<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 1999
REGISTRATION NO. 333-79879
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERWORLD CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7372 13-3818716
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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395 HUDSON STREET, 6TH FLOOR
NEW YORK, NEW YORK 10014
(212) 301-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
MICHAEL J. DONAHUE
CHAIRMAN
INTERWORLD CORPORATION
395 HUDSON STREET, 6TH FLOOR
NEW YORK, NEW YORK 10014
(212) 301-2500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
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<S> <C>
JAMES M. LURIE, ESQ. ALAN SINGER, ESQ.
ROBERT SEBER, ESQ. MORGAN, LEWIS & BOCKIUS LLP
O'SULLIVAN GRAEV & KARABELL, LLP 1701 MARKET STREET
30 ROCKEFELLER PLAZA PHILADELPHIA, PENNSYLVANIA 19103
NEW YORK, NEW YORK 10112 (215) 963-5000
(212) 408-2400
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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, 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 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,
check the following box. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED
AMOUNT MAXIMUM PROPOSED
TITLE OF EACH CLASS OF TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 per share............... 3,450,000 $16.00 $55,200,000 $15,345.60(2)(3)
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</TABLE>
(1) Includes 450,000 shares which the underwriter has the option to purchase to
cover over-allotments, if any. See "Underwriting".
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Previously paid.
-------------------------
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 SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 9, 1999
3,000,000 SHARES
INTERWORLD LOGO
INTERWORLD CORPORATION
COMMON STOCK
We are selling 3,000,000 shares of common stock. Prior to this offering,
there has been no public market for the common stock. The initial public
offering price of the common stock is expected to be between $14.00 and $16.00
per share.
The underwriter has an option to purchase a maximum of 450,000 additional
shares from us to cover over-allotments of shares.
The common stock has been approved for listing on the Nasdaq Stock Market's
National Market under the symbol "INTW."
INVESTING IN THE COMMON STOCK INVOLVES A NUMBER OF SIGNIFICANT RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 6.
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS INTERWORLD
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share......................... $ $ $
Total............................. $ $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVEMED ASSOCIATES
Prospectus dated , 1999
<PAGE> 3
Description of graphic material on inside front and back cover pages of the
prospectus:
Inside front cover (first page of a three page fold-out):
The page depicts in three columns the logos of InterWorld customers and
partners: Cisco Systems, Insight, USWeb/CKS, EDS, Nike, Net
Perceptions, NTT, Guess?, Hewlett Packard, Trans Cosmos USA, Every CD,
The North Face, Active Software, Warnaco, Inc., American Eagle
Outfitters, Havas Interactive, OKI, Cambridge Technology Partners,
boo.com, Fort Point Partners, Agency.com, Sun Microsystems, KPMG,
ProTeam.com, CyberSource, Whittman-Hart, Ltd., MicroWarehouse and
Authentic Fitness.
The text in the upper left hand corner is:
A sampling of the clients and partners who are members of the
InterWorld Enterprise Commerce community.
The caption on the top of the page is:
Clients and Partners
The page also includes InterWorld's logo
Inside two pages of fold-out:
The page depicts a diagram showing a customer of our client interfacing
with our client through the Enterprise Commerce solution surrounded by
figures depicting our customer's entire buying cycle from Sales to
Order Management to Fulfillment to Customer Service, and arrows
pointing to figures depicting our customer's core enterprise systems:
Manufacturing Systems, Distribution/Fulfillment Systems, Financial
Systems and Customer Systems.
The caption at the top of the page is:
Commerce Exchange: Designed to increase revenues, reduce operating
expenses and enhance customer loyalty.
The caption at the bottom of the page is:
We Provide Enterprise Commerce Software Solutions that Enable
Manufacturers, Distributors and Retailers to Conduct Business on the
Internet.
The text down the left hand margin of the page is:
The InterWorld Advantage
Comprehensive Functionality - Our solution provides a comprehensive set
of applications for efficiently managing selling processes online,
including sales, order management, fulfillment and customer service.
<PAGE> 4
State-of-the-Art Technology Foundation - Our technology supports the
deployment of mission-critical online business applications and can
accommodate a client's increasing business volumes.
Process - Centric(TM) Computing Approach - Our Process-Centric(TM)
approach enables a client to create online processes based on existing
and evolving business practices.
Interoperability - Our products are designed to work with an
organization's existing business operational systems and third-party
technologies.
The text down the right hand margin of the page is:
Commerce Exchange:
Mission-Critical Enterprise Commerce
Effective Enterprise Commerce enables companies to build their online
business and integrate them with their existing business practices.
Integration of Business Processes:
We enable a client's online processes to take into account
characteristics of the client's selling environment and its customer's
preferences.
Integration of Enterprise Systems:
Our Business Adapters are designed to facilitate the seamless
integration of external business functions, allowing them to be managed
within the Commerce Exchange process framework.
The page above includes InterWorld's logo.
Inside back cover:
This page depicts a diagram showing our client interfacing with the
Commerce Exchange solution surrounded by figures depicting the programs
and services we or our partners provide to our clients throughout
implementation and ongoing support. Next to each figure is a box
indicating the program and service provided. The text in the boxes next
to the figures is:
Advice on client online strategy and practices
bullet InterWorld one-on-one Workshops
Enterprise Commerce project planning
bullet InterWorld Professional Services
bullet System Integration Partners
Commerce site design
bullet InterWorld Professional Services
bullet Web Design Partners
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<PAGE> 5
Site implementation and enterprise systems integration
bullet InterWorld Professional Services
bullet System Integration Partners
Review
bullet InterWorld Professional Services
bullet System Integration Partners
Technical, educational and training services
bullet InterWorld Client Education Programs
Participation in product direction
bullet InterWorld Client Input Sessions
Client care
bullet InterWorld Client Satisfaction Team
Client support
bullet 24x7 Technical Support
The caption on the top of the page is:
How We Serve Our Clients
3
<PAGE> 6
[INSIDE COVER ART]
<PAGE> 7
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................. 1
Risk Factors........................ 6
Forward-Looking Statements.......... 14
Use of Proceeds..................... 15
Dividend Policy..................... 15
Capitalization...................... 16
Dilution............................ 17
Selected Consolidated Financial
Data.............................. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 21
Business............................ 31
Management.......................... 41
Certain Transactions................ 50
Principal Stockholders.............. 54
Description of Capital Stock........ 56
Shares Eligible for Future Sale..... 58
Underwriting........................ 59
Legal Matters....................... 61
Experts............................. 62
Change in Independent Accountants... 62
Additional Information.............. 62
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. SUBJECT TO
OUR OBLIGATION TO AMEND OR SUPPLEMENT THIS PROSPECTUS AS REQUIRED BY LAW AND THE
RULES OF THE SECURITIES AND EXCHANGE COMMISSION, THE INFORMATION CONTAINED IN
THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF
THE TIME OF DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
------------------------
We were incorporated in Delaware in 1995. Our principal executive offices
are located at 395 Hudson Street, 6th Floor, New York, New York 10014, (212)
301-2500. Our website is located at www.interworld.com. INFORMATION IN OUR
WEBSITE IS NOT A PART OF THIS PROSPECTUS.
Unless otherwise stated, all information contained in this prospectus
assumes no exercise of the over-allotment option to purchase up to 450,000
shares of common stock granted by us to the underwriter of this offering. Also,
unless otherwise stated, all information contained in this prospectus
reflects the conversion of all outstanding shares of preferred stock into shares
of common stock at the time of the closing of this offering.
InterWorld is our registered service mark and trademark, and
Process-Centric is our trademark. Trademarks of other companies appearing in
this prospectus are the property of their respective holders.
------------------------
Delivery of the shares of common stock will be made on or about
, 1999.
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DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, 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 UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 8
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the discussion
regarding the risks of investing in our common stock discussed under "Risk
Factors," before investing in our common stock.
INTERWORLD
We provide Internet commerce software solutions that enable manufacturers,
distributors and retailers to conduct business over the Internet. Our products,
which we call "enterprise commerce" software, enable companies to build their
online businesses and integrate them with their existing business practices and
systems. Commerce Exchange is our family of enterprise commerce software,
consisting of our Commerce Exchange platform, applications, tools and business
adapters. Commerce Exchange enables our clients to address their principal
selling and support processes, including sales, order management, fulfillment
and customer service. Our solution is designed to enable businesses to:
- increase revenues by extending their sales efforts to include an
Internet-based distribution channel;
- reduce operating expenses by streamlining and automating their selling
and support processes;
- enhance customer loyalty by offering a personalized, online buying
experience; and
- create online processes based on existing and evolving business practices
and integrate information from existing systems with their online
systems.
Our solution can be expanded to meet the demand of large organizations with
complex selling processes, and can handle a large number of simultaneous users,
high transaction rates and large datastores.
Our Commerce Exchange family of products may be arranged in a variety of
ways to meet clients' specific requirements. Our software platform and
applications include:
- Process Application Server, which provides an open, flexible foundation
to operate a sophisticated Internet business;
- WebBroker, which enables an enterprise commerce system to support
increasing demand; and
- Commerce Exchange applications, including Product Merchandising, Order
Management and Account Management.
The Commerce Exchange tools include development tools to add functions to
the system, administration tools to manage the system and reporting tools to
measure the results of the system. The Commerce Exchange business adapters
enable integration of the Commerce Exchange solution with existing
computer-based operational and reporting systems within the organization or
across the Internet with third parties. We also provide a range of services to
enable clients to implement and use the Commerce Exchange family of products.
Our professional services include project management, implementation and
integration, education and training and client support services.
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<PAGE> 9
Our solution has the following advantages:
- Comprehensive Functionality -- Our solution provides a comprehensive set
of applications for efficiently managing selling and support processes
online.
- State-of-the-Art Technology Foundation -- Our technology is specifically
designed to support the deployment of mission-critical online business
applications without which an enterprise would not be able to operate an
online business. The Commerce Exchange software architecture is designed
to operate on different computing platforms and to provide a reliable,
secure and flexible environment.
- Process-Centric(TM) Computing Approach -- Our Process-Centric computing
approach allows the Commerce Exchange solution to adapt to dynamically
changing business and technology conditions. Process-Centric computing is
an adaptable approach that enables a client's online processes to take
into account characteristics of the client's selling environment and its
customers' preferences.
- Interoperability -- Our products are designed to work in conjunction with
new Internet technologies and with an organization's existing business
systems.
We market our products and services primarily through our global direct
sales organization, which includes nine offices in the U.S. and four
international offices. In addition, we have strategic marketing relationships
with Active Software, Inc., Cambridge Technology Partners, Inc., Cisco Systems,
Inc., Electronic Data Systems Corporation, Fort Point Partners, Inc., KPMG LLP,
Net Perceptions, Inc., Sun Microsystems, Inc., Trans Cosmos USA, Inc., USWeb
Corporation and Whittman-Hart, Ltd. We also have technology and distribution
partnerships with CyberSource Corporation, Federal Express Corporation,
Hewlett-Packard Company and Cisco Systems, Inc.
As of May 1, 1999, we had over 70 clients, including BP Australia Ltd.,
Electronic Data Systems Corporation, GTE Communication Systems Corporation,
Guess? Inc., Insight Enterprises, Inc., Mattel, Inc., Micro Warehouse, Inc.,
Multiple Zones International, Inc., Nike, Inc., Nippon Telegram and Telephone
Corp., PETsMART.com, Inc., Seagate Technology, Inc. and Warnaco Inc.
2
<PAGE> 10
THE OFFERING
Common Stock Offered by
InterWorld...................... 3,000,000 shares
Common Stock to be Outstanding
After this Offering........... 26,348,482 shares
Use of Proceeds................. We expect to use the net proceeds from the
sale of shares offered by us for working
capital and general corporate purposes.
