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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 OCTOBER 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.)
370 SAN ALESO AVENUE
SUNNYVALE, CALIFORNIA 94085
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 543-3000
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 November 30, 2000 was 28,701,000.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Unaudited Condensed Consolidated Statements of Operations
for the three months ended October 31, 2000 and 1999...................................................3
Unaudited Condensed Consolidated Balance Sheets
as of October 31, 2000 and July 31, 2000..............................................................4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended October 31, 2000 and 1999..................................................5
Notes to Unaudited Condensed Consolidated Financial Statements.............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................................................................26
Item 2. Changes in Securities and Use of Proceeds.................................................................26
Item 3. Defaults Upon Senior Securities...........................................................................26
Item 4. Submission of Matters to a Vote of Security Holders.......................................................26
Item 5. Other Information.........................................................................................26
Item 6. Exhibits and Reports on Form 8-K..........................................................................26
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CERTAIN DEFINED TERMS
Unless the context otherwise requires, references herein to "we," "us,"
"the Company" or "Vicinity" are to Vicinity Corporation, a Delaware
corporation. References in this Quarterly Report 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", "MapBlast!" and
"GeoSearch" are registered marks of our company. Each trademark, trade name
or service mark of any other company appearing in this Quarterly Report
belongs to its holder.
FORWARD LOOKING STATEMENTS
The statements contained in this Quarterly 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 "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors That May Affect
Future Results" and in our other filings with the Securities and Exchange
Commission. We disclaim any obligation to update any of the forward-looking
statements contained in this report to reflect future events or developments.
2
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PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED FINANCIAL STATEMENTS
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VICINITY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
OCTOBER 31,
--------------------------
2000 1999
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REVENUES
License and hosting fees.................................................. $ 4,030 $ 2,166
Service and transaction fees ............................................. 1,400 365
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5,430 2,531
COST OF REVENUES (1)......................................................... 3,230 1,611
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Gross profit ............................................................. 2,200 920
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OPERATING EXPENSES
Product development (1)................................................... 1,417 681
Sales and marketing (1)................................................... 5,312 2,203
General and administrative (1)............................................ 2,372 766
Stock-based compensation ................................................. 201 197
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9,302 3,847
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LOSS FROM OPERATIONS......................................................... (7,102) (2,927)
Other income, net......................................................... 1,918 55
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NET LOSS..................................................................... (5,184) (2,872)
Accretion on redeemable
convertible preferred stock and warrants.................................. -- 502
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NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS....................................................... $ (5,184) $ (3,374)
=========== ============
BASIC AND DILUTED NET LOSS PER SHARE......................................... $ (0.19) $ (0.71)
============ ============
WEIGHTED AVERAGE SHARES USED
IN BASIC AND DILUTED NET LOSS
PER SHARE CALCULATION.................................................. 27,311 4,745
============ ============
--------------------------------------
(1) Excludes stock-based compensation of:
Cost of revenues....................................................... $ 9 $ 10
Product development.................................................... 21 20
Sales and marketing.................................................... 99 114
General and administrative............................................. 72 53
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$ 201 $ 197
========== ===========
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See Notes to Unaudited Condensed Consolidated Financial Statements.
