<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 2000
REGISTRATION NO. 333-38186
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
CORECHANGE, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 04-3367581
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
260 FRANKLIN STREET, SUITE 1890
BOSTON, MASSACHUSETTS 02110
(617) 204-3300
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
ULF ARNETZ
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CORECHANGE, INC.
260 FRANKLIN STREET, SUITE 1890
BOSTON, MASSACHUSETTS 02110
(617) 204-3300
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
PETER B. TARR, ESQ. STEVEN R. FINLEY, ESQ.
STUART M. FALBER, ESQ. GIBSON, DUNN & CRUTCHER LLP
HALE AND DORR LLP 200 PARK AVENUE
60 STATE STREET NEW YORK, NEW YORK 10166-0193
BOSTON, MASSACHUSETTS 02109 (212) 351-4000
(617) 526-6000
</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. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION--AUGUST 18, 2000
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY U.S. FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PROSPECTUS
, 2000
corechange
4,500,000 SHARES OF COMMON STOCK
--------------------------------------------------------------------------------
CORECHANGE:
- We develop, market and support software to manage access to business
information and applications using the internet and wireless internet
technology.
PROPOSED SYMBOL AND MARKET:
- CRCH/Nasdaq National Market
THE OFFERING:
- We are offering 4,500,000 shares of our common stock.
- The underwriters have an option to purchase up to an additional 675,000
shares from us to cover over-allotments.
- This is the initial public offering of our common stock.
- We anticipate that the initial public offering price will be between $8.00
and $10.00 per share.
- Closing: , 2000.
<TABLE>
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
Per Share Total
-----------------------------------------------------------------------------------------------------
Public offering price: $ $
Underwriting fees:
Proceeds to Corechange:
-----------------------------------------------------------------------------------------------------
</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
--------------------------------------------------------------------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE, NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY
DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
SG COWEN
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
DLJDIRECT INC.
<PAGE>
[ARTWORK]
COREPORT ACCESS FRAMEWORK SOFTWARE
The artwork includes nine circles under the heading "Representative Sources of
Information and Applications Accessed by Coreport" that show several of the
sources of information that feed the Coreport framework:
Document Management; Calendar; Collaborative Workgroup Software; eMail and
News Tickers; Enterprise Applications; Business Applications;
Intranet/Internet; Customer Management Applications; Database Applications.
Each of these sources or applications is shown feeding into the center of the
page where a graphic under the heading "Coreport Access Framework" shows the
Coreport Access Framework as follows:
The framework graphic shows an organization structure with several role
definitions (e.g., sales representative), several individual names
associated with a role and finally the information sources that have been
granted to that role.
To the left of this graphic, the page states:
Coreport allows administrators to define categories of users and classify
the types of information sources and applications that are available to each
category of users.
Below the framework graphic are images of three devices that are shown being fed
with information from the framework as follows:
A laptop personal computer, showing a full screen display of a Coreport
interface with several business applications including a sales pie chart.
A cellular phone with wireless internet access showing a business
application on its display.
A wireless hand-held portable computing device with wireless internet access
showing a business application (pie chart) on its display.
Below the images of the three devices, the page states:
"Information sources and applications may be accessed from personal
computers, cellular phones and personal digital assistants that have
wireless internet access."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Special Note Regarding Forward-Looking 13
Statements..........................
Use of Proceeds....................... 14
Dividend Policy....................... 14
Corporate Information................. 14
Capitalization........................ 15
Dilution.............................. 16
Selected Consolidated Financial 17
Data................................
Management's Discussion and Analysis 19
of Financial Condition and Results
of Operations.......................
Business.............................. 28
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management............................ 38
Related Party Transactions............ 48
Principal Stockholders................ 51
Description of Capital Stock.......... 53
Shares Eligible for Future Sale....... 56
Underwriting.......................... 57
Legal Matters......................... 59
Experts............................... 60
Change in Accountants................. 60
Where You Can Find More Information... 60
Index to Consolidated Financial F-1
Statements..........................
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY WITH THE MORE DETAILED INFORMATION IN
THIS PROSPECTUS ABOUT CORECHANGE AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING, INCLUDING RISK FACTORS AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND
THE RELATED NOTES.
CORECHANGE
We develop, market and support software that provides enterprises with a
framework to manage access to business information and applications using the
internet and wireless internet technology. Our access framework software,
Coreport, enables enterprises to provide their employees, customers, suppliers
and business partners with an internet-based interface to access and manipulate
the information they require to conduct business electronically, known as
e-business. In addition, Coreport's wireless capabilities allow users to access
relevant information and conduct e-business from web-enabled cellular phones and
personal digital assistants, in addition to personal computers.
Coreport's functionality provides enterprises with the following business
benefits:
- Provides relevant, personalized business information and applications;
- Facilitates mobile e-business;
- Enables more informed and timely business decisions;
- Promotes rapid implementation of enterprises' e-business strategies; and
- Enhances e-business relationships.
Coreport's role-based administration enables enterprises to define
categories of users and to provide these users with access to information and
applications based on the users' business needs and roles. Our software provides
users with a single sign-on to access relevant business information and
applications. Coreport is designed to easily scale to large numbers of users and
integrates with many types and sources of information.
Today, enterprises are increasingly using the internet to share business
information and create new business opportunities. Advances in wireless
communications and the increasing use of web-enabled wireless devices are
creating new ways to use the internet to access information and conduct
business. Orum estimates that the market for mobile electronic commerce will
grow to over $200 billion by 2005. ARC Group estimates that by 2005 over
1.0 billion people will access the internet using wireless devices compared to
650 million people using personal computers.
In today's e-business environment, access to the right information at the
right time is a significant competitive advantage. Although the internet and
wireless communications are making information more readily available, the
proliferation of business applications and other sources of information is
making it difficult for enterprises to aggregate and provide efficient access to
all relevant information. As enterprises increasingly adopt e-business
strategies, we believe that they will require a solution to efficiently and
effectively provide their employees, customers, suppliers and business partners
with access to information and applications specific to their business needs.
Our objective is to be the leading provider of access framework software.
Key elements of our strategy include pursuing wireless opportunities, targeting
Global 2000 enterprises and increasing the use of our software by our customers.
We also intend to continue to expand our distribution channels, develop
additional strategic relationships and expand our international presence.
We license our Coreport software to 41 domestic and international customers
in a variety of industries, including ABN AMRO, Braathens Airways, Children's
Hospital of Philadelphia and Philips Electronics.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered....................................... 4,500,000 shares
Common stock to be outstanding after this offering......... 15,778,366 shares
Use of proceeds............................................ Working capital and other general
corporate purposes, including the
expansion of sales and marketing
as well as research and
development activities
Proposed Nasdaq National Market symbol..................... CRCH
</TABLE>
The common stock outstanding after the offering is based on the number of
shares outstanding as of June 30, 2000, and does not include:
- 1,488,541 shares issuable upon exercise of outstanding options with a
weighted average exercise price of $3.26 per share;
- 1,919,360 additional shares available for issuance and grant under our
stock incentive plans; and
- 120,191 shares issuable upon exercise of an outstanding warrant to
purchase shares at an exercise price of $4.99 per share.
Unless otherwise indicated, all information in this prospectus:
- assumes that the underwriters will not exercise their over-allotment
option; and
- gives effect to the conversion of all outstanding shares of preferred
stock into 6,881,389 shares of common stock upon the completion of this
offering.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary statement of operations data should be read with
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements, including the related notes, included elsewhere in this prospectus.
Pro forma basic and diluted net loss per common share has been calculated
assuming the conversion of all outstanding shares of convertible preferred stock
into shares of common stock, as if the shares had converted immediately upon
issuance.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses.......................... $ 1,054 $ 1,004 $ 926 $ 677 $ 2,143
Services................................... 1,864 4,657 4,340 2,329 1,259
------- ------- ------- ------- --------
Total revenues........................... 2,918 5,661 5,266 3,006 3,402
Gross profit................................. 1,312 1,915 2,141 1,357 2,277
Operating loss............................... (8,780) (7,659) (4,787) (1,619) (5,783)
Net loss..................................... (8,975) (7,429) (4,782) (1,598) (5,591)
Pro forma basic and diluted net loss per
common share............................... $ (0.62) $ (0.95)
Shares used in computing pro forma basic and
diluted net loss per common share.......... 7,589 10,250
</TABLE>
The balance sheet data are presented on an actual basis and on a pro forma
as adjusted basis to give effect to the conversion of all outstanding shares of
our convertible preferred stock into shares of common stock that will occur upon
the closing of this offering and also to reflect the sale of 4,500,000 shares of
our common stock in this offering at an assumed initial public offering price of
$9.00 per share after deducting underwriting discounts and estimated offering
expenses.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 10,349 $47,323
Working capital........................................... 9,640 46,614
Total assets.............................................. 13,192 49,657
Redeemable convertible preferred stock.................... 33,102 --
Total stockholders' equity (deficit)...................... (22,318) 47,249
</TABLE>
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND THE OTHER INFORMATION
IN THIS PROSPECTUS, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE
RELATED NOTES, BEFORE INVESTING IN OUR COMMON STOCK. IF ANY OF THE FOLLOWING
RISKS ACTUALLY OCCUR, OUR BUSINESS, OPERATING RESULTS OR FINANCIAL CONDITION
WOULD LIKELY SUFFER. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO
ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND PROSPECTS.
We began operations in 1996, shipped our first product and began delivering
professional services in late 1996 and introduced Coreport in August 1999.
However, we did not recognize any material revenues from Coreport until the
first quarter of 2000. Our limited operating history may make it difficult for
you to evaluate our business and our prospects. Our prospects must be considered
in light of the risks encountered by early stage companies in new and rapidly
evolving markets.
WE DEPEND ON COREPORT FOR SUBSTANTIALLY ALL OF OUR REVENUES AND IF IT DOES NOT
ACHIEVE BROAD MARKET ACCEPTANCE, OUR REVENUES COULD DECLINE.
We introduced Coreport in August 1999 and generate substantially all of our
revenues from licensing Coreport and providing related services to Coreport
customers. We expect that we will continue to generate substantially all of our
revenues from Coreport. The failure of Coreport to achieve broad market
acceptance, the failure of the market for Coreport to grow or to grow at the
rate we anticipate, or a decline in the price of, or demand for, Coreport would
reduce our revenues. This could have a material adverse effect on the market
price of our common stock.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE, WHICH
COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
Our operations have never been profitable. We have incurred net losses in
every fiscal period since we began our operations. We incurred net losses of
$4.8 million for the year ended December 31, 1999 and $5.6 million for the six
months ended June 30, 2000. As of June 30, 2000 our accumulated deficit was
$29.0 million. We expect to substantially increase our sales and operating
expenses, including spending between $10.0 million and $15.0 million during the
second half of 2000. We will need to generate significant additional revenues to
achieve and maintain profitability in the future. We are not certain when we
will become profitable, if ever. Even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis. Failure to
achieve or maintain profitability will have a material adverse effect on the
market price of our common stock.
WE HAVE NOT BEEN ABLE TO FUND OUR OPERATIONS FROM CASH GENERATED BY OUR
BUSINESS, AND IF WE CANNOT MEET OUR FUTURE CAPITAL REQUIREMENTS, WE MAY NOT BE
ABLE TO DEVELOP OR ENHANCE OUR SOLUTION, TAKE ADVANTAGE OF BUSINESS
OPPORTUNITIES AND RESPOND TO COMPETITIVE PRESSURES.
We have principally financed our operations through the private placement of
shares of our preferred stock. If we do not generate sufficient cash from our
business to fund operations or if we cannot obtain additional capital through
equity or debt financings, we will be unable to grow as planned and may not be
able to take advantage of business opportunities, develop new solutions or
respond to competitive pressures. This could limit our growth and have a
material adverse effect on the market price of our common stock.
Any additional financing we may need in the future may not be available on
terms favorable to us, if at all. If we raise additional funds through the
issuance of equity or convertible debt securities, the percentage ownership of
Corechange by our stockholders would be reduced and the securities issued could
have rights, preferences and privileges more favorable than those of our
stockholders.
6
<PAGE>
IF WE DO NOT EXPAND THE NUMBER OF LICENSES USED BY OUR CUSTOMERS, WE MAY NOT
ACHIEVE GROWTH IN OUR REVENUES.
In order to increase our revenues, we will depend on customers to purchase
additional licenses of Coreport. Our sales strategy involves the licensing of
Coreport to customers on a limited basis to familiarize customers with the
benefits provided by Coreport, which we refer to as our initial rollout
strategy. Most of our customers have only licensed Coreport on an initial
rollout basis. To convert customers beyond the initial rollout stage and to have
customers expand their licensing of Coreport, it is important that our customers
are satisfied with Coreport and that they believe that expanded use of Coreport
will provide them with additional benefits. Customers may choose not to license
Coreport beyond the initial rollout stage or expand the use of our product. If
we do not increase sales to customers, we may not be able to achieve anticipated
revenue growth.
WE MAY EXPERIENCE DIFFICULTIES IN INTRODUCING NEW PRODUCT ENHANCEMENTS AND
UPDATES WHICH COULD RESULT IN NEGATIVE PUBLICITY, LOSS OF SALES, DELAY IN
MARKET ACCEPTANCE OR CUSTOMER DISSATISFACTION.
Our future financial performance depends on the successful and timely
development, introduction and market acceptance of new product enhancements and
updates. Without these enhancements and updates, Coreport may not satisfy the
requirements of the marketplace or achieve market acceptance. We may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new product enhancements and updates. The
introduction of enhancements to our product may also cause customers to defer
orders for our existing products. If new product enhancements and updates are
not released according to schedule, we may suffer from negative publicity, loss
of sales, delay in market acceptance of our products or customer claims against
us or our product may become obsolete and unmarketable.
For example, in March 2000, we introduced version 3.0 of Coreport with
additional functionality, including wireless capabilities. No customer has
implemented yet the wireless capabilities of version 3.0 on a wide-scale basis.
To successfully implement these wireless capabilities, customers will need to
integrate these capabilities with the wide variety of complex systems used by
customers. If Coreport's wireless capabilities cannot be implemented on a
wide-scale basis due to technological obstacles or the ease and speed of this
implementation does not meet the expectations of our customers, our reputation
and ability to sell Coreport will be harmed.
DELAYS OR PROBLEMS IN IMPLEMENTATION OF COREPORT AT ANY CUSTOMER SITE COULD
DELAY THE IMPLEMENTATION OF COREPORT AT OTHER CUSTOMER SITES, THE DEVELOPMENT
OF PRODUCT ENHANCEMENTS AND THE RELEASE OF NEW PRODUCTS.
The implementation of Coreport requires internal quality assurance testing
and customer testing which may reveal performance issues that could lead to
delays in setting up our solution for customers. The reallocation of resources
associated with any postponement could cause delays in the implementation of
Coreport at other customer sites and may adversely affect or delay our ability
to develop and release new products as well as future enhancements to Coreport.
OUR QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE AND ANY FAILURE TO MEET MARKET
EXPECTATIONS MAY CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
Our quarterly revenues and operating results are difficult to predict. We
have experienced, and expect to continue to experience, fluctuations in revenues
and operating results from quarter-to-quarter. If our revenues or operating
results fall below the expectations of securities analysts and investors, the
market price of our common stock may decline.
Factors that may cause our revenue or operating results to fluctuate
include:
- the timing of sales of our product, including the addition or loss of one
or more customers;
- the duration of the period between initial contact with a potential
customer and the license of Coreport by that customer, which typically
ranges from approximately 30 to 90 days and may be longer;
7
<PAGE>
- technical difficulties in our software that would delay product shipments
or increase the costs of introducing new products;
- changes in our mix of revenues from new product sales and services;
- the number and timing of new hires, particularly of sales, development and
services personnel; and
- costs related to possible acquisitions of technologies or businesses.
IF WE DO NOT EXPAND OUR SALES AND DISTRIBUTION CAPABILITIES, WE MAY NOT BE
ABLE TO INCREASE MARKET AWARENESS AND SALES OF COREPORT AND OUR GROWTH WILL BE
LIMITED.
We need to substantially expand our sales and distribution efforts in order
to increase market awareness and sales of Coreport and the related services we
offer. We have recently expanded our direct sales force and plan to hire
additional sales personnel. In addition, we intend to expand our indirect
distribution channels by establishing additional relationships with resellers,
distribution partners and other third parties. If we can not successfully expand
our direct sales force or expand our indirect distribution channels, our efforts
to expand our sales and distribution capabilities will not be successful and our
revenues may decline.
IF COREPORT IS UNRELIABLE, WE COULD LOSE CUSTOMERS AND REVENUES.
Our software is complex, and may contain undetected errors or performance
problems. Many serious defects are frequently found during the period
immediately following introduction of new software or enhancements to existing
software. Undetected errors or performance problems may be discovered in the
future and our customers may consider known errors to be more serious than we
do. This could result in lost revenues or delays in customer or market
acceptance, costly litigation, diversion of management's attention and
resources, increase in product development costs or loss of sales and could be
detrimental to our reputation.
BECAUSE WE INTEND TO USE THIRD PARTIES TO PROMOTE, SELL AND IMPLEMENT OUR
PRODUCT, OUR REVENUES WILL LIKELY SUFFER IF WE DO NOT DEVELOP AND MAINTAIN
THESE RELATIONSHIPS.
We intend to use third parties to promote, sell and implement our product.
If we fail to maintain and develop these relationships, our revenues will likely
suffer. We use third parties to recommend our product to their customers and to
install our product. If we are unable to use these third parties to implement
our product, we will likely have to provide these services ourselves, resulting
in increased costs, and limiting our ability to grow. Competition for
relationships with resellers, distribution partners and other third parties is
intense, and we may be unable to establish relationships on favorable terms, if
at all. These third parties may also develop, market or recommend products that
compete with our product. We must cultivate our relationships with these firms,
and our failure to do so could result in reduced sales revenues. If these third
parties fail to implement our product successfully, our reputation may be
harmed.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY, OUR REVENUES COULD DECLINE AND OUR
BUSINESS COULD FAIL.
The market for our software is changing rapidly and intensely competitive.
We expect competition to intensify further as the number of entrants and new
technologies increases. We may not be able to compete successfully against
current or future competitors. The competitive pressures facing us may result in
price reductions and our revenues could decline and our business could fail.
Our current and potential competitors include both private and public
companies which are perceived as providing products similar to ours, or which
actually provide components of the product we provide. Many of our competitors
and potential competitors possess longer operating histories, larger technical
staffs, larger customer bases, more established distribution channels, a broader
range of products, greater brand recognition and greater financial, marketing
and other resources than we do. Negotiating and maintaining favorable customer
and strategic relationships is critical to our business.
8
<PAGE>
Many of our competitors have well-established relationships with our existing
and prospective customers and may be able to negotiate strategic relationships
on more favorable terms than we are.
We also may face increased competition from existing large enterprise
software vendors that may broaden their product offerings to include software
similar to ours. Their significant installed customer bases and abilities to
offer a broad solution and price these new products as incremental add-ons to
existing systems could provide them with a significant competitive advantage.
IF WE ARE UNABLE TO EXPAND THE NUMBER OF HARDWARE, SOFTWARE, DATABASE AND
NETWORK SYSTEMS ON WHICH COREPORT MAY BE INSTALLED, OUR REVENUES COULD DECLINE
AND OUR ABILITY TO COMPETE COULD BE HARMED.
We serve a customer base with a wide variety of hardware, software, database
and networking systems. To gain broad market acceptance, we believe that we must
support an increased number of systems in the future. We offer Coreport on
Microsoft Windows NT and are adapting Coreport to be installed on other major
servers, such as Unix servers. A delay in this or any other rollout of our
product onto a new operating system could adversely affect our revenues and
operating results. There can be no assurance that we will adequately expand our
offerings to service potential customers, or that the expansion will be
sufficiently rapid to meet or exceed the offerings of our competitors.
IF WINDOWS NT FAILS TO MAINTAIN BROAD MARKET ACCEPTANCE, WE COULD LOSE MARKET
SHARE AND OUR BUSINESS COULD FAIL.
If the market for the Windows NT operating system declines or develops more
slowly than we expect, our business and operating results will be significantly
harmed. Market acceptance of the Windows NT operating system will depend on many
factors, including Microsoft's development and support of the Windows NT market.
For example, Microsoft could decide to discontinue or lessen its support of the
Windows NT market. Similarly, Microsoft could decide to shift its support to
another operating system to the detriment of Windows NT. We cannot predict the
ability of the Windows NT operating system to compete against existing and
emerging operating systems, including AIX, HP-UX, Linux and Solaris. Any decline
in the market penetration of Window NT operating systems will lead to a
shrinking market for our product.
OUR RECENT GROWTH HAS PLACED A STRAIN ON OUR MANAGERIAL AND OTHER RESOURCES
AND OUR FAILURE TO MANAGE GROWTH COULD CAUSE THE QUALITY OF OUR PRODUCTS TO
SUFFER, DISRUPT OUR OPERATIONS AND DELAY EXECUTION OF OUR BUSINESS PLAN.
We have increased, and plan to continue to increase, the scope of our
operations at a rapid rate. Our failure to manage growth effectively could cause
the quality of our products to suffer, delay execution of our business plan and
disrupt our operations. The number of people we employ has grown and we expect
it to continue to grow substantially. We expanded from 57 employees as of
December 31, 1999, to 96 employees as of June 30, 2000. Future expansion efforts
could be expensive and may strain our managerial and other resources. To manage
growth effectively, we must maintain and enhance our financial and accounting
systems and controls, integrate new personnel, build and train our sales and
marketing staff, develop our customer support capacity and manage expanded
operations. If we fail to do so, our growth will be limited.
IF WE DO NOT RETAIN OUR KEY MANAGEMENT PERSONNEL, THE MARKET'S PERCEPTION OF
OUR BUSINESS AND OUR ABILITY TO ACHIEVE OUR BUSINESS GOALS COULD BE HARMED.
Our future success depends upon the continued service of our executive
officers and other key personnel, many of whom do not have employment agreements
with us. If we lose the services of one or more of our executive officers or key
employees, or if one or more of them decide to join a competitor or otherwise
compete directly or indirectly with us, the market's perception of our business
and our ability to achieve our business goals could be harmed.
9
<PAGE>
IF WE FAIL TO RECRUIT AND RETAIN HIGHLY SKILLED SALES, MARKETING AND
ENGINEERING PERSONNEL, WE MAY NOT BE ABLE TO DEVELOP AND INTRODUCE OUR
PRODUCTS ON A TIMELY BASIS.
Our success depends on our ability to recruit, retain and motivate highly
skilled sales, marketing and engineering personnel. Competition for these
individuals in the software and internet industries is intense, and we may not
be able to successfully recruit or train qualified personnel. If we are unable
to recruit and retain a sufficient number of qualified personnel, we may not be
able to complete development of, or upgrade or enhance, our products in a timely
manner.
IF WE ARE UNSUCCESSFUL IN OUR EFFORTS TO EXPAND OUR INTERNATIONAL SALES, OUR
GROWTH WILL BE LIMITED.
We have generated a significant portion of our total revenues from foreign
sales and, although we anticipate that the percentage of our total revenues from
foreign sales will continue to decline in the future, we intend to expand our
international sales efforts and open new offices in Europe and in the
Asia-Pacific region. Expansion of our international operations will require a
significant amount of attention from our management and substantial financial
resources. If we are unable to grow our international operations successfully
and in a timely manner, our growth will be limited.
Conducting business internationally involves a number of risks for us:
- Because we conduct our international operations through foreign
subsidiaries, restrictions on repatriation of earnings from these
subsidiaries could limit our cash flows;
- We may have difficulties in staffing and managing foreign operations; and
- Because our foreign subsidiaries transact their business in foreign
currency, we are subject to risk of fluctuation of currency exchange
rates.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY LOSE A VALUABLE
ASSET, EXPERIENCE REDUCED MARKET SHARE, OR INCUR COSTLY LITIGATION TO PROTECT
OUR RIGHTS.
Our success depends, in part, upon our intellectual property rights. We have
relied primarily on a combination of trade secret and trademark laws, and
nondisclosure and other contractual restrictions on copying and distribution to
protect our proprietary technology. Litigation to enforce our intellectual
property rights or protect our trade secrets could result in substantial costs
and may not be successful. Any inability to protect our intellectual property
rights could seriously harm our business, operating results and financial
condition. The laws of foreign countries may not protect our intellectual
property rights to the same extent as do the laws of the United States. Our
means of protecting our intellectual property rights in the United States or
abroad may not be adequate to fully protect our intellectual property rights.
Others may develop technologies that are similar or superior to our technology
or design around the copyrights and trade secrets we own.
WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE COSTLY TO
DEFEND AND RESULT IN OUR LOSS OF SIGNIFICANT RIGHTS.
Other parties may assert intellectual property infringement claims against
us and our products may infringe the intellectual property rights of third
parties. Intellectual property litigation is expensive and time-consuming and
could divert management's attention from our business. If there is a successful
claim of infringement we may be required to develop non-infringing technology or
enter into royalty or license agreements which may not be available on
acceptable terms, if at all. Our failure to develop non-infringing technologies
or license the proprietary rights on a timely basis would harm our business.
OUR INDEMNIFICATION OBLIGATIONS COULD REQUIRE US TO DEFEND OUR CUSTOMERS
AGAINST CLAIMS THAT OUR PRODUCT INFRINGES UPON THE INTELLECTUAL PROPERTY
RIGHTS OF OTHERS, WHICH COULD CAUSE US TO INCUR SUBSTANTIAL COSTS.
We have agreed, and may agree in the future, to indemnify our customers
against claims that our product infringes upon the intellectual property rights
of others. We could incur substantial costs in defending ourselves and our
customers against infringement claims. If there is a claim of infringement,
10
<PAGE>
we and our customers may be required to obtain one or more licenses from third
parties. We, or our customers, may be unable to obtain necessary licenses from
third parties at a reasonable cost, or at all.
Defense of any lawsuit or failure to obtain any potentially required
licenses could harm our business, operating results and financial condition.
IF WE BECOME SUBJECT TO SERVICE-RELATED LIABILITY CLAIMS, THEY COULD BE
TIME-CONSUMING AND COSTLY TO DEFEND AND, IF SUCCESSFUL, COULD REQUIRE US TO
PAY SIGNIFICANT DAMAGES AWARDS.
Since our customers may use our product for mission-critical applications
such as communication, internet commerce and collaboration, errors, defects or
other performance problems could result in financial or other damages to our
customers. They could seek damages for losses from us, which, if successful,
could have a material adverse effect on our business, operating results or
financial condition. Although our agreements with our customers typically
contain provisions designed to limit our exposure to service-related liability
claims, existing or future laws or unfavorable judicial decisions could negate
these limitation of liability provisions. A service-related liability claim
brought against us, even if unsuccessful, could be time-consuming and costly to
defend and could harm our reputation.
RISKS RELATING TO OUR INDUSTRY
BECAUSE OUR COREPORT SOFTWARE IS DESIGNED TO SUPPORT BUSINESSES OPERATING OVER
THE INTERNET, OUR SUCCESS DEPENDS ON CONTINUED ADOPTION OF THE INTERNET AS A
METHOD OF CONDUCTING BUSINESS AND COMMUNICATIONS.