Dividend Policy................. We currently intend to retain all future
earnings to fund the development and growth
of our business. Therefore, we do not
currently anticipate paying cash dividends.
Proposed Nasdaq National Market
Symbol........................ INTW
We are permitted, and in some cases obligated, to issue shares of common
stock in addition to the common stock to be outstanding after this offering. If
and when we issue these shares, the percentage of our common stock that you own
will decrease. The following is a summary of these additional shares of common
stock:
- 6,088,114 shares of common stock reserved for issuance under our stock
option plan, of which options to purchase 4,716,331 were outstanding as
of March 31, 1999 at a weighted average exercise price of $5.18 per
share;
- 1,000,000 shares of common stock reserved for issuance under our employee
stock purchase plan; and
- 534,070 shares of common stock reserved for issuance at March 31, 1999
under outstanding warrants at a weighted average exercise price of $6.98
per share.
The common stock to be outstanding after this offering reflects 23,348,482
shares outstanding on July 1, 1999 and includes 146,597 shares issued upon
exercise of stock options subsequent to March 31, 1999.
3
<PAGE> 11
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes our financial data. You should read the
following information in conjunction with the financial statements and related
notes appearing elsewhere in this prospectus. You should also see the
information in this prospectus under the captions "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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<CAPTION>
THREE MONTHS
INCEPTION ENDED
(MARCH 28, 1995) YEAR ENDED DECEMBER 31, MARCH 31,
TO DECEMBER 31, ----------------------------- -----------------
1995 1996 1997 1998 1998 1999
---------------- ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net:
Product licenses......... $ 25 $ 779 $ 4,883 $ 9,754 $ 1,546 $ 4,386
Services................. 331 1,241 3,073 4,834 866 2,615
Other.................... 3 408 100 2 -- --
------ ------- -------- -------- ------- -------
Total revenues, net.... 359 2,428 8,056 14,590 2,412 7,001
Gross profit............... 228 289 927 7,867 1,208 4,037
Loss from continuing
operations............... (264) (7,197) (21,675) (22,062) (4,644) (7,151)
Basic loss per share and
diluted loss per share
from continuing
operations............... $(0.02) $ (0.53) $ (1.61) $ (1.60) $ (0.34) $ (0.52)
====== ======= ======== ======== ======= =======
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The following table is a summary of our balance sheet at March 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect the automatic conversion of all
outstanding shares of our Series A and Series B mandatorily redeemable
preferred stock into an aggregate of 9,189,999 shares of common stock,
which will occur at the same time as the closing of this offering; and
- on a pro forma as adjusted basis to reflect the sale by us of 3,000,000
shares of common stock in this offering, assuming an initial public
offering price of $15.00 per share and after deducting underwriting
discounts and commissions and estimated expenses payable by us.
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<CAPTION>
MARCH 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 7,103 $ 7,103 $47,953
Working capital..................................... 5,307 5,307 46,217
Total assets........................................ 22,785 22,785 63,635
Mandatorily redeemable preferred stock.............. 62,948 -- --
Total stockholders' equity (deficit)................ (51,545) 11,403 52,253
</TABLE>
Please note the following in reviewing the above data:
- On March 30, 1998, we completed a spin-off distribution of a subsidiary,
UGO Networks, Inc., formerly ActionWorld, Inc., reducing our majority
ownership of UGO Networks to a minority interest of approximately 18%.
Since March 30, 1998,
4
<PAGE> 12
our minority interest in UGO Networks has decreased to approximately 8%
due to private equity financings by UGO Networks. UGO Networks is an
online entertainment information and game company that commenced
operations in 1997. The spin-off was made in order to permit UGO Networks
to build a separate management team that would concentrate on creating an
online entertainment information and game company and to position UGO
Networks to seek private equity financing. UGO Networks has been
presented as a discontinued operation in our consolidated statement of
operations for the year ended December 31, 1997. A provision of $627 for
estimated operating losses through the disposal date was recorded at
December 31, 1997. See Note 13 of Notes to Consolidated Financial
Statements.
- In January 1999, we issued 1,650,000 shares of Series B mandatorily
redeemable preferred stock for an aggregate of $16.5 million in cash.
Upon the closing of this offering, all outstanding shares of our Series A
and Series B mandatorily redeemable preferred stock will automatically
convert into an aggregate of 9,189,999 shares of common stock. For the
year ended December 31, 1998, the pro forma basic and diluted loss per
share reflecting the effects of the conversion would have been $(0.96).
See Note 16 of Notes to Consolidated Financial Statements.
5
<PAGE> 13
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following factors and other information in this
prospectus before deciding to invest in shares of our common stock. If any of
the following risks actually occur, our business, financial condition, results
of operations and prospects for growth would likely suffer. As a result, the
trading price of our common stock could decline, and you could lose all or part
of your investment.
WE HAVE A LIMITED OPERATING HISTORY, SIGNIFICANT HISTORICAL LOSSES AND WE MAY
NEVER BE PROFITABLE.
We expect to incur losses for the foreseeable future and we may never
achieve or sustain profitability. We were incorporated in 1995 and have only a
limited operating history. Since inception, we have incurred substantial costs
to develop and market our products, and have incurred net losses. As of March
31, 1999, we had an accumulated deficit of $60.3 million. We expect that our
operating expenses will increase substantially in the foreseeable future as we
continue to develop our products, increase our sales and marketing efforts and
expand our operations.
IF OUR PRODUCTS ARE NOT WIDELY ACCEPTED IN THE INTERNET COMMERCE MARKET, OUR
BUSINESS, SALES AND PROFITABILITY WILL SUFFER.
The market for our products is new and rapidly evolving. Consequently, the
demand for products in this market is uncertain. Our business, financial
condition, results of operations and prospects for growth will be materially
adversely affected if our products are not widely accepted in the Internet
commerce software market. The following factors highlight the uncertainty of
market acceptance of our products:
- the market is characterized by rapid technological changes and evolving
industry standards;
- there is intense competition in the Internet commerce software industry;
- products are relatively expensive and require a large capital commitment
by the client;
- the infrastructure necessary to support increased commerce on the
Internet may not develop;
- consumers and businesses may not adopt electronic commerce; and
- our clients may not be successful in using our products to conduct their
commercial operations online.
Our future growth and success depends on broader acceptance of the Internet
as a medium for commerce. The Internet may not become a viable commercial
marketplace because of consumer concerns regarding reliability, cost, ease of
use and quality of service. In addition, consumer concerns regarding the
security and privacy of Internet transactions could inhibit the acceptance of
the Internet as a commercial medium. We have incorporated into our Commerce
Exchange family of products encryption algorithms to protect sensitive data such
as customer passwords and credit card information. However, we can not assure
you that this technology will not be breached. If the security measures used in
Commerce Exchange are compromised, our business could suffer.
6
<PAGE> 14
THE IMPOSITION OF SALES AND OTHER TAXES IN RESPECT OF PRODUCTS SOLD BY OUR
CLIENTS OVER THE INTERNET COULD HAVE A NEGATIVE EFFECT ON ELECTRONIC COMMERCE
GENERALLY AND, AS A RESULT, ON DEMAND FOR OUR PRODUCTS.
Recent federal legislation limits the imposition of state and local taxes
on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom
Act, which places a three-year moratorium on state and local taxes on
(1) Internet access, unless such tax was already imposed prior to October
1, 1998, and
(2) discriminatory taxes on electronic commerce.
There is a possibility that Congress may not renew this legislation in 2001. If
Congress chooses not to renew this legislation, state and local governments
would be free to impose taxes on electronically purchased goods. The imposition
of new sales or other taxes could materially adversely affect the growth of
electronic commerce generally and, as a result, on the demand for our products.
We believe that, in accordance with current industry practice, most
companies that sell products over the Internet do not currently collect sales or
other taxes in respect of shipments of their products into states or foreign
countries in which they are not physically present. However, one or more states
or foreign countries may seek to impose sales or other tax collection obligation
on out-of-jurisdiction companies that engage in electronic commerce. A
successful assertion by one or more states or foreign countries that companies
engaged in electronic commerce should collect sales or other taxes on the sale
of their products over the Internet, even though not physically present in the
state or foreign country, could have an adverse effect on electronic commerce
generally, and, as a result, on demand for our products.
ALL OF OUR REVENUES ARE DERIVED FROM A SINGLE FAMILY OF PRODUCTS, AND OUR
BUSINESS, SALES AND PROFITABILITY AND PROSPECTS FOR GROWTH WILL SUFFER IF OUR
PRODUCT OFFERINGS ARE NOT COMMERCIALLY SUCCESSFUL.
The Commerce Exchange family of products and related services have
accounted for substantially all of our revenues to date, and we expect these
products and related services to continue to account for most of our revenues
for the foreseeable future. If our current limited product offerings are not
commercially successful, our business, financial condition, results of
operations and prospects for growth will be materially adversely affected. We
may not successfully develop or market any enhanced or new products. Moreover,
competition or technological change could adversely affect the pricing of or
demand for our products, which would have a material adverse effect on our
business, financial condition and results of operations. In addition, as of
March 31, 1999, a majority of our clients were in the implementation phase of
deploying our software. As a result, our products are currently being used by
only a limited number of clients to conduct electronic commerce. From time to
time, some of our clients experience difficulty implementing our software or the
software does not meet our clients' expectations, and they may chose not to, and
in at least one case have chosen not to, continue to use our software. As a
result of these problems, our reputation may be damaged, which could have a
material adverse effect on our business.
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WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR SALES AND
PROFITABILITY.
There is intense competition in the Internet commerce software industry,
and we expect competition to intensify in the future. Our business, financial
condition, results of operations and prospects for growth will be materially
adversely affected if we are not able to compete successfully. We compete
against the in-house development efforts of companies engaging in Internet
commerce, as well as other software application vendors and developers. Our
current competitors include Art Technology Group, BroadVision, Inc.,
CommerceOne, Inc., IBM, Intershop Communications, Inc., Microsoft Corporation,
Netscape Communications Corporation, Open Market Inc., Oracle Corporation and
Pandesic LLC. We expect that additional competitors will enter our market with
competing products as the size and visibility of the market opportunity
increases. Many of our present and potential competitors have greater financial,
technical, marketing and other resources than we have. This may place us at a
disadvantage in responding to the offerings of our competitors, technological
changes or changes in client requirements. Also, we may be at a competitive
disadvantage because many of our competitors have greater name recognition, more
extensive client bases and a broader range of product offerings.
IF OUR FINANCIAL RESULTS DO NOT MEET EXPECTATIONS AS A RESULT OF FLUCTUATIONS IN
OUR QUARTERLY OPERATING RESULTS, OUR STOCK PRICE IS LIKELY TO DECLINE.
Our quarterly operating results will generally depend on the volume and
timing of sales of our products, which are difficult to predict. It is likely
that in some future quarter or quarters our operating results will not meet the
expectations of analysts and investors. In that case, the price of our common
stock is likely to decline.
We expect to experience fluctuations in our quarterly operating results due
to many factors, including:
- the size and timing of significant client agreements, which typically
occur near the end of our fiscal quarter, but, if delayed, may not occur
until the next quarter;
- the length of the sales cycle for our products;
- fluctuations in demand for our products;
- the introduction of new products by us or our competitors;
- changes in prices by us or our competition; and
- the timing and amount of our expenditures.
We plan to increase our operating expenses to achieve revenue growth. If
our revenues do not increase as anticipated and our spending levels are not
reduced accordingly, a significant decline in our quarterly operating results
could occur. In addition, we believe, based on general software industry trends,
that sales of our products may be highest in the fourth quarter of the year and
lowest in the first quarter. As a result, period-to-period comparisons of our
results of operations may not be meaningful, and you should not rely on them as
an indication of future performance.
