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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended April 30, 2000
Commission file number: 000-29365
VICINITY CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 77-0414631
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1135A San Antonio Road
Palo Alto, California 94303
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (650) 237-0300
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares of Common Stock, par value $0.001 per share, of Vicinity
Corporation outstanding as of June 1, 2000 was 28,085,490.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Unaudited Condensed Statements of Operations
for the three months and nine months ended April 30, 2000 and 1999.......................... 3
Unaudited Condensed Balance Sheets
as of April 30, 2000 and July 31, 1999...................................................... 4
Unaudited Condensed Statements of Cash Flows
for the nine months ended April 30, 2000 and 1999........................................... 5
Notes to Unaudited Condensed Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 23
Item 2. Changes in Securities and Use of Proceeds..................................................... 23
Item 3. Defaults Upon Senior Securities............................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders........................................... 23
Item 5. Other Information............................................................................. 23
Item 6. Exhibits and Reports on Form 8-K.............................................................. 23
</TABLE>
Forward Looking Statements
The statements contained in this report that are not historical facts may be
deemed to contain forward-looking statements. Such statements are indicated by
words or phrases such as "anticipate," "estimate," "projects," "believes,"
"intends," "expects" and similar words and phrases. Actual results may differ
materially from those expressed or implied in any forward-looking statement as a
result of certain risks and uncertainties, including, without limitation, the
risks and uncertainties detailed herein under "Risk Factors" and in our
Securities and Exchange Commission filings. We disclaim any obligation to update
any of the forward-looking statements contained herein to reflect future events
or developments.
2
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Financial Statements
VICINITY CORPORATION
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------- ----------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUES
License and hosting fees.......................... $ 2,904 $ 1,337 $ 7,664 $ 3,929
Service and transaction fees...................... 1,436 90 2,525 410
------- ------- -------- -------
4,340 1,427 10,189 4,339
COST OF REVENUES................................... 2,548 1,035 6,202 2,816
------- ------- -------- -------
Gross profit...................................... 1,792 392 3,987 1,523
------- ------- -------- -------
OPERATING EXPENSES
Product development............................... 880 427 2,336 1,169
Sales and marketing............................... 5,172 970 10,282 2,145
General and administrative........................ 1,480 448 3,173 1,234
Stock-based compensation.......................... 282 29 771 32
------- ------- -------- -------
7,814 1,874 16,562 4,580
------- ------- -------- -------
LOSS FROM OPERATIONS............................... (6,022) (1,482) (12,575) (3,057)
Other expense (income), net........................ (1,568) 8 (1,673) 31
------- ------- -------- -------
NET LOSS........................................... (4,454) (1,490) (10,902) (3,088)
Accretion on redeemable
convertible preferred stock and warrants.......... 45 289 1,049 639
------- ------- -------- -------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS............................... $(4,499) $(1,779) $(11,951) $(3,727)
======= ======= ======== =======
BASIC AND DILUTED NET LOSS PER SHARE............... $ (0.18) $ (0.45) $ (1.05) $ (0.95)
======= ======= ======== =======
WEIGHTED AVERAGE SHARES USED
IN BASIC AND DILUTED NET LOSS
PER SHARE CALCULATIONS.......................... 24,742 3,928 11,378 3,903
======= ======= ======== =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
3
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VICINITY CORPORATION
UNAUDITED CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
April 30, July 31,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................................ $ 82,363 $ 9,060
Short-term investments........................................................... 44,976 --
Accounts receivable, net......................................................... 3,265 2,847
Prepaid expenses and other current assets........................................ 2,319 360
-------- --------
Total current assets.............................................................. 132,923 12,267
PROPERTY AND EQUIPMENT, net....................................................... 4,694 912
OTHER ASSETS...................................................................... 312 24
-------- --------
Total Assets...................................................................... $137,929 $ 13,203
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank note........................................................................ $ -- $ 1,000
Accounts payable................................................................. 3,056 491
Accrued liabilities.............................................................. 2,371 1,245
Deferred revenue................................................................. 6,269 4,955
Capital lease obligations, current portion....................................... 1,101 380
-------- --------
Total current liabilities......................................................... 12,797 8,071
CAPITAL LEASE OBLIGATIONS......................................................... 489 298
-------- --------
Total liabilities................................................................. 13,286 8,369
REDEEMABLE CONVERTIBLE PREFERRED STOCK............................................ -- 21,403
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock..................................................................... 28 5
Additional paid-in capital, net of preferred stock accretion..................... 152,570 (301)
Deferred stock-based compensation................................................ (1,406) (1,044)
Notes receivable from employees.................................................. (233) (98)
Accumulated other comprehensive loss............................................. (283) --
Accumulated deficit.............................................................. (26,033) (15,131)
-------- --------
Total stockholders' equity (deficit).............................................. 124,643 (16,569)
-------- --------
Total Liabilities and Stockholders' Equity (Deficit).............................. $137,929 $ 13,203
======== ========
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
4
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VICINITY CORPORATION
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
-----------------------
2000 1999
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(10,902) $(3,088)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................................................................ 979 83
Allowance for doubtful accounts.............................................................. 45 60
Amortization of stock-based compensation..................................................... 771 32
Changes in operating assets and liabilities:
Accounts receivable.......................................................................... (457) (1,599)
Prepaid expenses and other current assets.................................................... (1,988) (170)
Accounts payable............................................................................. 2,565 151
Accrued liabilities.......................................................................... 1,039 152
Deferred revenue............................................................................. 1,314 1,542
-------- -------
Net cash used in operating activities.......................................................... (6,634) (2,838)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments of excess cash:
Purchases of available-for-sale securities................................................... (49,259) --
Sales of available-for-sale securities....................................................... 4,000 --
Deposits on building........................................................................... (260) --
Purchases of property and equipment............................................................ (3,227) (100)
-------- -------
Net cash used in investing activities.......................................................... (48,746) (100)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net.................................................... 126,473 18
Proceeds from issuance of preferred stock, net................................................. 3,750 3,793
Proceeds from bank note........................................................................ -- 200
Payment for bank note.......................................................................... (1,000) --
Principal payments on capital leases........................................................... (540) (64)
-------- -------
Net cash provided by financing activities...................................................... 128,683 3,947
-------- -------
Increase in cash................................................................................ 73,303 1,010
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................................ 9,060 264
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................................... $ 82,363 $ 1,274
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................................................................... $ 43 $ 66
======== =======
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchased under capital lease........................................................ $ 1,498 $ 562
======== =======
Accretion on redeemable preferred stock........................................................ $ 1,049 $ 639
======== =======
Common stock issued for note receivable........................................................ $ 135 $ --
======== =======
Deferred compensation related to stock options................................................. $ 1,133 $ 745
======== =======
Conversion of preferred stock into common stock................................................ $ 26,202 $ --
======== =======
Unrealized loss on available-for-sale securities............................................... $ 283 $ --
======== =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
5
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VICINITY CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1 - Presentation of Interim Financial Statements
The accompanying unaudited condensed financial statements have been prepared on
the same basis as the audited financial statements. In the opinion of
management, all significant adjustments that are normal, recurring in nature and
necessary for a fair presentation of the financial position and results of the
operations of the Company, have been consistently recorded. The operating
results for the interim periods presented are not necessarily indicative of
expected performance for the entire year. Certain previously reported amounts
have been reclassified to conform to the current presentation format. The
unaudited information should be read in conjunction with the Company's audited
financial statements included in the Company's registration statement on Form S-
1 declared effective by the Securities and Exchange Commission on February 8,
2000.
