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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 January 31, 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. [ ] Yes [ X ] No
The number of shares of Common Stock, par value $0.001 per share, of
Vicinity Corporation outstanding as of February 14, 2000 was 28,003,007.
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Table of Contents
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements...................................................................................... 4
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 4. Submission of Matters to a Vote of Security Holders....................................................... 23
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 24
</TABLE>
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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(R) and MapBlast!(R) 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.
<PAGE>
PART 1. FINANCIAL INFORMATION
VICINITY CORPORATION
BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
July 31, January 31, January 31,
1999 2000 2000
--------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,060,393 $ 5,089,568 $ 5,089,568
Accounts receivable, net 2,847,372 3,838,306 3,838,306
Prepaid expenses and other current assets 382,995 1,597,858 1,597,858
-------------- ------------- -------------
Total current assets 12,290,760 10,525,732 10,525,732
Property and equipment, net 912,489 2,686,897 2,686,897
-------------- ------------- -------------
Total assets $ 13,203,249 $ 13,212,629 13,212,629
============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank note $ 1,000,000 $ - $ -
Accounts payable 491,290 946,964 946,964
Capital lease obligations, current portion 379,545 953,478 953,478
Accrued liabilities 1,245,234 1,723,127 1,723,127
Deferred revenue 4,954,878 5,901,248 5,901,248
-------------- ------------- -------------
Total current liabilities 8,070,947 9,524,817 9,524,817
Capital lease obligations, excluding current portion 298,009 548,092 548,092
-------------- ------------- -------------
Total liabilities 8,368,956 10,072,909 10,072,909
Series A, B, C, D, E and F redeemable convertible preferred stock
and Series E warrants, $0.001 par value; authorized
12,519,768 at July 31 and January 31, 2000; issued and
outstanding 11,217,387 at July 31, 1999 and 12,519,768 and none
issued and outstanding pro forma at January 31, 2000; aggregate
liquidation preference of $32,066,788 at July 31, 1999 and $39,294,597
at January 31, 2000; aggregate redemption amount of $22,641,677 at
July 31, 1999 and $27,051,307 and none issued and outstanding pro
forma at January 31, 2000 21,403,089 26,157,635 --
Commitments
Stockholders' equity (deficit):
Common stock, $0.001 par value; 100,000,000 shares
authorized; issued and outstanding 5,287,667 at July 31,
1999 and 6,845,753 and 28,011,507 pro forma at January 31,
2000
5,289 6,846 19,962
Additional paid-in capital, net of preferred stock accretion (300,941) 474,852 26,619,371
Deferred stock based compensation (1,044,132) (1,688,411) (1,688,411)
Notes receivable from employees upon purchase of stock (97,652) (232,536) (232,536)
Accumulated deficit (15,131,360) (21,578,666) (21,578,666)
-------------- ------------- -------------
Total stockholders' equity (deficit) $ (16,568,796) $ (23,017,915) $ 3,139,720
-------------- ------------- -------------
Total liabilities and stockholders' equity (deficit) 13,203,249 13,212,629 13,212,629
============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VICINITY CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
January 31, January 31,
-------------------------- --------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
License and hosting fees $ 1,351,529 $ 2,593,334 $ 2,592,606 $ 4,759,813
Service and transaction fees 69,538 724,622 320,229 1,089,650
----------- ----------- ----------- -----------
Total revenues 1,421,067 3,317,956 2,912,835 5,849,463
----------- ----------- ----------- -----------
Cost of revenues 907,072 2,042,718 1,781,308 3,654,040
----------- ----------- ----------- -----------
Gross profit 513,995 1,275,238 1,131,527 2,195,423
----------- ----------- ----------- -----------
Operating expenses:
Product development 403,044 775,253 742,526 1,455,841
Sales and marketing 606,488 2,906,699 1,174,499 5,109,669
General and administrative 425,197 929,079 786,699 1,694,873
Stock-based compensation 2,459 290,802 2,459 488,234
----------- ----------- ----------- -----------
Total operating expenses 1,437,188 4,901,833 2,706,183 8,748,617
Loss from operations (923,193) (3,626,595) (1,574,656) (6,553,194)
Other expense (income), net 5,159 (51,235) 23,012 (105,884)
----------- ----------- ----------- -----------
Net loss $ (928,352) $(3,575,360) $(1,597,668) $(6,447,310)