THE YEAR 2000 PROJECTS OF OUR TARGET CLIENTS MAY ADVERSELY AFFECT DEMAND FOR OUR
PRODUCTS IN 1999 AND 2000.
We believe that year 2000 issues may affect purchasing patterns of our
clients and potential clients. Many companies are expending significant
resources to upgrade their current software systems to year 2000 functionality.
These expenditures may reduce funds
8
<PAGE> 16
available to purchase software products and related services, including those
offered by us. In addition, year 2000 issues could cause a significant number of
companies, including our clients, to reevaluate their current software
application solutions needs, and in connection with the reevaluation, select
other solutions. If, as a result, companies determine not to purchase our
software products and related services, our business, results of operations,
financial condition and prospects for growth would be materially adversely
affected.
WE INCREASINGLY RELY ON SYSTEMS INTEGRATION COMPANIES TO SELL AND IMPLEMENT OUR
PRODUCTS, AND IF WE CANNOT ESTABLISH OR MAINTAIN RELATIONSHIPS WITH THESE
COMPANIES, OR IF THEY ARE NOT SUCCESSFUL IN THEIR EFFORTS, THE GROWTH OF OUR
BUSINESS WOULD SUFFER.
We increasingly depend on systems integration companies for sales and
implementation of our products. Our growth will depend, in part, on maintaining
and expanding our relationships with systems integration companies. We may not
be able to develop or maintain relationships with systems integration companies.
Moreover, if the systems integration companies with which we have a strategic
relationship are not successful in selling and implementing systems that include
our products, or if they adopt, or promote more vigorously, a competing product
or technology, the growth of our business would be materially adversely
affected.
IF WE DO NOT RESPOND TO TECHNOLOGICAL CHANGE, OUR ENTERPRISE COMMERCE SOFTWARE
PRODUCTS MAY BECOME OBSOLETE, AND OUR LONG-TERM VIABILITY WOULD SUFFER.
The Internet commerce software industry is characterized by rapid
technological change, which can render products obsolete. Our success depends,
in part, on our ability to respond to technological change in a timely and
cost-effective manner. If we are not able to successfully respond to
technological change, our Commerce Exchange family of products may become
obsolete. This would threaten our long-term viability.
OUR PRODUCTS MAY CONTAIN DEFECTS, WHICH COULD RESULT IN REDUCED SALES, INCREASED
SERVICE AND WARRANTY COSTS AND LIABILITY TO OUR CLIENTS.
Our software products may contain errors that become apparent when the
products are introduced or when the volume of usage increases. Errors in our
products, implementation errors or other performance difficulties could result
in decreased sales of our products, increased service and warranty costs and
liability to our clients, which could have a material adverse effect on our
business, financial condition, results of operations and prospects for growth.
Although we carry errors and omissions insurance, it may not cover all product
liability claims made against us. Our risk of liability to clients is
particularly pronounced because of our belief that our products will be critical
to our clients' operations.
BECAUSE A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM A LIMITED NUMBER
OF CLIENTS THAT WILL CHANGE FROM YEAR TO YEAR, OUR SALES WILL DECLINE IF WE
CANNOT ATTRACT SIGNIFICANT NEW CLIENTS.
We expect that our largest clients will change from year to year because
our revenues from any client are typically greatest when the client first
licenses our products. Moreover, because our products require a meaningful
capital commitment, a significant portion of our revenues in any period is
derived from a limited number of clients. Therefore, if we are not able to
generate revenues from significant new clients, our business, financial
condition, results of operations and prospects for growth would be materially
adversely affected. In 1996, software license and service revenues from
Scholastic Corporation accounted for
9
<PAGE> 17
approximately 31% of our total revenues and from Cliggot Communications Inc.
accounted for approximately 17% of total revenues. In 1997, software license and
service revenues from Toys "R" Us, Inc. accounted for approximately 11% of total
revenues and from Electronic Data Systems Corporation accounted for
approximately 10% of total revenues. In 1998, software license and service
revenues from Warnaco Inc. accounted for approximately 14% of total revenues. In
the quarter ended March 31, 1999, software license and service revenues from
Guess? Inc. accounted for approximately 27% of total revenues and from Boo.com
accounted for approximately 15% of total revenues.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS WILL SUFFER.
We have grown rapidly since we were incorporated in 1995. Many members of
our senior management have only recently joined us. Of the six employees listed
in the management section of this prospectus, four have worked for us for less
than two years. Our rapid growth has placed, and is expected to continue to
place, a significant strain on our management and operations. To manage our
growth, we must continue to enhance our operating and financial systems,
infrastructure and controls. In the past, we have experienced some inadequacies
in our operating and financial systems, infrastructure and controls. In prior
years, we were not able to improve internal controls and upgrade our personnel
as needed to accommodate our growth. This resulted in errors in application of
our accounting policies which affected some information contained in our
financial statements for unaudited interim periods in our last fiscal year.
These errors were corrected following the hiring of experienced personnel,
consultation with our independent accountants and enhancement of internal
controls. Our growth will also depend on our ability to expand, train and manage
our employee base. In addition, we must expand our sales and marketing
organization, penetrate different markets and expand our capacity to support a
larger client base. If we do not manage our growth successfully, our business,
financial condition, results of operations and prospects for growth would be
adversely affected.
OUR PROPRIETARY RIGHTS MAY NOT BE FULLY PROTECTED, AND WE MAY BE SUBJECT TO
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS BY OTHERS.
InterWorld(R) and Process-Centric(TM) are our registered trademarks and we
have applied for other trade and service marks. Our efforts to establish and
protect our proprietary rights, including federal copyright and trademark
registrations, may be inadequate to prevent imitation of our products by others.
The laws of foreign countries in which our products are sold may offer less
protection to proprietary rights than the laws of the United States. Moreover,
others may claim violation of their proprietary rights by us. BroadVision, Inc.
and Open Market Inc., two of our competitors, have been issued U.S. patents on
some aspects of their electronic commerce software products. In August 1998, we
received a letter from counsel to Open Market concerning the potential
applicability of the Open Market patents to our products. The letter stated that
Open Market was prepared to meet with us to resolve issues concerning the
applicability of their patents and to discuss terms of an appropriate license
agreement. In early September 1998, we responded to the Open Market inquiry,
informing Open Market that based on our review of the Open Market patents and
the analysis and advice of our patent counsel, we believe that the technology
used in our products is sufficiently independent and does not infringe on the
patents awarded to Open Market. We have not received any further inquiries or
correspondence from Open Market since that time and have had no inquiries or
discussions with BroadVision with regard to patent matters. Although we do not
believe that we are infringing their patent rights, either of those companies
may claim that we are doing so. If
10
<PAGE> 18
a claim of patent infringement by these or other companies was made against
us,we would likely incur significant expenses in defending against the claim,
which could adversely affect our financial condition and results of operations.
In addition, if a claim of infringement is made against us and we are not
successful in defending against the claim, we could be liable for substantial
damages. We may also be required to make royalty payments, which could be
substantial, to the holder of the patent rights. These events could have a
material adverse effect our business, financial condition, results of operations
and prospects for growth.
IF OUR PLANNED INTERNATIONAL EXPANSION IS NOT SUCCESSFUL, OUR LONG-TERM GROWTH
COULD BE JEOPARDIZED.
International expansion is a component of our strategy. We may not be
successful in expanding our activities in international markets. Even if we are
successful in penetrating international markets, we will confront additional
technological challenges in keeping our international product offerings current
and conforming them to commercial standards in various countries. In addition,
there are risks in doing business in international markets, including:
- changes in laws and regulations;
- export controls on encryption technology and other export restrictions;
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- political and economic instability; and
- fluctuations in currency exchange rates.
Our success in expanding our international operations will be dependent, in
part, on our ability to anticipate and effectively manage these and other risks.
Our failure or inability to anticipate or manage these risks could have a
material adverse effect on our business, financial condition, results of
operations and prospects for growth.
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL
THIRD-PARTY SYSTEMS ARE NOT YEAR 2000 COMPLIANT.
We have not yet devised a year 2000 contingency plan. Although we believe
that each of our critical systems is year 2000 compliant, we have not yet
determined whether all of the systems of our suppliers are year 2000 compliant.
In addition, we have not undertaken, and do not intend to undertake, any
investigation regarding the year 2000 readiness of our clients. Therefore, we do
not know whether our clients' existing business systems which they may attempt
to integrate with our products are year 2000 compliant. Accordingly, we are
unable to predict the extent to which the year 2000 issue will affect our
suppliers or clients, or the extent to which we would be vulnerable to their
failure to remediate any year 2000 issues on a timely basis. The failure of our
internal systems or any material third-party systems to be year 2000 compliant
would have a material adverse effect on our business, results of operations,
financial condition and prospects for growth. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000
Compliance."
11
<PAGE> 19
IF WE CANNOT OBTAIN ADDITIONAL FINANCING WHEN NEEDED, WE MAY BE UNABLE TO
RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED REQUIREMENTS.
We may need additional financing to support more rapid growth than
currently anticipated or to respond to competitive pressures or unanticipated
requirements. Additional financing, if needed, may not be available on
satisfactory terms or at all. If additional funds are not available on
acceptable terms, we may be unable to fund our growth, develop or enhance our
products and services, respond to competitive pressures or take advantage of
acquisition opportunities. Any additional equity financing may cause investors
to experience dilution in their ownership interest, and the newly issued
securities may have rights superior to those of the common stock. Any debt
financing may result in limitations on our operations, including restrictions on
our spending or payment of dividends. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
IF WE ARE UNABLE TO RETAIN OR REPLACE OUR KEY PERSONNEL, OUR BUSINESS, FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND PROSPECTS FOR GROWTH COULD SUFFER.
We believe that our ability to successfully implement our business strategy
and to operate profitably depends on the continued employment of our executive
management team. We do not carry key-person insurance on any member of our
executive management team. Since January 1998, four executive officers have
resigned from their positions with us. If one or more members of our management
team become unable or unwilling to continue in their present positions and if
additional key personnel cannot be hired as needed, our business, financial
condition, results of operations and prospects for growth could be materially
adversely affected.
BECAUSE OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A SIGNIFICANT PERCENTAGE OF OUR
COMMON STOCK, THEY WILL EXERCISE SIGNIFICANT CONTROL OVER US.
Following this offering, our executive officers and directors will
beneficially own approximately 30.5% of the outstanding common stock, or
approximately 30.0% if the underwriter exercises its over-allotment option in
full. Accordingly, if they act together, they will be able to exercise
significant control over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate actions such as
mergers and other business combination transactions. This concentration of
ownership may also have the effect of delaying or preventing a change in control
over us unless it is supported by our executive officers and directors.
IF OUR STOCKHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE PUBLIC
MARKET FOLLOWING THIS OFFERING, THE MARKET PRICE OF OUR COMMON STOCK COULD
DECLINE.
The market price of our common stock could decline as a result of sales of
a large number of shares in the market after this offering, or the perception
that sales of a large number of shares could occur. These factors also could
make it more difficult for us to raise funds through future offerings of common
stock.
There will be 26,348,482 shares of common stock outstanding immediately
after this offering. Of these shares, the 3,000,000 shares sold in this offering
will be freely transferable without restriction or further registration under
the Securities Act of 1933, except for any shares purchased by our affiliates,
as defined in Rule 144 under the Securities Act. The remaining 23,348,482 shares
outstanding will be restricted securities, as defined in Rule 144. These shares
may be sold in the future without registration under the
12
<PAGE> 20
Securities Act to the extent permitted under Rule 144 or an exemption under the
Securities Act. Holders of 9,189,999 shares of common stock outstanding
immediately after this offering will also have registration rights enabling them
to cause us to register their shares for sale under the Securities Act. After
this offering, we will have 5,941,517 shares of common stock reserved for
issuance upon the exercise of stock options, of which 4,569,734 shares are
subject to currently outstanding options. Following this offering, we intend to
file a registration statement on Form S-8 to register these shares.
