 and
1999 |
|
F-4 |
|
|
Consolidated
Statement of Redeemable Convertible Preferred Stock and Stockholders
Equity (Deficit)
for the years ended December 31, 1997, 1998
and 1999 |
|
F-5 |
|
|
Consolidated
Statement of Cash Flows for the years ended December 31, 1997, 1998 and
1999 |
|
F-6 |
|
|
Notes to
Consolidated Financial Statements |
|
F-7 |
Report of
Independent Accountants
To the Board of
Directors and Stockholders of
Mainspring
Communications, Inc.:
In our opinion, the accompanying
consolidated balance sheet and the related consolidated statements of
operations, of changes in redeemable convertible preferred stock and
stockholders equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of Mainspring Communications, Inc.
and its subsidiary at December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the
responsibility of the Companys management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSE
COOPERS
LLP
Boston,
Massachusetts
February 10,
2000
MAINSPRING
COMMUNICATIONS, INC.
CONSOLIDATED
BALANCE SHEET
|
|
December
31,
|
|
Pro forma
December 31,
|
|
|
1998
|
|
1999
|
|
1999
|
|
|
|
|
|
|
(unaudited) |
Assets |
Current
assets: |
Cash and cash equivalents |
|
$
2,725,447 |
|
|
$
5,859,379 |
|
|
$
5,859,379 |
|
Short-term investments |
|
249,834 |
|
|
27,747,396 |
|
|
27,747,396 |
|
Accounts receivable, net of allowance for doubtful accounts of
$90,000 and $84,000 at
December 31, 1998 and
1999, respectively |
|
550,959 |
|
|
1,238,528 |
|
|
1,238,528 |
|
Unbilled revenue on contracts |
|
|
|
|
169,205 |
|
|
169,205 |
|
Prepaid expenses and other current assets |
|
93,545 |
|
|
517,233 |
|
|
517,233 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
3,619,785 |
|
|
35,531,741 |
|
|
35,531,741 |
|
Property and
equipment, net |
|
396,204 |
|
|
825,823 |
|
|
825,823 |
|
Note receivable
from officer |
|
|
|
|
100,000 |
|
|
100,000 |
|
Other
assets |
|
24,490 |
|
|
71,627 |
|
|
71,627 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$
4,040,479 |
|
|
$36,529,191 |
|
|
$36,529,191 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities,
Redeemable Convertible Preferred Stock and Stockholders Equity
(Deficit) |
Current
liabilities: |
Current portion of long-term debt |
|
$
268,512 |
|
|
$
132,149 |
|
|
$
132,149 |
|
Accounts payable |
|
258,483 |
|
|
1,318,628 |
|
|
1,318,628 |
|
Accrued expenses |
|
1,109,352 |
|
|
4,962,128 |
|
|
4,962,128 |
|
Deferred revenue |
|
1,040,950 |
|
|
1,713,426 |
|
|
1,713,426 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
2,677,297 |
|
|
8,126,331 |
|
|
8,126,331 |
|
Long-term
debt |
|
147,911 |
|
|
7,881 |
|
|
7,881 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
2,825,208 |
|
|
8,134,212 |
|
|
8,134,212 |
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies (Note 10) |
Redeemable
convertible preferred stock, $0.01 par value |
|
13,870,068 |
|
|
58,508,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity (deficit): |
Common stock, $0.01 par value; Authorized: 25,000,000 shares;
Issued: 1,472,368 and
1,895,970 shares at
December 31, 1998 and 1999, respectively, and 14,026,809
shares at December
31,1999 pro forma (unaudited); Outstanding: 1,468,368 and
1,891,970 shares at
December 31, 1998 and 1999, respectively, and 14,022,809
shares at December 31,
1999 pro forma (unaudited) |
|
14,724 |
|
|
18,960 |
|
|
140,268 |
|
Additional paid-in capital |
|
|
|
|
2,747,777 |
|
|
61,135,140 |
|
Deferred compensation |
|
|
|
|
(7,516,519 |
) |
|
(7,516,519 |
) |
Treasury stock, at cost |
|
(2,480 |
) |
|
(2,480 |
) |
|
(2,480 |
) |
Accumulated deficit |
|
(12,667,041 |
) |
|
(25,361,430 |
) |
|
(25,361,430 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit) |
|
(12,654,797 |
) |
|
(30,113,692 |
) |
|
28,394,979 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible
preferred stock and stockholders equity
(deficit) |
|
$
4,040,479 |
|
|
$36,529,191 |
|
|
$36,529,191 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these consolidated financial
statements.
MAINSPRING
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
Year Ended
December 31,
|
|
|
1997
|
|
1998
|
|
1999
|
Revenue: |
Consulting |
|
$
|
|
|
$
177,769 |
|
|
$
6,276,488 |
|
Subscriptions |
|
84,049 |
|
|
455,031 |
|
|
754,383 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
84,049 |
|
|
632,800 |
|
|
7,030,871 |
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenue: |
Consulting (exclusive of
$895,125 of stock-based
compensation for the year ended December 31,
1999) |
|
|
|
|
139,047 |
|
|
3,272,232 |
|
Subscriptions (exclusive of
$154,104 of stock-based
compensation for the year ended December 31,
1999) |
|
784,052 |
|
|
994,230 |
|
|
1,365,788 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
784,052 |
|
|
1,133,277 |
|
|
4,638,020 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
(700,003 |
) |
|
(500,477 |
) |
|
2,392,851 |
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
Research and development
(exclusive of $8,146 of
stock-based compensation for the year ended
December 31, 1999) |
|
2,204,883 |
|
|
992,805 |
|
|
1,800,696 |
|
Selling, general and
administrative (exclusive of $837,799
of stock-based compensation for the year ended
December 31, 1999) |
|
2,877,862 |
|
|
3,907,541 |
|
|
11,745,504 |
|
Stock-based compensation
employees and consultants |
|
|
|
|
|
|
|
1,895,174 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
5,082,745 |
|
|
4,900,346 |
|
|
15,441,374 |
|
|
|
|
|
|
|
|
|
|
|
Loss from
operations |
|
(5,782,748 |
) |
|
(5,400,823 |
) |
|
(13,048,523 |
) |
Interest income,
net |
|
355,275 |
|
|
237,673 |
|
|
354,134 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
(5,427,473 |
) |
|
(5,163,150 |
) |
|
(12,694,389 |
) |
Accretion of
preferred stock to redemption value |
|
|
|
|
|
|
|
(6,940,941 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss
attributable to common stockholders |
|
$(5,427,473 |
) |
|
$(5,163,150 |
) |
|
$(19,635,330 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted
net loss per share |
|
$
(4.81 |
) |
|
$
(3.40 |
) |
|
$
(12.44 |
) |
Shares used in
computing basic and diluted net loss per share |
|
1,127,348 |
|
|
1,516,656 |
|
|
1,577,881 |
|
Unaudited pro forma
basic and diluted net loss per share |
|
|
|
|
|
|
|
$
(1.29 |
) |
Shares used in
computing unaudited pro forma basic and diluted
net loss per share |
|
|
|
|
|
|
|
9,822,755 |
|
The accompanying
notes are an integral part of these consolidated financial
statements.