Accretion on redeemable convertible
preferred stock and warrants 221,466 502,273 350,124 1,004,546
----------- ----------- ----------- -----------
Net loss applicable to common stockholders $(1,149,818) $(4,077,633) $(1,947,792) $(7,451,856)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.30) $ (0.79) $ (0.51) $ (1.49)
----------- ----------- ----------- -----------
Weighted average shares outstanding used in
diluted net loss per share calculation 3,872,388 5,139,283 3,841,867 5,005,864
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
VICINITY CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended
January 31,
-----------------------------
1999 2000
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,597,668) $ (6,447,310)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 51,120 451,013
Allowance for doubtful accounts 40,000 30,000
Amortization of deferred stock based compensation 2,459 488,234
Changes in operating assets and liabilities:
Accounts receivable (574,373) (1,015,355)
Prepaid expenses and other current assets (28,641) (1,214,863)
Accounts payable (144,483) 455,675
Accrued liabilities 158,175 477,893
Payable to related party (163,686) -
Deferred revenue 575,281 946,370
----------- -------------
Net cash used in operating activities (1,681,816) (5,828,343)
----------- -------------
Cash flows from investing activities:
Purchases of equipment (41,737) (1,036,936)
----------- -------------
Net cash used in investing activities (41,737) (1,036,936)
----------- -------------
Cash flows from financing activities:
Payment for bank note - (1,000,000)
Proceeds from bank note 200,000 -
Principal payments for capital lease obligations (18,589) (370,045)
Proceeds from sale of preferred stock 3,667,346 3,750,000
Proceeds from sale of common stock 17,794 514,499
----------- -------------
Net cash provided by financing activities 3,866,551 2,894,454
----------- -------------
Net (increase) decrease in cash and cash equivalents 2,142,998 (3,970,825)
Cash and cash equivalents at beginning of period 263,944 9,060,393
----------- -------------
Cash and cash equivalents at end of period $ 2,406,942 $ 5,089,568
=========== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 42,136 $ 25,456
=========== =============
Schedule of noncash investing and financing activities:
Equipment purchased under capital lease $ 179,457 $ 1,153,205
=========== =============
Accretion on redeemable preferred stock $ 350,124 $ 1,004,546
=========== =============
Common stock issued for note receivable $ - $ 134,884
=========== =============
Deferred compensation related to stock option grants $ - $ 1,132,513
=========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VICINITY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying financial information is unaudited and in the opinion of
management, has been prepared on the same basis as the Company's annual audited
financial statements and include all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of the financial position of the Company at January 31, 2000 and
the results of operations for the three and six months ended January 31, 1999
and 2000. Operating results for the three and six months ended January 31, 2000
are not necessarily indicative of results that may be expected for the year
ending July 31, 2000. These financial statements and notes included herein
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.
2. Summary of Significant Accounting Policies
(a) Unaudited Pro Forma Balance Sheet
At the time of the completion of the initial public offering on February 14,
2000, all of the redeemable convertible preferred stock outstanding was
automatically converted into common stock. The conversion of the redeemable
convertible preferred stock has been reflected in the accompanying unaudited pro
forma balance sheet as of January 31, 2000.
(b) 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 redeemable convertible preferred
stock, outstanding 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 antidilutive.
Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
January 31, January 31,
1999 2000 1999 2000
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Stock options 2,621 1,583 2,621 1,583
Shares of common stock subject to repurchase 31 1,368 31 1,309
Convertible preferred warrants 952 - 952 -
Convertible preferred stock (as if converted) 8,871 12,957 8,117 12,560
------------- ------------- ------------- ------------
12,475 15,908 11,721 15,452
============= ============= ============= ============
</TABLE>
The weighted-average exercise prices of stock options outstanding were $0.11 and
$6.60 as of January 31, 1999 and 2000, respectively. The weighted-average
exercise price of shares of common stock subject to repurchase was $0.10 and
$0.44 as of January 31, 1999 and 2000, respectively.