SINCE OUR COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED, WE CANNOT PREDICT THE
EXTENT TO WHICH A TRADING MARKET FOR OUR COMMON STOCK WILL DEVELOP, OR WHETHER
YOU WILL BE ABLE TO SELL YOUR COMMON STOCK.
There has not been a public market for our common stock. We do not know the
extent to which investor interest in us will lead to the development of a
trading market or how liquid that market might be. The initial public offering
price for the shares of common stock has been determined through negotiations
between us and the underwriter of this offering and may not be indicative of
prices that will prevail in any trading market that develops. You may not be
able to resell your shares at or above the initial public offering price and you
may suffer a loss on your investment.
BECAUSE WE ARE CURRENTLY UNABLE TO SPECIFY THE SPECIFIC USES TO WHICH THE NET
PROCEEDS FROM THIS OFFERING WILL BE APPLIED, YOU WILL BE RELYING ON THE JUDGMENT
OF OUR MANAGEMENT REGARDING THE APPLICATION OF THE PROCEEDS.
We expect to use the net proceeds from this offering for working capital
and general corporate purposes, but we are unable to identify the specific uses
to which the net proceeds will be applied. Accordingly, our management will have
broad discretion with respect to the expenditure of the proceeds. Although we
have included estimates of expenditures for some specified uses under "Use of
Proceeds," actual expenditures for research and development, sales and
marketing, international expansion, capital expenditures and other purposes will
depend on market and other conditions existing in the future. You will be
relying on the judgment of our management regarding the application of the
proceeds. Our management will have the ability to change the application of the
proceeds of this offering without stockholder approval.
PURCHASERS OF SHARES IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The initial public offering price per share will significantly exceed the
net tangible book value per share. Accordingly, you will experience immediate
and substantial dilution in your investment.
13
<PAGE> 21
FORWARD-LOOKING STATEMENTS
Various statements made in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are "forward-looking statements." Forward-looking statements include,
without limitation, statements about the market opportunity for Internet
commerce software solutions, new product development, competition, expected
expense levels, seasonality and the adequacy of our available cash resources and
other statements contained in this prospectus that are not historical facts.
When used in this prospectus, the words "anticipate," "believe," "estimate,"
"expect" and "may" and similar expressions are generally intended to identify
forward-looking statements, but are not the exclusive expressions of
forward-looking statements. Because forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including but not limited to:
- changes in general economic and business conditions;
- actions of competitors;
- our inability to recover our costs in sales of our products and services;
- the extent to which we are able to develop and market new and improved
products;
- product defects;
- changes in our business strategies; and
- the other factors discussed under "Risk Factors."
14
<PAGE> 22
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of shares in
this offering of approximately $40.9 million, assuming an initial public
offering price of $15.00 and after deducting underwriting discounts and
commissions and estimated expenses of $1.0 million payable by us. We estimate
that we will receive additional net proceeds of up to $6.3 million if the
underwriter exercises the option granted to it in connection with this offering
to purchase additional shares from us to cover over-allotments. We expect to use
the net proceeds for working capital and general corporate purposes, including
research and development (approximately $12.5 million), sales and marketing
(approximately $19.5 million), international expansion (approximately $4.0
million) and capital expenditures (approximately $2.0 million). The actual
amounts expended for these purposes may vary from our current expectations and
will be determined by our management. Our future capital expenditures and the
allocation of the net proceeds of this offering will depend on many factors,
including:
- the rate of market acceptance of our products;
- our ability to expand and maintain our client base;
- the level of resources required to expand our marketing and sales
efforts; and
- research and development activities.
We may also use a portion of the net proceeds to fund possible acquisitions
of businesses and technologies that are complementary to ours and which our
board of directors decides to pursue based on circumstances existing at that
time and the board's determination to use net proceeds for an acquisition rather
than for one or more of the specific purposes referred to above. We will
consider acquisitions of businesses or technologies that can provide us with
technologically compatible products, including, for example, tools and business
adapters, that would extend or improve our enterprise commerce software
solution. We currently have no agreements, and are not engaged in any
negotiations, with respect to any acquisitions, and we have not established any
minimum financial benchmarks (for example, return on assets or return on
investment) that would need to be satisfied before undertaking an acquisition.
Pending use of the net proceeds, we intend to invest the net proceeds in
short-term, investment-grade securities.
DIVIDEND POLICY
Historically, we have not paid cash dividends on our common stock. We
currently intend to retain all future earnings to fund the development and
growth of our business. Therefore, we do not currently anticipate paying any
cash dividends. Future decisions regarding cash dividends on the common stock
will be made by our board of directors and will depend on our results of
operations, financial position, capital requirements, general business
conditions, restrictions imposed by financing arrangements, if any, legal and
regulatory restrictions on the payment of dividends and other factors the board
of directors deems relevant.
15
<PAGE> 23
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect the automatic conversion of all
outstanding shares of our Series A and Series B mandatorily redeemable
preferred stock into common stock, which will occur at the same time as
the closing of this offering; and
- on a pro forma as adjusted basis to reflect the sale by us of 3,000,000
shares of common stock in this offering, assuming an initial public
offering price of $15.00 per share and after deducting underwriting
discounts and commissions and estimated expenses payable by us. We will
have no preferred stock outstanding upon completion of this offering.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Mandatorily redeemable Series A convertible
preferred stock ($0.01 par value;
8,200,000 shares authorized, 7,539,999
issued and outstanding actual)............ $ 47,379 $ -- $ --
Mandatorily redeemable Series B convertible
preferred stock ($0.01 par value;
2,500,000 shares authorized, 1,650,000
issued and outstanding actual)............ 15,569 -- --
Stockholders' equity:
Preferred stock ($0.01 par value;
15,000,000 shares authorized pro forma
as adjusted)........................... -- -- --
Common stock ($0.01 par value, 35,000,000
shares authorized actual and pro forma
and 100,000,000 shares authorized pro
forma as adjusted; 14,011,886 issued
and outstanding actual; 23,201,885
shares issued and outstanding pro
forma; 26,201,885 shares issued and
outstanding pro forma as adjusted)..... 140 232 262
Additional paid-in capital.................. 8,661 71,517 112,337
Accumulated deficit......................... (60,346) (60,346) (60,346)
-------- -------- -------
Total stockholders' equity (deficit)... (51,545) 11,403 52,253
-------- -------- -------
Total capitalization................. $ 11,403 $ 11,403 $52,253
======== ======== =======
</TABLE>
16
<PAGE> 24
DILUTION
As of March 31, 1999, we had a pro forma net tangible book value of
approximately $0.49 per share. Pro forma net tangible book value per share
represents our net tangible assets, or total assets less liabilities and
intangible assets, divided by the total number of shares outstanding before this
offering after giving effect to the automatic conversion of all outstanding
shares of our mandatorily redeemable preferred stock into common stock upon the
closing of this offering. Without taking into account any changes in pro forma
net tangible book value after March 31, 1999, other than to give effect to this
offering assuming an initial public offering price of $15.00 per share and after
deducting underwriting discounts and commissions and estimated expenses payable
by us, the pro forma net tangible book value of the common stock as of March 31,
1999 would have been approximately $1.99 per share. The following table shows
the effect of this offering as if it had occurred at March 31, 1999 and
illustrates the immediate increase in net tangible book value of $1.50 per share
to existing stockholders and an immediate dilution of $13.01 per share to new
investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 15.00
Pro forma net tangible book value per share as of March 31,
1999...................................................... $ 0.49
Increase in pro forma net tangible book value per share
attributable to this offering............................. 1.50
--------
Pro forma net tangible book value per share as of March 31,
1999 after giving effect to this offering................. 1.99
-------
Immediate dilution per share to new investors in this
offering.................................................. $ 13.01
=======
</TABLE>
The calculation of pro forma net tangible book value per share assumes that
no options or warrants outstanding as of the date of this prospectus will be
exercised. The following is a summary of these additional shares of common
stock:
- 6,088,114 shares of common stock reserved for issuance under our stock
option plan, of which options to purchase 4,716,331 were outstanding as
of March 31, 1999 at a weighted average exercise price of $5.18 per
share; and
- 534,070 shares of common stock reserved for issuance at March 31, 1999
under outstanding warrants at a weighted average exercise price of $6.98
per share.
If our outstanding options and warrants were exercised, new investors in this
offering would suffer additional dilution.
The following table summarizes, as of March 31, 1999, on a pro forma basis,
the differences between the number of shares purchased from us, the total
consideration and the average price per share paid or to be paid by our existing
stockholders,
17
<PAGE> 25
optionholders and warrantholders and by new investors in this offering at an
assumed initial public offering price of $15.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 23,201,885 73.8% $ 65,773,093 47.3% $ 2.83
Existing optionholders..... 4,716,331 15.0 24,410,309 17.6 $ 5.18
Existing warrantholders.... 534,070 1.7 3,727,035 2.7 $ 6.98
New investors.............. 3,000,000 9.5 45,000,000 32.4 $15.00
---------- ----- ------------ -----
Total................. 31,452,286 100.0% $138,910,437 100.0%
========== ===== ============ =====
</TABLE>
This offering will benefit our existing stockholders by creating a public
market for our common stock. Upon consummation of this offering, the unrealized
appreciation in the value of the common stock held by existing stockholders will
be $282.3 million ($332.9 million assuming exercise of all outstanding options
and warrants), assuming an initial public offering price per share of $15.00.
18
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below as of December 31, 1997 and
1998 and for the years ended December 31, 1996, 1997 and 1998 have been derived
from our consolidated financial statements included in this prospectus, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected consolidated financial data below as of December 31, 1995 and for the
period from inception (March 28, 1995) through December 31, 1995 have been
derived from our audited consolidated financial statements that are not included
in this prospectus. The selected consolidated financial data below as of and for
the three months ended March 31, 1998 and 1999 have been derived from our
unaudited consolidated financial statements, which, in our opinion, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of our financial position and results of operations. Historical
results are not necessarily indicative of results to be expected for any future
period. You should read the data below together with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements included in this prospectus.
