<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
REQUISITE TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 84-1253066
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
10355 WESTMOOR DRIVE
SUITE 205
WESTMINSTER, CO 80021
(303) 474-2200
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
---------------------
BARBARA J. MOWRY
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
REQUISITE TECHNOLOGY, INC.
10355 WESTMOOR DRIVE
SUITE 205
WESTMINSTER, CO 80021
(303) 474-2200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
JAMES C.T. LINFIELD, ESQ. CHRISTOPHER L. KAUFMAN, ESQ.
STEVEN E. SEGAL, ESQ. RAYMOND Y. LIN, ESQ.
MICHAEL F. CYRAN, ESQ. LATHAM & WATKINS
COOLEY GODWARD LLP 135 COMMONWEALTH DRIVE
2595 CANYON BOULEVARD, SUITE 250 MENLO PARK, CA 94025
BOULDER, CO 80302 (650) 328-4600
(303) 546-4000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.001 par value............................. $92,000,000 $24,288
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares that the underwriters have the option to purchase solely to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o).
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion)
Issued September 5, 2000
Shares
[REQUISITE TECHNOLOGY, INC. LOGO]
COMMON STOCK
------------------------
REQUISITE TECHNOLOGY, INC. IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND
$ PER SHARE.
------------------------
WE INTEND TO FILE AN APPLICATION FOR OUR COMMON STOCK TO BE QUOTED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "RQST."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Requisite
-------- ------------- -----------
<S> <C> <C> <C>
Per Share......................................... $ $ $
Total............................................. $ $ $
</TABLE>
Requisite has granted the underwriters the right to purchase up to an
additional shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
------------------------
MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
DAIN RAUSCHER WESSELS
, 2000
<PAGE> 3
REQUISITE TECHNOLOGY, INC.
ARTWORK -- LEGAL DESCRIPTION
The top left-hand corner of the artwork contains the Requisite Technology,
Inc. logo, followed by the trademark "requisitetechnology(TM)," under which is
the following language: "Successful B2B e-commerce relies on unified electronic
catalogs. Spanning the supply chain, Requisite's solutions allow global buyers,
suppliers, and e-marketplaces to create, manage, and find commerce-ready
electronic content."
At the far left-hand side of the middle of the page, below the language
described in the first paragraph, is a graphic showing loose pieces of paper,
labeled "Original Content," under which is the following language: "Content is
supplied in disparate formats and sources including paper and legacy electronic
catalogs."
To the right of the graphic labeled "Original Content" is a graphic
depicting shifting gears with the word "create" shown below the gears, labeled
"Create & Maintain," under which is the following language: "Our content
creation facility, staffed with information experts, creates commerce-ready
electronic content and maintains a repository for buyers, suppliers, and
e-marketplaces."
To the right of the graphic labeled "Create & Maintain" is a graphic
depicting a stack of papers with one loose piece of paper on top, within a
computer screen, labeled "Requisite Unifying Structure," under which is the
following language: "Our standard platform provides the structure for globally
organizing and maintaining unified, commerce-ready electronic content."
There are three arrows to the right of the graphic labeled "Requisite
Unifying Structure." The first points diagonally above and to the right, the
second is a horizontal double-headed arrow, and the third points diagonally
below and to the right. All three arrows point to oval graphics. In the center
of each oval is a graphic of a stack of papers with one loose piece of paper on
top each within a computer screen. Each oval has the word "manage" on the left,
and the word "find" on the right. The top oval is labeled "Buyers," the middle
oval is labeled "Suppliers" and the bottom oval is labeled "e-Marketplaces."
Below the bottom oval graphic is the underlined heading "Buyers, Suppliers,
and e-Marketplaces Manage Electronic Content," under which is the following
language: "Our eMerge toolset allows buyers, suppliers, and e-marketplaces to
manage their catalogs."
To the right of each oval is a line connecting the oval to graphics showing
three staggered desktop computers. Under each of these graphics is the caption
"Desktop End Users."
Below the bottom graphic containing the staggered desktop computers is the
underlined heading "Desktop End Users," under which is the following language:
"Global 2000 and e-marketplace buyers can complete transactions using our
patented BugsEye(TM) finding technology."
The bottom right-hand corner of the artwork contains the following
language: "E-CONTENT SOLUTIONS THAT POWER B2B E-COMMERCE(TM)."
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Special Note Regarding Forward-Looking
Statements.......................... 16
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 20
Selected Consolidated Financial
Data................................ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business.............................. 33
Management............................ 45
Certain Transactions.................. 54
Principal Stockholders................ 55
Description of Capital Stock.......... 57
Shares Eligible for Future Sale....... 60
Underwriters.......................... 62
Legal Matters......................... 64
Experts............................... 64
Change in Accountants................. 64
Where to Find Additional
Information......................... 64
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock and
seeking offers to buy shares of common stock only in those jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our common stock.
UNTIL , 2000, 25 DAYS AFTER COMMENCEMENT OF THIS OFFERING, ALL
DEALERS THAT BUY, SELL OR TRADE SHARES, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2
<PAGE> 5
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
regarding our company and the common stock being sold in this offering and our
consolidated financial statements and notes to the consolidated financial
statements appearing elsewhere in this prospectus. In this prospectus, "we,"
"us" and "our" refer to Requisite Technology, Inc. and our wholly-owned
subsidiaries Antaeus Systems, Inc. and Requisite Technology, Ltd.
We are a leading provider of end-to-end electronic content creation and
management products and services that enable business-to-business electronic
commerce, or B2B e-commerce. Our solutions allow for the creation of electronic
catalogs of goods and services offered for sale over the Internet and corporate
networks. These catalogs can be created from a variety of paper and electronic
sources. We also provide tools for the management of electronic content as well
as search technology that allows buyers to find products and services more
efficiently. We believe that manageable and findable product and service
information is essential for the success of buyers, suppliers and Internet-based
electronic marketplaces, or e-marketplaces, in global B2B e-commerce. We have
established strategic partnerships with seven leading enterprise software
vendors, or ESVs, including SAP AG and Oracle Corporation, each of which
integrates our software into their B2B e-commerce procurement solutions. As of
August 25, 2000, we have sold our content management and finding solutions to 65
customers.
The Internet has become an important global commerce medium. According to
International Data Corporation, the number of commercial users employing the
Internet worldwide in the normal course of their operations is expected to grow
from 82 million at the end of 1999 to 250 million in 2003. GartnerGroup projects
that total B2B e-commerce sales will increase worldwide from $403 billion at the
end of 2000 to $7.3 trillion in 2004. This growth in B2B Internet usage is being
driven in part by the increasingly competitive global business environment,
which is causing businesses to seek new ways to reduce costs and make business
processes more efficient. According to AMR Research, between October 1998 and
March 2000, over 600 e-marketplaces began operations in industries ranging from
aerospace to oil and gas. Many types of production and non-production goods and
services can be purchased through these e-marketplaces, ranging from basic
office supplies, such as pens and pencils, to automobile parts to multi-million
dollar items such as turbine engines.
The success of most B2B procurement systems and e-marketplaces depends in
part on aggregating varied information about products or services from multiple
suppliers. A unified electronic catalog must be created in which information can
be easily found by people in many different organizations who may have different
buying systems, habits and computer skill levels. We believe that one of the
fundamental problems limiting widespread B2B e-commerce is the difficulty of
organizing product and service content from multiple suppliers and presenting
that information consistently and in a manner that is readily accessible to end
users.
Our objective is to become the leading provider of content creation and
management products and services to enable and facilitate global B2B e-commerce.
Our strategy includes propagating our Requisite Unifying Structure, or RUS,
platform as the standard for organizing electronic product and service
information and managing electronic content. We believe that integrating our
technology into our strategic partners' solutions will further drive the
adoption of RUS as a standard for companies transacting business on the
Internet. We believe this strategy will facilitate the sale or license of our
electronic catalog management and finding solutions. By offering an end-to-end
solution for the creation, management and finding of electronic content, we
offer buyers, suppliers and e-marketplaces a critical part of the infrastructure
they need to conduct e-commerce.
Buyers, suppliers, e-marketplaces and B2B e-commerce solution providers
each derive benefits from our solutions. For buyers, our content creation and
management solutions make electronic procurement applications more effective by
allowing users to easily find comprehensive information on the products they
want to buy. Our solutions enable suppliers to rapidly launch global e-commerce
initiatives, respond to customer demand for electronic content for their
procurement programs and become effective participants in e-marketplaces,
without having to make a substantial investment in personnel and systems. Our
solutions enable e-marketplaces to rapidly create and launch their services. Our
solutions allow B2B e-commerce solution providers to offer seamless electronic
procurement offerings to their customers by combining our electronic catalog
products with their procurement applications. By facilitating the rapid
deployment of effective electronic procurement solutions with superior finding
and content management capabilities, we can improve the competitive positions of
buyers, suppliers, e-marketplaces and of our strategic partners.
3
<PAGE> 6
THE OFFERING
Common stock offered.......... shares
Common stock to be outstanding
after this offering........... shares
Use of proceeds............... For general corporate purposes, including
working capital and capital expenditures. We
also may use a portion of the net proceeds to
acquire or invest in complementary companies,
products or technologies. See "Use of
Proceeds."
Proposed Nasdaq National
Market symbol................. RQST
The information contained in this prospectus is based on the number of
shares outstanding as of August 25, 2000, and excludes:
-- 37,419 shares of common stock issuable directly or indirectly upon
exercise of outstanding warrants as of August 25, 2000, at a weighted
average exercise price of $1.43 per share;
-- 7,950,000 shares of common stock reserved for issuance under our
stock option plans, of which 3,432,821 shares at a weighted average
exercise price of $2.38 per share were subject to outstanding options
as of August 25, 2000; and
-- 2,000,000 shares of common stock reserved for issuance under our
employee stock purchase plan.
In addition, except as otherwise noted, all information in this prospectus
assumes:
-- the conversion of all outstanding preferred stock into 17,265,196
shares of common stock upon the completion of this offering;
-- a three-for-two stock split of all of our outstanding common stock
and preferred stock effective as of , 2000; and
-- the underwriters' over-allotment option is not exercised.
We were incorporated in Delaware on November 1, 1993. Our principal
executive offices are located at 10355 Westmoor Drive, Suite 205, Westminster,
Colorado 80021, and our telephone number is (303) 474-2200. Our website address
is www.requisite.com. This is a textual reference only. We do not incorporate
the information on our website into this prospectus, and you should not consider
it part of this prospectus.
Requisite Technology(R) is registered as a trademark in the United States.
We also have filed trademark applications in the United States for BugsEye(TM)
and eLeader(TM). In addition, we have filed applications to register the
Requisite Technology and BugsEye trademarks in one or more foreign countries.
These trademark applications are subject to review by the applicable
governmental authorities, may be opposed by private parties and may not be
issued. The prospectus contains other trademarks, service marks and trade names
owned by other companies.
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The pro forma basic and diluted share calculations below reflect the
conversion upon the closing of this offering of all outstanding shares of
preferred stock into 17,265,196 shares of common stock as if the conversion
occurred at the date of original issuance.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue...................................... $ 217 $ 1,387 $ 7,299 $ 2,558 $14,186
Operating expenses........................... 5,346 7,520 19,465 5,938 23,194
Loss from operations......................... (5,129) (6,133) (12,166) (3,380) (9,008)
Net loss..................................... (5,028) (5,909) (11,691) (3,306) (8,695)
Net loss per share, basic and diluted........ $ (1.98) $ (2.06) $ (3.01) $ (.97) $ (1.70)
Weighted averaged common shares outstanding,
basic and diluted.......................... 2,543 2,873 3,882 3,398 5,103
Pro forma (unaudited):
Net loss per share, basic and diluted...... $ (.66) $ (.21) $ (.39)
Weighted average common shares outstanding,
basic and diluted....................... 17,831 16,029 22,169
</TABLE>
The following table presents summary consolidated balance sheet data as of
June 30, 2000. The pro forma column reflects the automatic conversion of all
shares of our outstanding preferred stock into common stock upon completion of
this offering. The pro forma as adjusted column further reflects our receipt of
the estimated net proceeds from our sale of the shares of common stock in
this offering at an assumed initial public offering price of $ per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $19,247 $19,247 $
Working capital............................................. 8,951 8,951
Total assets................................................ 32,576 32,576
Total liabilities........................................... 16,194 16,194
Total stockholders' equity.................................. 16,382 16,382
</TABLE>
5
<PAGE> 8
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks described below, together with all of the other
information included in this prospectus, before deciding to invest in shares of
our common stock. If any of the following risks actually occurs, our business,
results of operations or financial condition may be harmed. If our business,
results of operations or financial condition is harmed, the trading price of our
common stock could decline, and you might lose all or part of your investment.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business, results of operations
and financial condition.
RISKS RELATED TO OUR OPERATIONS
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE
OUR PROSPECTS.
We were founded in 1993 and changed our business strategy in February 1998.
We have a limited operating history under our current strategy, which makes an
evaluation of our future prospects very difficult. Our prospects for financial
and operational success must be considered in light of the challenges frequently
encountered by early-stage companies in the B2B e-commerce industry, which is
new and rapidly evolving. Many of these risks are described in more detail in
this "Risk Factors" section. We may not successfully address any of these risks.
If we do not successfully address these risks, our business could be seriously
harmed.
THE MARKET FOR OUR SOLUTIONS IS AT AN EARLY STAGE AND OUR SOLUTIONS WERE
ONLY RECENTLY INTRODUCED AND MAY NOT ACHIEVE MARKET ACCEPTANCE. IF OUR
SOLUTIONS ARE NOT ADOPTED BY MARKET PARTICIPANTS, OUR REVENUE GROWTH WILL
SUFFER.
The market for B2B e-commerce solutions is at an early stage of
development, and, even if B2B e-commerce gains widespread acceptance, our
content creation and management solutions may not be adopted by companies as
part of their B2B e-commerce solutions. We began shipping our BugsEye product in
1998 and our eMerge product in 1999. If our solutions do not achieve broad
market acceptance in the relatively near future, our ability to become
profitable will be jeopardized. Whether our solutions achieve broad market
acceptance depends on a number of factors, including:
-- potential customers understanding the value of our content creation,
management and finding solutions;
-- our ability to ensure that buyers, suppliers and e-marketplaces are
satisfied with the quality of the content we create;
-- our ability to expand our content creation capacity to meet current
and anticipated demand globally;
-- our success in enhancing the features and services of our content
finding and management solutions; and
-- our ability to expand our resources to support planned growth of our
customer base.
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT. WE EXPECT TO INCUR
LOSSES IN THE FUTURE AND MAY NEVER BE PROFITABLE.
We incurred net losses of $5.0 million in 1997, $5.9 million in 1998, $11.7
million in 1999 and $8.7 million for the six months ended June 30, 2000. As of
June 30, 2000, we had an accumulated deficit of approximately $34.6 million. We
expect to continue to incur net losses for the foreseeable future and we may
never be profitable. Although our revenue has grown in recent quarters, we may
not be able to sustain this growth rate or our revenue could decline. Over the
longer term, we expect to derive a portion of our revenue from transaction fees,
which are based on an unproven business model. Moreover, we expect to incur
significant selling, marketing, research and development, and general and
administrative expenses. In addition, we expect to incur substantial non-cash
costs relating to the amortization of deferred compensation, which will further
adversely affect our results of operations. As of June 30, 2000, we had an
aggregate of $18.5 million of deferred compensation remaining to be amortized
over the next seven years.
6
<PAGE> 9
WE DERIVE OUR REVENUE FROM A RELATIVELY SMALL NUMBER OF CUSTOMERS. LOSING A
SIGNIFICANT CUSTOMER WOULD SUBSTANTIALLY DIMINISH OUR REVENUE.
In 1999, three customers accounted for 80% of our revenue, each of which
accounted for more than 10% of our revenue. In the six months ended June 30,
2000, one customer, SAP AG, accounted for 66% of our revenue. We may continue to
derive a significant portion of our revenue from a relatively small number of
customers in the foreseeable future. If we were to lose all or a portion of the
revenue from one or more significant customers for any reason, our results of
operations and anticipated revenue could materially suffer.
IF WE CANNOT ACCURATELY CONVERT SUPPLIER PRODUCT DATA IN A TIMELY MANNER,
WE MAY LOSE SALES AND CUSTOMERS.
As a core part of our business, we convert, categorize and load supplier
product and service information into a database for use by our customers. The
information we create and provide to our customers and other users of our
solutions may not be accurate, complete or current. The accuracy and timeliness
of our conversion and categorization process depends upon a number of factors,
some of which are not within our control. These factors include whether
suppliers provide in a timely manner accurate, complete and current information
about their products and services, whether they promptly update this information
and whether the format of the information provided to us by suppliers is clean
and easy to convert. We have in the past experienced significant delays and may
in the future experience delays in delivery of converted content to our
customers. In addition, we have discovered errors in the content we have created
and we may make errors in the future. We have experienced delays in delivering
content to our customers as a result of correcting errors, which has caused
customer frustration and the delay of recognizing revenue. Problems with the
quality or timeliness of product data could result in decreased adoption and use
of our solutions. If these problems continue to occur or recur, we may lose
sales and our business reputation could be damaged.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF
WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES MARKET ANALYSTS OR
INVESTORS, THE MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY,
CAUSING LOSSES TO INVESTORS.
Our quarterly operating results have fluctuated significantly in the past
and may fluctuate significantly in the future. Many e-commerce companies have
experienced significant quarter-to-quarter fluctuations in their operating
results. We believe that period-to-period comparisons of our results of
operations are not meaningful and should not be relied upon as indicators of
future performance. Our operating results may fall below the expectations of
securities market analysts or investors in some future quarter or quarters. Our
failure to meet these expectations would likely cause the market price of our
common stock to fluctuate significantly or decline.
We do not record revenue resulting from our content creation services until
we create and deliver the electronic catalog to our customers. We have in the
past experienced, and may in the future experience, delays in delivering
electronic catalogs to our customers, resulting in missed deadlines imposed on
us by our customers. If these delays cause us to deliver our electronic catalog
in a later quarter than originally expected, we will realize less revenue than
anticipated for the quarter in which delivery was expected. In addition, we may
lose future business from our customers if we fail to meet these deadlines for
delivering electronic catalogs.
Because we plan to increase our expense levels in the near term, based in
part on expectations of future revenue, any decline in our revenue to a level
that is below expectations for any particular quarter would have an adverse
impact on our results of operations for that quarter. Furthermore, our quarterly
revenue may be affected significantly by changes in revenue recognition and
other accounting policies and procedures. These policies and procedures may
evolve or change over time based on new accounting standards and how new and
existing standards are interpreted.
Other factors that could cause our quarterly operating results to fluctuate
include:
-- changes in demand for our e-commerce solutions;
-- actions taken by our competitors, including new product introductions
and enhancements;
7
<PAGE> 10
-- our ability to expand our operations to support large numbers of
customers and transactions;
-- our ability to develop, introduce and market new products and
services and enhancements to our existing products and services on a
timely basis;
-- changes in our pricing policies or those of our competitors;
-- our ability to expand our selling and marketing operations, including
hiring additional sales personnel;
-- our success in maintaining and enhancing existing relationships and
developing new relationships with strategic partners, including ESVs,
systems integrators and others;
-- technological changes in our markets;
-- customer budget cycles and changes in these budget cycles; and
-- general economic factors that affect our target customers' purchasing
decisions.
THE PROCESS FOR LARGE COMPANIES OF DECIDING TO PURCHASE AND THEN
IMPLEMENTING ELECTRONIC PROCUREMENT SOLUTIONS IS COMPLEX, TIME CONSUMING
AND EXPENSIVE, WHICH CAUSES US TO FREQUENTLY EXPERIENCE LONG SALES AND
IMPLEMENTATION CYCLES AND COULD CAUSE DELAYS IN OUR ABILITY TO RECOGNIZE
REVENUE.
The process for large companies of deciding to purchase and then
implementing electronic procurement solutions is complex, time consuming and
expensive. In many cases, the decision involves changing current procurement
practices from using numerous printed catalogs or static, single-supplier
electronic catalogs to relying on one dynamic, multi-supplier electronic
catalog. In addition, companies often consider a wide range of other issues
before committing to purchase our solutions, including anticipated product
benefits, ease of installation, ability to work with existing computer systems,
functionality and reliability. The magnitude of these issues makes it more
difficult for our potential customers to decide to implement our solutions.
Furthermore, many of our potential customers may be addressing these issues for
the first time. As a result, we often devote significant time and resources to
educate potential customers on the use and benefits of our solutions. In
addition, the purchase of our solutions is often discretionary and generally
involves a significant commitment of capital and other resources by a customer
and may require approval at a number of management levels within the customer
organization. It frequently takes many months for us to complete a sale and
these long sales cycles may have an adverse impact on the timing of our revenue.
In addition, if our customers experience delays in implementing their
procurement applications, implementation of our related solutions could be
delayed. As a result of these factors, our recognition of revenue could be
delayed, and our operating results could be adversely affected.
THE B2B E-COMMERCE INDUSTRY HAS LOW BARRIERS TO ENTRY AND WE FACE INTENSE
COMPETITION FROM MANY INDUSTRY PARTICIPANTS.
The B2B e-commerce market is new and rapidly evolving, and the electronic
cataloging and content management segment is receiving increased attention from
various market participants. We expect competition to intensify in the future.
Increased competition is likely to result in price erosion, reduced gross
margins and loss of market share, any one of which could seriously harm our
results of operations and financial condition. Our competitors vary in size and
in the scope and breadth of the products and services they offer. We primarily
compete with respect to different aspects of our solutions with providers of
search engine technologies, content conversion and content management providers,
content aggregators, ESVs and others. Our current and future customers could
decide to develop competitive solutions and services. In addition, because there
are relatively low barriers to entry in our market, we expect additional
competition from other established and emerging companies.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base of
customers than we do. We have lost potential customers to competitors for
various reasons, including lower prices and other incentives not matched by us.
In addition, current and potential competitors have established or may establish
cooperative relationships to increase the ability of their solutions to address
their customers' content creation and management needs. Accordingly, new
competitors or alliances among existing competitors may
8
<PAGE> 11
emerge and acquire significant market share. We also expect that competition
will increase as a result of industry consolidation. If we are unable to compete
effectively, we may not be able to generate meaningful revenue or continue our
operations.
OUR GROWTH STRATEGY DEPENDS IN LARGE PART ON OUR ABILITY TO SUCCESSFULLY
MAINTAIN RELATIONSHIPS WITH OUR CURRENT AND POTENTIAL STRATEGIC PARTNERS
AND ON THEIR ABILITY TO TIMELY DEVELOP AND IMPLEMENT SUCCESSFUL
APPLICATIONS IN WHICH OUR SOLUTIONS ARE EMBEDDED, AND, IN SOME CASES, TO
PROVIDE SUPPORT TO OUR CUSTOMERS.
We have developed strategic relationships with American Management Systems,
Inc., Corio, Inc., ICG Commerce, Inc., Infobank International Holdings plc,
Oracle Corporation, Remedy Corporation and SAP AG, each of which has licensed
our products and integrates or intends to integrate our technology with their
e-commerce procurement applications. In many cases, we have entered into these
relationships only recently, and have not been operating under these agreements
for a sufficient period of time to determine their impact on our results of
operations. Our revenue growth depends in part on the success of these
relationships, expanding the scope of these relationships and forming
relationships with additional strategic partners, including ESVs, key software
component providers and B2B infrastructure providers. We also depend on some of
our strategic partners to provide customer support to users of BugsEye. If the
support provided by these strategic partners is not adequate, or if our BugsEye
customers are dissatisfied with the quality of the support they receive, our
relationship with these customers could be harmed, we may lose sales and our
reputation could be harmed. In addition, our strategy depends on our strategic
partners' ability to develop successful applications in which our solutions are
embedded, deliver them to market and implement them in a timely manner. If they
do not do so, or if we are not able to maintain good relationships with our
existing strategic partners or attract new strategic partners, our ability to
execute our growth strategy will be jeopardized.
WE MUST INTRODUCE NEW PRODUCTS AND SERVICES OR NEW VERSIONS OF OUR EXISTING
SOLUTIONS IN A TIMELY MANNER, WITH FEATURES AND FUNCTIONALITY THAT ARE
DESIRED BY OUR CURRENT AND POTENTIAL CUSTOMERS, IN ORDER TO INCREASE OUR
REVENUE OVER AN EXTENDED TIME PERIOD.
The features and functionality that we currently offer in our solutions, or
those that we may offer in the future, may not satisfy the requirements or
preferences of our current or potential customers or keep pace with
technological developments and emerging industry standards. We have obtained
feedback regarding the usefulness of our solutions from a relatively small
number of customers and this feedback may not be representative of market
demand. If we are unable to develop new solutions or enhancements to our
existing solutions in a timely and cost-effective manner, or if new solutions or
enhancements to our existing solutions do not achieve market acceptance, we may
not be able to sustain or accelerate our revenue growth or achieve and maintain
profitability. The life cycles of our solutions are difficult to predict because
the market for our solutions is new and emerging and characterized by rapid
technological change, changing customer needs and evolving industry standards.
The introduction by others of products or capabilities employing new
technologies or emerging industry standards could render our existing solutions
obsolete and unmarketable or shorten the life cycles of our existing solutions.
In the past, we have experienced delays in commercially releasing new
versions of our solutions. If commercial shipment of new releases of existing
solutions or of new solutions is delayed, we could experience customer
frustration and a delay or loss of revenue. Additionally, customers may delay
purchases of current versions of our solutions in anticipation of future
releases. If customers defer material purchase orders of our solutions in
anticipation of new releases, revenue may not be realized when expected, which
could negatively affect our operating results.
OUR SOLUTIONS MAY CONTAIN ERRORS OR DEFECTS, WHICH COULD RESULT IN A DELAY
OR DECLINE IN MARKET ACCEPTANCE OF OUR SOLUTIONS.
Our content creation and management solutions are complex and, accordingly,
may contain undetected errors or defects when first introduced or as new
versions are released, which may result in a delay or decline in market
acceptance of our solutions. We have in the past discovered errors and defects
in new releases of our
9
<PAGE> 12
existing solutions and in new solutions after their introduction. These errors
and defects have resulted in delayed revenue and customer frustration while we
were correcting them. We may in the future discover errors or defects in our
current solutions, new releases of current solutions or in new solutions. Even
if we correct errors or defects, our ESV strategic partners may not upgrade to
corrected versions of our solutions in a timely manner. In this case, they would
be shipping older versions of our solutions that do not contain corrections to
errors or defects.
WE COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS AND THIRD-PARTY
LIABILITY CLAIMS RELATED TO PRODUCTS AND SERVICES PURCHASED THROUGH AN
E-MARKETPLACE USING OUR SOLUTIONS, WHICH COULD BE TIME-CONSUMING AND
EXPENSIVE TO DEFEND.
A product liability claim or third-party liability claim brought against us
based on design or manufacturing defects of products purchased through an
e-marketplace using our solutions, even if not successful, would likely be
time-consuming and costly for us to defend. Although our customer licensing
agreements contain provisions designed to limit our exposure to these types of
claims, existing or future laws or unfavorable judicial decisions could negate
these limitation of liability provisions. In this event, we may not avoid civil
or criminal liability for problems related to the products and services sold
through our electronic catalogs.
The law relating to the liability of providers of electronic catalogs for
errors, defects or performance problems with respect to products and services
listed in those catalogs is unclear and unsettled. If we become subject to
liability due to these types of errors, defects or performance problems, we may
be required to discontinue certain product or service offerings or take
precautions to ensure that certain products or services are not available
through our electronic catalogs, either of which could result in reduced sales
by us and loss of revenue.
WE MAY FAIL TO IDENTIFY OR COMPLETE STRATEGIC ACQUISITIONS ON FAVORABLE
TERMS, IF AT ALL.
We may seek to acquire additional businesses, products or technologies in
order to further develop and expand our business. We have limited acquisition
experience, having completed only one acquisition to date. Our ability to
complete any additional acquisitions also could be hampered by our inability to
identify potential acquisition candidates, negotiate acceptable acquisition
agreements and, if necessary, obtain financing. We may not be able to acquire
desired targets on favorable terms, if at all.
If we consummate one or more significant acquisitions in which the
consideration consists of stock or other equity-related securities, your
investment could be significantly diluted. If we were to proceed with one or
more significant acquisitions in which the consideration included cash, we could
be required to use a substantial portion of our available cash, including
proceeds of this offering, to consummate any acquisition. If acquisition
financing is necessary, we may not be able to obtain it on favorable terms, or
at all. In addition, we may be required to amortize significant amounts of
goodwill and other intangible assets in connection with any future acquisitions,
which would diminish our ability to become profitable.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE ACQUISITIONS, WHICH COULD
THREATEN OUR FUTURE GROWTH.
Integrating an acquired business could cause significant diversions of
management time and resources. We may not successfully assimilate the
operations, technologies, products and personnel of the acquired companies. We
also risk impairing relationships with the employees, customers and suppliers of
the acquired business. In addition, acquisitions may involve entering markets in
which we have limited or no direct prior experience. Any of these factors could
disrupt our ongoing business and increase our expenses.
OUR SUCCESS DEPENDS ON RETAINING OUR CURRENT KEY PERSONNEL, WHO MAY LEAVE
US AT ANY TIME.
Our future performance depends on the continued service of our senior
management including, in particular, Barbara Mowry, our Chairman of the Board
and Chief Executive Officer, Louis Faust, III, our President and Chief Operating
Officer, Kathleen Cunningham, our Chief Financial Officer, Treasurer and
Assistant Corporate Secretary, Christopher Beall, our Chief Strategy and
Corporate Development Officer, and Michael Neal, our Chief Technology Officer.
None of our key personnel is bound by an employment agreement, and they may
leave
10
<PAGE> 13
us at any time. We do not carry key person life insurance. If we lose the
services of one or more of our key personnel, it could be costly and
time-consuming to replace them and our results of operations could suffer.
OUR SUCCESS DEPENDS ON OUR ABILITY TO HIRE AND RETAIN ADDITIONAL HIGHLY
SKILLED PERSONNEL.