(c) Pro Forma Basic and Diluted Net Loss per Common Share
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The pro forma basic and diluted net loss per share information below reflect the
effect of the conversion of the weighted average number of shares of the
outstanding redeemable convertible preferred stock as if the shares of stock
were converted as of the issuance date into shares of common stock.
<TABLE>
<CAPTION>
Three months ended Six months ended
January 31, 2000 January 31, 2000
------------------ ----------------
<S> <C> <C>
Pro forma basic and diluted net loss per share $ (0.20) $ (0.36)
Pro forma weighted average shares outstanding used
in basic diluted net loss per share calculation 18,255,037 18,121,648
</TABLE>
(d) 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 nonemployees 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 six months ended January 31, 2000 is distributed as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
January 31, January 31,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cost of revenues $ 295 $ 5,816 $ 295 $ 9,765
Product development - 14,540 - 24,412
Sales and marketing 1,377 162,849 1,377 273,411
General and administrative 787 107,597 787 180,647
------------- ------------- ------------- -------------
$ 2,459 $ 290,802 $ 2,459 $ 488,234
============= ============= ============= =============
</TABLE>
(e) Comprehensive Loss
The Company has no significant components of other comprehensive loss, and
accordingly, comprehensive loss is the same as net loss for all periods
presented.
(f) 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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(g) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (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,
<PAGE>
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.
2. 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 $195,000 for the three months
ended January 31, 2000 and $332,000 for the six months ended January 31, 2000
which was earned from customers in Europe. In fiscal 1999, there were no
revenues earned from customers in Europe.
All of the Company's long-lived assets are located in the United States.
3. Subsequent Event
On February 14, 2000, Vicinity completed its initial public offering 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 estimated offering expenses, were approximately
$126.1 million.
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."
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
<PAGE>
directions and directory services. We have continued to grow our client base in
fiscal 2000, and as of January 31, 2000 we had approximately 300 clients.
In February 2000, we completed our initial public offering, or IPO, and
issued 8,050,000 shares of common stock at a price of $17.00 per share. We
received approximately $126.1 million in cash, net of underwriting discounts,
commissions 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.
Revenue Recognition
We primarily derive revenue from license and hosting fees. Revenues are
recognized in accordance with Statement of Position (SOP) No. 97-2, Software
Revenue Recognition. As such, these revenues are recognized ratably over the
life of the contract, which typically has one-year, non-refundable terms.
Service and transaction fees consist of revenue generated from project related
professional services and to a lesser degree from advertising, sponsorship and
e-commerce transactions. These revenues are recognized as the services are
performed. We have no barter agreements, and no revenues have been derived from
barter transactions to date.
Deferred revenue consists of customer payments received and accounts
receivable recorded in advance of recognizing revenue for license and hosting
revenues.
Stock-based Compensation Expense
As of January 31, 2000, we had recorded deferred stock-based compensation
expense aggregating $2.3 million 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 $0.2 million in fiscal 1999 and $0.3 million and $0.5
million in the three and six months ended January 31, 2000, respectively. In
addition, we expect to recognize $0.5 million in the remainder of fiscal 2000,
$0.6 million in fiscal 2001 and $0.5 million in later years.
Results of Operations
Comparison of three months and six months ended January 31, 2000 and 1999
Revenues. In the three months ended January 31, 2000, we had $3.3 million
in total revenues, compared to $1.4 million for the three months ended January
31, 1999, representing an increase of $1.9 million, or 133%. For the six months
ended January 31, 2000, our revenues increased to $5.8 million from $2.9 million
in the six months ended January 31, 1999, representing an increase of $2.9
million, or 101%. Revenues associated with license and hosting fees were $2.6
million in the three months ended January 31, 2000, compared to $1.3 million in
the three months ended January 31, 1999, representing an increase of $1.3
million, or 92%. For the six months ended January 31, 2000, revenues associated
with license and hosting fees increased to $4.8 million from $2.6 million in the
six months ended January 31, 1999, representing an increase of $2.2 million, or
84%. The increase in license and hosting fees revenues in both the three- and
six-month periods ended January 31, 2000 was primarily attributable to growth in
our customer base due to increased market acceptance in our targeted markets.