MAINSPRING
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS
EQUITY (DEFICIT)
|
|
Redeemable
Convertible
Preferred Stock
|
|
Stockholders
Equity (Deficit)
|
|
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Deferred
Compensation
|
|
Accumulated
Deficit
|
|
Treasury
Stock
|
|
Total
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
Balance at December
31,
1996 |
|
2,102,043 |
|
$11,090,046 |
|
2,207,648 |
|
|
$22,078 |
|
|
$
|
|
|
$
|
|
|
$
(1,814,558 |
) |
|
$
|
|
|
$
(1,792,480 |
) |
Issuance of common
stock
pursuant to stock option
exercises |
|
|
|
|
|
17,014 |
|
|
170 |
|
|
2,942 |
|
|
|
|
|
|
|
|
|
|
|
3,112 |
|
Cancellation of
treasury
stock |
|
|
|
|
|
(145,780 |
) |
|
(1,458 |
) |
|
1,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series C
redeemable convertible
preferred stock |
|
225,103 |
|
2,780,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,727 |
) |
|
|
|
|
(37,727 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,427,473 |
) |
|
|
|
|
(5,427,473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31,
1997 |
|
2,327,146 |
|
13,870,068 |
|
2,078,882 |
|
|
20,790 |
|
|
4,400 |
|
|
|
|
|
(7,279,758 |
) |
|
|
|
|
(7,254,568 |
) |
Issuance of common
stock
pursuant to stock option
exercises |
|
|
|
|
|
9,012 |
|
|
90 |
|
|
1,572 |
|
|
|
|
|
|
|
|
|
|
|
1,662 |
|
Repurchase of common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(238,741 |
) |
|
(238,741 |
) |
Cancellation of
treasury
stock |
|
|
|
|
|
(615,526 |
) |
|
(6,156 |
) |
|
(5,972 |
) |
|
|
|
|
(224,133 |
) |
|
236,261 |
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,163,150 |
) |
|
|
|
|
(5,163,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31,
1998 |
|
2,327,146 |
|
13,870,068 |
|
1,472,368 |
|
|
14,724 |
|
|
|
|
|
|
|
|
(12,667,041 |
) |
|
(2,480 |
) |
|
(12,654,797 |
) |
Issuance of common
stock
pursuant to stock option
exercises |
|
|
|
|
|
384,118 |
|
|
3,841 |
|
|
186,273 |
|
|
|
|
|
|
|
|
|
|
|
190,114 |
|
Issuance of Series D
redeemable convertible
preferred stock |
|
1,315,790 |
|
4,964,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock |
|
|
|
|
|
39,484 |
|
|
395 |
|
|
137,799 |
|
|
|
|
|
|
|
|
|
|
|
138,194 |
|
Issuance of
warrants for
Series X convertible
preferred stock |
|
|
|
966,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series E
redeemable convertible
preferred stock and
beneficial conversion
feature |
|
4,400,001 |
|
31,766,954 |
|
|
|
|
|
|
|
66,667 |
|
|
|
|
|
|
|
|
|
|
|
66,667 |
|
Accretion of
preferred stock
to redemption value |
|
|
|
6,940,941 |
|
|
|
|
|
|
|
(6,940,941 |
) |
|
|
|
|
|
|
|
|
|
|
(6,940,941 |
) |
Deferred
compensation
related to grant of stock
options to employees |
|
|
|
|
|
|
|
|
|
|
|
8,839,431 |
|
|
(8,839,431 |
) |
|
|
|
|
|
|
|
|
|
Stock-based
compensation
associated with stock
option grants |
|
|
|
|
|
|
|
|
|
|
|
458,548 |
|
|
1,322,912 |
|
|
|
|
|
|
|
|
1,781,460 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,694,389 |
) |
|
|
|
|
(12,694,389 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31,
1999 |
|
8,042,937 |
|
$58,508,671 |
|
1,895,970 |
|
|
$18,960 |
|
|
$2,747,777 |
|
|
$(7,516,519 |
) |
|
$(25,361,430 |
) |
|
$
(2,480 |
) |
|
$(30,113,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these consolidated financial
statements.
MAINSPRING
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
Year Ended
December 31,
|
|
|
1997
|
|
1998
|
|
1999
|
Increase
(Decrease) in Cash and Cash Equivalents |
Cash flows from
operating activities: |
Net loss |
|
$(5,427,473 |
) |
|
$(5,163,150 |
) |
|
$(12,694,389 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities: |
Depreciation |
|
412,694 |
|
|
314,520 |
|
|
367,866 |
|
Loss on disposal of property and
equipment |
|
3,382 |
|
|
|
|
|
|
|
Realized gain on maturities of
short-term investments |
|
(144,199 |
) |
|
(11,217 |
) |
|
(5,902 |
) |
Services received in exchange
for preferred stock warrants |
|
|
|
|
|
|
|
1,669,617 |
|
Stock-based compensation
expense |
|
|
|
|
|
|
|
1,895,174 |
|
Changes in operating assets and
liabilities: |
Accounts receivable |
|
(145,166 |
) |
|
(405,793 |
) |
|
(687,569 |
) |
Unbilled revenue on contracts |
|
|
|
|
|
|
|
(169,205 |
) |
Prepaid expenses and other assets |
|
(159,043 |
) |
|
91,451 |
|
|
(370,825 |
) |
Accounts payable |
|
(266,256 |
) |
|
208,423 |
|
|
1,060,145 |
|
Accrued expenses |
|
260,225 |
|
|
529,122 |
|
|
3,216,026 |
|
Deferred revenue |
|
465,344 |
|
|
575,606 |
|
|
672,476 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities |
|
(5,000,492 |
) |
|
(3,861,038 |
) |
|
(5,046,586 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities: |
Purchases of property and
equipment |
|
(640,001 |
) |
|
(91,693 |
) |
|
(797,485 |
) |
Purchases of short-term
investments |
|
(43,694,833 |
) |
|
(1,756,634 |
) |
|
(30,992,968 |
) |
Proceeds from sale of short-term
investments |
|
42,300,000 |
|
|
4,004,797 |
|
|
3,501,308 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities |
|
(2,034,834 |
) |
|
2,156,470 |
|
|
(28,289,145 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities: |
Proceeds from issuance of
long-term debt |
|
499,025 |
|
|
|
|
|
|
|
Repayments of long-term
debt |
|
(90,909 |
) |
|
(276,394 |
) |
|
(276,393 |
) |
Issuance of note receivable from
officer |
|
|
|
|
|
|
|
(200,000 |
) |
Proceeds from issuance of
redeemable convertible preferred
stock |
|
2,742,295 |
|
|
|
|
|
36,731,462 |
|
Proceeds from issuance of common
stock |
|
|
|
|
|
|
|
24,480 |
|
Repurchase of common
stock |
|
|
|
|
(238,741 |
) |
|
|
|
Proceeds from exercise of stock
options |
|
3,112 |
|
|
1,662 |
|
|
190,114 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
3,153,523 |
|
|
(513,473 |
) |
|
36,469,663 |
|
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents |
|
(3,881,803 |
) |
|
(2,218,041 |
) |
|
3,133,932 |
|
Cash and cash
equivalents, beginning of year |
|
8,825,291 |
|
|
4,943,488 |
|
|
2,725,447 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents, end of year |
|
$4,943,488 |
|
|
$2,725,447 |
|
|
$
5,859,379 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these consolidated financial
statements.
MAINSPRING
COMMUNICATIONS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of the Business
Mainspring Communications, Inc. (
Mainspring) is an eStrategy consulting firm that focuses
exclusively on developing Internet strategies primarily for Fortune 1000
companies. Mainspring provides three integrated service offerings, eStrategy
Consulting, eStrategy Direct and eStrategy Executive Council, to help
companies develop eStrategies that protect, evolve and transform their
businesses to achieve a sustained competitive advantage in the new Internet
economy. Mainspring operated in one business segment through December 31,
1999. Mainspring was incorporated on April 2, 1996.
2.
Summary of Significant Accounting Policies
Principles of
Consolidation
The consolidated financial
statements include the accounts of Mainspring and its wholly-owned
subsidiary, Mainspring Securities Corporation. All intercompany transactions
have been eliminated.