<TABLE>
<CAPTION>
INCEPTION THREE MONTHS
(MARCH 28, 1995) YEAR ENDED DECEMBER 31, ENDED MARCH 31,
TO DECEMBER 31, ----------------------------- ------------------
1995 1996 1997 1998 1998 1999
---------------- ------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net:
Product licenses...................... $ 25 $ 779 $ 4,883 $ 9,754 $ 1,546 $ 4,386
Services.............................. 331 1,241 3,073 4,834 866 2,615
Other................................. 3 408 100 2 -- --
------ ------- -------- -------- -------- -------
Total revenues, net................ 359 2,428 8,056 14,590 2,412 7,001
------ ------- -------- -------- -------- -------
Cost of revenues:
Product licenses...................... 1 82 278 671 72 208
Services.............................. 130 1,735 6,744 6,052 1,132 2,756
Other................................. -- 322 107 -- -- --
------ ------- -------- -------- -------- -------
Total cost of revenues............. 131 2,139 7,129 6,723 1,204 2,964
------ ------- -------- -------- -------- -------
Gross profit............................ 228 289 927 7,867 1,208 4,037
Operating expenses:
Research and development.............. 234 2,362 6,863 9,558 1,964 3,637
Sales and marketing................... -- 2,435 8,487 11,969 2,064 4,968
General and administrative............ 258 2,730 6,405 6,356 1,425 1,213
Noncash employee
compensation....................... -- 71 752 1,615 377 1,121
------ ------- -------- -------- -------- -------
Total operating expenses........... 492 7,598 22,507 29,498 5,830 10,939
------ ------- -------- -------- -------- -------
Loss from operations.................... (264) (7,309) (21,580) (21,631) (4,622) (6,902)
Total other income (expense)............ -- 112 (95) (431) (22) (204)
Income taxes.......................... -- -- -- -- -- (45)
------ ------- -------- -------- -------- -------
Loss from continuing operations......... (264) (7,197) (21,675) (22,062) (4,644) (7,151)
Discontinued operations:
Expenses from discontinued
operations......................... -- -- (1,310) -- -- --
Provision for operating losses to date
of disposition..................... -- -- (627) -- -- --
====== ======= ======== ======== ======== =======
Net loss................................ $ (264) $(7,197) $(23,612) $(22,062) $ (4,644) $(7,151)
====== ======= ======== ======== ======== =======
Basic loss per share and diluted loss
per share............................. $(0.02) $ (0.53) $ (1.75) $ (1.60) $ (0.34) $ (0.52)
====== ======= ======== ======== ======== =======
Basic loss per share and diluted loss
per share from continuing
operations............................ $(0.02) $ (0.53) $ (1.61) $ (1.60) $ (0.34) $ (0.52)
====== ======= ======== ======== ======== =======
</TABLE>
19
<PAGE> 27
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------- AS OF MARCH 31,
1995 1996 1997 1998 1999
----- ------ -------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 50 $6,111 $ 6,081 $ 858 $ 7,103
Working capital (deficit).................. (286) 4,653 3,802 (635) 5,307
Total assets............................... 175 8,865 17,431 14,119 22,785
Mandatorily redeemable preferred
stock.................................... -- 13,431 37,319 47,334 62,948
Total stockholders' deficit................ (189) (7,119) (28,795) (46,216) (51,545)
</TABLE>
Please note the following in reviewing the data presented above:
- On March 30, 1998, we completed a spin-off distribution of a subsidiary,
UGO Networks, reducing our majority ownership of UGO Networks to a
minority interest of approximately 18%. Since March 30, 1998, our
minority interest in UGO Networks has decreased to approximately 8% due
to private equity financings by UGO Networks. UGO Networks is an online
entertainment information and game company that commenced operations in
1997. The spin-off was made in order to permit UGO Networks to build a
separate management team that would concentrate on creating an online
entertainment information and game company and to position UGO Networks
to seek private equity financing. UGO Networks has been presented as a
discontinued operation in our consolidated statement of operations for
the year ended December 31, 1997. See Note 13 of Notes to Consolidated
Financial Statements.
- In January 1999, we issued 1,650,000 shares of Series B mandatorily
redeemable preferred stock for an aggregate of $16.5 million in cash.
Upon the closing of this offering, all outstanding shares of our Series A
and Series B mandatorily redeemable preferred stock will automatically
convert into an aggregate of 9,189,999 shares of common stock. For the
year ended December 31, 1998, the pro forma basic and diluted loss per
share reflecting the effects of the conversion would have been $(0.96).
See Note 14 of Notes to Consolidated Financial Statements.
20
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We derive revenues primarily from licensing our Internet commerce software
products and providing related services and support to our clients. We
commercially introduced our first product in December 1995.
We generally price licenses of our platform and applications on a per
server or site basis. Standard per server license fees for the Windows NT
solutions are $150,000 and for Unix solutions are $250,000. The recommended
production configuration that supports redundancy, fault-tolerance and
distributed load balancing across multiple processors is generally available for
a license fee of approximately $300,000 to $500,000. Licenses for product
configurations that support additional servers and users are available.
Additional applications, tools, business adapters, professional services and
maintenance services are provided at an additional cost to the client. Site
licenses are also available. Site licenses typically require the client to pay
additional fees based on the client's achieving specified electronic commerce
revenues. Payment terms are generally net 30 days. However, from time to time in
order to induce clients to license our products, we have extended payment terms
to up to one year.
Revenue from client product licenses is recognized upon shipment to the
client under an executed software license agreement when no significant
obligations or contractual commitments remain and collection is probable. If
acceptance by the client is required, revenue is recognized upon client
acceptance. License revenue from resellers of our products is recognized upon
shipment by the reseller when collection is probable.
Revenue from services is recognized as the services are rendered. Revenue
from services requiring significant modification or customization of our
software products is recognized on a percentage-of-completion basis. Revenue
from maintenance and client support services is recognized ratably over the term
of the agreement for such services. Our license agreements typically require the
client to purchase one year of maintenance and client support services.
Currently, our cost of services revenues exceeds our services revenues. We
anticipate that services margins may improve in the future, but there can be no
assurance that such improvement will occur. Since we increasingly depend on
systems integration companies for implementation of our products, our service
revenues may decrease as a percentage of our aggregate revenues.
We have incurred significant research and development expenses to develop
our products. We charge all research and development costs incurred to establish
the technological feasibility of a product or product enhancement to research
and development expense as incurred. In addition, we have made substantial
investments in our infrastructure to support revenue growth. We intend to
increase our staffing in all functional areas as required to accommodate any
revenue growth.
The consolidated financial statements included in this prospectus were
prepared assuming that we will continue as a going concern. See Note 2 of Notes
to Consolidated Financial Statements.
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<PAGE> 29
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data for the
periods indicated expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues, net:
Product licenses................... 32.1% 60.7% 66.9% 64.1% 62.6%
Services........................... 51.1 38.1 33.1 35.9 37.4
Other.............................. 16.8 1.2 -- -- --
------ ------ ------ ------ ------
Total revenues, net............. 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------
Cost of revenues:
Product licenses................... 3.4 3.5 4.6 3.0 3.0
Services........................... 71.4 83.7 41.5 46.9 39.4
Other.............................. 13.3 1.3 -- -- --
------ ------ ------ ------ ------
Total cost of revenues.......... 88.1 88.5 46.1 49.9 42.4
------ ------ ------ ------ ------
Gross profit......................... 11.9 11.5 53.9 50.1 57.6
------ ------ ------ ------ ------
Operating expenses:
Research and development........... 97.3 85.2 65.5 81.4 52.0
Sales and marketing................ 100.3 105.4 82.0 85.6 71.0
General and administrative......... 112.4 79.5 43.6 59.1 17.2
Noncash employee compensation...... 2.9 9.3 11.1 15.6 16.0
------ ------ ------ ------ ------
Total operating expenses........ 312.9 279.4 202.2 241.7 156.2
------ ------ ------ ------ ------
Loss from operations................. (301.0) (267.9) (148.3) (191.6) (98.6)
Net loss............................. (296.4)% (293.1)% (151.2)% (192.5)% (102.1)%
====== ====== ====== ====== ======
</TABLE>
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Total Revenues, Net. Total revenues, net include fees from product
licenses and services. Our total revenues, net increased from $2.4 million in
1996 to $8.1 million in 1997 and to $14.6 million in 1998. These increases
resulted primarily from increased licenses of our software products at a higher
average fee per client and, to a lesser extent, from the provision of services
to a larger client base. We expect that our target clients' Year 2000 projects
may adversely affect demand for our products in 1999 and 2000.
Cost of Revenues. Cost of product license revenues consists of royalties
payable to third parties for software that is embedded in or bundled with our
products, the costs of product media, documentation and manufacturing costs.
Cost of services revenues consists primarily of costs related to employees and
consultants providing services and support. Total cost of revenues decreased
from $7.1 million in 1997 to $6.7 million in 1998. Total cost of revenues
increased from $2.1 million in 1996 to $7.1 million in 1997. In 1997,
particularly during the earlier part of the year, we hired outside consultants
to supplement our professional services organization and to provide services and
support to our expanding client base, and also hired additional employees.
During the course of 1998, we continued
22
<PAGE> 30
to hire additional personnel, which reduced our reliance on outside consultants,
and instituted implementation methodologies that resulted in shorter
implementation cycles. The implementation methodologies involve providing our
customers with a checklist that sets forth the steps, timing and procedures to
more effectively enable them to implement our Commerce Exchange family of
products. These measures, combined with the introduction of enhanced versions of
Commerce Exchange, reduced our cost of revenues as a percentage of total
revenues. As a result, cost of revenues as a percentage of total revenues
decreased from 88.5% for 1997 to 46.1% for 1998.
Research and Development. Research and development expenses consist of
costs related to research and development personnel, including salaries and
related expenses and consulting fees, and costs related to facilities and
equipment used in research and development. Research and development expenses
increased 39.3%, from $6.9 million in 1997 to $9.6 million in 1998. Research and
development expenses increased from $2.4 million in 1996 to $6.9 million in
1997. These increases were principally due to the addition of personnel to
support the design and development of our products. We expect to continue to
incur significant research and development expenses in future periods.
Sales and Marketing. Sales and marketing expenses consist of salaries and
related expenses for sales and marketing personnel, sales commissions and other
incentive compensation, travel and entertainment expenses and the costs of
marketing programs, including trade shows, promotional materials and
advertising. Sales and marketing expenses increased 41%, from $8.5 million 1997
to $12.0 million in 1998. Sales and marketing expenses increased from $2.4
million in 1996 to $8.5 million in 1997. These increases were due primarily to
the expansion of our sales and marketing organization and expanded marketing
activities, including advertising designed to increase awareness of our brand.
We expect to continue to incur significant sales and marketing expenses in
future periods.
General and Administrative. General and administrative expenses consist of
salaries and related expenses for administrative, finance and human resources
personnel and related facilities and equipment costs. General and administrative
expenses increased from $2.7 million in 1996 to $6.4 million in 1997 and 1998.
This increase reflected the additional administrative infrastructure necessary
to manage and support our growth. In addition, general and administrative
expenses for 1998 included approximately $0.5 million relating to an aborted
initial public offering.
Noncash Employee Compensation. Noncash employee compensation consists of
noncash charges for stock options granted to employees at exercise prices deemed
below the fair market value of our common stock at the time of grant. The amount
of the charge is equal to the difference between the exercise price of the stock
option and the deemed fair market value of our common stock multiplied by the
number of options granted. The charge is amortized over the vesting period of
the options (typically, five years). We recorded noncash employee compensation
of $1.6 million in 1998, $0.8 million in 1997 and $0.1 million in 1996.
Total Other Income (Expense). Other income (expense) consists primarily of
interest income earned on cash and cash equivalents, net of cash and noncash
interest expense for leased equipment. Our total other income (expense) was $0.1
million in 1996, $(0.1) million in 1997 and $(0.4) million in 1998.
Income Taxes. We have incurred losses since inception which have generated
net operating loss carryforwards of approximately $39.2 million at December 31,
1998 and $43.3 million at March 31, 1999 for federal and state income tax
purposes. These
23
<PAGE> 31
carryforwards are available to offset future taxable income and expire in 2011
through 2019 for federal income tax purposes. We also had research and
development tax credit carryforwards in the amount of $1.4 million at December
31, 1998, and $1.8 million at March 31, 1999 which expire in 2002 through 2019.
These losses and credits may be subject to significant limitations on
utilization in future years because of ownership changes that have occurred. We
have historically filed our corporate income tax returns utilizing a fiscal year
end of March 31, which we changed to December 31, effective December 31, 1998.
See Note 12 of Notes to Consolidated Financial Statements.
The net operating loss carryforwards and temporary differences between
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax benefit of $21.8 million at December
31, 1998 and $24.5 million at March 31, 1999. Our operating plans anticipate
taxable income in future periods; however, such plans make significant
assumptions which cannot be assured, including market acceptance of our products
by clients. Therefore, in consideration of our accumulated losses and the
uncertainty of our ability to utilize this deferred tax benefit in the future,
we have recorded a valuation allowance in the amount of $21.8 million at
December 31, 1998 and $24.5 million at March 31, 1999 to offset the deferred tax
benefit amount.