Our service and transaction fees totaled $0.7 million in the three months ended
January 31, 2000 and $1.1 million in the six months ended January 31, 2000
compared to $0.1 million and $0.3 million in the same three and six month
periods in fiscal 1999. The increase in service and transaction fees revenue
primarily reflects the development of strategic partnerships formed with
Internet-based promotion companies.
Deferred revenues as of January 31, 2000 were $5.9 million, compared to
$3.1 million as of January 31, 1999, representing an increase of $2.8 million,
or 90%.
<PAGE>
Cost of Revenues. These costs include salaries and benefits of our
operations personnel, the cost of acquiring data and content, the leasing and
depreciation costs of our computer hosting equipment and Internet connection and
data center charges. Cost of revenues was $2.0 million for the three months
ended January 31, 2000 and $3.7 million for the six months ended January 31,
2000. Cost of revenues increased by $1.1 million, or 125%, in the three months
ended January 31, 2000 from $0.9 million in the same period of a year ago. In
the six months ended January 31, 2000, cost of revenues increased by $1.9
million, or 105%, from $1.8 million in the same period of a year ago. The
increases in cost of revenues are attributable to increases in headcount to
support our business growth, the expansion of our data centers with related
increases in equipment costs and additions to our set of content providers.
Product Development. This expense consists primarily of salaries and
benefits, consulting expenses and equipment costs. To date, we have expensed all
product development costs as incurred. Product development expense was $0.8
million for the three months ended January 31, 2000 and $1.5 million for the six
months ended January 31, 2000, compared to $0.4 million for the three months
ended January 31, 1999 and $0.7 million for the six months ended January 31,
1999. The period over period increase for the three months ended January 31,
2000 when compared to the three months ended January 31, 1999 was $0.4 million,
or 92%. The period over period increase for the six months ended January 31,
2000 when compared to the six months ended January 31, 1999 was $0.7 million, or
96%. These increases were primarily attributable to increases in personnel and
personnel-related costs due to our expanded product offerings.
Sales and Marketing. This expense consists primarily of salaries,
commissions, promotions costs and advertising and travel-related expenses. Sales
and marketing expense was $2.9 million for the three months ended January 31,
2000, compared to $0.6 million for the three months ended January 31, 1999,
representing an increase of $2.3 million, or 379%. Sales and marketing expense
increased to $5.1 million in the six months ended January 31, 2000 from $1.2
million in the six months ended January 31, 1999, representing an increase of
$3.9 million, or 335%. 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 as a result of the aggressive expansion of our sales and
marketing efforts both domestically and internationally.
General and Administrative. This expense consists primarily of salaries
and related costs of our executive, administrative, finance and human resources
personnel as well as professional services fees. General and administrative
expense was $0.9 million for the three months ended January 31, 2000, compared
to $0.4 million for the three months ended January 31, 1999, representing an
increase of $0.5 million, or 119%. General and administrative expense increased
to $1.7 million in the six months ended January 31, 2000 from $0.8 million in
the six months ended January 31, 1999, representing a $0.9 million, or 115% .
These increases were primarily attributable to an increase in personnel and
personnel-related costs to support and grow our business including developing
our human resources organization and contracting with recruiters to support our
aggressive hiring plans. We expect general and administrative expenses to grow
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.
Stock-Based Compensation. Stock-based compensation expense was $0.3
million for the three months ended January 31, 2000 and $0.5 million for the six
months ended January 31, 2000. Stock-based compensation expense of $2,000 was
incurred in the comparable periods of a year ago.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the
sale of equity securities. In the fiscal years ended July 31, 1998 and 1999 and
the six months ended January 31, 2000 we received approximately $16,000, $12.5
million and $4.3 million, respectively, in net proceeds from the sale of equity
securities.