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VICINITY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
October 31, July 31,
2000 2000
-------------- --------------
ASSETS
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CURRENT ASSETS
Cash and cash equivalents...................................................... $ 30,853 $ 48,195
Short-term investments......................................................... 78,397 73,609
Accounts receivable, net....................................................... 6,223 4,333
Prepaid expenses and other current assets...................................... 1,735 2,312
----------- -----------
Total current assets.............................................................. 117,208 128,449
PROPERTY AND EQUIPMENT, net....................................................... 7,605 5,717
INTANGIBLE ASSETS, net............................................................ 7,347 --
INVESTMENTS....................................................................... 5,000 --
OTHER ASSETS...................................................................... 413 328
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Total Assets ..................................................................... $ 137,573 $ 134,494
============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................................... 2,670 1,399
Accrued liabilities............................................................ 3,689 3,773
Deferred revenue............................................................... 8,524 7,619
Capital lease obligations, current portion..................................... 922 1,042
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Total current liabilities......................................................... 15,805 13,833
CAPITAL LEASE OBLIGATIONS......................................................... 145 270
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Total liabilities................................................................. 15,950 14,103
STOCKHOLDERS' EQUITY
Common stock................................................................... 29 28
Additional paid-in capital..................................................... 158,721 152,565
Deferred stock-based compensation.............................................. (1,144) (1,160)
Notes receivable from employees................................................ (232) (232)
Accumulated other comprehensive loss........................................... (19) (262)
Accumulated deficit............................................................ (35,732) (30,548)
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Total stockholders' equity........................................................ 121,623 120,391
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Total Liabilities and Stockholders' Equity........................................ $ 137,573 $ 134,494
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See Notes to Unaudited Condensed Consolidated Financial Statements.
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VICINITY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
OCTOBER 31,
-----------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................................... $ (5,184) $ (2,872)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................................................. 838 177
Allowance for doubtful accounts................................................ 110 15
Amortization of stock-based compensation....................................... 201 197
Changes in operating assets and liabilities:
Accounts receivable............................................................ (1,805) 493
Prepaid expenses and other current assets...................................... 606 (47)
Accounts payable............................................................... 1,271 390
Accrued liabilities............................................................ (1,495) (699)
Deferred revenue............................................................... 782 (200)
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Net cash used in operating activities.............................................. (4,676) (2,546)
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CASH FLOWS FROM INVESTING ACTIVITIES
Investments of excess cash:
Purchases of available-for-sale securities...................................... (16,520) (544)
Sales of available-for-sale securities.......................................... 6,975 --
Purchases of property and equipment................................................ (2,530) --
Purchase of technology............................................................. (900) --
Purchase of NetCreate.............................................................. (250) --
Other.............................................................................. 8 --
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Net cash used in investing activities.............................................. (13,217) (544)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net........................................ 833 69
Proceeds from issuance of preferred stock, net..................................... -- 1,750
Payment for bank note.............................................................. -- (1,000)
Principal payments on capital leases............................................... (282) (126)
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Net cash provided by financing activities.......................................... 551 693
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Decrease in cash...................................................................... (17,342) (2,397)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................................... 48,195 9,060
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CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................ $ 30,853 $ 6,663
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See Notes to Unaudited Condensed Consolidated Financial Statements.
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VICINITY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated 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 audited financial statements of the Company and the notes thereto
for the year ended July 31, 2000 included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICY
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("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. 138, 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.
NOTE 3 - CASH, CASH EQUIVALENTS AND 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 long-term unless the Company's
intention is to convert them into cash for operations as needed, in which
case they are classified as short-term. Investments are classified as
available-for-sale and are carried at fair value.
NOTE 4 - NET LOSS PER SHARE
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):
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Three Months Ended
OCTOBER 31,
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2000 1999
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Stock options......................................................................... 2,327 1,426
Shares of common stock subject to repurchase.......................................... 789 1,147
Convertible preferred warrants........................................................ -- 952
Convertible preferred stock (as if converted) ........................................ -- 12,163
----------- ----------
3,116 15,688
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VICINITY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average exercise price of stock options outstanding was
$10.94 and $0.22 as of October 31, 2000 and 1999, respectively. The
weighted-average exercise price of shares of common stock subject to
repurchase was $0.25 and $0.22 as of October 31, 2000 and 1999, respectively.