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
Total Revenues, Net. Total revenues, net for the quarter ended March 31,
1999 were $7.0 million, an increase of $4.6 million over total revenues, net for
the quarter ended March 31, 1998 of $2.4 million. This increase is attributable
to our licensing more software products at higher average fees, as well as our
providing services to a larger client base.
Cost of Revenues. Total cost of revenues increased from $1.2 million for
the quarter ended March 31, 1998 to $3.0 million for the quarter ended March 31,
1999, an increase of $1.8 million. Total cost of revenue as a percent of total
revenues decreased from 49.9% for the quarter ended March 31, 1998 to 42.4% for
the same period in 1999. This decrease is due primarily to increased
productivity of our services personnel.
Research and Development. Research and development expenses increased $1.6
million, or 80%, from $2.0 million in the first quarter of 1998 to $3.6 million
in the first quarter of 1999. This increase was due principally to the addition
of personnel to support the design and development of our products.
Sales and Marketing. Sales and marketing expenses increased from $2.1
million in the first quarter of 1998 to $5.0 million in the first quarter of
1999, an increase of $2.9 million. These increases were due primarily to the
expansion of our sales and marketing organizations, higher commissions generally
reflecting increased revenues and expanded marketing activities.
General and Administrative. General and administrative expenses decreased
from $1.4 million to $1.2 million for the three months ended March 31, 1998 and
1999, respectively. This decrease was due primarily to lower legal and royalty
expenses and reductions in provisions for bad debt.
Noncash Compensation. Noncash employee compensation increased from $0.4
million for the quarter ended March 31, 1998 to $1.1 million for the quarter
ended March 31, 1999, primarily due to the January 1999 grant of 1,604,567
options to employees at a discount to deemed fair market value. We estimate that
we will recognize approximately $10.9 million of noncash employee compensation
expense in future periods through January 2004, including approximately $2.1
million during the remainder of 1999.
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<PAGE> 32
During the first quarter of 1999, we also recognized $0.4 million of
non-cash compensation expense related to stock options granted to two
consultants at a discount to deemed fair market value. Of this amount,
approximately $0.2 million was reflected in cost of sales and approximately $0.2
million was reflected in general and administrative expense. Based on the
performance of one of these consultants as determined by our chief executive
officer, we could recognize up to approximately $0.5 million of additional non-
cash compensation expense in future periods related to options granted to the
consultant.
Total Other Income (Expense). Other expense increased by approximately
$0.2 million. This increase is largely attributable to interest expense on
amounts outstanding under our secured loan agreement for a portion of the
quarter ended March 31, 1999.
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<PAGE> 33
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the nine quarters in the period ended March 31, 1999. The
quarterly data have been prepared on the same basis as the audited financial
statements appearing in this prospectus and, in our opinion, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation. The results of operations for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31 MARCH 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
--------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues, net:
Product licenses.... $ 491 $ 758 $ 1,533 $ 2,101 $ 1,546 $ 844 $ 3,002 $ 4,362 $ 4,386
Services............ 583 603 917 970 866 950 1,361 1,657 2,615
Other............... 100 -- -- -- -- -- 1 1 --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues,
net............ 1,174 1,361 2,450 3,071 2,412 1,794 4,364 6,020 7,001
------- ------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Product licenses.... 43 59 80 96 72 117 122 360 208
Services............ 2,069 1,805 1,576 1,294 1,132 1,318 1,530 2,072 2,756
Other............... 107 -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues....... 2,219 1,864 1,656 1,390 1,204 1,435 1,652 2,432 2,964
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit (loss)... (1,045) (503) 794 1,681 1,208 359 2,712 3,588 4,037
Operating expenses:
Research and
development....... 1,263 1,799 1,854 1,947 1,964 2,093 2,569 2,932 3,637
Sales and
marketing......... 1,729 2,441 2,297 2,020 2,064 2,582 3,199 4,124 4,968
General and
administrative.... 1,469 1,732 1,714 1,490 1,425 2,062 1,615 1,254 1,213
Noncash employee
compensation...... 25 26 581 120 377 488 375 375 1,121
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses....... 4,486 5,998 6,446 5,577 5,830 7,225 7,758 8,685 10,939
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from
operations.......... (5,531) (6,501) (5,652) (3,896) (4,622) (6,866) (5,046) (5,097) (6,902)
Other income
(expense):
Interest income..... 43 47 31 97 63 139 48 15 92
Interest expense.... (32) (80) (96) (105) (85) (130) (98) (383) (296)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total other income
(expense)...... 11 (33) (65) (8) (22) 9 (50) (368) (204)
Income taxes........ -- -- -- -- -- -- -- -- (45)
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from continuing
operations.......... $(5,520) $(6,534) $(5,717) $(3,904) $(4,644) $(6,857) $(5,096) $(5,465) $(7,151)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE> 34
Our quarterly operating results will generally depend on the volume and
timing of sales of our products, which are difficult to predict. We plan to
increase our operating expenses to achieve revenue growth. If our revenues do
not increase as anticipated and our spending levels are not reduced accordingly,
a significant decline in quarterly operating results could occur. We expect to
experience fluctuations in quarterly operating results due to many factors,
including:
- the size and timing of significant client agreements, which typically
occur near the end of our fiscal quarter, but, if delayed, may not occur
until the next quarter;
- the length of the sales cycle for our products;
- fluctuations in demand for our products;
- the introduction of new products by us or our competitors;
- changes in prices by us or our competition; and
- the timing and amount of expenditures by us.
In addition, we believe, based on general software industry trends, that sales
of our products will typically be highest in the fourth quarter of the year and
lowest in the first quarter. As a result, period-to-period comparisons of our
results of operations may not be meaningful, and should not be relied on as an
indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of mandatorily redeemable preferred stock, which have raised approximately
$64.5 million. At March 31, 1999, we had cash and cash equivalents of $7.1
million and working capital of $5.3 million.
We have had significant negative cash flows from operating activities to
date. Net cash used in operating activities for fiscal years 1997 and 1998 and
the three months ended March 31, 1999 was $22.2, $16.6 and $4.6 million,
respectively. Net cash used in operating activities in each of these periods was
primarily the result of expenditures for product development, sales and
marketing and infrastructure as well as the provision of extended payment terms
to clients. For the year ended December 31, 1998, our net accounts receivable
increased $2.0 million, from $4.2 million to $6.2 million. This increase was
primarily attributable to the significant increase in sales, particularly
several large sales in December 1998. The $4.4 million decrease in working
capital during the year ended December 31, 1998 was largely attributable to the
$5.2 million decrease in cash and cash equivalents and a $2.3 million increase
in accounts payable and accrued expenses, only partially offset by the increase
in accounts receivable. The increase in cash and cash equivalents and working
capital at March 31, 1999 was largely the result of the January 1999 issuance of
1,650,000 share of Series B manditorily redeemable preferred stock for an
aggregate of $16.5 million in cash.
Net cash used in investing activities consists primarily of capital
expenditures for computer equipment, purchased software, office equipment,
furniture, fixtures and leasehold improvements. Capital expenditures for
property and equipment for 1998 aggregated $1.9 million, primarily for computer
equipment. As of December 31, 1998, we also had commitments under noncancelable
operating leases of $8.6 million and under noncancelable capital leases of $2.1
million. In June 1999 the Company leased additional space in its existing
facility. See "Business -- Properties."
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<PAGE> 35
Effective as of May 1998, we amended our secured loan agreement with
Comdisco, Inc., one of our stockholders that holds warrants to purchase our
common stock, under which our maximum borrowings were increased to $11.0
million. Outstanding amounts under the loan agreement accrue interest, which is
payable monthly, at a rate of 10% per annum and is secured by our accounts
receivable. We may borrow amounts under the loan agreement for a period of
twelve months subsequent to our initial borrowing under the loan agreement
(which occurred in October 1998) or until completion of this offering. The loan
principal is due and payable at the later of 15 months from the initial
borrowing or 21 months from the date of the agreement. Although we have borrowed
under the loan agreement in the past, as of the date of this prospectus, we have
no outstanding borrowings under the loan agreement. See "Certain Transactions."
During the year ended December 31, 1998, less than 10% of our revenues were
generated by our foreign sales offices. At December 31, 1998, less than 6% of
gross receivables were denominated in foreign currencies. We do not engage in
any hedging activities although we may consider engaging in hedging activities
if increasing amounts of receivables are denominated in foreign currency.
We believe that our available cash resources, including the net proceeds
from this offering, will be sufficient to meet our working capital requirements
for at least the next twelve months. However, we may need additional financing
to support more rapid growth or to respond to competitive pressures or
unanticipated requirements. Additional financing, if needed, may not be
available on satisfactory terms or at all.
DISCONTINUED OPERATIONS
On March 30, 1998, we completed a spin-off distribution of our subsidiary,
UGO Networks, reducing our majority ownership of UGO Networks to a minority
interest of approximately 18%. Since March 30, 1998, our minority interest in
UGO Networks has decreased to approximately 8% due to private equity financings
by UGO Networks. UGO Networks is an entertainment information and game company
that commenced operations in 1997. We have presented UGO Networks as a
discontinued operation in our consolidated statement of operations for the year
ended December 31, 1997. We have not guaranteed and are not contingently liable
for any obligations of UGO Networks. During 1997, UGO Networks had no revenues
and incurred net losses of $1.3 million. A provision of $627 for estimated
operating losses of UGO Networks through the disposal date was recorded at
December 31, 1997. The basic loss per share and diluted loss per share for the
year ended December 31, 1997 attributable to discontinuance of the operations of
UGO Networks was approximately $0.14 per share. See Note 13 of Notes to
Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including a temporary inability to process
transactions, send invoices or engage in similar business activities. We are
exposed to the risk that the systems on which we are dependent to conduct our
operations are not year 2000 compliant.
State of Readiness. We assembled an internal task force in June 1998 to
evaluate the impact, if any, of year 2000 issues and implement appropriate steps
to ensure
28
<PAGE> 36
year 2000 compliance. The task force commenced a review of our information
technology, or IT, systems and our non-IT systems to identify those systems that
could be materially affected by year 2000 issues. The review focused on the
following categories:
(1) our products,
(2) critical business applications that have been developed internally or
are provided by suppliers and used in our internal business systems,
and
(3) our non-critical business applications that have been developed
internally or are provided by suppliers and used in our internal
business systems.
The review of the first two categories has been completed. Based on this review,
we do not believe that we have material exposure to the year 2000 issue with
respect to our products since our products correctly define the year 2000. We
have also contacted all of our suppliers to assess their year 2000 readiness.
Based on the responses to our questionnaire received from suppliers of critical
externally provided business applications, we do not believe that we have any
material year 2000 exposure. We believe that our critical internal business
systems are either year 2000 compliant, or that the operations preformed by
these systems could be performed manually or mechanically if they fail
electronically. We intend to complete our assessment and the replacement or
remediation of any non-critical business applications by September 30, 1999.
Costs. Based on the current status of our year 2000 program, the total
cost of effecting year 2000 compliance is not expected to exceed $350,000, of
which $250,000 had been incurred through March 31, 1999. These costs were
expensed in the period incurred and were paid out of working capital. However,
we may incur significant costs if unanticipated year 2000 compliance problems
arise. These unanticipated costs, or our failure to correct any unanticipated
year 2000 problems in a timely manner, could have a material adverse effect on
our business, financial condition, results of operations and prospects for
growth.