In February 2000, we completed our IPO and issued 8,050,000 shares of
commons stock at a price of $17.00 per share. We received approximately $126.1
million in cash, net of underwriting discounts, commissions and other offering
costs. To date, none of these proceeds have been utilized. We intend to use
these proceeds 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 to use the balance of the proceeds for
working capital and
<PAGE>
other general corporate purposes. Pending this use, we have invested these
proceeds in high quality, interest-bearing securities.
We currently have a total of $3.7 million in equipment financing
outstanding with two equipment leasing companies.
Cash used in operating activities was $5.8 million in the six months ended
January 31, 2000. This increase in cash used in operating activities were
primarily due to increased net losses, growth in accounts receivable due to
increased business levels and an accumulation of prepaid expenses related to our
initial public offering. Cash used in investing activities was $1.0 million in
the six months ended January 31, 2000. The increase in cash used in investing
activities was primarily due to infrastructure expansion to meet our growth and
capital expenditures for computers and other equipment for our data centers.
Cash provided by financing activities was $2.9 million in the six months ended
January 31, 2000. The increase in cash provided by financing activities in the
six months ended January 31, 2000 primarily reflects $3.8 million received in
proceeds from the sale of preferred and common stock during the last six months
offset by the $1.0 million repayment of our bank loan in August 1999.
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 business in Europe and Asia, 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 equipment, as well as personnel. We believe that our
cash and cash equivalents balances together with the proceeds from our initial
public offering will be sufficient to satisfy our cash requirements for at least
the next 12 to 24 months.
Forward Looking Statements
The statements contained in this report which 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.
Risk Factors
In addition to the other information contained herein, you should
carefully consider the following risk factors in evaluating our company.
Risks Related to our Business
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, we 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
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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 $6.2
million in fiscal 1997, $2.5 million in fiscal 1998, $5.5 million in fiscal
1999, and $6.4 million in the six months ended January 31, 2000. As of January
31, 2000, we had an accumulated deficit of approximately $21.6 million. 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 to
sustain or increase profitability on a quarterly or annual basis in the future.
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 $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 our net loss to increase over
the next several quarters as we incur significant expenses to 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. 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;
. the demand for 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; and
. economic conditions specific to the Internet as well as general
economic and market conditions.
Other factors which 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; and
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. 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.
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 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
in Europe and Asia; any success in these efforts may prove not to have been
worth the associated expense.
Our current business plan includes expanding into Europe and Asia. 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 78% of our revenues in the six months ended January 31, 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.
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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 will fall short of our projected sales and
would have to cultivate new sales opportunities, which may 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 campaigns or if they are otherwise unable to generate a
significant return on investment from using our products and 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 our services
through set-up and annual fees. There is a risk that competition with respect to
products and services we provide will eventually result in very low prices for
our products and 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 maintain back-up data at a
second site, 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 products and
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 computers and
telecommunications systems. If we are unable to maintain or upgrade our systems,
they could fail or suffer a 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 arrangements with strategic partners, including
Inktomi and Netopia, 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 affected services. In addition,
many companies that we may approach for a strategic relationship in the future
may have conflicting relationships with others. As a result, these companies may
be reluctant to enter into strategic relationships with us. If
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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 stock
is likely to fall. In addition, strategic relationships may be difficult to
implement and may not provide the anticipated benefits.
We are dependent on a limited number of third parties for a significant portion
of our geographic data.
Our products and 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 or be acquired, the
number of sources providing this geographic data would 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 accuracy 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, we must grow significantly. The
number of our employees grew from 49 as of October 31, 1998 to 141 as of January
31, 2000. We expect that the number of our employees will continue to increase
for the foreseeable future, in particular with respect to persons engaged in
product development, professional services and sales activities. 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 products and 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, systems integrators 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.
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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 negotiations in the ordinary course of our business. Some of those
discussions also contemplate the other party making an investment in 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 are currently in
active discussions with several potential partners in Asia, and although no
formal agreement has yet been reached with these parties, we plan to offer our
services to Japan in the first half of calendar year 2000. If we are unable to
reach agreement with our proposed partners in Asia on terms satisfactory to us,
this may delay our entry into the Japanese market and this could limit or
otherwise adversely affect our ability to sell our services in this market.