The market for our software is relatively new and is evolving rapidly. Our
business depends upon the widespread acceptance and use of the internet as an
effective medium for employee and business-to-business communication, commerce
and collaboration. The failure of the internet to continue to develop as a
commercial or business medium could harm our business, operating results and
financial condition. The acceptance and use of the internet for employee and
business-to-business communication, commerce and collaboration could be limited
by a number of factors, such as the growth and use of the internet in general,
the relative ease of communication, commerce and collaboration on the internet,
the efficiencies and improvements that the internet provides, concerns about
transaction security and taxation of transactions on the internet.
BECAUSE OUR COREPORT SOFTWARE IS DESIGNED TO SUPPORT THE USE OF WIRELESS
COMMUNICATION BY BUSINESSES, OUR SUCCESS DEPENDS ON THE GROWING USE OF
WIRELESS DEVICES TO CONDUCT BUSINESS AND COMMUNICATIONS.
Our future success depends in part upon the widespread acceptance and use of
wireless devices such as cellular phones and personal digital assistants to
provide access to business information and applications. There can be no
assurance that the continuously evolving wireless technologies will be developed
according to anticipated schedules, that they will perform according to
expectations or that they will achieve commercial acceptance within the
timeframe that we anticipate. The failure of vendor performance or technology
performance to meet expectations or the failure of a technology to achieve
commercial acceptance could harm our business, operating results and financial
condition.
INCREASED INFORMATION SECURITY RISKS MAY DETER FUTURE USE OF OUR PRODUCT AND
CAUSE OUR BUSINESS TO FAIL.
A fundamental requirement to conduct internet and wireless
business-to-business communication, commerce and collaboration is the secure
transmission of confidential information over public networks. Our customers and
their business partners may be required to incur significant costs to protect
against security breaches or to alleviate problems caused by breaches, reducing
their demand for our solution. Further, a well-publicized compromise of security
could deter businesses from using the internet to conduct transactions that
involve transmitting confidential information. The failure of the security
features of our services to prevent security breaches, or well publicized
security breaches affecting the internet in general, could significantly harm
our business, operating results and financial condition.
11
<PAGE>
RISKS RELATING TO THIS OFFERING
THE MARKET PRICE OF OUR COMMON STOCK AS A TECHNOLOGY STOCK MAY BE VOLATILE.
The stock market, and specifically the stock prices of internet-related and
software companies, has been very volatile. Prices for our common stock will be
determined in the marketplace and may be influenced by many factors, including
variations in our financial results, changes in earnings estimates by industry
analysts, investors' perceptions of us and general economic, industry and market
conditions. This volatility of the stock market and technology stocks may reduce
the price of our common stock, regardless of our operating performance. Due to
this volatility, the market price of our common stock could significantly
decrease.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE, WHICH COULD
LIMIT OUR ABILITY TO RAISE CAPITAL AND UNDERTAKE ACQUISITIONS.
If substantial amounts of our common stock were to be sold in the public
market following this offering, the market price of our common stock could fall.
These sales could introduce a large number of sellers of our common stock into a
market in which the common stock price is already volatile, thus driving our
common stock price down. These sales could create the perception to the public
of difficulties or problems with our product. A reduced stock price could impair
our ability to raise capital through the sale of additional equity or
equity-related securities and undertake acquisitions through the issuance of
additional equity securities at a time and price that we consider appropriate.
For a more detailed discussion of shares eligible for sale after the offering,
see "Shares Eligible for Future Sale."
OUR DIRECTORS AND EXECUTIVE OFFICERS AND THEIR AFFILIATES WILL CONTINUE TO
HAVE THE ABILITY TO CONTROL US AFTER THIS OFFERING AND COULD DELAY OR PREVENT
A CHANGE IN CONTROL.
Following the completion of this offering, it is anticipated that our
executive officers and directors and their affiliates will beneficially own or
control approximately 53.9% of our common stock. If those stockholders act
together, they will have the ability to control all matters submitted to our
stockholders for approval, including the election and removal of directors and
the approval of any merger, consolidation or sale of all or substantially all of
our assets. These stockholders may make decisions that are adverse to your
interests.
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION AND
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
Provisions of our certificate of incorporation and bylaws and of Delaware
law could have the effect of delaying, deferring or preventing an acquisition of
Corechange. For example, we have divided our board of directors into three
classes that serve staggered three-year terms, we may authorize the issuance of
up to 5,000,000 shares of preferred stock, our stockholders may not take actions
by written consent and may not call special meetings of stockholders, and our
stockholders are limited in their ability to introduce proposals at stockholder
meetings.
12
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. We have attempted to
identify forward-looking statements by terminology including "anticipate,"
"believe," "can," "continue," "could," "estimate," "expect," "intend," "may,"
"plan," "potential," "predict," "should" or "will" or the negative of these
terms or other comparable terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including the
risks and uncertainties outlined under "Risk Factors," that may cause our or our
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
13
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately
$36.5 million from the sale of the 4,500,000 shares of common stock we are
offering. If the underwriters exercise their over-allotment option in full, we
estimate that we will receive net proceeds of approximately $42.1 million. These
amounts are based on an assumed initial public offering price of $9.00 per share
after deducting underwriting discounts and estimated offering expenses payable
by us. We expect to use the net proceeds for working capital and other general
corporate purposes, including the expansion of our sales and marketing as well
as research and development activities.
The amounts and timing of our actual expenditures will depend upon numerous
factors, including:
- the status of our product development and commercialization efforts;
- the amount of proceeds actually raised in this offering;
- the amount of cash generated by our operations, competition; and
- sales and marketing activities.
We may also use a portion of the proceeds for the acquisition of, or
investment in, companies, technologies or assets that complement our business.
However, we have no understandings, commitments or agreements to enter into any
potential acquisitions or investments.
We have not determined the amounts we plan to spend on any of the areas
listed above or the timing of these expenditures. As a result, our management
will have broad discretion to allocate the net proceeds from this offering. We
intend to invest the net proceeds of the offering in short-term investment grade
and U.S. government securities until we use the net proceeds as described above.
DIVIDEND POLICY
We have never paid cash dividends on our common stock or any other
securities. We anticipate that we will retain all of our future earnings, if
any, for use in the expansion and operation of our business and do not
anticipate paying cash dividends.
CORPORATE INFORMATION
We were organized in March 1996 as a Delaware limited liability company,
with technology licensed from Cambridge Technology Partners, Inc., or CTP. In
May 1997, we changed our form of organization to a corporation. Our principal
executive office is located at 260 Franklin Street, Suite 1890, Boston,
Massachusetts 02110, and our telephone number is (617) 204-3300. Our web site is
www.corechange.com. The information contained on our web site is not a part of
this prospectus.
Corechange is a registered trademark owned by us. We have filed trademark
applications for Corealign and Coreport. All other trademarks and trade names
used in the prospectus are the property of their owners.
14
<PAGE>
CAPITALIZATION
The following table lists our capitalization as of June 30, 2000:
- on an actual basis; and
- on a pro forma as adjusted basis to reflect:
- the conversion of all outstanding shares of our convertible preferred
stock into shares of common stock that will occur upon the closing of
this offering; and
- the application of the estimated net proceeds from the sale of common
stock in this offering at an assumed initial public offering price of
$9.00 per share, after deducting underwriting discounts and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
---------------------------
PRO FORMA AS
ACTUAL ADJUSTED
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
Cash and cash equivalents................................... $ 10,349 $ 47,323
======== ========
Series A and B redeemable convertible preferred stock;
6,884,598 shares authorized and 5,931,371 shares issued
and outstanding, actual; no shares authorized, issued or
outstanding, pro forma as adjusted........................ $ 33,102 $ --
Stockholders' equity (deficit):
Series I, II and III convertible preferred stock;
964,986 shares authorized and 950,018 shares issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma as adjusted...................... 6,542 --
Preferred stock; 5,000,000 shares authorized, pro forma as
adjusted; no shares issued or outstanding, pro forma as
adjusted................................................ -- --
Common stock; 15,000,000 shares authorized,
4,396,977 shares issued and outstanding, actual;
45,000,000 shares authorized, 15,778,366 shares issued
and outstanding, pro forma as adjusted.................. 44 158
Additional paid-in capital.................................. 2,061 78,056
Deferred stock-based compensation........................... (1,984) (1,984)
Accumulated deficit......................................... (28,970) (28,970)
Cumulative translation adjustment........................... (11) (11)
-------- --------
Total stockholders' equity (deficit)...................... (22,318) $ 47,249
-------- --------
Total capitalization................................ $ 10,784 $ 47,249
======== ========
</TABLE>
This table does not include:
- 1,488,541 shares issuable upon exercise of options outstanding as of
June 30, 2000 with a weighted average exercise price of $3.26 per share;
- 120,191 shares issuable upon exercise of an outstanding warrant to
purchase shares at an exercise price of $4.99 per share; and
- 1,919,360 additional shares available for issuance and grant under our
stock incentive plans as of June 30, 2000.
15
<PAGE>
DILUTION
PRO FORMA NET TANGIBLE BOOK VALUE
The pro forma net tangible book value of our common stock as of June 30,
2000 was $10.3 million, or $0.91 per share, after giving effect to the
conversion of all outstanding shares of convertible preferred stock into shares
of common stock upon the closing of this offering. Pro forma net tangible book
value per share represents the amount of our total tangible assets less total
liabilities, divided by the pro forma number of shares of common stock
outstanding, after giving effect to the conversion of all outstanding shares of
convertible preferred stock into shares of common stock that will occur upon the
closing of this offering.
DILUTION AFTER THIS OFFERING
After giving effect to the sale of the 4,500,000 shares of common stock
being offered in this offering at an assumed initial public offering price of
$9.00 per share, and after deducting the underwriting discounts and estimated
offering expenses payable by us, our adjusted pro forma net tangible book value
at June 30, 2000 would have been approximately $47.2 million, or approximately
$2.99 per share. This represents an immediate increase in pro forma net tangible
book value per share of $2.08 to existing stockholders and dilution in pro forma
net tangible book value per share of $6.01 to new investors who purchase shares
of common stock in this offering.
The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $9.00
Pro forma net tangible book value per share as of June 30,
2000...................................................... $0.91
Increase attributable to new investors...................... 2.08
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.99
-----
Dilution per share to new investors......................... $6.01
=====
</TABLE>
DIFFERENCES BETWEEN NEW AND EXISTING STOCKHOLDERS IN NUMBER OF SHARES AND AMOUNT
PAID
The following table summarizes, on a pro forma basis, as of June 30, 2000,
the differences between the number of shares of common stock purchased, the
total consideration paid and the average price per share paid by existing
stockholders and by the new investors purchasing shares in this offering. The
calculation below is based on an assumed initial public offering price of $9.00
per share, before deducting underwriting discounts and estimated offering
expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 11,278,366 71% $37,753,062 48% $3.35
New investors............ 4,500,000 29 40,500,000 52 9.00
---------- --- ----------- ---
Total.................... 15,778,366 100% $78,253,062 100%
========== === =========== ===
</TABLE>
This discussion and the tables above assume no exercise of any stock options
or warrants outstanding as of June 30, 2000. As of June 30, 2000, there were
1,488,541 shares of common stock issuable upon exercise of outstanding stock
options at a weighted average exercise price of $3.26 per share and 120,191
shares of common stock issuable upon exercise of an outstanding warrant at an
exercise price of $4.99 per share. If any of these options and warrants are
exercised in the future, there will be further dilution to new investors.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The statements of operations data for the years ended December 31, 1997 and
1998 and the balance sheet data as of December 31, 1998 have been derived from
our audited consolidated financial statements included elsewhere in this
prospectus that have been audited by Ernst & Young LLP, independent auditors.
The statement of operations data for the year ended December 31, 1999 and
balance sheet data as of December 31, 1999 have been derived from our audited
consolidated financial statements included elsewhere in this prospectus that
have been audited by Arthur Andersen LLP, independent public accountants. The
statements of operations data for the period from the date we began operations,
March 14, 1996, through December 31, 1996 and the balance sheet data as of
December 31, 1996 and 1997 have been derived from our audited consolidated
financial statements which are not included in this prospectus.
The statement of operations data for the six months ended June 30, 1999 and
2000 and the balance sheet data as of June 30, 2000 are derived from our
unaudited consolidated financial statements included elsewhere in this
prospectus. The pro forma net loss per share data reflect the conversion of our
outstanding convertible preferred stock into common stock that will occur upon
the closing of this offering.
Our historical results are not necessarily indicative of results to be
expected from any future period. The data presented below have been derived from
financial statements that have been prepared based on generally accepted
accounting principles and should be read with our financial statements,
including the accompanying notes, and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
MARCH 14, 1996 YEAR ENDED DECEMBER 31, JUNE 30,
THROUGH ------------------------------ -------------------
DECEMBER 31, 1996 1997 1998 1999 1999 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Software licenses........................... $ 844 $ 1,054 $ 1,004 $ 926 $ 677 $ 2,143
Services.................................... 127 1,864 4,657 4,340 2,329 1,259
------- ------- ------- -------- ------- --------
Total revenues.......................... 971 2,918 5,661 5,266 3,006 3,402
Cost of revenues(1)........................... 1,170 1,606 3,746 3,125 1,649 1,125
------- ------- ------- -------- ------- --------
Gross profit............................ (199) 1,312 1,915 2,141 1,357 2,277
Operating expenses:
Sales and marketing(1)...................... 1,335 2,437 3,914 2,845 1,257 4,026
Research and development(1)................. -- 1,240 1,768 1,344 536 1,635
General and administrative(1)............... 610 1,915 3,489 2,531 1,165 1,895
Acquired in-process technologies............ -- 4,500 -- -- -- --
Stock-based compensation.................... -- -- 208 18 504
Restructuring costs......................... -- -- 403 -- -- --
------- ------- ------- -------- ------- --------
Total operating expenses................ 1,945 10,092 9,574 6,928 2,976 8,060
------- ------- ------- -------- ------- --------
Operating loss.......................... (2,144) (8,780) (7,659) (4,787) (1,619) (5,783)
Interest expense.............................. (75) (219) (16) (43) (12) (50)
Interest income............................... 26 24 246 48 33 242
------- ------- ------- -------- ------- --------
Net loss................................ (2,193) (8,975) (7,429) (4,782) (1,598) (5,591)
Accretion and dividends on preferred stock.... -- -- (61) (61) (30) (4,903)
------- ------- ------- -------- ------- --------
Net loss attributable to common
stockholders.......................... $(2,193) $(8,975) $(7,490) $ (4,843) $(1,628) $(10,494)
======= ======= ======= ======== ======= ========
Net loss per share:
Basic and diluted net loss per share........ $ (0.91) $ (3.36) $ (2.04) $ (1.29) $ (0.43) $ (2.51)
======= ======= ======= ======== ======= ========
Basic and diluted weighted average common
shares outstanding........................ 2,400 2,669 3,664 3,754 3,762 4,181
======= ======= ======= ======== ======= ========
Pro forma net loss per share:
Pro forma basic and diluted net loss per
share..................................... $ (0.62) $ (0.95)
======== ========
Pro forma basic and diluted weighted average
common shares outstanding................. 7,589 10,250
======== ========
</TABLE>
------------------------------
(1) The following summarizes the departmental allocation of stock-based
compensation:
17
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
MARCH 14, 1996 YEAR ENDED DECEMBER 31, JUNE 30,
THROUGH ------------------------------ -------------------
DECEMBER 31, 1996 1997 1998 1999 1999 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Cost of Revenues.......................... $ -- $ -- $ -- $ 42 $ 4 $ 101
Operating Expenses:
Sales and marketing..................... -- -- -- 41 4 100
Research and development................ -- -- -- 63 5 152
General and administrative.............. -- -- -- 62 5 151
------- ------- ------- -------- ------- --------
Total stock-based compensation........ $ -- $ -- $ -- $ 208 $ 18 $ 504
======= ======= ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------- JUNE 30,
1996 1997 1998 1999 2000
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 68 $ 748 $ 2,890 $ 2,102 $ 10,349
Working capital............................................. (1,288) (1,561) 2,348 (1,900) 9,640
Total assets................................................ 1,589 3,423 4,866 3,644 13,192
Redeemable convertible preferred stock...................... -- -- 11,573 11,634 33,102
Total stockholders' equity (deficit)........................ (973) (912) (8,401) (13,018) (22,318)
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We were organized in March 1996 to focus on the development and
commercialization of methodologies and technologies licensed from CTP for the
enterprise-wide deployment of software applications.
In June 1997, we introduced our initial Microsoft Windows-based software
product. Substantially all our revenues through December 1999 relate to this
product. This product required us to provide our customers with significant
implementation and support services. In late 1998, we shifted our efforts to the
development of internet-based solutions that would provide us with additional
growth opportunities. In August 1999, we introduced Coreport, our internet-based
software product, and in December 1999, we discontinued development and
marketing of our initial product. For the six months ended June 30, 2000,
revenues associated with Coreport represented 82.2% of our total revenues. We
did not realize any material revenues from Coreport until the first quarter of
2000. We do not expect to generate material revenues from the licensing of our
initial product in the future. We expect to continue to generate substantially
all of our revenues from licensing Coreport and providing related services.
REVENUES
Our revenues were $2.9 million in 1997, $5.7 million in 1998, $5.3 million
in 1999 and $3.4 million for the six months ended June 30, 2000 and consisted of
software license revenue and services revenue. Software license revenue is
generated from licensing our software to our customers and the customers of our
distribution partners. Services revenue is generated from implementation,
maintenance and other support services related to the licensing of our software
and from other consulting services provided to our customers.
REVENUE RECOGNITION
Software license revenue is recognized upon the execution of a license
agreement, delivery of the software to a customer and determination that
collection of a fixed license fee is probable. We use the residual method when
fair value does not exist for one of the delivered elements in a license
arrangement. Under the residual method, the fair value of the undelivered
elements is deferred and subsequently recognized. Software license revenue is
recognized under the residual method in arrangements in which software is
licensed with professional services, training and maintenance and support
services.
Services revenue from implementation services and training is recognized as
the services are performed for time and material contracts or on a
percentage-of-completion basis for fixed-price contracts. Services revenue from
maintenance and customer support fees is recognized ratably over the term of the
maintenance contract on a straight-line basis.
CUSTOMERS
We license our products to customers in the United States, Canada and
Europe. Revenue from customers in the United States, as a percentage of total
revenue, was approximately 48.5% in 1997, 21.7% in 1998, 35.2% in 1999 and 64.9%
for the six months ended June 30, 2000. We anticipate that revenues from
customers in the United States will represent an increasing percentage of our
total revenues in the future. Our top five customers accounted for 60.7% of our
total revenues in 1999 and 54.1% of our total revenues for the six months ended
June 30, 2000. Manor Bakeries accounted for 38.9% of our total revenues in 1999.
Revenues from Manor Bakeries related to our initial product and other consulting
services we provided in 1999. For the six months ended June 30, 2000, ABN AMRO
19
<PAGE>
accounted for 21.9% of our total revenues and Children's Hospital of
Philadelphia accounted for 12.4% of our total revenues. We market our software
and related services primarily through our direct sales organization and have
recently established indirect distribution relationships in the United States
and internationally.
ACQUISITION OF TECHNOLOGIES FROM CTP
In February 1997, we acquired from CTP, for a purchase price of
$4.5 million, methodologies previously licensed from CTP relating to technology
that we used to develop our initial Microsoft Windows-based software product.
The costs of these software rights were expensed as acquired in-process
technologies because the related technology was not at the point of
technological feasibility and had no alternative future use at the date of
acquisition. As of the acquisition date, neither a detailed program design nor a
working model had been completed for the product. Subsequent to the acquisition,
we incurred an additional $0.5 million in the development of the product before
its release in July 1997.
STOCK ISSUANCES
In connection with stock option grants and restricted stock issuances, we
recorded deferred stock-based compensation totaling approximately $0.8 million
in 1999 and $1.9 million for the six months ended June 30, 2000. The deferred
compensation represents the aggregate difference between the option exercise
price or the restricted stock issuance price and the fair value of the common
stock on the date of grant for accounting purposes. The deferred compensation
will be recognized as expense over the vesting period, two to four years, of the
underlying stock options and restricted stock. We recognized compensation
expense of $0.2 million in 1999 and $0.5 million for the six months ended
June 30, 2000 related to these options and restricted stock. Future non-cash
amortization of the deferred compensation is expected through 2003.
In February 2000, we issued 3,046,773 shares of series B convertible
preferred stock. Upon the closing of this offering, all outstanding shares of
series B convertible preferred stock will automatically convert into 3,046,773
shares of common stock, resulting in an effective purchase price of $5.837 per
common share. The difference between the effective purchase price of the common
stock and the deemed fair value of the common stock on the date of issuance of
the series B convertible preferred stock for accounting purposes resulted in a
beneficial conversion feature of $4.2 million, which is reflected as a dividend
in the six months ended June 30, 2000.
ACCUMULATED DEFICIT AND NET LOSS
As of June 30, 2000, we had an accumulated deficit of approximately
$29.0 million. Our net loss was $9.0 million in 1997, $7.4 million in 1998,
$4.8 million in 1999 and $5.6 million for the six months ended June 30, 2000.
These losses resulted from costs incurred in the development and sale of our
products and services. We expect to increase our sales personnel, marketing
expenses and services and operating expenses so that we may expand sales and
operations domestically and internationally. We expect to incur additional
losses and will need to generate significant additional revenues to achieve and
maintain profitability in the future.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of
total revenues:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- --------------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses............................. 36.1% 17.7% 17.6% 22.5% 63.0%
Services...................................... 63.9 82.3 82.4 77.5 37.0
------ ------ ------ ----- ------
Total revenues............................ 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ----- ------
Cost of revenues................................ 55.0 66.2 59.3 54.9 33.1
------ ------ ------ ----- ------
Gross profit.................................... 45.0 33.8 40.7 45.1 66.9
Operating expenses:
Sales and marketing........................... 83.5 69.1 54.0 41.8 118.3
Research and development...................... 42.5 31.2 25.5 17.8 48.1
General and administrative.................... 65.7 61.7 48.1 38.8 55.6
Acquired in-process technologies.............. 154.2 -- -- -- --
Stock-based compensation...................... -- -- 4.0 0.6 14.8
Restructuring costs........................... -- 7.1 -- -- --
------ ------ ------ ----- ------
Total operating expenses.................. 345.9 169.1 131.6 99.0 236.8
------ ------ ------ ----- ------
Operating loss.................................. (300.9) (135.3) (90.9) (53.9) (169.9)
Interest income (expense), net.................. (6.7) 4.1 0.1 0.7 5.6
------ ------ ------ ----- ------
Net loss........................................ (307.6)% (131.2)% (90.8)% (53.2)% (164.3)%
====== ====== ====== ===== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
REVENUES
TOTAL REVENUES. Total revenues were $3.0 million for the six months ended
June 30, 1999 and $3.4 million for the six months ended June 30, 2000,
representing an increase of $0.4 million, or 13.2%. Total revenues from our
initial product were $3.0 million for the six months ended June 30, 1999 and
$0.6 million for the six months ended June 30, 2000. Total revenues from
Coreport were $2.8 million for the six months ended June 30, 2000. We did not
generate any material revenues from Coreport prior to 2000.
SOFTWARE LICENSES. Software license revenue was $0.7 million for the six
months ended June 30, 1999 and $2.1 million for the six months ended June 30,
2000, representing an increase of $1.5 million, or 216.5%. The increase in
software license revenue was primarily due to our introduction of Coreport in
the second half of 1999. Software license revenues from our initial product were
$0.7 million for the six months ended June 30, 1999 and $0.3 million for the six
months ended June 30, 2000. Software license revenues from Coreport were
$1.8 million for the six months ended June 30, 2000.
SERVICES. Services revenue was $2.3 million for the six months ended
June 30, 1999 and $1.3 million for the six months ended June 30, 2000,
representing a decrease of $1.1 million, or 45.9%. The decrease in services
revenue was primarily due to the discontinuation of implementation services for
our initial product in 1999. In future periods, we expect services revenue to
continue to decrease as a percentage of total revenues. Services revenues from
our initial product and other consulting services were $2.3 million for the six
months ended June 30, 1999 and $0.3 million for the six months ended June 30,
2000. Services revenues from Coreport were $1.0 million in the six months ended
June 30, 2000.
21
<PAGE>
COST OF REVENUES
Cost of revenues consists principally of personnel costs and third-party
consulting fees for implementation, customization, maintenance and other
customer support services. Cost of revenues also includes the costs of the media
in which the software is delivered, although these costs are not significant.
Cost of revenues was $1.6 million for the six months ended June 30, 1999 and
$1.1 million for the six months ended June 30, 2000, representing a decrease of
$0.5 million, or 31.8%. Cost of revenues was 54.9% of total revenues for the six
months ended June 30, 1999 and 33.1% of total revenues for the six months ended
June 30, 2000. The decrease was primarily due to reduced implementation costs
for Coreport as compared to our initial product.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist principally of
salaries, commissions, bonuses, travel, public relations, marketing materials,
advertising and trade shows relating to the sales and marketing of our products.
Sales and marketing expenses were $1.3 million for the six months ended
June 30, 1999 and $4.0 million for the six months ended June 30, 2000,
representing an increase of $2.8 million, or 220.3%. Sales and marketing
expenses as a percentage of total revenues were 41.8% for the six months ended
June 30, 1999 and 118.3% for the six months ended June 30, 2000. The increase in
sales and marketing expenses was primarily due to a 129.4% increase in the
number of sales and marketing personnel and a 57.1% increase in the cost of
recruiting this personnel. We intend to continue to invest resources to expand
our direct sales force and other distribution channels, and to conduct marketing
programs to support our existing and future product offerings. We expect sales
and marketing expenses to continue to increase in future periods.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
principally of personnel and related expenses for the development of new
products, the enhancement of existing products and quality assurance and testing
costs incurred before commercial production. Research and development expenses
were $0.5 million for the six months ended June 30, 1999 and $1.6 million for
the six months ended June 30, 2000, representing an increase of $1.1 million, or
205.0%. Research and development expenses as a percentage of total revenues were
17.8% for the six months ended June 30, 1999 and 48.1% for the six months ended
June 30, 2000. The increase in research and development expenses was primarily
due to a 158.3% increase in the number of research and development employees and
increased consulting expenses. We anticipate that research and development
expenses will increase in future periods as we hire additional personnel and
expand our product development activities. All research and development expenses
have been charged as incurred.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of salaries and other related costs for finance and human resource
employees, as well as accounting, legal and other professional fees. General and
administrative expenses were $1.2 million for the six months ended June 30, 1999
and $1.9 million for the six months ended June 30, 2000, representing an
increase of $0.7 million, or 62.7%. General and administrative expenses as a
percentage of total revenues were 38.8% for the six months ended June 30, 1999
and 55.7% for the six months ended June 30, 2000. The increase in general and
administrative expenses was primarily due to increased professional services
costs and associated expenses necessary to manage and support the growth of our
organization. We anticipate that our general and administrative expenses will
continue to increase as we continue to expand our administrative staff and
facilities to support our growing operations.
STOCK-BASED COMPENSATION. We recorded deferred stock-based compensation of
$0.3 million for the six months ended June 30, 1999 and $1.9 million for the six
months ended June 30, 2000, relating to stock options granted to employees and
consultants. These amounts represent the difference between the exercise price
and the deemed fair value of our common stock at the date of grant. These
amounts are being amortized over the vesting periods, two to four years, of the
granted options. We
22
<PAGE>
recognized stock-based compensation expense of $0.02 million in the six months
ended June 30, 1999 and $0.5 million in the six months ended June 30, 2000.
INTEREST EXPENSE, NET. Interest expense, net consists of interest income,
interest expense and other non-operating expenses. Interest expense, net
fluctuates based on the amount of cash balances available for investment and
interest expense related to our notes payable.