Note 2 - Summary of Significant Accounting Policies
(a) Cash, Cash Equivalents and Short-Term Investments. The Company considers all
highly liquid investments purchased with original maturities of three months or
less at the date of acquisition to be cash equivalents. The Company considers
investments with original maturities of more than three months but less than one
year at the date of acquisition to be short-term investments. Where the original
maturity is more than one year, the investments are classified as short-term as
the Company's intention is to convert them into cash for operations as needed.
Short-term investments are classified as available-for-sale and are carried at
fair value.
(b) Securities Available-for-Sale. Marketable equity securities and debt
securities are classified as available-for-sale. Available-for-sale securities
are carried at fair value, with the unrealized gains and losses, net of tax,
reported as a component of other comprehensive income (loss). The amortized cost
of debt securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses and declines in value judged to be other-than-
temporary on available-for-sale securities are included in other income
(expense), net. The cost of securities sold is based on the specific
identification method. Interest on securities classified as available-for-sale
is included in interest income. Through April 30, 2000, the Company has not
realized significant gains or losses on the sale of available-for-sale
marketable securities.
(c) Fair value of Financial Instruments. Fair values of cash, cash equivalents
and short-term investments are based on quoted market prices.
(d) Per Share Computations. Basic net loss per share is computed by dividing
net loss applicable to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted net loss per share is computed
by dividing net loss applicable to common stockholders by the weighted-average
number of common and, when dilutive, potential common equivalent shares
outstanding during the period. Common equivalent shares include the effect of
outstanding redeemable convertible preferred stock, warrants and stock options.
All potential common shares have been excluded from the computation of diluted
net loss per share for all periods presented because the effect would be anti-
dilutive.
Diluted net loss per share does not include the effect of the following anti-
dilutive common equivalent shares (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
April 30, April 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Stock options 2,095 3,222 2,095 3,222
Shares of common stock subject to repurchase 1,298 25 1,298 25
Convertible preferred warrants - 952 - 952
Convertible preferred stock (as if converted) - 10,063 - 8,763
---------- ---------- ---------- ----------
3,393 14,262 3,393 12,962
========== ========== ========== ==========
</TABLE>
6
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VICINITY CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
The weighted-average exercise prices of stock options outstanding were $0.16 and
$10.40 as of April 30, 1999 and 2000, respectively. The weighted-average
exercise price of shares of common stock subject to repurchase was $0.11 and
$0.45 as of April 30, 1999 and 2000, respectively.
(e) Stock-Based Compensation. The Company accounts for its stock-based
compensation arrangements for employees using the intrinsic-value method
pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Compensation expense is recorded for the Company's stock
options on the date of grant, to the extent the fair value of the underlying
common stock exceeds the exercise price for stock options or the purchase price
for common stock. Options granted to consultants and other non-employees are
considered compensatory and are accounted for at fair value pursuant to
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." Because the options generally vest ratably over a
four year period, the service period over which compensation is accrued as a
charge to expense is determined separately for each 25 percent portion of the
total award, in accordance with Financial Accounting Standards Board (FASB)
Interpretation No. 28 (FIN 28). The result of applying FIN 28 is that
approximately 52% of the unearned deferred compensation will be amortized in the
first year, 27% in the second year, 15% in the third year and 6% in the fourth
year following the date of grant. Stock compensation expense for the three and
nine month periods ended April 30, 1999 and 2000 is distributed as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
April 30, April 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cost of revenues $ 13 $ 1 $ 37 $ 2
Product development 29 -- 79 --
Sales and marketing 140 25 404 26
General and administrative 100 3 251 4
------------- ------------- ------------- -------------
$ 282 $ 29 $ 771 $ 32
============= ============= ============= ==============
</TABLE>
(f) Comprehensive Loss. The following table sets forth the calculation of other
comprehensive loss for the three and nine-month periods ended April 30, 2000 and
1999 (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
April 30, April 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $(4,454) $(1,490) $(10,902) $(3,088)
Unrealized losses on
available-for-sale securities (283) -- (283) --
------------- ------------- ------------- -------------
Comprehensive loss $(4,737) $(1,490) $(11,185) $(3,088)
============= ============= ============= =============
</TABLE>
Note 3 - Segment Information
During fiscal 1999, the Company adopted the provisions of SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 requires disclosures of selected segment-related financial information about
products, major customers and geographic areas.
The Company's chief operating decision maker (CODM) is considered to be the
Company's CEO. The CODM evaluates performance, makes operating decisions and
allocates resources based on financial data consistent with the presentation in
the accompanying financial statements. Therefore, the Company operates in a
single segment for purposes of disclosure under SFAS No. 131.
The Company's revenues in fiscal 2000 have been earned from customers in the
United States with the exception of approximately $416,000 for the three months
ended April 30, 2000 and $748,000 for the nine months ended April 30,
7
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VICINITY CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
2000 which was earned from customers in Europe. For the nine months ended April
30, 2000, there were no revenues earned from customers in Europe. For the three
months ended April 30, 2000, the Company had one customer that accounted for
approximately 13% of the Company's revenues. For the nine months ended April 30,
1999, another customer accounted for approximately 13% of the Company's
revenues.
All of the Company's long-lived assets are located in the United States.
Note 4 - Initial Public Offering
In February 2000, Vicinity completed its initial public offering ("IPO"), which
resulted in the sale by the Company of 8,050,000 shares of common stock at
$17.00 per share. The Company's net proceeds from the IPO, after deducting
underwriting discounts and offering expenses, were approximately $125.9 million.
Note 5 - Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments (including derivative instruments
embedded in other contracts) and for hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. To date, the Company has not entered into any
derivative financial instruments or hedging activities.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), as amended by
SAB No. 101A, to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements; however, SAB No. 101 does not
change existing literature on revenue recognition. SAB No. 101 explains the
staff's general framework for interpretation of revenue recognition rules. The
Company believes that its current revenue recognition policy is in compliance
with this guidance; however, the Company continues to evaluate the impact, if
any, of SAB No. 101 and any possible subsequent interpretations of SAB No. 101
on the Company's policies and procedures. SAB No. 101 is effective beginning the
Company's fiscal quarter ending October 31, 2000.
The FASB issued Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - an Interpretation of APB Opinion No. 25" (FIN No.
44) in March 2000. The Interpretation clarifies the application of Opinion 25
for only certain issues such as the following: (a) the definition of employee
for purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. The Company believes that its current accounting treatment
for transactions involving stock compensation is in compliance with this
guidance.
In March 2000, the Emerging Issues Task Force (EITF) issued EITF No. 00-2,
"Accounting for Web Site Development Costs." EITF No. 00-2 establishes
accounting and reporting standards for capitalization of web site development
costs in accordance with Statement of Accounting Principle No. 98-1. The Company
adopted EITF No. 00-2 during the fiscal quarter ended April 30, 2000. The
adoption of EITF No. 00-2 did not have a material impact on the Company's
results of operations or financial position.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF OUR COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS
QUARTERLY REPORT AND THE FINANCIAL STATEMENTS AND NOTES THERETO AND MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
YEAR ENDED JULY 31, 1999 AND THE QUARTER ENDED OCTOBER 31, 1999 INCLUDED IN OUR
COMPANY'S REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-90253). THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. PLEASE SEE "RISK FACTORS."