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. In fiscal 1998, we lost our
then largest client, Yahoo!, due to price competition with a competitor that
continues to provide map and driving direction services to Yahoo!.
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:
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. 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 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 products and 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 which 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," "Business Finder" and "MapBlast!," in the
United States and in other countries, and will seek to register additional
service marks
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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 any patent
with respect to our technology, and any patent which 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.
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 $440,500 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. In the future, we may introduce products and services 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 future products and
services that are dependent on the use of cookies would be adversely affected
and could require us to alter or adjust our business plan.
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
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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. We are currently in active
discussions with several partners in Asia, and although no formal agreement has
yet been reached with these parties, we plan to offer our services in Japan in
the first half of calendar year 2000. Our 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 products and services, take
advantage of business opportunities or respond to competitive pressures.
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, since our initial public offering in February
2000 through March 7, 2000, the trading price of our common stock has ranged
from a high of $76.25 per share to a low of $30.00 per share. Many factors could
cause the market price of our common stock to rise and fall. Some of these
factors include:
. actual or anticipated variations in our operating results;
. announcement of technological innovations;
. results of our planned expansion into Europe and Asia;
. 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;
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. 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.
The financial markets have experienced significant price and volume
fluctuations, and the market prices of technology companies, particularly
Internet-related companies, have been and continue to be extremely 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.
The large number of shares eligible for public sale after this offering could
cause our stock price to decline.
The market price of our common stock could decline as a result of sales of
a large number of shares or the perception that sales could occur. 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
have an aggregate of 29,437,757 shares outstanding as of January 31, 2000 on a
pro forma as adjusted basis that includes the shares sold in our IPO. The
8,050,000 shares sold in our IPO are freely tradable with the exception of those
shares purchased by our affiliates. 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.
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 which
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
21
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prevent 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 approximately 40% 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.
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.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments to date have
been in short-term instruments. Due to the short-term nature of those
investments, we believe that we have not been subject to any material market
risk exposure.
22
<PAGE>
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. As of March 7, 2000, Mr. Babcock has
not taken action to pursue his claim in arbitration. If and when this claim is
pursued in arbitration, we plan to vigorously defend against these allegations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In November 1999, a holder of Series E Preferred Stock warrants received
952,381 shares of Preferred Stock upon exercise of these warrants at an exercise
price of $2.10 per share. This issuance was deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on Section 4(2) of the Securities Act or Regulation D
promulgated thereunder as a transaction by an issuer not involving a public
offering.
During the three months ended January 31, 2000, we issued 726,182 shares
of our common stock to 41 individuals upon exercise of outstanding employee
incentive stock options. These sales were deemed to be exempt from registration
under the Securities Act in reliance on Rule 701 promulgated under Section 3(b)
of the Securities Act as a transaction to compensatory benefit plans and
contracts relating to compensation as provided under Rule 701.
During the three months ended January 31, 2000, we issued options
exercisable for 873,250 shares (net of cancellations) of our common stock
pursuant to our 1996 Incentive Stock Option Plan and our 2000 Equity
Participation Plan to 67 individuals. Of this amount, options for 7,500 shares
of common stock had been exercised as of January 31, 2000. These grants were
deemed to be exempt from registration under the Securities Act in reliance on
Rule 701 promulgated under Section 3(b) of the Securities Act as a transaction
to compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each of the foregoing
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the instruments representing such securities
issued in such transactions.
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 commissions of $9.6
million and expenses of $1.2 million, we received net proceeds of $126.1
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Effective January 27, 2000, Vicinity Corporation, a California corporation
("Vicinity California"), consummated a reorganization pursuant to which it was
reincorporated as a Delaware corporation. The reorganization was effected
through a merger between Vicinity California, and its wholly-owned subsidiary,
Vicinity Merger Sub Corporation, a Delaware corporation ("Vicinity Merger Sub"),
with Vicinity Merger Sub, renamed "Vicinity Corporation" as the
23
<PAGE>
surviving corporation. As a result of the reorganization, the shareholders of
Vicinity California became our stockholders immediately after the
reorganization.