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
REVENUES
TOTAL REVENUES. Total revenues were $2.9 million in 1997, $5.7 million in
1998 and $5.3 million in 1999, representing an increase of $2.7 million, or
94.0%, from 1997 to 1998 and representing a decrease of $0.4 million, or 7.0%,
from 1998 to 1999. Total revenues from our initial product were $2.9 million in
1997, $5.7 million in 1998 and $5.2 million in 1999. Total revenues from
Coreport were $0.1 million in 1999.
SOFTWARE LICENSES. Software license revenue was $1.1 million in 1997,
$1.0 million in 1998 and $0.9 million in 1999, representing a decrease of
$0.1 million, or 4.7%, from 1997 to 1998 and a decrease of $0.1 million, or
7.8%, from 1998 to 1999. The decrease in software license revenue from 1997 to
1998 was primarily due to lower than expected demand for our initial product.
The decrease in software license revenue from 1998 to 1999 was primarily due to
a reduced emphasis on our initial product as we developed and introduced
Coreport.
SERVICES. Services revenue was $1.9 million in 1997, $4.7 million in 1998
and $4.3 million in 1999, representing an increase of $2.7 million, or 149.8%,
from 1997 to 1998 and a decrease of $0.3 million, or 6.8%, from 1998 to 1999.
The increase in services revenue from 1997 to 1998 was primarily due to
implementation services we provided to our customers related to our initial
product. Additionally, we began operations in the United Kingdom in late 1997,
and only began to realize significant services revenue in 1998. The decrease in
services revenue from 1998 to 1999 was primarily due to reduced implementation
services provided to customers that licensed our initial product.
COST OF REVENUES
Cost of revenues was $1.6 million in 1997, $3.7 million in 1998 and
$3.1 million in 1999, representing an increase of $2.1 million, or 133.3%, from
1997 to 1998 and a decrease of $0.6 million, or 16.6%, from 1998 to 1999. Cost
of revenues as a percentage of total revenues was 55.0% in 1997, 66.2% in 1998
and 59.3% in 1999. The increase in cost of revenues from 1997 to 1998 was
primarily due to a 228.6% increase in professional services and customer support
personnel and an increase in third-party consulting expenses. The decrease in
cost of revenues from 1998 to 1999 was primarily due to a 21.7% staff reduction
in late 1998 and the reduction of implementation services provided to customers
that licensed our initial product.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses were $2.4 million in
1997, $3.9 million in 1998 and $2.8 million in 1999, representing an increase of
$1.5 million, or 60.6%, from 1997 to 1998 and a decrease of $1.1 million, or
27.3%, from 1998 to 1999. Sales and marketing expenses as a percentage of total
revenues were 83.5% in 1997, 69.1% in 1998 and 54.0% in 1999. The dollar
increase in sales and marketing expenses from 1997 to 1998 was primarily due to
the expansion of our sales and marketing organization, higher sales commissions
and increased marketing activities. The decrease in sales and marketing expenses
from 1998 to 1999 was primarily due to the 15.0% reduction in our sales and
marketing personnel in late 1998, which resulted in fewer sales and marketing
personnel during 1999, as well as our efforts to control our sales expenses.
23
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expenses were
$1.2 million in 1997, $1.8 million in 1998 and $1.3 million in 1999,
representing an increase of $0.5 million, or 42.6%, from 1997 to 1998 and a
decrease of $0.4 million, or 24.0%, from 1998 to 1999. Research and development
expenses as a percentage of total revenues were 42.5% in 1997, 31.2% in 1998 and
25.5% in 1999. The dollar increase in research and development expenses from
1997 to 1998 was primarily due to a 44.4% increase in development personnel and
increased consulting expenses. The dollar decrease in research and development
expenses from 1998 to 1999 was primarily due to a 30.0% decrease in development
personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1.9 million in 1997, $3.5 million in 1998 and $2.5 million in 1999,
representing an increase of $1.6 million, or 82.2%, from 1997 to 1998 and a
decrease of $1.0 million, or 27.5%, from 1998 to 1999. General and
administrative expenses as a percentage of total revenues were 65.7% in 1997,
61.7% in 1998 and 48.1% in 1999. The dollar increase in general and
administrative expenses from 1997 to 1998 was primarily due to the addition of
six employees in 1998 and expenses related to our expansion. The decrease in
general and administrative expenses from 1998 to 1999 was primarily due to a
11.1% headcount reduction and a greater focus on cost control across our
organization.
ACQUIRED IN-PROCESS TECHNOLOGIES. In February 1997, we acquired from CTP,
for a purchase price of $4.5 million, methodologies previously licensed from CTP
relating to technology that we used to develop our initial product. Acquired
in-process technologies expense was charged to operations, as the technologies
had not yet reached technological feasibility and did not have alternative
future uses as of the date of the acquisition. As of the acquisition date,
neither a detailed program design nor a working model had been completed for the
product. Subsequent to the acquisition, we incurred an additional $0.5 million
in the development of the product before its release in July 1997.
RESTRUCTURING COSTS. In the second half of 1998, we restructured our
business and began to focus on developing an internet-based software product. In
conjunction with this restructuring, we recorded a one-time charge to operations
of $0.4 million. We reduced our staff by 18 employees, approximately 19.0% of
our workforce, representing a charge of $0.3 million, and terminated a
facilities lease, representing a charge of $0.1 million.
STOCK-BASED COMPENSATION. During 1999 we recorded deferred stock-based
compensation expense of $0.8 million relating to stock options granted to
employees and consultants. We had no deferred stock compensation relating to
stock options granted to employees and consultants in 1997 or 1998. We recorded
stock-based compensation expense of $0.2 million in 1999. There was no
stock-based compensation expense recorded during 1997 or 1998.
INTEREST EXPENSE, NET. Interest expense, net consists of interest income,
interest expense and other non-operating expenses. Interest expense, net
fluctuates based on the amount of cash balances available for investment and
interest expense related to our notes payable.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
data for the six quarters ended June 30, 2000, as well as data expressed as a
percentage of our total revenues for the periods presented. We have prepared
this information on the same basis as our consolidated financial statements and
the information includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and operating results for the quarters presented. Our quarterly
operating results have varied substantially in the past and may vary
substantially in the future. You should not draw any conclusions about our
future results for any period from the results of operations for any particular
quarter.
Cost of revenues and departmental operating expense amounts and percentages
exclude amortization of deferred stock based compensation, which is reported as
a separate operating expense.
24
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses............ $ 204 $ 473 $ 171 $ 78 $ 601 $ 1,542
Services..................... 1,079 1,250 1,267 744 546 713
------ ------ ------ ------- ------- -------
Total revenues........... 1,283 1,723 1,438 822 1,147 2,255
Cost of revenues............... 793 856 751 725 473 652
Gross profit............. 490 867 687 97 674 1,603
Operating expenses:
Sales and marketing.......... 607 650 708 880 1,276 2,750
Research and development..... 260 276 295 513 500 1,135
General and administrative... 620 545 611 755 1,117 777
Stock-based compensation..... -- 18 63 127 151 353
------ ------ ------ ------- ------- -------
Total operating
expenses............... 1,487 1,489 1,677 2,275 3,044 5,015
------ ------ ------ ------- ------- -------
Operating loss................. (997) (622) (990) (2,178) (2,370) (3,412)
Interest income (expense),
net.......................... 12 9 1 (17) 43 148
------ ------ ------ ------- ------- -------
Net loss....................... $ (985) $ (613) $ (989) $(2,195) $(2,327) $(3,264)
====== ====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses............. 15.9% 27.5% 11.9% 9.5% 52.4% 68.4%
Services...................... 84.1 72.5 88.1 90.5 47.6 31.6
------ ------ ------ ------- ------- ------
Total revenues............ 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues................ 61.8 49.7 52.2 88.2 41.2 28.9
Gross profit.............. 38.2 50.3 47.8 11.8 58.8 71.1
Operating expenses:
Sales and marketing........... 47.3 37.8 49.3 107.0 111.2 122.0
Research and development...... 20.3 16.0 20.5 62.4 43.6 50.3
General and administrative.... 48.3 31.6 42.5 91.8 97.4 34.4
Stock-based compensation...... -- 1.0 4.4 15.5 13.2 15.7
------ ------ ------ ------- ------- ------
Total operating
expenses................ 115.9 86.4 116.7 276.7 265.4 222.4
------ ------ ------ ------- ------- ------
Operating loss.................. (77.7) (36.1) (68.9) (264.9) (206.6) (151.3)
Interest income (expense),
net........................... 0.9 0.5 0.1 (2.1) 3.7 6.6
------ ------ ------ ------- ------- ------
Net loss........................ (76.8)% (35.6)% (68.8)% (267.0)% (202.9)% (144.7)%
====== ====== ====== ======= ======= ======
</TABLE>
For each of the quarters in 1999, we generated substantially all of our
software license revenue from our initial product. In 1999, we reduced our focus
on the licensing of our initial product, which we discontinued developing and
marketing in December 1999. Our decision to reduce our focus on and discontinue
developing and marketing our initial product caused software license revenue to
decrease for the third and fourth quarters of 1999. During these two quarters,
we devoted our resources to the launch of Coreport, which we introduced in
August 1999. Services revenue also decreased primarily due to reduced
implementation services resulting from the discontinuation of development and
marketing of our initial product. We expect software license revenue to continue
to increase as a percentage of total revenues. General and administrative
expenses during the first quarter of 2000 were significantly
25
<PAGE>
higher than during the fourth quarter of 1999 and the second quarter of 2000 due
to compensation to an outside consultant during the period.
Our quarterly operating results have fluctuated significantly in the past,
and will continue to fluctuate in the future. Due to our limited operating
history, we cannot forecast operating expenses based on historical results.
Accordingly, we base our anticipated level of expense in part on future revenue
projections. Most of our expenses are fixed in the short term and we may not be
able to quickly reduce spending if revenues are lower than we have projected.
Our ability to forecast our quarterly revenues accurately is limited given our
limited operating history and the length of our sales cycle. If revenues in a
particular quarter do not meet projections, our net losses in a given quarter
would be greater than expected. Investors should not rely on the results of one
quarter as an indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
We have financed our operations primarily through the private sale of equity
securities, borrowings and the sale of our software and services. As of
June 30, 2000, we have raised approximately $34.6 million, net of offering
costs, from the issuance of preferred stock. Our cash and cash equivalents as of
June 30, 2000 were $10.3 million.
Cash provided by financing activities was $7.6 million in 1997,
$9.3 million in 1998, $3.3 million in 1999 and $12.6 million for the six months
ended June 30, 2000. Cash provided by financing activities consisted primarily
of proceeds from private sales of preferred stock and borrowings under various
notes payable.
OPERATING ACTIVITIES
Cash used in operating activities was $4.3 million for 1997, $6.7 million
for 1998, $3.9 million for 1999 and $4.1 million for the six months ended
June 30, 2000. Cash used in operating activities during 1997 was primarily due
to a net loss of $9.0 million and an increase in accounts receivable offset in
part by acquired in-process technologies, a non-cash expense. Cash used in
operating activities during 1998 was primarily due to a net loss of
$7.4 million, offset in part by a decrease in accounts receivable and a decrease
in deferred revenues. Cash used in operating activities during 1999 was
primarily due to a net loss of $4.8 million, offset in part by depreciation and
amortization expenses. Cash used in operating activities during the six months
ended June 30, 2000 was primarily due to a net loss of $5.6 million, an increase
in accounts payable, accrued expenses and accounts receivable offset in part by
stock-based compensation.
INVESTING ACTIVITIES
Cash used in investing activities was $2.6 million in 1997, $0.4 million in
1998, $0.1 million in 1999 and $0.3 million for the six months ended June 30,
2000. Except for 1997, cash used in investing activities was primarily for
purchases of property and equipment in each period. Cash used during 1997
included $2.0 million for the acquisition of in-process technologies from CTP.
WORKING CAPITAL REQUIREMENTS
We expect to experience significant growth in our operating expenses,
particularly sales and marketing and research and development expenses. We
anticipate that these operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. We may
utilize cash resources to fund acquisitions or investments in complementary
businesses, technologies or product lines. We believe that our existing cash and
cash equivalents, cash from operations and the net proceeds of this offering
will be sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. We may find it necessary to obtain
additional equity or
26
<PAGE>
debt financing. If additional financing is required, we may not be able to raise
it on acceptable terms or at all.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1999, we had net operating loss carryforwards of
$17.2 million and research and development tax credit carryforwards of
$0.2 million. The net operating loss and tax credit carryforwards will begin to
expire at various dates through 2019, if not utilized. The Tax Reform Act of
1986 imposes substantial restrictions on the utilization of net operating loss
and tax credit carryforwards if a corporation changes ownership. Our ability to
utilize net operating losses and tax credit carryforwards on an annual basis
could be limited if we have an ownership change. We have completed several
financings and believe that we have incurred ownership changes, which we do not
believe will have a material impact on our ability to utilize our net operating
loss and tax credit carryforwards.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or the FASB, issued
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement established
accounting and reporting standards for derivative instruments and hedging
activities. SFAS 133, as amended by SFAS 137, will be effective for our
financial reporting beginning in the first quarter of 2001. SFAS 133 will
require that we recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting for
gains and losses from changes in the fair value of a particular derivative will
depend on the intended use of that derivative. We believe the adoption of this
statement will not have a significant impact on our financial position, results
of operations or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, REVENUE
RECOGNITION. This bulletin establishes guidelines for revenue recognition and is
in effect for periods beginning March 31, 2000. We do not expect that the
adoption of this methodology will have a material impact on our financial
condition or results of operations.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF APB OPINION
NO. 25. The interpretation clarifies the application of APB Opinion No. 25 to
accounting for stock issued to employees. The interpretation is effective
July 1, 2000, but covers events occurring during the period between
December 15, 1998 and July 1, 2000. If events covered by the interpretation
occur during this period, the effects of applying the interpretation to the
events would be recognized on a prospective basis from July 1, 2000. As a
result, the interpretation will not require that any adjustments be made to our
consolidated financial statements for periods before July 1, 2000 and no expense
would be recognized for any additional compensation cost measured that is
attributable to periods before July 1, 2000. We believe the adoption of this
interpretation will not have a significant impact on our financial position,
results of operations or cash flows.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We have international offices in Canada, England, Norway and Sweden. As of
June 30, 2000, 13.9% of our total assets were located outside of the United
States. In 1999, 64.8% of our revenues and 49.2% of our expenses, and for the
six months ended June 30, 2000, 35.1% of our revenues and 28.3% of our expenses,
were from our international operations. These subsidiaries transact business in
local currency or the euro. We are exposed to foreign currency exchange risks.
Fluctuations in foreign currency exchange rates have not had a material effect
on our business. We have not conducted any hedging transaction to reduce the
risk related to currency fluctuations, though we may do so as our international
revenues increase.
Our interest income is sensitive to changes in the general level of United
States interest rates, particularly since the majority of our investments are in
short-term instruments. We deposit our cash in highly rated financial
institutions in North America and Europe and invest in diversified U.S. money
market investments with remaining maturities of less than 90 days. Due to the
short-term nature of our investments, we believe that we have minimal market
risk.
27
<PAGE>
BUSINESS
OVERVIEW
We develop, market and support software that provides enterprises with a
framework to manage access to business information and applications using the
internet and wireless internet technology. Our access framework software,
Coreport, enables enterprises to provide their employees, customers, suppliers
and business partners with an internet-based interface to access and manipulate
the information they require to conduct e-business. Coreport's wireless
capabilities allow users to access relevant information and conduct e-business
from web-enabled cellular phones and personal digital assistants, in addition to
personal computers.
Coreport's role-based administration enables enterprises to define
categories of users and to provide these users with access to information and
applications based on the users' business needs and roles. Our software provides
users with a single sign-on to access relevant business information and
applications. Coreport is designed to easily scale to large numbers of users and
integrates with many types and sources of information.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND E-BUSINESS
The internet has emerged as a global platform for communications and
commerce and is fundamentally changing the way enterprises interact with their
employees, customers, suppliers and business partners. Enterprises are
increasingly using the internet to share business information and create new
business opportunities. Forrester Research estimates that worldwide
internet-based commerce will grow from $657 billion in 2000 to $6.8 trillion in
2004. To take advantage of e-business opportunities, enterprises must extend
their business applications to the internet and seamlessly integrate their
business processes with those of their customers, suppliers and business
partners.
GROWTH OF WIRELESS ACCESS TO INFORMATION
Today, users typically access business information and applications from
their personal computers. Increasingly, however, advances in wireless
communications, including the development of web-enabled wireless devices and
the adoption of standards for the transfer of wireless data, such as wireless
application protocol or WAP, are enabling new ways to deliver and retrieve
business information. Worldwide use of wireless communications has grown rapidly
as web-enabled cellular phones and other wireless devices have become widely
available and affordable. ARC Group estimates that by 2005 1.0 billion people
worldwide will access the internet using wireless devices compared to
650 million people using personal computers. Having grown accustomed to and
dependent on the information and applications available on their personal
computers, business users will increasingly demand wireless access to this
information to conduct business anytime, anywhere. According to Ovum, the market
for mobile electronic commerce is expected to grow to over $200 billion by 2005.
PROLIFERATION OF BUSINESS INFORMATION AND APPLICATIONS
In today's e-business environment, access to the right business information
at the right time is a significant competitive advantage. While the internet and
wireless devices are making information more readily available, business
applications and other sources of information are proliferating and the rate and
frequency of business interactions are accelerating. Many enterprises have
invested significant resources to implement enterprise-wide information systems,
including enterprise resource planning or ERP systems, corporate intranets and
other private internet-based networks. The proliferation of information combined
with these disparate information systems make it difficult to aggregate and
disseminate relevant information. Enterprises have not fully realized the
expected benefits from their
28
<PAGE>
significant investments, and business users must spend considerable time and
resources gathering, organizing and analyzing the information they require to
effectively conduct business.
MARKET OPPORTUNITY FOR ACCESS FRAMEWORK SOFTWARE
Enterprises face many challenges in effectively managing and providing their
employees, customers, suppliers and business partners access to the right
information at the right time. These challenges include:
- delivering timely and relevant business information and applications;
- integrating many types and sources of information, including enterprises'
information systems, e-mail systems and new e-business applications;
- providing easy access to information and applications through any
web-enabled device, including wireless devices;
- scaling with the increasing volume of information and number of users,
including mobile users; and
- administering and managing secure access to information and applications.
We believe that current solutions, such as information portal software and
application or content integration technologies, are partial solutions that do
not adequately address all of these challenges and that there is a substantial
market opportunity for access framework software that provides a comprehensive
solution.
THE CORECHANGE SOLUTION
We develop, market and support software that provides enterprises with a
framework to manage access to business information and applications using the
internet and wireless internet technology. Our access framework software,
Coreport, enables enterprises to provide their employees, customers, suppliers
and business partners with an internet-based interface to access and manipulate
the information they require to conduct e-business.
We believe Coreport provides the following benefits:
- PROVIDES RELEVANT, PERSONALIZED BUSINESS INFORMATION AND APPLICATIONS.
Using our software, enterprises can deliver relevant business information
and applications to employees, suppliers, customers and business partners.
Coreport's role-based administration allows enterprises to define
categories of users and to provide these users with access to business
information and applications based on their specific needs and roles.
Enterprises can rapidly add new users by assigning them to a role rather
than having to define access privileges for each user. In addition,
enterprises can easily modify roles to meet evolving business needs and
combine multiple roles per user.
- FACILITATES MOBILE E-BUSINESS. Coreport's wireless capabilities allow
users to conduct business from web-enabled cellular phones and personal
digital assistants, in addition to personal computers. Coreport provides
users with wireless access to critical business information and
applications that were historically only available through personal
computers.
- ENABLES MORE TIMELY AND INFORMED BUSINESS DECISIONS. Coreport provides a
single framework to access business information and applications, reducing
the time and expense spent aggregating and analyzing this information. By
providing users with information that is specific to their business needs
and roles, Coreport enables users to make more informed and better
business decisions.
- PROMOTES RAPID IMPLEMENTATION OF E-BUSINESS STRATEGY. Coreport provides
functionality and integration with many types of business applications and
information systems including ERP
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systems without the need of additional services or customization. This
integration capability, which we refer to as out-of-the-box integration,
allows enterprises to quickly and cost-effectively implement e-business
solutions around existing enterprise information systems.
- ENHANCES BUSINESS RELATIONSHIPS. Using Coreport, enterprises can provide
their customers, suppliers and business partners with easy access to
business applications. By rapidly and efficiently sharing information,
enterprises can strengthen their business relationships, increase business
connectivity and create new business opportunities.
STRATEGY
Our objective is to be the leading provider of access framework software
that enables enterprises to manage access to business information and
applications. Key elements of our ongoing strategy include:
- ESTABLISHING COREPORT AS THE LEADING FRAMEWORK SOFTWARE. We believe that
our technology will position Coreport to become the standard for access
framework software. We plan to extend the functionality and enhance the
capabilities of Coreport through internal development, strategic
relationships and potential acquisitions.
- PURSUING WIRELESS OPPORTUNITIES. The increased use of web-enabled wireless
devices and the growing demand for wireless access to business information
and applications represent a significant market opportunity for our
software. We believe that our ability to provide wireless access to
business information and applications provides us with a competitive
advantage in obtaining new customers.
- EXPANDING OUR DISTRIBUTION CHANNELS. We intend to significantly expand our
distribution channels by increasing the size of our sales force in North
America and Europe as well as establishing additional distribution
relationships. For instance, we intend to increase the size of our sales
force from 30 as of June 30, 2000 to approximately 50 as of December 31,
2000. We intend to expand upon our initial success in the financial
services and healthcare industries and target other industries.
- DEVELOPING AND EXPANDING STRATEGIC RELATIONSHIPS. We intend to continue to
establish strategic relationships with leading companies that develop
business applications or provide consulting and implementation services.
We believe these relationships further validate our technology and
increase our recognition in the marketplace. We have established strategic
relationships with technology leaders such as IBM to provide
out-of-the-box integration with their products. We have formed strategic
marketing and implementation relationships with Microsoft, Evidian and Cap
Gemini Ernst & Young.
- TARGETING GLOBAL 2000 COMPANIES. We plan to continue targeting Global 2000
companies as they rapidly transition their businesses online and take
advantage of wireless technologies. We believe that Global 2000 companies
represent a significant market opportunity for our software. They
typically have made significant investments in disparate information
systems and applications that they need to make available to a large
number of users. We believe that these companies face competitive pressure
to implement e-business strategies and have the resources to support
enterprise-wide implementations.
- EXPANDING OUR INTERNATIONAL PRESENCE. We have generated a significant
percentage of our revenues from Europe. We have European offices in
London, Oslo and Stockholm and an Asia-Pacific office in Sydney. Our
international presence allows us to better serve Global 2000 companies and
take advantage of global wireless opportunities. We plan to expand our
international presence and open new offices in Europe and in the
Asia-Pacific region. For instance, we intend to open an office in France
in the second half of 2000.
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- INCREASING THE USE OF OUR SOFTWARE BY OUR CUSTOMERS. Many of our customers
first license our product on an initial rollout basis or implement our
product within a specific department or for an identified business
application. We believe that the value of our software to an enterprise
increases as it is more widely used. We intend to seek to increase the use
of our software by our customers.
OUR PRODUCT AND TECHNOLOGY
Our product, Coreport, is comprised of five modules described below which
are licensed as a single, integrated product. The following graphic summarizes
how Coreport works:
[The graphic shows how the five modules of Coreport operate, examples of data
and applications being integrated by the Coreport Context Engine and the
categories of users (employees, suppliers, customers and business partners) who
gain access to information with an illustration of the personal computers or
wireless devices such users can use to access information]
COREPORT CONTEXT ENGINE maintains the relationships among users, their roles
and the data and applications they need, and provides this information to the
Coreport web server, Coreserv, which generates personalized browser interfaces
for all users. The Coreport Context Engine maintains security information for
each user and for each information system, providing users with access to all
these systems with a single username and password. The Coreport Context Engine
classifies the types of information sources to be made available on any
web-enabled personal computer or wireless device.
COREPORT ADMINISTRATOR enables enterprises to easily and securely administer
the needs of large numbers of users from one or many locations. Coreport
Administrator allows non-technical administrators to assign and manage access
rights to specified business information and applications for selected
individuals or groups based upon their roles.
CORESERV provides users with a personalized browser interface to access the
business information and applications they require. A single Coreport
installation can have multiple Coreserv servers, enabling large number of users
with varying levels of access rights and providing redundancy if there is a
server failure.
COREALIGN enables enterprises to send targeted messages and content to
users, based on any set of parameters provided by the Coreport Context Engine.
Important messages, such as enterprise announcements, can be delivered to the
user interface and can be configured to require a response or confirmation.
COREPORT INTEGRATED SEARCH provides users with intelligent, natural language
searching capabilities across over 250 industry standard data formats using
technology licensed from Autonomy and integrated into our product. Coreport
Integrated Search allows enterprises to build and update an information index,
enabling users to rapidly identify relevant business information from a diverse
range of internal and external sources. Pre-configured searches or agents can be
built by users and stored as part of their Coreport profile.
COREPORT FEATURES
We believe that Coreport is a highly differentiated business product due to
several important features:
- ROLE-BASED ADMINISTRATION OF USERS AND THEIR INFORMATION NEEDS. Unlike
software solutions that require enterprises to maintain a profile for
every user and grant access rights on a per-user basis, Coreport enables
enterprises to define business roles and to then associate users with one
or more roles. This means that instead of managing 10,000 profiles for
10,000 users, an organization will only have to manage as many roles as it
needs to define.
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- OUT-OF-THE-BOX INTEGRATION. Our product is designed to be rapidly
installed for a large number of users. Coreport includes pre-configured
links to many types of business applications and information systems,
significantly reducing implementation time.
- SECURE, SINGLE SIGN-ON. Coreport provides users with access to all of
their business information and applications using a single username and
password. Coreport uses encryption technology to securely maintain and
manage all of the passwords required for each individual application.
- OPEN FRAMEWORK DESIGNED FOR INTEGRATION. Coreport integrates with
web-based and business applications and databases, permitting users to
access relevant business information. Coreport also includes a tool set to
facilitate integration with third-party applications and information
sources.
- DESIGNED FOR SCALABILITY AND ROBUSTNESS. Coreport provides a scalable
approach to integrate a broad range of business information and
application interfaces. Instead of copying business information onto a
separate server for redistribution to users, Coreport maintains address
links to the original data so that it can be accessed directly at its
source. Each module of Coreport can be replicated and placed on separate
servers to enable large-scale implementations and to ensure redundancy if
there is a hardware or network failure.
- PERSONALIZED USER INTERFACE. Coreport users can personalize the interface
on their personal computer or wireless device, which we believe increases
loyalty, familiarity and productivity.
- DIRECT APPLICATION LAUNCH. Coreport allows users to launch applications
directly by clicking within the Coreport browser interface. This
dashboard-like feature reduces the time required for users to find the
appropriate underlying applications.
- INFORMATION MANAGEMENT. Coreport's ability to develop a profile of a
user's business information needs and to suggest relevant information
sources makes it easier for users to find information.
INTEGRATION AND INDUSTRY STANDARDS
Coreport is built using industry standard tools and techniques on the
Microsoft platform. Coreport supports industry standards, including:
- Lightweight Directory Access Protocol for synchronization of user
information with other applications;
- WAP for distribution of content to web-enabled wireless devices; and
- eXtensible Markup Language for sharing data between applications and
organizations.