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VICINITY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - COMPREHENSIVE LOSS
The following table sets forth the calculation of comprehensive loss (in
thousands):
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Three Months Ended
OCTOBER 31,
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2000 1999
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Net loss..................................................................... $ (5,184) $ (2,872)
Unrealized gain on available-for-sale securities............................. 243 --
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Comprehensive loss........................................................... $ (4,941) $ (2,872)
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NOTE 6 - SEGMENT INFORMATION
The Company's chief operating decision maker ("CODM") is considered to be
the Company's Chief Executive Officer. The CODM evaluates performance, makes
operating decisions and allocates resources based on financial data
consistent with the presentation in the accompanying consolidated financial
statements. Therefore, the Company operates in a single segment for purposes
of disclosure under SFAS No. 131.
The Company's revenues have been earned primarily from customers in the
United States, with the exception of approximately $672,000 and $137,000 in
revenues for the three months ended October 31, 2000 and 1999, respectively,
which was earned from customers in Europe. For the three months ended October
31, 2000 and 1999, no customer accounted for 10% or more of the Company's
revenues.
Primarily all of the Company's long-lived assets are located in the
United States.
NOTE 7 - BUSINESS COMBINATION
In October 2000, the Company acquired NetCreate Systems, Inc.
("NetCreate"), an Internet products company that provides tools and services
to build or enhance the features and functionality of web sites. In
connection with the acquisition, the Company paid $250,000 in cash and issued
441,405 shares of its common stock in exchange for all outstanding shares of
NetCreate common stock. In addition, the Company reserved an additional
90,513 shares of the Company's common stock for issuance in connection with
the assumption of NetCreate's outstanding stock options and warrants. The
acquisition was accounted for using the purchase method of accounting and the
results of NetCreate have been included in the Company's consolidated
financial statements from October 18, 2000. A summary of the purchase price
for the acquisition is as follows (in thousands):
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Stock and stock options, net of issuance costs............................$ 5,169
Cash...................................................................... 250
Direct acquisition costs.................................................. 190
Other liabilities assumed................................................. 636
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Total.....................................................................$ 6,245
========
The purchase price was allocated as follows:
Tangible assets acquired...............................................$ 398
Capitalized software................................................... 66
Deferred stock-based compensation...................................... 185
Intangible assets acquired:
Goodwill........................................................... 4,226
Developed product technology....................................... 990
Assembled workforce................................................ 380
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Total..................................................................$ 6,245
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VICINITY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Goodwill will be amortized over its estimated life of five years.
Capitalized software, developed product technology and the assembled
workforce are intangible assets, which will be amortized over their estimated
lives of three years. Pro forma comparative combined financial information
has not been shown as the results of NetCreate are not significant.
NOTE 8 - TECHNOLOGY PURCHASE
In September 2000, the Company entered into a Technology Purchase
Agreement ("the Agreement") with BeeLine LLC ("BeeLine"), under which the
Company agreed to pay up to $2.7 million dollars during fiscal 2001 to
purchase technology and related consulting services from BeeLine. In
addition, the Agreement specifies an additional payment of $0.3 million to
BeeLine upon the filing of a patent application related to the purchased
BeeLine technology. The technology was purchased for internal use and is
currently in the application development stage.
As of October 31, 2000, $1.8 million of costs had been incurred under
the Agreement and capitalized as an intangible asset. The Company expects to
amortize such costs over the estimated economic life of the services into
which such technology is incorporated, generally three years, beginning at
the date on which such services are available for general release to
customers.
NOTE 9 - CONTINGENCY
In May 1999, a former employee of the Company filed a complaint against
the Company and certain of the Company's officers and stockholders in
California Superior Court for reformation of contract alleging various
contract and tort causes of action and seeking declaratory relief. In the
complaint, the plaintiff seeks, among other things, the issuance of at least
281,250 shares of the Company's common stock, an unspecified amount of
compensatory damages and punitive damages, plus attorneys' fees. In November
1999, the court stayed the claim and granted the Company's motion to compel
arbitration. An arbitration hearing was conducted in November 2000. Prior to
the commencement of the arbitration hearing, the plaintiff agreed to dismiss
all of his claims against the Company's officers and stockholders. During the
arbitration hearing, the judge hearing the arbitration dismissed all of the
plaintiff's contract-based claims against the Company. A decision from the
judge with respect to the remaining tort claims is expected in December 2000.