Our future success depends on our continuing ability to attract, hire and
retain a substantial number of highly skilled managerial, technical, sales,
marketing and customer support personnel. We particularly need to hire
additional personnel to increase our sales, marketing, product development and
content creation organizations. In addition, new employees frequently require
extensive training before they achieve desired levels of productivity, which is
costly and time-consuming to provide. Competition for qualified skilled
personnel is intense, and we may fail to retain our skilled employees or to hire
or retain other highly qualified personnel, which could harm our ability to
maintain or increase our market share and grow our business.
IF WE ARE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY, OUR
COMPETITORS MAY GAIN ACCESS TO OUR TECHNOLOGY, WHICH WOULD IMPAIR OUR
COMPETITIVENESS. IN ADDITION, THE COST OF ENFORCING AND DEFENDING OUR
PROPRIETARY RIGHTS AND OF OBTAINING ANY NECESSARY LICENSES FROM THIRD
PARTIES MAY BE EXPENSIVE AND RESULT IN SIGNIFICANT LOSSES.
We depend on our ability to develop and maintain the proprietary aspects of
our technology, including RUS. We license rather than sell BugsEye and eMerge,
and require our customers to enter into licensing agreements that impose
restrictions on their ability to utilize these products. In addition, we seek to
avoid disclosure of our trade secrets through a number of means, including
requiring those persons with access to our proprietary information to execute
confidentiality agreements with us and restricting access to our source code. We
seek to protect our software, documentation and other written materials under
patent, trademark, trade secret and copyright laws, which may afford only
limited protection. None of our proprietary rights relating to our BugsEye,
eMerge and other solutions may be viable or of value in the future because the
validity, enforceability and type of protection of proprietary rights in
Internet-related and software industries is uncertain and still evolving.
We have one issued patent and five existing patent applications. Our patent
applications may not result in issued patents. Our current and future patents,
if any, may be successfully challenged or may not provide us with any
competitive advantages.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products and services or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
technology is difficult and expensive, and, while we are unable to determine the
extent to which piracy of our technology exists, piracy can be expected to be a
persistent problem. In addition, the laws of some other countries do not protect
our proprietary rights to the same extent as do the laws of the United States.
As we expand globally, our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology,
duplicate our solutions or design around patents issued to us or our other
intellectual property, which could result in increased competition in our market
and shorten the life cycle of our current or future solutions.
There has been a substantial amount of litigation in the Internet and
software industry regarding intellectual property rights. In the future, third
parties may claim that we or our current or potential future solutions infringe
upon their intellectual property rights. We expect that product developers and
providers of e-commerce solutions will increasingly be subject to infringement
claims as the number of products and competitors in our industry segment grows
and the functionality of products in different industry segments overlaps. Any
infringement claims brought against us, with or without merit, could be time
consuming to defend, result in costly litigation, damage our reputation, cause
product shipment delays or require us to enter into royalty or licensing
agreements to continue using the intellectual property at issue. Royalty or
licensing agreements, if required, may not be available on terms acceptable to
us or at all, which could jeopardize our business.
In addition, we may in the future need to license or otherwise obtain
access to intellectual property of third parties in order to compete
successfully. Our inability to license or otherwise obtain access to required
intellectual property of third parties on reasonable terms or at all may result
in our solutions becoming obsolete, resulting in decreased sales, which could
jeopardize our business.
11
<PAGE> 14
IF WE FAIL TO MANAGE OUR CURRENT AND ANTICIPATED FUTURE GROWTH AND
EXPANSION, OUR BUSINESS COULD SUFFER.
If we fail to effectively manage our current and anticipated future growth
and expansion, our business could be seriously harmed. During 2000, we have
hired 350 employees, increasing our total headcount to 499 as of August 25,
2000, and we plan to hire a significant number of employees in the future. We
also plan to expand the geographic scope of our customer base and operations. We
must effectively execute our operational and administrative procedures and
control processes, and be able to recruit, hire and retain qualified employees,
to manage this anticipated growth of our operations. This anticipated expansion
is expected to place a significant strain on our managerial, operational and
financial resources. Our management may be required to divert a disproportionate
amount of its attention away from day-to-day activities and to devote a
substantial amount of time to managing this anticipated expansion.
FACTORS RELATED TO INTERNATIONAL EXPANSION COULD IMPAIR OUR BUSINESS.
To be successful, we believe we must continue to expand our international
operations and hire additional international personnel. In particular, we expect
to commit significant resources to expand our international sales and marketing
activities. If we are unable to successfully expand internationally, our
business could suffer. Our ability to successfully expand internationally
depends on a number of factors, including:
-- difficulties in managing and staffing international operations;
-- currency exchange rate fluctuations;
-- difficulties managing linguistic and cultural differences, character
sets and dialects, including the creation of content in another
country's native language;
-- unexpected changes in regulatory requirements in other countries;
-- uncertain protection of intellectual property in other countries;
-- tariffs, export controls and other trade barriers;
-- longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
-- potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
-- the burdens of complying with a wide variety of, and potentially
inconsistent, laws in other countries; and
-- political instability.
OUR PRIMARY DEPENDENCE UPON A SINGLE LOCATION FOR PROVISION OF CONTENT
CREATION SERVICES MAKES US SUSCEPTIBLE TO DISRUPTION OF THESE SERVICES.
Our primary content creation facility is located in Toronto, Canada. At
this time, we do not have a sufficient alternate facility to our facility
located in Toronto for the processing of content. Any disruption to that
facility resulting from a natural disaster or work stoppage or other event could
result in an interruption of our content creation services which could impair
customer service and satisfaction.
SYSTEM FAILURE MAY CAUSE INTERRUPTION OF OUR SERVICES, WHICH MIGHT MAKE IT
DIFFICULT OR IMPOSSIBLE FOR US TO PROVIDE UNINTERRUPTED SERVICE TO OUR
CUSTOMERS.
The performance of our server and networking hardware and software
infrastructure is critical to our ability to store and manage content for those
customers for which we provide hosting services. Currently, our core
infrastructure and systems, including those necessary to deliver our products
and services to our customers, are located at one site in Denver, Colorado. We
currently do not have a disaster recovery plan in effect and do not have fully
redundant systems for our data and services at an alternate site. Any disruption
to this infrastructure resulting from a natural disaster or other event could
result in an interruption in our services, fewer transactions for those
customers to whom we provide hosting services and, if sustained or repeated,
could impair our reputation and the attractiveness of our services.
12
<PAGE> 15
RISKS RELATED TO THE INTERNET INDUSTRY
OUR GROWTH DEPENDS IN PART ON THE INCREASING USE OF THE INTERNET AND ON THE
GROWTH OF E-COMMERCE. IF THE USE OF THE INTERNET AND E-COMMERCE DO NOT GROW
AS ANTICIPATED, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION
MAY BE HARMED.
Our growth depends in part on the increased acceptance and use of the
Internet as a medium of commerce. Rapid growth in the acceptance and use of the
Internet is relatively recent. As a result, acceptance and use may not continue
to develop at historical rates and a sufficiently broad base of business
customers may not adopt or continue to use the Internet as a medium of commerce,
which could result in a decline in the use of our solutions. Demand and market
acceptance for recently introduced solutions over the Internet are subject to a
high level of uncertainty. If the Internet does not gain widespread acceptance
as a medium of commerce, our ability to sustain or accelerate revenue growth may
be harmed.
FAILURE OF THE INTERNET INFRASTRUCTURE TO EXPAND COULD LIMIT OUR FUTURE
GROWTH.
The recent growth in Internet traffic has caused frequent periods of
decreased performance, and, if Internet usage continues to grow rapidly, its
infrastructure may not be able to support the growing demand and its performance
and reliability may decline. If outages or delays on the Internet occur
frequently or increase in frequency, overall Internet usage, including use of
our solutions, could grow more slowly than expected or decline. Our ability to
increase the speed and scope of our solutions is ultimately limited by, and
depends upon, the speed and reliability of both the Internet and our customers'
internal networks. Consequently, the emergence and growth of the market for our
solutions depends upon improvements being made throughout the Internet as well
as to our individual customers' networking infrastructures to alleviate
overloading and congestion. If these improvements are not made, the ability of
our customers to utilize our solutions will be hindered, and we may be unable to
increase our revenue or achieve or sustain profitability.
SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR
CONDUCTING E-COMMERCE, WHICH COULD DELAY OR PREVENT BROAD MARKET ACCEPTANCE
OF OUR SOLUTIONS.
A significant barrier to the widespread acceptance of B2B e-commerce is the
secure transmission of confidential information from many sources over the
Internet, which is a public network. In the past, computer viruses that disable
or impair computers have been distributed and have rapidly spread over the
Internet. Computer viruses could be introduced into our systems or those of our
customers or suppliers, which could disrupt such systems or make them
inaccessible to customers or suppliers. In addition, unauthorized persons could
circumvent our security measures and misappropriate proprietary information or
cause interruptions in our services or operations. Advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments could result in compromises or breaches of network security
systems. Well-publicized compromises or breaches of security systems could have
the effect of substantially reducing the use of the Internet for commerce and
communications, which would delay or prevent broad market acceptance of our
solutions. We may be required to expend significant capital and other resources
to protect against the threat of security breaches or to alleviate problems
caused by breaches. Since some of our activities involve the storage and
transmission of proprietary information, security breaches could expose us to
litigation and possible liability, which could be expensive and time-consuming
to defend against and harm our reputation regardless of the outcome.
AN INCREASE IN GOVERNMENT REGULATION OR TAXATION COULD LIMIT THE MARKET
FOR, OR IMPOSE SALES OR OTHER TAXES ON, PRODUCTS AND SERVICES PURCHASED
USING OUR SOLUTIONS.
As Internet commerce evolves, federal, state or foreign agencies may adopt
regulations covering issues such as user privacy and the pricing, content and
quality of products and services sold over the Internet. It is possible that
legislation could expose companies involved in e-commerce to liability, which
could limit the growth of e-commerce generally and reduce the need for our
solutions, limiting our growth. Legislation could impede the growth in Internet
usage and decrease its acceptance as a communications and commercial medium. In
addition, legislation could be passed resulting in the additional taxation of
Internet-based transactions, which could
13
<PAGE> 16
discourage the use of the Internet and of our solutions. If enacted, these laws,
rules or regulations could limit the market for our solutions, making it more
difficult for us to maintain revenue growth and threaten our ability to achieve
and maintain profitability.
RISKS RELATED TO THIS OFFERING
IN THE FUTURE WE MAY NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE
AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL.
We expect that the net proceeds from the sale of common stock in this
offering, together with our existing working capital immediately prior to this
offering, will be sufficient to meet our working capital and operating resource
expenditure requirements for at least the next 12 months. After that, we may
need to raise additional funds and we cannot be certain that we will be able to
obtain additional financing on favorable terms, if at all. If we cannot raise
funds on acceptable terms, if and when needed, we may not be able to develop or
enhance our products and services, take advantage of future opportunities, grow
our business or respond to competitive pressures or anticipated or unanticipated
requirements.
OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
TO INVESTORS PURCHASING SHARES IN THIS OFFERING.
Prior to this offering, our common stock could not be bought or sold
publicly and an active public market for our common stock may not develop or be
sustained after this offering. We will negotiate and determine the initial
public offering price with the representatives of the underwriters based on
several factors, and the market price of our common stock after the offering may
vary from the initial public offering price. Consequently, you may be unable to
sell your shares of common stock at or above the initial public offering price.
The volatility of the market prices of the stock of software and Internet-based
companies is often not related to the operating performance of these companies.
The market price of our common stock may fluctuate significantly in response to
several factors, including the following, some of which are beyond our control:
-- variations in our quarterly operating results;
-- changes in securities market analysts' estimates of our financial
performance;
-- the number of freely tradable shares of our common stock;
-- changes in market valuations of similar companies;
-- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
-- the loss of a major customer or failure to complete an anticipated
significant transaction; and
-- departures of key personnel.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED
STOCK PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market prices of their
securities. We may in the future be the target of similar litigation. Securities
litigation could harm our reputation, result in substantial costs and divert our
management's attention and resources, regardless of the merits or outcome of the
case.
FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS COULD AFFECT OUR STOCK
PRICE.
If our existing stockholders sell substantial amounts of our common stock
in the public market following this offering, the market price of our common
stock could fall, potentially resulting in substantial losses to investors.
These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. Based on shares outstanding as of , 2000, upon
completion of this offering we will have outstanding shares of common
stock, assuming no exercise of options after , 2000, the conversion
of all shares of outstanding preferred stock into common stock
14
<PAGE> 17
and the exercise of all outstanding warrants to purchase our common stock or
preferred stock. Holders of approximately shares are subject to
agreements with the underwriters that restrict their ability to sell or transfer
their stock for 180 days from the date of this prospectus. Morgan Stanley & Co.
Incorporated, on behalf of the underwriters, may waive the restrictions on
transfer in these agreements during this period. When determining whether or not
to release stockholders from these agreements, Morgan Stanley & Co. Incorporated
may consider, among other factors, the number of shares proposed to be released
or for which the release is being requested, a stockholder's reasons for
requesting the release and any potential impact the release of the shares would
have on the public market and the trading price of our common stock. After these
agreements expire, approximately shares will be eligible for sale in
the public market assuming no exercise of stock options after ,
2000.
PURCHASERS IN THIS OFFERING WILL INCUR IMMEDIATE, SUBSTANTIAL DILUTION.
We expect that the initial public offering price of our common stock will
be substantially higher than the book value per share of our outstanding common
stock. As a result, investors purchasing common stock in this offering will
incur immediate and substantial dilution. In the past, we have issued options
and warrants to purchase our common stock at prices significantly below the
initial public offering price. To the extent these outstanding options and
warrants are ultimately exercised, there will be further dilution to investors
in this offering.
WE HAVE ADOPTED ANTITAKEOVER PROVISIONS THAT COULD MAKE IT MORE DIFFICULT
TO ACQUIRE US.
Our certificate of incorporation contains provisions that could make it
more difficult for a third party to acquire us without the consent of our board
of directors. In addition, our board of directors has approved amendments to our
certificate of incorporation and bylaws, which, subject to stockholder approval,
may delay or prevent a third party from acquiring us even if this change of
control would benefit our stockholders.
OUR MANAGEMENT HAS BROAD DISCRETION AS TO THE USE OF THE NET PROCEEDS FROM
THIS OFFERING.
Our management has broad discretion as to the use of the net proceeds that
we will receive from this offering. Our management may not apply these funds
effectively, and the net proceeds from this offering may not be invested to
yield a favorable return, which would have an adverse affect on our financial
condition.
OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
CONTROL US AND COULD LIMIT THE ABILITY OF OUR OTHER STOCKHOLDERS TO
INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER TRANSACTIONS
SUBMITTED FOR A VOTE OF OUR STOCKHOLDERS.
Upon completion of this offering, our executive officers, directors and
principal stockholders will beneficially own, in the aggregate, approximately
% of our outstanding common stock. As a result, these stockholders will be
able to exercise control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could have the effect of delaying or preventing a third
party from acquiring us.
15
<PAGE> 18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by words such as "may," "will," "might," "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," "could,"
"should," "continue" and similar expressions, including the singular or plural
forms of these expressions. You should read statements that contain these words
carefully because they discuss our expectations about our future performance,
contain projections of our future operating results or our future financial
condition, or state other "forward-looking" information. Because these
forward-looking statements involve risks and uncertainties, actual results could
differ materially from those expressed or implied by these forward-looking
statements.
Before you invest in our common stock, you should be aware that the
occurrence of any of the events described in these risk factors and elsewhere in
this prospectus could substantially harm our business, results of operations and
financial condition and that upon the occurrence of any of these events the
trading price of our common stock could decline and you could lose all or part
of your investment.
16
<PAGE> 19
USE OF PROCEEDS
We estimate that we will receive net proceeds of $ million from the
sale of the shares of common stock in this offering, at an assumed
initial public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be $ million.
We intend to use the net proceeds of the offering primarily for general
corporate purposes, including working capital and capital expenditures. We may,
if appropriate opportunities arise, use an undetermined portion of the net
proceeds to acquire or invest in complementary companies, products or
technologies. We do not currently have any agreements or commitments with
respect to any acquisition or investment. Pending these uses, the net proceeds
of the offering will be invested in short-term, investment grade,
interest-bearing investments or accounts.
DIVIDEND POLICY
We have never paid cash dividends on our common stock or our preferred
stock and do not anticipate paying cash dividends in the foreseeable future. We
currently intend to retain any future earnings to develop and expand our
business. We also may incur indebtedness in the future that may prohibit or
effectively restrict the payment of dividends on our common stock.
17
<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
-- on an actual basis;
-- on a pro forma basis to reflect the automatic conversion of all of
the outstanding shares of our preferred stock into 17,265,196 shares
of common stock upon the completion of this offering; and
-- on a pro forma as adjusted basis to give effect to the receipt of the
estimated net proceeds from our sale of common stock in this offering
at an assumed initial public offering price of $ per share and
after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the related notes to the consolidated financial
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Stockholders' equity:
Convertible preferred stock, $.001 par value per share
Series A, 506,130 shares authorized, 506,130 shares
issued and outstanding actual, no shares issued and
outstanding pro forma and pro forma as adjusted...... $ 271 $ -- $
Series B, 4,698,803 shares authorized, 4,678,176 shares
issued and outstanding actual, no shares issued and
outstanding pro forma and pro forma as adjusted...... 5,645 --
Series C, 4,432,176 shares authorized, 4,419,129 shares
issued and outstanding actual, no shares issued and
outstanding pro forma and pro forma as adjusted...... 6,776 --
Series D, 3,250,001 shares authorized, 3,249,998 shares
issued and outstanding actual, no shares issued and
outstanding pro forma and pro forma as adjusted...... 7,085 --
Series E, 4,786,766 shares authorized, 4,411,763 shares
issued and outstanding actual, no shares issued and
outstanding pro forma and pro forma as adjusted...... 24,968 --
Common stock, $.001 par value per share, 30,000,000 shares
authorized actual, 100,000,000 shares authorized pro
forma and pro forma as adjusted, 5,416,077 shares
issued and 5,371,077 shares outstanding actual,
22,681,273 shares issued and 22,636,273 shares
outstanding pro forma, shares issued and
shares outstanding pro forma as adjusted..... 5 22
Additional paid-in capital................................ 4,111 48,839
Treasury stock............................................ (255) (255)
Options and warrants...................................... 20,749 20,749
Deferred stock-based compensation......................... (18,482) (18,482)
Accumulated deficit....................................... (34,590) (34,590)
Accumulated other comprehensive income.................... 99 99
-------- -------- -------
Total stockholders' equity............................. 16,382 16,382
-------- -------- -------
Total capitalization................................. $ 16,382 $ 16,382 $
======== ======== =======
</TABLE>
18
<PAGE> 21
This table excludes the following:
-- 37,419 shares of common stock issuable directly or indirectly upon
exercise of outstanding warrants as of June 30, 2000, at a weighted
average exercise price of $1.43 per share; and
-- 5,895,000 shares of common stock reserved for issuance under our
incentive plans, of which 3,570,369 shares at a weighted average
exercise price of $2.06 per share were subject to outstanding options
as of June 30, 2000.
19
<PAGE> 22
DILUTION
Our pro forma net tangible book value as of June 30, 2000, was $15.9
million, or approximately $.70 per share. Pro forma net tangible book value is
defined as total assets minus the sum of liabilities and intangible assets. Pro
forma net tangible book value per share is defined as pro forma net tangible
book value divided by the total number of shares outstanding, assuming
conversion of all outstanding shares of preferred stock into common stock. After
giving effect to our sale of the shares offered hereby at an assumed initial
public offering price of $ per share, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value as of June 30, 2000, would have
been $ million, or $ per share. The following table illustrates the
pro forma increase in net tangible book value of $ per share and the
dilution, which is the difference between the offering price per share and pro
forma net tangible book value per share, to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of June 30,
2000................................................... $ .70
Increase per share attributable to new investors..........
-------
Pro forma net tangible book value per share after this
offering..................................................
-------
Dilution per share to new investors in this offering........ $
=======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 2000,
the differences between existing stockholders and the new investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid before deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 22,636,273 % $45,269,000 % $2.00
New investors..........................
---------- --- ----------- ---
Total........................ 100% $ 100%
========== === =========== ===
</TABLE>
In the discussion and tables above, we assume no exercise of any stock
options or warrants to purchase our common stock. As of June 30, 2000, there
were outstanding options to purchase a total of 3,570,369 shares of common stock
at a weighted average exercise price of $2.06 per share. In addition, there were
outstanding warrants to purchase a total of 37,419 shares of common stock. To
the extent that holders of these options and warrants exercise their outstanding
options and warrants, new investors will be further diluted.
20
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data should be read in
conjunction with, and is qualified by reference to, our consolidated financial
statements and the related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. We derived the selected consolidated financial data as of December
31, 1998 and 1999, and for the years ended December 31, 1997, 1998 and 1999,
from the audited consolidated financial statements included elsewhere in this
prospectus, which have been audited by Arthur Andersen LLP, independent public
accountants. We derived the selected financial data as of December 31, 1995,
1996 and 1997, and for the years ended December 31, 1995 and 1996, from
unaudited financial statements that are not included in this prospectus. The
selected financial data as of June 30, 2000, and for the six months ended June
30, 1999 and 2000, is derived from unaudited financial statements included
elsewhere in this prospectus. The selected financial data as of June 30, 1999,
is derived from unaudited financial statements that are not included in this
prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, which we consider necessary for
the fair presentation of our financial position and results of operations for
these periods. Operating results for the six months ended June 30, 2000, are not
necessarily indicative of the results we will experience for the entire year.
Historical results are not necessarily indicative of the results to be expected
in the future. Please see Note 2 in the notes to our consolidated financial
statements for the method of computing pro forma basic and diluted net loss per
share.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
----- ------- ------- ------- -------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue............................ $ 93 $ 40 $ 217 $ 1,387 $ 7,299 $ 2,558 $14,186
Operating expenses................. 568 2,468 5,346 7,520 19,465 5,938 23,194
----- ------- ------- ------- -------- ------- -------
Loss from operations............... (475) (2,428) (5,129) (6,133) (12,166) (3,380) (9,008)
Net loss........................... $(503) $(2,390) $(5,028) $(5,909) $(11,691) $(3,306) $(8,695)
===== ======= ======= ======= ======== ======= =======
Net loss per share, basic and
diluted.......................... $(.30) $ (.88) $ (1.98) $ (2.06) $ (3.01) $ (.97) $ (1.70)
===== ======= ======= ======= ======== ======= =======
Weighted averaged common shares
outstanding, basic and diluted... 1,687 2,701 2,543 2,873 3,882 3,398 5,103
Pro forma (unaudited):
Net loss per share, basic and
diluted....................... $ (.66) $ (.21) $ (.39)
======== ======= =======
Weighted average common shares
outstanding, basic and
diluted....................... 17,831 16,029 22,169
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------ ------ ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......... $ 2 $ 1,027 $4,422 $6,662 $22,541 $ 4,495 $19,247
Working capital................... (416) 767 3,903 5,480 20,707 1,232 8,951
Total assets...................... 22 1,331 5,296 8,852 29,309 10,471 32,576
Total liabilities................. 421 410 934 2,701 6,316 7,245 16,194
Total stockholders' equity........ (399) 921 4,362 6,151 22,993 3,226 16,382
</TABLE>
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
included elsewhere in this prospectus. In addition to historical information,
the discussion in this prospectus contains certain forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated by these forward-looking statements due to factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
We were founded in November 1993 with a strategy to develop a procurement
application and associated content services. In February 1998, we significantly
altered our strategy to provide comprehensive solutions to create, manage and
find product and service information in electronic catalogs. Our suite of
software products and catalog services enables suppliers and e-marketplaces to
create and dynamically manage information on a wide range of products and
services, and allows buyers to quickly and easily find information on the
products and services they wish to buy. We have formed strategic partnerships
with ESVs to offer a seamless electronic procurement solution to their customers
by integrating our electronic catalog products into their solutions. We sell to
buyers, suppliers and e-marketplaces through a direct sales force in North
America and Europe and indirectly through our strategic partners.
In April 1998, we acquired Antaeus Systems, Inc., a content creation
services company headquartered in Toronto, Canada. Antaeus had developed a
product called Heritage, which employed technology to extract data from
engineering drawings into manufacturing parts databases. Antaeus had seven
customers, some of which remain our customers, including The Boeing Company and
Ingersoll-Rand Company. Our content creation services have been available to
buyers, suppliers and e-marketplaces since the acquisition of Antaeus.
We began developing our BugsEye finding technology in late 1997 and began
to license it in the fourth quarter of 1998 to large ESVs, such as Oracle and
SAP, and to suppliers, such as W.W. Grainger, Inc. These ESVs incorporate
BugsEye into their procurement applications for which they pay us some
combination of license, maintenance and royalty fees. Suppliers use BugsEye to
allow their customers to find product information in electronic catalogs over
the Internet, for which they pay us some combination of license, maintenance and
transaction fees.
Our content management offerings include eMerge, first released in the
third quarter of 1999, the use of RUS and the management of unified catalogs.
Our content management customers often are referred to us by our ESV partners.
In addition, we create content and manage content repositories for
e-marketplaces, for which they pay us content creation fees and recurring
content management fees. Some of these arrangements also include transaction fee
revenue and, in some cases, we may receive an equity interest in our
e-marketplace customers.
REVENUE
Through June 30, 2000, our revenue principally has been derived from:
-- content management products and services;
-- content creation services;
-- royalties from and licenses of our BugsEye technology; and
-- engineering and consulting services, including implementation and
training services.
Content management revenue consists of fees from buyers, suppliers and
e-marketplaces that have contracted with us to manage their electronic catalogs.
We derive content management revenue from licensing eMerge and RUS and from
managing our customers' unified catalogs. We generally charge for content
management on a fixed annual fee basis or based on the number of items in the
catalog, the number of supplier catalogs the customer places into its unified
catalog, and, in some cases, on the total number of users of the
22
<PAGE> 25
catalog. We also expect to derive content management revenue in the future from
e-marketplaces through transaction-based fees. Revenue from content management
and the related implementation is recognized ratably over the term of the
contract.
We also derive revenue from content creation services, which consist of
converting electronic or paper-based product and service information into a
unified electronic catalog in order to enable our customers' B2B e-commerce
activities. We provide content creation services to buyers, suppliers and
e-marketplaces. We generally charge for content creation services on a per
catalog item basis. Content creation revenue is recognized when the content is
delivered to the customer unless there is an acceptance period. If an acceptance
period is present in the agreement, revenue is recognized upon the earlier to
occur of customer acceptance or the expiration of the acceptance period.
Our royalty and license fee revenue has been derived primarily from
licensing BugsEye to our ESV partners for integration into their procurement
applications. We account for our revenue from the licensing of software and
performance of related services in compliance with Statement of Position, or
SOP, 97-2, "Software Revenue Recognition." SOP 97-2 generally provides that
revenue earned from software arrangements involving multiple elements should be
allocated to each element based on the fair value of the elements. We generally
bundle our license fees and subsequent maintenance and do not sell the various
elements of our licensing agreements separately. In these situations, royalty
and license fee revenue is deferred and recognized ratably over the term of the
contract. In those circumstances in which we are able to unbundle the various
elements of a software arrangement, software license fee revenue is recognized
when the contract is signed, the software has been delivered, our fee is fixed
and collectability is probable.
We receive engineering fees for integrating BugsEye into an ESV's software,
and we receive consulting fees associated with implementing content management
products and services. These fees are deferred and recognized ratably over the
term of the license or content management agreement. If engineering or
consulting services are performed in conjunction with another revenue stream
such as license fees or content management, the related revenue is deferred and
recognized ratably over the same term as the license fee or content management
term. If consulting services are separately purchased, these fees are recognized
as the services are performed unless there is an acceptance period. If an
acceptance period is present in the agreement, revenue is recognized upon the
earlier to occur of customer acceptance or the expiration of the acceptance
period.
For all periods presented, we have adopted the provisions of the Securities
and Exchange Commission's Staff Accounting Bulletin, or SAB, No. 101, "Revenue
Recognition." SAB No. 101 provides interpretive guidance on the recognition,
presentation and disclosure of revenue in financial statements.
We believe our current revenue recognition policies and practices are
consistent with the provisions of SAB No. 101 and SOP 97-2, as amended by SOP
98-4 and SOP 98-9, which were issued by the American Institute of Certified
Public Accountants. Implementation guidelines for these standards, as well as
potential new standards, could result in unanticipated changes to our current
revenue recognition policies. These changes could affect the timing of our
future revenue recognition and results of operations.
OPERATING EXPENSES
Our operating expenses are classified into five categories: cost of
operations, selling and marketing, research and development, general and
administrative and stock-based compensation. Each of these categories includes
related salaries and commissions, employee benefits, bonuses, travel and
entertainment costs, communications costs and third-party professional services
fees. We allocate the total costs for overhead and facilities based on headcount
to each of the functional areas that benefit from the overhead and facilities
services. These allocated charges include facility costs, communication charges
and depreciation expense for office furniture and equipment. Cost of operations
also includes costs associated with our content creation facility in Toronto, as
well as salaries and related expenses for our customer support, implementation
and training service organizations. In addition, selling and marketing expenses
include expenditures specific to the sales force and to the marketing group,
such as commissions, public relations and advertising, trade shows and marketing
collateral materials. To date, all research and software development costs have
been expensed in the period incurred. General and
23
<PAGE> 26
administrative expenses include expenses related to executive staff, legal and
accounting services, corporate finance, investor relations, facilities and human
resource personnel.
Stock-based compensation includes the amortization, over the vesting
periods, of deferred compensation for stock options granted to employees with an
exercise price lower than the deemed fair value of the common stock for
accounting purposes on the date the options were granted. Stock-based
compensation also includes expenses recognized for the issuance of equity
instruments issued directly to employees and non-employees in consideration of
services performed by non-employees, for employee severance costs, executive
bonuses paid in stock and for the earn-out arrangements from our acquisition of
Antaeus. In connection with granting stock options to our employees, we recorded
deferred stock-based compensation, net of adjustments for terminated employees,
totaling approximately $20.7 million as of June 30, 2000. This amount represents
the difference between the exercise price and the deemed fair value of our
common stock for accounting purposes on the date these stock options were
granted. This amount is included as a component of stockholders' equity and is
being amortized over the vesting period of the options on a straight-line basis.