Coreport includes adapters for integration with leading products from IBM,
Microsoft, Informix, Oracle, Sybase and many other vendors. We are developing a
version of Coreport for the Unix platform, which we expect to complete during
the first quarter of 2001. Industry-standard application programming interfaces
are also provided to allow system customization and integration with other
applications.
CUSTOMERS
We license our Coreport software to 41 customers. Of these customers, 27
customers are in the initial rollout stage and 14 customers have entered into
license agreements for wider-scale implementations. In the initial rollout
stage, our customers license Coreport in order to become familiar with its use
and benefits. Our sales strategy involves converting these customers beyond the
initial rollout stage. Customers may choose not to license Coreport beyond the
initial rollout stage.
Select customers who have licensed our Coreport software are listed below.
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FINANCIAL SERVICES:
ABN AMRO
Bank One
Capital One
Credit Suisse First Boston
Deutsche Bank Securities
Fairfax Financial Holdings
Fidelity Investments
Lloyds TSB Bank
Marsh McLennan Companies
Royal & Sun Alliance
Skandia
Soros Fund Management
The Advest Group
GOVERNMENT:
City of Stockholm
United Kingdom Ministry of Defense
HEALTHCARE:
Children's Hospital of Philadelphia
Community Medical Center of Scranton, Pennsylvania
HealthSystem Minnesota
Jacobi Medical Center
Rowan Regional Medical Center
Spartanburg Regional Medical Center
INDUSTRIAL:
ABB
AIMCOR
NSTAR
Philips Electronics
Scottish Power
TotalFina Elf
Volvo Personbilar
Wiremold
SERVICES:
AMB Property Corporation
Ashurst Morris Crisp
Braathens Airways
Drake Beam Morin
Kjessler & Mannerstrale
Ropes & Gray
SHL Group
Tecsys
OTHER:
Ericsson
Telco Systems
Unilever
Our top five customers accounted for 60.7% of our total revenues in 1999 and
54.1% of our total revenues for the six months ended June 30, 2000. Manor
Bakeries accounted for 38.9% of our total revenues in 1999. Revenues from Manor
Bakeries related to our initial product and other consulting services we
provided to Manor Bakeries in 1999 and do not relate to Coreport. During the six
months ended June 30, 2000, ABN AMRO accounted for 21.9% of our total revenues
and Children's Hospital of Philadelphia accounted for 12.4% of our total
revenues.
CUSTOMER CASE STUDIES
The following case studies illustrate representative uses of Coreport by our
customers. These case studies are intended only to illustrate how companies have
used Coreport and should not be viewed by investors as an endorsement or
promotion of Coreport by those customers.
CREDIT SUISSE FIRST BOSTON
DESCRIPTION. Credit Suisse First Boston is a global investment banking firm
with over 15,000 employees worldwide.
BUSINESS CHALLENGE. Credit Suisse First Boston, or CSFB, was seeking to
integrate access to a variety of internal information systems and sources of
financial and corporate information for employees within its finance department.
Due to extensive travel by these employees, CSFB wanted to provide wireless
access to these employees. CSFB also wanted a secure solution that was easy to
manage to ensure that corporate compliance and other important policy documents
were only provided to appropriate recipients.
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SOLUTION. CSFB selected Coreport because of its ability to provide users
with wireless access to information from various sources. Coreport's role-based
administration facilitates delivery of targeted and often sensitive information
to CSFB employees based on their role within the organization. CSFB expects that
Coreport will provide users with rapid access to information anytime, anywhere,
resulting in enhanced decision-making capabilities. CSFB has installed Coreport
for use by a select group of finance department employees in Europe, North
America and Southeast Asia.
Frank J. Fanzilli, Jr., one of our directors, is a managing director and the
co-chief information officer of information technology at CSFB.
ABN AMRO BANK
DESCRIPTION. ABN AMRO Bank is a global bank with 110,000 employees
worldwide.
BUSINESS CHALLENGE. ABN AMRO was looking for a solution to efficiently
deliver business information and applications to its North American employees
across its many business units and regional locations. ABN AMRO wanted a
solution that was easy to administer, allowed for single sign-on and would
integrate a broad range of internal and external sources of information.
SOLUTION. ABN AMRO selected Coreport software and is in the process of
installing Coreport for use by approximately 17,000 employees in North America.
ABN AMRO expects to increase employee efficiency and productivity by providing a
single web-based framework for employees to access internal reports,
personalized news feeds, e-mail, calendaring and scheduling applications,
procurement systems and employee human resource applications as well as back-end
business applications. ABN AMRO also intends to use Coreport to provide video
training on demand and online discussion groups. ABN AMRO expects to
significantly decrease the administrative burden and costs of managing and
disseminating this information to its employees. ABN AMRO anticipates that
Coreport's role-based administration will allow it to more easily manage the
delivery of business information and applications to its many organizational
levels.
Daniel J. Foreman, one of our directors, is a managing director of ABN AMRO
Private Equity, an affiliate of ABN AMRO Bank. ABN AMRO Capital (USA), Inc., an
affiliate of ABN AMRO Private Equity, will beneficially own 4.3% of our common
stock following this offering.
THE CHILDREN'S HOSPITAL OF PHILADELPHIA
DESCRIPTION. The Children's Hospital of Philadelphia is a large pediatric
healthcare network in the United States with over 5,600 employees in 41
locations.
BUSINESS CHALLENGE. The Children's Hospital needed a solution to easily
manage staff access to business and medical information across its multiple
locations, which solution would be able to easily aggregate and integrate with
its many applications, including proprietary and legacy medical systems. The
Children's Hospital also wanted to be able to access this information from
wireless devices as well as personal computers. The Children's Hospital needed
the solution to comply with strict internal and government mandated guidelines
for security and privacy.
SOLUTION. The Children's Hospital selected Coreport and has recently begun
implementing it for use by approximately 5,000 employees. Using Coreport's
role-based administration, the hospital expects to provide its staff with an
easy-to-use, single point of access to more than 20 critical business and
medical applications as well as many other information sources, based on each
individual's job function. Coreport's security features and integration with
legacy information systems also satisfy the government's medical records
electronic information privacy requirements. The Children's Hospital expects
that Coreport's web-based architecture will allow it to rapidly implement our
software to its network of hospitals and physicians for use from personal
computers as well as wireless devices. In addition to using mobile workstations,
the hospital is also investigating the use of other wireless devices, such as
the Palm VII and Blackberry.
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PROFESSIONAL SERVICES
We support our customers and partners with a range of services, including:
- IMPLEMENTATION CONSULTING SERVICES. We primarily provide implementation
services for the initial rollout of our product and rely on our
implementation partners for subsequent larger implementations. From time
to time, we also may provide additional technical services to our
customers and partners to assist them, if necessary, during product
implementation.
- TRAINING SERVICES. For our new customers and partners, we provide
training sessions and related materials on product functionality and
system administration.
- CUSTOMER SUPPORT. We believe that our success depends on providing
quality ongoing customer support. We provide customer support seven days a
week, twenty four hours a day. We have a worldwide support organization to
provide global coverage for our customers.
Through our services organization we attempt to make our customers and
partners technically self-sufficient. We intend to expand our services
organization as our license sales increase and as we enter into additional
strategic alliances.
SALES AND MARKETING
We market our software and services primarily through a direct sales
organization, complemented by indirect sales channels. As of June 30, 2000, we
had 24 direct and six indirect sales personnel located in offices in Boston,
Toronto, London, New York, Stockholm and Oslo. We intend to increase our direct
sales force and open additional offices.
We have established indirect sales, joint marketing and implementation
relationships with Cap Gemini Ernst & Young, Evidian and Intellinet, an
application and internet service provider. We also have relationships with e-100
Group, Atlantic Data Services, Averstar, Enator, KM ProNet, Kraftnatet, Logica,
Microsoft, OS Integration, Salmon Ltd. and Sentillion.
We use a wide variety of marketing programs to attract potential customers
and to promote Coreport and its brand name. We use a mix of analyst updates,
seminars, market research, trade shows, speaking engagements, public relations,
web site marketing, direct mail and print advertising to achieve these goals.
Our marketing department also produces collateral material for distribution to
potential customers including presentation materials, Coreport demonstrations,
white papers, brochures and fact sheets. We provide support to our partners with
a variety of programs and training and product marketing support materials.
STRATEGIC RELATIONSHIPS
As part of our strategy to establish Coreport as the leading provider of
access framework software, we have formed relationships with leading companies
that develop business applications and provide integrated solutions. We work
closely with many software and services providers to maintain a high level of
integration with information systems and emerging technologies.
We have established relationships with IBM and Evidian to integrate Coreport
with their information systems. We have also established relationships with
wireless industry leaders such as Avantgo and i3Mobile to integrate and jointly
market our products.
RESEARCH AND DEVELOPMENT
We have invested significantly in research and development to enhance our
solution and develop new solutions. Our research and development organization is
responsible for development, quality and assurance testing, documentation,
release and maintenance, and overall execution of our development strategy. Our
research and development organization is based primarily in Boston with a small
group in Stockholm focused on Coreport's wireless functionality. We intend to
continue to invest significantly in research and development activities to
expand and enhance the capabilities of Coreport.
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COMPETITION
COMPETITORS' OFFERINGS
The emerging market for our software is rapidly changing, intensely
competitive and is likely to become more competitive as the number of entrants
and new technologies increases and the demand for wireless access to business
information grows. While we are not aware that any of our competitors or
potential competitors offers a solution that is substantially similar to ours,
our product may be subject to current or potential competition from products
that provide one or more of the functions our product provides, including:
- enterprise information portal vendors, such as Epicentric and Plumtree;
- wireless information service providers, such as Phone.com;
- e-business software providers, such as Ariba and SAP; and
- application integration software providers, such as Tibco.
COMPETITIVE FACTORS
We believe that the principal factors affecting a customer's decision to
select a solution include:
- ability to provide users access to a broad range of business information
and applications;
- ability to deliver business information and applications when and where it
is needed to a number of web-enabled devices including wireless devices;
- ability to scale to and manage large numbers of users;
- speed of implementation and ease of use; and
- product quality, customer service and price.
Some large potential competitors have longer operating histories, larger
customer bases, greater brand recognition, and significantly greater financial,
marketing and other resources than we do and may enter strategic or commercial
relationships with larger, more established and well-financed companies. Some of
our competitors may be able to secure alliances with customers and affiliates on
more favorable terms, devote greater resources to marketing and promotional
campaigns and devote substantially more resources to systems development than we
do. New technologies and the expansion of existing technologies may increase
competitive pressures on us. We may not be able to compete successfully against
current and future competitors, and competitive pressures faced by us could harm
our business, operating results and financial condition.
INTELLECTUAL PROPERTY
PROPRIETARY TECHNOLOGY
Our success depends in part upon our proprietary technology. We rely on a
combination of trademark and trade secret protection and confidentiality and
nondisclosure agreements to establish and protect our intellectual property
rights. 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 nondisclosure agreements with us and restricting access
to our source code. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. We have no patents.
PROTECTION OF PROPRIETARY TECHNOLOGY
Our means of protecting our proprietary rights may not be adequate. Our
competitors may independently develop similar technology, duplicate our products
or design around our proprietary intellectual property. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or to obtain and use information that we consider proprietary.
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Policing unauthorized use of our products is difficult, and while we are unable
to determine the extent to which piracy of our solution exists, piracy can be
expected to be a persistent problem. The laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States.
INTELLECTUAL PROPERTY LITIGATION
There has been a substantial amount of litigation in the software industry
and the internet industry regarding intellectual property rights. It is possible
that in the future, third parties may claim that we or our current or potential
future products infringe upon their intellectual property. We expect that
software product developers and providers of internet-based software
applications 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 claims, with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, which could seriously harm our business.
EMPLOYEES
As of June 30, 2000, we employed 96 people, including 39 in sales and
marketing, 31 in product development, 19 in services and 7 in administration,
operations and finance. None of our employees is represented by a labor union,
and we believe that our relations with our employees are good.
FACILITIES
Our executive offices and principal operations are located in Boston,
Massachusetts and consist of approximately 7,832 square feet of office space
held under a lease that expires in February 2002 with respect to 5,879 square
feet and March 2005 with respect to 1,953 square feet. We also lease offices in
London, New York, Oslo, Stockholm, Sydney and Toronto. We believe that our
existing facilities are adequate to meet our requirements, or that suitable
additional space will be available on commercially reasonable terms.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information regarding our directors,
executive officers and key employees as of June 30, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Ulf Arnetz................................ 40 Chief Executive Officer, President and
Director
Charles F. Kane........................... 43 Chief Operating Officer and Chief
Financial Officer
Lars G. Ivarsson.......................... 48 Executive Vice President, Sales and
Marketing
Felimy Greene............................. 33 Executive Vice President, Product
Development
N. Hakan Wohlin........................... 34 Executive Vice President, Business
Development
Joachim Zetterlund........................ 37 Executive Vice President, Europe
Daniel Matlow............................. 38 Vice President, North American Sales
David G. Broms............................ 44 Vice President, Indirect Sales
Brian Flynn............................... 46 Vice President, Product Integration
Ingemar Bjorklund......................... 34 Vice President, Product Development
Angiras Koorapaty......................... 37 Vice President, Finance and Administration
Mats E.G. Lordin.......................... 37 Vice President, Professional Services
Martin T. Hart............................ 64 Chairman of the Board of Directors
Frank J. Fanzilli, Jr..................... 43 Director
Daniel J. Foreman......................... 41 Director
Richard Lindh............................. 35 Director
Ofer Nemirovsky........................... 42 Director
Robert Pirie.............................. 66 Director
Gustav Vik................................ 42 Director
</TABLE>
ULF ARNETZ is the founder of Corechange and has served as our president,
chief executive officer and a director since we were founded. From
February 1994 to December 1995, he served as President of Cambridge Technology
Partners Scandinavia, a software services company. From 1988 to 1994,
Mr. Arnetz served as founder and president of IOS AB, a professional services
company in Sweden focused on enterprise information needs. Mr. Arnetz holds an
M.S. from the Royal Institute of Technology in Stockholm, Sweden.
CHARLES F. KANE has served as our chief operating officer and chief
financial officer since May 2000. From March 2000 to May 2000, Mr. Kane served
as the chief financial officer of Informix, Inc., a software company. From
December 1995 to March 2000, he served as a vice president and the chief
financial officer of Ardent Software, Inc., a software company which was
acquired by Informix in March 2000. From 1989 to November 1995, Mr. Kane served
in several financial and accounting positions with Stratus Computer, Inc., a
manufacturer of fault-tolerant computers, most recently as international
controller and finance director, mergers and acquisitions. Mr. Kane is a
certified public accountant and holds an M.B.A. from Babson College and a B.B.A.
in accountancy from the University of Notre Dame.
LARS G. IVARSSON has served as our executive vice president, sales and
marketing since January 1996. From 1993 to December 1995, Mr. Ivarsson served as
business development director of Cambridge Technology Partners Scandinavia, a
software services company, and during that time he established Cambridge
Technology Partners Norway.
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FELIMY GREENE has served as our executive vice president, product
development since March 2000. From August 1999 to March 2000, he served as our
senior vice president, product development. From August 1998 to July 1999,
Mr. Greene served as a managing director of VICO Solutions Ltd., a consulting
firm, and provided consulting services to Corechange UK Ltd. From October 1990
to August 1998, he served in a number of positions at Citibank N.A., most
recently as vice president of technology for their private banking division in
Europe, the Middle East and Africa. Mr. Greene holds a B.S. in computer science
from University College Dublin, Ireland.
N. HAKAN WOHLIN has served as our executive vice president, business
development since May 2000. From September 1999 to May 2000, Mr. Wohlin served
as a financial consultant to Corechange and as our acting chief financial
officer. From November 1998 to September 1999, he served as vice president,
investment banking for Prudential Securities Incorporated. From 1992 to
August 1998, he served in various capital markets positions with Bear, Stearns &
Co., Inc., most recently as an associate director, capital markets. Mr. Wohlin
holds an M.B.A. from Stockholm University, Sweden.
JOACHIM ZETTERLUND has served as our executive vice president, Europe since
April 2000. From October 1999 to April 2000, he served as the managing director
of Corechange U.K. From August 1998 to September 1999, Mr. Zetterlund was
managing director, preferred accounts division for the United Kingdom, for Dell
Computer Corporation. From October 1997 to May 1998, Mr. Zetterlund was vice
president, Europe for James Martin and Company, an information technology and
management consulting firm. From February 1994 to August 1997, Mr. Zetterlund
served in a number of positions at CTP, most recently as vice president and
territory manager, Northern Europe. From August 1990 to February 1994,
Mr. Zetterlund held various positions with Digital Equipment Corporation, a
computer company, most recently sales director for consumer, process and
transportation industries.
DANIEL MATLOW has served as our vice president, North American sales since
August 1999 and as our vice president, healthcare business unit from September
1996 to July 1999. From September 1991 to July 1996, he served as the chief
executive officer and president of SDLC Technologies Inc., a software and
education services company. From 1989 to August 1991, Mr. Matlow served as the
vice president of Canadian operations for Online Software International, Inc., a
software company. He holds a B.A. from York University in Toronto, Canada.
DAVID G. BROMS has served as our vice president, indirect sales since
May 2000. From November 1999 to May 2000, Mr. Broms served as a director of
alliances for Inforay, Incorporated, an information services company. From
June 1998 to November 1999, he was an industrial sales representative for Oracle
Corporation, an information management software company. From September 1996 to
June 1998, Mr. Broms served as director of alliances for Computervision
Corporation, a software company. From April 1994 to September 1996, he was the
New York/Midwest regional manager for Neuron Data Corporation, a software
company. Mr. Broms holds a B.S. in economics from the University of New
Hampshire.
BRIAN FLYNN has served as our vice president, product integration since May
2000. From April 1999 to November 1999, he served as a systems analyst for BT
CellNet, a communications company. From November 1998 to March 1999, Mr. Flynn
served as an information technology consultant with ABB Business Services Ltd.,
an information technology consulting company. He was an information technology
consultant with Comforce, a consulting company, from January 1998 to November
1998, and with Allsoft Ltd., a consulting company, from November 1988 to January
1998, Mr. Flynn holds a B.S. in computer science and avionics from Locking
College in the United Kingdom.
INGEMAR BJORKLUND has served as our vice president, product development
since May 1999 and as our director, product development, from May 1996 to April
1999. From February 1993 to May 1996, he was director of Cambridge Technology
Partners Scandinavia. From September 1992 to February 1993, Mr. Bjorklund served
as chief architect of product development at IOS AB. He holds a B.S. in computer
science from Uppsala University, Sweden.
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<PAGE>
ANGIRAS KOORAPATY has served as our vice president, finance and
administration since April 1998. From October 1997 to March 1998, Mr. Koorapaty
served as an independent financial consultant. From February 1990 to September
1997, Mr. Koorapaty served as finance division manager of Allstate Corporation,
an insurance company. From July 1983 until June 1987, he served as an auditor
for Sundaram and Srinivasan, Chartered Accountants. Mr. Koorapaty is a qualified
chartered accountant. He holds an M.B.A. from the George Washington University
and a B.A. from Loyola College.
MATS E.G. LORDIN has served as our vice president, professional services
since March 2000. From 1996 to February 2000, Mr. Lordin served as our director,
professional services. During 1995, he served as a director for Cambridge
Technology Partners, a consulting firm. Mr. Lordin was chief architect for Enea
Data, a software company, from 1993 to 1995 and chief architect for Infologics,
a consulting company, from 1988 to 1993. He holds a B.S. in computer science
from Uppsala University, Sweden.
MARTIN T. HART has served as the chairman of our board of directors since
January 1998. Mr. Hart has been a business advisor and private investor since
1969. He serves as a director of P.J. America, Inc., a food service company,
MassMutual Corporate Investors, an investment company, MassMutual Participation
Investors, Inc., an investment company, Schuler Homes, Inc., a homebuilder, Vail
Banks, Inc., a bank holding company, T-Netix, Inc., a communications company,
and ValueClick, Inc., an internet advertising company.
FRANK J. FANZILLI, JR. has served as a director since February 2000. He is a
managing director and the co-chief information officer of information technology
at Credit Suisse First Boston Corp., a global investment bank. Since joining
Credit Suisse First Boston in 1985, Mr. Fanzilli has held various positions
within information technology, including head of European information services.
DANIEL J. FOREMAN has served as a director since February 2000. He serves as
a managing director of ABN AMRO Private Equity, an investment firm. Mr. Foreman
joined ABN AMRO in October 1997. From October 1987 to October 1997, he served in
various positions at Ameritech Development Corporation, most recently as vice
president of investments and acquisitions. Prior to joining Ameritech in 1987,
Mr. Foreman was a consultant with Booz, Allen and Hamilton, a management
consulting firm. Mr. Foreman is also a director of Daleen Technologies, Inc., a
billing and customer care software provider, Integrated Information
Systems, Inc., an integrated internet solutions provider, Tavve Software, Inc.,
a network management system software company, and Synacom Technology, Inc., a
wireless infrastructure software provider.
RICHARD LINDH has served as a director since April 1999. He has served as
the marketing director for Microsoft Europe, Middle East and Africa since June
1998 and prior to that as director, partner strategy and business development
for Microsoft Europe from January 1994 to June 1998. Mr. Lindh served in a
variety of positions for Microsoft Sweden from August 1990 to January 1994. From
February 1988 until May 1990, he served as European marketing manager of
Synectics Medical AB, a Swedish medical technology company.
OFER NEMIROVSKY has served as a director since January 1998. He has served
as a managing director of HarbourVest Partners, a venture capital investment
firm, since 1986. Mr. Nemirovsky serves as a director for Daleen
Technologies, Inc., a telecommunications billing and customer care software
provider, Primix Solutions, Inc., an internet software and services company,
Ultimate Software Group, Inc., a software company, and several private
companies. Mr. Nemirovsky serves on the advisory board of DS Polaris Fund II
(Israel).
ROBERT PIRIE has served as a director since January 1998. He has served as
vice-chairman, investment banking of SG Cowen Securities Corporation since
October 1996. From 1993 to 1996, Mr. Pirie served as a senior managing director
of Bear, Stearns & Co. Inc. From 1982 to 1993, he served as president, chief
executive officer and co-chairman at Rothschild, Inc., an investment banking
firm, and Rothschild North America, Inc. From 1973 to 1982, Mr. Pirie was a
partner at Skadden,
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<PAGE>
Arps, Slate, Meagher & Flom, a law firm. Mr. Pirie serves as chairman of
Thrucom, Inc., a fixed wireless data company.
GUSTAV VIK has served as a director since February 2000. He has served as
executive vice president, treasurer, secretary and a director of Xcelera.com, an
internet holding company, since March 1989. Mr. Vik has also served as the chief
executive officer and manager of OneSure.com, LLC, an internet company, since
January 2000, and of atinsurance.com LLC, an internet company, since May 1997.
Since March 1999, he has served as a director and secretary of Mirror-Image
Internet, Inc., an internet services company. Since 1988, Mr. Vik has been a
director and treasurer of VBI Corporation, a holding company. From
September 1986 to April 1997, Mr. Vik was the president and a director of Vik
Brothers Insurance, Inc.
BOARD COMPOSITION
We have eight directors. Each of our directors was elected to our board of
directors under a stockholders' agreement that we entered into with our
stockholders in connection with the sale of shares of our series B convertible
preferred stock. This agreement will terminate by its terms upon the completion
of this offering. Upon the closing of this offering the terms of office of the
board of directors will be divided into three classes. A portion of our board of
directors will be elected each year. The division of the three classes, the
initial directors and their respective election dates are as follows:
- the class 1 directors will be Messrs. Fanzilli, Lindh and Vik and their
term will expire at the annual meeting of stockholders to be held in 2001;
- The class 2 directors will be Messrs. Foreman, Nemirovsky and Pirie and
their term will expire at the annual meeting of stockholders to be held in
2002; and
- the class 3 directors will be Messrs. Arnetz and Hart and their term will
expire at the annual meeting of stockholders to be held in 2003.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose terms are to expire will be elected to serve from
the time of election and qualification until the third annual meeting following
election. The authorized number of directors may be changed only by resolution
of the board of directors. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of one-third of the
directors. This classification of the board of directors may have the effect of
delaying or preventing changes in control or management of Corechange.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has established an audit committee and a compensation
committee. The audit committee reviews our internal accounting procedures and
consults with, and reviews the services provided by, our independent public
accountants. The members of our audit committee are Messrs. Fanzilli, Foreman
and Hart. The compensation committee reviews and recommends to the board of the
compensation and benefits of all of our officers and reviews general policy
relating to compensation and benefits of our employees. The compensation
committee also administers the issuance of stock options and other awards under
our stock plans. The members of the compensation committee are Messrs.
Nemirovsky, Pirie and Vik.
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<PAGE>
DIRECTOR COMPENSATION
CASH COMPENSATION
Our directors do not receive any cash compensation from us for their service
as members of the board of directors, although they are reimbursed for
out-of-pocket expenses for attendance at board and committee meetings.
STOCK OPTIONS
We have granted stock options outside of any stock plan to directors:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
DIRECTOR GRANT DATE UNDERLYING OPTIONS EXERCISE PRICE
-------- ------------- ------------------ --------------
<S> <C> <C> <C>
Martin T. Hart.................... June 1999 40,000 $0.45
Ofer Nemirovsky................... June 1999 40,000 0.45
Robert Pirie...................... June 1999 40,000 0.45
Richard Lindh..................... June 1999 20,000 0.45
Frank J. Fanzilli................. February 2000 20,000 0.45
</TABLE>
- The options granted to Messrs. Hart, Pirie and Nemirovsky vest with
respect to 20,000 shares immediately upon grant, with respect to 6,667
shares on the first anniversary of the date of grant and with respect to
the balance of the shares in 24 monthly installments beginning 13 months
after the date of grant.
- The options granted to Messrs. Lindh and Fanzilli vest with respect to
6,667 shares on the first anniversary of the date of grant and with
respect to the balance of the shares in 24 monthly installments beginning
13 months after the date of grant.
Our 2000 director stock option plan will become effective upon the
completion of this offering. The director plan provides for the grant of stock
options to purchase a maximum of 250,000 shares of our common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors consists of Messrs.
Nemirovsky, Pirie and Vik. No executive officer has served as a director or
member of the compensation committee, or other committee serving an equivalent
function, of any entity whose executive officers served as a member of the
compensation committee of our board of directors.
EXECUTIVE COMPENSATION
The following table presents summary information for the year ended
December 31, 1999, regarding the compensation of our chief executive officer and
our other executive officers whose compensation exceeded $100,000 in 1999,
collectively referred to as the named executive officers. Messrs. Kane, Wohlin
and Zetterlund would be named executive officers listed in the table if they had
served in their present positions with us during 1999. Mr. Gelfand resigned as
chief financial officer on September 3, 1999, and his annual compensation
provided below represents only the compensation paid to him through the date of
his resignation, September 3, 1999.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS (#)
<S> <C> <C> <C> <C>
Ulf Arnetz............................................ 1999 $180,000 -- --
President and Chief Executive Officer
Lars G. Ivarsson...................................... 1999 180,000 32,728 100,000
Executive Vice President, Sales and Marketing
Neil Gelfand.......................................... 1999 140,996 -- --
Former Chief Financial Officer
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table lists information regarding options granted to our named
executive officers during the year ended December 31, 1999. We have not granted
any stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN PRICE EXPIRATION -----------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Ulf Arnetz.................. -- -- -- -- -- --
Lars G. Ivarsson............ 100,000 16.7% $0.45 6/9/09 $1,351,195 $2,077,153
Neil Gelfand................ -- -- -- -- -- --
</TABLE>
The percentage shown under "Percentage of Total Options Granted in Fiscal
Year" is based on an aggregate of 598,954 options granted to our employees in
1999 under our 1997 Stock Incentive Plan.