Unless the context otherwise requires, references herein to "we," "us,"
"the company" or "Vicinity" are to Vicinity Corporation, a Delaware corporation.
References in this Report on Form 10-Q to fiscal years refer to the fiscal year
of our company ended on July 31 of that year. We were incorporated as a
California corporation in October 1995 and reincorporated as a Delaware
corporation in January 2000. Vicinity and MapBlast! are registered marks of our
company. Each trademark, trade name or service mark of any other company
appearing in this Report on Form 10-Q belongs to its holder.
References to or comparisons between the same "period" in this Form 10-Q
refer to our company's three- and/or nine-month periods of the relevant fiscal
year.
Overview
We are a leading provider of Internet-based marketing infrastructure
services. Our clients use our services to direct consumers searching for a
specific product or service to the nearest brick-and-mortar store that carries
that product or service. Our company was formed in October 1995, and our initial
revenues were derived from providing maps, driving directions and directory
services to regional telephone companies and large portal companies. In fiscal
1997, we restructured our company by cutting staff and expenses, hiring a new
chief executive officer and refocusing our strategy on our Business Finder
service.
In fiscal 1998, we grew our clients from 102 companies to 193 companies as
a result of the continued concentration of our efforts on Business Finder. We
continued to increase our revenues in fiscal 1998 despite the loss of our
biggest customer at the time, Yahoo!. In fiscal 1999, we recruited additional
key members of our management team and expanded our product offerings to include
Telephone Business Finder, SiteMaker and Print Maps. Historically, we have
generated substantially all of our revenues from our Web Business Finder, maps,
driving directions and directory services. During recent periods, however, we
have begun to generate significant revenue from service and transaction fees,
principally project-related professional services. We have continued to grow our
client base in fiscal 2000 and, as of April 30, 2000, we had approximately 336
clients.
In February 2000, we completed our initial public offering ("IPO"). As a
result, we issued 8,050,000 shares of common stock at a price of $17.00 per
share and received approximately $125.9 million in cash, net of underwriting
discounts and other offering costs.
We have not achieved profitability on a quarterly or annual basis and
expect to continue to incur net losses for the foreseeable future. We anticipate
incurring significant sales and marketing, product development and
administrative expenses as we continue to expand our product offerings and
attempt to build our customer base.
Results of Operations
License and hosting fees. Revenue from license and hosting fees is
recognized in accordance with Statement of Position (SOP) No. 97-2, Software
Revenue Recognition. As such, this revenue is recognized ratably over the life
of the contracts, which typically have one-year, non-refundable terms.
9
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For the three-month period ended April 30, 2000, we recognized $2.9 million
of license and hosting fees revenue, an increase of $1.6 million, or 117%,
compared to $1.3 million for the three-month period ended April 30, 1999. For
the nine-month period ended April 30, 2000, license and hosting fees revenue
increased $3.7 million, or 95%, to $7.7 million from $3.9 million for the
comparable period in fiscal 1999. The increases in license and hosting fees
revenue for both the three- and nine-month periods ended April 30, 2000 were
generally attributable to growth in our customer base due to increased market
acceptance and, specifically, to growth in demand for our Business Finder
products.
Deferred revenue consists of customer payments received and accounts
receivable recorded in advance of recognizing revenue for license and hosting
revenues. Deferred revenue as of April 30, 2000 was $6.3 million, compared to
$5.0 million as of July 31, 1999, representing an increase of $1.3 million, or
26%.
Service and transaction fees. Revenue from service and transaction fees
consists of revenue generated from project-related professional services and, to
a lesser degree, from advertising, sponsorship and e-commerce transactions. This
revenue is recognized as the services are performed. For the fiscal quarter
ended April 30, 2000, we recognized $1.4 million of service and transaction fees
revenue, an increase of $1.3 million from $0.1 million for the fiscal quarter
ended April 30, 1999. For the nine-month period ended April 30, 2000, service
and transaction fees revenue increased $2.1 million, or 516%, to $2.5 million
from $0.4 million for the comparable period in fiscal 1999. The increases in
service and transaction fees revenue for both the three- and nine-month periods
ended April 30, 2000 primarily reflect the increase in service agreements that
involve the customization of our applications for customer-specific needs.
Cost of revenues. Cost of revenues include salaries and benefits of our
operations personnel, the cost of acquiring data and content, leasing and
depreciation costs for our computer hosting equipment and Internet connection
and data center charges. Cost of revenues increased $1.5 million, or 146%, to
$2.5 million for the three-month period ended April 30, 2000 compared to $1.0
million for the three-month period ended April 30, 1999. For the nine-month
period ended April 30, 2000, cost of revenues increased $3.4 million, or 120%,
to $6.2 million from $2.8 million for the comparable period in fiscal 1999. The
increases in cost of revenues are attributable to increases in headcount to
support our business growth, increases in equipment costs related to the
expansion of our data centers and increases in content fees as a result of
additions to our set of content providers.
Product development. Product development expense consists primarily of
salaries and benefits, consulting expenses and equipment costs. Product
development expense increased $0.5 million, or 106%, to $0.9 million for the
three-month period ended April 30, 2000 from $0.4 million for the fiscal quarter
ended April 30, 1999. For the nine-month period ended April 30, 2000, product
development expense increased $1.2 million, or 100%, to $2.3 million from $1.2
million for the comparable period in fiscal 1999. These increases were primarily
attributable to increases in personnel and personnel-related costs due to our
expanded product offerings.
Sales and marketing. Sales and marketing expense consists primarily of
salaries, commissions, promotion costs, advertising and travel-related expenses.
Sales and marketing expense increased $4.2 million, or 433%, to $5.2 million for
the fiscal quarter ended April 30, 2000 from $1.0 million for the fiscal quarter
ended April 30, 1999. For the nine-month period ended April 30, 2000, sales and
marketing expense increased $8.1 million, or 379%, to $10.3 million from $2.1
million for the comparable period in fiscal 1999. These increases were primarily
attributable to increases in personnel, personnel-related costs, promotion and
advertising to support our expanded sales and marketing efforts. We expect our
sales and marketing expense to continue to increase, but at a slower rate, as a
result of the expansion of our sales and marketing efforts both domestically and
internationally.
General and administrative. General and administrative expense consists
primarily of salaries and related costs for our executive, administrative,
finance and human resources personnel as well as accounting, legal and other
professional fees. General and administrative expense increased $1.0 million, or
230%, to $1.5 million for the fiscal quarter ended April 30, 2000 from $0.5
million for the fiscal quarter ended April 30, 1999. For the nine-month period
ended April 30, 2000, general and administrative expense increased $1.9 million,
or 157%, to $3.2 million from $1.2 million for the comparable period in fiscal
1999. These increases were primarily attributable to an increase in personnel
and personnel-related costs to support and grow our business as well as to
support the requirements related to the operation of our company as a publicly-
traded company. We expect general and administrative expenses to grow moderately
as additional personnel are hired and additional expenses are incurred in
connection with the growth of our business and our operation as a public
company.