Risks. While our products are year 2000 compliant, we have not undertaken,
and do not intend to undertake, any investigation regarding the year 2000
readiness of any of our clients. Accordingly, we do not know whether our
clients' business systems which they may attempt to integrate with our products
are year 2000 compliant. If a client is not able to operate its systems with our
products as a result of year 2000 problems with its systems, we would be
adversely affected. If a major supplier or client fails to convert its systems
on a timely basis or converts in a manner that is incompatible with our systems,
our business, financial condition, results of operations and prospects for
growth could be materially adversely affected.
We believe that year 2000 issues may affect purchasing patterns of our
clients and prospective clients. Many companies are expending significant
resources to upgrade their current software systems to year 2000 functionality.
These expenditures may reduce funds available to purchase software products and
related services such as those offered by us. In addition, year 2000 issues
could cause a significant number of companies, including our clients, to
reevaluate their current software application solutions needs, and in connection
with the reevaluation, select other solutions. Any of the foregoing could have a
material adverse effect on our business, results of operations, financial
condition and prospects for growth.
In addition, there can be no assurance that governmental agencies, utility
companies, banks, Internet access companies, third-party service providers and
others outside our
29
<PAGE> 37
control will be year 2000 compliant. The failure by those entities to be year
2000 compliant could result in a systemic failure beyond our control, such as
prolonged Internet, telecommunications or electrical failure, which could
decrease the use of the Internet. Furthermore, retailers and other
business-to-consumer users of our products may be unwilling to continue to
license our products if their customers are unable to use their credit cards to
make electronic purchases because of year 2000 problems affecting banks or other
credit card vendors. Any of the foregoing could have a material adverse effect
on our business, results of operations, financial condition and prospects for
growth.
Contingency Plan. Although we are engaged in an ongoing year 2000
assessment, we have not developed a contingency plan to address the worst-case
scenario that might occur if technologies we are dependent upon are not year
2000 compliant. The completion of our assessment and the remaining responses to
be received from all suppliers will be taken into account in determining the
need for and nature and extent of any contingency plan. We intend to develop any
required contingency plan by September 30, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions. SOP 98-9 generally
requires revenue earned on software arrangements involving multiple elements to
be allocated to each element based on the relative vendor specific objective
evidence of the elements. We adopted SOP 98-9 for software transactions entered
into in 1998. The revenue allocated to licensing of software is generally
recognized when a fixed and determinable fee has been contractually established,
the product has been shipped to the client and when collectibility is probable.
The revenue allocated to the postcontract client support portion of a contract
is consistent with fees charged when client support is sold separately on a
renewal basis, and is recognized ratably over the term of the support. Revenue
from professional services, such as custom development, installation and
integration support, is recognized as the services are rendered. The adoption of
SOP 98-9 did not have a material impact on our results of operations.
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<PAGE> 38
BUSINESS
OVERVIEW
We provide Internet commerce software solutions that enable manufacturers,
distributors and retailers to conduct business over the Internet. Our products,
which we call "enterprise commerce" software, enable companies to build their
online businesses and integrate them with their existing business practices and
enterprise systems. Commerce Exchange is our family of enterprise commerce
software, consisting of our Commerce Exchange platform, applications, tools and
business adapters. Commerce Exchange enables our clients to address their
principal selling and support processes, including sales, order management,
fulfillment and customer service. Our solution is designed to enable businesses
to:
- increase revenues by extending their sales efforts to include an
Internet-based distribution channel;
- reduce operating expenses by streamlining and automating their selling
and support processes;
- enhance customer loyalty by offering a personalized, online buying
experience; and
- create online processes based on existing and evolving business practices
and integrate information from existing systems with their online
systems.
Our solution can be expanded to meet the demand of large organizations with
complex selling processes, and can handle a large number of simultaneous users,
high transaction rates and large datastores. It also can be fully integrated
into every phase of selling and support processes, from order entry to customer
service. Commerce Exchange enables an organization to integrate its online
business with its existing business systems, including manufacturing, financial,
distribution and customer systems, and business practices. The functionality and
the ease of implementing, maintaining and upgrading our products address what we
believe is a growing desire by businesses to maximize return on investment by
more efficiently using their information systems.
INDUSTRY BACKGROUND
Commerce conducted over the Internet has grown dramatically in recent
years. Forrester Research, Inc., an information technology research firm,
estimates that intercompany trade of hard goods over the Internet will grow from
approximately $43 billion in 1998 to approximately $1.3 trillion in 2003.
Businesses have embraced Internet commerce because it enables them to both
increase revenues and reduce operating expenses by:
- establishing a new distribution channel for products and services;
- enhancing customer relationships by offering increased convenience and
personalization; and
- automating sales, support and customer service processes.
Because of its convenience and widespread accessibility, the Internet
provides businesses greater access to both new and existing customers. On the
Internet, businesses are not limited by geography or store hours as they seek to
reach customers domestically
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and internationally. Many customers now demand the option of purchasing goods
and services online rather than through traditional means including, for
example, stores and catalogs. Customer demand for online services has compelled
companies to respond to both traditional competitors that have extended their
sales efforts to the Internet and new competitors that only offer products and
services online.
Internet commerce also enables businesses to enhance and personalize their
client relationships. Customers can access businesses' Internet sites 24 hours
per day, seven days per week from any Internet-enabled computer in any location.
Businesses can learn more about their customers' preferences by tracking their
product research and purchasing decisions online and tailoring their offerings
to those preferences. The customer information gained can be used by businesses
to serve their customers better not only online, but also through traditional
distribution channels.
Businesses are also embracing Internet commerce because it enables them to
reduce operating expenses by automating many commerce functions. Sales, support
and customer service processes require fewer resources online than in
traditional distribution channels. Businesses can also expand and automate their
relationships with suppliers and fulfillment partners. Businesses can reduce
their facilities, personnel and inventory costs by using the Internet.
In order to extend their operations to the Internet, businesses must
implement reliable information technology solutions to run mission-critical
online business applications without which the enterprise would not be able to
operate an online business. These solutions must meet rigorous performance
requirements and typically operate 24 hours per day, seven days per week. They
must be easy to use, while accessing a wide and complex array of databases and
computing platforms. During the initial years of Internet commerce, businesses
typically addressed these requirements by either building a custom solution or
purchasing a low-end system with only basic Internet commerce functionality.
We believe that few businesses have developed custom Internet commerce
solutions on a timely and cost-effective basis. Internet technology and business
requirements are evolving so rapidly that it is difficult for internal
information technology staffs to keep pace. Custom solutions are very expensive
to develop, install and maintain. Low-end systems, while less expensive, often
cannot support high transaction volumes, address complex and changing business
requirements or operate in conjunction with other systems. For these reasons, we
believe that many of these solutions have failed to deliver the full benefits of
Internet commerce. This has led to market demand for enterprise commerce
solutions that provide:
- Complete functionality for automating sales, order management,
fulfillment and customer service;
- Scalability to manage increasing numbers of users, higher transaction
rates and larger databases as transaction volume increases;
- Flexibility to meet the varying and evolving needs of businesses and to
permit rapid and cost-effective implementation, maintenance and upgrades;
and
- Interoperability to work in conjunction with new Internet technologies
and with an organization's existing business systems.
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OUR PRODUCTS AND SERVICES
Our Commerce Exchange family of products may be arranged in a variety of
ways to meet clients' specific requirements and includes:
- Process Application Server, which provides an open, flexible foundation
to operate a sophisticated Internet business;
- WebBroker, which enables an enterprise commerce system to support
increasing demand; and
- Commerce Exchange applications, including Product Merchandising, Order
Management and Account Management.
The Commerce Exchange family of products also includes tools and business
adapters. Our tools include development tools to add functions to the system,
administration tools to manage the system and reporting tools to measure the
results of the system. Our business adapters enable integration of the Commerce
Exchange solution with existing business systems within the organization,
including manufacturing, financial, distribution and customer systems, or across
the Internet with third parties.
We provide a range of services to enable clients to implement and use the
Commerce Exchange family of products. Our professional services include project
management, implementation and integration, education and training and client
support services. As of May 1, 1999, we had 72 employees dedicated to providing
professional services and client education.
THE COMMERCE EXCHANGE SOLUTION
The Commerce Exchange solution is based on Process-Centric(TM) computing.
Process-Centric computing is an approach that enables our clients to create
software functionality modeled on their existing business practices, while
providing the flexibility to implement new Internet business processes.
Process-Centric computing enables a client's online processes to take into
account characteristics of the client's selling environment and its customers'
preferences. This approach provides each user with a personalized buying
experience. By building on process components, Process-Centric computing also
enables businesses to quickly make changes to their systems to adapt to changing
business conditions and to reduce the long-term maintenance costs associated
with supporting highly customized applications.
Our solution is designed to provide businesses with enterprise commerce
application software that is functionally comprehensive, expandable to meet the
requirements of global operations and flexible enough to apply online processes
to existing and evolving business practices. Our solution operates in
conjunction with a wide variety of Internet technologies and existing legacy
systems. The functionality and the ease of implementing, maintaining and
upgrading our products address what we believe is a growing desire by businesses
to maximize return on investment by more effectively deploying their information
systems.
COMMERCE EXCHANGE PLATFORM
Process Application Server
Our Process Application Server is a software platform upon which clients
can build and deploy sophisticated enterprise commerce solutions. The platform
is designed to allow
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these solutions to integrate with a wide variety of hardware, operating systems,
databases, Web servers and other business applications. The Process Application
Server comes bundled with our Product Merchandising, Order Management and
Account Management applications.
Developed in the C++ and Java programming languages, the platform provides
open application programming interfaces to enable custom application components
to be developed to extend a client's enterprise commerce system. The platform
supports industry standard Web browsers, including Microsoft Explorer and
Netscape Navigator, and operates on multiple operating systems, including
Microsoft Windows NT, Sun Solaris-Unix and HP-UX. Data access is handled via
native drivers that support industry-standard databases, including Microsoft SQL
Server, Oracle and Sybase. Microsoft IIS, Netscape Enterprise and Apache Web
servers are supported. The architecture is designed to facilitate migration to
other database and server platforms as client demand or market conditions
require.
The Process Application Server incorporates both generally accepted and
advanced Internet security standards, such as SSL and X.509. The security
components enable secure communication across the Internet among businesses,
customers, trading partners and the information systems they use to manage their
businesses. These secure trading environments can be established without
affecting a client's existing security scheme or firewall. Commerce Exchange
supports three main layers of security: object-level, file system and database
security.
WebBroker
Our WebBroker product can be used by clients to manage the workload of
their enterprise commerce system by intelligently distributing Internet requests
across multiple application servers. WebBroker also enables multimedia content
to be displayed quickly and efficiently. By optimizing server utilization and
minimizing wait times, WebBroker provides a lower total cost of ownership and a
higher level of client service. WebBroker also increases fault tolerance and
reliability for Internet commerce sites by eliminating reliance on a single
server.
COMMERCE EXCHANGE APPLICATIONS
Our applications work in conjunction with our Process Application Server to
provide functionality for sales, order management, fulfillment and customer
service. The adaptable nature of our applications enable clients to deploy them
in their standard form or to easily customize or extend them to meet their
individual requirements.
Our Commerce Exchange applications include:
- Product Merchandising: Our Product Merchandising application enables a
client to create an interactive catalog that provides an online buying
and selling experience. The application enables personalized product
views, as well as dynamic product pricing, discounting and promotions. It
also supports advanced up-selling, cross-selling, product comparison and
product alternative features. Self-service functions include advanced
search capabilities, resulting in an experience directed at buyers'
specific needs. Selling organizations can personalize their offerings for
different buyers, products and locations. Easy-to-use administrative
interfaces facilitate managing the addition, modification and usage of
catalog product information.