The exercise price of each option was equal to the fair market value of our
common stock as determined by the board of directors on the date of grant.
The exercise price for each option may be paid in cash, promissory notes, in
shares of our common stock valued at fair market value on the exercise date or
through a broker-assisted cashless exercise procedure involving a same-day sale
of the purchased shares.
The potential realizable value of these options at 5% and 10% appreciation
is calculated by assuming an initial public offering price of $9.00 per share
that appreciates at the indicated rate for the ten-year term of the option at
the time of grant. Stock price appreciation of 5% and 10% is assumed as provided
by rules made by the Securities and Exchange Commission and does not represent
our prediction of our stock price performance.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding the number and value of
securities underlying unexercised options that are held by each of our named
executive officers as of December 31, 1999. No shares were acquired on the
exercise of stock options by these individuals during the year ended
December 31, 1999.
Amounts shown under "Value of Unexercised In-the-Money Options at
December 31, 1999" are based on the assumed initial public offering price of
$9.00 per share, without taking into account any
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<PAGE>
taxes that may be payable, multiplied by the number of shares underlying the
option, less the exercise price payable for these shares.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT
FY-END (#) FY-END ($)
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Ulf Arnetz............................... -- -- -- --
Lars G. Ivarsson......................... -- 100,000 -- $855,000
Neil Gelfand............................. -- -- -- --
</TABLE>
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
We entered into an employment agreement with Mr. Kane, our chief operating
officer and chief financial officer, for the one-year period ending May 24,
2001, subject to extension for additional one-year periods. Under this
agreement:
- Mr. Kane receives an annual base salary of $200,000 and is eligible for an
annual bonus of up to $100,000.
- We granted Mr. Kane an option to purchase 187,500 shares of common stock
with an exercise price of $5.837 per share which will vest with respect to
one-third of the shares on the first anniversary of the beginning of his
employment with us and with respect to the balance of the shares in 24
monthly installments beginning on the date 13 months after the beginning
of his employment with us.
- If Mr. Kane's employment is terminated by us due to our nonrenewal of the
employment agreement or without cause, he will receive a pro rata portion
of his annual base salary during the three month period after the date of
termination.
We entered into an employment agreement with Mr. Zetterlund, our executive
vice president, Europe. Under this agreement:
- Mr. Zetterlund receives an annual base salary of $190,000. He received an
initial guaranteed bonus of $15,000 for the first three months of his
employment. Mr. Zetterlund's employment may be terminated at any time upon
six months written notice.
- We granted Mr. Zetterlund an option to purchase 25,000 shares of common
stock at an exercise price of $0.45 per share, which he has exercised in
full. Of the 25,000 shares purchased by Mr. Zetterlund, 10,000 shares have
vested, 5,000 shares will vest one year after the date of grant and the
remaining 10,000 shares will vest in 24 monthly installments beginning on
the date 13 months after the date of grant.
Each option agreement for an option granted under, and each restricted stock
agreement evidencing an award granted under, our 1997 stock incentive plan
provides that upon a change in control of Corechange, the option or the
restricted stock, as applicable, will become fully vested.
STOCK PLANS
1997 STOCK INCENTIVE PLAN
GENERAL. A total of 3,500,000 shares of our common stock are reserved for
issuance under our 1997 stock incentive plan. As of June 30, 2000, options to
purchase an aggregate of 1,306,148 shares were outstanding and 1,919,360 shares
of common stock were available for future grant. The maximum
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<PAGE>
number of shares of common stock with respect to which awards may be granted to
any individual under the 1997 stock plan shall not exceed 400,000 shares of
common stock during any calendar year.
The 1997 stock plan provides for the grant of incentive stock options,
nonqualified stock options, shares of restricted stock and other stock-based
awards, each known as an award, to our employees, officers, directors,
consultants and advisors.
An incentive stock option means an option granted to a company's employee
if:
- the option is granted under a plan approved by the stockholders of the
company within 12 months before or after the plan is adopted;
- the option is granted within 10 years from the earlier of the date the
plan is adopted or the date the plan was approved by the stockholders;
- the option is not exercisable after 10 years from the date of grant; and
- the option price is at least 100% of the fair market value of the
underlying stock on the date of grant.
If the option holder, at the time the option is granted, owns stock equal to
10% or more of the total combined voting power of all classes of stock of the
company, the option price must be at least 110% of fair market value on date of
grant.
ADMINISTRATION. The 1997 stock plan is administered by our board of
directors or a committee appointed by the board of directors. Subject to the
provisions of the 1997 stock plan, the board of directors has the authority to
determine:
- to whom awards will be granted;
- the number of shares to be covered by an award;
- when an award becomes exercisable; and
- any restrictions on sale and repurchase rights which shall be placed on
shares purchased upon exercise of an award.
The maximum term of awards granted under the 1997 stock plan is ten years.
The 1997 stock plan will terminate in July 2007 unless we terminate it earlier.
2000 DIRECTOR STOCK OPTION PLAN
Our 2000 director stock option plan was adopted by our board of directors in
May 2000, subject to stockholder approval. Under the terms of the director stock
option plan, directors who are not our employees or employees of our
subsidiaries are eligible to receive nonqualified options to purchase shares of
our common stock. A total of 250,000 shares of our common stock may be issued
upon exercise of options granted under the director stock option plan.
The board of directors has the authority to adopt, amend and repeal the
administrative rules, guidelines and practices relating to the director stock
option plan. Under the terms of the director stock option plan, we will grant
stock options to non-employee directors as follows:
- each non-employee director continuing as a director following this
offering will receive an option to purchase 5,000 shares of our common
stock at a price per share equal to the public offering price.
- Each non-employee director will receive an option to purchase 3,000 shares
of our common stock on the date of each annual meeting of stockholders
beginning with the 2001 annual meeting of stockholders.
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<PAGE>
- Individuals who become directors after this offering and are not our
employees will receive an option to purchase 5,000 shares of our common
stock on the date of initial election to the board of directors.
- The chairmen of our audit committee and compensation committee will each
receive options to purchase an additional 1,000 shares of common stock on
the effective date of this offering at a price per share equal to the
public offering price.
- The chairmen of our audit committee and compensation committee will each
receive an option to purchase 500 shares of our common stock on the date
of each annual meeting of stockholders.
- Individuals who become the chairman of our audit committee or compensation
committee after this offering will receive an option to purchase 1,000
shares of our common stock on the date of appointment as chairman.
The exercise price per share of all options granted under the plan other
than the options granted on the effective date of this offering will be the
closing price per share of our common stock on the date of grant. All options
granted under the director stock option plan will be fully vested upon grant.
2000 EMPLOYEE STOCK PURCHASE PLAN
AUTHORIZED SHARES. Our 2000 employee stock purchase plan provides for the
issuance of up to 250,000 shares of our common stock to participating employees.
OFFERING PERIODS. The employee stock purchase plan, which is intended to
qualify under Section 423 of the Internal Revenue Code, provides for
consecutive, overlapping 24 month offering periods. Each offering period
includes four six-month purchase periods. The offering periods generally start
on the first trading day on or after September 1 and March 1 of each year.
However, the first offering period will begin shortly after the effective date
of this offering.
ELIGIBILITY. All of our employees and all employees of any participating
subsidiaries whose customary employment is for more than five months in a
calendar year and who have been employed by us for at least seven calendar days
before enrolling are eligible to participate in the employee stock purchase
plan. Employees who would immediately after the grant own five percent or more
of the total combined voting power or value of our stock or any subsidiary are
not eligible to participate.
PURCHASE PRICE. To participate in the employee stock purchase plan, an
employee must authorize us to deduct from one to ten percent of his base pay
during the offering period. Deducted amounts are used to purchase shares of
common stock at the end of each purchase period. The price of stock purchased
under the employee stock purchase plan is 85% of the lower of the fair market
value of the common stock
- at the beginning of the offering period, or
- at the end of the purchase period.
However, under some circumstances, the purchase price may be adjusted to a
price not less than 85% of the lower of the fair market value on the common
stock on
- the date our stockholders approve an increase in shares reserved for
issuance under the employee stock purchase plan, or
- at the end of the purchase period.
In the event the fair market value at the end of a purchase period is less
than the fair market value at the beginning of the offering period, the
participants will be withdrawn from the current
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<PAGE>
offering period following exercise and automatically re-enrolled in a new
offering period. The new offering period will use the lower fair market value as
of the first date of the new offering period to determine the purchase price for
future purchase periods. Participants may end their participation at any time
during an offering period, and they will be paid their payroll deductions to
date. Participation ends automatically upon termination of employment.
401(K) PLAN
We have adopted an employee savings and retirement plan qualified under
Section 401 of the Internal Revenue Code that covers all full-time employees.
Employees may elect to reduce their current compensation by up to 20%, subject
to the statutorily prescribed annual limit, and have the amount of the reduction
contributed to the 401(k) plan. Although not required, we have made matching or
additional contributions to the 401(k) plan in amounts determined annually by
our board of directors. Amounts contributed by us in an employee's 401(k)
account vest in four equal annual installments.
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<PAGE>
RELATED PARTY TRANSACTIONS
We have engaged in the following transactions with our directors, officers
and holders of more than five percent of our voting securities and affiliates of
our directors, officers and five percent stockholders.
ULF ARNETZ
Ulf Arnetz, our president and chief executive officer, founded Corechange as
a limited liability company in March 1996. In April 1996, Mr. Arnetz contributed
$1.2 million to our capital and, with his wife, Mona Arnetz, received 1,200,000
of our units. Concurrently with this contribution, Mr. Arnetz loaned us
$1.4 million under a demand promissory note bearing interest at a rate of 8% per
annum. In January 1997, Mr. Arnetz loaned us an additional $80,000. This loan
bore interest at a rate of 8% per year.
In February 1997, Mr. Arnetz loaned us $2.0 million to assist us with our
acquisition of technologies from CTP. This loan bore interest at a rate of 8%
per year. Mr. Arnetz also personally guaranteed a note in the original principal
amount of $2.5 million which we issued to CTP in payment of part of the purchase
price for the technologies. Mr. Arnetz pledged and granted a security interest
in a cash amount of $2.0 million held in escrow and options held by Mr. Arnetz
to purchase 345,000 shares of CTP stock as collateral for the note.
In April 1997, Mr. Arnetz agreed to lend to us up to $1.0 million at any
time when we required additional financing for our operations so that we could
make payments on 11% convertible promissory notes in the aggregate principal
amount of $1.0 million that we issued to two individuals. This obligation to
lend terminated in June 1997 upon the conversion of the notes into shares of our
series I junior convertible preferred stock, and Mr. Arnetz granted tag-along
rights to the two individuals entitling them to participate in any sale by Mr.
Arnetz of his shares.
In May 1997, Mr. Arnetz and his wife exchanged the 1,200,000 units in
Corechange as a limited liability company held by them for 2,400,000 shares of
common stock in Corechange as a corporation. Mr. Arnetz also forgave
$2.5 million of our indebtedness to him.
Mr. Arnetz loaned us $200,000 in June 1997, $600,000 in September 1997 and
$600,000 in December 1997. These loans bore interest at a rate of 8% per year.
We fully repaid the June 1997 loan in July 1997, the September 1997 loan in
November 1997 and the December 1997 loan in January 1998.
In February 1998, we repaid the remaining principal amount outstanding of
$1.0 million to Mr. Arnetz. We paid the interest on the indebtedness to Mr.
Arnetz in July 1997 in the amount of $89,800, in January 1998 in the amount of
$55,652 and in February 1998 in the amount of $9,590.
ISSUANCE OF SERIES I JUNIOR CONVERTIBLE PREFERRED STOCK
In June 1997, we issued 413,965 shares of our series I junior convertible
preferred stock at a price per share of $6.38 for a total purchase price of
$2.6 million. Of the 413,965 shares sold, 15,673 shares were sold to Bengt
Arnetz, a brother of Ulf Arnetz, for a purchase price of $100,000.
ISSUANCE OF SERIES II JUNIOR CONVERTIBLE PREFERRED STOCK
In June 1997, we issued 336,021 shares of our series II junior convertible
preferred stock at a price per share of $7.44 for a total purchase price of
$2.5 million. Of the 336,021 shares sold, 20,161 shares were sold to Martin
Hart, a director of Corechange, for a purchase price of $149,998.
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<PAGE>
ISSUANCE OF SERIES III JUNIOR CONVERTIBLE PREFERRED STOCK
In October 1997, we issued 200,032 shares of our series III junior
convertible preferred stock at a price per share of $7.49 for a total purchase
price of $1.5 million. Of the 200,032 shares sold, 13,400 shares were sold to
Bengt Arnetz for a purchase price of $100,366.
ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK
In January 1998, we issued 2,403,832 shares of our series A convertible
preferred stock at a price per share of $4.16 for a total purchase price of
$10.0 million. These shares were all sold to HarbourVest Partners V-Direct Fund
L.P. HarbourVest also received an option to purchase an additional 480,766
shares of series A convertible preferred stock at a purchase price of $4.16. In
June 1998, HarbourVest exercised this option and purchased all 480,766 shares
for a purchase price of $2,000,000.
8% CONVERTIBLE NOTES
In November 1999, December 1999 and January 2000, we issued 8% convertible
notes in the aggregate principal amount of $3.4 million. The notes bear interest
at a rate of 8% per year. All of these notes were converted into shares of
series B convertible preferred stock when we sold our series B convertible
preferred stock in February 2000. We issued convertible notes in the aggregate
original principal amount of $750,000 to the following directors, officers and
five percent stockholders and their affiliates:
<TABLE>
<CAPTION>
PRINCIPAL
NAME AMOUNT
---- ---------
<S> <C>
Ulf Arnetz................................................ $250,000
HarbourVest Partners V-Direct Fund L.P.................... 500,000
</TABLE>
ISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK
In February 2000, we issued 3,046,773 shares of our series B convertible
preferred stock at a price per share of $5.837 for a total purchase price of
$17.7 million, including 588,891 shares issued upon conversion of the
convertible notes. Of the 3,046,773 shares sold, we sold 2,530,052 shares to the
following directors, officers and five percent stockholders and their
affiliates:
<TABLE>
<CAPTION>
SERIES B
CONVERTIBLE
NAME PREFERRED STOCK PURCHASE PRICE
---- --------------- --------------
<S> <C> <C>
ABN AMRO Capital (USA), Inc.............................. 685,284 $4,000,000
Ulf Arnetz............................................... 43,853 250,000
HarbourVest Partners V-Direct Fund L.P................... 344,688 2,000,000
Xcelera.com, Inc......................................... 1,456,227 8,500,000
</TABLE>
We believe that the securities issued in the transactions described above
were sold at their then fair market value and that the terms of the transactions
described above were no less favorable than we could have obtained from
unaffiliated third parties.
COREPORT LICENSES
CREDIT SUISSE FIRST BOSTON
In March 2000, we entered into an initial rollout license agreement and a
license agreement for Coreport with Credit Suisse First Boston (Europe) Limited.
Under the initial rollout agreement, we licensed Coreport for 40 authorized
users, and under the license agreement, we licensed Coreport for
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<PAGE>
50 authorized users. We also agreed to license Coreport for additional users at
specified rates and provide installation services, configuration support
services and maintenance services. As of June 30, 2000 we have received $26,614
from CSFB.
ABN AMRO
In May 2000, we entered into an initial rollout license agreement and a
license agreement for Coreport with ABN AMRO Information Technology Services Co.
Under the initial rollout agreement, we licensed Coreport for 50 authorized
users. We then entered into the license agreement and licensed Coreport for
17,000 authorized users. Under the license agreement, we agreed to provide
support services for a one-year period. We also entered into a professional
services agreement with ABN AMRO. Under this agreement, we agreed to provide
services in connection with the installation of Coreport for ABN AMRO. As of
June 30, 2000, we have received $655,000 from ABN AMRO under these agreements.
We believe that the terms of these agreements with CSFB and ABN AMRO were
negotiated on an arms' length basis and are on terms that are no less favorable
than we could have obtained from unaffiliated third parties which were licensing
Coreport for the same number of authorized users.
REGISTRATION AGREEMENT
We have entered into a registration agreement with the purchasers of our
series A and series B convertible preferred stock, including those executive
officers and holders of five percent or more of our voting securities listed
above, which provides these purchasers registration rights for their shares
following this offering. Please read "Description of Capital Stock--Registration
Rights" for a further description of the terms of that agreement.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of our common stock as of June 30, 2000, and as adjusted to reflect the sale of
our common stock offered by this prospectus, by:
- each person, or group of affiliated persons, who is known by us to
beneficially own 5.0% or more of our common stock;
- each of our named executive officers;
- each of our directors; and
- all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options that
are exercisable or exercisable within 60 days of June 30, 2000 are deemed
outstanding for purposes of computing the percentage ownership of any person.
These shares, however, are not considered outstanding when computing the
percentage ownership of each other person. Except as indicated in the footnotes
to this table and as provided by state community property laws, each stockholder
named in the table has sole voting and investment power for the shares shown as
beneficially owned by them.
Percentage of ownership before this offering is based on 11,278,366 shares
of common stock outstanding on June 30, 2000 and assumes the conversion of all
outstanding shares of our convertible preferred stock into shares of common
stock. Percentage of ownership after this offering is based on 15,778,366 shares
of common stock to be outstanding after completion of this offering and assumes
no exercise of the underwriters' over-allotment option.
Unless otherwise indicated in the footnotes, the address of each of the
individuals named below is c/o Corechange, Inc., 260 Franklin Street, Suite
1890, Boston, Massachusetts 02110.
<TABLE>
<CAPTION>
PERCENTAGE OF
OPTIONS OWNERSHIP
NUMBER OF SHARES INCLUDED IN ----------------------
BENEFICIALLY BENEFICIAL BEFORE THE AFTER THE
OWNED OWNERSHIP OFFERING OFFERING
<S> <C> <C> <C> <C>
5% STOCKHOLDERS:
HarbourVest Partners V-Direct Fund L.P...... 3,229,286(1) -- 28.6% 20.5%
One Financial Center, 44th Floor
Boston, MA 02111
Xcelera.com, Inc............................ 1,627,547 -- 14.4 10.3
Ugland House, South Church Street
Grand Cayman, Cayman Islands,
British West Indies
ABN AMRO Capital (USA), Inc................. 685,284(2) -- 6.1 4.3
208 South LaSalle Street, 10th Floor
Chicago, IL 60604
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
OPTIONS OWNERSHIP
NUMBER OF SHARES INCLUDED IN ----------------------
BENEFICIALLY BENEFICIAL BEFORE THE AFTER THE
OWNED OWNERSHIP OFFERING OFFERING
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Ulf Arnetz.................................. 2,373,520(3) -- 21.0% 15.0%
Lars G. Ivarsson............................ 371,392(4) 41,481 3.3 2.3
Neil Gelfand................................ 71,526 -- * *
Martin T. Hart.............................. 95,486 28,296 * *
Frank J. Fanzilli, Jr....................... -- -- -- --
Daniel J. Foreman........................... 685,284(5) -- 6.1 4.3
Richard Lindh............................... 8,296 8,296 * *
Ofer Nemirovsky............................. 3,257,582(6) 28,296 28.8 20.6
Robert Pirie................................ 28,296 28,296 * *
Gustav Vik.................................. 1,627,547(7) -- 14.4 10.3
All directors and executive officers as a 8,635,407 230,535 75.0% 53.9%
group.....................................
</TABLE>
------------------------
* Less than 1%.
(1) HarbourVest Partners, LLC is the managing member of HVP V-Direct Associates
L.L.C., the general partner of HarbourVest Partners V-Direct Fund L.P.
Edward W. Kane and D. Brooks Zug, who comprise the investment committee of
HarbourVest Partners, LLC, hold the power to vote and dispose of the shares
held by HarbourVest Partners V-Direct Fund L.P.
(2) The power to vote and dispose of the shares held by ABN AMRO Capital (USA),
Inc. is shared by Daniel J. Foreman, a managing director of ABN AMRO Private
Equity, which is an affiliate of ABN AMRO Capital (USA), Inc., and three
other partners of ABN AMRO Private Equity.
(3) Includes 150,000 shares held by Mr. Arnetz's minor children and 666 shares
held by Mr. Arnetz's wife.
(4) Includes 50,000 shares held by Mr. Ivarsson's wife and 68,675 shares held by
Pinnacle Trustees, Ltd., in trust for Mr. Ivarsson's children.
(5) Consists of 685,284 shares held by ABN AMRO Capital (USA), Inc., an
affiliate of ABN AMRO Private Equity, of which Mr. Foreman is a managing
director. Mr. Foreman disclaims beneficial ownership of these shares.
(6) Includes 3,229,286 shares held by HarbourVest Partners V-Direct Fund L.P.,
an affiliate of HarbourVest Partners, LLC, of which Mr. Nemirovsky is a
managing director. Mr. Nemirovsky disclaims beneficial ownership of these
shares.
(7) Consists of 1,627,547 shares held by Xcelera.com, Inc., of which Mr. Vik is
executive vice president, treasurer, secretary and a director. Mr. Vik
disclaims beneficial ownership of these shares.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the filing of our amended and restated certificate of incorporation
upon the closing of this offering, our authorized capital stock will consist of
45,000,000 shares of common stock and 5,000,000 shares of preferred stock.
COMMON STOCK
As of June 30, 2000 there were 4,396,977 shares of common stock outstanding.
After giving effect to the conversion of all outstanding shares of convertible
preferred stock into 6,881,389 shares of common stock that will occur upon the
closing of this offering, there will be 11,278,366 shares of common stock
outstanding held by 268 stockholders of record.
Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of the stockholders and do not have any
cumulative voting rights. Accordingly, holders of a majority of the shares of
common stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of our common stock are entitled to
receive proportionally any dividends declared by our board of directors, subject
to any preferential dividend rights of outstanding preferred stock.
If we liquidate, dissolve or wind up, holders of our common stock are
entitled to share ratably in all assets remaining after payment of all debts and
other liabilities, subject to the prior rights of any outstanding preferred
stock. Holders of our common stock have no preemptive, subscription, redemption
or conversion rights. The outstanding shares of our common stock are, and the
shares to be issued by us in this offering will be, when issued and paid for,
validly issued, fully paid and nonassessable. The rights, preferences and
privileges of holders of our common stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of preferred stock
that we may issue.
PREFERRED STOCK
Under the terms of our amended and restated certificate of incorporation to
be filed upon the closing of this offering, our board of directors will be
authorized to issue shares of preferred stock in one or more series without
further stockholder approval. The board has discretion to determine the rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences, of
each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays from a
stockholder vote on specific issuances. The issuance of preferred stock, while
providing desirable flexibility for possible acquisitions and other corporate
purposes, could make it more difficult for a third party to acquire, or could
discourage a third party from acquiring, a majority of our outstanding voting
stock.
WARRANTS
As of June 30, 2000, we had an outstanding common stock purchase warrant
entitling its holder to purchase 120,191 shares of common stock at an exercise
price of $4.99 per share.
REGISTRATION RIGHTS
Under the terms of the registration agreement dated February 18, 2000 among
us and the holders of our series A convertible preferred stock and series B
convertible preferred stock, the holders of our series A convertible preferred
stock and series B convertible preferred stock have registration rights with
respect to shares of common stock held by them or issuable to them upon
conversion of shares of preferred stock held by them.
53
<PAGE>
PIGGYBACK REGISTRATION RIGHTS. The holders of registrable shares have the
right to request that any registrable shares be included in any registration
initiated by us. In any public offering, the underwriters may, for marketing
reasons, exclude all or part of the shares requested to be registered on behalf
of these holders. We have the right to terminate any registration initiated by
us before its effectiveness regardless of any request for inclusion by a holder
of registrable securities. All holders of registrable securities have waived
their registration rights with respect to this offering.
DEMAND REGISTRATION. At any time after February 18, 2002, holders of
registrable securities may request that we register shares of common stock
having an aggregate offering price to the public of at least $250,000. Holders
of our series A convertible preferred stock may request up to two registrations
under the demand registration provisions and the holders of our series B
convertible preferred stock may also request up to two registrations. If at the
time of any request for registration, we are engaged, or plan to engage within
30 days, in a registered public offering or our board of directors determines an
activity of ours would be adversely affected by the request, then we may delay
the requested registration for a period of up to six months from the effective
date of the offering or the date of the commencement of this activity.
We have agreed that, under the Members' Agreement dated February 7, 1997
among us, Ulf Arnetz, Mona Arnetz and CTP, the members have the right to request
that any registrable securities be included in any registration initiated by us.
In any public offering, the underwriters may, for marketing reasons, exclude all
or part of the shares requested to be registered on behalf of these holders. The
members have the right to request a registration of their securities on a
Form S-3 if we are eligible to use Form S-3 at the time. The members have waived
their registration rights with respect to this offering.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER AND BYLAW PROVISIONS
DELAWARE LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporate Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that the stockholder
became an interested stockholder unless:
- before this date, the board of directors of the corporation 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's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who are
directors and also officers, and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be sold or exchanged in a tender or
exchange offer; or
- on or after this date, the business combination is approved by the board
of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
54
<PAGE>
- in general, any transaction that results in the issuance or transfer by
the corporation of any stock of the corporation to 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 an entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by this entity or person.
CHARTER AND BYLAW PROVISIONS
CLASSIFIED BOARD. The amended and restated certificate of incorporation and
amended and restated bylaws that will be effective upon the closing of this
offering provide for the division of our board of directors into three classes
as nearly equal in size as possible with staggered three-year terms. Under the
certificate of incorporation and the bylaws, any vacancy on the board of
directors, including a vacancy resulting from an enlargement of the board of
directors, may only be filled by vote of a majority of the directors then in
office. The classification of the board of directors and the limitation on and
filling of vacancies could make it more difficult for a third party to acquire,
or discourage a third party from acquiring, control of Corechange.
ACTIONS BY STOCKHOLDERS. The certificate of incorporation and bylaws will
also provide that any action required or permitted to be taken by our
stockholders at an annual meeting or special meeting of stockholders may only be
taken if it is properly brought before the meeting and may not be taken by
written action. The certificate of incorporation and bylaws will further provide
that special meetings of the stockholders may only be called by our chairman of
the board, the president or our board of directors. For any matter to be
considered properly brought before a meeting, a stockholder must comply with
requirements regarding advance notice and provide us with information. These
provisions could have the effect of delaying a vote on stockholder actions which
are favored by the holders of a majority of our outstanding voting securities
until the next stockholders meeting.
AMENDMENTS TO OUR CHARTER AND BYLAWS. The General Corporation Law of
Delaware provides generally that the affirmative vote of a majority of the
shares entitled to vote on any manner is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws requires a greater percentage. Our certificate of
incorporation will require the affirmative vote of holders of at least 75% of
the votes which all the stockholders would be entitled to cast in any annual
election of directors to amend or repeal any of the provisions contained in the
certificate of incorporation described in the prior two paragraphs and this
paragraph, or our bylaws.