10
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Stock-based compensation. As of April 30, 2000, we had recorded deferred
stock-based compensation expense aggregating $2.3 million in stockholders'
equity (deficit) for the difference at the date of grant between the exercise
price and the fair value of the common stock underlying stock options granted in
fiscal 1999 and the first two quarters of fiscal 2000. Of this amount, we
recognized as expense a total of $0.2 million for fiscal 1999 and $0.3 million
and $0.8 million for the three- and nine-month periods ended April 30, 2000,
respectively. In addition, we expect to recognize as expense $0.2 million for
the remainder of fiscal 2000, $0.6 million for fiscal 2001 and $0.5 million
thereafter.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
As of or for the As of or for the
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Cash, cash equivalents and short-term investments $ 127.4 $ 1.3 $ 127.4 $ 1.3
Working capital (deficit) $ 120.1 $ (1.9) $ 120.1 $ (1.9)
Cash used for operations $ (0.8) $ (1.2) $ (6.6) $ (2.8)
Cash used for investment activities $ (47.7) $ (0.1) $ (48.8) $ (0.1)
Cash provided by financing activities $ 125.8 $ 0.1 $ 128.7 $ 3.9
</TABLE>
In February 2000, we completed our IPO and, as a result, issued 8,050,000
shares of common stock at a price of $17.00 per share. We received approximately
$125.9 million in cash from our IPO, net of underwriting discounts and other
offering costs. We intend to use these proceeds to expand our sales and
marketing efforts to expand our international business, to develop new
technologies and products and improve our technology infrastructure and to use
the balance of the proceeds for working capital and other general corporate
purposes. Pending this use, we have invested these proceeds in interest-bearing
securities, primarily government securities, municipal bonds, time deposits,
Eurodollar deposits, certificates of deposit with approved financial
institutions, commercial paper rated A-1/P-1/F-1, corporate notes and bonds and
other money market instruments of similar liquidity and credit quality.
Cash used in operating activities was $0.8 million and $6.6 million for the
quarter and nine months ended April 30, 2000, respectively. For both the quarter
and nine-month period ended April 30, 2000, cash used in operating activities
was primarily a result of our net losses for the periods, partially offset by
increases in our accounts payable, accrued liabilities and deferred revenue
balances in excess of the growth in our operating asset balances.
Cash used in investing activities increased to $47.7 million and $48.8
million for the quarter and nine months ended April 30, 2000, respectively, from
$0.1 million used in the comparable periods of the prior fiscal year. These
increases in cash used in investing activities was due in large part to the
investment in available-for-sale securities of the cash we received from our IPO
in February 2000. Cash used in investing activities also included capital
expenditures for computers and other equipment, primarily for our data centers.
Cash provided by financing activities increased to $125.8 million and
$128.7 million for the quarter and nine months ended April 30, 2000. These
increases were due primarily to net proceeds of approximately $125.9 million
received as a result of our IPO.
As part of our business strategy, we intend to invest significant amounts
of capital over the next 12 to 24 months to expand our sales and marketing
resources, including expanding our international business, and to develop new
technologies and products and improve our technology infrastructure. This
investment could be in the form of direct investment or through the formation of
joint ventures, strategic partnerships or similar arrangements.
Future capital requirements will depend upon many factors, including the
rate of expansion of our sales and marketing resources and the timing and
magnitude of our research and product development efforts. We expect to continue
to expend significant amounts on expansion of facility infrastructure; computers
and related data center
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equipment, as well as personnel. We believe that our cash and cash equivalents
balances together with the proceeds from our IPO will be sufficient to satisfy
our cash requirements for at least the next 12 to 24 months.
Risk Factors
Our business is difficult to evaluate because we have a limited operating
history and have been focused on our current business strategy for only
approximately three years.
Our company was founded in October 1995, and our initial revenues were
derived from providing maps, driving directions and directory services. Not only
is our operating history short, but we also refocused our business strategy on
our Business Finder service in early 1997. Accordingly, we have a limited
operating history from which you can evaluate our present business and future
prospects. As a relatively new entrant to the Internet-based marketing services
business, we face risks and uncertainties relating to our ability to implement
our business plan successfully. Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly companies in new and rapidly evolving
markets such as the Internet. If we are unsuccessful in addressing these risks
and uncertainties, our business, results of operations, financial condition and
prospects will be materially adversely affected.
We have a history of losses and negative cash flows and anticipate continued net
losses because we intend to continue to invest in developing our business.
We have not generated enough revenues to exceed the substantial amounts we
have spent to develop our business. We incurred net losses of approximately
$10.9 million for the nine months ended April 30, 2000, $5.5 million for fiscal
1999, $2.5 million for fiscal 1998 and $6.2 million for fiscal 1997. We expect
to continue to lose money for the foreseeable future because we plan to continue
to incur significant expenses as we expand our sales and marketing resources,
including expanding our business in Europe and Asia, and develop new
technologies and products and improve our technology infrastructure. Moreover,
we base current and future expense levels on our operating plans and our
estimates of future revenues. If our revenues grow at a slower rate than we
anticipate, or if our spending exceeds our expectations or cannot be adjusted to
reflect slower revenue growth, we may not generate sufficient revenues to
achieve profitability. If we do achieve profitability, we may be unable in the
future to sustain or increase profitability on a quarterly or annual basis.
Our business is subject to quarterly fluctuations in operating results, which
may negatively impact the price of our common stock.
You should not rely on quarter-to-quarter comparisons of our operating
results as an indication of future performance. It is possible that in some
future periods our quarterly operating results may fall below the expectations
of public market analysts and investors. In this event, the price of our common
stock is likely to fall.
Our quarterly net loss was approximately $4.5 million for the fiscal
quarter ended April 30, 2000, $3.6 million for the fiscal quarter ended January
31, 2000, $2.9 million for the fiscal quarter ended October 31, 1999, $2.4
million for the fiscal quarter ended July 31, 1999, $1.5 million for the fiscal
quarter ended April 30, 1999 and $0.9 million for the fiscal quarter ended
January 31, 1999. We expect to continue to incur net losses over the next
several quarters as we incur expenses to expand our sales and marketing
resources, including expanding our international business, and develop new
technologies and products and improve our technology infrastructure. However,
our quarterly operating results may fluctuate significantly in the future due to
a variety of factors. These factors include the following, which are generally
outside of our control:
. competition in the markets for our services;
. variation in the demand for our Internet-based marketing infrastructure
services and seasonal trends relating to marketing spending;
. our ability to protect our systems from telecommunications failures,
power loss or equipment or software-related system failures;
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<PAGE>
. the availability and cost of geographic data and content from third
party providers; and
. economic conditions specific to the Internet as well as general economic
and market conditions.
Other factors that may cause our quarterly operating results to fluctuate
significantly which are at least partially under our control include:
. the rate of new customer acquisitions;
. whether revenues related to new customer acquisitions are recognized
currently or deferred over future time periods;
. the timing and effectiveness of our development of new services;
. the timing and effectiveness of potential strategic alliances or other
business combinations; and
. changes in our operating expenses.
In addition, our operating expenses are based on our expectations of our
future revenues and some of our operating expenses are relatively fixed in the
short term, including personnel costs, data support expenses and the cost of
licensing necessary information. We may be unable to reduce our expenses quickly
enough to offset any revenue shortfall.