We recorded option-related stock-based compensation amortization expense of $0
in 1997, $74,000 in 1998, $765,000 in 1999 and $251,000 and $1.4 million for the
six months ended June 30, 1999 and June 30, 2000, respectively. As of June 30,
2000, we had an aggregate of $18.5 million of deferred stock-based compensation
remaining to be amortized. The amortization of the remaining deferred
stock-based compensation will result in additional charges to operations through
2007.
We have issued various equity instruments to employees and non-employees
that have resulted in stock-based compensation in addition to that resulting
from grants of options to employees. We recorded stock-based compensation of
$19,000 in 1997, $126,000 in 1998, $2.8 million in 1999 and $75,000 and $464,000
for the six months ended June 30, 1999 and 2000, for stock issued in
consideration of services performed by non-employees, for employee severance
costs, executive bonuses paid in stock, and for compensation expense related to
earn-out arrangements from our acquisition of Antaeus. Combined with the
amortization of deferred compensation expenses from the grant of options for
common stock to employees, these stock-based compensation expenses are
classified as a separate component of operating expenses in our consolidated
statements of operations.
OTHER INCOME, NET
Other income, net, is primarily derived from income earned on investments
and interest expense. Cash balances during the period varied from $1.3 million
in the second quarter of 1998 to a high of $26.0 million in the third quarter of
1999, after we completed a private placement of our preferred stock.
QUARTERLY RESULTS OF OPERATIONS
Our limited operating history under our current business model makes the
prediction of future operating results very difficult. We believe that
period-to-period comparisons of operating results should not be relied upon as
predictive of future performance. Our prospects must be considered in light of
the risks, expenses and difficulties encountered by companies in new and rapidly
evolving markets. We may not be successful in addressing these risks and
difficulties. Although we have experienced significant percentage growth in
revenue in recent periods, we do not believe that prior growth rates are
sustainable or indicative of future operating results.
24
<PAGE> 27
The following tables set forth consolidated statement of operations data
for each of the ten quarters ended June 30, 2000, as well as the percentage of
our total revenue represented by each item. This information has been derived
from our unaudited consolidated financial statements. The unaudited consolidated
financial statements have been prepared on the same basis as the audited
consolidated financial statements contained in this prospectus and include all
adjustments, consisting only of normal recurring adjustments, which we consider
necessary for the fair presentation of our financial position and results of
operations for these periods. You should read this information in conjunction
with our audited consolidated financial statements and related notes appearing
elsewhere in this prospectus. You should not draw any conclusions about our
future results from the results of operations for any quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Content management fees.................... $ -- $ -- $ -- $ -- $ --
Content creation fees...................... -- 285 331 326 182
Royalty and license fees................... 36 31 29 212 314
Engineering and consulting fees............ 4 -- 28 105 285
------- ------- ------- ------- -------
Total revenue........................ 40 316 388 643 781
Operating expenses:
Cost of operations......................... 612 608 678 417 545
Selling and marketing...................... 473 365 282 698 551
Research and development................... 477 457 542 473 618
General and administrative................. 231 292 373 342 504
Stock-based compensation................... 2 1 17 180 160
------- ------- ------- ------- -------
Total operating expenses............. 1,795 1,723 1,892 2,110 2,378
------- ------- ------- ------- -------
Loss from operations........................ (1,755) (1,407) (1,504) (1,467) (1,597)
Other income, net........................... 39 14 99 72 58
------- ------- ------- ------- -------
Net loss.................................... $(1,716) $(1,393) $(1,405) $(1,395) $(1,539)
======= ======= ======= ======= =======
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
1999 1999 1999 2000 2000
-------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Content management fees.................... $ -- $ -- $ 81 $ 223 $ 642
Content creation fees...................... 1,064 1,235 869 1,009 2,139
Royalty and license fees................... 294 928 1,171 4,859 4,883
Engineering and consulting fees............ 419 192 265 57 374
------- ------- ------- ------- -------
Total revenue........................ 1,777 2,355 2,386 6,148 8,038
Operating expenses:
Cost of operations......................... 1,077 1,529 1,792 2,445 3,670
Selling and marketing...................... 913 1,324 2,196 3,378 6,246
Research and development................... 658 788 1,104 1,074 1,163
General and administrative................. 746 686 894 1,438 1,933
Stock-based compensation................... 166 460 2,754 998 849
------- ------- ------- ------- -------
Total operating expenses............. 3,560 4,787 8,740 9,333 13,861
------- ------- ------- ------- -------
Loss from operations........................ (1,783) (2,432) (6,354) (3,185) (5,823)
Other income, net........................... 16 82 319 254 59
------- ------- ------- ------- -------
Net loss.................................... $(1,767) $(2,350) $(6,035) $(2,931) $(5,764)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
Content management fees........ --% --% --% --% --%
Content creation fees.......... -- 90 85 51 23
Royalty and license fees....... 90 10 8 33 40
Engineering and consulting
fees......................... 10 -- 7 16 37
------ ---- ---- ---- ----
Total revenue............ 100 100 100 100 100
Operating expenses:
Cost of operations............. 1,530 192 175 65 70
Selling and marketing.......... 1,182 116 73 108 71
Research and development....... 1,193 145 140 74 79
General and administrative..... 578 92 96 53 64
Stock-based compensation....... 5 -- 4 28 20
------ ---- ---- ---- ----
Total operating
expenses............... 4,488 545 488 328 304
------ ---- ---- ---- ----
Loss from operations............ (4,388) (445) (388) (228) (204)
Other income, net............... 98 4 26 11 7
------ ---- ---- ---- ----
Net loss........................ (4,290)% (441)% (362)% (217)% (197)%
====== ==== ==== ==== ====
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
1999 1999 1999 2000 2000
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
Content management fees........ --% --% 3% 4% 8%
Content creation fees.......... 60 53 37 16 26
Royalty and license fees....... 16 39 49 79 61
Engineering and consulting
fees......................... 24 8 11 1 5
---- ---- ---- --- ---
Total revenue............ 100 100 100 100 100
Operating expenses:
Cost of operations............. 61 65 75 40 46
Selling and marketing.......... 51 56 92 55 78
Research and development....... 37 33 46 18 14
General and administrative..... 42 29 38 23 24
Stock-based compensation....... 9 20 115 16 10
---- ---- ---- --- ---
Total operating
expenses............... 200 203 366 152 172
---- ---- ---- --- ---
Loss from operations............ (100) (103) (266) (52) (72)
Other income, net............... 1 3 13 4 1
---- ---- ---- --- ---
Net loss........................ (99)% (100)% (253)% (48)% (71)%
==== ==== ==== === ===
</TABLE>
COMPARISON OF TEN QUARTERS ENDED JUNE 30, 2000
REVENUE
Content Management Fees. We began marketing our content management solution
in the third quarter of 1999, after our ESV partners had released and began
selling procurement applications into which our BugsEye product is integrated.
These partnerships allow us to provide our content management solution to our
25
<PAGE> 28
ESV partners' end users, who are primarily buyers. We also derived revenue from
providing content management solutions to suppliers and e-marketplaces. In the
fourth quarter of 1999, we began recognizing revenue from two content management
customers, and as of June 30, 2000, we had recognized content management revenue
from a total of 27 customers.
Content Creation Fees. Our content creation revenue fluctuated in 1998 and
1999 due to the small number of customers from which we earned this revenue.
During 1998 and the first quarter of 1999, we de-emphasized content creation
services which were then provided through Antaeus' Heritage offering. Such fees
increased in the second quarter of 1999 with the implementation of our content
management offering.
Royalty and License Fees. Our royalty and license fee revenue increased in
each of the ten quarters ended June 30, 2000, except during the second and third
quarters of 1998 and the second quarter of 1999. These fluctuations were due to
the small number of customers from which we earned this revenue. The number of
our ESV partners increased from zero in 1998 to five as of June 30, 2000, and
led to significant increases in royalty and license fee revenue from licensing
our BugsEye product. In March 2000, we amended an agreement with a strategic ESV
partner to provide for a specified annual fee, payable in advance, for the
continued integration of our technology into its procurement application for a
five year term. The first payment was billed in March 2000 and is being
recognized ratably over the remainder of the year.
Engineering and Consulting Fees. Our engineering and consulting fees in
late 1998 and early 1999 primarily were derived from a single customer
contracting for engineering work. This work was performed under separate
arrangements, each with an acceptance period. The majority of this work was
completed and accepted in the first and second quarters of 1999 and the second
quarter of 2000, at which time revenue was recognized. Engineering and
consulting fees also included integration work for our ESV partners.
OPERATING EXPENSES
Cost of Operations. During the ten quarters ended June 30, 2000, our
content creation, implementation, technical support and training personnel costs
grew from $417,000 during the fourth quarter of 1998 to $3.7 million during the
second quarter of 2000, due primarily to the addition of personnel and the
expansion of our content creation facility. Our cost of operations during the
first three quarters of 1998 was essentially unchanged because Antaeus supported
approximately the same number of customers in each of these quarters. During the
fourth quarter of 1998, cost of operations declined as we restructured our
operations and repositioned our product offerings. Cost of operations increased
in each of the six quarters ended June 30, 2000. In the first and second
quarters of 1999, we began to accelerate the hiring of additional content
creation, implementation and technical support personnel. In the fourth quarter
of 1999, we began to hire training personnel to provide training services to
customers and ESV partners. We believe these expenses will continue to increase
in absolute dollars since we expect to continue to expand our services.
Selling and Marketing. Selling and marketing expenses declined during the
first three quarters of 1998 as we repositioned our product line. Our selling
and marketing expenses increased in each of the five quarters ended June 30,
2000. The increases primarily were attributable to the hiring of additional
marketing and sales personnel, the addition of our international sales office in
London, increased sales commissions, expanded marketing and advertising programs
for trade shows and the establishment of our regional sales offices in Atlanta
and Indianapolis. During this five quarter period, selling and marketing
expenses increased from $551,000 in the first quarter of 1999 to $6.2 million in
the second quarter of 2000 as a result of increasing our total sales force and
marketing headcount and due to increases in media and advertising expense. We
believe these expenses will continue to increase in absolute dollar amounts in
future periods since we expect to continue to expand our selling and marketing
efforts.
Research and Development. Research and development expenses were
essentially unchanged during 1998. Our research and development expenses
generally increased in the four quarters ended December 31, 1999. These expenses
increased from $473,000 during the fourth quarter of 1998 to $1.2 million during
the second quarter of 2000. During this period, we increased the number of
research and development personnel to develop subsequent releases of our
products, RUS and our proprietary internal content creation software tools.
Research and development expenses declined slightly in the first quarter of 2000
to $1.1 million, due to reorganization of a
26
<PAGE> 29
small division, and increased again in the second quarter of 2000. The market
for qualified people in this area is competitive, and costs associated with
finding and retaining qualified personnel are high. The increased number of
personnel and the higher cost per person contributed to our increases in
research and development expenses. We believe that continued investment in
research and development is critical to attaining our strategic objectives, and,
as a result, we expect research and development expenses to increase
significantly in future periods.
General and Administrative. During the first three quarters of 1998,
general and administrative expenses increased primarily as a result of the
hiring of additional personnel. During the fourth quarter of 1998, general and
administrative expenses decreased slightly. General and administrative expenses
increased in the first and second quarters of 1999 due to the hiring of
additional personnel and higher legal expenses associated with contracts and
consulting fees in evaluating the European market, and declined slightly in the
third quarter of 1999, largely due to lower legal expenses. General and
administrative expenses further increased in each of the three quarters ended
June 30, 2000, as a result of the addition of finance, information technology,
investor relations and administrative personnel, increased legal expenses, and
the purchase and implementation of our financial and human resource system
infrastructure. We believe general and administrative expenses will increase in
absolute dollars, as we expect to add personnel to support our expanding
operations, incur additional costs related to the growth of our business and
assume the responsibilities of a public company.
Stock-Based Compensation. Stock-based compensation has increased in most
quarters, primarily resulting from the earn-out from our acquisition of Antaeus
and the increase in the issuance of options to our employees as our employee
base grows, as well as the increase in deemed fair value of our common stock for
accounting purposes. Assuming no forfeitures, we will recognize additional
compensation expense of $2.5 million for the remainder of 2000, $4.9 million in
2001, $4.9 million in 2002, $4.3 million in 2003, $1.5 million in 2004, $235,000
in 2005, and $177,000 thereafter, relating to the amortization of our deferred
compensation.
OTHER INCOME, NET
Other income, net, has varied during the ten quarters ended June 30, 2000,
depending upon the level of cash invested and the interest income earned on such
investments. Interest rates remained generally unchanged during the ten-quarter
period.
27
<PAGE> 30
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data
for each of the periods indicated as a percentage of total revenue represented
by each item.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ---------------
1997 1998 1999 1999 2000
------ ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Content management fees......................... --% --% 1% --% 6%
Content creation fees........................... 47 68 46 49 22
Royalty and license fees........................ 46 22 37 24 69
Engineering and consulting fees................. 7 10 16 27 3
------ ---- ---- ---- ---
Total revenue........................... 100 100 100 100 100
Operating expenses:
Cost of operations.............................. 601 167 68 63 43
Selling and marketing........................... 530 131 68 57 68
Research and development........................ 935 141 43 50 15
General and administrative...................... 389 89 39 49 24
Stock-based compensation........................ 9 14 49 13 13
------ ---- ---- ---- ---
Total operating expenses................ 2,464 542 267 232 163
------ ---- ---- ---- ---
Loss from operations.............................. (2,364) (442) (167) (132) (63)
Other income, net................................. 47 16 7 3 2
------ ---- ---- ---- ---
Net loss.......................................... (2,317)% (426)% (160)% (129)% (61)%
====== ==== ==== ==== ===
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 2000
REVENUE
Content Management Fees. Content management revenue increased from $0 for
the six months ended June 30, 1999, to $865,000 for the six months ended June
30, 2000. In the third quarter of 1999, we commenced marketing and selling our
content management solution. As of June 30, 2000, we had provided content
management services to a total of 27 customers.
Content Creation Fees. Content creation revenue increased from $1.2 million
for the six months ended June 30, 1999, to $3.1 million for the six months ended
June 30, 2000. This increase primarily was attributable to expanding our
strategy into e-marketplaces and creating unified catalogs for buyers and
suppliers. For the six months ended June 30, 1999, two customers accounted for
88% of content creation revenue, and for the six months ended June 30, 2000, six
customers accounted for 95% of content creation revenue.
Royalty and License Fees. Royalty and license fee revenue increased from
$608,000 for the six months ended June 30, 1999, to $9.7 million for the six
months ended June 30, 2000. This increase primarily was attributable to license
fees related to a strategic agreement with an ESV. In the six months ended June
30, 1999, two customers accounted for 90% of license fee revenue, and for the
six months ended June 30, 2000, one customer accounted for 96% of license fee
revenue.
Engineering and Consulting Fees. Engineering and consulting fee revenue
decreased from $704,000 for the six months ended June 30, 1999, to $431,000 for
the six months ended June 30, 2000. This decrease primarily was attributable to
one customer contracting for special engineering services under a statement of
work that had acceptance criteria. The revenue associated with this customer
represented $601,000 of the $704,000 total engineering and consulting fees
revenue in the six months ended June 30, 1999. In the six months ended June 30,
2000, the services provided were in conjunction with integrating our products
into our ESV partners' e-procurement applications, implementing content
management products and providing special engineering
28
<PAGE> 31
services under a statement of work with acceptance criteria. The integration and
implementation fees are recognized ratably over the term of the contract for the
license fees on content management agreements.
During the six months ended June 30, 1999, two customers each accounted for
more than 10% of total revenue, and, in the six months ended June 30, 2000, one
customer accounted for more than 10% of total revenue. Revenue from
international sales was insignificant for the six months ended June 30, 1999,
and $9.4 million for the six months ended June 30, 2000. Revenue from
international sales during the six months ended June 30, 2000, was derived from
sales in Germany and the United Kingdom.
OPERATING EXPENSES
Cost of Operations. Cost of operations increased from $1.6 million for the
six months ended June 30, 1999, to $6.1 million for the six months ended June
30, 2000. This increase primarily was attributable to an increase in the number
of content creation personnel and additional expense due to facilities
expansion.
Selling and Marketing. Selling and marketing expenses increased from $1.5
million for the six months ended June 30, 1999, to $9.6 million for the six
months ended June 30, 2000. This increase primarily was attributable to hiring
additional selling and marketing personnel, the addition of our international
sales office in London, increased sales commissions, expanded marketing programs
for trade shows, increased advertising and the expansion of our regional sales
offices.
Research and Development. Research and development expenses increased from
$1.3 million for the six months ended June 30, 1999, to $2.2 million for the six
months ended June 30, 2000. The increase primarily was attributable to an
increase in the number of research and development personnel.
General and Administrative. General and administrative expenses increased
from $1.3 million for the six months ended June 30, 1999, to $3.4 million for
the six months ended June 30, 2000. This increase primarily was attributable to
an increase in the number of administrative personnel, higher professional
services fees, and, to a lesser extent, to increased communication costs,
particularly in our remote and international offices, the costs of our financial
and human resource systems and increased facility costs.
Stock-Based Compensation. Stock-based compensation increased from $326,000
for the six months ended June 30, 1999, to $1.8 million for the six months ended
June 30, 2000. The increase was due to the increase in the number of stock
options issued to employees as our employee base increased and the increase in
the deemed fair value of our common stock for accounting purposes as compared to
the exercise price.
OTHER INCOME, NET
Other income, net, increased from $74,000 for the six months ended June 30,
1999, to $313,000 for the six months ended June 30, 2000. This increase was
attributable to increases in interest income during the six months ended June
30, 2000, which resulted from higher levels of cash and income from short-term
investments during the six months ended June 30, 2000, due to a $25.0 million
private placement of our preferred stock in September 1999.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
REVENUE
Content Management Fees. Content management revenue increased from $0 in
1997 and 1998 to $81,000 in 1999. This increase was due to the fact that we
started to market and sell content management solutions in 1999. As of December
31, 1999, we had two content management customers generating revenue.
Content Creation Fees. Content creation revenue increased from $102,000 in
1997 to $942,000 in 1998 to $3.4 million in 1999. In 1998, this revenue
primarily was attributable to conversion work for seven Heritage customers,
formerly Antaeus customers, for which data was extracted from mechanical
drawings into manufacturers' parts databases. In 1998, one customer accounted
for 80% of our content creation revenue. In 1999, our content creation fees
increased due to content creation services performed for e-marketplaces and
customers of
29
<PAGE> 32
our content management services. In 1999, one e-marketplace customer accounted
for 78% of our content creation revenue.
Royalty and License Fees. Royalty and license fee revenue increased from
$100,000 in 1997 to $308,000 in 1998 to $2.7 million in 1999. These increases
primarily were attributable to an ESV agreement. During 1998, two customers
accounted for 81% of total royalty and license fee revenue and, during 1999, two
customers, one of which was a new customer, accounted for 89% of royalty and
license fee revenue.
Engineering and Consulting Fees. Engineering and consulting fee revenue
increased from $15,000 in 1997 to $137,000 in 1998 to $1.2 million in 1999.
These increases primarily were attributable to one customer contracting for
special engineering services. This work was performed during 1998 and 1999, but
was not accepted until 1999, at which time the revenue was recognized.
OPERATING EXPENSES
Cost of Operations. Cost of operations increased from $1.3 million in 1997
to $2.3 million in 1998 to $4.9 million in 1999. These increases primarily were
attributable to increases in the number of content creation personnel.
Selling and Marketing. Selling and marketing expenses increased from $1.2
million in 1997 to $1.8 million in 1998 to $5.0 million in 1999. These increases
primarily were attributable to a larger number of selling and marketing
personnel, the opening of our London office in 1999 and to increases in sales
commissions and marketing program spending.
Research and Development. Research and development expenses decreased from
$2.0 million in 1997 to $1.9 million in 1998, and increased to $3.2 million in
1999. The decrease from 1997 to 1998 was due to our change in business strategy,
which resulted in reducing a portion of our development staff. The increase from
1998 to 1999 was attributable to an increased number of research and development
personnel.
General and Administrative. General and administrative expenses increased
from $844,000 in 1997 to $1.2 million in 1998 to $2.8 million in 1999. These
increases primarily were attributable to the increase in the number of general
and administrative personnel.
Stock-Based Compensation. Stock-based compensation increased from $19,000
in 1997 to $200,000 in 1998, and increased to $3.5 million in 1999. These
increases were due primarily to recognizing $2.4 million of compensation expense
in 1999 for the earn-out arrangement from our acquisition of Antaeus, the
increase in the amount of stock options issued to employees as our employee base
increased and the increase in the deemed fair value of our common stock for
accounting purposes as compared to the exercise price.
OTHER INCOME, NET
Other income, net, increased from $101,000 in 1997 to $224,000 in 1998 to
$475,000 in 1999. These increases primarily were attributable to an increase in
interest income derived from deposits in our operating and investment accounts
and to a higher level of investment income derived from a $6.8 million private
placement of our preferred stock completed in July 1998 and a $25.0 million
private placement of our preferred stock completed in September 1999.
PROVISION FOR INCOME TAXES
We have incurred operating losses for all periods from inception through
June 30, 2000, and expect to incur additional losses in the future. We have
recorded a valuation allowance for the full amount of our net deferred tax
assets, as the future realization of the tax benefit is not currently likely,
and, therefore, we have not recorded a tax benefit for our losses.
As of December 31, 1999, we had net operating loss carry-forwards for tax
purposes of approximately $19.3 million. These tax loss carry-forwards are
available to reduce future taxable income and expire at various dates into 2019.
Under the provisions of the Internal Revenue Code, certain substantial changes
in our ownership
30
<PAGE> 33
may limit the amount of net operating loss carry-forwards that could be utilized
annually in the future to offset taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through private sales of
our preferred and common stock, with aggregate net proceeds of $45.3 million. As
of June 30, 2000, we had $19.2 million in cash and cash equivalents and $9.0
million in working capital.
Net cash used in operating activities was $4.7 million in 1997, $4.6
million in 1998, $6.6 million in 1999 and $746,000 in the six months ended June
30, 1999. In the six months ended June 30, 2000, net cash provided by operating
activities was $2.7 million. Net cash flows from operating activities in each
period reflected increases in net losses and accounts receivable offset by
increases in stock-based compensation, amortization of deferred compensation and
deferred revenue. Net cash provided by operating activities in the six months
ended June 30, 2000, reflected an increase of $6.9 million of deferred revenue.
Net cash used in investing activities was $518,000 in 1997, $291,000 in
1998, $2.2 million in 1999, $1.2 million in the six months ended June 30, 1999,
and $5.8 million in the six months ended June 30, 2000, which consisted entirely
of capital expenditures. Our capital expenditures were for purchases of
operating resources, including computer hardware and software, office furniture
and equipment and leasehold improvements. We expect that our capital
expenditures will continue to increase in the future. Since inception, we have
generally funded capital expenditures either through the use of working capital
or with capital leases.
Net cash from financing activities was $8.6 million in 1997, $7.1 million
in 1998 and $24.7 million in 1999. Our financing activities required cash of
$133,000 in the six months ended June 30, 1999, and $210,000 in the six months
ended June 30, 2000. These net cash flows primarily reflected proceeds from
private placements of our preferred stock, issuances of common stock pursuant to
the exercise of options, the repayment of capital leases and deferred costs
related to this offering.
We expect to experience significant growth in our operating expenses in the
foreseeable future, particularly for operations, research and development,
selling and marketing and investment in content creation facilities, in order to
execute our business plan. As a result, we anticipate that our operating
expenses, as well as planned capital expenditures, will constitute a material
use of our cash resources. In addition, we may utilize cash resources to fund
acquisitions or investments in complementary businesses, technologies or product
lines. We believe that the net proceeds from the sale of the common stock in
this offering, together with our existing working capital immediately prior to
this offering, will be sufficient to meet our working capital and operating
resource expenditure requirements for at least the next 12 months. Without the
net proceeds of this offering, we believe our capital resources will be
sufficient to fund our operations through at least December 31, 2000. If we
should require additional financing due to unanticipated developments,
additional financing may not be available when needed or, if available, we may
not be able to obtain this financing on terms favorable to us or to our
stockholders. Insufficient funds may require us to delay, scale back or
eliminate some or all of our research and development programs, or may adversely
affect our ability to continue to execute our business plan. Prior to completion
of this offering, we may seek to raise additional capital in the form of equity
or debt. If additional funds are raised by issuing equity securities,
substantial dilution to existing stockholders may result.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. It requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measures those
instruments at fair value. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133--An amendment of FASB Statement No.
133." SFAS No. 137 delays the effective date of SFAS No. 133 to financial
quarters and financial years beginning after June 15, 2000. We do not typically
enter into arrangements that would fall under the scope of
31
<PAGE> 34
SFAS No. 133 and, thus, management believes that SFAS No. 133 will not
significantly affect our financial condition and results of operations.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, or SAB No. 101, "Revenue Recognition." SAB
No. 101 provides interpretive guidance on the recognition, presentation and
disclosure of revenue in financial statements. For all periods presented, we
have adopted the provisions of SAB No. 101. Implementation guidelines for this
standard, as well as potential new standards, could result in unanticipated
changes to our current revenue recognition policies.
In March 2000, the FASB issued FASB Interpretation No. 44, or FIN No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." FIN No. 44
clarifies the application of Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees," for certain issues related to equity based
instruments issued to employees. FIN No. 44 became effective on July 1, 2000,
except for certain transactions, and will be applied on a prospective basis. The
implementation of FIN No. 44 did not have an impact on our financial statements.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products and services in the United States and currently market
our products and services 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. As sales
are currently made in U.S. dollars, a strengthening of the dollar could make our
products and services less competitive in foreign markets. Our interest income
from our cash and cash equivalent holdings is sensitive to changes in the
general level of U.S. interest rates. We currently believe that there is no
material interest rate risk due to holding our funds as cash. Therefore, no
quantitative tabular disclosures are required. We have subsidiaries in Canada
and the United Kingdom. While contracts are U.S. dollar denominated, operating
expenses are paid in each country's local currency, exposing us to risks from
foreign currency fluctuations.
32
<PAGE> 35
BUSINESS
OVERVIEW
We are a leading provider of comprehensive solutions to create, manage and
find product and service information to enable and facilitate global B2B
e-commerce. Our solutions allow for the creation of electronic catalogs from a
variety of paper and electronic sources for use by buyers, suppliers and
Internet-based e-marketplaces. Our solutions also include tools for the
management of electronic content as well as search technology that allows buyers
to find products and services efficiently. We believe that manageable and
findable product and service information is essential for the success of global
B2B e-commerce. We have established strategic partnerships with leading ESVs and
other B2B solution providers, including SAP, Oracle, Remedy, ICG Commerce, Inc.,
Infobank and Corio, each of which integrates our content solutions into their
B2B procurement offerings. In addition to these strategic partners, some of our
customers include BAA plc, Delta Air Lines, Inc., Deutsche Bank AG, GE Supply
Net, a division of General Electric Company, Ingersoll-Rand, Petrocosm Corp.,
Reuters Group plc, SciQuest.com and W.W. Grainger, Inc.
INDUSTRY BACKGROUND
EVOLUTION OF B2B E-COMMERCE
Internet usage has grown rapidly in recent years, and the Internet has
become an important global communications and commerce medium. According to
International Data Corporation, the number of commercial users employing the
Internet worldwide in the normal course of their operations is expected to grow
from an estimated 82 million at the end of 1999 to 250 million in 2003.
GartnerGroup projects that total B2B e-commerce sales will increase worldwide
from $403 billion at the end of 2000 to $7.3 trillion in 2004. This growth in
B2B Internet usage and commerce is being driven in part by the increasingly
competitive global business environment, which is leading businesses to seek new
ways to reduce costs and make business processes more efficient.
One way in which companies have sought to achieve these benefits is by
streamlining and automating their procurement and distribution processes by
connecting directly with each other over the Internet. This automation allows
formerly manual processes, such as telephone ordering of goods and services from
paper catalogs, to be replaced by electronic communication. In addition to B2B
e-commerce transacted directly between buyers and suppliers, a number of
e-marketplaces are emerging on the Internet designed to bring multiple buyers
and suppliers together to effect transactions. Buyers seeking to aggregate their
purchasing power have formed some of these e-marketplaces. Others have been
created by suppliers, particularly in industries where a relatively few large
suppliers serve many buyers. Neutral market makers also have created
e-marketplaces designed to bring multiple buyers and suppliers together in a
single marketplace. A wide variety of production and non-production goods and
services can be purchased through e-marketplaces, ranging from basic office
supplies to automobile parts to multi-million dollar items such as turbine
engines.
As B2B e-commerce has proliferated, many companies have significantly
changed the ways they purchase and sell goods and services. For example, as part
of the move to improve efficiency in the procurement process, electronic
purchasing systems allow end users to be given a greater degree of purchasing
responsibility. Allowing buying decisions to be made by the individual using the
product or service eliminates the need for procurement professionals to review
and approve requisition requests. As a result, procurement professionals have
more time to focus on strategic tasks, such as improving the internal
procurement process, negotiating more favorable contract terms with suppliers
and improving supplier relationships. Additionally, the Internet removes
geographic barriers between buyers and suppliers, increasing the available
market for both.
NEED FOR CONTENT MANAGEMENT
Historically, suppliers have offered their goods and services through paper
catalogs and, more recently, through web sites and electronic database catalogs.
Even in an e-marketplace, however, finding and comparing products and services
across different suppliers' catalogs can be difficult because suppliers may
describe similar or identical products and services in a variety of ways, use
different abbreviations or display them in different categories. In addition,
product and service information presented in paper catalogs and some electronic
catalogs
33
<PAGE> 36
quickly becomes outdated, and may contain errors that have persisted through
multiple generations of the same catalog.
The success of many B2B procurement systems and e-marketplaces depends in
part on aggregating varied information about products or services from multiple
suppliers. A unified electronic catalog must be created in which information can
be easily found by people in many different organizations who may have different
buying systems, habits and computer skill levels. Many unified online catalogs
will need to include millions of items from thousands of suppliers. We believe
that one of the fundamental problems limiting the widespread adoption of B2B
e-commerce is the difficulty of organizing product and service information from
multiple suppliers and presenting that information consistently and in a manner
that is readily accessible to end users.