INDEMNIFICATION. The certificate of incorporation will contain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. Further, our certificate of incorporation will contain provisions to
indemnify our directors and officers to the fullest extent permitted by the
General Corporation Law of Delaware. We believe that these provisions will
assist us in attracting and retaining qualified individuals to serve as
directors.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, LLC has been appointed as the transfer
agent and registrar for our common stock.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Upon completion of this
offering, we will have outstanding an aggregate of 15,778,366 shares of common
stock. Of these shares, all of the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless these shares are purchased by a person that directly or indirectly
controls, is controlled by or is under common control with, us. These persons
are considered to be affiliates of ours under Rule 144 under the Securities Act.
The remaining 11,278,366 shares of common stock held by existing stockholders
are restricted securities. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under the Securities Act.
Our executive officers, directors and stockholders holding substantially all
of our shares outstanding have agreed in writing that for a period of 180 days
from the date of this prospectus, they will not sell any shares of common stock
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
However, under these lock-up agreements, holders of shares who have not been
employees since the date of this prospectus may offer, sell or dispose of:
- 25% of the shares they own if after 90 days or the second trading day
after release of our quarterly results, whichever is later, the price of
the common stock has been at least twice the price per share in this
offering for 20 of the 30 trading days ending on the last trading day of
this period; and
- an additional 25% of those shares if after 135 days the price of the
common stock is at least twice the price per share in this offering for 20
of the 30 trading days ending on the last trading day of this period.
Assuming a full lock-up of 180 days and under the rules under the Securities
Act, the restricted shares will be available for sale in the public market,
subject to volume and other restrictions, as follows:
<TABLE>
<CAPTION>
DAYS AFTER THE NUMBER OF SHARES
EFFECTIVE DATE ELIGIBLE FOR SALE COMMENT
<S> <C> <C>
On effectiveness 56,384 Shares not locked up and eligible for sale under Rule 144
Lock-up released; shares eligible for sale under Rules 144
180 days 8,763,400 and 701
</TABLE>
At the expiration of the 180-day lock-up period, 718,231 shares of the
1,488,541 shares that may be issued upon the exercise of options outstanding as
of June 30, 2000 will be vested and exercisable and will be available for sale
in the public market.
STOCK OPTIONS
Following this offering, we intend to file a registration statement under
the Securities Act covering approximately 3,407,901 shares of common stock
reserved for issuance under our stock incentive plans. We expect the
registration statement to be filed and become effective as soon as practicable
after the closing of this offering. Accordingly, shares registered under such
registration statement will be available for sale in the open market after the
effectiveness of the registration statement.
56
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 2000, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, SG Cowen Securities
Corporation, Prudential Securities Incorporated and DLJDIRECT Inc., have agreed
to purchase from us the number of shares of common stock shown opposite their
names below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
<S> <C>
UNDERWRITERS:
Donaldson, Lufkin & Jenrette Securities Corporation.........
SG Cowen Securities Corporation.............................
Prudential Securities Incorporated..........................
DLJDIRECT Inc...............................................
---------
Total................................................... 4,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares offered by this
prospectus are subject to the approval of their counsel of legal matters and
other conditions. The underwriters must purchase and accept delivery of all of
the shares of common stock offered by this prospectus, other than those covered
by the over-allotment option described below, if any are purchased.
The underwriters propose initially to offer some of the shares directly to
the public at the public offering price on the cover page of this prospectus and
some of these shares of common stock to dealers, including the underwriters, at
the public offering price less a concession not in excess of $ per share.
The underwriters may allow, and these dealers may re-allow, a concession not in
excess of $ per share on sales to other dealers. After the initial offering
of the common stock to the public, the representatives of the underwriters may
change the public offering price and other selling terms.
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase, up to 675,000 additional shares
of common stock at the initial public offering price less underwriting discounts
and commissions. The underwriters may exercise this option solely to cover
over-allotments, if any, made in connection with this offering. To the extent
that the underwriters exercise this option, each underwriter will become
obligated, under conditions specified in the underwriting agreement, to purchase
its pro rata portion of the additional shares based on that underwriter's
underwriting commitment as indicated in the preceding table.
The following table shows the underwriting fees to be paid by us in this
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
<S> <C> <C>
Per share............................................ $ $
Total................................................
</TABLE>
We will pay the offering expenses, estimated to be $1.2 million.
Upon the consummation of this offering, Robert Pirie, one of our directors,
will receive options to purchase 5,000 shares of our common stock at an exercise
price equal to the initial public offering price, pursuant to our 2000 director
stock option plan. Mr. Pirie is vice chairman, investment banking of SG Cowen
Securities Corporation.
Pursuant to an engagement letter between Corechange and Prudential
Securities Incorporated, Prudential Securities Incorporated has a right of first
refusal to participate as a managing underwriter
57
<PAGE>
in an initial public offering of our common stock if the initial public offering
occurs prior to June 30, 2001.
We, our officers and directors, and stockholders holding substantially all
of our shares outstanding have agreed, for a period of 180 days after the date
of this prospectus, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, not to:
- 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 or 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 all or a portion
of the economic consequences of ownership of the common stock, regardless
of whether any transaction described above is to be settled by delivery of
common stock or other securities, in cash or otherwise.
However, holders of shares who have not been employees since the date of
this prospectus may offer, sell or otherwise dispose of:
- 25% of the shares they own if after 90 days or the second trading day
after release of our quarterly results, whichever is later, the price of
the common stock has been at least twice the price per share in this
offering for 20 of the 30 trading days ending on the last trading day of
this period; and
- an additional 25% of those shares if after 135 days the price of the
common stock is at least twice the price per share in this offering for 20
of the 30 trading days ending on the last trading day of this period.
The underwriting agreement contains limited exceptions to these lock-up
agreements.
During this 180-day period, we have also agreed not to file any registration
statement for the registration of any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
Each of our executive officers and directors and substantially all of our
stockholders holding registration rights have similarly agreed not to make any
demand for or exercise any right for any registration of shares of common stock.
An electronic prospectus will be available on the web sites maintained by
DLJDIRECT Inc., one of the underwriters and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation, and PrudentialSecurities.com, a division of
Prudential Securities Incorporated.
We have agreed to indemnify the underwriters against specified civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make because of these
liabilities.
Before the offering, there has been no established trading market for the
common stock. We and the underwriters will negotiate the initial public offering
price for the shares of common stock offered by this prospectus. The factors
considered in determining the initial public offering price include:
- our history of and the prospects for the industry in which we compete;
- our past and present operations;
- our historical results of operations;
- our prospects for future earnings;
- the recent market prices of securities of generally comparable companies;
and
- the general conditions of the securities market at the time of the
offering.
We have applied for quotation on the Nasdaq National Market under the symbol
"CRCH".
58
<PAGE>
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may create a syndicate short
position by making short sales of our common stock and may purchase shares of
our common stock on the open market to cover syndicate short positions created
by short sales.
Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Covered short sales
are sales made in an amount not greater than the underwriters' over-allotment
option to purchase additional shares in the offering. Naked short sales are
sales in excess of the over-allotment option. The underwriters are more likely
to create a naked short position if the underwriters are concerned that there
may be downward pressure on the price of the common stock in the open market
after pricing that could adversely affect investors who purchase in the
offering.
The underwriters may close out any covered short position by either
exercising their over-allotment option or purchasing shares in the open market.
The underwriters must close out any naked short position by purchasing shares in
the open market. In determining the source of shares to close out the covered
short position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option.
The underwriting syndicate may reclaim selling concessions if the syndicate
repurchases previously distributed shares in syndicate covering transactions, in
stabilization transactions or in some other way or if Donaldson, Lufkin &
Jenrette Securities Corporation receives a report that indicates clients of such
syndicate members have immediately resold the shares. The covering of short
sales may have the effect of raising or maintaining the market price of our
common stock or preventing or retarding a decline in the market price of our
common stock. As a result, the price of our common stock may be higher than the
price that might otherwise exist in the open market. The underwriters are not
required to engage in these activities and may end any of these activities at
any time.
Donaldson, Lufkin & Jenrette Securities Corporation has reserved for sale at
the initial public offering price up to shares of common stock offered by
this prospectus for sale to our employees, directors and other persons
designated by us. The number of shares available for sale to the general public
will be reduced to the extent that any reserved shares are purchased. Any
reserved shares not so purchased will be offered by the underwriters on the same
basis as the other shares offered through this prospectus.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered by this prospectus in any jurisdiction where action for that purpose is
required. The shares of common stock offered by this prospectus may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements associated with the offer and sale of any of
the shares of common stock offered through this prospectus be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of that jurisdiction. You
should inform yourself and observe any restrictions relating to the offering of
the common stock and the distribution of this prospectus. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any shares
of common stock offered in this prospectus in any jurisdiction in which an offer
or a solicitation is unlawful.
LEGAL MATTERS
Selected legal matters with respect to the validity of the shares offered in
this offering will be passed upon for us by Hale and Dorr LLP, Boston,
Massachusetts. Selected legal matters with respect to this offering will be
passed upon for the underwriters by Gibson, Dunn & Crutcher LLP, New York, New
York.
59
<PAGE>
EXPERTS
Our consolidated balance sheet as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended included in this prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report, and are included in this prospectus in reliance upon the authority of
said firm as experts in giving said report.
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998, and for each of the two years ended
December 31, 1998, as shown in their report. We have included these financial
statements in this prospectus and elsewhere in the registration statement of
which this prospectus is a part in reliance on Ernst & Young LLP's report given
on their authority as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
On March 8, 2000, after discussions with us, Ernst & Young LLP resigned as
our independent auditors when we informed them of our intention to enter into a
strategic alliance with the consulting division of Ernst & Young LLP. At that
time, Ernst & Young LLP advised us that the existence of such a relationship
would impair their independence in their role as independent auditors. We
subsequently appointed Arthur Andersen LLP as our independent accountants.
There were no disagreements with Ernst & Young during the years ended
December 31, 1997 and 1998 or during any subsequent interim period before their
replacement on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to Ernst & Young's satisfaction, would have caused them to make
reference to the subject matter of the disagreement in their report. Ernst
& Young issued an unqualified report on the financial statements as of and for
the years ended December 31, 1997 and 1998.
We did not consult Arthur Andersen LLP on any accounting or financial
reporting matters in the periods before their appointment. The change in
accountants was approved by our board of directors.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the Commission a registration statement on Form S-1 under the
Securities Act for the offer and sale of common stock under this prospectus.
This prospectus, which is a part of that registration statement, does not
contain all the information in the registration statement or the exhibits which
are a part of the registration statement. Statements made in this prospectus
concerning the contents of any contract, agreement or other document filed as an
exhibit to the registration statement are summaries of the material terms of
those contracts, agreements or documents and do not describe all of the terms of
those contracts, agreements or documents.
The registration statement and the exhibits filed with the Commission may be
inspected, without charge, and copies may be obtained at prices set by the
Commission, at the public reference facility maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Please call the Commission at 1-800-SEC-0330 for
further information on the operation of the public reference facility. The
registration statement and other information filed by us with the Commission
also are available at the web site maintained by the Commission on the internet
at http//:www.sec.gov. For further information pertaining to us and our common
stock offered by this prospectus, reference is hereby made to the registration
statement.
60
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................... F-2
Report of Independent Auditors.............................. F-3
Consolidated Balance Sheets as of December 31, 1998 and 1999
and June 30, 2000 (unaudited)............................. F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998, and 1999 and for the Six Months
Ended June 30, 1999 and 2000 (unaudited).................. F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1997, 1998 and 1999 and
for the Six Months Ended June 30, 2000 (unaudited)........ F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999 and for the Six Months
Ended June 30, 1999 and 2000 (unaudited).................. F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Corechange, Inc.:
We have audited the accompanying consolidated balance sheet of
Corechange, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1999 and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 Corechange, Inc. and
subsidiaries as of December 31, 1999 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 11, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To Corechange, Inc.:
We have audited the accompanying consolidated balance sheet of
Corechange, Inc. and subsidiaries (the Company) as of December 31, 1998 and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the years ended December 31, 1997 and 1998. 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 generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Corechange, Inc. as of December 31, 1998 and the consolidated results of its
operations and its cash flows for the years ended December 31, 1997 and 1998 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 26, 1999
F-3
<PAGE>
CORECHANGE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 2000
------------------- ----------------------
1998 1999 ACTUAL PRO FORMA
(NOTE 2(C))
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,890 $ 2,102 $ 10,349 $ 10,349
Accounts receivable--less allowance for doubtful accounts
of approximately $40 in 1998 and 1999 and $108 in
2000.................................................... 917 715 1,024 1,024
Other current assets...................................... 235 311 675 675
-------- -------- -------- --------
Total current assets................................ 4,042 3,128 12,048 12,048
Property and Equipment, net................................. 717 516 635 635
Other Assets................................................ 107 -- 509 509
-------- -------- -------- --------
Total assets........................................ $ 4,866 $ 3,644 $ 13,192 $ 13,192
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Convertible promissory notes.............................. $ -- $ 3,267 $ -- $ --
Notes payable............................................. 254 212 -- --
Accounts payable and accrued expenses..................... 1,100 1,127 2,066 2,066
Deferred revenue.......................................... 340 422 342 342
-------- -------- -------- --------
Total current liabilities........................... 1,694 5,028 2,408 2,408
Commitments and Contingencies (Note 10)
Redeemable Convertible Preferred Stock (Note 8)............. 11,573 11,634 33,102 --
STOCKHOLDERS' EQUITY (DEFICIT):
Series I convertible preferred stock--413,965 shares
authorized, issued and outstanding; no shares
authorized, issued or outstanding pro forma (liquidation
preference of $2,639)................................... 2,641 2,641 2,641 --
Series II convertible preferred stock--336,021 shares
authorized, issued and outstanding; no shares
authorized, issued or outstanding pro forma (liquidation
preference of $2,500)................................... 2,484 2,484 2,484 --
Series III convertible preferred stock--215,000 shares
authorized; 200,032 shares issued and outstanding; no
shares authorized, issued or outstanding pro forma
(liquidation preference of $1,500)...................... 1,417 1,417 1,417 --
Preferred stock, $0.01 par value; 5,000,000 shares
authorized, pro forma; no shares issued or outstanding,
pro forma............................................... -- -- -- --
Common stock--$0.01 par value; 15,000,000 shares
authorized; 4,144,365, 4,117,621 and 4,396,977 shares
issued and outstanding at December 31, 1998 and 1999 and
June 30, 2000, respectively; 11,278,366 shares issued
and outstanding pro forma............................... 41 41 44 113
Additional paid-in capital................................ 3,630 4,369 2,061 41,636
Deferred stock-based compensation......................... -- (547) (1,984) (1,984)
Accumulated deficit....................................... (18,597) (23,379) (28,970) (28,970)
Cumulative translation adjustment......................... (17) (44) (11) (11)
-------- -------- -------- --------
Total stockholders' equity (deficit)................ (8,401) (13,018) (22,318) 10,784
-------- -------- -------- --------
Total liabilities and stockholders' equity
(deficit)......................................... $ 4,866 $ 3,644 $ 13,192 $ 13,192
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
CORECHANGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Software licenses(2).................................. $ 1,054 $ 1,004 $ 926 $ 677 $ 2,143
Services(2)........................................... 1,864 4,657 4,340 2,329 1,259
------- ------- ------- ------- --------
Total revenues.................................... 2,918 5,661 5,266 3,006 3,402
COST OF REVENUES(1)..................................... 1,606 3,746 3,125 1,649 1,125
------- ------- ------- ------- --------
Gross profit...................................... 1,312 1,915 2,141 1,357 2,277
OPERATING EXPENSES:
Sales and marketing(1)................................ 2,437 3,914 2,845 1,257 4,026
Research and development(1)........................... 1,240 1,768 1,344 536 1,635
General and administrative(1)......................... 1,915 3,489 2,531 1,165 1,895
Acquired in-process technologies...................... 4,500 -- -- -- --
Stock-based compensation(1)........................... -- -- 208 18 504
Restructuring costs................................... -- 403 -- -- --
------- ------- ------- ------- --------
Total operating expenses.......................... 10,092 9,574 6,928 2,976 8,060
------- ------- ------- ------- --------
Operating loss.................................... (8,780) (7,659) (4,787) (1,619) (5,783)
Interest Expense........................................ (219) (16) (43) (12) (50)
Interest Income......................................... 24 246 48 33 242
------- ------- ------- ------- --------
Net loss.......................................... (8,975) (7,429) (4,782) (1,598) (5,591)
Accretion and dividends on preferred stock.............. -- (61) (61) (30) (4,903)
------- ------- ------- ------- --------
Net loss attributable to common stockholders...... $(8,975) $(7,490) $(4,843) $(1,628) $(10,494)
======= ======= ======= ======= ========
Net Loss per Share (Note 2(g))--Basic and diluted....... $ (3.36) $ (2.04) $ (1.29) $ (0.43) $ (2.51)
======= ======= ======= ======= ========
Weighted average common shares outstanding--Basic and
diluted............................................... 2,669 3,664 3,754 3,762 4,181
======= ======= ======= ======= ========
Pro Forma Net Loss per Share (Note 2(g))--Basic and
diluted............................................... $ (0.62) $ (0.95)
======= ========
Pro forma weighted average common shares outstanding--
Basic and diluted................................... 7,589 10,250
======= ========
</TABLE>
--------------------------
(1) The following summarizes the departmental allocation of stock-based
compensation:
<TABLE>
<S> <C> <C> <C> <C> <C>
Cost of Revenues......................................... $ -- $ -- $ 42 $ 4 $ 101
Operating Expenses:
Sales and marketing.................................... -- -- 41 4 100
Research and development............................... -- -- 63 5 152
General and administrative............................. -- -- 62 5 151
------- ------- ------- ------- -------
Total stock-based compensation..................... $ -- $ -- $ 208 $ 18 $ 504
======= ======= ======= ======= =======
</TABLE>
(2) The following summarizes revenues from related parties:
<TABLE>
<S> <C> <C> <C> <C> <C>
Software licenses........................................ $ -- $ -- $ -- $ -- $ 664
Services................................................. -- -- -- -- 120
------- ------- ------- ------- -------
Total revenues................................... $ -- $ -- $ -- $ -- $ 784
======= ======= ======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
CORECHANGE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MEMBERSHIP UNITS CONVERTIBLE PREFERRED STOCK
----------------------------------- -------------------------------------------------------
CLASS A CLASS B SERIES I SERIES II SERIES III
--------------- ------------------ ----------------- ----------------- -----------------
UNITS AMOUNT UNITS AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996........................ 33,333 $ 33 1,166,667 $1,167 -- $ -- -- $ -- -- $ --
Comprehensive loss:
Net loss.................... -- -- -- -- -- -- -- -- -- --
Cumulative translation
adjustment................ -- -- -- -- -- -- -- -- -- --
Total comprehensive
loss.................. -- -- -- -- -- -- -- -- -- --
Issuance of membership
units..................... 2,667 3 -- -- -- -- -- -- -- --
Change in form of
organization from LLC to
corporation on May 12,
1997...................... (36,000) (36) (1,166,667) (1,167) -- -- -- -- -- --
Contribution of note payable
by shareholder to equity on
May 12, 1997................ -- -- -- -- -- -- -- -- -- --
Issuance of common stock...... -- -- -- -- -- -- -- -- -- --
Sale of convertible preferred
stock in April 1997 at $6.38
per share................... -- -- -- -- 254,347 1,623 -- -- -- --
Conversion of note payable by
shareholders to preferred
stock, including $18 of
accrued interest, at $6.38
per share................... -- -- -- -- 159,618 1,018 -- -- -- --
Sale of convertible preferred
stock in July 1997 at $7.44
per share, net of $16
issuance costs.............. -- -- -- -- -- -- 336,021 2,484 -- --
Sale of convertible preferred
stock in November 1997 at
$7.49 per share, net of $81
issuance costs.............. -- -- -- -- -- -- -- -- 200,032 1,417
------- ---- ---------- ------ -------- ------- -------- ------- -------- -------
Balance at December 31,
1997........................ -- -- -- -- 413,965 2,641 336,021 2,484 200,032 1,417
Comprehensive loss:
Net loss.................... -- -- -- -- -- -- -- -- -- --
Cumulative translation
adjustment................ -- -- -- -- -- -- -- -- -- --
Total comprehensive
loss.................. -- -- -- -- -- -- -- -- -- --
Issuance of common stock.... -- -- -- -- -- -- -- -- -- --
Repurchase and retirement of
common stock.............. -- -- -- -- -- -- -- -- -- --
Accretion of redeemable
convertible preferred
stock..................... -- -- -- -- -- -- -- -- -- --
------- ---- ---------- ------ -------- ------- -------- ------- -------- -------
Balance at December 31,
1998........................ -- -- -- -- 413,965 2,641 336,021 2,484 200,032 1,417
Comprehensive loss:
Net loss.................... -- -- -- -- -- -- -- -- -- --
Cumulative translation
adjustment................ -- -- -- -- -- -- -- -- -- --
Total comprehensive
loss.................. -- -- -- -- -- -- -- -- -- --
Issuance of common stock.... -- -- -- -- -- -- -- -- -- --
Deferred stock-based
compensation.............. -- -- -- -- -- -- -- -- -- --
Stock-based compensation
expense................... -- -- -- -- -- -- -- -- -- --
Repurchase and retirement of
common stock.............. -- -- -- -- -- -- -- -- -- --
Accretion of redeemable
convertible preferred
stock..................... -- -- -- -- -- -- -- -- -- --
------- ---- ---------- ------ -------- ------- -------- ------- -------- -------
Balance at December 31,
1999........................ -- -- -- -- 413,965 2,641 336,021 2,484 200,032 1,417
Comprehensive loss:
Net loss.................... -- -- -- -- -- -- -- -- -- --
Cumulative translation
adjustment................ -- -- -- -- -- -- -- -- -- --
Total comprehensive
loss.................. -- -- -- -- -- -- -- -- -- --
Issuance of common stock.... -- -- -- -- -- -- -- -- -- --
Adjustment of common stock
in connection with the
reorganization (Note
14)....................... -- -- -- -- -- -- -- -- -- --
Deferred stock-based
compensation.............. -- -- -- -- -- -- -- -- -- --
Stock-based compensation
expense................... -- -- -- -- -- -- -- -- -- --
Compensation expense related
to consultant options..... -- -- -- -- -- -- -- -- -- --
Repurchase and retirement of
common stock.............. -- -- -- -- -- -- -- -- -- --
Accretion and dividends on
redeemable convertible
preferred stock........... -- -- -- -- -- -- -- -- -- --
------- ---- ---------- ------ -------- ------- -------- ------- -------- -------
Balance at June 30, 2000
(unaudited)................. -- -- -- -- 413,965 2,641 336,021 2,484 200,032 1,417
Pro forma conversion of
preferred stock into common
stock....................... -- -- -- -- (413,965) (2,641) (336,021) (2,484) (200,032) (1,417)
------- ---- ---------- ------ -------- ------- -------- ------- -------- -------
Pro Forma Balance at June 30,
2000 (unaudited)............ -- $ -- -- $ -- -- $ -- -- $ -- -- $ --
======= ==== ========== ====== ======== ======= ======== ======= ======== =======
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED CUMULATIVE STOCKHOLDERS'
--------------------- PAID-IN STOCK-BASED ACCUMULATED TRANSLATION EQUITY
SHARES PAR VALUE CAPITAL COMPENSATION DEFICIT ADJUSTMENT (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996........................ -- $ -- $ 20 $ -- $ (2,193) $ -- $ (973)
Comprehensive loss:
Net loss.................... -- -- -- -- (8,975) -- (8,975)
Cumulative translation
adjustment................ -- -- -- -- -- (8) (8)
--------
Total comprehensive
loss.................. -- -- -- -- -- -- (8,983)
Issuance of membership
units..................... -- -- -- -- -- -- 3
Change in form of
organization from LLC to
corporation on May 12,
1997...................... 2,405,332 24 1,179 -- -- -- --
Contribution of note payable
by shareholder to equity on
May 12, 1997................ -- -- 2,479 -- -- -- 2,479
Issuance of common stock...... 1,856,892 18 2 -- -- -- 20
Sale of convertible preferred
stock in April 1997 at $6.38
per share................... -- -- -- -- -- -- 1,623
Conversion of note payable by
shareholders to preferred
stock, including $18 of
accrued interest, at $6.38
per share................... -- -- -- -- -- -- 1,018
Sale of convertible preferred
stock in July 1997 at $7.44
per share, net of $16
issuance costs.............. -- -- -- -- -- -- 2,484
Sale of convertible preferred
stock in November 1997 at
$7.49 per share, net of $81
issuance costs.............. -- -- -- -- -- -- 1,417
---------- ---- ------- ------- -------- ---- --------
Balance at December 31,
1997........................ 4,262,224 42 3,680 -- (11,168) (8) (912)
Comprehensive loss:
Net loss.................... -- -- -- -- (7,429) -- (7,429)
Cumulative translation
adjustment................ -- -- -- -- -- (9) (9)
--------
Total comprehensive
loss.................. -- -- -- -- -- (7,438)
Issuance of common stock.... 53,036 1 11 -- -- -- 12
Repurchase and retirement of
common stock.............. (170,895) (2) -- -- -- -- (2)
Accretion of redeemable
convertible preferred
stock..................... -- -- (61) -- -- -- (61)
---------- ---- ------- ------- -------- ---- --------
Balance at December 31,
1998........................ 4,144,365 41 3,630 -- (18,597) (17) (8,401)
Comprehensive loss:
Net loss.................... -- -- -- -- (4,782) -- (4,782)
Cumulative translation
adjustment................ -- -- -- -- -- (27) (27)
--------
Total comprehensive
loss.................. -- -- -- -- -- -- (4,809)
Issuance of common stock.... 225,084 2 48 -- -- -- 50
Deferred stock-based
compensation.............. -- -- 755 (755) -- -- --
Stock-based compensation
expense................... -- -- -- 208 -- -- 208
Repurchase and retirement of
common stock.............. (251,828) (2) (3) -- -- -- (5)
Accretion of redeemable
convertible preferred
stock..................... -- -- (61) -- -- -- (61)
---------- ---- ------- ------- -------- ---- --------
Balance at December 31,
1999........................ 4,117,621 41 4,369 (547) (23,379) (44) (13,018)
Comprehensive loss:
Net loss.................... -- -- -- -- (5,591) -- (5,591)
Cumulative translation
adjustment................ -- -- -- -- -- 33 33
--------
Total comprehensive
loss.................. -- -- -- -- -- -- (5,558)
Issuance of common stock.... 83,004 1 49 -- -- -- 50
Adjustment of common stock
in connection with the
reorganization (Note
14)....................... 196,774 2 (2) -- -- -- --
Deferred stock-based
compensation.............. -- -- 1,941 (1,941) -- -- --
Stock-based compensation
expense................... -- -- -- 504 -- -- 504
Compensation expense related
to consultant options..... -- -- 607 -- -- -- 607
Repurchase and retirement of
common stock.............. (422) -- -- -- -- -- --
Accretion and dividends on
redeemable convertible
preferred stock........... -- -- (4,903) -- -- -- (4,903)
---------- ---- ------- ------- -------- ---- --------
Balance at June 30, 2000
(unaudited)................. 4,396,977 44 2,061 (1,984) (28,970) (11) (22,318)
Pro forma conversion of
preferred stock into common
stock....................... 6,881,389 69 39,575 -- -- -- 33,102
---------- ---- ------- ------- -------- ---- --------
Pro Forma Balance at June 30,
2000 (unaudited)............ 11,278,366 $113 $41,636 $(1,984) $(28,970) $(11) $ 10,784
========== ==== ======= ======= ======== ==== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
CORECHANGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR 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.................................................. $(8,975) $(7,429) $(4,782) $(1,598) $(5,591)
Adjustments to reconcile net loss to net cash used in
operating activities--
Acquired in-process technologies........................ 4,500 -- -- -- --
Non-cash interest expense............................... 18 -- -- -- --
Stock-based compensation expense........................ -- 8 208 18 1,056
Depreciation and amortization........................... 187 313 435 280 199
Changes in operating assets and liabilities--
Accounts receivable................................... (596) 804 202 44 (308)
Other current assets.................................. (154) (1) (76) (6) (364)
Accounts payable and accrued expenses................. 481 (99) 29 (33) 988
Deferred revenue...................................... 234 (303) 81 85 (80)
------- ------- ------- ------- -------
Net cash used in operating activities............... (4,305) (6,707) (3,903) (1,210) (4,100)
------- ------- ------- ------- -------
Cash Flows from Investing Activities:
Increase in other assets.................................. (8) -- -- -- --
Purchases of property and equipment....................... (582) (417) (127) (31) (319)
Purchase of in-process technologies....................... (2,000) -- -- -- --
------- ------- ------- ------- -------
Net cash used in investing activities............... (2,590) (417) (127) (31) (319)
------- ------- ------- ------- -------
Cash Flows from Financing Activities:
Net proceeds from issuance of preferred stock............. 5,523 11,512 -- -- 13,186
Deferred financing costs.................................. -- -- -- -- (509)
Proceeds from notes payable to stockholders............... 3,877 -- 3,267 -- 116
Payments of notes payable to stockholders................. -- (1,832) -- -- --
Proceeds from note payable................................ 192 -- -- -- --
Payments of notes payable................................. (2,032) (406) (42) (46) (212)
Proceeds from issuance of common stock.................... 21 4 50 -- 52
Proceeds from issuance of membership units................ 3 -- -- -- --
Repurchase and retirement of common stock................. -- (3) (5) (4) --
------- ------- ------- ------- -------
Net cash provided by financing activities........... 7,584 9,275 3,270 (50) 12,633
Effect of Exchange Rates on Cash............................ (8) (9) (28) (19) 33
------- ------- ------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents........ 681 2,142 (788) (1,310) 8,247
Cash and Cash Equivalents at Beginning of Period............ 67 748 2,890 2,890 2,102
------- ------- ------- ------- -------
Cash and Cash Equivalents at End of Period.................. $ 748 $ 2,890 $ 2,102 $ 1,580 $10,349
======= ======= ======= ======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest.................................... $ 180 $ 57 $ -- $ -- $ 14
======= ======= ======= ======= =======
Non-cash Financing Activities:
Issuance of note payable to CTP for in-process
technologies............................................ $ 2,500 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Contribution of note payable by stockholders to equity
upon incorporation...................................... $ 2,479 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Conversion of note payable by lenders to Series I
convertible preferred stock, including $18 of accrued
interest................................................ $ 1,018 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Conversion of note payable to Series B redeemable
convertible preferred stock, including $50 of accrued
interest................................................ $ -- $ -- $ -- $ -- $ 3,433
======= ======= ======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. ORGANIZATION AND OPERATIONS
Corechange, Inc. (Corechange or the Company) was organized in March 1996
under the name SPI Company, LLC as a Delaware limited liability company. In
connection with the organization of the limited liability company, in March
1996, SPI Company LLC entered into a license agreement with Cambridge Technology
Partners, Inc. (CTP) for certain technologies. In August 1996, the company name
was changed to Corechange, LLC and on May 12, 1997, Corechange changed its form
of organization from a limited liability company to a corporation.