Financial
Instruments
The carrying value of Mainspring
s financial instruments, which include cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, accrued
expenses and long-term debt, approximate their fair values.
Cash, Cash
Equivalents and Short-Term Investments
Mainspring considers all highly
liquid investments purchased with an original maturity of three months or
less to be cash equivalents. Mainspring invests excess cash primarily in
money market funds of major financial institutions and U.S. Treasury
securities. These investments are subject to minimal credit and market
risk.
At December 31, 1998 and 1999,
cash equivalents were comprised of money market funds totaling approximately
$66,000 and $4,843,000, respectively, and U.S. Treasury bills totaling
approximately $2,648,000 and $0, respectively. Short-term investments
consist of U.S. Treasury bills having a weighted-average remaining
contractual maturity of 1.5 months and 6.7 months at December 31, 1998 and
1999, respectively. At December 31, 1998 and 1999, cash equivalents and
short-term investments are classified as available-for-sale and recorded at
amortized cost, which approximates fair value.
Revenue
Recognition
Mainsprings service
offerings are priced on a stand-alone basis. eStrategy Consulting services
are priced on a fixed fee basis. eStrategy Direct and eStrategy Executive
Council are both annually renewable subscription-based
offerings.
Revenue pursuant to eStrategy
Consulting services is recognized as services are rendered on the
percentage-of-completion method of accounting (based on the ratio of costs
incurred to total estimated costs). Provisions for estimated losses on
uncompleted contracts are made on a contract-by-contract basis and are
recognized in the period in which losses become probable and can be
reasonably estimated. To date, such losses have been insignificant. Revenue
pursuant to eStrategy Direct and eStrategy Executive Council subscriptions
is recognized ratably over the term of the contract, generally 12 months.
Revenue under arrangements where multiple services are sold together is
allocated to each element based on their relative fair values, with fair
value being the price charged when that element is sold separately. Revenue
excludes reimbursable expenses charged to and collected from clients. The
unearned portion of customer billings is included in deferred revenue in the
accompanying consolidated balance sheet.
MAINSPRING
COMMUNICATIONS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Accounts
Receivable, Concentration of Credit Risk and Major Customers
Financial instruments which
potentially expose Mainspring to concentrations of credit risk consist
primarily of trade accounts receivable. Management believes its credit
policies are prudent and reflect normal industry terms and business risk.
Mainspring performs ongoing credit evaluations of customers financial
condition but does not require collateral. Credit losses have not been
significant to date.
At December 31, 1998, 25%, 18%,
18% and 11% of Mainsprings accounts receivable were due from four
customers. At December 31, 1999, 12%, 11% and 11% of Mainsprings
accounts receivable were due from three customers.
Revenue from three customers
represented 37%, 26% and 25% of total revenue during the year ended December
31, 1997. Revenue from two customers represented 33% and 20% of total
revenue during the year ended December 31, 1998. No customer represented
more than 10% of total revenue during the year ended December 31,
1999.
Property and
Equipment
Property and equipment are
recorded at cost and depreciated using the straight-line method over their
estimated useful lives. Repair and maintenance costs are expensed as
incurred.
Stock-Based
Compensation
Mainspring accounts for
stock-based awards to employees using the intrinsic value method as
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations. Mainspring applies the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, through disclosure only
(Note 7). Stock-based awards to nonemployees are accounted for at their fair
value in accordance with SFAS No. 123 and the Emerging Issues Task Force (
EITF) Issue No. 96-18, Accounting for Equity Investments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services.
Advertising
Costs
Advertising costs are charged to
operations as incurred. Advertising costs were insignificant for the years
ended December 31, 1997 and 1998, and were approximately $1,000,000 for the
year ended December 31, 1999.
Use of
Estimates
The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting period. Actual
amounts could differ from those estimates.
Unaudited Pro
Forma Balance Sheet
Upon the closing of Mainspring
s anticipated initial public offering, all shares of redeemable
convertible preferred stock outstanding at December 31, 1999 (Note 6) will
automatically convert into 12,130,839 shares of common stock. This
conversion has been reflected in the unaudited pro forma balance sheet as of
December 31, 1999.
MAINSPRING
COMMUNICATIONS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Net Loss per
Share and Unaudited Pro Forma Net Loss per Share
Net loss per share is computed in
accordance with SFAS No. 128, Earnings Per Share. Basic net loss
per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of shares of common stock
outstanding, excluding shares of common stock subject to repurchase. Diluted
net loss per share does not differ from basic net loss per share since
potential common shares from conversion of preferred stock, exercise of
stock options and warrants and the lapsing of restrictions on common stock
subject to repurchase are antidilutive for all periods presented. Unaudited
pro forma basic and diluted net loss per share has been calculated assuming
the conversion of all outstanding shares of preferred stock into common
shares, as if the shares had converted immediately upon their
issuance.
Internal Use
Software
On January 1, 1999, Mainspring
adopted American Institute of Certified Public Accountants Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use (SOP 98-1). Accordingly,
Mainspring capitalizes costs incurred during the application development
stage of software developed for internal use. To date, internal costs
eligible for capitalization under SOP 98-1 have not been
significant.
Recently Issued
Accounting Pronouncements
In June 1998, the FASB issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.
The new standard establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133, as amended, is effective for Mainspring beginning
January 1, 2001. Mainspring does not expect SFAS No. 133 to have a material
effect on its financial position or results of operations.
3.
Property and Equipment
Property and equipment consists of
the following:
|
|
|
|
December
31,
|
|
|
Useful life
in years
|
|
1998
|
|
1999
|
Computer equipment
and software |
|
3 |
|
$844,129 |
|
$1,591,828 |
Furniture and
fixtures |
|
5 |
|
55,582 |
|
93,329 |
Leasehold
improvements |
|
2 |
|
89,605 |
|
101,644 |
|
|
|
|
|
|
|
|
|
|
|
989,316 |
|
1,786,801 |
Less
accumulated depreciation |
|
|
|
593,112 |
|
960,978 |
|
|
|
|
|
|
|
|
|
|
|
$396,204 |
|
$
825,823 |
|
|
|
|
|
|
|
Depreciation expense on property
and equipment was $412,694, $314,520 and $367,866 in 1997, 1998 and 1999,
respectively.
MAINSPRING
COMMUNICATIONS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
4.
Accrued Expenses
Accrued expenses consist of the
following:
|
|
December
31,
|
|
|
1998
|
|
1999
|
Professional
fees |
|
$
514,655 |
|
$
1,446,934 |
Compensation and
benefits |
|
500,482 |
|
1,943,775 |
Accrued
compensation related to unvested Series X warrants |
|
|
|
636,750 |
Other accrued
expenses |
|
94,215 |
|
934,669 |
|
|
|
|
|
|
|
$1,109,352 |
|
$
4,962,128 |
|
|
|
|
|
5.
Long-Term Debt
Long-term debt consists of the
following:
|
|
December
31,
|
|
|
1998
|
|
1999
|
Term loan payable
to bank in monthly principal installments of $15,152 plus
accrued interest at prime rate plus 0.5% (9.0%
at December 31, 1999) through
March 2000 |
|
$227,273 |
|
$45,455 |
Term loan payable
to bank in monthly principal installments of $7,881 plus accrued
interest at prime rate plus 0.5% (9.0% at
December 31, 1999) through January
2001 |
|
189,150 |
|
94,575 |
|
|
|
|
|
|
|
416,423 |
|
140,030 |
Less current
portion |
|
268,512 |
|
132,149 |
|
|
|
|
|
|
|
$147,911 |
|
$
7,881 |
|
|
|
|
|
All borrowings under the
aforementioned term loans are collateralized by substantially all of
Mainsprings assets and are subject to certain minimum working capital
and tangible net worth requirements and other nonfinancial covenants,
including restrictions on Mainsprings ability to pay dividends. At
December 31, 1999, future aggregate principal payments on long-term debt are
as follows:
Year ending December
31, |
2000 |
|
$132,149 |
2001 |
|
7,881 |
|
|
|
|
|
$140,030 |
|
|
|
Mainspring paid $53,950, $51,190
and $24,705 in the years ended December 31, 1997, 1998 and 1999,
respectively, for interest.