Creating the electronic form of catalog information from multiple
suppliers, cleansing that content of errors and omissions, structuring it for
efficient searching and keeping the content current and accurate are significant
tasks that are not within the core competencies of most market participants. In
addition, the global reach of the Internet requires that this information be
translated into multiple languages. To realize the benefits of an electronic B2B
catalog, a company must be able to dynamically change information regarding
suppliers, products and services in a manner that makes the updated information
immediately available to the end user. In addition, as B2B procurement systems
become more widely deployed and used by many end users instead of only trained
procurement professionals, it becomes increasingly important that these systems
be easy to use and offer an intuitive and effective method to allow users to
find a desired product or service and compare relevant data from multiple
suppliers. Search-engine technology, such as that employed by Internet search
services, often returns either too many results, too few results or incorrect
results. Structured search techniques that rely on category hierarchies to
organize information require the user to recall precise nomenclature and
navigate several layers of searching.
THE REQUISITE SOLUTION
We have developed solutions that create, manage and find product and
service information to enable and facilitate global B2B e-commerce. Our
solutions are designed to address the challenges of assembling large product and
service offerings from multiple suppliers into a unified, easy-to-use electronic
catalog that can easily be updated to reflect current information. Catalogs can
be hosted by us, by our strategic partners or by our customers. Our solutions
enable suppliers and e-marketplaces to dynamically manage information for
virtually all products and services, and allow buyers to quickly and easily find
information about the products or services they wish to buy. We offer:
-- Scalable, End-to-End Solutions. Our solutions consist of a
comprehensive array of catalog creation services, our eMerge toolset
for managing electronic catalogs and our patented BugsEye finding
technology. They are designed to accommodate large numbers of items
and suppliers, allowing e-marketplaces and buyer procurement systems
to expand rapidly and easily.
-- Standard Platforms to Organize and Manage Electronic Content. Our
solutions are based upon RUS, our standard platform for organizing
data from disparate sources into an electronic catalog. RUS provides
the foundation for efficiently creating content that can then be
effectively managed and used by multiple buyers, suppliers and
e-marketplaces.
-- Patented Finding Technology. Our patented BugsEye technology enables
both frequent and occasional users to quickly and reliably find
products and services in a multi-supplier catalog. BugsEye uses
standard browser-based technology and is designed for ease of use.
-- Global Solutions. Our electronic catalog solutions are designed to be
deployed internationally, and can be used in various local languages
by multinational corporations, e-marketplaces operating
internationally and suppliers participating in global markets. We
currently offer catalog creation in American English, British
English, Danish, Dutch, French, German, Norwegian and Spanish.
-- Complementary, Standards-based Technologies. Our solutions are
designed to efficiently integrate with and be complementary to
offerings from B2B e-commerce solution providers, including ESVs,
application service providers and B2B e-commerce technology and
service providers.
34
<PAGE> 37
Our solutions have four principal constituencies: buyers, suppliers,
e-marketplaces and B2B e-commerce solution providers. We believe that our
solutions provide the following benefits to these constituencies:
-- Benefits to Buyers. Our solutions make electronic procurement
applications more effective by allowing users to easily find
comprehensive information on the products and services they want to
buy. Buyers can find and compare product and service information in a
single catalog containing many items from multiple suppliers. This
catalog may be part of a buyer's procurement system or it can be
provided by an e-marketplace. Our BugsEye finding technology is
designed for ease of use by both experienced and occasional users,
facilitating broad usage throughout the buyer's enterprise, while
allowing the buying organization to maintain control over the
procurement process. These capabilities, when implemented, increase
the returns on the investments that buyers have made in electronic
procurement applications. In addition, our solutions are designed to
reduce buying costs by eliminating reliance on paper catalogs,
facilitating comparison of products and services, reducing error
rates on orders and minimizing off-contract buying.
-- Benefits to Suppliers. Our solutions enable suppliers to rapidly
launch global e-commerce initiatives, respond to customer demand for
electronic procurement programs and become effective participants in
e-marketplaces. In addition, our eMerge toolset allows suppliers to
dynamically manage their product and service information to reflect
new offerings, new features, new categories and changes in pricing.
Our solutions also facilitate the creation of customized offerings
for particular buyers, allowing suppliers to differentiate themselves
in their respective e-marketplaces. These features enable suppliers
to reach customers more efficiently, increase customer satisfaction
and compete more effectively.
-- Benefits to E-Marketplaces. Our content creation and management
solutions enable the rapid creation and launch of e-marketplaces.
Suppliers whose catalogs already conform to RUS can be quickly added
to an e-marketplace. New supplier offerings also can be efficiently
added to e-marketplaces through our content creation service.
Additionally, our eMerge toolset enables e-marketplaces to manage
their catalogs, including the look and feel, security and access,
catalog structure and content.
-- Benefits to B2B E-Commerce Solution Providers. Our products and
services allow B2B e-commerce solution providers to offer a seamless
electronic procurement solution by combining our electronic catalog
products with their procurement applications. By adding superior
finding capabilities, we can improve the quality and completeness of
our strategic partners' offerings.
STRATEGY
Our objective is to be the leader in electronic content solutions to enable
and facilitate B2B e-commerce. In order to achieve this objective, we intend to
do the following:
-- Create a Network Effect by Driving Adoption of our Solutions
Throughout the Supply Chain. We intend to create a network effect by
first facilitating the adoption of our solutions by ESVs. We believe
that embedding our technology into the electronic procurement
applications of these vendors will lead to greater use of our
solutions by buyers and e-marketplaces. We expect that buyers and
e-marketplaces will influence their suppliers to adopt our RUS
standard in the creation of their content. We believe that as more
buyers, suppliers and e-marketplaces adopt our solutions, the value
of our solutions to both existing and new participants will increase.
In addition, as more catalogs are created using RUS, we believe that
our solutions will become a standard for content creation and
management throughout the supply chain.
-- Fuel the Network Effect by Expanding our Electronic Content Creation
Capabilities. We intend to aggressively expand our electronic catalog
creation capabilities in strategic markets throughout the world. We
believe that the ability to rapidly create large amounts of
high-quality, electronic product information in multiple languages
will establish RUS as the standard platform for B2B content, which
will cause global buyers, suppliers and e-marketplaces to adopt our
standard.
-- Offer Leading-edge Technology by Investing in Product and Process
Innovation. We plan to continue to offer products based on
leading-edge technology by investing in research and development
related to our
35
<PAGE> 38
BugsEye and eMerge technologies and our content creation tools and
processes. To achieve this goal, we plan to further our efforts to
attract, hire, develop and retain high-quality technical personnel
and to pursue technology alliances with other companies as
appropriate.
-- Expand and Leverage our Strategic Relationships. We intend to expand
and leverage our strategic relationships with B2B e-commerce solution
providers to increase our customer base and product and service
offerings, and to accelerate deployment of our solutions globally.
These relationships allow us to focus on our areas of expertise while
accessing our strategic partners' complementary technology and, in
many cases, large, well-established customer bases.
-- Address the Global B2B Opportunity by Expanding Internationally. We
intend to expand our international presence in order to efficiently
provide global electronic content solutions for our current and
potential customers and to assist them with their international
expansion efforts. Accordingly, we plan to expand our worldwide
sales, marketing and services organizations, create alliances with
key regional and global companies and continue to globalize our
operations and expand our corporate infrastructure to support
international operations.
-- Create Multiple Recurring Revenue Streams. We sell our solutions to
companies participating in key segments of the evolving B2B
e-commerce market, including buyers, suppliers, e-marketplaces and
ESVs. Our business model is designed to establish and grow recurring
revenue sources from each of these customer constituencies, such as
annual software royalty and license fees, catalog hosting fees and
content management service fees. As the B2B e-commerce market
continues to grow and evolve, we believe we are well positioned to
benefit regardless of the structure of that market. We believe that
our solutions have the potential to create significant, ongoing value
for buyers, suppliers and e-marketplaces, and we seek to capture a
share of that value through our pricing structure.
PRODUCTS, SERVICES AND TECHNOLOGY
Our solutions consist of the following products, services and technology
platforms:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
PRODUCTS AND SERVICES APPLICATION DESCRIPTION
----------------------------------------------------------------------------------------------
<S> <C> <C>
Content Creation Services Creation of online electronic Enables organizations to
catalog content outsource to us the creation
of electronic catalogs from a
variety of existing sources,
including paper catalogs and
electronic files in multiple
formats
----------------------------------------------------------------------------------------------
eMerge Content management tools and Enables buyers, suppliers and
services e-marketplaces to manage
electronic catalogs on an
ongoing basis, whether hosted
by them or by us
----------------------------------------------------------------------------------------------
BugsEye Catalog engine and finding Enables end users to easily
technology find desired products and
services in the large,
multi-supplier catalogs that
characterize B2B
e-marketplaces and procurement
systems
----------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
TECHNOLOGY PLATFORMS APPLICATION DESCRIPTION
----------------------------------------------------------------------------------------------
<S> <C> <C>
RUS B2B electronic catalog Provides a standard platform
structure and unified content to organize electronic content
repositories for effective management of
multi-supplier repositories
and electronic catalogs and
provides a cognitive framework
to improve end-user finding
----------------------------------------------------------------------------------------------
eCx XML standard for dynamic Facilitates movement of
catalog interoperability selected content and catalog
structure among cooperating
catalogs and content services
under the control of the
catalog administrator,
enabling interoperability
among catalogs
----------------------------------------------------------------------------------------------
</TABLE>
CONTENT CREATION SERVICES
We offer our content creation services through our content creation
facility in Toronto. These services are based on a scalable set of tools and
processes that provide for the creation of high-quality, findable electronic
catalog content by our content creation specialists. Our content creation
service processes multiple formats, including paper catalogs, web pages and
electronic databases. Our content creation service process includes:
-- extracting input data from the source catalog through an automated
process;
-- transforming the extracted data into a standard format;
-- categorizing catalog items according to RUS;
-- assigning specific values to product attributes, such as size, color
or horsepower;
-- normalizing content according to our style guide;
-- associating pictures and original supplier descriptions with items;
-- verifying content quality;
-- obtaining content verification and approval from the supplier; and
-- preparing finished content for distribution.
EMERGE
eMerge is a browser-based toolset for managing electronic catalogs. We
offer eMerge to buyers, suppliers and e-marketplaces to enable them to manage
catalog content from multiple sources, to control the viewing and use of
catalogs by multiple groups of users and to customize catalog interfaces and
behavior. The primary functions of eMerge are:
-- Content Authoring and Management. eMerge provides for the secure
creation and maintenance of electronic catalogs. eMerge also allows
incremental content updating and loading, integrating changes made by
suppliers under the control of the catalog administrator.
-- Catalog Administration. eMerge allows the catalog administrator to
manage presentation formats, to control user and group access rights,
and to tailor catalog search configurations to the needs of different
users.
-- Content Extraction and Formatting. Selected catalog content must
often be extracted from a content repository and converted to a
specific B2B content format required by a buyer or an e-marketplace.
eMerge provides for identification, extraction and formatting of
updated items. eMerge supports eCx and other popular e-commerce
formats, including Ariba Inc.'s .CIF and cXML, Commerce One, Inc.'s
37
<PAGE> 40
xCBL, the Open Buying on the Internet Standard, or OBI, and BMEcat, an emerging
European e-commerce standard.
BUGSEYE
BugsEye is an electronic catalog engine that provides a robust and scalable
infrastructure for catalog creation and management, combined with a patented
finding technology that allows end users to easily locate products and services
in large, multi-supplier catalogs. BugsEye supports multiple search techniques
and can be easily used by both frequent and occasional users. BugsEye can be
implemented on any combination of a standard relational database, such as Oracle
8 and 8i and Microsoft SQL Server 7, and a text search engine, ensuring that
BugsEye has the scalability, data security and reliability of the leading
commercial relational databases. Every element of the catalog can be controlled
by the administrator, including category and attribute structure configuration,
availability of views to different groups of users and the look and feel of the
user interface. Additionally, BugsEye supports the simultaneous expression of a
catalog in multiple languages, providing organizations with an enhanced ability
to execute a global B2B e-commerce strategy.
BugsEye is written in Java and is implemented as a servlet running under
the control of any standard web or application server. BugsEye is compatible
with industry-standard B2B e-commerce platforms, including Sun Solaris, Hewlett
Packard HP-UX, IBM AIX and Microsoft Windows NT. BugsEye is designed for simple
integration into procurement and e-marketplace systems. It can be invoked as a
subsidiary web application and comes with a configurable HTML or XML shopping
cart interface. Additional web-based technical interfaces to BugsEye also are
provided, allowing other applications to query a BugsEye catalog directly for
item or catalog structure information.
REQUISITE UNIFYING STRUCTURE
All of our offerings are based on RUS, our standard platform to organize
and manage electronic content. RUS defines the generic categories, attributes
and category-specific attributes needed to unify the product and service
information from multiple suppliers into a coherent catalog, facilitating
content finding and management. We centrally maintain RUS and regularly update
it with new categories and attributes that we discover during our content
creation process. RUS is compatible with the United Nations Standard Product and
Service Codes and other evolving e-commerce standards such as eCl@ss. The
primary characteristics of RUS are:
-- Designed for End-User Finding. RUS is designed to support the
creation and management of catalogs that provide a reliable,
effective end-user finding experience. Categories are created by our
trained catalog schema developers, working under the guidance of a
team of ontologists operating within a defined cognitive and
linguistic framework. RUS also provides a framework for the
normalization of product and service attributes, such as units of
measure and manufacturing names. The resulting organization of data
allows for intuitive, robust and dynamic data searching.
-- Designed for Ease of Maintenance. RUS can be easily maintained,
primarily because it is not based on a hierarchical structure.
Therefore, the introduction of a new category is straightforward,
requiring only that the new category be named and its attributes
defined. It is not necessary for a new category to conform to the
structure of an existing hierarchy. The RUS management process
includes the participation of subject matter experts, including our
customers, employees and members of the academic and standards
communities.
ECX
We develop and employ eCx, a standard for catalog interoperability that is
based on eXtensible Markup Language, or XML, a standard that defines a universal
method for structuring data. We specifically designed eCx to provide an
integrated framework for cooperation among catalog management tools, centralized
content repositories, catalog staging environments and final production
catalogs. eCx is designed to provide updates efficiently to our customers'
target catalogs to reflect changes either in RUS or a source catalog. Individual
items and attribute values can be updated, along with discrete elements of
catalog structure, minimizing the amount of data that needs to be transmitted to
keep multiple catalogs coordinated. eCx is designed to provide the owner of
38
<PAGE> 41
the catalog with complete control of the loading process by defining rules that
may be used to reject or modify any catalog structure or content changes defined
in the source eCx file.
PRODUCT DEVELOPMENT
Our technology group, which is responsible for product development, is
focused primarily on the following:
-- continued evolution of RUS, including enhancement of our schema
development and ontology processes to allow more efficient extension
of RUS into new categories;
-- continued development of BugsEye and eMerge;
-- development and deployment of internal tools and integrated processes
to achieve productivity and quality improvements for content
creation;
-- integration of our technology into our strategic partners' solutions;
and
-- continued development of catalog interoperability technology.
In addition to software development, our technology group encompasses
software quality assurance, technical documentation and ontology, the study of
the organization of knowledge. Our professional staff includes specialists in
the areas of ontology, catalog engine design, database architecture and
cognitive and computational linguistics.
STRATEGIC ALLIANCES
We have formed strategic partnerships with the following corporations:
Oracle Corporation. In September 1998, we entered into a technology license
agreement with Oracle, permitting Oracle to distribute BugsEye, in object code
form only, bundled with its procurement software. In addition, the agreement
provides Oracle with our BugsEye source code to enable more extensive
integration of BugsEye into Oracle's procurement software. The license was
granted on a non-exclusive basis for a license fee. The contract continues in
perpetuity unless terminated by either party for the other party's breach of the
contract. In July 2000, we entered into an agreement with Oracle to provide
marketplace site management services for OracleExchange.com. These content
management services include creating, maintaining and updating supplier catalogs
using RUS. We are compensated by receiving a percentage of the marketplace
transaction fees.
SAP AG. In April 1999, we entered into a software license and reseller
agreement with SAP. The agreement permits SAP to distribute BugsEye, in object
code form only, bundled with its business-to-business procurement, or BBP,
software and its application software, to end users. SAP pays us fees for
licensed end users authorized to access SAP's BBP software that integrates our
BugsEye technology. In March 2000, we amended our agreement with SAP to also
provide for payment of an annual license fee for SAP's use and distribution of
BugsEye, as integrated in SAP's BBP products through the year 2004.
Infobank International Holdings plc. In February 2000, we entered into a
software license and reseller agreement with Infobank to integrate BugsEye, in
object code form only, into its InTrade Purchase software application. Infobank
also licensed our eMerge content management software and will use our content
creation services. The licenses were granted on a non-exclusive basis for
license fees, royalties and transaction revenue. The term of the agreement is
five years.
Remedy Corporation. In April 2000, we entered into a software license and
reseller agreement with Remedy to integrate BugsEye, in object code form only,
into its Purchasing@Work software. In addition, Remedy obtained a license to
eMerge and the right to sublicense such content management software to its
customers. We received license fees and royalty fees on such transactions. The
term of the agreement is two years.
Corio Inc. In April 2000, we entered into a hosting software license and
reseller agreement with Corio, an application service provider, for
participating in its hosting of managed databases for each of its managed
customers. We will provide hosting and content management services for Corio's
customers. The license was
39
<PAGE> 42
granted on a non-exclusive basis for fees based upon the number of items under
management and transaction revenue. The term of the agreement is five years.
ICG Commerce, Inc. In August 2000, we entered into a strategic alliance
agreement to provide content creation services and eMerge content hosting
services to ICG Commerce and its suppliers. ICG Commerce is also granted the
right to sublicense BugsEye bundled within its procurement solution. We receive
license fees, content management and service fees, and royalty fees. The term of
the agreement is five years.
SALES AND MARKETING
We sell our products and related services through our direct sales
organization, complemented by the efforts of our strategic partners. We target
entities we view as critical e-commerce participants in the following
categories: global 2000 companies, e-marketplaces and suppliers. While the
majority of our sales are made by our direct sales force, many sales are the
result of leads generated by our strategic partners. The sales cycle for our
solutions typically ranges from 60 to 180 days.
Our sales and marketing group is primarily located in our headquarters in
Westminster, Colorado and our European headquarters in London. We also have
sales staff located in Atlanta, Boston, Indianapolis, Kansas City, Philadelphia,
Sacramento and San Francisco. We plan to continue to expand our sales and
marketing group through aggressive recruiting of qualified individuals.
Because we believe that our products and related services can directly
increase a company's return on investment and accelerate its e-commerce
deployment, we direct our marketing efforts to executives with responsibility
for areas such as procurement, business development and e-commerce, as well as
chief executive officers, chief financial officers, chief information officers
and chief technology officers. We intend to leverage our existing customer
relationships and strategic partnerships in order to gain new customers through
exposure of our solutions to their business partners. In the past, we have
conducted such joint marketing and selling efforts with Oracle, Petrocosm, SAP
and GE Supply Net. We plan to continue conducting these efforts, including
informational seminars, advertising, speaking engagements and joint sales calls
with our strategic partners and customers.
We use a variety of marketing programs to build customer awareness of our
brand and of our content management products and related services, including
market research, product and strategy updates with industry analysts,
advertising, public relations and direct mail activities, and participation in
seminars, trade shows, speaking engagements, conferences and web site marketing
programs. Our marketing professionals also produce marketing materials to
support sales to prospective customers, which include brochures, data sheets,
white papers, presentations and demonstrations.
40
<PAGE> 43
CUSTOMERS
We target large, multinational market leaders in a broad range of
industries. As of August 25, 2000, the following ESVs, buyers, suppliers and
e-marketplaces have purchased licenses for BugsEye and eMerge:
<TABLE>
<CAPTION>
ESVS BUYERS SUPPLIERS E-MARKETPLACES
---- ------ --------- --------------
<S> <C> <C> <C>
American Management Allstate Corporation CEX Holdings, Inc. Advanstar Communications
Systems, Anheuser-Busch, (Corporate Express) Inc.
Inc. Incorporated GE Supply Net, a division Belgacom, Societe Anonyme
Corio Inc. ARDEC, Picatinny Arsenal, of de dfoit public
ICG Commerce, Inc. a branch of the US Army General Electric Company Blue 292, Inc.
InfoBank International AT&T Cable Services, W.W. Grainger, Inc. BuildNet, Inc.
Holdings plc formerly TCI Graybar, Inc. Commerx, Inc.
Oracle Corporation Communications, Inc. Praxair, Inc. Deutsche Bank AG
Remedy Corporation BAA plc RoweCom, Inc. EqualFooting.com Inc.
SAP AG Bank of Montreal Staples, Inc. Eventory Inc.
BASF Corporation Ford B2B, LLC
The Boeing Company GOPrinter, Inc.
BT Office Products Industry Suppliers.com
International, Inc. SA France
Canada Post Corporation MedCenterDirect.com, Inc.
Cap Gemini UK plc for OracleExchange.com
services to Defence (Oracle Corporation)
Electronic Commerce Petrocosm Corporation
Service for The Secretary Purchase On-Line ASA
of State for Defence SciQuest.com, Inc.
Compaq Computer Corporation SetFair.com
Delta Air Lines, Inc. Sonae.com S.G.P.S., S.A.
EchoStar Communications SourceAlliance, LLC
Corporation SupplyForce.com, LLC
EMC Corporation TotalMRO.com, a unit of
Honeywell Corp. W.W. Grainger, Inc.
Hormel Foods Corporation WorldCrest Group
Ingersoll Rand Company
International Paper Company
Kimberly Clark Corporation
MedAssets.com, Inc.
NTL Group Ltd.
Oracle Corporation
OSRAM SYLVANIA, a division
of OSRAM GmbH
Owens Corning
Pitney Bowes Inc.
The Quaker Oats Company
Reuters Ltd.
Whirlpool Corporation
Xerox Corporation
</TABLE>
In 1999, three customers, SAP, W.W. Grainger and SciQuest.com, each
accounted for more than 10% of our revenue, and in the aggregate accounted for
80% of our revenue. In the six months ended June 30, 2000, SAP accounted for 66%
of our revenue, and no other customer accounted for 10% or more of our revenue.
CUSTOMER SERVICE, TRAINING AND SUPPORT
We offer a range of customer support programs available by telephone,
e-mail, over the Internet or by on-site visits. We monitor the activity of these
programs through customer support software, enabling us to track every customer
inquiry from receipt through resolution. Our system includes escalation
procedures for customers requiring immediate assistance. We also maintain a
self-service support web site for our customers. For BugsEye customers, we
provide support seven days a week, 24 hours a day. For eMerge customers, we
provide support five days a week, 12 hours a day. Our customer training team
provides a comprehensive series of classes that provide information on our
products and services, as well as the knowledge and skills necessary to
successfully deploy, use and maintain our products and services and our
customers' content. Our classes include general instruction, demonstrations,
discussions and the actual use of our products. We hold classes regularly in our
41
<PAGE> 44
training facility at our corporate headquarters in Westminster, Colorado. We
also conduct on-site training at our customers' locations.
COMPETITION
The B2B e-commerce market is new and rapidly evolving, and the electronic
cataloging and content management segment of the business is receiving increased
attention from various market participants. We expect competition to continue as
new companies are created and existing B2B companies seek to expand their
offerings to include more robust content management and electronic catalog
solutions. We believe that the critical success factors for companies seeking to
create end-to-end electronic content management solutions include the following:
-- ease of use;
-- the ability to offer a single solution that creates and manages
content, and provides useful finding of that content;
-- quality and reliability of the solution and the content;
-- functionality and interoperability of the content management
technology;
-- the ability to scale content creation capacity to meet demand; and
-- the ability to attract, retain and technically integrate with
strategic partners.
Although we believe that our solutions compete favorably with respect to
these factors, our markets are relatively new and evolving rapidly. We may not
be able to maintain our competitive position against current and potential
competition, especially against competitors with significantly greater
financial, marketing, service support, technical and other resources. We
currently experience competition from a number of companies for different
elements of our solutions. We believe that no single competitor competes against
us across our full range of solutions. Our primary competitors include:
-- Catalog and Search Engine Technologies. A number of companies,
including i2 Technologies, Inc., Mercado Software, Inc. and SAQQARA
Systems Inc., provide either an entire catalog engine with search
capability or search technology that competes directly with BugsEye
for the ESV market, or directly or indirectly with BugsEye for
e-marketplaces. We experience additional competition from the
internally developed catalog engines at prospective partner companies
such as Ariba, Commerce One and Siebel Systems, Inc.
-- Alternative Catalog Approaches. Our approach to B2B catalog and
content management is predicated on the need for organized content to
be created and managed in order to provide a successful end-user
finding experience. Alternative approaches have been proposed and
brought to market by companies such as CardoNet, Inc. and Cohera
Corporation. These approaches focus on mapping data from databases
and web sites, not through active creation of catalog information.
-- Content Conversion and Management Companies. Several companies,
including ec-Content, Inc., i2 Technologies, Peregrine Systems, Inc.
and Profile Systems, Inc., perform content conversion services and
will deliver converted content in multiple formats. These companies
often operate on a fee-for-service basis for content conversion.
-- Content Aggregators. Content aggregators collect, organize and
package content, usually on a subscription basis. Content aggregators
participating in the B2B e-commerce market with which we compete
include ec-Content, i2 Technologies and Information Handling Services
Group. These companies offer services to buyers, suppliers and
e-marketplaces, and often have many items of classified and
parameterized content that could be included in a new e-marketplace
or procurement initiative.
Our current and potential competitors may develop electronic catalog and
content management solutions that achieve greater market acceptance than our
solutions. Many of our existing and potential competitors have greater
42
<PAGE> 45
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. Such competitors can undertake
more extensive marketing campaigns for their brands, products and services,
adopt more aggressive pricing policies and make more attractive offers to
customers, potential employees, strategic partners and others. In addition, many
of our prospective customers have established relationships with some of our
current and potential competitors. Accordingly, we may not be able to expand or
retain our base of customers and may not be able to compete successfully against
our current or future competitors. Our ongoing ability to compete effectively
also depends on our ability to respond to technological change by providing
feature enhancements and expanded product and service offerings, the quality and
reliability of our operations, customer service and support, and the
effectiveness of our sales and marketing programs.
INTELLECTUAL PROPERTY
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade secrets
and patent, copyright and trademark laws.
We license rather than sell BugsEye and eMerge, and require our customers
to enter into licensing agreements that impose restrictions on their ability to
utilize these products. In addition, we seek to avoid disclosure of our trade
secrets through a number of means, including requiring those persons with access
to our proprietary information to execute confidentiality agreements with us and
restricting access to our source code. We seek to protect our software,
documentation and other written materials under patent, trademark, trade secret
and copyright laws, which afford only limited protection. None of our
proprietary rights relating to our BugsEye, eMerge and other solutions may be
viable or of value in the future because the validity, enforceability and type
of protection of proprietary rights in Internet-related and software industries
is uncertain and still evolving.
We presently have one U.S. patent issued and five U.S. patent applications
pending. It is possible that the patents that we have applied for, if issued, or
our potential future patents, or our issued patents may be successfully
challenged or that no patents will be issued from our patent applications. It
also is possible that we may not in the future develop proprietary products or
technologies that are patentable, that any patent issued to us may not provide
us with a competitive advantage or that the patents of others will seriously
harm our ability to do business.
Requisite Technology(R) is registered as a trademark in the United States.
We also have filed trademark applications in the United States for BugsEye(TM)
and eLeader(TM). In addition, we have filed applications to register the
Requisite Technology and BugsEye trademarks in one or more foreign countries.
These trademark applications are subject to review by the applicable
governmental authorities, may be opposed by private parties or may not be
issued.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products and services or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
technology is difficult and expensive, and while we are unable to determine the
extent to which piracy of our technology exists, piracy can be expected to be a
persistent problem. In addition, the laws of some countries do not protect our
proprietary rights to the same extent as do the laws of the United States. Our
means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our
solutions or design around patents issued to us or our other intellectual
property.
There has been a substantial amount of litigation in the software and
Internet industries regarding intellectual property rights. In the future, third
parties may claim that we or our current or potential future solutions infringe
upon their intellectual property rights. We expect that software product
developers and providers of e-commerce solutions will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Any infringement claims brought against us, with or without merit,
could be time-consuming to defend, result in costly litigation, damage our
business reputation, cause product shipment delays or require us to enter into
royalty or licensing arrangements to continue using the intellectual property at
issue. Royalty or licensing agreements, if required, may not be available on
terms acceptable to us or at all, which could seriously harm our business.
43
<PAGE> 46
EMPLOYEES
As of August 25, 2000, we had 499 employees. We believe that our future
success will depend in part on our continued ability to attract, hire, train and
retain qualified personnel. None of our employees currently is represented by a
labor union or subject to a collective bargaining agrement. We never have
experienced a work stoppage and we believe that our employee relations are good.
PROPERTIES
Our headquarters are located in facilities consisting of approximately
33,000 square feet in Westminster, Colorado, which we occupy under a lease that
expires in August 2004. We also lease approximately 28,000 square feet of office
space in Toronto, which lease expires in June 2005, approximately 5,300 square
feet of office space in London, which lease expires in February 2010, and we
have established regional offices in Duluth, Georgia and Carmel, Indiana. These
leases may be extended. We have negotiated a replacement of our Westminster
lease with a lease for another building in the same industrial park for
approximately 98,500 square feet with a five-year term, which we expect to
occupy during the first half of 2001. We intend to sublease approximately 30,000
square feet of this space. In addition, we exercised an option on our lease in
Toronto to approximately double the office space and to extend the lease for an
additional year.
LEGAL PROCEEDINGS
We currently are not involved in any material legal proceedings.