The following matters were submitted to a vote of the security holders of
Vicinity Corporation during the three month period ended January 31, 2000 and
prior to the reorganization.
(1) Effective January 31, 2000, our stockholders approved by written consent
the following corporate actions:
(a) Approval of the Restated Certificate of Incorporation to be effective
immediately upon the closing of our IPO. The Restated Certificate of
Incorporation (i) increased the authorized number of shares of common
stock from 22,000,000 to 100,000,000, (ii) decreased the authorized
numbers of shares of preferred stock from 12,519,768 to 5,000,000,
(iii) authorized the Board of Directors to establish the rights,
preferences and restrictions on any unissued series of preferred
stock, (iv) divided the Board into three classes, and apportioned the
current directors among the three classes, and (v) eliminated the
ability of the stockholders to act by written consent;
(b) Approved the adoption of our 2000 Equity Participation Plan and
reserved the number of shares issuable under such plan;
(c) Approved the adoption of our 2000 Employee Stock Purchase Plan and
reserved 200,000 shares of common stock for issue under such plan.;
(d) Approved the adoption of our Elaine Hamilton Non-Statutory Stock
Option Agreement, and reserved 75,000 shares of common stock for
issue under such plan;
(e) Approved the form of Indemnification Agreement to be entered into by
the Company and each of its executive officers and directors; and
(f) Approved the amendment of our 1996 Incentive Stock Option Plan,
increasing the number of shares reserved for issuance under such plan
by 325,000 to 4,216,317 shares.
A total of 3,170,649 shares of common stock (out of 6,845,753 shares
outstanding) were voted in favor of the written consent. A total of
1,852,000 shares of Series A Preferred Stock (out of 1,852,000 shares
outstanding) were voted in favor of the written consent. A total of
2,439,024 shares of Series B Preferred Stock (out of 2,577,236 shares
outstanding) were voted in favor of the written consent. A total of
3,304,000 shares of Series C Preferred Stock (out of 3,304,000 shares
outstanding) were voted in favor of the written consent. A total of
2,300,613 shares of Series D Preferred Stock (out of 2,300,316 shares
outstanding) were voted in favor of the written consent. A total of
1,000,000 shares of Series E Preferred Stock (out of 1, 011,905 shares
outstanding) were voted in favor of the written consent. A total of
1,100,000 shares of Series F Preferred Stock (out of 2,070,000 shares
outstanding) were voted in favor of the written consent.
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
- ------- ----------------------
27.1 Financial Data Schedule for the six months ended January 31, 2000.
(b) Reports on Form 8-K:
None.
24
<PAGE>
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: March 13, 2000 By: /s/ Emerick Woods
----------------------------------------------
Emerick Woods
President and Chief Executive Officer
Dated: March 13, 2000 By: /s/ David Seltzer
----------------------------------------------
David Seltzer
Vice President and Chief Financial Officer
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
BALANCE SHEETS, CONDENSED STATEMENTS OF OPERATIONS AND CONDENSED NOTES TO
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0001029784
<NAME> VICINITY CORPORATION /DE/
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 5,089,568
<SECURITIES> 0
<RECEIVABLES> 3,838,306
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,525,732
<PP&E> 2,686,897
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,212,629
<CURRENT-LIABILITIES> 9,524,817
<BONDS> 548,092
0
26,157,635
<COMMON> 6,846
<OTHER-SE> (23,024,761)
<TOTAL-LIABILITY-AND-EQUITY> 13,212,629
<SALES> 5,849,463
<TOTAL-REVENUES> 5,849,463
<CGS> 3,654,040
<TOTAL-COSTS> 3,654,040
<OTHER-EXPENSES> 8,748,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (105,884)
<INCOME-PRETAX> (6,447,310)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,447,310)
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<EXTRAORDINARY> 0
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<NET-INCOME> (6,447,310)
<EPS-BASIC> (1.49)
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