The market price of our common stock has been and may continue to be highly
volatile.
The market price of our common stock has fluctuated widely and may
continue to do so. For example, during the period following our IPO in February
2000 through the period ended June 1, 2000, the trading price of our common
stock has ranged from a high of $76.25 per share to a low of $9.50 per share.
Many factors could cause the market price of our common stock to rise and fall
in the future. Some of these factors include:
. actual or anticipated variations in our operating results;
. announcement of technological innovations;
. conditions or trends in the Internet and marketing infrastructure
services industries;
. acquisitions and alliances by us or others in the industry;
. changes in estimates of our performance or recommendations by
financial analysts;
. market conditions in the industry and the economy as a whole;
. introduction of new services by our competitors;
. changes in the market valuations of other Internet service
companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel; and
. other events or factors, many of which are beyond our control or
only partially in our control.
The overall financial markets have recently experienced significant price
and volume fluctuations, and the market prices of technology companies,
particularly Internet-related companies, have been and continue to be extremely
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<PAGE>
volatile. Volatility in the price of our common stock may be caused by factors
outside of our control and may be unrelated or disproportionate to our operating
results. In the past, following periods of volatility in the market price of a
public company's securities, securities class action litigation has often been
instituted against that company. Securities class action litigation could result
in substantial costs and a diversion of our management's attention and
resources.
If demand for Internet-based marketing services fails to develop or develops
more slowly than we expect, we may not generate sufficient revenues to achieve
profitability.
Our future success is highly dependent on an increase in the use of the
Internet as a marketing medium. If significant demand for Internet-based
marketing services fails to develop or develops more slowly than we expect, we
may not generate sufficient revenues to achieve profitability. The market for
Internet-based marketing services is new and rapidly evolving, and it cannot yet
be compared with traditional marketing media to gauge its effectiveness.
Companies that have historically relied on traditional marketing methods may be
reluctant or slow to adopt online marketing. As a result, demand and market
acceptance for Internet-based marketing solutions cannot yet be determined. Many
of our current and potential clients have little or no experience using the
Internet for marketing purposes and may allocate only a limited portion of their
marketing budgets to the Internet. Companies that have invested substantial
resources in traditional methods of marketing may be reluctant to reallocate
those resources to online marketing. In addition, companies that have invested a
significant portion of their marketing budget in online marketing may decide
after a time to return to more traditional methods if they find that online
marketing is a less effective method of promoting their products and services
than traditional marketing methods.
We will continue to dedicate significant resources toward developing new clients
internationally; any success in these efforts may prove not to have been worth
the associated expense.
Our current business plan includes expanding internationally. To date, we
have limited experience in marketing our services internationally, and we cannot
predict our success in these international markets. In order to expand overseas,
we intend to enter into relationships with foreign businesses, and we cannot
predict whether those relationships will be successful. Our plans to expand
internationally are subject to inherent risks, including:
. the impact of economic fluctuations in economies outside of the United
States;
. greater difficulty in accounts receivable collection and longer
collection periods;
. unexpected changes in regulatory requirements, tariffs and other trade
barriers;
. difficulties and costs of staffing and managing foreign operations due
to distance, as well as language and cultural differences;
. political instability, currency exchange fluctuations and potentially
adverse tax consequences; and
. reduced protection for intellectual property rights outside the United
States.
We cannot predict whether the expansion of our business internationally
will be successful. The results of our efforts may prove not to have been worth
the associated expense and opportunity cost.
Historically, we have depended on a limited number of services for most of our
revenues.
Historically, we have derived most of our revenues from our Web Business
Finder, maps, driving directions and directory services, which represented
approximately 68% of our revenues in the nine months ended April 30, 2000, 86%
of our revenues in fiscal 1999 and 91% of our revenues in fiscal 1998. Our
results of operations would be materially and adversely affected by a reduction
in demand or a change in the pricing structure for these services, unless and
until we are able to generate revenue from other services.
14
<PAGE>
We have relied on our ability to sell existing customers additional services to
generate revenue and the continued growth of our business depends on our ability
to continue to do so in the future.
Much of our past sales growth is the result of selling additional services
to existing clients. Our growth strategy depends on the introduction of new
services that we hope to sell to our existing clients. We may not develop any of
these new services in a cost-effective and timely manner, and we have
insufficient experience with these new service offerings to know whether they
will be well received by our clients. Any new service we introduce that is not
favorably received could damage our relationships with our clients. If our
existing clients decide to maintain their current level of service and not
upgrade to additional services, we might fall short of our projected sales and
would have to cultivate other sales opportunities, which might be expensive and
might not materialize.
We may be unable to maintain our current pricing structure because our business
is changing rapidly as are the services that we provide.
Our current business model is to provide marketing infrastructure services
to our business clients. We may not achieve an acceptable level of
profitability, or become profitable at all, if our clients' marketing executives
do not perceive that the use of our services will improve the effectiveness of
their marketing efforts or if they are otherwise unable to generate a
significant return on investment from using our services. Internet-based
marketing services are relatively new and unproven and may not achieve
widespread customer acceptance. To be successful, we must adapt to our rapidly
changing market by continually enhancing the technologies used in our services
and introducing new technology to address the changing needs of our clients.
Under our current pricing structure, clients pay for most of our services
through set-up and annual fees. There is a risk that competition with respect to
the services we provide will eventually result in very low prices for our
services. If we are unable to maintain an adequate pricing structure, we will
not generate sufficient revenues to achieve and maintain profitability.
Our business is dependent on the continuous, reliable and secure operation of
our databases and the related services that we provide, and a system failure
could negatively impact our business.
Our operations are dependent on our ability to maintain our databases,
servers and communications equipment in effective working order and to protect
them from fire, natural disaster, sabotage, power loss, telecommunications
failure, human error or similar events. Although we currently maintain two
geographically dispersed data centers, a system failure or natural disaster
could significantly disrupt our operations. Any system failure, including a
network, software or hardware failure, that causes an interruption in the
performance of our services or a decrease in responsiveness of our services
could result in lost clients, reduced revenue and harm to our reputation.
Despite the implementation of security measures and standard operating
procedures, our infrastructure may also be vulnerable to computer viruses,
hackers, human error or similar problems caused by our employees, clients or
Internet users. A party who is able to circumvent our security measures could
misappropriate proprietary database information or cause interruptions in our
operations. As a result, we may be required to expend significant capital and
other resources to help protect against, or to alleviate problems caused by,
these security breaches. Our insurance may not adequately compensate us for any
losses that may occur due to any failure in our system or interruption in our
service. In addition, the growth of our business may strain the capacity of our
servers and telecommunications systems. If we are unable or otherwise fail to
maintain or upgrade our systems, they could fail or suffer degradation in
performance. Any damage, failure or delay that causes significant interruption
in our databases or other systems would adversely affect our operating results
and could cause the price of our common stock to decline.
Our current business plan depends in significant part on third party
relationships, many of which are short-term or terminable.