MAINSPRING
COMMUNICATIONS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
6.
Redeemable Convertible Preferred Stock and Stockholders
Equity (Deficit)
Preferred
Stock
Mainsprings preferred stock
is comprised of the following:
|
|
December
31,
|
|
|
1998
|
|
1999
|
Redeemable
Convertible Preferred Stock: |
Series A: |
1,205,884 shares authorized,
issued and outstanding at December 31, 1998
and
1999 |
|
$
4,100,006 |
|
$
6,401,185 |
Series B: |
896,159 shares authorized,
issued and outstanding at December 31, 1998
and
1999 |
|
6,990,040 |
|
8,749,579 |
Series C: |
225,103 shares authorized,
issued and outstanding at December 31, 1998
and
1999 |
|
2,780,022 |
|
3,138,168 |
Series D: |
1,315,790 shares authorized,
issued and outstanding at December 31, 1999 |
|
|
|
7,486,552 |
Series E: |
4,400,001 shares authorized,
issued and outstanding at December 31, 1999 |
|
|
|
31,766,987 |
Series X: |
460,000 shares authorized; no
shares issued and outstanding at
December 31,
1998 and 1999 |
|
|
|
|
Series X convertible preferred stock warrants |
|
|
|
966,200 |
|
|
|
|
|
Total Redeemable Convertible Preferred
Stock |
|
13,870,068 |
|
58,508,671 |
Preferred
Stock: |
Undesignated: |
1,172,854 and 6,497,063 shares
authorized at December 31, 1998 and 1999;
no shares issued
and outstanding at December 31, 1998 and 1999 |
|
|
|
|
|
|
|
|
|
|
|
$13,870,068 |
|
$58,508,671 |
|
|
|
|
|
The Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock (collectively, the Senior Redeemable
Preferred Stock) and Series X Preferred Stock (together with the
Senior Redeemable Preferred Stock, the Preferred Stock) have the
following characteristics:
Dividend
Rights
Holders of the Preferred Stock are
not entitled to receive dividends unless declared by Mainsprings Board
of Directors. Any dividends declared must be distributed to the holders of
each series of the Senior Redeemable Preferred Stock equally and no
dividends may be paid on the common stock until any and all dividends
declared on the Senior Redeemable Preferred Stock have been paid in full.
The Series X Preferred Stock has no dividend rights. Through December 31,
1999, no dividends have been declared or paid by Mainspring.
MAINSPRING
COMMUNICATIONS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Liquidation
Preferences
In the event of any liquidation,
dissolution or winding up of Mainspring, the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock, Series E Preferred Stock and Series X Preferred Stock
shall be entitled to receive, in preference to the common stockholders, per
share amounts equal to $3.40, $7.80, $12.35, $3.80, $7.50 and $4.35,
respectively, plus any declared but unpaid dividends.
The holders of the Series E
Preferred Stock shall be entitled to receive, in preference to the holders
of the Series A, Series B, Series C, Series D and Series X Preferred Stock
and the common stock, an amount equal to $7.50 per share. Once the
distribution to the holders of the Series E Preferred Stock has been made in
full, the holders of the Series D Preferred Stock shall be entitled to
receive, in preference to the holders of the Series A, Series B, Series C
and Series X Preferred Stock and the common stock, an amount equal to $3.80
per share. Once the distributions to the holders of the Series E and Series
D Preferred Stock have been made in full, the holders of Series A, Series B
and Series C Preferred Stock, in preference to the holders of the Series X
Preferred Stock and the common stock, shall share ratably in any
distribution of assets in proportion to their respective preference amounts
of $3.40, $7.80 and $12.35 per share, respectively. Once the distributions
to the holders of the Senior Redeemable Preferred Stock have been made in
full, the holders of Series X Preferred Stock shall be entitled to receive,
in preference to the holders of common stock, an amount equal to $4.35 per
share.
Any assets remaining following the
full distributions to the holders of the Preferred Stock will be distributed
ratably among the common stockholders.
Conversion
Each share of Series A, Series B,
Series C, Series D, Series E and Series X Preferred Stock may be converted
at any time, at the option of the stockholder, into approximately 2.00,
2.36, 2.53, 2.00, 1.00 and 1.00 shares of common stock, respectively,
subject to certain antidilution adjustments for the Senior Redeemable
Preferred Stock. Upon the closing of a public offering of Mainspring common
stock involving aggregate proceeds to Mainspring of at least $15 million and
a per share price of not less than $11.70, all shares of Preferred Stock
will automatically convert into common stock. Upon the conversion of at
least 60% of the Series A, Series B, Series C, Series D and Series X
Preferred Stock, taken together as a class, into common stock by its
holders, all remaining shares of such series of Preferred Stock will
automatically convert into common stock. Upon the conversion of at least 76%
of the Series E Preferred Stock, all remaining shares of such series of
Preferred Stock will automatically convert into common stock.
The following table summarizes the
effect of conversion of Preferred Stock into common stock and its impact on
unaudited pro forma weighted-average shares outstanding:
|
|
Preferred
shares
outstanding
|
|
Common stock
conversion
ratio
|
|
Common stock
equivalent
shares
|
|
Increase in
weighted-average
unaudited pro forma
shares outstanding
|
Preferred
Stock: |
|
|
|
|
|
|
|
|
Series A |
|
1,205,884 |
|
2.00 |
|
2,411,768 |
|
2,411,768 |
Series B |
|
896,159 |
|
2.36 |
|
2,118,969 |
|
2,118,969 |
Series C |
|
225,103 |
|
2.53 |
|
568,521 |
|
568,521 |
Series D |
|
1,315,790 |
|
2.00 |
|
2,631,580 |
|
2,412,282 |
Series E |
|
4,400,001 |
|
1.00 |
|
4,400,001 |
|
733,334 |
Series X |
|
|
|
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,042,937 |
|
|
|
12,130,839 |
|
8,244,874 |
|
|
|
|
|
|
|
|
|
MAINSPRING
COMMUNICATIONS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The weighted-average unaudited pro forma shares outstanding reflects the
period such Preferred Stock was outstanding. Series D and Series E Preferred
Stock are not included for the entire fiscal year as these securities were
issued during fiscal 1999.
At December 31, 1999, Mainspring
has reserved 12,590,839 shares of its common stock for issuance upon
conversion of the Preferred Stock.
Redemption
At the request of at least 60% of
the holders of the Senior Redeemable Preferred Stock, Mainspring will redeem
all outstanding shares of the Senior Redeemable Preferred Stock in three
equal annual installments beginning in December 2002. The redemption rights
are cumulative, such that any shares subject to redemption not redeemed may
be carried forward. In the event of redemption, each holder of the Series A,
Series B, Series C, Series D and Series E Preferred Stock would be entitled
to receive the greater of $3.40, $7.80, $12.35, $3.80 and $7.50 per share,
respectively, plus all declared but unpaid dividends, or the fair market
value of each series as mutually agreed by a majority of the independent
members of Mainsprings Board of Directors and the holders of a
majority of each series of the Senior Redeemable Preferred Stock, or as
otherwise defined in Mainsprings charter. The Senior Redeemable
Preferred Stock is being accreted, using the interest method and a current
estimate of fair value, over the redemption period.