The Company continues to believe that the plaintiff's claims are without
merit and expects the remaining claims to be dismissed in favor of the
Company.
NOTE 10 - SUBSEQUENT EVENTS
In November 2000, the Company approved a plan to restructure certain of
its operations in order to reduce expenses. In connection with this
restructuring, the Company expects to reduce its worldwide headcount by
approximately 15% and close its German sales facility. Expenses associated
with this plan are estimated to be approximately $1.3 million.
In November 2000, the Company purchased the commercial building in which
the Company's New Hampshire operations are currently located for
approximately $2.1 million in cash.
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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 our annual
report on Form 10-K for the fiscal year ended July 31, 2000, as filed with
the Securities and Exchange Commission.
OVERVIEW
Vicinity is a leading provider of marketing infrastructure services for
Global 2000 branded companies on the Internet and on wireless platforms. We
use our expertise in designing and maintaining complex spatial databases to
provide a suite of Internet-based marketing infrastructure services, ranging
from store locators for customers with a few hundred locations to the design
and maintenance of complex, multi-attribute databases for customers with
millions of product records that include information such as regularly
stocked products and current promotional offers.
COMPANY HISTORY AND EVOLUTION. 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. Since then, we have refocused our strategy on our Business Finder
service, recruited additional members of our management team and expanded our
product offerings to include Telephone Business Finder, SiteMaker and
BrandFinder. In February 2000, we completed our initial public offering, or
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. During fiscal 2000, we
expanded our operations into Europe as we opened sales offices in France,
Germany and the United Kingdom.
In November 2000, we approved a plan to restructure certain of our
operations in order to reduce expenses. In connection with this
restructuring, we expect to reduce our worldwide headcount by approximately
15% and close our German sales facility. Expenses associated with this plan
are estimated to be approximately $1.3 million.
Historically, we have generated substantially all of our revenues from
our Web Business Finder, maps, driving directions and directory services.
During recent fiscal quarters, 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 and, as of
October 31, 2000, we had approximately 400 customers.
In addition to our continuing focus on Web Business Finder and various
extensions of that product, we recently re-launched our MapBlast! service
together with our BrandFinder service as a distribution platform that we call
the "Vicinity Network". Our objective with this effort is to enable unique
lead generation opportunities for our customers. We began syndicating
MapBlast! and BrandFinder and expect to emphasize this approach over the
option of building MapBlast!, located at www.mapblast.com, as a unique
business to consumer destination site. Increasingly, we expect to place more
emphasis on the Vicinity Network in order to utilize it as a syndicated
platform on which we can deliver traffic, high quality leads and incremental
sales opportunities for our brick-and-mortar customers on the Internet and on
wireless and broadband platforms.
BUSINESS COMBINATION. In October 2000 we acquired NetCreate Systems,
Inc. ("NetCreate"), an Internet products company that provides tools and
services to build or enhance the features and functionality of web sites, in
a transaction that has been accounted for as a purchase. We paid $250,000 in
cash and issued 441,405 shares of our common stock in exchange for all
outstanding shares of NetCreate common stock. We also reserved an additional
90,513 shares of our common stock for issuance in connection with the
assumption of NetCreate's outstanding stock options and warrants.
The purchase price was allocated to the fair value of the acquired
assets and assumed liabilities based on their fair values at the date of
acquisition. The total purchase price of $6.2 million included the issuance
of stock and the assumption of stock options (together $5.2 million), cash of
$0.2 million, direct acquisition costs of $0.2 million and liabilities
assumed of $0.6 million. Of the total purchase price, approximately $0.4
million was allocated to tangible assets, $0.1 million was allocated to
capitalized software, $0.2 million was allocated to deferred stock-based
compensation, $4.2 million was allocated to goodwill, $1.0 million was
allocated to developed product technology and
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$0.4 million was allocated to the assembled workforce. Goodwill will be
amortized over its estimated life of five years. Capitalized software,
developed product technology and the assembled workforce are intangible
assets, which will be amortized over their estimated lives of three years.