44
<PAGE> 47
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their positions and ages as of
August 25, 2000, are as follows:
<TABLE>
<CAPTION>
AGE POSITION
--- --------
<S> <C> <C>
Barbara J. Mowry.......................... 52 Chairman of the Board and Chief Executive
Officer
Louis Faust, III.......................... 46 President and Chief Operating Officer
Christopher W. Beall...................... 45 Chief Strategy and Corporate Development
Officer
Kathleen J. Cunningham.................... 53 Chief Financial Officer, Treasurer and
Assistant Secretary
Michael R. Neal........................... 40 Chief Technology Officer
Susan L. Oakes............................ 41 Vice President, General Counsel and
Secretary
Dush Ramachandran......................... 45 Vice President of Global Sales
Joanna King............................... 43 Vice President of Marketing
C. Jeff Dekker............................ 36 Vice President, Controller
Noel J. Fenton............................ 62 Director
Nancy J. Schoendorf....................... 45 Director
Thomas G. Washing......................... 59 Director
Steven L. Scheid.......................... 47 Director
</TABLE>
Barbara J. Mowry has served as our Chief Executive Officer since November
1997 and as Chairman of the Board since May 2000. Ms. Mowry also served as our
President from 1997 to May 2000. Ms. Mowry served as President of the New
Products Division and Senior Vice President of Customer Satisfaction of
TeleCommunications, Inc. from 1995 to 1997. Ms. Mowry was the Founder and
President of The Mowry Company, a customer relationship company, from 1990 to
1995. She also served as founder, President and Chief Executive Officer of
Mileage Plus Incorporated, d/b/a Marketing Performance Innovation, a wholly
owned subsidiary of UAL, Inc. Ms. Mowry holds a B.A. from Miami University of
Ohio and an M.B.A. from the University of Minnesota.
Louis Faust, III has served as our President since May 2000 and as our
Chief Operating Officer since February 2000. From 1998 until 1999, Mr. Faust
served as the Chief Executive Officer, and from 1996 to 1998 as the Co-Chief
Executive Officer of International Language Engineering Corporation, a
globalization services company. From 1996 until 1998, Mr. Faust served as a
member of the board of directors of International Language Engineering
Corporation. From 1985 to 1996, he served at Salomon Brothers, Inc., most
recently as a Managing Director and the Head of Global Operations. Mr. Faust
holds a B.A. with honors in Political Science from California State University
and a J.D. from the University of California, Davis School of Law.
Christopher W. Beall has served as our Chief Strategy and Corporate
Development Officer since May 2000, and as our Chief Technology Officer from
1996 to June 2000. From 1992 to 1996, Mr. Beall served as the Chief Technology
Officer of CADIS, Inc., an Internet and intranet information technology
development company. Mr. Beall holds a B.A.E., with honors, in Physics from
Arizona State University.
Kathleen J. Cunningham has served as our Chief Financial Officer and
Treasurer since May 1999, as our Secretary from May 1999 to July 2000, and as
our Assistant Secretary since July 2000. Ms. Cunningham served as the Chief
Operating Officer and Chief Financial Officer of NxTrend Technology, Inc., a
wholesale distribution software company, from 1992 to 1999. From 1987 to 1991,
Ms. Cunningham served as Chief Financial Officer of Spatial Technology, Inc. Ms.
Cunningham holds a B.A. in Economics from the University of Wisconsin and an
M.B.A. in Finance from the University of Denver.
Michael R. Neal has served as our Chief Technology Officer since May 2000,
and as our Vice President of Technology from 1998 to May 2000. From 1997 to
1998, Mr. Neal served as the President of JavaKats, Inc., an electronic commerce
and virtual community consulting company. Mr. Neal served as a senior member of
the
45
<PAGE> 48
technical staff of CADIS, Inc. from 1995 to 1997. Mr. Neal holds a B.S. in
Computer Science from the University of South Carolina.
Susan L. Oakes has served as our Vice President, General Counsel and
Secretary since July 2000. Most recently, she served as Vice President and
General Counsel of Epidemic Marketing, Inc., an Internet marketing services
company. Ms. Oakes was a partner with Holme, Roberts & Owen, LLP in 1999. Ms.
Oakes was a Vice President, Director and Shareholder with Ireland, Stapleton,
Pryor & Pascoe, P.C. from 1990 to 1999, and an associate from 1984 to 1990. Ms.
Oakes holds a B.A. in Economics from Kenyon College and a J.D. from the
University of Michigan School of Law.
Dush Ramachandran has served as our Vice President of Global Sales since
May 2000 and served as Vice President of Sales from 1998 until April 2000. Mr.
Ramachandran co-founded Antaeus Systems, Inc., a content creation services
company that we acquired in 1998 and served as its President and Chief Executive
Officer from 1995 to 1998. Mr. Ramachandran was the founder of Conceptual
Technologies Inc., and served as its President from 1992 to 1995. Mr.
Ramachandran holds a B.S. in Physics from St. Joseph's College, Bangalore,
India, and an M.B.A. from the Indian Institute in Bangalore, India.
Joanna King has served as our Vice President of Marketing since May 2000
and as our Director of European Marketing since February 2000. From 1999 to
2000, Ms. King served as Worldwide Brand Communications Director of Visio
Corporation, an international software company. Ms. King served as the European
Marketing Communications Director for Visio from 1997 to 1999, and as the
European Marketing Communications Manager from 1994 to 1997. Ms. King received a
marketing diploma from the Chartered Institute of Marketing.
C. Jeff Dekker has served as our Vice President, Controller since May 2000
and as Controller since June 1999. From 1993 to 1999, Mr. Dekker served as
Controller of NxTrend Technology, Inc., a wholesale distribution software
company. Mr. Dekker was Manager of General Accounting at ITT Rayonier Port
Angeles Pulp Division, Port Angeles, Washington from 1989 to 1993. Prior to
1989, he was employed by KPMG Peat Marwick in Los Angeles. Mr. Dekker holds a
B.S. in Accounting from Utah State University and is a certified public
accountant.
Noel J. Fenton has served as a member of our board of directors since 1997.
Mr. Fenton has served as a General Partner of Trinity Ventures since 1986. From
1966 to 1986, Mr. Fenton co-founded several technology companies, and has served
as Chief Executive Officer of Acurex and Covalent Systems Corporation. Mr.
Fenton serves as a director of SciQuest.com. Mr. Fenton holds a B.S. from
Cornell University and an M.B.A. from the Stanford Graduate School of Business.
Nancy J. Schoendorf has served as a member of our board of directors since
1996. Ms. Schoendorf has served as the Managing Partner of Mohr, Davidow
Ventures since 1997, and as General Partner of Mohr, Davidow Ventures from 1993
to 1997. Ms. Schoendorf serves as a director of Agile Software Corporation,
BroadBase Software, Inc. and Onvia.com, Inc. Ms. Schoendorf holds a B.S. from
Iowa State University and an M.B.A. from Santa Clara University.
Thomas G. Washing has served as a member of our board of directors since
1995. Mr. Washing has served as the Managing Partner of Sequel Venture Partners
since 1996. From 1994 to 1996, Mr. Washing was a private investor and consultant
to a number of technology companies. From 1986 to 1994, Mr. Washing served as a
partner in the private equity investment firm of Hill, Carman & Washing. Mr.
Washing holds a B.A. from Dartmouth College and a J.D. from the University of
Michigan School of Law.
Steven L. Scheid has served as a member of our board of directors since
June 2000. Mr. Scheid has served as Vice Chairman and Enterprise President for
financial products and services at The Charles Schwab Corporation since 1999.
Mr. Scheid previously served as Chief Financial Officer of the Charles Schwab
Corporation from 1996 until 1999. From 1990 to 1996, he was Executive Vice
President for First Interstate Bancorp, and principal financial officer from
1995 to 1996. Mr. Scheid holds a B.S. from Michigan State University and is a
certified public accountant.
46
<PAGE> 49
BOARD OF DIRECTORS
Upon completion of the offering, the terms of the board of directors will
be divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 2001; Class II, whose term will expire at
the annual meeting of stockholders to be held in 2002; and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2003. The Class
I director is Noel Fenton, the Class II directors are Nancy Schoendorf and Tom
Washing, and the Class III directors are Steven Scheid and Barbara Mowry. At
each annual meeting of stockholders after the initial classification, the
successors to directors whose terms expire will be elected to serve a term of
three years. This classification of directors may have the effect of delaying or
preventing changes in our control.
BOARD COMMITTEES
Audit Committee. The board of directors has established an audit committee
consisting of Steven Scheid, chairman, Thomas Washing and Nancy Schoendorf. The
audit committee reviews with our independent accountants the scope and timing of
their audit services and any other services they are asked to perform, the
independent accountants' report on our consolidated financial statements
following completion of their audit, and our policies and procedures with
respect to internal accounting and financial controls. In addition, the audit
committee makes annual recommendations to our board of directors for the
appointment of independent accountants for the ensuing year.
Compensation Committee. The board of directors has established a
compensation committee consisting of Thomas Washing, chairman, and Noel Fenton.
The compensation committee makes recommendations to the board concerning
salaries and incentive compensation for our officers and employees and
administers our employee benefit plans.
DIRECTOR COMPENSATION
Our directors do not receive any cash compensation for their services as
directors but are reimbursed for their reasonable travel expenses in attending
meetings of the board of directors. Our non-employee directors are eligible to
participate in our 2000 Equity Incentive Plan. Non-employee directors not
previously designated by certain holders of our preferred stock receive an
initial stock grant of 10,000 non-qualified stock options upon joining the board
of directors and thereafter receive 8,000 non-qualified stock options per year
vesting over a four-year period. Each such non-employee director who serves as a
committee chairperson receives 800 additional such options per year, vesting
over a four-year period. Our other directors do not receive any compensation for
such service.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, Thomas Washing and Nancy Schoendorf served as the members of
our compensation committee. Current members of our compensation committee are
Thomas Washing, chairman, and Noel Fenton. None of our executive officers serves
as a member of the board of directors or compensation committee of any other
entity that has an executive officer serving on our board of directors or
compensation committee.
47
<PAGE> 50
EXECUTIVE COMPENSATION
The following table presents information regarding the compensation earned
by our chief executive officer and each of our four other highest-paid executive
officers whose total salary and bonus exceeded $100,000 for the year ended
December 31, 1999, collectively referred to below as the Named Executive
Officers, for services rendered in all capacities to us during the year ended
December 31, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS/SARS COMPENSATION
--------------------------- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C>
Barbara J. Mowry, Chairman of the Board and Chief
Executive Officer.................................. $259,375 $75,000(1) -- $ --
Christopher W. Beall, Chief Strategy and Corporate
Development Officer................................ 180,308 -- -- --
Dush Ramachandran, Vice President of Global Sales.... 177,708 -- -- 365(2)
Michael R. Neal, Chief Technology Officer............ 133,958 5,000 30,000 --
Kathleen J. Cunningham, Chief Financial Officer,
Treasurer and Assistant Secretary(3)............... 122,000 45,770(1) 247,500 --
</TABLE>
------------
(1) Stock bonus.
(2) Reimbursement of moving expenses.
(3) We hired Ms. Cunningham in May 1999.
OPTION GRANTS IN LAST YEAR
The following table designates each grant of stock options to each of the
Named Executive Officers during the year ended December 31, 1999. All of these
options were granted under our incentive plans during the year ended December
31, 1999.
The percentages in the column entitled "Percent of Total Options Granted to
Employees in 1999" are based on an aggregate of 1,120,354 options granted to our
employees under our incentive plans during the year ended December 31, 1999. The
exercise price of each option is equal to the fair market value of our common
stock as determined by the board of directors on the date of grant, taking into
account the purchase price paid by investors for shares of our preferred stock,
the liquidation preferences and other rights, privileges and preferences
associated with the preferred stock, and an evaluation by our board of directors
of our overall business performance, revenue, operating history and prospects.
The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. For purposes of these columns, we assumed stock
price appreciation of 5% and 10% as required by the Securities and Exchange
Commission. These rates of appreciation do not represent our prediction of our
stock price performance. The potential realizable values at 5% and 10%
appreciation are calculated by assuming that the estimated fair market value on
the date of grant, based upon the assumed initial public offering price of
$ per
48
<PAGE> 51
share, appreciates at the indicated rate for the entire term of the options, and
that the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED 1999 PER SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Barbara J. Mowry................ -- --% $ -- -- $ $
Christopher W. Beall............ -- -- -- --
Kathleen J. Cunningham.......... 247,500(1) 22.1 .50 5/2/09
Michael R. Neal................. 30,000(2) 2.7 1.67 10/5/09
Dush Ramachandran............... -- -- -- --
</TABLE>
------------
(1) 25% of the options vested on May 3, 2000. The remaining 75% vest in 36 equal
monthly installments thereafter.
(2) 25% of the options vest on October 6, 2000. The remaining 75% vest in 36
equal monthly installments thereafter.
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
The following table presents for each of the Named Executive Officers the
number of options exercised during the year ended December 31, 1999, and the
number and value of securities underlying unexercised options that are held by
each of the Named Executive Officers as of December 31, 1999. The heading
"Unvested" includes shares subject to repurchase as of December 31, 1999. The
numbers in the column entitled "Value of Unexercised In-the-Money Options as of
December 31, 1999" are based on an assumed initial public offering price of
$ per share and net of the exercise price payable for these shares.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AS OF OPTIONS AS OF
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED ON VALUE ----------------- --------------------
EXERCISE REALIZED VESTED UNVESTED VESTED UNVESTED
----------- --------- ------ -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Barbara J. Mowry.......... 507,811 $ 56,252 635,937 $ $
Christopher W. Beall...... 198,750 16,875 129,375
Kathleen J. Cunningham.... 61,875(1) -- 247,500
Michael R. Neal........... 37,500 6,250 136,250
Dush Ramachandran......... -- 11,250 33,750
</TABLE>
------------
(1) All of the shares were subject to repurchase as of December 31, 1999.
EMPLOYEE BENEFIT PLANS
2000 EQUITY INCENTIVE PLAN
Our 2000 Equity Incentive Plan was originally adopted as the 1995 Stock
Option Plan. The 1995 Stock Option Plan was subsequently amended and restated as
the 1995 Amended and Restated Stock Option Plan and then amended and restated as
the 1999 Equity Incentive Plan. Its most recent amendment and restatement, the
2000 Equity Incentive Plan, was adopted by our board of directors on August 2,
2000, and is expected to be approved by our stockholders prior to the effective
date of the registration statement of which this prospectus is a part. The 2000
equity incentive plan is effective on the closing date of this offering,
therefore no grants have been made under the 2000 equity incentive plan to date.
There is currently an aggregate of 7,950,000 shares of common stock authorized
for issuance under the 2000 equity incentive plan.
49
<PAGE> 52
On January 1 of each year for 10 years beginning on January 1, 2001, the
number of shares reserved under the incentive plan automatically will be
increased by 2% of the lesser of:
-- the total number of our shares outstanding on a fully-diluted basis
on such January 1; or
-- the total number of our shares outstanding on a fully-diluted basis
on the effective date of the 2000 equity incentive plan.
However, our board of directors may provide for a lesser increase each
year. The automatic share reserve increase in the aggregate may not exceed
7,000,000 shares over the 10-year period.
The incentive plan will terminate on August 1, 2010, unless sooner
terminated by our board of directors, or by a committee thereof. As of August
25, 2000:
-- awards of or options to purchase 3,432,821 shares at a weighted
average price of $2.38 per share were outstanding; and
-- 2,137,176 shares remained available for future stock awards under the
incentive plan.
Awards issued under the incentive plan prior to its amendment and
restatement as the 2000 equity incentive plan will be governed by the terms of
the plan and applicable option agreements in effect prior to such amendment and
restatement. In general, those terms are identical to those described in this
section except as indicated in this section.
The terms of options granted under the incentive plan may not exceed ten
years. Our board of directors or a committee thereof determines the exercise
price of options granted under the incentive plan. However, the exercise price
for an incentive stock option cannot be less than 100% of the fair market value
of the common stock on the date of the option grant, and the exercise price for
a nonstatutory stock option cannot be less than 85% of the fair market value of
the common stock on the date of the option grant. Options granted under the
incentive plan vest at the rate specified in the option agreement. Generally,
the optionee may not transfer a stock option other than by will or the laws of
descent or distribution, unless the optionee holds a nonstatutory stock option
that provides for transfer in the stock option agreement. However, an optionee
may designate a beneficiary who may exercise the option following the optionee's
death. An optionee whose service relationship with us or any of our affiliates
ceases for any reason may exercise vested options for the term provided in the
option agreement, which will generally be three months after termination.
No incentive stock option may be granted to any person who, at the time of
the grant, owns, or is deemed to own, stock possessing more than 10% of our
total combined voting power or of any of our affiliates, unless the option
exercise price is at least 110% of the fair market value of the stock subject to
the option on the date of grant and the term of the option does not exceed five
years from the date of grant. In addition, the aggregate fair market value,
determined at the time of grant, of the shares of common stock with respect to
which incentive stock options are exercisable for the first time by an optionee
during any calendar year, under the incentive plan and all of the other stock
plans of our affiliates, may not exceed $100,000.
Pursuant to Section 162(m) of the Internal Revenue Code of 1986, as
amended, which denies a deduction to publicly held corporations for certain
compensation paid to specified employees in a taxable year to the extent that
the compensation exceeds $1,000,000, no person may be granted options under our
incentive plan covering more than 1,500,000 shares of common stock in any
calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the incentive plan. Under its general authority to grant and to
amend options, our board of directors or a committee thereof has the authority
to reprice outstanding options or to offer optionees the opportunity to replace
outstanding options with new options for the same or a different number of
shares. Both the original and new options will count toward the Internal Revenue
Code Section 162(m) limitation set forth above.
Options granted under the 2000 incentive plan may include a right entitling
the optionee to a further option in the event the optionholder exercises the
option by surrendering other shares of common stock.
50
<PAGE> 53
Restricted stock purchase awards granted under the incentive plan may be
subject to a repurchase option in favor of us in accordance with a vesting
schedule determined by our board of directors or a committee thereof. The price
of a restricted stock purchase award under the incentive plan cannot be less
than 85% of the fair market value of the stock subject to the award on the date
of grant. Stock bonuses may be awarded in consideration of past services without
a purchase payment. Unless otherwise specified, rights under a stock bonus or
restricted stock bonus agreement under the incentive plan generally may not be
transferred other than by will or the laws of descent and distribution during
such period as the stock awarded pursuant to such an agreement remains subject
to the agreement.
Transactions not involving our receipt of consideration, including a
merger, consolidation, reorganization, stock dividend and stock split, may
change the class and number of shares subject to the incentive plan and to
outstanding awards. In that event, our board of directors will appropriately
adjust the incentive plan as to the class and the maximum number of shares
subject to the incentive plan. It also will adjust outstanding awards as to the
class, number of shares and price per share subject to options under the
incentive plan.
If we dissolve or liquidate, the outstanding stock awards will terminate
immediately prior to this event. Except for stock options granted under versions
of the incentive plan in effect prior to March 10, 1999, if there is any sale of
substantially all of our assets, any merger, reverse merger or any consolidation
in which we are not the surviving corporation, or any acquisition by certain
persons, entities or groups of 50% or more of our stock, either:
-- all outstanding awards under the incentive plan will be assumed or
substituted for by any surviving entity, and
-- award holders having been in service with us and our affiliates for
at least 12 months prior to such transaction will be entitled to
either an additional 12 months vesting or the vesting of 25% of his
or her remaining unvested awards, whichever is greater, and
-- the vesting of award holders whose continuous service is
involuntarily terminated without cause within 24 months after such
transaction generally will accelerate in full; or
-- if the surviving entity determines not to assume or substitute for
such awards, the vesting provisions of all stock awards generally
will be accelerated in full and the awards terminated if not
exercised prior to such transaction.
In addition, as of August 25, 2000, there were outstanding options to
purchase approximately 1,182,364 shares of our common stock granted under
versions of the incentive plan in effect prior to March 10, 1999, which will
vest in full in the event of any merger, reverse merger or consolidation in
which we are not the surviving corporation or in the event of any acquisition by
certain persons, entities or groups of 50% or more of our stock.
2000 EMPLOYEE STOCK PURCHASE PLAN
Adoption. Our board of directors adopted the 2000 Employee Stock Purchase
Plan on July 17, 2000, and our stockholders approved it on , 2000.
We authorized the issuance of 2,000,000 shares of our common stock pursuant
to purchase rights granted to eligible employees under the purchase plan. On
December 31 of each year for 10 years, beginning on December 31, 2000, the
number of shares in the purchase plan reserve automatically will be increased by
the greater of:
-- 2% of our outstanding shares on a fully-diluted basis; or
-- that number of shares that have been issued under the purchase plan
during the prior 12-month period.
However, our board of directors may provide for a lesser increase each
year. The automatic share reserve increase in the aggregate may not exceed
7,000,000 shares over the 10-year period.
51
<PAGE> 54
The purchase plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code. The purchase
plan provides a means by which eligible employees may purchase our common stock
through payroll deductions. We implement the purchase plan by offerings of
purchase rights to eligible employees. Generally, all of our employees and the
employees of our affiliates incorporated in the United States may participate in
offerings under the purchase plan. However, no employee may participate in the
purchase plan if, immediately after we grant the employee a purchase right, the
employee has voting power over 5% or more of our outstanding capital stock.
Our board of directors has the authority to set the terms of an offering
under the purchase plan. It may specify offerings of up to 27 months where
common stock is purchased for accounts of participating employees at a price per
share equal to the lower of:
-- 85% of the fair market value of a share on the first day of the
offering; or
-- 85% of the fair market value of a share on the purchase date.
For the first offering, which will begin on the closing date of this
initial public offering, we will offer shares registered on a Form S-8
registration statement. The fair market value of the shares on the first date of
this offering will be the price per share at which our shares are first sold to
the public as specified in the final prospectus with respect to our initial
public offering. Otherwise, fair market value generally means the closing sales
price, rounded up where necessary to the nearest whole cent, for such shares, or
the closing bid, if no sales were reported, as quoted on the Nasdaq National
Market on the last trading day prior to the relevant determination date.
Our board of directors may provide that employees who become eligible to
participate after the offering period begins nevertheless may enroll in the
offering on the first day of the next purchase period. These employees will
purchase our stock at the lower of:
-- 85% of the fair market value of a share on the first day of the
purchase period that they began participating in the purchase plan;
or
-- 85% of the fair market value of a share on the purchase date.
Our board of directors has determined that participants may authorize
payroll deductions of up to 15% of their compensation, including salaries and
wages, bonuses, commissions, overtime, incentive pay and other compensation
payments, but excluding severance, for the purchase of stock under the purchase
plan. These employees may end their participation in the offering at any time up
to ten days before a purchase date. Their participation ends automatically on
termination of their employment.
A participant's right to purchase our stock under the purchase plan, plus
any other purchase plans established by us or by our affiliates, is limited. It
may accrue at a rate of no more than $25,000 of the fair market value of our
stock for each calendar year in which the purchase right is outstanding. We
determine the fair market value of our stock, for the purpose of this
limitation, as of the first day of the offering.
Upon a change in control, our board of directors may provide that the
successor corporation will assume or substitute for outstanding purchase rights
under our purchase plan. Alternatively, our board of directors may shorten the
offering period and provide that our stock will be purchased for the
participants immediately before the change in control.
The purchase plan will not be effective until the closing of this initial
public offering. Therefore, as of the date hereof, no shares of common stock
have been purchased under the purchase plan.
The purchase plan has no set termination date. Our board of directors may
terminate the purchase plan at any time after the end of an offering.
52
<PAGE> 55
401(K) Plan
Our employees are eligible to participate in our 401(k) plan. Pursuant to
the 401(k) plan, employees may elect to reduce their current compensation by up
to the lesser of 15% of eligible compensation or the statutorily prescribed
annual limit, which is $10,500 in 2000. Employees may contribute this amount on
a pre-tax basis to the 401(k) plan. Employees direct the investment of the
assets of the 401(k) plan in up to ten different investment funds. The 401(k)
plan is intended to qualify under Section 401 of the Internal Revenue Code of
1986, as amended, so that contributions by employees to the 401(k) plan and
income earned on plan contributions are not taxable to employees until
withdrawn. Our matching and profit sharing contributions are discretionary.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the Delaware General Corporation Law, we have adopted
provisions in our certificate of incorporation and bylaws that limit or
eliminate the personal liability of our directors for a breach of their
fiduciary duty of care as a director. The duty of care generally requires that,
when acting on behalf of the corporation, directors exercise an informed
business judgment based on all material information reasonably available to
them. Consequently, a director will not be personally liable to us or our
stockholders for monetary damages or breach of fiduciary duty as a director,
except for liability for:
-- any breach of the director's duty of loyalty to us or our
stockholders;
-- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
-- unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions; or
-- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation requires us to indemnify our directors to
the full extent permitted by Delaware law. Additionally, our bylaws require us
to indemnify our directors and officers, and allow us to indemnify our employees
and other agents, to the full extent permitted by Delaware law. We intend to
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law and that may provide additional procedural protection.
We believe that these provisions and agreements are necessary to attract and
retain qualified directors and officers. The indemnification agreements require
us, among other things, to:
-- indemnify officers and directors against certain liabilities that may
arise because of their status as officers or directors; and
-- advance expenses, as incurred, to officers and directors in
connection with a legal proceeding, subject to limited exceptions.
Our bylaws also permit us to, and we intend to, purchase insurance on
behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether
Delaware law would permit indemnification.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or other agents in which indemnification is
sought, nor are we aware of any threatened litigation that may result in claims
for indemnification.
53
<PAGE> 56
CERTAIN TRANSACTIONS
Since January 1, 1997, there has been no transaction or series of
transactions to which we were a party involving $60,000 or more and in which any
executive officer, director or holder of more than 5% of our capital stock had a
material interest other than the transactions described below.
SALES OF PREFERRED STOCK TO EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT
STOCKHOLDERS
Since January 1, 1997, we have issued shares of preferred stock in private
placement transactions to the following persons who are our executive officers,
directors or principal stockholders:
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Executive Officers
Dush Ramachandran(1)........................... -- 60,000 -- --
Entities Affiliated with Directors
Mohr Davidow Ventures(2)....................... 2,486,188 1,149,863 359,694 384,300
Sequel Venture Partners(3)..................... 1,632,598 797,119 240,358 256,800
Trinity Ventures(4)............................ -- 1,630,435 161,287 172,323
5% Stockholders
Bowman Capital Management(5)................... -- -- -- 1,764,706
W.W. Grainger, Inc. ........................... -- -- 2,293,578 --
</TABLE>
------------
(1) Includes shares issued to Dush Ramachandran, his spouse and the Ramachandran
Family Trust in connection with our acquisition of Antaeus Systems, Inc.
(2) Affiliates of Mohr Davidow Ventures include Mohr, Davidow Ventures IV, L.P.
and MDV IV Entrepreneurs' Network Fund, L.P. Nancy Schoendorf, one of our
directors, is the Managing Partner of Mohr Davidow Ventures. Includes shares
issued in July 1996.
(3) Affiliates of Sequel Venture Partners include Sequel Limited Partnership and
Sequel Euro Limited Partnership. Thomas Washing, one of our directors, is
the Managing Partner of Sequel Venture Partners.
(4) Affiliates of Trinity Ventures include Trinity Ventures V, L.P. and Trinity
V Side-by-Side Fund, L.P. Noel Fenton, one of our directors, is a General
Partner of Trinity Ventures.
(5) Affiliates of Bowman Capital Management include Spinnaker Clipper Fund,
L.P., Spinnaker Crossover Institutional Fund, L.P. and Spinnaker Crossover
Fund, L.P.
The preferred stock purchased by these directors, executive officers and
affiliates was purchased on the same terms and conditions as the preferred stock
purchased by other investors. The preferred stock is convertible into common
stock at the rate of one share of common stock for each share of preferred
stock.
OTHER SALES OF STOCK TO EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT
STOCKHOLDERS
In April 1998, we sold 215,001 shares of our common stock to Dush
Ramachandran, his spouse and the Ramachandran Family Trust in connection with
our acquisition of Antaeus Systems, Inc.
In January 1999, we issued 20,923 shares of our common stock to Dush
Ramachandran, his spouse and the Ramachandran Family Trust pursuant to certain
performance thresholds being achieved in connection with our acquisition of
Antaeus Systems, Inc.
In March 2000, we issued 100,429 shares of our common stock to Dush
Ramachandran, his spouse and the Ramachandran Family Trust pursuant to certain
performance thresholds being achieved in connection with our acquisition of
Antaeus Systems, Inc.
REGISTRATION RIGHTS
Pursuant to the third amended and restated investor rights agreement, dated
as of September 13, 1999, among us and some of our investors, these investors
have certain registration rights for the shares of common stock held by them.
These investors have waived their registration rights in connection with this
offering. See "Description of Capital Stock--Registration Rights" for a
description of these registration rights.
54
<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of August 25, 2000, and as adjusted to reflect the sale of the shares of
common stock offered hereby, held by:
-- each of our Named Executive Officers and directors;
-- all current executive officers and directors as a group; and
-- each person or entity who is known by us to beneficially own 5% or
more of our outstanding common stock.
Unless otherwise indicated, the address for each of the named individuals
is c/o Requisite Technology, Inc., 10355 Westmoor Drive, Suite 205, Westminster,
Colorado 80021. Except as otherwise indicated, and subject to applicable
community property laws, we believe that the persons named in the table have
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
Applicable percentage ownership in the table is based on 22,786,242 shares
of common stock outstanding as of August 25, 2000, and shares
outstanding immediately following the completion of this offering, assuming the
underwriters' over-allotment option is not exercised and the conversion of all
shares of our outstanding preferred stock into common stock. Beneficial
ownership is determined under the rules and regulations of the Securities and
Exchange Commission. Shares of common stock subject to options or warrants that
are presently exercisable or exercisable within 60 days of August 25, 2000, are
deemed outstanding for the purpose of computing the percentage ownership of the
person or entity holding options or warrants, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person or
entity. Entries denoted by an asterisk represent an amount less than 1%.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
NUMBER OF BENEFICIALLY OWNED
SHARES -------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Mohr Davidow Ventures(1).................................... 4,380,045 19.2% %
Sequel Venture Partners(2).................................. 2,926,875 12.8
W.W. Grainger, Inc.(3)...................................... 2,293,578 10.1
Trinity Ventures(4)......................................... 1,964,045 8.6
Bowman Capital Management, LLC(5)........................... 1,764,706 7.7
Barbara J. Mowry(6)......................................... 857,013 3.7
Christopher W. Beall(7)..................................... 254,699 1.1
Kathleen J. Cunningham(8)................................... 93,692 *
Michael R. Neal(9).......................................... 91,374 *
Dush Ramachandran(10)....................................... 416,040 1.8
Noel J. Fenton(11).......................................... 1,964,045 8.6
Steven L. Scheid............................................ 0 *
Nancy J. Schoendorf (12).................................... 4,380,045 19.2
Thomas G. Washing(13)....................................... 3,208,311 14.1
All directors and executive officers as a group (13
persons)(14).............................................. 11,355,217 49.1
</TABLE>
(Footnotes on next page)
55
<PAGE> 58
------------
(1) Consists of 191,749 shares held by MDV IV Entrepreneurs' Network Fund, L.P.
and 4,188,296 shares held by Mohr, Davidow Ventures IV, L.P. The address of
each such entity is 2775 Sand Hill Road, Suite 240, Menlo Park, California
94025.