Voting
Rights
Each holder of the Preferred Stock
is entitled to the number of votes equal to the number of shares of
Mainsprings common stock into which such holders shares are
convertible at the record date for such vote.
Warrants to
Purchase Series X Convertible Preferred Stock
In September 1999, Mainspring
entered into an alliance agreement with Bain & Company, Inc. (Bain
). Pursuant to the terms of this agreement, Bain agreed to provide
consulting resources in exchange for warrants to purchase up to 230,000
shares of Series X Preferred Stock at an exercise price of $0.01 per share.
The warrants vest as follows: 30,000 shares upon signing of the agreement;
100,000 upon completion of three months of service, as defined in the
agreement; and 100,000 upon completion of six months of service, as defined
in the agreement. At December 31, 1999, 130,000 warrants have vested
pursuant to the agreement. In accordance with EITF No. 96-18, Mainspring
measures the value of the services provided by calculating the fair value of
the warrants on the vesting dates. For periods prior to vesting, an estimate
of fair value is used based upon the current fair value at the balance sheet
date. The resulting charge is recorded over the service period in accordance
with FASB Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans. Mainspring has
recorded $1,602,950 in research and development expenses for the year ended
December 31, 1999 pursuant to these warrants.
Beneficial
Conversion Feature
In December 1999, Mainspring
issued 66,667 shares of Series E Preferred Stock to E-Squam Investors I,
L.P., an affiliate of Bain at $7.50 per share. When issued, each share of
Series E Preferred Stock, was convertible into one share of common stock,
which represents a discount from the fair value of common stock on the date
of issuance of $8.50 per share. The value attributable to this conversion
right represents an incremental yield, or a beneficial conversion feature.
Since Bain is performing consulting services for Mainspring as described
above, the value attributable to this conversion right of $66,667 was
recorded as research and development expense during the year ended December
31, 1999.
MAINSPRING
COMMUNICATIONS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Undesignated
Preferred Stock
At December 31, 1999, Mainspring
was authorized to issue up to 6,497,063 shares of preferred stock (the
Undesignated Preferred Stock). Issuances of the Undesignated
Preferred Stock may be made at the discretion of the Board of Directors of
Mainspring (without stockholder approval) with designations, rights and
preferences as the Board of Directors may determine from time to time which
may be more expansive than the rights of the holders of the Preferred Stock
and the common stock.
Common
Stock
In September 1997, an aggregate of
145,780 unvested common shares were contributed to Mainspring by its two
founders. These shares were immediately canceled and a corresponding
increase in the number of shares available for issuance pursuant to the 1996
Omnibus Stock Plan was authorized (Note 7).
In connection with the resignation
of one of its founders, Mainspring repurchased 236,366 shares of unvested
common stock held by that individual at a price of $.005 per share in March
1998. In August 1998, Mainspring repurchased 379,160 shares of vested common
stock from the same individual at a price of $0.62 per share. These shares
were immediately canceled and a corresponding increase in the number of
shares available for issuance pursuant to the 1996 Omnibus Stock Plan was
authorized (Note 7).
In connection with the resignation
of one of its employees, Mainspring repurchased 4,000 shares of common stock
held by that individual at a price of $0.62 per share. These shares are held
in treasury and carried at cost at December 31, 1998 and 1999.
7.
1996 Stock Plan
During 1996, Mainspring adopted
the 1996 Omnibus Stock Plan (the 1996 Plan). The 1996 Plan
provides for the granting of incentive and nonqualified stock options to
employees, consultants and directors of Mainspring. As amended, the total
number of shares of common stock that may be issued pursuant to the exercise
of options granted under the 1996 Plan is 3,926,908 at December 31, 1999.
The exercise price of each stock option shall be specified by the Board of
Directors at the time of grant. However, incentive stock options may not be
granted at less than the fair market value of Mainsprings common stock
at the date of grant or for a term in excess of ten years. For holders of
more than 10% of Mainsprings total combined voting power of all
classes of stock, incentive stock options may not be granted at less than
110% of the fair market value of Mainsprings common stock at the date
of grant or for a term greater than five years. Options granted under the
1996 Plan to date generally vest either over a four-year period for
employees or over the service period for nonemployees and generally expire
ten years from the date of grant.
Mainspring applies APB Opinion No.
25 in accounting for its Stock Plan for stock options granted to employees.
Had Mainspring determined compensation cost based on the fair value at the
grant date for employee stock options under SFAS No. 123, Mainsprings
net loss and net loss per share would have been increased to the pro forma
amounts indicated below:
|
|
Year ended
December 31,
|
|
|
1997
|
|
1998
|
|
1999
|
Net loss |
As reported |
|
$(5,427,473 |
) |
|
$(5,163,150 |
) |
|
$(12,694,389 |
) |
Pro forma |
|
(5,448,395 |
) |
|
(5,220,988 |
) |
|
(13,779,432 |
) |
Basic and diluted
net loss per share |
As reported |
|
$
(4.81 |
) |
|
$
(3.40 |
) |
|
$
(12.44 |
) |
Pro forma |
|
(4.83 |
) |
|
(3.44 |
) |
|
(13.13 |
) |
MAINSPRING
COMMUNICATIONS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Because the determination of the
fair value of all options granted after Mainspring becomes a public entity
will include an expected volatility factor, additional option grants are
expected to be made subsequent to December 31, 1999 and most options vest
over several years, the above pro forma effects are not necessarily
indicative of the pro forma effects on future years.
Under SFAS No. 123, the fair value
of each employee option grant is estimated on the date of grant using the
Black-Scholes option pricing model to apply the minimum value method with
the following weighted-average assumptions used for grants made during the
years ended December 31, 1997, 1998 and 1999:
|
|
Year ended
December 31,
|
|
|
1997
|
|
1998
|
|
1999
|
Expected option
term (years) |
|
5 |
|
|
5 |
|
|
5 |
|
Risk-free interest
rate |
|
6.2 |
% |
|
5.2 |
% |
|
5.7 |
% |
Dividend
yield |
|
0.0 |
% |
|
0.0 |
% |
|
0.0 |
% |
A summary of the status of
Mainsprings stock options as of December 31, 1997, 1998 and 1999, and
changes during the years then ended is presented below:
|
|
1997
|
|
1998
|
|
1999
|
|
|
Number
of
shares
|
|
Weighted-
average
exercise
price
|
|
Number
of
shares
|
|
Weighted-
average
exercise
price
|
|
Number
of
shares
|
|
Weighted-
average
exercise
price
|
Outstanding at
beginning of year |
|
414,376 |
|
|
$.17 |
|
900,330 |
|
|
$.40 |
|
1,365,242 |
|
|
$
.55 |
Granted |
|
816,796 |
|
|
.47 |
|
1,022,664 |
|
|
.62 |
|
1,938,234 |
|
|
2.06 |
Exercised |
|
(17,014 |
) |
|
.19 |
|
(9,012 |
) |
|
.18 |
|
(384,118 |
) |
|
.49 |
Canceled |
|
(313,828 |
) |
|
.30 |
|
(548,740 |
) |
|
.45 |
|
(264,060 |
) |
|
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end
of year |
|
900,330 |
|
|
$.40 |
|
1,365,242 |
|
|
$.55 |
|
2,655,298 |
|
|
$1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
at end of year |
|
145,072 |
|
|
$.22 |
|
269,484 |
|
|
$.38 |
|
546,627 |
|
|
$1.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
fair value of options
granted during the year (all granted at
fair value for 1997 and 1998 and all
granted below fair value for 1999) |
|
$
.12 |
|
|
|
|
$
.14 |
|
|
|
|
$
5.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available
for future grant |
|
263,628 |
|
|
|
|
405,230 |
|
|
|
|
861,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes
information about stock options outstanding at December 31,
1999:
Exercise
price
|
|
Options
outstanding
|
|
Weighted-
average
remaining
contractual life
(in years)
|
|
Options
exercisable
|
$0.17
$0.62 |
|
1,000,439 |
|
8.4 |
|
275,952 |
$2.00
$2.20 |
|
1,136,600 |
|
8.7 |
|
225,600 |
$2.50
$5.00 |
|
518,259 |
|
9.9 |
|
45,075 |
|
|
|
|
|
|
|
|
|
2,655,298 |
|
|
|
546,627 |
|
|
|
|
|
|
|
MAINSPRING
COMMUNICATIONS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Deferred
Compensation
During the year ended December 31,
1999, Mainspring granted stock options to employees for the purchase of
180,350 shares of its common stock with an exercise price of $0.62 per
share; 913,925 shares of its common stock with an exercise price of $2.00
per share; 221,425 shares of its common stock with an exercise price of
$2.20 per share; 495,050 shares of its common stock with an exercise price
of $2.50 per share and 39,484 shares of its common stock with an exercise
price of $5.00 per share. Mainspring recorded deferred compensation relating
to these options totaling $8,839,431, representing the differences between
the estimated fair market value of the common stock on the date of grant and
the exercise price. Compensation expense related to these options is being
amortized over the related vesting periods.