TECHNOLOGY PURCHASE. In September 2000, we entered into a Technology
Purchase Agreement ("the Agreement") with BeeLine LLC ("BeeLine"), under
which we agreed to pay up to $2.7 million dollars during fiscal 2001 to
purchase technology and related consulting services from BeeLine. In
addition, the Agreement specifies an additional payment of $0.3 million to
BeeLine upon the filing of a patent application related to the purchased
BeeLine technology.
RESULTS OF OPERATIONS
REVENUES
LICENSE AND HOSTING FEES. Revenue from license and hosting fees is
recognized ratably over the life of the contracts, which typically have
one-year, non-refundable terms. For the three months ended October 31, 2000,
we recognized $4.0 million of license and hosting fees revenue, an increase
of $1.9 million, or 86%, compared to $2.2 million for the three months ended
October 31, 1999. This increase in license and hosting fees revenue was
generally attributable to the growth in our customer base and, specifically,
to growth in demand for Business Finder services.
Deferred revenue consists of customer payments received and accounts
receivable recorded in advance of recognizing revenue for license and hosting
services. Deferred revenue as of October 31, 2000 was $8.5 million, compared
to $4.8 million as of October 31, 1999, representing an increase of $3.8
million, or 79%.
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 three months ended October 31, 2000, we recognized $1.4 million of
service and transaction fees revenue, an increase of $1.0 million, or 284%,
from $0.4 million for the three months ended October 31, 1999. This increase
in service and transaction fees revenue is primarily attributable to an
increase in demand for professional services, mostly web development services
for our customers, as well as increased advertising and transaction revenue
derived mainly from customers utilizing the Vicinity Network. Although we
have seen an increase in transaction revenue, the rate of growth is not as
great as we had anticipated. While overall market adoption is out of our
control, we have responded to this decreased growth rate with targeted
initiatives, including the creation of specific sales and marketing programs.
COST OF REVENUES
Cost of revenues includes 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 $1.6 million, or 100%, to $3.2
million for the three months ended October 31, 2000, compared to $1.6 million
for the three months ended October 31, 1999. The increase in cost of revenues
is attributable to increases in personnel to support our business growth,
equipment costs related to the expansion of our data centers and content fees
as a result of additions to our set of content providers. Gross margin for
the three months ended October 31, 2000 was 41%, compared to 36% for the
three months ended October 31, 1999. We expect gross margin to improve
slightly during fiscal 2001 and our present target is to reach a level of 50%
gross margin by the last quarter of fiscal 2001.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expense consists primarily of
salaries and benefits, consulting expenses and equipment costs. Product
development expense increased $0.7 million, or 108%, to $1.4 million for the
three months ended October 31, 2000 from $0.7 million for the three months
ended October 31, 1999. This increase in product development expense was
primarily attributable to increases in personnel and personnel-related costs.
SALES AND MARKETING. Sales and marketing expense consists primarily of
salaries, commissions, promotion costs, advertising and travel-related
expenses. Sales and marketing expense increased $3.1 million, or 141%, to
$5.3 million
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for the three months ended October 31, 2000 from $2.2 million for the three
months ended October 31, 1999. The number of sales and marketing personnel,
and the amount of personnel-related, promotion and advertising costs
increased during fiscal 2000 to support our expanded sales and marketing
efforts. However, during the three months ended October 31, 2000, the market
for highly skilled sales personnel continued to be tight and prevented us
from meeting our sales hiring plan. As a result, we had fewer sales people in
the field than we had assumed we would have at the beginning of the quarter.
We have hired two full-time recruiters to accelerate our recruiting efforts.