We presently rely on our strategic partners to provide key services,
marketing opportunities, technologies, clients and users. These arrangements can
be terminated by our partners in some circumstances. If our relationships with
our strategic partners were terminated, we would have to adapt our operations or
business plan, which may take time and may interrupt the provision of the
affected services. In addition, if we do not establish additional, and maintain
existing, strategic relationships on commercially reasonable terms or if our
strategic relationships do not result in an increase in the number of users of
our services, we may be unable to continue to offer existing products or to
develop new products and we may not experience a significant portion of the
anticipated growth in our clients and the number of end-users of our services.
As a result, we may not generate sufficient revenues to achieve profitability,
and the price of our common
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<PAGE>
stock is likely to fall. Finally, new strategic relationships that are entered
into may prove difficult to implement and may fail to provide some or all of the
anticipated benefits.
We are dependent on a limited number of third parties for a significant portion
of our geographic data.
Most of our services rely on the availability and accuracy of geographic
data. We have licensed a significant portion of our geographic data from a
limited number of sources through non-exclusive, short-term contractual
arrangements. If any of these third parties were to merge with or be acquired by
another company, the number of sources providing this geographic data could be
further reduced. Given the short terms of our geographic data licenses, we will
have to renegotiate our contracts in the foreseeable future, which may result in
contractual terms that are not as favorable to us as our existing data licenses.
If we cannot maintain these data licenses or any other third-party license
arrangement on commercially reasonable terms, the scope and quality of our
services may suffer.
If we are unable to generate fast and accurate responses to queries, the
marketability of our services will be reduced.
If we are unable to generate responses quickly or if the responses we
generate are not accurate, the marketability of our services will be reduced and
we may experience a decline in the number of users of our services. The accuracy
of our services is substantially dependent on the accuracy of data that we
license from third parties. We plan to update our geographic databases
periodically. However, in view of the complexity of updating multiple databases
and revising software, and the need to obtain geographic data for address
information from third parties, we may not be able to perform these updates as
planned. This could harm our business, financial condition and results of
operations.
We have recently experienced and currently anticipate rapid growth in our
business, and any inability to manage this growth could harm our business.
In order to execute our business plan, our company has grown significantly.
The number of our employees grew from 49 as of October 31, 1998 to 186 as of
April 30, 2000. This growth has placed, and our anticipated future growth
combined with the requirements we will face as a public company will continue to
place, a significant strain on our management systems and resources. We expect
that we will need to continue to improve our financial and managerial controls
and reporting systems and procedures. We will also need to continue to expand
and maintain close coordination among our technical, finance, sales and
marketing groups.
We will not be able to execute our business plan if we cannot increase our
direct and indirect sales channels.
We will need to expand substantially our direct and indirect sales
operations, both domestically and internationally, in order to increase market
awareness and sales of our products. Our services require a sophisticated sales
effort targeted at several people within our prospective clients' organizations.
We have recently expanded our direct sales force and plan to hire additional
sales personnel. Competition for qualified sales personnel is intense, and we
might not be able to hire the kind and number of sales personnel we are
targeting. In addition, we believe that our future success is dependent upon
establishing and maintaining productive relationships with a variety of
distribution partners, resellers, and joint marketing partners. We cannot be
sure that we will be successful in signing up desired partners or that our
partners will devote adequate resources or have the technical and other sales
capabilities to sell our products.
Similarly, the complexity of our products and the difficulty of installing
them require highly trained customer service and support personnel. We currently
have a small customer service and support organization, and we will need to
increase our staff to support new services, new customers and the expanding
needs of existing customers. Competition for customer service and support
personnel is intense in our industry due to the limited number of people
available with the necessary technical skills and understanding of the Internet.
Acquisitions or strategic investments may disrupt or otherwise have a negative
impact on our business.
We may acquire or make investments in complementary businesses,
technologies, services or products, or enter into strategic partnerships with
parties who can provide access to those assets, if appropriate opportunities
arise. From time to time we have had discussions and negotiations with companies
regarding our acquiring, investing in or partnering with their businesses,
products, services or technologies, and we regularly engage in these discussions
and
16
<PAGE>
negotiations in the ordinary course of our business. Some of those discussions
also contemplate the other party making an investment in our company or a
subsidiary of our company. We may not identify suitable acquisition, investment
or strategic partnership candidates, or if we do identify suitable candidates,
we may not complete those transactions on commercially acceptable terms or at
all. If we acquire another company, we could have difficulty in assimilating
that company's personnel, operations, technology and software. In addition, the
key personnel of the acquired company may decide not to work for us. If we make
other types of acquisitions, we could have difficulty in integrating the
acquired products, services or technologies into our operations. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses. Furthermore, we may incur indebtedness or
issue equity securities to pay for any future acquisitions. The issuance of
equity securities would dilute the ownership interests of the holders of our
common stock.
We face competition and may face future competition from companies with
different business strategies that could cause us to lower our prices or to lose
a significant portion of our market share.
We may be unable to compete successfully with current or future
competitors. We face competition from many companies, both traditional and
online. Increased competition could result in price reductions for our services,
reduced gross margins and loss of our market share.
Many of our existing competitors, as well as potential future competitors,
have longer operating histories, greater name recognition, larger customer bases
and significantly greater financial, technical and marketing resources than our
company. These advantages may allow them to respond more quickly and effectively
to new or emerging technologies and changes in customer requirements. It may
also allow them to engage in more extensive research and development, undertake
farther-reaching marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to potential employees and strategic partners. One
or more of these companies could adopt a different business strategy for
achieving profitability that could allow them to charge fees that are lower than
ours in order to attract clients. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products or services to
address the needs of our current and prospective clients.
Online marketing is a rapidly developing industry, and new types of
products and services may emerge that are more attractive to consumers and
marketers than the types of services we offer. As a result, it is possible that
new competitors may emerge and rapidly acquire significant market share.
Without the continued growth in use of the Internet and wireless devices, we may
not experience a significant portion of the growth currently anticipated.
Our future success is substantially dependent upon continued growth and use
of the Internet and wireless devices such as cellular telephones. Rapid growth
in the use of and interest in the Internet and wireless devices is a relatively
recent phenomenon and may not continue to grow at their current rates. Internet
usage may be inhibited for many reasons, including the following:
. the inability of Web sites to provide security and authentication of
confidential information contained in transmissions over the Internet;
and
. the inability of Web sites to respond to privacy concerns of potential
users, including concerns related to the placement by Web sites of
information, so-called cookies, on a user's hard drive without the
user's knowledge or consent.
Even if the Internet and wireless services continue to experience
significant growth in the number of users and level of use, the Internet and
wireless services infrastructures may not be able to support the demands placed
upon them by this growth. Our success and the viability of the Internet and
wireless services as information media and commercial marketplaces will depend
in large part upon the development of robust telecommunications infrastructure
for providing Internet access and carrying Internet and wireless traffic. If the
use of the Internet and wireless services do not continue to grow, if the
necessary telecommunications infrastructure or complementary products are not
developed or do not effectively support growth that may occur or if the Internet
and wireless services do not become viable information
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media and commercial marketplaces, we may not experience a significant portion
of the growth currently anticipated and the price of our common stock is likely
to fall.
We face a competitive labor market for highly skilled employees that we must
attract, retain and motivate in order to execute our growth plan.