8.
Income Taxes
Net deferred tax assets consist of
the following:
|
|
December
31,
|
|
|
1998
|
|
1999
|
Net operating loss
carryforwards |
|
$4,706,000 |
|
|
$
8,462,000 |
|
Research and
development credit carryforwards |
|
115,000 |
|
|
87,000 |
|
Accrued
expenses |
|
203,000 |
|
|
439,000 |
|
Other |
|
16,000 |
|
|
287,000 |
|
|
|
|
|
|
|
|
Gross deferred tax
assets |
|
5,040,000 |
|
|
9,275,000 |
|
Deferred tax asset
valuation allowance |
|
(5,040,000 |
) |
|
(9,275,000 |
) |
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets
is dependent upon the generation of future taxable income. Mainspring has
provided a valuation allowance for the full amount of its deferred tax
assets since it is more likely than not these future benefits will not be
realized. If Mainspring achieves future profitability, these deferred tax
assets could be available to offset future income taxes.
At December 31, 1999, Mainspring
has federal and state net operating loss carryforwards of approximately
$21,062,000 and $20,750,000, respectively, available to reduce future
taxable income which expire at various dates between 2001 and 2019. The
Company also has federal and state research and development tax credit
carryforwards of approximately $74,000 and $35,000, respectively, available
to reduce future tax liabilities which expire at various dates between 2011
and 2013.
Under the Internal Revenue Code,
certain substantial changes in Mainsprings ownership could result in
an annual limitation on the amount of net operating loss and tax credit
carryforwards which can be utilized in future years to offset future taxable
income and tax liabilities.
9.
Employee Savings Plan
In 1999, Mainspring established a
401(k) Retirement/Savings Plan (the 401(k) plan) which covers
all full-time employees. The 401(k) plan allows eligible employees to make
contributions up to a specified annual maximum contribution, as defined.
Under the 401(k) plan, Mainspring may, but is not obligated to, match a
portion of the employee contributions up to a defined maximum. Mainspring
did not contribute to the 401(k) plan in 1999.
MAINSPRING
COMMUNICATIONS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
10.
Commitments and Contingencies
Operating
Leases
Mainspring leases its facilities
and certain equipment under noncancelable operating leases which expire at
various dates through September 2009. Future minimum lease payments due
under operating leases are as follows:
2000 |
|
$
2,451,000 |
2001 |
|
3,423,000 |
2002 |
|
3,485,000 |
2003 |
|
3,564,000 |
2004 |
|
3,580,000 |
2005 and
Thereafter |
|
6,404,000 |
|
|
|
|
|
$22,907,000 |
|
|
|
Rent expense under operating
leases (net of related sublease income) totaled approximately $339,000,
$285,000 and $446,900 for the years ended December 31, 1997, 1998 and 1999,
respectively.
Legal
Proceedings
Mainspring is from time to time
subject to legal proceedings and claims which arise in the normal course of
its business. In the opinion of management, the amount of ultimate liability
with respect to these actions will not have a material adverse effect on
Mainsprings financial position or results of operations.
11.
Subsequent Events
2000 Stock Option
and Incentive Plan
Mainsprings 2000 Stock
Option and Incentive Plan (2000 Option Plan) was adopted by the
Board of Directors on February 9, 2000. A total of 5,000,000 shares of
common stock have initially been reserved for issuance under the 2000 Option
Plan. The 2000 Option Plan provides that the number of shares authorized for
issuance will automatically increase annually by 8% of the outstanding
number of shares of common stock and the number of shares of common stock
issuable pursuant to the exercise of outstanding options, up to a maximum of
an additional 5,000,000 shares of common stock per year. Under the terms of
the 2000 Option Plan, Mainspring is authorized to grant incentive stock
options as defined under the Internal Revenue Code, nonqualified options,
stock awards or opportunities to make direct purchases of common stock to
employees, officers, directors, consultants and advisors of Mainspring and
its subsidiaries.
2000 Non-Employee
Director Stock Option Plan
Mainsprings 2000
Non-Employee Director Stock Option Plan (Director Plan) was
adopted by the Board of Directors on February 9, 2000 and becomes effective
on the date on which Mainsprings common stock is registered under the
Exchange Act. A total of 200,000 shares of common stock have been authorized
for issuance under the Director Plan.
Under the Director Plan, each
nonemployee director who is or becomes a member of the Board of Directors is
automatically granted on the date on which the common stock becomes
registered under the Exchange Act or, if not a director on that date, the
date first elected to the Board of Directors, an initial option to purchase
20,000 shares of common stock which will vest quarterly over four years in
equal installments. Thereafter, each
nonemployee director will automatically be granted an annual option to
purchase 3,000 shares of common stock, which will vest quarterly over that
year in equal installments. All options granted under the Director Plan will
have an exercise price equal to the fair market value of the common stock on
the date of grant and a term of ten years from the date of grant.
Unexercisable options terminate when the director ceases to be a director
for any reason other than death or permanent disability. Vested options may
be exercised at any time during the option term. The term of the Director
Plan is ten years, unless sooner terminated by a vote of the Board of
Directors.
2000 Employee
Stock Purchase Plan
The 2000 Employee Stock Purchase
Plan (Stock Purchase Plan) was adopted by the Board of Directors
on February 9, 2000 and becomes effective on the date on which Mainspring
s common stock is registered under the Exchange Act. The Stock
Purchase Plan provides for the issuance of up to an aggregate of 1,000,000
shares of common stock to participating employees. The Stock Purchase Plan
provides that the number of shares authorized for issuance under the Stock
Purchase Plan will automatically increase annually by 2% of the outstanding
number of shares of common stock, up to a maximum of an additional 1,000,000
shares of common stock per year.
All employees who have completed
three months of employment with Mainspring and whose customary employment is
more than 20 hours per week and for more than five months in any calendar
year are eligible to participate in the Stock Purchase Plan. The right to
purchase common stock under the Stock Purchase Plan will be made available
through a series of offerings. On the first day of an offering period,
Mainspring will grant to each eligible employee who has elected in writing
to participate in the Stock Purchase Plan an option to purchase shares of
common stock. The employee will be required to authorize an amount, between
1% and 20% of the employees compensation, to be deducted from the
employees pay during the offering period. On the last day of the
offering period, the employee will be deemed to have exercised the option,
at the option exercisable price, to the extent of accumulated payroll
deductions. Under the terms of the Stock Purchase Plan, the option exercise
price is an amount equal to 85% of the fair market value of one share of
common stock on either the first or last day of the offering period,
whichever is lower. No employee may be granted an option that would permit
the employees rights to purchase common stock to accrue in excess of
$25,000 in any calendar year. Options granted under the Stock Purchase Plan
terminate upon an employees voluntary withdrawal from the plan at any
time or upon termination of employment.