(2) Consists of 946,398 shares held by Sequel Euro Limited Partnership and
1,980,477 shares held by Sequel Limited Partnership. The address of each
such entity is 4430 Arapahoe Avenue, Suite 220, Boulder, Colorado 80303.
(3) The address of W.W. Grainger, Inc. is 100 Grainger Parkway, Lake Forest,
Illinois 60045.
(4) Consists of 106,886 shares held by Trinity V Side-by-Side Fund, L.P. and
1,857,159 shares held by Trinity Ventures V, L.P. The address of each such
entity is 3000 Sand Hill Road, Building 4, Suite 160, Menlo Park,
California 94025.
(5) Consists of 11,119 shares held by Spinnaker Clipper Fund, L.P., 24,243
shares held by Spinnaker Crossover Fund, L.P. and 1,729,344 shares held by
Spinnaker Crossover Institutional Fund, L.P. The address of each such
entity is 1875 South Grant Street, Suite 600, San Mateo, California 94402.
(6) Includes 649,997 shares held by Ms. Mowry jointly with her spouse and
159,376 shares subject to options exercisable within 60 days of August 25,
2000.
(7) Includes 49,219 shares subject to options exercisable within 60 days of
August 25, 2000.
(8) Includes 20,625 shares subject to options exercisable within 60 days of
August 25, 2000.
(9) Includes 13,749 shares subject to options exercisable within 60 days of
August 25, 2000.
(10) Includes 99,088 shares held by Mr. Ramachandran's spouse, 98,694 shares
held by the Ramachandran Family Trust and 19,687 shares subject to options
exercisable within 60 days of August 25, 2000.
(11) Consists solely of shares held by Trinity Ventures. See Note 4 above. Mr.
Fenton is a member of Trinity TVL V, L.L.C., the general partner of Trinity
V Side-by-Side Fund, L.P. and Trinity Ventures V, L.P., and as such has
shared voting and investment power with respect to the shares held by such
entities. Mr. Fenton disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest therein.
(12) Consists solely of shares held by Mohr Davidow Ventures. See Note 1 above.
Ms. Schoendorf is a member of Fourth MDV Partners, L.L.C., the general
partner of MDV IV Entrepreneurs' Network Fund, L.P. and Mohr, Davidow
Ventures IV, L.P., and as such has shared voting and investment power with
respect to the shares held by such entities. Ms. Schoendorf disclaims
beneficial ownership of such shares except to the extent of her pecuniary
interest therein.
(13) Includes 2,926,875 shares held by Sequel Venture Partners. See Note 2
above. Mr. Washing is a managing member of Sequel Venture Partners, L.L.C.,
the general partner of Sequel Euro Limited Partnership and Sequel Limited
Partnership, and as such has shared voting and investment power with
respect to the shares held by such entities. Mr. Washing disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein. Also includes 22,500 shares held by Mr. Washing's spouse,
of which 15,000 shares are held by her as trustee for the benefit of Mr.
Washing's daughter; Mr. Washing disclaims beneficial ownership of such
shares.
(14) Includes an aggregate of 345,154 shares subject to options exercisable
within 60 days of August 25, 2000. Also, see Notes 6 through 13 above.
56
<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock.
The following is a summary of our capital stock. Our certificate of
incorporation and bylaws to be effective upon the closing of this offering and
the provisions of applicable law provide further information about our capital
stock, and the following summary is qualified by reference to our certificate of
incorporation and bylaws.
COMMON STOCK
Assuming the conversion of all outstanding shares of our preferred stock
into common stock, as of August 25, 2000, we had 22,786,242 shares of common
stock outstanding held of record by approximately 160 stockholders. Subject to
preferences that may be applicable to any preferred stock outstanding at the
time, the holders of outstanding shares of common stock are entitled to the
following rights:
-- to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors from time to time
may determine in its sole discretion;
-- one vote for each share held on all matters submitted to a vote of
stockholders; and
-- upon our liquidation, dissolution or winding-up, to share ratably in
all assets remaining after payment of liabilities and the liquidation
of any preferred stock.
Cumulative voting for the election of directors is not authorized by our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election. The
common stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Each outstanding share of common stock is, and all
shares of common stock to be outstanding upon completion of this offering will
be, upon payment, duly and validly issued, fully paid and nonassessable. The
rights, preferences and privileges of the holders of common stock are subject
to, and may be adversely affected by, the rights of the holders of any shares of
preferred stock that we may issue in the future.
PREFERRED STOCK
Upon completion of this offering, all outstanding shares of preferred stock
will be converted on a one-to-one basis into 17,265,176 shares of common stock.
However, following this conversion, under our certificate of incorporation to be
effective upon the closing of this offering, our board of directors will have
the authority, without further action by the stockholders, to designate and
issue up to 10,000,000 shares of preferred stock in one or more series. Our
board of directors can fix the rights, preferences and privileges of the shares
of each series and any qualifications, limitations or restrictions on these
shares.
Our board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could, under certain circumstances, have the effect of
delaying, deferring or preventing a change in our control. We have no current
plans to issue any shares of preferred stock.
WARRANTS
In October 1996, we issued to Comdisco, Inc. a warrant to purchase an
aggregate of 20,625 shares of Series B preferred stock at an exercise price of
$1.21 per share. The warrant may be exercised at any time before the later of
ten years after issuance of the warrant or five years after the closing of this
offering.
In December 1997, we issued to Comdisco, Inc. a warrant to purchase an
aggregate of 13,044 shares of Series C preferred stock at an exercise price of
$1.53 per share. The warrant may be exercised at any time before the later of
ten years after issuance of the warrant or five years after the closing of this
offering.
57
<PAGE> 60
In December 1999, we issued to GE Capital Equity Investments, Inc. a
warrant to purchase an aggregate of 3,750 shares of common stock at an exercise
price of $2.33 per share. The warrant may be exercised at any time before the
earlier of five years after issuance of the warrant or the closing of this
offering.
REGISTRATION RIGHTS
Following this offering, the holders of 17,085,196 shares of our preferred
stock, convertible into 17,085,196 shares of common stock, and 20,625 shares of
stock issuable upon exercise of warrants will have rights to register those
shares under the Securities Act and our third amended and restated investor
rights agreement. Subject to limitations in the third amended and restated
investor rights agreement, the holders of a majority of these shares, so long as
the aggregate offering price is at least $15,000,000, may require, on two
occasions, that we use our best efforts to register these shares for public
resale. If we register any of our shares of common stock for our own account or
for the account of other security holders, the holders of these shares are
entitled to include their shares of common stock in the registration, subject to
the ability of the underwriters to limit the number of shares included in the
offering. Any holder or holders of these shares may also require us to register
all or a portion of their registrable securities in a registration statement on
Form S-3 when we are eligible to use that form, provided, among other
limitations, that the proposed aggregate price to the public is at least
$750,000 and that we have not effected two of these registrations in any
12-month period. We will pay all fees, costs and expenses of these
registrations, other than underwriting discounts and commissions. These rights
terminate on the earlier of the date which is five years from the closing of
this offering or the date when all shares of a holder can be sold by the holder
under Rule 144 of the Securities Act during any 90-day period.
All of the registration rights described above are subject to conditions
and limitations, among them the right of the underwriters in any underwritten
offering to limit the number of shares of common stock to be included in a
registration. Registration of any shares of common stock held by holders with
registration rights would result in these shares being freely tradeable without
restriction under the Securities Act upon the effective date of the
registration. Pursuant to the third amended and restated investor rights
agreement, dated September 13, 1999, among us and some of our investors, these
investors have certain registration rights for the shares of common stock held
by them. All holders of registration rights have waived these rights in
connection with this offering.
ANTITAKEOVER EFFECTS OF DELAWARE LAW AND PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits any publicly-held Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date of the transaction in which the
stockholder became an interested stockholder, unless:
-- prior to that date, the board of directors approved either the
business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
-- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the stockholder owned at least
85% of the voting stock outstanding at the time the transaction
began; or
-- on or following that date, the business combination is approved by
our board of directors and authorized at an annual or special meeting
of stockholders by the affirmative vote at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines a business combination to include:
-- any merger or consolidation involving the corporation and the
interested stockholder;
-- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
58
<PAGE> 61
-- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
-- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
-- the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person who, together with affiliates and associates, owns, or within three
years, did own, 15% or more of the corporation's voting stock.
CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation to be effective upon the closing of this
offering will provide that all stockholder actions must be effected at a duly
called meeting and not by a consent in writing. After the closing of this
offering, our bylaws will provide that, except as otherwise required by law or
by our certificate of incorporation, special meetings of the stockholders can
only be called by a resolution adopted by the chairman of our board of
directors, our chief executive officer or a majority of our board of directors.
Our certificate of incorporation and bylaws will provide that our board of
directors will be divided into three classes, with each class serving staggered
three-year terms. The classification system of electing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us and may maintain the incumbency of our board of directors,
as the classification of the board of directors generally increases the
difficulty of replacing a majority of the directors. Our certificate of
incorporation will authorize undesignated preferred stock, which makes it
possible for our board of directors to issue preferred stock with voting or
other rights or preferences that could discourage potential acquisition
proposals and could delay or prevent a change in our control or management. The
amendment of any of these provisions would require approval by holders of at
least two-thirds of our outstanding common stock.
These provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal, and to enhance the likelihood of continuity and stability
in the composition of our board of directors. These provisions also are designed
to discourage tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares and, as a consequence, they also may inhibit fluctuations
in the market price of our shares that could result from rumored or actual
takeover attempts.
TRANSFER AGENT AND REGISTRAR
Upon the closing of this offering, the transfer agent and registrar for our
common stock will be ChaseMellon Shareholder Services LLC.
59
<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been a public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market, or the perception that these sales may occur, could adversely affect
prevailing market prices.
Upon completion of this offering, we will have outstanding shares
of common stock, assuming no exercise of the underwriters' over-allotment
option. Of these outstanding shares, the shares sold in this offering
through the underwriters will be freely tradeable without restriction or further
registration under the Securities Act, except that any shares purchased by our
"affiliates," as defined in Rule 144 under the Securities Act, generally may be
sold only in compliance with the limitations of Rule 144 described below. Shares
purchased by affiliates also will be restricted from sale until 180 days after
the date of this prospectus pursuant to lock-up agreements between these
affiliates and the underwriters.
The remaining 22,786,242 shares of common stock outstanding upon completion
of this offering will be "restricted securities," as defined in Rule 144.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144 or 701 under the
Securities Act, which are summarized below.
The amount of restricted securities that will be available for sale in the
public market, taking into account the lock-up agreements described below and
subject in some cases to the volume limitations and other restrictions of Rule
144, will be as follows:
<TABLE>
<CAPTION>
APPROXIMATE SHARES
DAYS AFTER DATE OF ELIGIBLE FOR
THIS PROSPECTUS FUTURE SHARE COMMENT
------------------ ------------------ -------
<S> <C> <C>
On Effectiveness.................... Freely tradeable shares sold in
offering
180 Days............................ 22,534,557 180 day lock-up expires; shares
salable under Rule 144 or 701
More than 180 Days.................. 251,685 Restricted securities held for one
year or less
</TABLE>
Shares issued upon exercise of options granted by us to any of our
employees or advisors who purchase shares from us in connection with a
compensatory stock plan or other written agreement prior to the date of this
prospectus will be available for sale in the public market under Rule 701 of the
Securities Act. Rule 701 permits resales of these shares in reliance upon Rule
144 but without compliance with various restrictions, including the public
information, holding period, volume limitation or notice provisions of Rule 144,
and permits affiliates to sell their Rule 701 shares without having to comply
with the Rule 144 holding period restriction. In general, under Rule 144 as
currently in effect, beginning 90 days after the date of this prospectus, a
person, or persons whose shares are aggregated, who has beneficially owned
shares of our common stock for at least one year would be entitled to sell
within any three-month period a number of shares not to exceed the greater of
(1) one percent of the then outstanding shares of common stock or (2) the
average weekly trading volume of our common stock during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to the sale. Sales
under Rule 144 also are subject to manner of sale and notice requirements, as
well as to the availability of current public information about us. Under Rule
144(k), a person who is not deemed to have been an affiliate at any time during
the 90 days preceding a sale and who has beneficially owned the shares proposed
to be sold for at least two years is entitled to sell the shares under Rule
144(k) without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
We have reserved an aggregate of 7,950,000 shares of common stock for
issuance pursuant to our 1999 equity incentive plan, which will be amended and
restated as the 2000 equity incentive plan concurrently with the closing of this
offering. As of August 25, 2000, options to purchase an aggregate of 3,432,821
shares of common stock were outstanding and 2,137,176 shares remained available
for future option grants under our 1999 equity incentive plan. We have also
reserved an aggregate of 2,000,000 shares of common stock for issuance pursuant
to our 2000 employee stock purchase plan. The 2000 employee stock purchase plan
will not be effective until the closing of this offering. Therefore, as of
August 25, 2000, no shares of our common stock have been purchased
60
<PAGE> 63
under this plan. We intend to file registration statements on Form S-8 under the
Securities Act approximately 90 days after the date of this prospectus to
register all of the shares of common stock issued or reserved for issuance under
our 2000 equity incentive plan and 2000 employee stock purchase plan. After the
filing of related registration statements, shares of common stock issued under
these plans will be freely tradable in the public market, subject in the case of
the holders to the Rule 144 limitations applicable to our affiliates, lock-up
agreements with the underwriters and vesting restrictions imposed by us.
Our officers, directors and substantially all other stockholders have
agreed with Morgan Stanley & Co. Incorporated not to sell or otherwise dispose
of any of their shares for a period of 180 days after the date of the offering
without the consent of Morgan Stanley & Co. Incorporated.
61
<PAGE> 64
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement, the underwriters named below, for whom Morgan Stanley & Co.
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation and Dain
Rauscher Incorporated are acting as representatives, have severally agreed to
purchase, and we have agreed to sell to them, severally, the number of shares
indicated below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Dain Rauscher Incorporated..................................
----------
Total.............................................
==========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept delivery
of the shares of common stock offered by this prospectus are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus, other than those covered by the
over-allotment option described below, if any of the shares are taken. Morgan
Stanley Dean Witter Online, an affiliate of Morgan Stanley & Co. Incorporated,
is acting as a selected dealer in connection with the offering and will be the
sole distributor of shares of common stock over the Internet to its eligible
account holders.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. No
underwriter will allow, and no dealer will reallow, any concession to other
underwriters or to other dealers. After the initial offering of the shares of
common stock, the offering price and other selling terms may from time to time
be varied by the representatives.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price set forth on the
cover page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is exercised,
each underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of the additional shares of common
stock as the number located next to that underwriter's name in the preceding
table bears to the total number of shares of common stock set forth next to the
names of all underwriters in the preceding table. If the underwriters' option is
exercised in full, the total price to the public would be $ , the total
underwriters' discounts and commissions would be $ and the total proceeds to
us would be $ .
At our request, the underwriters expect to reserve for sale at the initial
public offering price up to shares offered by this prospectus for our
employees, officers and directors. The number of shares of common stock
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered by this prospectus.
62
<PAGE> 65
We, the directors, officers and substantially all of our other
stockholders, and substantially all individuals holding options to acquire
shares of our common stock that will be vested within the 180-day period after
the date of this prospectus, have each agreed that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we
will not, during the period ending 180 days after the date of this prospectus:
-- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common
stock; or
-- enter into any swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of
common stock,
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
-- the sale of shares to the underwriters under the underwriting
agreement; or
-- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after
the completion of the offering of the shares.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering if the syndicate repurchases previously distributed
common stock in transactions to cover syndicate short positions, in stabilizing
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities and may end any of
these activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there was no public market for the common stock.
The initial public offering price will be determined by negotiations between us
and the representatives of the underwriters. Among the factors to be considered
in determining the initial public offering price will be our record of
operations; our current financial position and future prospects; the experience
of our management; sales, earnings and certain of our other financial and
operating information in recent periods; and the price-earnings ratios,
price-sales ratios, market prices of securities and certain financial and
operating information of companies engaged in activities similar to ours. The
estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
63
<PAGE> 66
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon by Cooley Godward LLP, Boulder, Colorado. An investment partnership
affiliated with Cooley Godward LLP owns 22,936 shares of our Series D preferred
stock, which will convert into an equal number of shares of our common stock
upon completion of this offering. Certain legal matters in connection with the
offering will be passed upon for the underwriters by Latham & Watkins, Menlo
Park, California.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999, and
for each of the three years in the period ended December 31, 1999, included in
this prospectus and registration statement to the extent and for the periods
indicated in their report have been audited by Arthur Andersen LLP, independent
public accountants, and are included herein in reliance upon the authority of
said firm as experts in auditing and accounting in giving said reports.
CHANGE IN ACCOUNTANTS
Effective January 11, 2000, Arthur Andersen LLP was engaged as our
independent accountants and replaced PricewaterhouseCoopers LLP, who were
dismissed as our independent accountants. The decision to change independent
accountants was approved by our Board of Directors. PricewaterhouseCoopers LLP
reported on our financial statements as of and for the years ended December 31,
1997 and 1998. The report of PricewaterhouseCoopers LLP on those financial
statements did not contain an adverse opinion or disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with their audits as of and for the years ended
December 31, 1997 and 1998 and through January 11, 2000, we did not have any
disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements, if not resolved to their satisfaction, would
have caused them to make reference thereto in connection with their report on
the financial statements for such periods. PricewaterhouseCoopers LLP has not
audited or reported on any financial statements or information included in this
prospectus. For purposes of this filing, the financial statements for the years
ended December 31, 1997 and 1998 have been audited by Arthur Andersen LLP. Prior
to retaining Arthur Andersen LLP, we had not consulted with Arthur Andersen LLP
on items that involved our accounting principles or the form of audit opinion to
be issued on our financial statements.
WHERE TO FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered by this prospectus. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement and the exhibits and schedules filed with
it. For further information about us and our common stock, reference is made to
the registration statement and the exhibits and schedules filed with it. With
respect to statements contained in this prospectus regarding the contents of any
agreement or any other document, in each instance, reference is made to the copy
of such agreement or other document filed as an exhibit to the registration
statement. Each statement is qualified in all respects by the exhibits and
schedules.
You may read and copy any document we file at the Securities and Exchange
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information about the public reference rooms. Our
Securities and Exchange Commission filings are also available to the public from
the Securities and Exchange Commission's website at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, and
will file periodic reports, proxy statements and other information with the
Securities and Exchange Commission. These periodic reports, proxy statements and
other information will be available for inspection and copying at the Securities
and Exchange Commission's public reference rooms and the Securities and Exchange
Commission's website, which is described above.
64
<PAGE> 67
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
F-1
<PAGE> 68
After the stock split discussed in Note 2 to the Company's Financial
Statements is effected, we expect to be in a position to render the following
audit report.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 30, 2000.
------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Requisite Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Requisite
Technology, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Requisite Technology, Inc.
and subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Denver, Colorado,
August 30, 2000 (except with respect
to the stock split discussed in Note 2,
as to which the date is , 2000).
F-2
<PAGE> 69
REQUISITE TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, ---------
------------------- JUNE 30, JUNE 30,
1998 1999 2000 2000
-------- -------- -------- ---------
(UNAUDITED)
(NOTE 2)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,662 $ 22,541 $ 19,247
Accounts receivable--trade................................ 785 3,763 4,784
Prepaid and other assets.................................. 25 376 357
-------- -------- --------
Total current assets............................... 7,472 26,680 24,388
-------- -------- --------
PROPERTY AND EQUIPMENT, net................................. 710 2,189 7,048
OTHER ASSETS, net........................................... 40 91 930
GOODWILL, net............................................... 630 349 210
-------- -------- --------
Total assets....................................... $ 8,852 $ 29,309 $ 32,576
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 294 $ 866 $ 1,874
Accrued liabilities and other............................. 295 257 2,283
Deferred revenue.......................................... 1,181 4,623 11,119
Current portion of capital leases......................... 222 227 161
-------- -------- --------
Total current liabilities.......................... 1,992 5,973 15,437
CAPITAL LEASES, net of current portion...................... 347 128 88
DEFERRED REVENUE, net of current portion.................... 362 215 669
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $0.001 par value per share:
Series A, 284,445, 284,445 and 506,130 shares
issued and outstanding actual, 0 pro forma,
respectively; $256, $256 and $456 liquidation
value, respectively.............................. 256 256 271 $ --
Series B, 4,678,176 shares issued and outstanding
actual, 0 pro forma; $5,645 liquidation value.... 5,645 5,645 5,645 --
Series C, 4,419,129 shares issued and outstanding
actual, 0 pro forma; $6,776 liquidation value.... 6,776 6,776 6,776 --
Series D, 3,249,998 shares issued and outstanding
actual, 0 pro forma; $7,085 liquidation value.... 7,085 7,085 7,085 --
Series E, 0, 4,411,763 and 4,411,763 shares issued
and outstanding actual, 0 pro forma,
respectively; $25,000 liquidation value.......... -- 24,968 24,968 --
Common stock, $0.001 par value per share, 25,275,000,
30,000,000 and 30,000,000 shares authorized,
respectively; 3,140,602, 4,766,634 and 5,416,077 shares
issued, respectively; 3,140,602, 4,721,635 and 5,371,077
shares outstanding, respectively, actual; 100,000,000
shares authorized, 22,681,273 shares issued and
22,636,273 shares outstanding, pro forma................ 3 5 5 22
Additional paid-in capital................................ 355 1,126 4,111 48,839
Stock issuable for earn-out (Note 5)...................... 124 2,390 -- --
Treasury stock............................................ -- (255) (255) (255)
Options and warrants...................................... 1,620 5,207 20,749 20,749
Deferred stock-based compensation......................... (1,500) (4,322) (18,482) (18,482)
Accumulated deficit....................................... (14,204) (25,895) (34,590) (34,590)
Accumulated other comprehensive (loss) income............. (9) 7 99 99
-------- -------- -------- --------
Total stockholders' equity......................... 6,151 22,993 16,382 $ 16,382
-------- -------- -------- ========
Total liabilities and stockholders' equity......... $ 8,852 $ 29,309 $ 32,576
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 70
REQUISITE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Content management fees............... $ -- $ -- $ 81 $ -- $ 865
Content creation fees................. 102 942 3,350 1,246 3,148
Royalty and license fees.............. 100 308 2,707 608 9,742
Engineering and consulting fees....... 15 137 1,161 704 431
---------- ---------- ----------- ----------- -----------
Total revenue.................. 217 1,387 7,299 2,558 14,186
---------- ---------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of operations (excludes
stock-based compensation, see Note
7).................................. 1,303 2,315 4,943 1,622 6,115
Selling and marketing (excludes
stock-based compensation, see Note
7).................................. 1,151 1,818 4,984 1,464 9,624
Research and development (excludes
stock-based compensation, see Note
7).................................. 2,029 1,949 3,168 1,276 2,237
General and administrative (excludes
stock-based compensation, see Note
7).................................. 844 1,238 2,830 1,250 3,371
Stock-based compensation (see Note
7).................................. 19 200 3,540 326 1,847
---------- ---------- ----------- ----------- -----------
Total operating expenses....... 5,346 7,520 19,465 5,938 23,194
---------- ---------- ----------- ----------- -----------
LOSS FROM OPERATIONS.................... (5,129) (6,133) (12,166) (3,380) (9,008)
OTHER INCOME, net....................... 101 224 475 74 313
---------- ---------- ----------- ----------- -----------
NET LOSS................................ $ (5,028) $ (5,909) $ (11,691) $ (3,306) $ (8,695)
========== ========== =========== =========== ===========
NET LOSS PER SHARE, basic and diluted... $ (1.98) $ (2.06) $ (3.01) $ (0.97) $ (1.70)
========== ========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted........ 2,543,463 2,873,273 3,881,915 3,397,522 5,103,145
========== ========== =========== =========== ===========
PRO FORMA NET LOSS PER SHARE
(UNAUDITED--Note 2):
Net loss per share, basic and
diluted............................. $ ( 0.66) $ (0.21) $ (0.39)
=========== =========== ===========
Weighted average common shares
outstanding, basic and diluted...... 17,831,148 16,029,270 22,169,128
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 71
REQUISITE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL
-------------------- ------------------ ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- --------- ------ -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996..................... 3,305,162 $ 3,901 2,847,512 $ 3 -- $ -- $283
Issuance of common stock upon exercise of
options...................................... -- -- 107,812 -- -- -- 13
Sale of Series B preferred stock in January
1997 for cash of $1.21 per share............. 1,657,459 2,000 -- -- -- -- --
Sale of Series C preferred stock in August 1997
for cash of $1.53 per share.................. 4,239,129 6,500 -- -- -- -- --
Repurchase of common stock..................... -- -- -- -- (666,705) (94) --
Retirement of treasury stock................... -- -- (629,205) (1) 629,205 88 (87)
Shares issued for services..................... -- -- 41,250 -- -- -- 6
Stock-based compensation....................... -- -- -- -- -- -- --
Issuance of warrants........................... -- -- -- -- -- -- --
Net loss....................................... -- -- -- -- -- -- --
---------- ------- --------- --- -------- ----- ----
BALANCES, December 31, 1997..................... 9,201,750 12,401 2,367,369 2 (37,500) (6) 215
Issuance of common stock upon exercise of
options...................................... -- -- 200,230 -- -- -- 25
Shares issued for services..................... -- -- 3,000 -- -- -- --
Stock-based compensation....................... -- -- -- -- -- -- --
Common stock and Series C preferred stock
issued in conjunction with business
acquisition.................................. 180,000 276 645,003 1 -- -- 128
Sale of Series D preferred stock in July 1998
for cash of $2.18 per share.................. 3,249,998 7,085 -- -- -- -- --
Repurchase of common stock..................... -- -- -- -- (37,500) (7) --
Retirement of treasury stock................... -- -- (75,000) -- 75,000 13 (13)
Deferred stock-based compensation.............. -- -- -- -- -- -- --
Deferred stock-based compensation adjustment
for terminated employees..................... -- -- -- -- -- -- --
Amortization of deferred stock-based
compensation................................. -- -- -- -- -- -- --
Stock issuable for earn-out.................... -- -- -- -- -- -- --
Cumulative translation adjustment.............. -- -- -- -- -- -- --
Net loss....................................... -- -- -- -- -- -- --
Comprehensive loss............................. -- -- -- -- -- -- --
---------- ------- --------- --- -------- ----- ----
BALANCES, December 31, 1998..................... 12,631,748 $19,762 3,140,602 $ 3 -- $ -- $355
========== ======= ========= === ======== ===== ====
<CAPTION>
STOCK ACCUMULATED
ISSUABLE OPTIONS DEFERRED OTHER
FOR AND STOCK-BASED ACCUMULATED COMPREHENSIVE COMPREHENSIVE
EARN-OUT WARRANTS COMPENSATION DEFICIT INCOME/(LOSS) LOSS
-------- -------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996..................... $ -- $ 17 $ -- $ (3,267) $--
Issuance of common stock upon exercise of
options...................................... -- -- -- -- --
Sale of Series B preferred stock in January
1997 for cash of $1.21 per share............. -- -- -- -- --
Sale of Series C preferred stock in August 1997
for cash of $1.53 per share.................. -- -- -- -- --
Repurchase of common stock..................... -- -- -- -- --
Retirement of treasury stock................... -- -- -- -- --
Shares issued for services..................... -- -- -- -- --
Stock-based compensation....................... -- 13 -- -- --
Issuance of warrants........................... -- 14 -- -- --
Net loss....................................... -- -- -- (5,028) -- $(5,028)
---- ------ ------- -------- --- =======
BALANCES, December 31, 1997..................... -- 44 -- (8,295) --
Issuance of common stock upon exercise of
options...................................... -- -- -- -- --
Shares issued for services..................... -- -- -- -- --
Stock-based compensation....................... -- 2 -- -- --
Common stock and Series C preferred stock
issued in conjunction with business
acquisition.................................. -- -- -- -- --
Sale of Series D preferred stock in July 1998
for cash of $2.18 per share.................. -- -- -- -- --
Repurchase of common stock..................... -- -- -- -- --
Retirement of treasury stock................... -- -- -- -- --
Deferred stock-based compensation.............. -- 1,595 (1,595) -- --
Deferred stock-based compensation adjustment
for terminated employees..................... -- (21) 21 -- --
Amortization of deferred stock-based
compensation................................. -- -- 74 -- --
Stock issuable for earn-out.................... 124 -- -- -- --
Cumulative translation adjustment.............. -- -- -- -- (9) $ (9)
Net loss....................................... -- -- -- (5,909) -- (5,909)
-------
Comprehensive loss............................. -- -- -- -- -- $(5,918)
---- ------ ------- -------- --- =======
BALANCES, December 31, 1998..................... $124 $1,620 $(1,500) $(14,204) $(9)
==== ====== ======= ======== ===
<CAPTION>
TOTAL
--------
<S> <C>
BALANCES, December 31, 1996..................... $ 937
Issuance of common stock upon exercise of
options...................................... 13
Sale of Series B preferred stock in January
1997 for cash of $1.21 per share............. 2,000
Sale of Series C preferred stock in August 1997
for cash of $1.53 per share.................. 6,500
Repurchase of common stock..................... (94)
Retirement of treasury stock................... --
Shares issued for services..................... 6
Stock-based compensation....................... 13
Issuance of warrants........................... 14
Net loss....................................... (5,028)
--------
BALANCES, December 31, 1997..................... 4,361
Issuance of common stock upon exercise of
options...................................... 25
Shares issued for services..................... --
Stock-based compensation....................... 2
Common stock and Series C preferred stock
issued in conjunction with business
acquisition.................................. 405
Sale of Series D preferred stock in July 1998
for cash of $2.18 per share.................. 7,085
Repurchase of common stock..................... (7)
Retirement of treasury stock................... --
Deferred stock-based compensation.............. --
Deferred stock-based compensation adjustment
for terminated employees..................... --
Amortization of deferred stock-based
compensation................................. 74
Stock issuable for earn-out.................... 124
Cumulative translation adjustment.............. (9)
Net loss....................................... (5,909)
Comprehensive loss............................. --
--------
BALANCES, December 31, 1998..................... $ 6,151