Corechange develops, markets and supports software that provides enterprises
with a framework to manage access to business information and applications using
the internet and wireless internet technology. Corechange's access framework
software, Coreport, enables enterprises to provide their employees, customers,
suppliers and business partners with an internet-based interface to access and
manipulate the information they require to conduct e-business.
Corechange's principal geographic markets for its products are North America
and Europe.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described below and elsewhere in these notes
to consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the results of
operations of Corechange and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
(B) UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements as of June 30, 2000 and
for the six months ended June 30, 1999 and 2000 are unaudited. These unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include, in the opinion of management, all normal
recurring adjustments necessary for a fair presentation of the financial
position, results of operations, and cash flows for the interim periods
presented. Results for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the entire fiscal year or
future periods.
(C) UNAUDITED PRO FORMA PRESENTATION
The unaudited pro forma consolidated balance sheet as of June 30, 2000 and
the pro forma net loss per share for the year ended December 31, 1999 and the
six months ended June 30, 2000 reflect the automatic conversion of all
outstanding shares of Series A and Series B redeemable convertible preferred
stock and Series I, II, and III convertible preferred stock into 6,881,389
shares of common stock, which will occur upon the closing of Corechange's
proposed initial public offering.
F-8
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, at the date of
the financial statement and the reported amount of revenues and expenses during
the reported period. Actual results could differ from those estimates.
(E) REVENUE RECOGNITION
Corechange generates revenues from licensing its software and providing
professional services and training, maintenance, and customer support services.
Corechange executes separate contracts that govern the terms and conditions of
each software license and maintenance arrangement and each professional services
arrangement. These contracts may be elements in a multiple element arrangement.
Revenues under multiple element arrangements, which may include several
different software products or services sold together, are allocated to each
element based on the residual method in accordance with American Institute of
Certified Public Accountants (AICPA) Statement of Position 98-9, SOFTWARE
REVENUE RECOGNITION WITH RESPECT TO CERTAIN ARRANGEMENTS.
Corechange uses the residual method when vendor-specific objective evidence
of fair value does not exist for one of the delivered elements in an
arrangement. Under the residual method, the fair value of the undelivered
elements is deferred and subsequently recognized. Corechange has established
sufficient vendor specific objective evidence for professional services,
training, and maintenance and support services based on the price charged when
these elements are sold separately. Accordingly, software license revenues are
recognized under the residual method in arrangements in which software is
licensed with professional services, training, and maintenance and support
services.
Corechange recognizes software license revenues upon execution of a signed
license agreement, delivery of the software to a customer, and determination
that collection of a fixed license fee is probable.
Services revenues include professional services and training, maintenance,
and customer support fees. Professional services are not essential to the
functionality of the other elements in an arrangement and are accounted for
separately. Professional services revenues are recognized as the services are
performed for time and material contracts or on a percentage-of-completion basis
for fixed price contracts. The percentage of completion basis is used by
measuring the percentage of costs (primarily labor) incurred to date as compared
to the estimated total costs (primarily labor) for each contract. When a loss is
anticipated on a contract, the full amount thereof is provided currently. If
conditions for acceptance are required, professional services revenues are
recognized upon customer acceptance. Training revenues are recognized as the
services are provided. Maintenance and customer support fees include the right
to unspecified upgrades on a when-and-if-available basis and ongoing technical
support. Maintenance and customer support fees are recognized ratably over the
term of the maintenance contract on a straight-line basis.
F-9
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) COST OF REVENUES
Cost of revenues consists primarily of personnel costs and third-party
consulting fees associated with implementation, training, maintenance, and other
support and professional services. Cost of revenues also includes software
license costs consisting of the costs of the media in which it is delivered;
these costs are not significant.
(G) LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing the net loss
attributable to common stockholders for the period by the weighted average
number of unrestricted common shares outstanding during the period. Basic and
diluted net loss per share are the same, as the effect of the inclusion of
shares of common stock issuable upon the conversion of convertible preferred
stock and redeemable convertible preferred stock, as well as stock options,
restricted stock, and a stock warrant, would be antidilutive. In accordance with
Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB)
No. 98, the Company has determined that there were no nominal issuances of
common stock or potential common stock in the period prior to the Company's
planned initial public offering. The following weighted average totals of
potentially issuable shares were excluded from the calculation of dilutive
weighted average shares outstanding, as their effect would be antidilutive (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
Convertible preferred stock.............. 475 3,478 3,835 3,835 6,069
Common stock options..................... -- 441 590 435 1,103
Restricted common stock.................. 749 547 221 221 83
Common stock warrant..................... -- 120 120 120 120
----- ----- ----- ----- -----
Total................................ 1,224 4,586 4,766 4,611 7,375
===== ===== ===== ===== =====
</TABLE>
F-10
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The calculation of pro forma basic and diluted shares outstanding is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 JUNE 30, 2000
<S> <C> <C>
Weighted average shares used in computing basic and diluted
net loss per share........................................ 3,754 4,181
Weighted average adjustment to reflect the effect of the
conversion of preferred stock............................. 3,835 6,069
------- --------
Shares used in computing pro forma basic and diluted net
loss per share............................................ 7,589 10,250
======= ========
Net loss attributable to common stockholders used in
computing basic and diluted net loss per share............ $(4,843) $(10,494)
Adjustments to reflect the effect of the conversion of
preferred stock:
Reversal of accrued dividends........................... -- 537
Reversal of accretion to redemption value............... 122 261
------- --------
Net loss available to common stockholders used in computing
pro forma basic and diluted net loss per share............ $(4,721) $ (9,696)
======= ========
</TABLE>
(H) CASH AND CASH EQUIVALENTS
Corechange considers all highly liquid investments purchased with original
maturities of 90 days or less to be cash equivalents.
(I) PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful life. Leasehold improvements are
amortized over the estimated useful life or the lease term, whichever is
shorter. Corechange reviews its property and equipment whenever events or
changes in circumstances indicate that the carrying amount of certain assets
might not be recoverable and recognizes an impairment loss when it is probable
that the estimated cash flows are less than the carrying value of the asset.
(J) RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
Software development costs are included in research and development and are
charged to operations as incurred. After technological feasibility is
established, material software development costs are capitalized. The
capitalized cost is then amortized on a straight-line basis over the estimated
product life or in the ratio of current revenues to total projected product
revenues, whichever is greater. To date, the period between achieving
technological feasibility, which the Company has defined as when beta testing
commences, and the general availability of such software have been minimal, and
software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs for the periods presented.
F-11
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(K) INCOME TAXES
Corechange accounts for income taxes using the liability method under which
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws.
(L) FOREIGN CURRENCY TRANSLATION
The balance sheet accounts of Corechange's foreign subsidiaries are
translated into U.S. dollars at current exchange rates; revenue and expense
accounts are translated at average exchange rates during the period. Translation
gains and losses are included as a separate component of stockholders' equity.
Transaction gains and losses, which are insignificant, are included in
operations.
(M) FINANCIAL INSTRUMENTS
The carrying value of financial instruments such as cash equivalents,
accounts receivable and accounts payable approximates their fair value based on
the short-term maturities of these instruments. The carrying value of the
convertible promissory notes and notes payable approximates the fair value based
on current interest rates.
(N) CONCENTRATION OF CREDIT RISK AND OFF-BALANCE-SHEET RISK
Corechange has no significant off-balance-sheet risk such as foreign
exchange contracts, option contracts, or other foreign currency hedging
arrangements. Financial instruments that potentially subject Corechange to
credit risk consist of cash equivalents and accounts receivable. The
concentration of credit risk with respect to cash equivalents is minimized by
Corechange's policies in which investments are only placed with highly rated
issuers with relatively short maturities. The concentration of credit risk with
respect to accounts receivable is minimized by the creditworthiness of
Corechange's customers and the variety of industries in which the customers
operate. Corechange generally does not require collateral. Corechange maintains
an allowance for doubtful accounts but historically has not experienced any
significant losses related to individual customers or groups of customers in any
particular industry or area. Three customers accounted for approximately 17%,
53%, and 51% of revenues for the years ended December 31, 1997, 1998 and 1999
and 51% and 41% of revenues for the six months ended June 30, 1999 and 2000,
respectively. These three customers accounted for approximately 54% and 21% of
accounts receivable at December 31, 1998 and 1999, respectively, and 33% of
accounts receivable at June 30, 2000.
(O) STOCK-BASED COMPENSATION
Corechange accounts for its stock-based employee compensation plan utilizing
the provisions of Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. Corechange has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Corechange accounts for its stock-based
compensation for non-employee consultants utilizing the provisions of SFAS
No. 123. (See Note 9)
F-12
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(P) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively, the derivatives) and for hedging activities. SFAS
No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. This new standard is not anticipated
to have a significant impact on Corechange's consolidated financial statements
based on the current structure and operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 REVENUE
RECOGNITION. This bulletin establishes guidelines for revenue recognition and is
in effect for periods beginning March 31, 2000. Corechange does not expect that
the adoption of this methodology will have a material impact on their financial
condition or results of operations.
In March 2000, the FASB issued interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF APB OPINION
NO. 25. The Interpretation clarifies the application of APB Opinion No. 25 in
certain situations, as defined. The Interpretation is effective July 1, 2000,
but covers certain events occurring during the period after December 15, 1998,
but before the effective date. To the extent that events covered by this
Interpretation occur during the period after December 15, 1998, but before the
effective date, the effects of applying this Interpretation would be recognized
on a prospective basis from the effective date. Accordingly, upon initial
application of the final Interpretation, (a) no adjustments would be made to the
financial statements for periods before the effective date and (b) no expense
would be recognized for any additional compensation cost measured that is
attributable to periods before the effective date. This new Interpretation is
not anticipated to have a significant impact on Corechange's consolidated
financial statements based on the current structure and operations.
3. RESTRUCTURING
During 1998, Corechange undertook certain actions to restructure its
business. The restructuring resulted from lower than expected demand for its
then-current products. The restructuring plan resulted in a restructuring charge
to operations totaling approximately $403,000. The principal actions in the
restructuring plan included the reduction of workforce, the reduction of
facilities and the decrease in efforts to market Corechange's then-current
products. Substantially all of the costs related to the restructuring charge
were paid in 1998. The restructuring charge is detailed as follows (in
thousands):
<TABLE>
<S> <C>
Employee severance, benefits, and related costs............. $ 324
Reduction in facilities..................................... 79
--------
$ 403
========
</TABLE>
F-13
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
3. RESTRUCTURING (CONTINUED)
EMPLOYEE SEVERANCE, BENEFITS, AND RELATED COSTS
The number of employees terminated, by department, resulting in the employee
severance costs detailed above is as follows:
<TABLE>
<S> <C>
Service..................................................... 4
Sales and marketing......................................... 8
Research and development.................................... 6
---
18
===
</TABLE>
REDUCTION IN FACILITIES
Approximately $79,500 of the restructuring charge relates to the termination
of a facilities lease and other lease-related costs. The facility lease had a
remaining term of six months. The amount charged to operations reflects
Corechange's actual costs incurred to buy out the lease. Included in this amount
is the write-off of certain assets, primarily leasehold improvements, that
relate to the termination of this lease.
4. ACQUIRED TECHNOLOGIES
In connection with its formation, Corechange entered into a seven-year
software license agreement with CTP granting Corechange licensee rights,
including internal use of software in exchange for payment of a royalty of 15%
of license fee revenues. On February 7, 1997, Corechange paid $4,500,000 to CTP
in exchange for software and methodology and the proprietary rights to the
software that were previously owned by CTP and licensed to Corechange, thus
canceling the license agreement. A stockholder of Corechange and a third party
advanced Corechange $2,000,000, resulting in notes payable bearing interest at
8% per annum. Corechange used the advances to pay $2,000,000 of the purchase
price to CTP in March 1997; the remaining $2,500,000 was due in monthly
principal installments of $200,000 and interest (6% per annum) through
March 1998.
The costs of the software rights were charged to expense as acquired
in-process technologies costs as the related technologies was not at the point
of technological feasibility and had no alternative future use at the date of
purchase. As of the acquisition date, neither a detail program design nor a
working model had been completed for the initial product. Subsequent to the
acquisition, Corechange incurred an additional $523,000 in its Windows-based
product before its release in July 1997.
F-14
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
ESTIMATED USEFUL LIFE 1998 1999 2000
<S> <C> <C> <C> <C>
Computer equipment.......................... 3-4 years $ 800 $ 827 $1,015
Furniture and fixtures...................... 4 years 273 310 354
Lesser of estimated
Leasehold improvements...................... useful life or lease term 54 40 59
------ ------ ------
1,127 1,177 1,428
Less--Accumulated depreciation and
amortization.............................. 410 661 793
------ ------ ------
Property and equipment, net............. $ 717 $ 516 $ 635
====== ====== ======
</TABLE>
6. INCOME TAXES
Through May 12, 1997, Corechange was taxed as an LLC under the Internal
Revenue Code. In lieu of corporation income taxes, the members were taxed on
their share of the entity's taxable income. Upon termination of the LLC,
deferred income taxes were recorded for the tax effect of cumulative temporary
differences between the financial reporting and tax bases of certain assets and
liabilities, primarily net operating losses (NOL carryforwards), depreciation,
and amortization.
Corechange has incurred net operating losses since inception. At
December 31, 1999, Corechange has net operating loss carryforwards available to
reduce future federal and state taxable income of approximately $17,200,000 and
net operating loss carryforwards available to reduce foreign taxable income of
approximately $1,265,000. Also at December 31, 1999, Corechange has research and
development credits that can be used for federal and state tax reporting
purposes aggregating $154,000. These carryforwards and credits expire at various
times through 2019. Under the provisions of the Internal Revenue Code, certain
substantial changes in Corechange's ownership may significantly limit the amount
of net operating loss carryforwards that could be utilized annually to offset
future taxable income. Subsequent significant ownership changes could further
affect the limitation in future years.
Due to the uncertainty surrounding Corechange's ability to utilize its net
operating loss carryforwards and other deferred tax assets, Corechange has
provided a full valuation allowance against its otherwise recognizable deferred
tax asset at December 31, 1998 and 1999.
F-15
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
6. INCOME TAXES (CONTINUED)
Deferred tax assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
<S> <C> <C>
Net operating loss carryforwards............................ $2,900 $6,881
Research and development credit carryforwards............... 100 154
Other....................................................... 37 21
------ ------
Deferred tax assets..................................... 3,037 7,056
Valuation allowance......................................... (3,037) (7,056)
------ ------
$ -- $ --
====== ======
</TABLE>
7. DEBT
(A) CONVERTIBLE PROMISSORY NOTES
In November and December 1999 and in January 2000, Corechange entered into
unsecured subordinated convertible promissory notes with investors totaling
$3,383,000 (the Notes). The Notes accumulated interest at a rate of 8% per
annum, and had a maturity date of the earlier of October 1, 2000 or upon the
closing date of a qualified financing, as defined. The Notes and related accrued
interest were convertible into the securities sold in a qualified financing at a
conversion rate equal to the price at which these securities were sold in the
qualified financing. Upon closing of the Series B redeemable convertible
preferred stock (Series B preferred stock) financing on February 18, 2000 (see
Note 8), all principal and accrued interest on the Notes automatically converted
into 588,191 shares of Series B preferred stock at a conversion price equal to
$5.837 per share.
(B) NOTES PAYABLE
Corechange maintains a line of credit with a Swedish bank, secured by
principal shareholders for up to approximately $236,000. Any borrowings are due
upon demand and accrue interest at a rate of 12.2% per annum. As of
December 31, 1998 and 1999, Corechange had outstanding borrowings of $190,939
and $211,674, respectively. No borrowings were outstanding as of June 30, 2000.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1998, Corechange sold 2,884,598 shares of Series A redeemable
convertible preferred stock (Series A preferred stock) at $4.16 per share,
resulting in net proceeds of $11,511,796.
In February 2000, Corechange sold 2,458,582 shares of Series B preferred
stock at $5.837 per share, resulting in net proceeds of approximately
$13,132,000. In addition, holders of the Notes described in Note 7(a) converted
$3,433,274 of such Notes and accrued interest thereon, into 588,191 shares of
Series B preferred stock. The rights, preferences, and privileges of the
Series A and Series B preferred stock are as follows:
F-16
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
VOTING
The holders of Series A and Series B preferred stock are entitled to the
number of votes equal to the number of whole shares of common stock into which
the preferred shares are convertible. The holders vote together with the holders
of common stock as a single class.
DIVIDENDS
The holders of Series A and Series B preferred stock are entitled to receive
dividends when, as, and if declared by the Board of Directors. The holders of
Series B preferred stock shall also accrue dividends on a daily basis at the
rate of 8% per annum on the liquidation value of each Series B share from the
issuance of the shares to the first of either (i) the liquidation date or
(ii) the conversion date. Dividends shall be cumulative and payable in
preference to any dividends payable on all other classes of stock. As of
June 30, 2000, Corechange had accrued $537,464 of cumulative dividends by
charges to additional paid in capital.
LIQUIDATION PREFERENCE
In the event of a voluntary or involuntary liquidation, dissolution, or
winding-up of Corechange, the holders of Series B preferred stock shall be
entitled to receive, in preference to the holders of all other classes and
series of stock, an amount equal to $5.837 per share plus all accrued and unpaid
dividends. After the distribution to Series B preferred stockholders, the
holders of Series A preferred stock shall be entitled to receive, in preference
to the holders of all other classes and series of stock, an amount equal to
$4.16 per share plus all accrued and unpaid dividends. If the assets of
Corechange are insufficient to pay the full preferential amounts to the
shareholders, the assets legally available for distribution shall be distributed
first to the holders as described above in proportion to the preferential amount
each holder is entitled to, and then ratably among the holders of other classes
of preferred stock.
CONVERSION
The Series A and Series B preferred stock are each convertible, at the
option of the holder, into one share of common stock, adjustable for certain
dilutive events. All shares of Series A and Series B preferred stock shall
automatically convert into common stock upon the closing of an underwritten
initial public offering of Corechange's common stock at a per-share offering
price of at least $8.32 and $14.59, respectively, and yielding aggregate gross
proceeds to Corechange of at least $20,000,000 and $30,000,000, respectively.
Mandatory conversion of Series B preferred stock shall also take place upon the
consent of at least 75% of the holders of the then-outstanding shares of
Series B preferred stock.
Upon the closing of Corechange's proposed initial public offering of its
common stock, all outstanding shares of Series B preferred stock will
automatically convert into 3,046,773 shares of common stock, resulting in an
effective purchase price of $5.837 per common share. The difference between the
effective purchase price per common share and the deemed fair value of the
common stock on the date of issuance of the Series B preferred stock for
accounting purposes resulted in a beneficial conversion feature of
$4.2 million, which is reflected as a dividend in the six months ended June 30,
2000.
F-17
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
REDEMPTION
In the event of a change in ownership and upon receipt of written request
for redemption from holders of at least a majority of the shares then
outstanding, Corechange will redeem all of the outstanding shares of Series B
preferred stock. The price per share to be paid to redeem the shares shall be an
amount equal to $5.837 plus all accrued and unpaid dividends, provided that, if
the aggregate consideration paid as a result of the change in ownership equals
at least $30,000,000, then accrued and unpaid 8% dividends shall not be included
in the redemption price. After the payment of all amounts to the holders of
Series B preferred stock, Corechange will redeem all of the outstanding shares
of Series A preferred stock upon written request from the holders of at least a
majority of the Series A preferred stock then outstanding. The price per share
to be paid to redeem the Series A preferred stock shall be equal to $4.16 plus
all accrued and unpaid dividends.
At any time on or after February 18, 2005, upon receipt of written request
for redemption from holders of at least a majority of the shares then
outstanding, Corechange will redeem all of the outstanding shares of Series A
and Series B preferred stock. The price per share to be paid to redeem the
shareholders of Series A preferred stock shall be equal to the sum of $4.16 plus
all accrued and unpaid dividends. The price per share to be paid to redeem the
shareholders of Series B preferred stock shall be an amount equal to the greater
of the sum of $5.837 plus all accrued and unpaid dividends or the fair market
value per share as determined by an independent appraiser.
The following table summarizes the activity of the Series A and B preferred
stock (in thousands, except share data):
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK
-------------------- --------------------
NUMBER OF NUMBER OF TOTAL
SHARES VALUE SHARES VALUE VALUE
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997.................. -- $ -- -- $ -- $ --
Issuance of Series A preferred stock.... 2,884,598 11,512 -- -- 11,512
Accretion to redemption value........... -- 61 -- -- 61
--------- ------- --------- ------- -------
Balance, December 31, 1998.................. 2,884,598 11,573 -- -- 11,573
Accretion to redemption value........... -- 61 -- -- 61
--------- ------- --------- ------- -------
Balance, December 31, 1999.................. 2,884,598 11,634 -- -- 11,634
Issuance of Series B preferred stock.... -- -- 3,046,773 16,565 16,565
Accretion to redemption value........... -- 33 -- 106 139
Dividend related to beneficial
conversion of Series B preferred
stock................................. -- -- -- 4,227 4,227
Accrued dividends on Series B preferred
stock................................. -- -- -- 537 537
--------- ------- --------- ------- -------
Balance, June 30, 2000...................... 2,884,598 $11,667 3,046,773 $21,435 $33,102
========= ======= ========= ======= =======
</TABLE>
F-18
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
9. STOCKHOLDERS' EQUITY
As of December 31, 1999 and June 30, 2000, the authorized capital stock of
Corechange was 9,000,000 and 15,000,000 shares of common stock, $0.01 par value
per share, respectively, and 7,849,584 shares of preferred stock, $0.01 par
value per share, of which 2,884,598 shares are designated Series A Preferred
Stock (Note 8), 4,000,000 shares are designated Series B Preferred Stock
(Note 8), 413,965 shares are designated Series I junior convertible preferred
stock, 336,021 shares are designated Series II junior convertible preferred
stock, and 215,000 shares are designated Series III junior convertible preferred
stock.
(A) JUNIOR CONVERTIBLE PREFERRED STOCK
Each series of junior convertible preferred stock converts into common stock
at the option of the holder or automatically upon the completion of a qualified
public offering, as defined. Each series of convertible preferred stock converts
into common shares at a per-share conversion price of $6.38, $7.44, and $7.49
for Series I, Series II, and Series III shares, respectively, subject to
adjustment for stock dividends, stock splits, or other similar
recapitalizations. Convertible preferred Series I, II, and III shares have
liquidation preference over the common stockholders in the amount of $6.38,
$7.44, and $7.49 per share, respectively. Each series is entitled to the number
of votes equal to the number of whole shares of common stock into which the
shares of that series are convertible. Each series ranks equally in liquidation.
(B) ADJUSTMENT TO COMMON STOCK
In June 1997, Corechange was advised by CTP that CTP believed that its
holdings of Class A Units of Corechange, LLC prior to the reorganization into a
corporation should have resulted in CTP holding 7.77% of the common stock of
Corechange following the reorganization that occurred on May 12, 1997. On
April 7, 2000, Corechange and CTP agreed upon a resolution whereby Corechange
issued 196,774 shares of common stock to CTP. Following the issuance, CTP held a
total of 202,106 shares of common stock to CTP, which represents 7.77% of
Corechange's common stock outstanding at the time of the reorganization. CTP
holds 4.6% of Corechange's common stock at June 30, 2000. Corechange has
accounted for the transaction as an adjustment of shares in connection with the
re-organization and thus recorded the common shares issued at par value in the
six months ended June 30, 2000.
(C) RESTRICTED COMMON STOCK
The Board awarded 933,770, 14,350, and 20,000 shares of restricted stock
with purchase prices ranging from $0.01 to $0.45, which were determined to be
the fair value at the date of grant during 1997, 1998, and 1999, respectively.
The restricted stock generally vests over three years and, as of December 31,
1999 and June 30, 2000, approximately 97,000 and 68,000 shares remain unvested.
Through June 30, 2000, Corechange has repurchased and retired 423,145 shares of
restricted stock.