In the marketing area, we are attempting to increase the size of our
telemarketing team to continue to build on our ability to realize sales
opportunities from our marketing programs.
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 $1.6 million,
or 210%, to $2.4 million for the three months ended October 31, 2000 from
$0.8 million for the three months ended October 31, 1999. This increase was
caused mainly by the increase in personnel and personnel-related costs, both
as a result of the need to support and grow our business as well as the need
to support the requirements related to the operation of our company as a
publicly-traded company.
STOCK-BASED COMPENSATION. As of July 31, 2000, we had recorded deferred
stock-based compensation expense aggregating $2.3 million in stockholders'
equity 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
2000 and 1999. During the three months ended October 31, 2000, we recorded an
additional $0.2 million of deferred stock-based compensation in connection
with the NetCreate acquisition. Of these amounts, we recognized as expense a
total of $0.2 million for both the three months ended October 31, 2000 and
the three months ended October 31, 1999. In addition, we expect to recognize
$0.4 million in total for the remaining quarters of fiscal 2001, $0.5 million
in fiscal 2002 and $0.1 million in fiscal 2003.
OTHER INCOME/EXPENSE, NET. Other income/expense for the three months
ended October 31, 2000 was comprised of approximately $1.9 million of
interest income earned on the cash proceeds received from our IPO in February
2000, offset by less than $0.1 million of interest expense related to capital
lease obligations.
NET LOSS. We have not achieved profitability on a quarterly or annual
basis and expect to continue to incur net losses through at least the middle
of fiscal 2002.
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LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. 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 have used a portion of
these proceeds, and intend to continue 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
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.
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 equipment. We believe that
our cash, cash equivalents and short-term investments will be sufficient to
satisfy our cash requirements for at least the next 12 months.
COMPARATIVE CASH FLOW INFORMATION. The following table compares cash,
cash equivalent and short-term investment and working capital balances as
well as sources and uses of cash as of, and for the three months ended,
October 31, 2000 and 1999 (in millions):
<TABLE>
<CAPTION>
Three Months Ended
October 31,
------------------------
2000 1999
--------- --------
<S> <C> <C>
Cash, cash equivalents and short-term investments..................................... $ 109.3 $ 6.7
Working capital....................................................................... 101.4 2.5
Cash used in operating activities..................................................... (4.7) (2.5)
Cash used in investing activities..................................................... (13.2) (0.5)
Cash provided by financing activities................................................. 0.6 0.7
</TABLE>
Cash used in operating activities was $4.7 million for the three months
ended October 31, 2000 compared to $2.5 million for the three months ended
October 31, 1999. This increase was primarily as a result of the increase in
our net loss to $5.2 million for the three months ended October 31, 2000 from
$2.9 million for the three months ended October 31, 1999, partially offset by
non-cash charges for depreciation, amortization and stock-based compensation,
and the net change in operating assets and liabilities.
Cash used in investing activities increased to $13.2 million for the
three months ended October 31, 2000, from $0.5 million for the three months
ended October 31, 1999. This increase was due in large part to investment in
available-for-sale securities. Cash used in investing activities also
included capital expenditures for computers and other equipment, primarily
for our data centers, as well as expenditures for the NetCreate acquisition
and the BeeLine technology purchase.
Cash provided by financing activities was $0.6 million for the three
months ended October 31, 2000, compared to $0.7 million for the three months
ended October 31, 1999. Cash provided by financing activities for the three
months ended October 31, 2000 was generated primarily from approximately $0.8
million in cash received from employees under the Employee Stock Purchase
Plan, offset by payments on capital lease obligations.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
Current and potential stockholders should consider carefully each of the
following factors in making their investment decisions. These factors should
be considered together with the other information included in this Quarterly
Report.