========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 72
REQUISITE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
LOSS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL
-------------------- ------------------ ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- --------- ------ -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1998.................... 12,631,748 $19,762 3,140,602 $ 3 -- $ -- $ 355
Issuance of common stock upon exercise of
options..................................... -- -- 1,521,359 2 -- -- 262
Repurchase of common stock and related
compensation................................ -- -- -- -- (45,000) (255) 249
Issuance of common stock for earn-out......... -- -- 62,769 -- -- -- 124
Shares issued for services.................... -- -- 7,500 -- -- -- 60
Stock-based compensation...................... -- -- 34,404 -- -- -- 76
Sale of Series E preferred stock in September
1999 for cash of $5.67 per share, net of
offering costs of $32....................... 4,411,763 24,968 -- -- -- -- --
Deferred stock-based compensation............. -- -- -- -- -- -- --
Deferred stock-based compensation adjustment
for terminated employees.................... -- -- -- -- -- -- --
Amortization of deferred stock-based
compensation................................ -- -- -- -- -- -- --
Stock issuable for earn-out................... -- -- -- -- -- -- --
Cumulative translation adjustment............. -- -- -- -- -- -- --
Net loss...................................... -- -- -- -- -- -- --
Comprehensive loss............................ -- -- -- -- -- -- --
---------- ------- --------- --- -------- ----- ------
BALANCES, December 31, 1999.................... 17,043,511 44,730 4,766,634 5 (45,000) (255) 1,126
Issuance of common stock upon exercise of
options (unaudited)......................... -- -- 256,670 -- -- -- 69
Issuance of common stock upon exercise of
warrants (unaudited)........................ -- -- 102,750 -- -- -- 2
Stock-based compensation (unaudited).......... -- -- 13,236 -- -- -- 178
Shares issued for cash ($60) and services
(unaudited)................................. -- -- 25,714 -- -- -- 346
Issuance of common stock for earn-out
(unaudited)................................. -- -- 251,073 -- -- -- 2,390
Issuance of Series A preferred stock upon
exercise of warrant (unaudited)............. 221,685 15 -- -- -- -- --
Deferred stock-based compensation
(unaudited)................................. -- -- -- -- -- -- --
Deferred stock-based compensation adjustment
for terminated employees (unaudited)........ -- -- -- -- -- -- --
Amortization of deferred stock-based
compensation (unaudited).................... -- -- -- -- -- -- --
Cumulative translation adjustment
(unaudited)................................. -- -- -- -- -- -- --
Net loss (unaudited).......................... -- -- -- -- -- -- --
Comprehensive loss (unaudited)................ -- -- -- -- -- -- --
---------- ------- --------- --- -------- ----- ------
BALANCES, June 30, 2000 (unaudited)............ 17,265,196 $44,745 5,416,077 $ 5 (45,000) $(255) $4,111
========== ======= ========= === ======== ===== ======
<CAPTION>
STOCK ACCUMULATED
ISSUABLE OPTIONS DEFERRED OTHER
FOR AND STOCK-BASED ACCUMULATED COMPREHENSIVE COMPREHENSIVE
EARN-OUT WARRANTS COMPENSATION DEFICIT INCOME/(LOSS) LOSS
-------- -------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1998.................... $ 124 $ 1,620 $ (1,500) $(14,204) $(9)
Issuance of common stock upon exercise of
options..................................... -- -- -- -- --
Repurchase of common stock and related
compensation................................ -- -- -- -- --
Issuance of common stock for earn-out......... (124) -- -- -- --
Shares issued for services.................... -- -- -- -- --
Stock-based compensation...................... -- -- -- -- --
Sale of Series E preferred stock in September
1999 for cash of $5.67 per share, net of
offering costs of $32....................... -- -- -- -- --
Deferred stock-based compensation............. -- 3,900 (3,900) -- --
Deferred stock-based compensation adjustment
for terminated employees.................... -- (313) 313 -- --
Amortization of deferred stock-based
compensation................................ -- -- 765 -- --
Stock issuable for earn-out................... 2,390 -- -- -- --
Cumulative translation adjustment............. -- -- -- -- 16 $ 16
Net loss...................................... -- -- -- (11,691) -- (11,691)
--------
Comprehensive loss............................ -- -- -- -- -- $(11,675)
------- ------- -------- -------- --- ========
BALANCES, December 31, 1999.................... 2,390 5,207 (4,322) (25,895) 7
Issuance of common stock upon exercise of
options (unaudited)......................... -- -- -- -- --
Issuance of common stock upon exercise of
warrants (unaudited)........................ -- -- -- -- --
Stock-based compensation (unaudited).......... -- -- -- -- --
Shares issued for cash ($60) and services
(unaudited)................................. -- -- -- -- --
Issuance of common stock for earn-out
(unaudited)................................. (2,390) -- -- -- --
Issuance of Series A preferred stock upon
exercise of warrant (unaudited)............. -- -- -- -- --
Deferred stock-based compensation
(unaudited)................................. -- 16,360 (16,360) -- --
Deferred stock-based compensation adjustment
for terminated employees (unaudited)........ -- (818) 818 -- --
Amortization of deferred stock-based
compensation (unaudited).................... -- -- 1,382 -- --
Cumulative translation adjustment
(unaudited)................................. -- -- -- -- 92 $ 92
Net loss (unaudited).......................... -- -- -- (8,695) -- (8,695)
--------
Comprehensive loss (unaudited)................ -- -- -- -- -- $ (8,603)
------- ------- -------- -------- --- ========
BALANCES, June 30, 2000 (unaudited)............ $ -- $20,749 $(18,482) $(34,590) $99
======= ======= ======== ======== ===
<CAPTION>
TOTAL
---------
<S> <C>
BALANCES, December 31, 1998.................... $ 6,151
Issuance of common stock upon exercise of
options..................................... 264
Repurchase of common stock and related
compensation................................ (6)
Issuance of common stock for earn-out......... --
Shares issued for services.................... 60
Stock-based compensation...................... 76
Sale of Series E preferred stock in September
1999 for cash of $5.67 per share, net of
offering costs of $32....................... 24,968
Deferred stock-based compensation............. --
Deferred stock-based compensation adjustment
for terminated employees.................... --
Amortization of deferred stock-based
compensation................................ 765
Stock issuable for earn-out................... 2,390
Cumulative translation adjustment............. 16
Net loss...................................... (11,691)
Comprehensive loss............................ --
---------
BALANCES, December 31, 1999.................... 22,993
Issuance of common stock upon exercise of
options (unaudited)......................... 69
Issuance of common stock upon exercise of
warrants (unaudited)........................ 2
Stock-based compensation (unaudited).......... 178
Shares issued for cash ($60) and services
(unaudited)................................. 346
Issuance of common stock for earn-out
(unaudited)................................. --
Issuance of Series A preferred stock upon
exercise of warrant (unaudited)............. 15
Deferred stock-based compensation
(unaudited)................................. --
Deferred stock-based compensation adjustment
for terminated employees (unaudited)........ --
Amortization of deferred stock-based
compensation (unaudited).................... 1,382
Cumulative translation adjustment
(unaudited)................................. 92
Net loss (unaudited).......................... (8,695)
Comprehensive loss (unaudited)................ --
---------
BALANCES, June 30, 2000 (unaudited)............ $ 16,382
=========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 73
REQUISITE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------- -------------------
1997 1998 1999 1999 2000
--------- --------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $(5,028) $(5,909) $(11,691) $(3,306) $(8,695)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities--
Write-off of asset....................... -- 81 -- -- --
Depreciation and amortization............ 126 416 939 373 1,057
Amortization of discount on debt......... 5 10 10 5 5
Loss on disposal of fixed assets......... 14 23 -- -- --
Foreign exchange loss.................... -- 15 (2) 2 129
Common stock issued for services......... 6 1 60 -- 286
Stock-based compensation................. 13 125 2,715 75 178
Amortization of deferred stock-based
compensation........................... -- 74 765 251 1,382
Change in other assets................... -- (107) 6 (4) (597)
Changes in operating assets and
liabilities--
Accounts receivable--trade............. (105) (671) (2,994) (2,794) (1,003)
Prepaids and other current assets...... (87) 125 (332) (65) 3
Accounts payable and accrued
liabilities......................... 369 (281) 601 302 3,039
Deferred revenue....................... -- 1,542 3,295 4,415 6,949
------- ------- -------- ------- -------
Net cash (used in) provided by
operating activities.............. (4,687) (4,556) (6,628) (746) 2,733
------- ------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......... (518) (291) (2,184) (1,189) (5,802)
------- ------- -------- ------- -------
Net cash used in investing
activities........................ (518) (291) (2,184) (1,189) (5,802)
------- ------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale-leaseback of assets...... 254 484 -- -- --
Proceeds from issuance of preferred stock... 8,500 7,085 25,000 -- 15
Costs related to the issuance of preferred
stock.................................... -- -- (32) -- --
Proceeds from issuance of common stock...... 13 25 264 61 131
Deferred financing costs.................... -- -- -- -- (245)
Repurchases of common stock................. (94) (7) (255) -- --
Principal payments on capital leases and
long-term debt........................... (72) (501) (291) (194) (111)
------- ------- -------- ------- -------
Net cash provided by (used in)
financing activities.............. 8,601 7,086 24,686 (133) (210)
------- ------- -------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH....... -- -- 5 1 (15)
------- ------- -------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 3,396 2,239 15,879 (2,067) (3,294)
------- ------- -------- ------- -------
CASH AND CASH EQUIVALENTS, beginning of
period...................................... 1,027 4,423 6,662 6,662 22,541
------- ------- -------- ------- -------
CASH AND CASH EQUIVALENTS, end of period...... $ 4,423 $ 6,662 $ 22,541 $ 4,595 $19,247
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 74
REQUISITE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------- -------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 45 $ 49 $ 37 $ 23 $ 11
==== ==== ==== ==== ====
Cash paid for taxes............................. $ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== ====
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Warrants issued for capital leases.............. $ 14 $ -- $ -- $ -- $ --
==== ==== ==== ==== ====
Deferred payments for acquisition............... $ -- $300 $ -- $ -- $ --
==== ==== ==== ==== ====
Stock issued for acquisition.................... $ -- $405 $ -- $ -- $ --
==== ==== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 75
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Requisite Technology, Inc. (the "Company"), a Delaware corporation,
provides technology and services for creating business-to-business electronic
catalog content and finding content information. The Company also provides
content management services to enable and enhance electronic commerce. The
Company creates, maintains and integrates retrievable, commerce-ready products
and services information to benefit buyers, suppliers and marketplaces.
The Company was incorporated in November 1993 and began operations shortly
thereafter. Since its inception, the Company has incurred significant losses.
Although the Company anticipates that funds from product sales and working
capital at December 31, 1999, will be sufficient to fund its operations through
at least December 31, 2000, additional financing may be needed by the Company to
fund its operations, continue the commercial development of its products and
develop its sales and marketing infrastructure. There is no guarantee that such
financing will be available when needed upon terms acceptable to the Company.
Operations of the Company are subject to certain risks and uncertainties
including, among others, uncertainty of product development, inexperience in
marketing or selling its products, technological uncertainty, competition,
dependence on key personnel and the management of rapid growth.
To address these risks, the Company must, among other things, maintain and
increase its customer base, implement and successfully execute its business and
marketing strategy, continue to develop and upgrade its technology, provide
superior customer service and attract, hire and retain qualified personnel.
There can be no guarantee that the Company will be successful in addressing such
risks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The interim financial statements as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000, are unaudited and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the Company's management, the unaudited interim financial
statements contain all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions may affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Antaeus Systems, Inc. ("Antaeus") and
Requisite Technology, Ltd. All significant intercompany accounts and
transactions have been eliminated.
F-9
<PAGE> 76
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency of our subsidiaries is their local currency.
Accordingly, all assets and liabilities of our foreign subsidiaries are
translated at current exchange rates and translation adjustments are included in
stockholders' equity as a component of other comprehensive income. Revenue,
expenses and cash flows are translated at the weighted average exchange rate for
the period.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents and
accounts receivable. The Company maintains its cash balances in the form of bank
demand deposits, money market accounts and commercial paper with financial
institutions that management believes are creditworthy. Accounts receivable are
typically unsecured and are comprised of amounts due from software vendors and
numerous other entities participating in the business-to-business electronic
commerce industry. The Company's major customers (Note 10) accounted for 86.5%
and 87.1% of the Company's accounts receivable as of December 31, 1998 and 1999,
respectively. The Company has no significant financial instruments with
off-balance sheet risk of accounting loss, such as foreign exchange contracts,
option contracts or other foreign currency hedging arrangements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents
and accounts receivables and payables. The carrying values of the cash
equivalents and accounts receivables and payables approximate their fair values.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Impairment is indicated when the carrying amount of the asset is
greater than amounts recoverable from future undiscounted cash flows.
REVENUE RECOGNITION
The Company accounts for its revenue from the license of software and
performance of related services in compliance with Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 generally provides that
revenue earned from software arrangements involving multiple elements should be
allocated to each element based on the vendor-specific objective evidence of the
relative fair value of the elements. The Company generally bundles license fees
and subsequent maintenance and does not offer the various elements of its
license agreements for sale separately. In such situations, license fee revenue
is deferred and recognized ratably over the term of the arrangement. In those
circumstances where the Company is able to unbundle the various elements of a
software arrangement, software license revenue is recognized when the contract
is signed, the software has been delivered, the fee is fixed, and collectibility
is probable.
The Company also generates revenue from other services and products.
Revenue from content management and the related implementation is recognized
ratably over the term of the arrangement. Any engineering fees associated with
integrating the Company's BugsEye software product into a customer's software or
consulting fees associated with implementing content management products and
services are deferred and recognized ratably over the term of the arrangement.
Content creation revenue is recognized as the converted product and service
information is delivered to the customer, unless there is an acceptance period.
If an acceptance period is present, revenue is recognized upon the earlier of
customer acceptance or the expiration of the acceptance period.
F-10
<PAGE> 77
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
If engineering or consulting services are performed in conjunction with another
revenue stream (i.e. license fees or content management) the fees are deferred
and recognized ratably over the same term as the license fee or content
management term. If consulting fees are separately purchased, they are
recognized as performed unless there is an acceptance period. If an acceptance
period is present, revenue is recognized upon the earlier of customer acceptance
or the expiration of the acceptance period.
For all periods presented, the Company has adopted the provisions of the
Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 101
"Revenue Recognition" ("SAB No. 101"). SAB No. 101 provides interpretive
guidance on the recognition, presentation and disclosure of revenue in financial
statements. The Company believes its current revenue recognition policies and
practices are consistent with the provisions of SOP 97-2, as amended by SOP 98-4
and SOP 98-9, which were issued by the American Institute of Certified Public
Accountants and SAB No. 101 issued by the SEC. Implementation guidelines for
these standards, as well as potential new standards, could lead to unanticipated
changes in the Company's current revenue recognition policies. Such changes
could affect the timing of the Company's future revenue and results of
operations.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred and
consist of salaries and other direct costs. Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," requires the capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
The Company's software is deemed to be technologically feasible at the point a
working model of the software product is developed. Through December 31, 1999,
for products developed by the Company, the period since attainment of
technological feasibility has been brief and qualifying costs were not
significant; and, accordingly, the Company has not capitalized any qualifying
software development costs in the accompanying financial statements.
INCOME TAXES
The current provision for income taxes represents actual or estimated
amounts payable on tax return filings each year. Deferred tax assets and
liabilities are recorded for the estimated future tax effects of temporary
differences between the tax bases of assets and liabilities and amounts reported
in the accompanying balance sheets and for operating loss and tax credit
carryforwards. The change in deferred tax assets and liabilities for the period
measures the deferred tax provision or benefit for the period. Effects of
changes in enacted tax laws on deferred tax assets and liabilities are reflected
as adjustments to the tax provision or benefit in the period of enactment. The
Company's deferred tax assets have been reduced by a valuation allowance to the
extent it is more likely than not that some or all of the deferred tax assets
will not be realized.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock option plans in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"), and related interpretations. The
Company adopted the disclosure-only requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS
No. 123") which allows entities to continue to apply the provision of APB No. 25
for transactions with employees and provide pro forma disclosures for employee
stock grants made as if the fair value-based method of accounting in SFAS No.
123 had been applied to these transactions. Any deferred stock compensation
calculated according to APB No. 25 is amortized on a straight-line basis over
the vesting period of the individual options.
The Company applies the provisions of SFAS No. 123 and related
interpretations to stock-based compensation to non-employees.
F-11
<PAGE> 78
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK SPLIT
On February 22, 2000, the Company's Board of Directors authorized a
three-for-two stock split of its common and preferred stock to be effective upon
the approval of stockholders, which is expected to occur prior to the effective
date of a Registration Statement on Form S-1 filed by the Company with the SEC.
All common and preferred share amounts, equivalent common and preferred share
amounts and per share amounts have been adjusted retroactively to reflect the
stock split.
NET EARNINGS OR LOSS PER SHARE
The Company presents basic and diluted earnings or loss per share in
accordance with Statement of Financial Accounting Standards No. 128 "Earnings
per Share" ("SFAS No. 128"), which establishes standards for computing and
presenting basic and diluted earnings per share. Under this statement, basic
earnings or loss per share is computed by dividing the net earnings or loss by
the weighted average number of shares of common stock outstanding. Diluted
earnings or loss per share is determined by dividing the net earnings or loss by
the sum of (1) the weighted average number of common shares outstanding, (2) if
not anti-dilutive, the number of shares of convertible preferred stock as if
converted upon issuance, and (3) if not anti-dilutive, the effect of outstanding
stock options and warrants determined utilizing the treasury stock method.
For all periods presented, the effects of the convertible preferred stock
and stock options were excluded from the calculation of diluted loss per share
because the result would have been anti-dilutive. The weighted average number of
shares issuable on the exercise of common stock options that were excluded from
the calculation of diluted loss per share because their effect was antidilutive
(without regard to the treasury stock method) totaled 1,517,722, 2,453,362 and
2,723,029 in 1997, 1998 and 1999, respectively. For all periods presented, each
share of preferred stock converts into one share of common stock.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1999, and the
six months ended June 30, 1999 and 2000, are computed using the net loss and
weighted average number of common shares outstanding, including the pro forma
effects of the assumed conversion of the Company's convertible preferred stock
into shares of the Company's common stock as if such conversion occurred on
January 1, 1999, or at the date of original issuance, if later. The resulting
pro forma adjustment includes an increase in the weighted average shares used to
compute basic and diluted net loss per share of approximately 13,949,233,
12,631,748 and 17,065,983 shares for the year ended December 31, 1999, and the
six months ended June 30, 1999 and 2000, respectively. The pro forma effects of
these transactions are unaudited.
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of the Company's planned initial public
offering, all of the outstanding shares of Convertible Preferred Stock will
automatically convert into 17,265,196 shares of common stock. The pro forma
effects of these transactions are unaudited and have been reflected in the
accompanying pro forma balance sheet at June 30, 2000.
COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting comprehensive
income (loss) and its components in financial statements. Comprehensive income
includes all changes in equity during a period from non-owner sources.
F-12
<PAGE> 79
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ADVERTISING COSTS
The Company expenses advertising costs as incurred.
REPORTABLE SEGMENTS
Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of and Enterprise and Related Information," establishes standards for
the reporting of information about operating segments. Since its inception, the
Company has conducted its operations in one operating segment.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. It requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS Statement No. 133--an
amendment of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 137 delays the
effective date of SFAS No. 133 to fiscal quarters and fiscal years beginning
after June 15, 2000. Since inception, the Company has not entered into
arrangements that would fall under the scope of SFAS No. 133 and thus,
management believes that SFAS No. 133 will not significantly affect its
financial condition and results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN No. 44"). FIN No. 44
clarifies the application of APB No. 25 for certain issues related to
equity-based instruments issued to employees. FIN No. 44 is effective on July 1,
2000, except for certain transactions, and will be applied on a prospective
basis. The implementation of FIN No. 44 did not have a significant impact on the
Company's financial statements.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment.......................................... $1,020 $2,584
Software.................................................... 34 223
Furniture and fixtures...................................... 8 362
Leasehold improvements...................................... -- 13
------ ------
1,062 3,182
Less--accumulated depreciation.............................. (352) (993)
------ ------
$ 710 $2,189
====== ======
</TABLE>
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method based on estimated useful lives ranging from three to
seven years. Maintenance and repairs are expensed as incurred. Depreciation
expense was $126,000, $209,000 and $641,000 for the years ended December 31,
1997, 1998 and 1999, respectively. During 1997 and 1998, the Company sold
property, plant and equipment to a leasing company for $254,000 and $484,000,
respectively, and leased the assets back under capital leases.
F-13
<PAGE> 80
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. OTHER ASSETS:
Other assets consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
----- -----
(IN THOUSANDS)
<S> <C> <C>
Patents and trademarks...................................... $ -- $ 52
Long-term deposits.......................................... 40 56
---- ----
40 108
Less--accumulated amortization.............................. -- (17)
---- ----
$ 40 $ 91
==== ====
</TABLE>
Amortization expense was $0, $0, and $17,000 for the years ended December
31, 1997, 1998 and 1999, respectively.
5. ACQUISITION:
On March 31, 1998, the Company acquired all of the capital stock of
Antaeus, a Canadian company providing professional and technical services
including data conversion processes which prepare data for e-commerce or other
customer catalog needs. The total purchase price was $705,000, consisting of
deferred payments, common stock, and Series C preferred stock. The purchase
price was allocated to the fair value of Antaeus' assets and liabilities at the
acquisition date as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 8
Property and equipment...................................... 54
Other assets................................................ 3
Current liabilities......................................... (159)
Debt........................................................ (38)
Goodwill.................................................... 837
-----
$ 705
=====
</TABLE>
The acquisition was accounted for using the purchase method and the excess
of cost over fair value of the assets acquired was allocated to goodwill, which
is being amortized on a straight-line basis over three years. Amortization
expense was $207,000 and $281,000 for the years ended December 31, 1998 and
1999, respectively.
As part of the Antaeus acquisition, the Company entered into an earn-out
agreement whereby the selling stockholders could receive additional shares of
the Company's common stock if Antaeus met certain financial targets, contingent
upon the Antaeus founders remaining as employees of the Company on the specified
earn-out measurement dates. During the year ended December 31, 1998, the selling
stockholders earned the right to receive an aggregate of 62,769 shares under the
earn-out agreement with a fair value of $124,000, which were issued in January
1999. During the year ended December 31, 1999, the selling stockholders earned
the right to receive an aggregate of 251,073 shares under the earn-out agreement
with a fair value of $2,390,000 which were issued in March 2000. The fair value
of the shares issued in 1998 and 1999 was recorded as additional compensation
expense in the year in which those shares were earned as the right to receive
such shares were contingent on continued employment with the Company.
F-14
<PAGE> 81
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. CAPITAL LEASES:
Capital lease obligations consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
----- -----
(IN THOUSANDS)
<S> <C> <C>
Capitalized lease obligations for equipment due on various
dates through 2002, minimum monthly payments in varying
amounts, at December 31, 1999, $22,000 including imputed
interest ranging from 7.51% to 8.07% per annum,
collateralized by the related assets with a net book value
of $524,000 and $258,000, respectively. .................. $ 569 $ 355
Less--Current portion....................................... (222) (227)
----- -----
$ 347 $ 128
===== =====
</TABLE>
Maturities of capital lease obligations as of December 31, 1999, are as
follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 249
2001........................................................ 123
2002........................................................ 15
-----
387
Less--amount related to interest............................ (25)
Less--unamortized discount.................................. (7)
-----
Total principal............................................. 355
Less--current portion....................................... (227)
-----
$ 128
=====
</TABLE>
7. STOCKHOLDERS' EQUITY:
AUTHORIZED SHARES
As of December 31, 1999, the Company had authorized 30,000,000 shares of
common stock and 17,673,876 shares of preferred stock.
F-15
<PAGE> 82
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONVERTIBLE PREFERRED STOCK
A summary of the Company's convertible preferred stock is presented in the
table below:
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-----------------------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D SERIES E
---------------- ------------------ ------------------ ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------ --------- ------ --------- ------ --------- ------ --------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31,
1996..................... 284,445 $256 3,020,717 $3,645 -- $ -- -- $ -- -- $ --
Sale of Series B
preferred stock in
January 1997 for cash
of $1.21 per share..... -- -- 1,657,459 2,000 -- -- -- -- -- --
Sale of Series C
preferred stock in
August 1997 for cash of
$1.53 per share........ -- -- -- -- 4,239,129 6,500 -- -- -- --
------- ---- --------- ------ --------- ------ --------- ------ --------- -------
BALANCES, December 31,
1997..................... 284,445 256 4,678,176 5,645 4,239,129 6,500 -- -- -- --
Series C preferred stock
issued in conjunction
with business
acquisition............ -- -- -- -- 180,000 276 -- -- -- --
Sale of Series D
preferred stock in July
1998 for cash of $2.18
per share.............. -- -- -- -- -- -- 3,249,998 7,085 -- --
------- ---- --------- ------ --------- ------ --------- ------ --------- -------
BALANCES, December 31,
1998..................... 284,445 256 4,678,176 5,645 4,419,129 6,776 3,249,998 7,085 -- --
Sale of Series E
preferred stock in
September 1999 for cash
of $5.67 per share, net
of offering costs of
$32.................... -- -- -- -- -- -- -- -- 4,411,763 24,968
------- ---- --------- ------ --------- ------ --------- ------ --------- -------
BALANCES, December 31,
1999..................... 284,445 256 4,678,176 5,645 4,419,129 6,776 3,249,998 7,085 4,411,763 24,968
Issuance of Series A
preferred stock upon
exercise of warrant in
May, 2000
(unaudited)............ 221,685 15 -- -- -- -- -- -- -- --
------- ---- --------- ------ --------- ------ --------- ------ --------- -------
BALANCES, June 30, 2000
(unaudited).............. 506,130 $271 4,678,176 $5,645 4,419,129 $6,776 3,249,998 $7,085 4,411,763 $24,968
======= ==== ========= ====== ========= ====== ========= ====== ========= =======
</TABLE>
The Company is authorized to issue preferred stock in various series with
rights and privileges as determined by the Board of Directors as follows:
Dividends
The holders of preferred stock are entitled to receive dividends at the
rate of 8% of the original issue price per share annually, payable in preference
and priority to any payment of dividends to holders of common stock. All the
above dividends are payable when, as, and if declared by the Board of Directors
and are non-cumulative. No dividends have been declared or paid to date on any
series of preferred stock.
Voting Rights
Except with respect to certain specified matters, holders of shares of all
preferred stock generally have the same voting rights as common stock. For the
following matters, preferred stockholders have voting preferences over holders
of common stock:
- Changes to organizational and governance documents;
- Issuances of new securities;
- Redemption, repurchase, payment of dividends, or other distributions
to common stockholders;
F-16
<PAGE> 83
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- Mergers, acquisitions, and asset transfers; and
- Election of the Board of Directors.
Conversion Rights
Each share of preferred stock was, as of December 31, 1999, convertible
into one share of common stock at the option of the holder, subject to future
adjustment in the event of subdivisions, combinations or consolidations.
Liquidation Preference
In the event of liquidation of the Company, the holders of preferred stock
will be entitled to be paid out of the assets, prior and in preference to, any
payments to holders of common stock. The payments shall be an amount per share
equal to the sum of the original issue price per share (Series A -- $0.90;
Series B -- $1.21; Series C -- $1.53; Series D -- $2.18; Series E -- $5.67) plus
an amount per share equal to all declared but unpaid dividends. The remaining
funds are to be paid ratably to holders of preferred stock and common stock on
an as-if-converted to common stock basis until the Series A, B, C and D
preferred holders have received three times the original purchase price in total
and the Series E preferred holders have received two times the original issuance
price in total. The remaining assets of the Company legally available for
distribution are to be distributed ratably to the holders of the common stock.
STOCK WARRANTS
In June 1994, the Company entered into a warrant agreement with a
consultant to purchase 65,250 shares of the Company's common stock for an
exercise price of $0.0067 per share. The warrant expires on June 3, 2001. The
value of this warrant was determined to be nominal. The warrant was exercised on
January 10, 2000.
In July 1996, in conjunction with the Series A preferred stock offering,
the Company entered into warrant agreements with a related party to purchase
221,685 shares of the Company's Series A Preferred Stock for an exercise price
of $0.067 per share and 30,000 shares of the Company's common stock for an
exercise price of $0.0067 per share. The warrant for common stock expires on the
earlier of the closing of an initial public offering of the Company's common
stock or July 18, 2001; and the warrant for Series A expires on the earlier of
the closing of an initial public offering of the Company's common stock or July
18, 2006. These warrants were exercised on May 24, 2000.
In October 1996, the Company entered into a warrant agreement with a
leasing agent to purchase 20,625 shares of the Company's Series B Preferred
Stock for an exercise price of $1.21 per share. The warrant expires on the later
of October 10, 2006, or five years from the effective date of the Company's
initial public offering. The Company has determined the fair value of this
warrant to be $17,000 using the Black-Scholes option pricing model and the
following assumptions:
<TABLE>
<S> <C>
Exercise price........................................... $1.21
Fair market value of Series B on grant date.............. $1.21
Option life.............................................. 10 years
Volatility rate.......................................... 55%
Risk-free rate of return................................. 4.18%
Dividend rate............................................ 0%
</TABLE>
The fair value of this warrant has been included as a discount to the
related capital lease obligation and is being recognized as additional interest
expense over the lease term.
F-17
<PAGE> 84
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1997, the Company entered into another warrant agreement with
the same leasing agent to purchase 13,044 shares of the Company's Series C
Preferred Stock for an exercise price of $1.53 per share. The warrant expires on
the later of December 10, 2007, or five years from the effective date of the
Company's initial public offering. The Company has determined the fair value of
the warrant granted in December 1997 to be $14,000 using the Black-Scholes
option pricing model using the following assumptions:
<TABLE>
<S> <C>
Exercise price........................................... $1.53
Fair market value of Series C on grant date.............. $1.53
Option life.............................................. 10 years
Volatility rate.......................................... 55%
Risk-free rate of return................................. 4.18%
Dividend rate............................................ 0%
</TABLE>
The fair value of this warrant has been included as a discount to the
related capital lease obligation and is being recognized as additional interest
expense over the lease term.