Our future success depends on our ability to attract, train, motivate and
retain highly skilled employees. Competition for employees among Internet and
software companies is intense, particularly in the Silicon Valley area in which
our headquarters are located. Market wages for employees include expectations
for significant stock-based compensation. We may be unable to retain our key
employees or attract, assimilate or retain other highly qualified employees in
the future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. The inability to attract
additional qualified personnel could disrupt the implementation of our growth
strategy upon which the success of our business depends.
We are highly dependent on the acceptance and effectiveness of the Internet as a
medium for consumer transactions and on the increased use of the Internet by
consumers to locate our clients' products.
The future success of a number of our services is dependent in large part
on an increase in the use of the Internet for business transactions with
consumers and on the increased use of the Internet by consumers to locate our
clients' products. The electronic commerce market is new and rapidly evolving
and the extent of consumer acceptance of the Internet cannot yet be determined.
If a sufficiently broad base of consumers do not accept the use of the Internet
for transacting business or do not use the Internet to locate our clients'
products, our business, financial condition and results of operations could be
materially and adversely affected.
If we fail to protect our intellectual property rights or face a claim of
intellectual property infringement by a third-party, we could lose our
intellectual property rights or be liable for significant damages.
Our success depends significantly upon our proprietary technology. We
currently rely on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect our proprietary
rights. Our employees are generally required to execute confidentiality and
assignment agreements that transfer any rights they may have in copyrightable
works or patentable technologies to us. In addition, prior to entering into
discussions with strategic partners, we generally require that these parties
enter into a non-disclosure agreement. If these discussions result in a license
or other business relationship, we also generally require that the agreement
setting forth the parties' respective rights and obligations include provisions
for the protection of our intellectual property rights. Our failure to enter
into these agreements when appropriate or our inability to enforce our rights
under one or more of these agreements could jeopardize our ability to protect
our intellectual property. This could materially and adversely affect our
business.
We have applied for registration of a number of service marks and
trademarks, including "Vicinity," "Vicinity Business Finder," "Vicinity
BrandFinder" and "MapBlast!," in the United States and in other countries, and
will seek to register additional service marks and trademarks, as appropriate.
We may be unsuccessful in obtaining the service marks and trademarks for which
we have applied. We may not be granted certain patents with respect to our
technology, and any patent that is granted may be challenged or invalidated. We
may not develop proprietary products or technologies that are patentable, and
any issued patent may not provide us with any competitive advantages or
withstand challenges by third parties. In addition, the patents of others may
adversely affect our ability to conduct our business. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy aspects of our
products or services or obtain and use information that we regard as
proprietary. The laws of some foreign countries do not protect proprietary
rights to as great an extent as do the laws of the United States, and we do not
currently have any patents or patent applications pending in any foreign
country. Our means of protecting our proprietary rights may not be adequate, and
our competitors may independently develop similar technology or duplicate our
products or design around patents issued to us or our other intellectual
property rights. Our failure to protect our proprietary rights adequately or our
competitors' successful duplication of our technology could harm our operating
results and cause the price of our common stock to decline.
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Litigation over intellectual property rights could disrupt or otherwise have a
negative impact on our business.
There has been frequent litigation in the computer industry regarding
intellectual property rights. We have in the past been subject to claims
regarding the alleged intellectual property rights of third parties. In fiscal
1999, we entered into a settlement agreement and agreed to pay $441,000 for a
patent license with respect to an intellectual property rights claim. Third
parties may make additional claims of infringement by us with respect to current
or future products, trademarks or other proprietary rights. These claims could
be time-consuming, result in costly litigation, divert our management's
attention, cause product or service release delays, require us to redesign our
products or services or require us to enter into costly royalty or licensing
agreements.
Privacy concerns may adversely affect our ability to implement our Internet
solutions.
Web sites and Internet ad servers typically place a small file commonly
known as a "cookie" on a user's hard drive, generally without the user's
knowledge or consent. We may introduce services or features that are dependent
on the use of cookies to collect, sort and analyze information about Internet
users. Most currently available Internet browsers allow users to modify their
browser settings to prevent cookies from being stored on their hard drive or to
delete cookies at any time. In addition, some Internet commentators and privacy
advocates have suggested limiting or eliminating the use of cookies and the
Federal Trade Commission is investigating these issues in response to recent
publicity regarding Internet advertising companies. The effectiveness of future
services could be limited by a significant reduction or limitation in the use of
cookies. In addition, privacy concerns may cause some Web users to be less
likely to visit Web sites that use cookies. If enough Web users choose not to
visit sites that use cookies, our ability to sell our services or features that
are dependent on the use of cookies would be adversely affected and could
require us to alter or adjust our business practices.
Legislation or regulations may be adopted that could affect our ability to
generate or use information for profiles and may hinder our ability to conduct
business.
The legal and regulatory environment governing the Internet and the use of
information about Internet users is constantly evolving. United States
legislators in the past have introduced a number of bills aimed at regulating
the collection and use of personal data from Internet users and additional
similar bills may be considered during any congressional session. Although we
believe no current legislation has had a material adverse effect on our
business, it is possible that a bill may be enacted into law that negatively
affects our ability to collect and use data about Internet users or that
otherwise affects our business. The European Union has recently adopted a
directive addressing data privacy that may result in limitations on the
collection and use of specific personal information regarding Internet users. In
addition, Germany has imposed its own laws protecting data that can become
personally identifiable through subsequent processing. Other countries may also
enact limitations on the use of personal data.
To date, these regulations have not materially restricted the use of our
products. However, legislation or regulations may in the future be adopted which
may limit our ability to target advertising or collect and use information in
one or more countries. Further, a number of laws and regulations have been and
may be adopted covering issues such as pricing, acceptable content, taxation and
quality of products and services on the Internet. This legislation could dampen
the growth in use of the Internet generally and decrease the acceptance of the
Internet as a communications and commercial medium. In addition, due to the
global nature of the Internet, it is possible that multiple federal, state or
foreign jurisdictions might inconsistently regulate our activities or the
activities of ad networks or Web sites.
Our management will have broad discretion in using the proceeds from our IPO and
therefore investors will be relying on the judgment of our management to invest
those funds effectively.
We intend to use the net proceeds of our IPO to expand our sales and
marketing resources, including expanding our business in Europe and Asia, to
develop new technologies and products and improve our technology infrastructure
and for working capital and other general corporate purposes. The amounts and
timing of these expenditures will vary significantly depending upon a number of
factors, including the amount of cash generated or consumed by our operations,
the progress of our development activities and the market response to the
introduction of any new services. In addition, we may use a portion of the net
proceeds from our IPO to acquire or invest in businesses, products, services or
technologies complementary to our current business, through mergers,
acquisitions, joint ventures or otherwise. Our
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management will retain broad discretion with respect to the expenditure of
proceeds. Stockholders will be relying on the judgment of our management
regarding the application of the proceeds of our IPO.
We may be unable to raise additional financing.
We may need to raise additional funds in the future in order to implement
our business plan, to fund more aggressive marketing programs or to acquire
complementary businesses, technologies or services. Any required additional
financing may be unavailable on terms favorable to us, or at all. If we raise
additional funds by issuing equity securities, you may experience significant
dilution of your ownership interest and these securities may have rights senior
to those of the holders of our common stock. If additional financing is not
available when required or is not available on acceptable terms, we may be
unable to fund our expansion, develop or enhance our services, take advantage of
business opportunities or respond to competitive pressures.