(D) WARRANT
In January 1998, Corechange issued a warrant to one of its advisors for the
purchase of 120,191 shares of common stock at an exercise price of $4.99 per
share. The warrant is immediately exercisable
F-19
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
9. STOCKHOLDERS' EQUITY (CONTINUED)
and expires on January 21, 2001. At the time of issuance, Corechange determined
that the value of the warrant was not material.
(E) STOCK PLANS
The 1997 Stock Incentive Plan (the 1997 Plan) provides for the issuance of
options, restricted stock or other stock-based awards to the employees,
officers, directors, consultants, and advisors of Corechange. Corechange is
authorized to issue up to 1,113,451 and 3,500,000 shares of common stock under
the 1997 Plan at December 31, 1999 and June 30, 2000, respectively. At
December 31, 1999 and June 30, 2000, there were 182,674 and 1,919,360 shares,
respectively, available for grant under the 1997 Plan. Incentive stock options
may be granted at an exercise price determined by the Board of Directors at the
date of grant and for a term not to exceed 10 years. The Board may grant awards
entitling recipients to acquire shares of common stock, subject to the right of
Corechange to repurchase all or part of such shares at their issue price or
another stated price from the recipient in the event that conditions specified
by the Board in the applicable award are not satisfied prior to the end of the
applicable restriction period (Restricted Stock). The Board may at any time
provide that any options become immediately exercisable in full or in part, that
any Restricted Stock awards be free of all restrictions, or that any other
stock-based awards may become exercisable in full or in part, or free of some or
all restrictions or conditions.
2000 DIRECTOR STOCK OPTION PLAN
In May 2000, the 2000 Director Stock Option Plan (the Director Plan) was
adopted by the Board of Directors, subject to stockholder approval. Under the
terms of the Director Plan, directors who are not employees are eligible to
receive nonqualified options to purchase shares of common stock. A total of
250,000 shares of common stock may be issued upon exercise of options granted
under the Director Plan.
Under the terms of the Director Plan, each non-employee director as of the
effective date of the proposed initial public offering will receive an option to
purchase 5,000 shares of common stock on the effective date of the proposed
offering. In addition, each such non-employee director will annually receive an
option to purchase 3,000 shares of common stock. Individuals who become
directors after the proposed offering and are not employees will receive an
option to purchase 5,000 shares of common stock on the date of his or her
initial election to the board of directors. Additionally, the chairman of the
audit and compensation committees will each receive an option to purchase 1,000
shares of common stock upon either the date of the proposed offering or the date
of his or her election as chairman and an annual option to purchase 500 shares
of common stock. The exercise price per share of all such options will be the
closing price per share of Corechange's common stock on the date of grant except
for the options issued on the effective date of the proposed offering. Such
options will be exercisable at the public offering price. All options granted
under the Director Plan will be fully vested upon grant. Corechange will account
for the Director Plan in accordance with APB No. 25 and, accordingly, no
compensation cost will be recognized under the Director Plan. Corechange will
elect the disclosure only alternative under SFAS 123.
F-20
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
9. STOCKHOLDERS' EQUITY (CONTINUED)
2000 EMPLOYEE STOCK PURCHASE PLAN
In May 2000, the 2000 Employee Stock Purchase Plan (ESPP) was approved by
the Board of Directors, subject to stockholder approval and provides for the
issuance of up to 250,000 shares of common stock to participating employees. The
ESPP will be effective, but will not commence, upon the successful closing of
Corechange's proposed initial public offering. The ESPP is intended to provide a
means whereby eligible employees may purchase on a semi-annual basis, common
stock of Corechange through payroll deductions. Each offering period includes
four six-month purchase periods. The purchase price of shares of common stock
under the ESPP during each offering period is the lower of 85% of the fair
market value of the common stock (1) at the beginning of the offering period, or
(2) at the end of the applicable purchase period. Corechange will account for
the ESPP in accordance with APB No. 25 and, accordingly, no compensation cost
will be recognized under the ESPP. Corechange will elect the disclosure only
alternative under SFAS 123.
The following table presents the stock option activity for the years ended
December 31, 1998 and 1999 and the six months ended June 30, 2000. There were no
stock options granted, exercised, canceled, or terminated during 1997.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding at December 31, 1997........................ -- $ --
Granted............................................. 441,304 0.237
---------- -------
Outstanding at December 31, 1998........................ 441,304 0.237
Granted............................................. 791,725 0.45
Exercised........................................... (396) 0.45
Canceled............................................ (379,558) 0.45
---------- -------
Outstanding at December 31, 1999........................ 853,075 0.45
Granted............................................. 735,093 6.11
Exercised........................................... (56,698) 0.45
Canceled............................................ (42,929) 0.63
---------- -------
Outstanding at June 30, 2000............................ 1,488,541 $ 3.26
========== =======
Exercisable at June 30, 2000............................ 433,591 $ 1.42
========== =======
Exercisable at December 31, 1999........................ 275,711 $ 0.45
========== =======
Exercisable at December 31, 1998........................ -- $ --
========== =======
</TABLE>
F-21
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
9. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information relating to currently outstanding
and exercisable options as of June 30, 2000:
<TABLE>
<CAPTION>
OUTSTANDING
----------------------------
WEIGHTED AVERAGE
REMAINING EXERCISABLE
NUMBER OF CONTRACTUAL LIFE NUMBER OF
EXERCISE PRICES SHARES IN YEARS SHARES
<S> <C> <C> <C>
0.09...$....... 8,000 7.64 4,781
0.45.......... 770,448 8.87 333,072
5.84.......... 558,468 9.76 79,416
8.00 151,625 9.90 16,322
--------- -------
1,488,541 9.31 433,591
========= =======
</TABLE>
In connection with certain stock option and restricted stock grants during
the year ended December 31, 1999 and the six months ended June 30, 2000,
Corechange recorded deferred compensation of $755,566 and $1,941,115,
respectively. The deferred compensation represents the aggregate difference
between the option exercise price and the deemed fair value of the common stock
for accounting purposes. All stock options granted and stock sold prior to 1999
were at fair market value, and, therefore, did not result in deferred
compensation. The deferred compensation will be recognized as an expense over
the vesting period, generally 2 to 4 years, of the underlying stock options
using the accelerated method prescribed under FASB Interpretation 28, ACCOUNTING
FOR STOCK APPRECIATION RIGHTS AND OTHER VARIABLE STOCK OPTION OR AWARD PLANS--AN
INTERPRETATION OF APB OPINION NOS. 15 AND 25. Corechange recorded compensation
expense of $208,399 and $504,087 in the year ended December 31, 1999 and the six
months ended June 30, 2000, respectively, related to these options. Corechange
expects to record the following compensation expense related to these grants in
the years ending December 31 (in thousands):
<TABLE>
<S> <C>
2000........................................................ $1,236
2001........................................................ 870
2002........................................................ 335
2003........................................................ 47
------
$2,488
======
</TABLE>
During 1998, 1999 and 2000, Corechange issued stock options to certain
consultants and advisors to the company. The vesting periods of the stock
options range from immediately to 4 years and expire at various times through
May 2010. In accordance with Emerging Issues Task Force (EITF) 96-18, ACCOUNTING
FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR
IN CONJUNCTION WITH SELLING, GOODS OR SERVICES, the fair value of the stock
options, using the Black-Scholes option pricing model, is charged to operations
over the performance period, typically the vesting period. The following
assumptions were used for 1999 and 2000: (1) expected life of the options of ten
years; (2) no dividend yield; (3) expected volatility of 70%; and (4) risk-free
interest rate of 5.75%. During the year ended December 31, 1998, the effect of
such options was not material to the results of
F-22
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
9. STOCKHOLDERS' EQUITY (CONTINUED)
operations. During the year ended December 31, 1999 and the six months ended
June 30, 2000, the Company charged to expense approximately $17,000 and
$552,000, in connection with the options.
Corechange issued stock options to consultants and advisors as follows (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
TERM OR PERIOD
IN WHICH
NATURE OF SERVICES WERE NUMBER OF CUMULATIVE
SERVICES PROVIDED SHARES EXERCISE PRICE CHARGE
------------------------------------------- ---------------- --------- -------------- ----------
<S> <C> <C> <C> <C>
General advisory........................... 2-4 year vesting 18,000 $0.09-$5.84 $ 50
Immediate-
Marketing.................................. 4 year vesting 35,496 $0.09-$8.00 144
Financial advisory......................... Immediate 40,000 $0.45-$5.84 336
Technical advisory......................... 2 year 25,000 $ 0.45 39
Preferred stock financing.................. Immediate 6,168 $ 5.84 55
------- ----
124,664 $624
======= ====
</TABLE>
For purposes of the pro forma disclosures required by SFAS No. 123, the fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model. The assumptions used and the weighted
average information for the years ended December 31, 1998 and 1999 and the six
months ended June 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- ---------------------
1998 1999 1999 2000
<S> <C> <C> <C> <C>
Risk-free interest rates.......................... 5.5% 4.6%-6.0% 4.6% 6.5%
Expected lives.................................... 10 years 3-4 years 3-4 years 3 years
Expected dividend yield........................... -- -- -- --
Expected volatility............................... 70% 70% 70% 80%
Weighted average fair value of options granted
whose exercise price equals market price on the
date of grant................................... $0.237 $ 0.592 $ 0.592 N/A
Weighted average fair value of options granted
whose exercise price is less than market value
of the date of grant............................ N/A $ 0.817 $ 0.603 $ 5.029
</TABLE>
F-23
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
9. STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation cost for Corechange's 1997 Plan been determined consistent
with SFAS No. 123, Corechange's net loss would have been as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- -------------------
1998 1999 1999 2000
<S> <C> <C> <C> <C>
Net loss attributable to common
stockholders--
As reported......................... $(7,490) $(4,843) $(1,628) $(10,494)
======= ======= ======= ========
Pro forma........................... $(7,496) $(4,926) $(1,670) $(10,838)
======= ======= ======= ========
Basic and diluted net loss per share--
As reported......................... $ (2.04) $ (1.29) $ (0.43) $ (2.51)
======= ======= ======= ========
Pro forma........................... $ (2.05) $ (1.31) $ (0.44) $ (2.59)
======= ======= ======= ========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
Corechange leases office space and other equipment under various agreements
classified as operating leases. During the years ended December 31, 1997, 1998,
and 1999 and the six months ended June 30, 1999 and 2000, rent expense totalled
approximately $336,000, $572,000, $479,000, $263,000, and $258,000,
respectively.
Future minimum payments due under non-cancelable leases with terms of one
year or more are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31,
2000........................................................ $ 582
2001........................................................ 609
2002........................................................ 615
2003........................................................ 613
2004........................................................ 613
Thereafter.................................................. 423
------
Total................................................... $3,455
======
</TABLE>
(B) LICENSE AND DISTRIBUTION AGREEMENT
In 1999, Corechange entered into a three-year OEM license and distribution
agreement with a third party. During the term of the agreement, Corechange is
required to make royalty payments of 7.5% to 50% to the third party based on
product and level of actual sales in addition to a $10,000 annual maintenance
fee. As of December 31, 1999 and June 30, 2000, Corechange has prepaid $100,000
in royalties and no amounts have been charged to expense.
F-24
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
11. DEFINED CONTRIBUTION PLAN
Corechange has implemented a defined contribution plan, under the provisions
of Section 401(k) of the Internal Revenue Code, covering substantially all of
its employees. Participants may contribute up to 20% of their gross pay subject
to certain limitations. Corechange may make discretionary matching
contributions. Corechange contributions vest ratably over a four-year period.
Matching contributions were approximately $21,000, $36,000, $14,000, $8,000,
and $15,000 for the years ended December 31, 1997, 1998, and 1999 and the six
months ended June 30, 1999 and 2000, respectively.
12. BALANCE SHEET DATA
(A) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------- JUNE 30,
1998 1999 2000
<S> <C> <C> <C>
Accounts payable.................................... $ 470 $ 356 $ 922
Payroll and benefits................................ 337 345 805
Other............................................... 293 426 339
------ ------ ------
$1,100 $1,127 $2,066
====== ====== ======
</TABLE>
(B) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of Corechange's allowance for doubtful
accounts (in thousands):
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
PERIOD ADDITIONS DEDUCTIONS PERIOD
<S> <C> <C> <C> <C>
Year ended December 31, 1997....................... $40 $45 $ -- $85
Year ended December 31, 1998....................... 85 -- (45) 40
Year ended December 31, 1999....................... 40 -- -- 40
Six months ended June 30, 2000..................... 40 68 -- 108
</TABLE>
13. SEGMENT AND GEOGRAPHIC INFORMATION
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, established standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to stockholders. It also
established standards for disclosures about products and services and geographic
areas. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. Corechange's chief operating
decision maker is the Chief Executive Officer.
Corechange is organized geographically and by line of business. Corechange
has two major lines of business operating segments: software licenses, and
services. The software license line of business is
F-25
<PAGE>
CORECHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
13. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
engaged in the development and licensing of software. The services line of
business offers implementation, training, and other consulting services.
Revenues for these segments are reported on the accompanying consolidated
statements of operations. Corechange does not allocate any expenses or any other
source of income to its business line segments. Similarly, property and
equipment are not allocated to the segments for management or segment reporting
purposes.
GEOGRAPHIC INFORMATION
Domestic and export sales as a percentage of total revenues are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
United States................................. 49% 22% 35% 35% 65%
United Kingdom................................ -- 29 39 36 13
Norway........................................ 15 14 15 18 8
Sweden........................................ 36 35 11 11 14
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
Revenues and identifiable assets for Corechange's North American and
European operations are as follows (in thousands). Corechange has intercompany
distribution arrangements with its subsidiaries. The basis for these
arrangements, disclosed below as transfers between geographic locations, is cost
plus a specified percentage for services and a commission rate for sales
generated in the geographic region.
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM NORWAY SWEDEN OTHER ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997--
Revenues.......................... $ 1,416 $ -- $445 $1,057 $ -- $ -- $ 2,918
Identifiable assets............... 3,050 58 299 429 161 (574) 3,423
Year ended December 31, 1998--
Revenues.......................... 1,345 1,645 948 2,084 698 (1,059) 5,661
Identifiable assets............... 5,356 383 309 384 117 (1,683) 4,866
Year ended December 31, 1999--
Revenues.......................... 2,295 2,105 902 807 981 (1,824) 5,266
Identifiable assets............... 5,078 335 165 993 74 (3,001) 3,644
Six months ended June 30, 1999--
Revenues.......................... 1,456 1,095 635 419 458 (1,057) 3,006
Identifiable assets............... 4,072 639 308 987 36 (2,940) 3,102
Six months ended June 30, 2000--
Revenues.......................... 2,351 533 327 599 888 (1,296) 3,402
Identifiable assets............... 15,508 444 248 958 184 (4,150) 13,192
</TABLE>
F-26
<PAGE>
[CORECHANGE LOGO]
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
, 2000
corechange
4,500,000 SHARES OF COMMON STOCK
----------------------
PROSPECTUS
--------------------------
DONALDSON, LUFKIN & JENRETTE
SG COWEN
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
DLJDIRECT INC.
------------------------------------------------------------
We have not authorized any dealer, sales person or other person to give you
written information other than this prospectus or to make representations about
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made under this prospectus after the date of this prospectus shall create
an implication that the information contained in this prospectus or the affairs
of Corechange have not changed since the date of this prospectus.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Until , 2000, all dealers that effect transactions in these shares of
common stock may be required to deliver a prospectus. This is in addition to the
dealer's obligation to deliver a prospectus when acting as an underwriter and
with respect to its unsold allotments or subscriptions.
--------------------------------------------------------------------------------
<PAGE>
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 discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimated except
the SEC registration fee, the NASD filing fee and the Nasdaq National Marketing
listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC registration fee........................................ 13,200
NASD filing fee............................................. 5,500
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving costs................................ 200,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 350,000
Blue sky fees and expenses (including legal fees)........... 25,000
Transfer agent fees......................................... 25,000
Miscellaneous............................................... 86,300
----------
Total....................................................... $1,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation (the "Certificate") provides
that, except to the extent prohibited by the Delaware General Corporation Law
(the "DGCL"), the Registrant's directors shall not be personally liable to the
Registrant or its stockholders for monetary damages for any breach of fiduciary
duty as directors of the Registrant. Under the DGCL, the directors have a
fiduciary duty to the Registrant which is not eliminated by this provision of
the Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the DGCL
(i) for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. This provision also does not affect the
directors' responsibilities under any other laws, such as the Federal securities
laws or state or Federal environmental laws.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers. The DGCL provides further
that the indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate provides that the Registrant shall fully indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding (whether civil, criminal, administrative
or investigative) by reason of the fact that such person is or was a director or
officer of the Registrant, or is or was serving at the request of the Registrant
as a director or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. The Registrant has obtained liability insurance for its officers and
directors.
II-1
<PAGE>
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate of Incorporation. The Registrant is
not aware of any threatened litigation or proceeding that may result in a claim
for such indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is a description of the Registrant's
sales of unregistered securities since May 25, 1997. The sales made to investors
were made in accordance with Section 4(2), Regulation S or Regulation D of the
Securities Act. Sales to all our employees, directors and officers were deemed
to be exempt from registration under the Securities Act in reliance on Rule 701
promulgated under Section 3(b) of the Securities Act as transactions under
compensatory benefit plans and contracts relating to compensation provided under
Rule 701.
In June 1997, we issued 413,965 shares of our Series I Junior Convertible
Preferred Stock to individual foreign investors and accredited investors in the
United States at a price per share of $6.38 for an aggregate purchase price of
$2,641,097. We also issued 336,021 shares of our Series II Junior Convertible
Preferred Stock to individual foreign investors and accredited investors in the
United States at a price per share of $7.44 for a total purchase price of
$249,996. Both issuances were made in reliance on Regulation S and
Regulation D.
In October 1997, we issued 200,032 shares of our Series III Junior
Convertible Preferred Stock to individual foreign investors and accredited
investors in the United States at a price per share of $7.49 for a total
purchase price of $1,498,240 in reliance on Regulation S and Regulation D.
In January 1998, we issued 2,403,832 shares of our Series A Convertible
Preferred Stock to individual foreign investors and accredited investors in the
United States at a price per share of $4.1600244 for a total purchase price of
$10.0 million in reliance on Regulation S and Regulation D. These shares were
all sold to HarbourVest Partners V-Direct Fund L.P. HarbourVest had an option to
purchase an additional 480,766 shares at $4.1600244, which it exercised in June
1998 for the purchase price of $2,000,000.
In November 1999, December 1999 and January 2000, we issued 8% convertible
notes to individual foreign investors and accredited investors in the United
States in the aggregate original principal amount of $3,383,000 in reliance on
Regulation S and Regulation D. These notes were converted into Series B
Convertible Preferred Stock in February 2000.
In February 2000, we issued 3,046,773 shares of our Series B Convertible
Preferred Stock to individual foreign investors and accredited investors in the
United States at a price per share of $5.837 for a total purchase price of
$17,784,014 in reliance on Regulation S and Regulation D.
As of June 30, 2000, we had issued to directors, officers, employees,
consultants and contractors, upon the exercise of stock options or otherwise,
3,942,912 shares of common stock at a price of $.01 per share, 178,772 shares of
common stock at a price of $.02 per share, 149,886 shares of common stock at a
price of $.09 per share and 125,407 shares at a price of $.45 per share. In
addition, options to purchase 1,306,148 shares of common stock were outstanding
under our 1997 Stock Incentive Plan with exercise prices ranging from $.01 to
$8.00.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement
3.1** -- Certificate of Incorporation, as amended to date
3.2*** -- Form of Certificate of Amendment to Certificate of
Incorporation, to be filed prior to the effectiveness of
this registration statement
3.3** -- Form of Amended and Restated Certificate of Incorporation,
to be filed upon the closing of this offering
3.4** -- Amended and Restated Bylaws of the registrant, as amended to
date
4.1 -- Specimen Certificate representing the Common Stock
5.1* -- Opinion of Hale and Dorr LLP
10.1** -- 1997 Stock Incentive Plan, as amended
10.2** -- 2000 Director Option Plan
10.3** -- 2000 Employee Stock Purchase Plan
10.4*** -- Series B Convertible Preferred Stock Purchase Agreement
dated February 18, 2000, by and among the registrant and the
persons listed on the schedule of purchasers thereto, as
amended
10.5** -- Registration Agreement dated February 18, 2000, by and among
the registrant, each of the Persons listed on the Schedule
of Investors attached hereto, HarbourVest
Partners V--Direct Fund L.P., and each of the other holders
of registrable securities who may from time to time become a
party thereto by executing a counterpart to the agreement
10.6** -- Members' Agreement dated as of February 7, 1997, by and
among the registrant, Ulf Arnetz, Mona Arnetz and Cambridge
Technology Partners (Massachusetts) Inc.
10.7** -- Employment Agreement dated May 24, 2000, between the
registrant and Charles F. Kane
10.8** -- Employment Agreement dated July 29, 1999, between the
registrant and Joachim Zetterlund
10.9** -- Employment Agreement dated March 1, 2000, between the
registrant and Felimy Greene
10.10*** -- Office Lease dated December 27, 1996, by and between the
registrant and 260 Franklin Street Associates Trust, as
amended
+10.11** -- Coreport License and Services Agreement dated May 9, 2000,
between the registrant and ABN AMRO Information Technology
Services Co.
+10.12** -- Coreport License Agreement dated May 11, 2000, between the
registrant and ABN AMRO Information Technology Services Co.
+10.13** -- Professional Services Agreement dated May 11, 2000 between
the registrant and ABN AMRO Information Technology Services
Co.
+10.14** -- Letter Agreement dated March 28, 2000, between the
registrant and Credit Suisse First Boston (Europe) Limited
+10.15** -- Letter Agreement dated March 30, 2000, between the
registrant and Credit Suisse First Boston (Europe) Limited
+10.16** -- OEM License and Distribution Agreement dated as of
August 31, 1999 by and between the registrant and Autonomy,
Inc.
16.1** -- Letter dated May 30, 2000 from Ernst & Young LLP
21.1** -- Subsidiaries of the registrant
23.1 -- Consent of Arthur Andersen LLP, Independent Public
Accountants
23.2 -- Consent of Ernst & Young LLP, Independent Auditors
23.3* -- Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1** -- Powers of Attorney
27.1** -- Financial Data Schedule
</TABLE>
--------------------------
* To be filed by amendment.
** Previously filed.
*** Supersedes previously filed exhibit.
+ Confidential treatment has been requested for portions of these exhibits.
Omitted material has been filed separately with the Commission.
(b) Financial Statement Schedules.
None.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification to liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation of the Registrant, the Underwriting Agreement, 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
Securities 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 hereunder, the Registrant will,
unless in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purpose 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 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Boston,
Commonwealth of Massachusetts, on this 18th day of August 2000.
<TABLE>
<S> <C> <C>
CORECHANGE, INC.
By: /s/ CHARLES KANE
-----------------------------------------
Charles Kane
CHIEF OPERATING OFFICER AND CHIEF
FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ULF ARNETZ* President, Chief Executive
------------------------------------------- Officer and Director
Ulf Arnetz (Principal Executive August 18, 2000
Officer)
/s/ CHARLES KANE Chief Operating Officer and
------------------------------------------- Chief Financial Officer
Charles Kane (Principal Financial August 18, 2000
Officer)
/s/ ANGIRAS KOORAPATY* Vice President, Finance and
------------------------------------------- Administration (Principal August 18, 2000
Angiras Koorapaty Accounting Officer)
/s/ MARTIN HART* Chairman of the Board of
------------------------------------------- Directors August 18, 2000
Martin Hart
/s/ FRANK FANZILLI, JR.* Director
------------------------------------------- August 18, 2000
Frank Fanzilli, Jr.
/s/ DANIEL FOREMAN* Director
------------------------------------------- August 18, 2000
Daniel Foreman
/s/ RICHARD LINDH* Director
------------------------------------------- August 18, 2000
Richard Lindh
/s/ OFER NEMIROVSKY* Director
------------------------------------------- August 18, 2000
Ofer Nemirovsky
/s/ ROBERT PIRIE* Director
------------------------------------------- August 18, 2000
Robert Pirie
/s/ GUSTAV VIK* Director
------------------------------------------- August 18, 2000
Gustav Vik
</TABLE>
<TABLE>
<S> <C>
*By: /s/ CHARLES KANE
--------------------------------------
Charles Kane
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement
3.1** -- Certificate of Incorporation, as amended to date
3.2*** -- Form of Certificate of Amendment to Certificate of
Incorporation, to be filed prior to the effectiveness of
this registration statement
3.3** -- Form of Amended and Restated Certificate of Incorporation,
to be filed upon the closing of this offering
3.4** -- Amended and Restated Bylaws of the registrant, as amended to
date
4.1 -- Specimen Certificate representing the Common Stock
5.1* -- Opinion of Hale and Dorr LLP
10.1** -- 1997 Stock Incentive Plan, as amended
10.2** -- 2000 Director Option Plan
10.3** -- 2000 Employee Stock Purchase Plan
10.4*** -- Series B Convertible Preferred Stock Purchase Agreement
dated February 18, 2000, by and among the registrant and the
persons listed on the schedule of purchasers thereto, as
amended
10.5** -- Registration Agreement dated February 18, 2000, by and among
the registrant, each of the Persons listed on the Schedule
of Investors attached hereto, HarbourVest
Partners V--Direct Fund L.P., and each of the other holders
of registrable securities who may from time to time become a
party thereto by executing a counterpart to the agreement
10.6** -- Members' Agreement dated as of February 7, 1997, by and
among the registrant, Ulf Arnetz, Mona Arnetz and Cambridge
Technology Partners (Massachusetts) Inc.
10.7** -- Employment Agreement dated May 24, 2000, between the
registrant and Charles F. Kane
10.8** -- Employment Agreement dated July 29, 1999, between the
registrant and Joachim Zetterlund
10.9** -- Employment Agreement dated March 1, 2000, between the
registrant and Felimy Greene
10.10*** -- Office Lease dated December 27, 1996, by and between the
registrant and 260 Franklin Street Associates Trust, as
amended
+10.11** -- Coreport License and Services Agreement dated May 9, 2000,
between the registrant and ABN AMRO Information Technology
Services Co.
+10.12** -- Coreport License Agreement dated May 11, 2000, between the
registrant and ABN AMRO Information Technology Services Co.
+10.13** -- Professional Services Agreement dated May 11, 2000 between
the registrant and ABN AMRO Information Technology Services
Co.
+10.14** -- Letter Agreement dated March 28, 2000, between the
registrant and Credit Suisse First Boston (Europe) Limited
+10.15** -- Letter Agreement dated March 30, 2000, between the
registrant and Credit Suisse First Boston (Europe) Limited
+10.16** -- OEM License and Distribution Agreement dated as of
August 31, 1999 by and between the registrant and Autonomy,
Inc.
16.1** -- Letter dated May 30, 2000 from Ernst & Young LLP
21.1** -- Subsidiaries of the registrant
23.1 -- Consent of Arthur Andersen LLP, Independent Public
Accountants
23.2 -- Consent of Ernst & Young LLP, Independent Auditors
23.3* -- Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1** -- Powers of Attorney
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
27.1** -- Financial Data Schedule
</TABLE>
------------------------
* To be filed by amendment.
** Previously filed.
*** Supersedes previously filed exhibit.
+ Confidential treatment has been requested for portions of these exhibits.
Omitted material has been filed separately with the Commission.
(b) Financial Statement Schedules.
None.