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 FOUR 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 business of
providing marketing infrastructure services for Global 2000 branded companies
on the Internet and on wireless platforms, 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 $5.2 million for the three months ended October 31, 2000, $15.4
million for fiscal 2000 and $5.5 million for fiscal 1999. We expect to
continue to lose money for the immediately 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. Such a shortfall occurred in
the three months ended October 31, 2000 and required that we reduce our
personnel levels in response. 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 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 $5.2 million for the three
months ended October 31, 2000, $4.5 million for the three months ended July
31, 2000, $4.5 million for the three months ended April 30, 2000, $3.6
million for the three months ended January 31, 2000 and $2.9 million for the
three months ended October 31, 1999. We presently expect to continue to incur
net losses until at least mid-fiscal 2002 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;
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- our ability to protect our systems from telecommunications failures,
power loss or equipment or software-related system failures;
- 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 and may incur costs, such as
severance costs, imposed by any expense reduction program.
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 November 30, 2000, the trading price
of our common stock has ranged from a high of $76.25 per share to a low of
$2.25 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;
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<PAGE>
- 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 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 MARKETING INFRASTRUCTURE 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 and wireless platforms as marketing channels including, in
particular, the deployment and acceptance of wireless and broadband
platforms. If significant demand for marketing infrastructure services fails
to develop or develops more slowly than we expect, we may not generate
sufficient revenues to achieve profitability. The market for marketing
infrastructure 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 or wireless marketing. As a result,
demand and market acceptance for Internet and wireless-based marketing
solutions cannot yet be determined. Many of our current and potential clients
have little or no experience using the Internet or wireless platforms for
marketing purposes and may allocate only a limited portion of their marketing
budgets to these platforms. Companies that have invested substantial
resources in traditional methods of marketing may be reluctant to reallocate
those resources to online or wireless marketing. In addition, companies that
have invested a significant portion of their marketing budget in online or
wireless marketing may decide after a time to return to more traditional
methods if they find that online or wireless 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. During
fiscal 2000, we opened sales offices in France, Germany and the United
Kingdom. We recently announced the closure of our office in Germany in order
to centralize functions in the United Kingdom and France offices. 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 continue 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.
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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 during the first quarter of fiscal 2001, we were
not able to hire the kind and number of sales personnel we were targeting.
Also, the recent decline in our stock price may significantly increase the
difficulty in hiring new qualified sales personnel. 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.
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 71% of our revenues in the first fiscal quarter of fiscal 2001,
65% of our revenues in fiscal 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.
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.
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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
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 GROWTH IN OUR BUSINESS,
AND ANY INABILITY TO MANAGE THIS GROWTH COULD HARM OUR BUSINESS.
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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 224 as of October 31, 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.
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ACQUISITIONS OR STRATEGIC INVESTMENTS MAY DISRUPT OR OTHERWISE HAVE A
NEGATIVE IMPACT ON OUR BUSINESS.
In October 2000, we acquired NetCreate Systems, Inc. ("NetCreate"), and
in the future may acquire or make investments in other 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 or a subsidiary of our company. We may
not identify other suitable acquisition, investment or strategic partnership
candidates, or if we do identify other suitable candidates, we may not
complete those transactions on commercially acceptable terms or at all. We
could have difficulty in assimilating NetCreate's personnel, operations,
technology and software or those of another company that we acquire. In
addition, the key personnel of NetCreate or another company that we acquire
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 its current
rate. 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.
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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 and, in light of the
disappointing performance of our stock price, we may be unable to offer
attractive equity packages to potential employees, and may also be unable to
retain and motivate our existing employees whose stock options are
out-of-the-money. 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 registered several service marks in the United States, including
"Vicinity," "MapBlast!" and "GeoSearch" and have applied for registration of
a number of additional service marks, including "Vicinity Business Finder,"
"Vicinity SiteMaker," "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
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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. Like others in our industry, we are from time
to time 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 advertisement 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 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 advertising
networks or Web sites.