In March 1997, the Company entered into a warrant agreement with a
consultant to purchase 7,500 shares of the Company's common stock for an
exercise price of $0.12 per share. The warrant expires March 22, 2004. The value
of this warrant was determined to be nominal. The warrant was exercised on
January 10, 2000.
In December 1999, the Company entered into a warrant agreement with a
customer to purchase 3,750 shares of the Company's common stock for an exercise
price of $2.33 per share. The warrant expires on December 31, 2004. The value of
this warrant was determined to be nominal.
TREASURY STOCK
During 1997, 1998 and 1999, the Company repurchased 666,705, 37,500 and
45,000 shares, respectively, of common stock of which 629,205 and 75,000 were
retired in 1997 and 1998, respectively. The repurchases were made based upon the
termination agreements of the stockholders' employment or pursuant to the terms
of the restricted stock agreements. During 1999, the Company recorded $249,000
of compensation expense related to the repurchase of shares acquired from the
exercise of options.
STOCK OPTION PLAN
In December 1995, the Company established the 1995 Stock Option Plan as
amended by the 1999 Stock Option Plan (collectively, the "Plan") under which
incentive and nonqualified stock options may be granted to employees, directors
and independent contractors. An aggregate of 5,895,000 shares of common stock
have been reserved for issuance under the Plan. Under the terms of the Plan, the
exercise price per share of each option granted will not be less than 110% of
the fair market value of the stock in the case of incentive stock options
granted to persons owning 10% or more of the voting power of the Company, as
defined, and otherwise shall not be less than 100% of the fair market value of
the stock. Options generally vest over a four to seven year term. The exercise
period is not more than five years from the date of grant in the case of
incentive stock options granted to persons owning 10% or more of the voting
power of the Company and otherwise not more than ten years.
During the years ended December 31, 1998 and 1999, and the six months ended
June 30, 2000, in connection with the grant of certain stock options to
employees, the Company recorded deferred stock-based compensation of
approximately $1,595,000, $3,900,000 and $16,360,000, respectively, representing
the difference between the exercise price and the deemed fair value (for
financial reporting purposes) of the Company's common stock on the date these
stock options were granted. Deferred compensation is included as a component of
shareholders' equity and is being amortized on a straight-line basis over the
vesting periods of the related options.
F-18
<PAGE> 85
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK-BASED COMPENSATION
The Company has issued various equity instruments to compensate both
employees and non-employees for services. The Company has segregated these costs
in stock-based compensation in the accompanying statement of operations.
Allocation of stock-based compensation to the related employee/non-employee's
functional classification is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- ---------------
1997 1998 1999 1999 2000
----- ----- ------- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cost of operations............................. $-- $ 82 $1,668 $157 $ 920
Selling and marketing.......................... -- 82 1,358 29 189
Research and development....................... -- 18 105 31 119
General and administrative..................... 19 18 409 109 619
--- ---- ------ ---- ------
$19 $200 $3,540 $326 $1,847
=== ==== ====== ==== ======
</TABLE>
Remaining deferred stock-based compensation as of June 30, 2000 (unaudited)
will be recognized during the periods ending December 31, as follows (in
thousands):
<TABLE>
<S> <C>
Remainder of 2000......................................... $ 2,485
2001...................................................... 4,927
2002...................................................... 4,896
2003...................................................... 4,277
2004...................................................... 1,485
2005...................................................... 235
Thereafter................................................ 177
-------
$18,482
=======
</TABLE>
These amounts may be reduced for non-vested options of terminated
employees.
F-19
<PAGE> 86
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of all employee options activity under the Plan for the years
ended December 31, 1997, 1998 and 1999, and for the six months ended June 30,
2000, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Options outstanding at December 31, 1996................. 1,074,000 $0.12
Granted................................................ 1,849,575 $0.14
Exercised.............................................. (10,312) $0.12
Forfeited.............................................. (98,813) $0.12
----------
Options outstanding at December 31, 1997................. 2,814,450 $0.13
Granted................................................ 1,837,500 $0.27
Exercised.............................................. (200,230) $0.12
Forfeited.............................................. (1,188,522) $0.14
----------
Options outstanding at December 31, 1998................. 3,263,198 $0.21
Granted................................................ 1,120,354 $1.10
Exercised.............................................. (1,516,109) $0.17
Forfeited.............................................. (307,805) $0.32
----------
Options outstanding at December 31, 1999................. 2,559,638 $0.61
Granted (unaudited).................................... 1,777,212 $4.12
Exercised (unaudited).................................. (256,670) $0.27
Forfeited (unaudited).................................. (526,311) $2.77
----------
Options outstanding at June 30, 2000 (unaudited)......... 3,553,869 $2.07
==========
</TABLE>
As of December 31, 1997, 1998 and 1999, 582,868, 906,575 and 209,925 of the
above options were exercisable, respectively, with weighted average exercise
prices of $0.12, $0.13 and $0.39, respectively. As of June 30, 1999 and 2000,
804,364 and 360,873 of the above options were exercisable, respectively, with
weighted average exercise prices of $0.16 and $0.78, respectively (unaudited).
F-20
<PAGE> 87
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the weighted average exercise prices of
options granted during the years ended December 31, 1997, 1998 and 1999, and the
six months ended June 30, 1999 and 2000 (unaudited). The table includes options
for common stock whose exercise price was less than the deemed fair market
value, for financial reporting purposes, of the underlying common stock at the
date of grant and equal to the fair market value at the date of grant:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------ -------------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
EXERCISE PRICE:
Less than fair market value--
Number of options............ -- 1,408,500 1,120,354 600,887 1,777,212
========== ========== ========== ======== ==========
Weighted average exercise
price...................... $ -- $ 0.31 $ 1.10 $ 0.54 $ 4.12
========== ========== ========== ======== ==========
Weighted average fair
value...................... $ -- $ 1.44 $ 4.58 $ 3.29 $ 15.01
========== ========== ========== ======== ==========
Equal to fair market value--
Number of options............ 1,849,575 429,000 -- -- --
========== ========== ========== ======== ==========
Weighted average exercise
price...................... $ 0.14 $ 0.15 $ -- $ -- $ --
========== ========== ========== ======== ==========
Weighted average fair
value...................... $ 0.14 $ 0.15 $ -- $ -- $ --
========== ========== ========== ======== ==========
</TABLE>
The following table summarizes information about employee stock options
outstanding and exercisable under the Plan at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
NUMBER OF WEIGHTED
OPTIONS AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICE 1999 LIFE IN YEARS PRICE 1999 PRICE
------------------- -------------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.12 102,661 6.96 $0.12 37,373 $0.12
$0.15 510,473 7.87 $0.15 6,896 $0.15
$0.20 180,003 8.45 $0.20 20,627 $0.20
$0.33 742,034 8.87 $0.33 125,153 $0.33
$0.50 487,050 9.28 $0.50 1,126 $0.50
$1.30 30,900 9.50 $1.30 -- $ --
$1.67 422,012 9.69 $1.67 18,750 $1.67
$2.33 84,505 9.79 $2.33 -- $ --
--------- -------
2,559,638 8.82 $0.61 209,925 $0.39
========= ==== ===== ======= =====
</TABLE>
F-21
<PAGE> 88
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about employee stock options
outstanding and exercisable under the Plan at June 30, 2000 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED NUMBER
NUMBER OF AVERAGE WEIGHTED EXERCISABLE WEIGHTED
OPTIONS REMAINING AVERAGE AT AVERAGE
OUTSTANDING AT CONTRACTUAL EXERCISE JUNE 30, EXERCISE
EXERCISE PRICES JUNE 30, 2000 LIFE IN YEARS PRICE 2000 PRICE
--------------- -------------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.12........................... 53,363 6.42 $0.12 24,081 $0.12
$0.15........................... 460,034 7.38 $0.15 89,877 $0.15
$0.20........................... 134,042 7.96 $0.20 6,542 $0.20
$0.33........................... 666,662 8.39 $0.33 164,053 $0.33
$0.50........................... 379,265 8.78 $0.50 37,788 $0.50
$1.30........................... 29,851 9.01 $1.30 1,803 $1.30
$1.67........................... 309,512 9.18 $1.67 -- $ --
$2.33........................... 204,615 9.45 $2.33 1,729 $2.33
$3.67........................... 757,524 9.76 $3.67 55,000 $3.67
$4.33........................... 109,015 9.76 $4.33 -- $ --
$5.33........................... 212,061 9.88 $5.33 -- $ --
$6.00........................... 237,925 10.00 $6.00 -- $ --
--------- -------
3,553,869 8.92 $2.07 380,873 $0.78
========= ===== ===== ======= =====
</TABLE>
PRO FORMA DISCLOSURES
SFAS No. 123 defines a fair value-based method of accounting for
stock-based compensation plans. An entity may continue to measure compensation
cost for options granted to employees using the intrinsic value-based method
prescribed by APB No. 25, provided that pro forma disclosures are made of net
income or loss, assuming the fair value-based method of SFAS No. 123 had been
applied.
The Company has elected to account for its stock-based employee
compensation plans under APB No. 25; accordingly, for purposes of the pro forma
disclosures presented below, the Company has computed the fair values of all
options granted during 1997, 1998 and 1999 using the Black-Scholes pricing model
and the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate.............................. 6.19% 5.11% 5.61%
Expected lives....................................... 4.0 years 5.1 years 5.0 years
Expected volatility.................................. 0.001% 0.001% 0.001%
Expected dividend yield.............................. 0% 0% 0%
</TABLE>
Cumulative compensation cost recognized in pro forma net income or loss
with respect to options that are forfeited prior to vesting is adjusted as a
reduction of pro forma compensation expense in the period of forfeiture.
The total fair value of options granted to employees was computed to be
approximately $57,000, $1,712,000 and $4,193,000 for the years ended December
31, 1997, 1998 and 1999, respectively. This amount is amortized ratably over the
vesting periods of the options. Pro forma stock-based compensation, net of the
effect of forfeitures and amounts recognized under APB No. 25, was $14,000,
$16,000 and $187,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
F-22
<PAGE> 89
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net loss would have been reported as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss:
As reported........................................... $(5,028) $(5,909) $(11,691)
======= ======= ========
Pro forma............................................. $(5,042) $(5,925) $(11,878)
======= ======= ========
Net loss per share:
As reported........................................... $ (1.98) $ (2.06) $ (3.01)
======= ======= ========
Pro forma............................................. $ (1.98) $ (2.06) $ (3.06)
======= ======= ========
</TABLE>
OPTIONS ISSUED TO NON-EMPLOYEES
SFAS No. 123 and related interpretations require that all transactions with
non-employees in which goods or services are the consideration received for the
issuance of equity instruments be accounted for based on the fair value of the
consideration received or the equity instruments issued, whichever is more
reliably measurable. The Company has computed the fair value of all options
granted to non-employees previous to and during 1997, using the Black-Scholes
pricing model. No expense has been recognized related to these options as their
fair value was determined to be nominal. Except as discussed above, no options
were issued to non-employees in 1998, 1999, or the six months ended June 30,
2000.
A summary of all non-employee option activity for the years ended December
31, 1997, 1998 and 1999, and for the six months ended June 30, 2000, is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1996............................ 106,500 $0.12
Granted................................................... 12,750 $0.12
Exercised................................................. (97,500) $0.12
------- -----
Outstanding at December 31, 1997 and 1998................... 21,750 $0.12
Exercised................................................. (5,250) $0.12
------- -----
Outstanding at December 31, 1999 and June 30, 2000
(unaudited)............................................... 16,500 $0.12
======= =====
</TABLE>
At December 31, 1999, and June 30, 2000, 16,500 non-employee stock options
were exercisable at $0.12 and had remaining contractual lives of 6.96 and 6.42
years, respectively.
F-23
<PAGE> 90
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES:
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current--
Federal................................................ $ -- $ -- $ --
State.................................................. -- -- --
------- ------- -------
Total current provision........................ -- -- --
------- ------- -------
Deferred--
Federal................................................ (1,755) (2,014) (3,597)
State.................................................. (251) (295) (585)
Valuation allowance.................................... 2,006 2,309 4,182
------- ------- -------
Total deferred provision (benefit)............. -- -- --
------- ------- -------
Total provision................................ $ -- $ -- $ --
======= ======= =======
</TABLE>
The statutory federal income tax rate was 35% for the years ended December
31, 1997, 1998 and 1999. Differences between the income tax expense reported in
the statements of operations and the amount computed by applying the statutory
federal income tax rate to earnings before income taxes are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Benefit at statutory rate................................ $(1,760) $(2,068) $(4,092)
Increase (decrease) due to--
State income taxes..................................... (166) (195) (386)
Nondeductible expenses................................. 17 95 128
Nondeductible stock-based compensation................. -- 28 293
Research and development tax credit and other.......... (97) (169) (125)
Valuation allowance.................................... 2,006 2,309 4,182
------- ------- -------
Income tax provision..................................... $ -- $ -- $ --
======= ======= =======
</TABLE>
Components of net deferred tax assets (liabilities) as of December 31, 1998
and 1999, are as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current--
Accrued liabilities and other................... $ 17 $ 65
Deferred revenue................................ 591 1,853
Non-current--
Net operating losses............................ 4,681 7,428
Tax credits..................................... 276 401
------- -------
Total net deferred tax assets..................... 5,565 9,747
Valuation allowance............................... (5,565) (9,747)
------- -------
Net deferred tax assets........................... $ -- $ --
======= =======
</TABLE>
For income tax reporting purposes, the Company has approximately $19.3
million of net operating loss carryforwards that expire at various dates through
2019. The Tax Reform Act of 1986 contains provisions that may limit the net
operating loss carryforwards available to be used in any given year in the event
of a significant
F-24
<PAGE> 91
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
change in ownership interests. As such, a portion of the Company's net operating
loss carryforwards may be limited. The Company also has available income tax
credits of approximately $400,000 expiring at various dates through 2019.
Realization of net operating loss and tax credit carryforwards is dependent on
generating sufficient taxable income prior to their expiration dates.
During 1997, 1998 and 1999, the Company increased its valuation allowance
by $2,006,000, $2,309,000 and $4,182,000, respectively, due mainly to
uncertainty relating to the realizability of the Company's net operating loss
carryforwards and income tax credits. The amount of the deferred tax assets
considered realizable could be adjusted in the near term if future taxable
income materializes.
9. COMMITMENTS:
The Company leases office and other space and equipment under
non-cancelable operating leases which expire at various dates through 2010 and
contain a renewal option. Future minimum lease payments are as follows (in
thousands):
<TABLE>
<S> <C>
2000........................................................ $ 620
2001........................................................ 770
2002........................................................ 786
2003........................................................ 802
2004........................................................ 640
Thereafter.................................................. 838
------
$4,456
======
</TABLE>
Rent expense was approximately $121,000, $137,000 and $331,000 for the
years ended December 31, 1997, 1998 and 1999. Subsequent to December 31, 1999,
the Company entered into agreements for additional office space.
10. MAJOR CUSTOMERS:
The Company's revenue from customers in excess of 10% of net revenue for
the years ended December 31, 1997, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A.................................................. --% 14.1% 17.1%
Customer B.................................................. --% 54.2% 0.1%
Customer D.................................................. --% --% 35.3%
Customer E.................................................. --% --% 27.1%
Customer F.................................................. 47.0% --% 0.9%
Customer G.................................................. 46.1% 7.2% --%
---- ---- ----
93.1% 75.5% 80.5%
==== ==== ====
</TABLE>
F-25
<PAGE> 92
REQUISITE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's accounts receivable-trade as of December 31, 1998 and 1999,
are concentrated with the following major customers as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Customer A.................................................. 12.6% 1.8%
Customer B.................................................. 19.5% 2.2%
Customer C.................................................. 54.4% 2.3%
Customer D.................................................. --% 14.3%
Customer E.................................................. --% 66.5%
---- ----
86.5% 87.1%
==== ====
</TABLE>
11. GEOGRAPHIC INFORMATION:
The Company's operations and assets are based primarily in the United
States and Canada. The Company also has operations in the United Kingdom.
The Company sells its products and services to both United States and
international customers. The Company's revenue by geographic area for the years
ended December 31, 1997, 1998 and 1999, is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
United States............................................... $217 $ 445 $3,949
Canada...................................................... -- 942 3,350
---- ------ ------
$217 $1,387 $7,299
==== ====== ======
</TABLE>
12. EMPLOYEE BENEFIT PLAN:
During 1997, the Company adopted a 401(k) savings plan, whereby eligible
employees can contribute up to 15% of their salary per year, subject to certain
maximum contribution amounts. The Company's matching and profit sharing
contributions are discretionary. Employees become eligible to participate in the
plan on the first day of the month following the hire date after the attainment
of age twenty-one. No Company contributions were made to the plan for the years
ended December 31, 1997, 1998 and 1999.
13. SUBSEQUENT EVENTS:
Subsequent to December 31, 1999, and through June 30, 2000, the Company
granted options to purchase 1,777,212 shares of common stock to employees and
directors at exercise prices ranging from $2.33 to $6.00 per share. In
connection with the stock option grants, the Company will recognize compensation
expense over the related vesting periods of approximately $16.4 million relating
to these grants for the difference between the exercise price and the deemed
fair market value for financial reporting purposes.
On September 5, 2000, the Company filed a Registration Statement with the
Securities and Exchange Commission for an initial public offering of its common
stock.
F-26
<PAGE> 93
[REQUISITE TECHNOLOGY, INC. LOGO]
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount and commissions, payable by us in connection with the sale
of the common stock being registered hereby. All amounts shown are estimates,
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 24,288
NASD filing fee............................................. 9,700
Nasdaq National Market listing fee..........................
Blue Sky fees and expenses (including legal fees)...........
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Directors' and officers' insurance..........................
Transfer agent and registrar fees...........................
Miscellaneous expenses......................................
--------
TOTAL............................................. $
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, or DGCL, permits
indemnification of our officers and directors under certain conditions and
subject to certain limitations. Section 145 of the DGCL also provides that a
corporation has the power to purchase and maintain insurance on behalf of its
officers and directors against any liability asserted against such person and
incurred by him or her in such capacity, or arising out of his or her status as
such, whether or not the corporation would have the power to indemnify him or
her under the provisions of Section 145 of the DGCL.
Our amended and restated bylaws that will become effective upon the closing
of this offering provide that we will indemnify our directors and officers to
the fullest extent permitted by Delaware law and may indemnify our employees and
other agents to the fullest extent permitted by Delaware law.
In addition, our restated certificate of incorporation that will become
effective upon the closing of this offering provides that, to the fullest extent
permitted by Delaware law, our directors will not personally be liable to us or
our stockholders for monetary damages for any breach of fiduciary duty as
directors. This provision of the restated certificate of incorporation does not
eliminate the directors' duty of care. In appropriate circumstances, equitable
remedies such as an injunction or other forms of non-monetary relief are
available under Delaware law. This provision also does not affect the directors'
responsibilities under any other laws, such as the federal securities laws and
state and federal environmental laws.
Each director will continue to be subject to liability for:
-- breach of a director's duty of loyalty to us and our stockholders;
-- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
-- unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
-- any transaction from which a director derived an improper personal
benefit.
We intend to enter into indemnity agreements with our directors and
officers and to obtain directors' and officers' liability insurance.
II-1
<PAGE> 95
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is information regarding securities that have been issued
by us since August 1, 1997. The information reflects the assumed three-for-two
forward split of our common stock and preferred stock to be effected by us prior
to the closing of the offering to which this registration statement relates.
On various dates between August 1, 1997, and August 25, 2000, we authorized
the grant of stock options to employees, consultants, directors and officers to
purchase 6,257,791 shares of our common stock at exercise prices ranging from
$.15 to $6.67 per share.
In August 1997, we issued 4,239,129 shares of our Series C preferred stock
(which will convert into an equal number of shares of common stock upon the
closing of this offering) to certain accredited investors for cash proceeds in
the amount of $6,500,002.40.
In November 1997, we issued 37,500 shares of our common stock to one of our
directors in consideration for certain consulting services rendered.
In December 1997, we issued a warrant to purchase 13,044 shares of our
Series C preferred stock (which will convert into an equal number of shares of
our common stock upon the closing of this offering) at an exercise price of
$1.53 per share to one lender.
In March 1998, we issued 3,000 shares of our common stock to a consultant
in exchange for certain services rendered.
In April 1998, we issued an aggregate of 645,003 shares of our common
stock, and 180,000 shares of our Series C preferred stock (which will convert
into an equal number of shares of common stock upon the closing of this
offering), to the former holders of all of the issued and outstanding capital
stock of Antaeus Systems, Inc. pursuant to the Stock Purchase Agreement, dated
April 1, 1998.
In July 1998, we issued 3,249,998 shares of our Series D preferred stock
(which will convert into an equal number of shares of common stock upon the
closing of this offering) to certain accredited investors for cash proceeds in
the amount of $7,085,001.09.
In January 1999, we issued 34,404 shares of our common stock to our Chief
Executive Officer, as a bonus in lieu of cash.
In January 1999, we issued 62,769 shares of our common stock to the former
holders of all of the issued and outstanding capital stock of Antaeus Systems,
Inc. in accordance with certain financial performance thresholds achieved
pursuant to the Stock Purchase Agreement, dated April 1, 1998.
In September 1999, we issued 4,411,763 shares of our Series E preferred
stock (which will convert into an equal number of shares of common stock upon
the closing of this offering) to certain accredited investors for cash proceeds
in the amount of $25,000,004.50.
In October 1999, we issued 7,500 shares of our common stock to a consultant
in exchange for certain services rendered.
In December 1999, we issued a warrant to purchase 3,750 shares of our
common stock at an exercise price of $2.33 per share to one lender.
In January 2000, we issued an aggregate of 72,750 shares of our common
stock to two investors, pursuant to their exercise of warrants.
In February 2000, we issued 13,236 shares of our common stock to our Chief
Executive Officer, as a bonus in lieu of cash.
In February 2000, we issued 25,714 shares of our common stock to a
consultant in exchange for certain services rendered.
II-2
<PAGE> 96
In March 2000, we issued 251,073 shares of our common stock to the former
holders of all of the issued and outstanding capital stock of Antaeus Systems,
Inc. in accordance with certain financial performance thresholds achieved
pursuant to the Stock Purchase Agreement, dated April 1, 1998.
In May 2000, we issued 30,000 shares of our common stock and 221,685 shares
of our Series A Preferred Stock to an investor, pursuant to its exercise of
warrants.
In July 2000, we issued 6,037 shares of our common stock to our Chief
Financial Officer, as a bonus in lieu of cash.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15, and we believe that each transaction was
exempt from the registration requirements of the Securities Act of 1933, as
amended, by virtue of Section 4(2) thereof and Regulation D promulgated
thereunder or Rule 701.
The recipients of the above-described securities represented their
intention to acquire the securities for investment only and not with a view
toward distribution thereof. Appropriate legends were affixed to the stock
certificates issued in such transactions. All recipients had adequate access,
through employment or other relationships, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Stock Purchase Agreement, dated April 1, 1998
3.1 Restated Certificate of Incorporation, currently in effect
3.2 Bylaws, as amended, currently in effect
3.3 Form of Restated Certificate of Incorporation, to become
effective upon the closing of this offering
3.4 Amended and Restated Bylaws, to become effective upon the
closing of this offering
4.1 Reference is made to Exhibits 3.1 through 3.4
4.2* Specimen Stock Certificate
5.1* Form of Opinion of Cooley Godward LLP regarding legality of
securities being issued
10.1 Series A and Series B Preferred Stock Purchase Agreement,
dated July 18, 1996, as amended
10.2 Series C Preferred Stock Purchase Agreement, dated August
25, 1997
10.3 Series D Preferred Stock Purchase Agreement, dated July 1,
1998
10.4 Series E Preferred Stock Purchase Agreement, dated September
13, 1999
10.5 Second Amended and Restated Shareholders Agreement by and
among the Registrant and certain stockholders of the
Company, dated September 13, 1999
10.6 Third Amended and Restated Investor Rights Agreement by and
among the Registrant and certain stockholders of the
Company, dated September 13, 1999
10.7 Investment Agreement by and among the Registrant and W.W.
Grainger, Inc., dated July 1, 1998
10.8 Agreement regarding Management Rights by and between the
Registrant and Sequel Limited Partnership, dated January 29,
1997
10.9 Warrant Agreement to purchase shares of Series B Preferred
Stock with Comdisco, Inc., dated October 9, 1996, as amended
</TABLE>
II-3
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.10 Warrant Agreement to purchase shares of Series C Preferred
Stock with Comdisco, Inc., dated December 9, 1997
10.11 Warrant Agreement to purchase shares of Common Stock with GE
Capital Equity Investment, Inc., dated December 31, 1999
10.12*+ Software License and Reseller Agreement by and between the
Registrant and SAP AG, dated April 29, 1999, as amended
10.13 2000 Employee Stock Purchase Plan and form of agreements
thereunder
10.14 2000 Equity Incentive Plan and form of agreements thereunder
10.15 Lease by and between the Registrant and Westmoor Business
Park Ltd., LLLP, dated December 23, 1998, as amended
10.16 Lease by and between Registrant and Westmoor Business Park
Ltd., LLLP, dated June 6, 2000, as amended
10.17 Sublease by and between the Company and MacDonald Dettwiler
Space and Advanced Robotics Ltd., dated December 22, 1999
10.18 Form of Indemnification Agreement between the Registrant and
each of its directors and officers
16.1 Letter regarding Change in Certifying Accountant
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Cooley Godward LLP (reference is made to Exhibit
5.1)
24.1 Powers of Attorney (reference is made to Page II-6)
27.1* Financial Data Schedule
</TABLE>
------------
* To be filed by amendment
+ The Company is applying for confidential treatment with respect to portions of
this exhibit
(B) FINANCIAL STATEMENT SCHEDULES.
Not applicable.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 98
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Westminster, County of Jefferson, State of Colorado, on September 5, 2000.
By: /s/ BARBARA J. MOWRY
----------------------------------
Barbara J. Mowry
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Barbara J. Mowry and Kathleen J.
Cunningham and each of them, as his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments, exhibits thereto and other
documents in connection therewith) to this Registration Statement and any
subsequent registration statement filed by the Registrant pursuant to Rule
462(b) of the Securities Act of 1933, as amended, which relates to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ BARBARA J. MOWRY Chairman of the Board and Chief September 5, 2000
----------------------------------------------------- Executive Officer (Principal
Barbara J. Mowry Executive Officer)
/s/ KATHLEEN J. CUNNINGHAM Chief Financial Officer, Treasurer September 5, 2000
----------------------------------------------------- and Assistant Secretary
Kathleen J. Cunningham (Principal Financial Officer)
/s/ C. JEFF DEKKER Vice President, Controller September 5, 2000
----------------------------------------------------- (Principal Accounting Officer)
C. Jeff Dekker
/s/ NOEL J. FENTON Director September 5, 2000
-----------------------------------------------------
Noel J. Fenton
</TABLE>
II-6
<PAGE> 100
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEVEN L. SCHEID Director September 5, 2000
-----------------------------------------------------
Steven L. Scheid
/s/ NANCY J. SCHOENDORF Director September 5, 2000
-----------------------------------------------------
Nancy J. Schoendorf
/s/ THOMAS G. WASHING Director September 5, 2000
-----------------------------------------------------
Thomas G. Washing
</TABLE>
II-7
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Stock Purchase Agreement, dated April 1, 1998
3.1 Restated Certificate of Incorporation, currently in effect
3.2 Bylaws, as amended, currently in effect
3.3 Form of Restated Certificate of Incorporation, to become
effective upon the closing of this offering
3.4 Amended and Restated Bylaws, to become effective upon the
closing of this offering
4.1 Reference is made to Exhibits 3.1 through 3.4
4.2* Specimen Stock Certificate
5.1* Form of Opinion of Cooley Godward LLP regarding legality of
securities being issued
10.1 Series A and Series B Preferred Stock Purchase Agreement,
dated July 18, 1996, as amended
10.2 Series C Preferred Stock Purchase Agreement, dated August
25, 1997
10.3 Series D Preferred Stock Purchase Agreement, dated July 1,
1998
10.4 Series E Preferred Stock Purchase Agreement, dated September
13, 1999
10.5 Second Amended and Restated Shareholders Agreement by and
among the Registrant and certain stockholders of the
Company, dated September 13, 1999
10.6 Third Amended and Restated Investor Rights Agreement by and
among the Registrant and certain stockholders of the
Company, dated September 13, 1999
10.7 Investment Agreement by and among the Registrant and W.W.
Grainger, Inc., dated July 1, 1998
10.8 Agreement regarding Management Rights by and between the
Registrant and Sequel Limited Partnership, dated January 29,
1997
10.9 Warrant Agreement to purchase shares of Series B Preferred
Stock with Comdisco, Inc., dated October 9, 1996, as amended
10.10 Warrant Agreement to purchase shares of Series C Preferred
Stock with Comdisco, Inc., dated December 9, 1997
10.11 Warrant Agreement to purchase shares of Common Stock with GE
Capital Equity Investment, Inc., dated December 31, 1999
10.12*+ Software License and Reseller Agreement by and between the
Registrant and SAP AG, dated April 29, 1999, as amended
10.13 2000 Employee Stock Purchase Plan and form of agreements
thereunder
10.14 2000 Equity Incentive Plan and form of agreements thereunder
10.15 Lease by and between the Registrant and Westmoor Business
Park Ltd., LLLP, dated December 23, 1998, as amended
10.16 Lease by and between Registrant and Westmoor Business Park
Ltd., LLLP, dated June 6, 2000, as amended
10.17 Sublease by and between the Company and MacDonald Dettwiler
Space and Advanced Robotics Ltd., dated December 22, 1999
10.18 Form of Indemnification Agreement between the Registrant and
each of its directors and officers
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
16.1 Letter regarding Change in Certifying Accountant
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Cooley Godward LLP (reference is made to Exhibit
5.1)
24.1 Powers of Attorney (reference is made to Page II-6)
27.1* Financial Data Schedule
</TABLE>
------------
* To be filed by amendment
+ The Company is applying for confidential treatment with respect to portions of
this exhibit