[INSIDE BACK COVER ARTWORK]
Multicolor background with the
heading, Mainsprings eStrategy APPROACH, written in black
and red letters, followed by the text, Our approach to eStrategy
enables our clients to address complex strategy issues that span new
business, customer, brand, and technology requirements. Multicolor
quadrants with multicolor figures in each quadrant. From top-left and moving
clockwise: the first quadrant includes the heading, Build the Business
Model, followed by the text, Define the business model and
estimate the investment required.; the second quadrant includes the
heading, Create the Customer Experience, followed by the text,
Develop a complementary creative strategy that defines the customer
experience.; the third quadrant includes the heading,
Commercialize the Business Plan, followed by the text,
Outline an organizational structure, financial approach, and launch
plan.; and the fourth quadrant includes the heading, Define the
Solution Architecture, followed by the text, Define a set of
technologies that form the solution for the business model.
[MAINSPRING LOGO
APPEARS HERE]
PART
II
INFORMATION NOT
REQUIRED IN PROSPECTUS
Item 13. Other
Expenses of Issuance and Distribution.
Estimated expenses payable in
connection with the sale of the common stock in this offering are as
follows:
SEC registration
fee |
|
$
15,312 |
NASD filing
fee |
|
6,300 |
Nasdaq National
Market listing fee |
|
5,000 |
Printing and
engraving expenses |
|
125,000 |
Legal fees and
expenses |
|
300,000 |
Accounting fees and
expenses |
|
275,000 |
Transfer agent and
registrar fees and expenses |
|
85,000 |
Miscellaneous |
|
138,388 |
|
|
|
Total |
|
$950,000 |
|
|
|
Mainspring will bear all of the
expenses shown above.
Item 14.
Indemnification of Directors and Officers.
The Delaware General Corporation
Law and the Companys charter provide for indemnification of the Company
s directors and officers for liabilities and expenses that they may
incur in such capacities. In general, directors and officers are indemnified
with respect to actions taken in good faith in a manner reasonably believed
to be in, or not opposed to, the best interests of the Company, and with
respect to any criminal action or proceeding, actions that the indemnitee
had no reasonable cause to believe were unlawful. Reference is made to the
Companys corporate charter and by-laws filed as Exhibits 3.1 and 3.4
hereto, respectively.
The Underwriting Agreement
provides that the Underwriters are obligated, under certain circumstances,
to indemnify directors, officers and controlling persons of the Company
against certain liabilities, including liabilities under the Securities Act.
Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1
hereto.
The Company currently carries a
directors and officers insurance policy and intends to increase
its coverage amounts under this policy.
Item 15. Recent
Sales of Unregistered Securities.
In the three years preceding the
filing of this registration statement, the Company has issued the following
securities that were not registered under the Securities Act:
On September 26, 1997, we issued
an aggregate of 225,103 shares of its Series C Preferred Stock for aggregate
consideration of $2,780,022.05 to a group of venture capital
investors.
On February 8, 1999, we issued an
aggregate of 1,315,790 shares of its Series D Preferred Stock for aggregate
consideration of $5,000,002 to a group of venture capital investors and high
net-worth individuals.
On November 18, 1999, December 23,
1999 and February 10, 2000, we issued an aggregate of 4,426,668 shares of
its Series E Preferred Stock for aggregate consideration of $33,200,010 to a
group of venture capital investors, high net-worth individuals and senior
executive officers.
Each of the above issuances was
made in reliance upon Rule 506 under the Securities Act.
On September 2, 1999, we issued a
warrant to purchase 230,000 shares of Series X Preferred Stock to a
strategic partner in reliance upon Section 4(2) of the Securities Act. We
issued 229,744 shares of Series X Preferred Stock on March 1, 2000 upon the
exercise of this warrant.
From January 1, 1997 to December
31, 1999, the Company has issued options to purchase an aggregate of
3,777,694 shares of common stock under the 1996 Omnibus Stock Plan,
exercisable at a weighted average price of $1.33 per share. From January 1,
1997 through December 31, 1999, options to purchase 410,144 shares had been
exercised. The options were issued in reliance upon Rule 701 of the
Securities Act or Section 4(2) of the Securities Act.
No underwriters were involved in
the foregoing sales of securities.
Item 16.
Exhibits and Financial Statement Schedules.
(a) Exhibits:
Exhibit
No
|
|
Exhibit
|
1.1 |
|
Form of
Underwriting Agreement |
*3.1 |
|
Fourth Amended and
Restated Certificate of Incorporation of Mainspring currently in
effect |
*3.2 |
|
Form of Fifth
Amended and Restated Certificate of Incorporation of Mainspring to be
filed with the
Secretary of State of Delaware and effective upon the effectiveness of the
registration statement |
*3.3 |
|
By-laws of
Mainspring currently in effect |
*3.4 |
|
Form of Amended and
Restated By-Laws of the Company to be effective upon the effectiveness of
the offering |
*3.5 |
|
Form of Certificate
of Amendment to Fourth Amended & Restated Certificate of Incorporation
of
Mainspring |
**4.1 |
|
Specimen
certificate for shares of Mainsprings common stock |
**5.1 |
|
Form of legal
opinion of Testa, Hurwitz & Thibeault, LLP |
*10.1 |
|
Mainspring
Communications, Inc. 1996 Omnibus Stock Plan, as amended |
10.2 |
|
Mainspring
Communications, Inc. 2000 Stock Plan |
10.3 |
|
Mainspring
Communications, Inc. 2000 Employee Stock Purchase Plan |
10.4 |
|
Mainspring
Communications, Inc. 2000 Non-Employee Director Stock Option
Plan |
*10.5 |
|
Full Recourse
Promissory Note, dated August 31, 1999, between the Company, as lender,
and Ming
Tsai |
*10.6 |
|
Lease Agreement,
dated as of July 31, 1996, between the Company and River Front Office Park
Associates II Limited Partnership for office space located at One Main
Street, Cambridge,
Massachusetts 02142 |
*10.7 |
|
Amendment No. 1 to
Agreement of Lease, dated September 1998, between the Company and
Riverfront Office Park Associates II Limited Partnership for office space
located at One Main Street,
Cambridge, Massachusetts 02142 |
*10.8 |
|
Amendment No. 2 to
Agreement of Lease, dated November 30, 1998, between the Company and
Riverfront Office Park Associates II Limited Partnership for office space
located at One Main Street,
Cambridge, Massachusetts 02142 |
*10.9 |
|
Amendment No. 3 to
Agreement of Lease, dated January 31, 2000, between the Company and BRE
Riverfront LLC for office space located at One Main Street, Cambridge,
Massachusetts 02142 |
*10.10 |
|
Lease Agreement,
dated January 2000, between the Company and 404 Fifth LLC for office space
located at 404 Fifth Avenue, New York, New York 10018 |
*10.11 |
|
Series E Preferred
Stock Purchase Agreement, dated November 18, 1999, between the Company and
the several Purchasers set forth on Schedule 1.1 thereto |
10.12 |
|
Employment
Agreement between the Company and John Connolly. |
Exhibit
No
|
|
Exhibit
|
*10.13 |
|
Amendment No. 4 to
Agreement of Lease, dated March 10, 2000, between the Company and
BRE/Riverfront LLC for office space located at One Main Street, Cambridge,
Massachusetts 02142 |
**10.14 |
|
Full Recourse
Promissory Note, dated March 15, 2000, between the Company, as lender, and
Michael J. Armano |
*11.1 |
|
Statement re:
computation of per share earnings |
*21.1 |
|
Subsidiaries of the
Company |
23.1 |
|
Consent of Testa,
Hurwitz & Thibeault, LLP (included in Exhibit 5.01) |
**23.2 |
|
Consent of
PricewaterhouseCoopers LLP |
*24.1 |
|
Power of Attorney
(contained on signature page on II-4) |
*27.1 |
|
Financial Data
Schedule |
**99.1 |
|
Consent of Lawrence
Begley |
|
To be filed by
amendment
|
* Previously
filed
**Filed
herewith
(b) Financial Statement
Schedules
Schedule II-Valuation
and Qualifying Accounts
Description
|
|
Balance at
beginning of
period
|
|
Charged to
operations
|
|
Deductions
|
|
Balance at
end of period
|
Year ended December
31, 1997 |
|
|
|
|
|
|
|
|
Reserves and
allowances deducted from asset accounts |
|
|
|
|
|
|
|
|
Valuation allowance for deferred tax assets |
|
$
712,000 |
|
2,159,000 |
|
|
|
$2,871,000 |
Allowance for doubtful accounts |
|
|
|
10,000 |
|
|
|
10,000 |
|
Year ended December
31, 1998 |
|
|
|
|
|
|
|
|
Reserves and
allowances deducted from asset accounts |
|
|
|
|
|
|
|
|
Valuation allowance for deferred tax assets |
|
$2,871,000 |
|
2,169,000 |
|
|
|
$5,040,000 |
Allowance for doubtful accounts |
|
10,000 |
|
80,000 |
|
|
|
90,000 |
|
Year ended December
31, 1999 |
|
|
|
|
|
|
|
|
Reserves and
allowances deducted from asset accounts |
|
|
|
|
|
|
|
|
Valuation allowance for deferred tax assets |
|
$5,040,000 |
|
4,235,000 |
|
|
|
$9,275,000 |
Allowance for doubtful accounts |
|
90,000 |
|
|
|
6,000 |
|
84,000 |
All other schedules are omitted
because they are not applicable or the required information is shown in the
other Financial Statements or Notes thereto.