The large number of shares eligible for public sale after our IPO could cause
our stock price to decline.
In February 2000, we issued 8,050,000 shares of common stock pursuant to
our IPO. These shares are freely tradable with the exception of those shares
purchased by our affiliates. We had an aggregate of approximately 28.1 million
shares of our common stock outstanding as of June 1, 2000, which includes the
shares sold in our IPO. Of the remaining shares, approximately 18.5 million are
subject to underwriter lock-up agreements which terminate on August 8, 2000
unless released earlier by the lead underwriter. The remaining shares may be
sold only pursuant to a registration statement under the Securities Act or an
exemption from the registration requirements of the Securities Act. The market
price of our common stock could decline as a result of the sales of a large
number of these shares or the perception that sales could occur. In addition,
the large number of shares eligible for sale may make it more difficult for us
to sell common stock in the future at a time and at a price that we deem
appropriate.
We do not plan to pay dividends in the foreseeable future.
We do not anticipate paying cash dividends to the holders of our common
stock in the foreseeable future. Accordingly, stockholders must rely on sales of
their common stock after price appreciation, which may never occur, as the only
way to realize on their investment. Investors seeking cash dividends should not
purchase our common stock.
A third party's ability to acquire us might be more difficult because of
anti-takeover provisions in our certificate of incorporation and bylaws.
We are authorized to issue five million shares of undesignated preferred
stock. Our Board of Directors has the authority to issue the preferred stock in
one or more series and to fix the price, rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting a series or the designation of
any series, without any further vote or action by our stockholders. The issuance
of preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
delaying, deferring or preventing a change in control of our company without
further action by our stockholders and may adversely affect the market price of
our common stock and the voting and other rights of our stockholders. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of our common stock, including the loss
of voting control to others. We have no current plans to issue any shares of
preferred stock.
Provisions of our Certificate of Incorporation and Bylaws eliminate the
right of stockholders to act by written consent without a meeting, eliminate the
right of stockholders to call a special meeting of stockholders, specify
procedures for nominating directors and submitting proposals for consideration
at stockholder meetings and provide for a staggered Board of Directors, so that
no more than approximately one-third of our directors could be replaced each
year and it would take three successive annual meetings to replace all
directors. These provisions are intended to enhance the likelihood of continuity
and stability in the composition of our Board of Directors and in the policies
formulated by our Board of Directors and to discourage some transactions that
may involve an actual or threatened change of control of our company. These
provisions are designed to reduce the vulnerability of our company to an
unsolicited acquisition proposal and, accordingly, could discourage potential
acquisition proposals and delay or prevent
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a change in control of our company. These provisions are also intended to
discourage tactics that may be used in proxy fights but could, however, have the
effect of discouraging others from making tender offers for our common stock
and, consequently, may also inhibit fluctuations in the market price of our
common stock that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
our company.
Many corporate actions will be controlled by officers, directors and affiliated
entities regardless of the opposition of other investors or the desire of other
investors to pursue an alternative course of action.
Our executive officers, directors and entities affiliated with them, in the
aggregate, beneficially own a significant percentage of our outstanding common
stock. These stockholders, if acting together, would be able to significantly
influence all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We develop products in the United States and market our products in North
America and Europe. As a result, our financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Since all of our sales are currently made in U.S.
dollars, a strengthening of the dollar could make our products less competitive
in foreign markets.
The primary objective of our investment activities is to preserve principal
and assure sufficient liquidity to meet anticipated needs, while at the same
time maximizing the income we receive from our investments within such
constraints. Some of the securities that we invest in may be subject to market
risk. This means that a change in prevailing interest rates may cause the
principal amount of the investment to fluctuate. For example, if we hold a
security that was issued with a fixed interest rate at the then-prevailing rate
and the prevailing interest rate later rises, the principal amount of our
investment will probably decline. To minimize this risk in the future, we intend
to maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including government securities, municipal bonds, time
deposits, Eurodollar deposits, certificates of deposit, commercial paper,
corporate notes and bonds and other specific money market instruments. We
classify our cash equivalents and short-term investments as "fixed-rate" if the
rate of return on such instruments remains fixed over their term. We classify
our cash equivalents and short-term investments as "variable rate" if the rate
of return on such investments varies based on the change in a predetermined
index or set of indices during their term. The table below presents the amounts
and related weighted interest rates of our investment portfolio at April 30,
2000:
<TABLE>
<CAPTION>
Average Fair
Interest Rate Cost Value
-------------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash equivalents:
Fixed rate.............. 6.09% $ 14,615 $ 14,579
Variable rate........... 5.94% $ 21,115 $ 21,108
Short-term investments:
Fixed rate.............. 6.46% $ 45,260 $ 44,976
</TABLE>
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In May 1999, Eddie Babcock, a founder and former employee of our company,
filed a complaint against us and several of our officers in California Superior
Court for reformation of contract alleging various contract and tort causes of
action and seeking declaratory relief. In his complaint, Mr. Babcock seeks,
among other things, the issuance to him of at least 281,250 shares of our common
stock, an unspecified amount of compensatory damages and punitive damages, plus
attorneys' fees. In November 1999, the court stayed Mr. Babcock's claim and
granted our motion to compel arbitration. Such arbitration is currently schedule
to occur in November 2000. We plan to vigorously defend against these
allegations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In February 2000, we commenced and completed a firm commitment underwritten
initial public offering of 8,050,000 shares of our common stock, including
1,050,000 shares related to the underwriters' overallotment option, at a price
of $17.00 per share. The shares were registered with the Securities and
Exchange Commission pursuant to a Registration Statement on Form S-1 (File No.
333- 90253), which was declared effective on February 8, 2000. The public
offering was underwritten by a syndicate of underwriters led by J.P. Morgan &
Co., Bear, Stearns & Co. Inc. and U.S. Bancorp Piper Jaffray as their
representatives. After deducting underwriting discounts and expenses, we
received net proceeds of $125.9 million.
As of March 7, 2000 we had invested the net proceeds from our initial
public offering in high quality interest bearing investments in order to meet
anticipated cash needs for future working capital. The use of proceeds from the
offering does not represent a material change in the use of proceeds described
in our Registration Statement on Form S-1 (File No. 333-90253). None of the net
proceeds of the offering were paid directly or indirectly to any director or
officer of Vicinity Corporation, persons owning 10% or more of any class of our
equity securities or any of our affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The following exhibits are included as part of this Report:
Exhibit
No. Description of Exhibit
-------- ----------------------
10.1 Lease Agreement, dated February 25, 2000, by and between Vicinity
Corporation and San Aleso, LLC.
10.2 Second Amendment to Security Agreement, dated April 1, 2000, by and
between Vicinity Corporation and Emerick M. Woods.
10.3 Offer of Employment Letter, dated January 15, 2000, by and between
Vicinity Corporation and Howard A. Bain III.
27.1 Financial Data Schedule for the nine months ended April 30,
2000.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VICINITY CORPORATION
Registrant
Dated: June 13, 2000 By: /s/ EMERICK WOODS
------------------------------------------
Emerick Woods
President and Chief Executive Officer
Dated: June 13, 2000 By: /s/ HOWARD A. BAIN III
------------------------------------------
Howard A. Bain III
Executive Vice President and
Chief Financial Officer
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