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OUR MANAGEMENT HAS 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 have used a portion of, and intend to continue 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 additional businesses,
products, services or technologies complementary to our current business,
through mergers, acquisitions, joint ventures or otherwise. Our management
has broad discretion with respect to the expenditure of our IPO proceeds.
Stockholders will be relying on the judgment of our management regarding the
application of these proceeds.
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 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 28.7
million shares of our common stock outstanding as of October 31, 2000, which
includes the shares sold in our IPO. The shares not registered as part of our
IPO 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 RESTATED 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.
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Provisions of our Restated 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 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.
The following discussion about our market rate risk involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates, foreign currency exchange rates and
equity security price risk.
INTEREST RATE RISK. 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 October 31, 2000 (in thousands):
<TABLE>
<CAPTION>
Average Fair
Interest Rate Cost Value
------------- ----------- -----------
<S> <C> <C> <C>
Cash equivalents:
Fixed rate.......................................................... 6.41% $ 3,971 $ 3,971
Variable rate....................................................... 7.58% $ 1,165 $ 1,165
Short-term investments:
Fixed rate.......................................................... 6.72% $ 70,045 $ 70,025
Variable rate....................................................... 6.66% $ 8,524 $ 8,525
</TABLE>
FOREIGN CURRENCY EXCHANGE RATE 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.
EQUITY SECURITY PRICE RISK. In October 2000, we invested $5.0 million in
a newly organized, non-diversified, closed-end management investment company
(the "Fund") that is subject to market price volatility. The Fund has an
investment objective of long-term capital appreciation and seeks to achieve
its objective by investing in equity securities of small, medium and large
capitalized United States and foreign companies considered to significantly
benefit from, or derive revenue from, the Internet. In addition, this fund
may also invest in securities of private investment funds that invest
primarily in venture capital companies. Investments in technology companies
and, in particular, venture capital companies, pose special risks. Currently,
no market exists for the Fund's shares. The Fund's shares will not be listed
on any securities exchange and the Fund does not anticipate that a secondary
market for its shares will develop. Consequently, we may not be able to sell
our shares in the Fund. Since opportunities for redemption of shares are
severely limited, the Fund's shares are appropriate only as a long-term
investment. Equity price fluctuations of plus or minus 10% would have had a
$0.5 million impact on the value of this investment in the three months ended
October 31, 2000.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In May 1999, a former employee of the Company filed a complaint against
the Company and certain of the Company's officers and stockholders in
California Superior Court for reformation of contract alleging various
contract and tort causes of action and seeking declaratory relief. In the
complaint, the plaintiff seeks, among other things, the issuance of at least
281,250 shares of the Company's common stock, an unspecified amount of
compensatory damages and punitive damages, plus attorneys' fees. In November
1999, the court stayed the claim and granted the Company's motion to compel
arbitration. An arbitration hearing was conducted in November 2000. Prior to
commencement of the arbitration hearing, the plaintiff agreed to dismiss all
of his claims against the Company's officers and stockholders. During the
arbitration, the judge hearing the arbitration dismissed all of plaintiff's
contract-based claims against the Company. A decision from the judge with
respect to the remaining tort claims is expected in December 2000. The
Company continues to believe that the plaintiff's claims are without merit
and expects the remaining claims to be dismissed in favor of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
ISSUANCE OF SHARES OF COMMON STOCK. In October 2000, we issued 441,405
shares of our common stock in exchange for all the issued and outstanding
common stock of NetCreate Systems, Inc. in connection with our acquisition of
that company. The sale of these securities was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, and Regulation D promulgated thereunder, as a transaction by
an issuer not involving a public offering. The recipients of these securities
represented their intention 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 the
securities issued in this transaction.
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 Separation Agreement, dated November 30, 2000, by and between Vicinity
Corporation and Howard Bain.
27.1 Financial Data Schedule for the three months ended October 31, 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: December 14, 2000 By: /s/ EMERICK WOODS
-------------------------------------
Emerick Woods
President and Chief Executive Officer
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