Item 17.
Undertakings.
Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to provisions
described in Item 14 above, or otherwise, the Company has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
The Company hereby undertakes:
(1) to provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser; (2) that for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of a registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and (3)
that for the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of
the Securities Act of 1933, the registrant has duly caused this Amendment
No. 2 to Registration Statement on Form S-1 to be signed on its behalf by
the undersigned, thereunto duly authorized, in Cambridge, Massachusetts on
this 11th day of April, 2000.
|
MAINSPRING
COMMUNICATIONS, INC.
|
|
Chief Financial
Officer, Senior Vice President, Finance and Operations, Treasurer and
Director
|
SIGNATURES
Pursuant to the requirements of
the Securities Act of 1933, this registration statement has been signed by
the following persons in the capacities and on the dates
indicated.
Signature
|
|
Title
|
|
Date
|
|
|
*
John Connolly |
|
Chairman,
President and Chief
Executive Officer (principal
executive officer) |
|
April 11,
2000 |
|
|
/S
/ MARK
VERDI
Mark Verdi |
|
Chief Financial
Officer, Senior
Vice President, Finance and
Operations, Treasurer and
Director (principal financial
officer and principal accounting
officer) |
|
April 11,
2000 |
|
|
*
Bruce Barnet |
|
Director |
|
April 11,
2000 |
|
|
*
Anthony Brenner |
|
Director |
|
April 11,
2000 |
|
|
*
Jerome Colonna |
|
Director |
|
April 11,
2000 |
|
|
*
William S. Kaiser |
|
Director |
|
April 11,
2000 |
|
|
*
Paul A. Maeder |
|
Director |
|
April 11,
2000 |
|
|
*
Brian Nairn |
|
Director |
|
April 11,
2000 |
|
|
*By:
/S
/ MARK
VERDI
Mark Verdi
Attorney-in-Fact |
|
|
|
|
Exhibit
Index
Exhibit
No
|
|
Exhibit
|
1.1 |
|
Form of
Underwriting Agreement |
*3.1 |
|
Fourth
Amended and Restated Certificate of Incorporation of Mainspring
currently in effect |
*3.2 |
|
Form of
Fifth Amended and Restated Certificate of Incorporation of
Mainspring to be filed with the
Secretary of State of Delaware and effective upon the effectiveness
of the registration statement |
*3.3 |
|
By-laws of
Mainspring currently in effect |
*3.4 |
|
Form of
Amended and Restated By-Laws of the Company to be effective upon
the effectiveness of
the offering |
*3.5 |
|
Form of
Certificate of Amendment to Fourth Amended & Restated
Certificate of Incorporation of
Mainspring |
**4.1 |
|
Specimen
certificate for shares of Mainsprings common
stock |
**5.1 |
|
Form of
legal opinion of Testa, Hurwitz & Thibeault, LLP |
*10.1 |
|
Mainspring
Communications, Inc. 1996 Omnibus Stock Plan, as
amended |
10.2 |
|
Mainspring
Communications, Inc. 2000 Stock Plan |
10.3 |
|
Mainspring
Communications, Inc. 2000 Employee Stock Purchase Plan |
10.4 |
|
Mainspring
Communications, Inc. 2000 Non-Employee Director Stock Option
Plan |
*10.5 |
|
Full
Recourse Promissory Note, dated August 31, 1999, between the
Company, as lender, and Ming
Tsai |
*10.6 |
|
Lease
Agreement, dated as of July 31, 1996, between the Company and
River Front Office Park
Associates II Limited Partnership for office space located at One
Main Street, Cambridge,
Massachusetts 02142 |
*10.7 |
|
Amendment
No. 1 to Agreement of Lease, dated September 1998, between the
Company and
Riverfront Office Park Associates II Limited Partnership for office
space located at One Main Street,
Cambridge, Massachusetts 02142 |
*10.8 |
|
Amendment
No. 2 to Agreement of Lease, dated November 30, 1998, between the
Company and
Riverfront Office Park Associates II Limited Partnership for office
space located at One Main Street,
Cambridge, Massachusetts 02142 |
*10.9 |
|
Amendment
No. 3 to Agreement of Lease, dated January 31, 2000, between the
Company and BRE
Riverfront LLC for office space located at One Main Street,
Cambridge, Massachusetts 02142 |
*10.10 |
|
Lease
Agreement, dated January 2000, between the Company and 404 Fifth
LLC for office space
located at 404 Fifth Avenue, New York, New York 10018 |
*10.11 |
|
Series E
Preferred Stock Purchase Agreement, dated November 18, 1999,
between the Company and
the several Purchasers set forth on Schedule 1.1 thereto |
10.12 |
|
Employment
Agreement between the Company and John Connolly. |
*10.13 |
|
Amendment
No. 4 to Agreement of Lease, dated March 10, 2000, between the
Company and
BRE/Riverfront LLC for office space located at One Main Street,
Cambridge, Massachusetts 02142 |
**10.14 |
|
Full
Recourse Promissory Note, dated March 15, 2000, between the
Company, as lender, and
Michael J. Armano |
*11.1 |
|
Statement
re: computation of per share earnings |
*21.1 |
|
Subsidiaries of the Company |
23.1 |
|
Consent of
Testa, Hurwitz & Thibeault, LLP (included in Exhibit
5.01) |
**23.2 |
|
Consent of
PricewaterhouseCoopers LLP |
*24.1 |
|
Power of
Attorney (contained on signature page on II-4) |
*27.1 |
|
Financial
Data Schedule |
**99.1 |
|
Consent of
Lawrence Begley |
|
To be
filed by amendment
|
*
Previously filed
**Filed
herewith