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- Order Management: Our Order Management application is designed to
support the personalized processing of orders within Commerce Exchange,
including order entry and order processing functions. Order entry
involves the capture of information required to place an order. Order
processing involves payment, shipping, inventory and taxation processes
once an order has been entered. The Order Management application supports
multiple payment and shipping methods.
- Account Management: Our Account Management application provides user
management, account tracking and management and online customer
self-service capabilities. The application enables the client to identify
and administer the users of the system and to logically assign those
users to specific groups. This enables the system functionality to be
personalized to different users and groups. The account tracking and
management functionality enables managers to set credit limits and
control and monitor the status of accounts. The application also provides
online buyers with the ability to manage their customer profile online,
as well as review shipment status and order and payment history. The
easy-to-use graphical interfaces also enable customers to cancel orders
as well as generate returns.
TOOLS
We provide a number of software development, system administration and
reporting tools that enable clients with limited programming experience to
customize and manage our software and monitor and analyze activity on their
enterprise commerce system. In addition, experienced engineers can utilize our
tools to develop advanced, customized applications for enterprise commerce as
well as other markets based on our software.
- Workplace: Our Workplace is a secure point of access for all system
management functions, such as application management, process modeling
and reporting. It provides a browser-based, remotely accessible interface
whose capabilities are determined by the security clearance of the
particular user. Workplace allows for either a single point of control or
distributed administration for all installed Commerce Exchange
applications.
- Visual Process Builder: Our Visual Process Builder enables the graphical
modeling, development and deployment of online business processes without
the need for traditional programming languages. Visual Process Builder
includes a comprehensive library of standard application process
components that enable the customization of the base application. Visual
Process Builder enables the Commerce Exchange solution to be adapted to
changing business and technology conditions.
- Business Analyzer: Our Business Analyzer enables graphical analysis and
manipulation of large amounts of data, such as products sold, total
sales, shipping analysis, site traffic, purchasing results and order
fulfillment. Clients can customize and easily build a wide variety of
reports to analyze captured data. Additionally, Business Analyzer can be
easily deployed over a corporate intranet, extranet or the Internet with
links to relational databases and existing data warehouses.
BUSINESS ADAPTERS
Our Business Adapters are designed to facilitate the seamless integration
of external business functions, allowing them to be managed within the Commerce
Exchange process
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framework. This technology allows existing enterprise resource planning, supply
chain management, client asset management and fulfillment business functions to
be extended to the Internet. Our Business Adapters are available for products in
the following areas:
- enterprise resource planning;
- supply chain management;
- client asset management;
- sales tax calculation;
- shipping and fulfillment;
- payment processing;
- digital product clearinghouse;
- messaging interfaces;
- electronic data interchange, or EDI, translators; and
- zip codes.
SERVICES
Professional services include consulting and system integration services
that are associated with the planning, installation and customization of our
products. We have developed an implementation methodology that is designed to
facilitate the rapid and cost-effective implementation of our products. Our
implementation methodology is based on the following phases:
- sales cycle analysis;
- project planning and management;
- technology analysis and preparation;
- business design;
- site design;
- site development;
- site testing;
- conversion; and
- post-implementation review.
Technical education and training services for our clients and certified
systems integration partners are available both on-site and off-site and cover
the implementation, management, utilization and customization of our products.
Product training workshops are designed to give clients and partners the
knowledge that they need to configure, support and administer their Internet
commerce systems. Product training can also be customized to meet a client's
specific business needs.
Our client support is available up to 24 hours a day, seven days a week.
Technical support services include online support via the Internet, toll-free
telephone technical support and direct support from a client satisfaction team.
We have developed client service programs, including one-on-one workshops and
client satisfaction teams consisting of a sales representative, a technical
account manager and, in many cases, an executive sponsor. Client satisfaction is
tracked on an account-by-account basis and reported to our
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executive management team. To maximize client satisfaction, we have created a
client support and satisfaction division. The division's mission is to provide a
high level of client support and service, account management and advisory
services.
THE INTERWORLD ADVANTAGE
The advantages of our solution are:
- Comprehensive Functionality -- Our solution provides a comprehensive set
of applications for efficiently managing selling processes online,
including sales, order management, fulfillment and customer service.
Consumers and business buyers are provided with personalized buying
experiences. Selling organizations are provided with a workplace capable
of remotely administering on-line storefronts, user accounts, products,
prices and content.
- State-of-the-Art Technology Foundation -- Our technology is specifically
designed to support the deployment of mission-critical online business
applications without which the enterprise would not be able to operate an
online business. Our solution scales to meet the demands of large
organizations that have complex transactions, high numbers of
simultaneous users, high transaction rates and large databases. Our
solution can accommodate a client's increasing business volumes. The
Commerce Exchange software architecture is designed to operate on many
different computing platforms and to provide a reliable, secure and
flexible environment.
- Process-Centric(TM) Computing Approach -- The flexibility of our
Process-Centric(TM) computing approach allows the Commerce Exchange
solution to adapt to dynamically changing business and technology
conditions. This approach enables a client to create online processes
based on existing and evolving business practices and to integrate
information from existing systems with their online system.
Process-Centric computing facilitates the deployment of enterprise
commerce systems.
- Interoperability -- Our products are designed to work in conjunction with
new Internet technologies and with an organization's existing business
systems and third-party technologies.
SALES AND MARKETING
We market our products and services primarily through our direct sales
organization. As of May 1, 1999, our sales force consisted of 57 employees
located in nine domestic offices (Atlanta, Georgia; Bellevue, Washington;
Boston, Massachusetts; Chicago, Illinois; Dallas, Texas; Los Angeles,
California; New York, New York; Vienna, Virginia; and San Francisco, California)
and three international offices (London, Sydney and Tokyo). We intend to
continue to add sales personnel worldwide. We supplement our direct sales
efforts with strategic marketing alliances, including relationships with Active
Software, Inc., Agency.com, Inc., Cambridge Technology Partners, Inc., Cisco
Systems, Inc., Electronic Data Systems Corporation, Fort Point Partners, Inc.,
KPMG LLP, Sun MicroSystems, Inc., Net Perceptions, Inc., Trans Cosmos USA, Inc.,
USWeb Corporation and Whittman-Hart, Ltd., all of which have referred at least
one client to us. The contractual arrangements provide for the partner to
receive training from us and then market or provide sales leads for our products
through their direct sales force. We also have active technology and
distribution partnerships with CyberSource Corporation, Federal Express
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Corporation, Hewlett-Packard Company and Cisco Systems, Inc. The contractual
arrangements provide for the joint development of compatible products or
extensions of our products, and provide for joint marketing and sales effects.
We deploy sales teams consisting of both sales and technical professionals
to create proposals, presentations and demonstrations that address the
requirements of the client. The decision makers within our prospective clients
are typically their executive management teams. Currently, the sales cycle for
our products typically ranges from two to 12 months.
Our marketing programs are targeted at sales, marketing and information
technology executives within large, multi-national organizations. Marketing
activities include branding, such as advertising and public relations campaigns;
lead generation and management; direct mail campaigns; field and channel
marketing, including joint marketing with strategic partners; product marketing;
and development of technology alliances.
CLIENTS
We believe that those organizations that are most likely to use our
products sell a large number of products, through diverse distribution channels
with a large number of trading partners. Accordingly, we market our products and
services to large domestic and international manufacturers, distributors,
retailers and direct marketers. As of May 1, 1999, we had over 70 clients.
Set forth below is a representative list of our clients. Each client listed
accounted for at least $150,000 of revenues for the eighteen month period ended
June 30, 1999.
American Eagle Outfitters, Inc.
Authentic Fitness Corporation
BP Australia Ltd.
Boo.com
Electronic Data Systems Corporation
Every CD, Inc.
Guess?, Inc.
GTE Communication Systems Corporation
Havas Interactive, Inc.
(formerly Cendant Corporation)
Insight Enterprises, Inc.
Mattel, Inc.
Micro Warehouse, Inc.
Multiple Zones International, Inc.
NIKE, Inc.
Nippon Telegram and
Telephone Corp.
Oki Data America, Inc.
PETsMART.com, Inc.
ProTeam.com, Inc.
Seagate Technology, Inc.
Techwave, Inc.
The North Face, Inc.
Warnaco Inc.
COMPETITION
There is intense competition in the Internet commerce software industry. We
expect competition to intensify in the future. We compete against the in-house
development efforts of companies engaging in Internet commerce, as well as other
software application vendors and developers. Our current competitors include Art
Technology Group, BroadVision, Inc., CommerceOne, Inc., IBM, Intershop
Communications, Inc., Microsoft Corporation, Netscape Communications
Corporation, Open Market Inc., Oracle Corporation and Pandesic LLC. We expect
other companies to enter our market. We compete principally on the basis of
product performance, client service and price. Our market is still evolving, and
we may not be able to compete successfully with current or future
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competitors, and competitive pressures faced by us may have a material adverse
effect on our business, financial condition and results of operations. See "Risk
Factors -- We face intense competition, which could adversely affect our sales
and profitability."
PRODUCT DEVELOPMENT
We have both strategic and tactical development groups. The strategic
development group focuses on developing application functionality for sales,
support and client service processes, as well as enhancing the platform and
tools. The tactical development group develops products and features in
connection with specific client implementations. To the extent that we believe
that these products have broader application, they are incorporated into the
Commerce Exchange family of products. As of May 1, 1999, our development
organization was comprised of approximately 90 developers, development managers,
quality assurance personnel and testing engineers. Our expenses for research and
development were $2.4 million, $6.9 million and $9.6 million in 1996, 1997 and
1998, respectively.
We employ a collaborative product planning and development process. The
planning process involves gathering product requirements from our sales and
marketing organizations, as well as from clients and strategic partners. Clients
and partners have input into future product direction and functionality.
We follow a rigorous quality assurance and testing process. This process is
designed to identify software defects through the entire development cycle.
Several test types are employed and defect reports and metrics are tracked to
facilitate resolution, including system testing and performance benchmarking.
PROPRIETARY RIGHTS
We rely on intellectual property laws, employee and third-party
non-disclosure agreements and other methods to protect our proprietary rights.
We currently have one patent application pending in the United States relating
to our product architecture and technology. While we believe that the pending
patent application relates to a patentable invention, the pending or any future
patent applications may not be granted, and any patent relied upon by us in the
future may be challenged, invalidated or circumvented. Moreover, the rights
granted under any patent issued to us or under licensing agreements may not
provide competitive advantages to us. We believe that, due to the rapid pace of
technological innovation for Internet commerce solutions, our ability to
establish and maintain a position of technology leadership in the industry is
dependent more on the skills of our development personnel than upon the legal
protections afforded our existing technology.
Our agreements with employees, consultants and others who participate in
the development of our software may be breached, and we may not have adequate
remedies for any breach. In addition, our trade secrets may otherwise become
known to or independently developed by competitors. Furthermore, our efforts to
protect our proprietary technology may fail to prevent the development and
design by others of products or technology similar to or competitive with those
developed by us.
The computer software market is characterized by frequent and substantial
intellectual property litigation. Intellectual property litigation is complex
and expensive, and the outcome of such litigation is difficult to predict.
BroadVision, Inc. and Open Market Inc., two of our competitors, have been issued
U.S. patents on some aspects of their electronic
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commerce products. In August 1998, we received a letter from counsel to Open
Market concerning the potential applicability of the Open Market patents to our
products. The letter stated that Open Market was prepared to meet with us to
resolve issues concerning the applicability of their patents and to discuss
terms of an appropriate license agreement. In early September 1998, we responded
to the Open Market inquiry, informing Open Market that based on our review of
the Open Market patents and the analysis and advice of our patent counsel, we
believe that the technology used in our products is sufficiently independent and
does not infringe on the patents awarded to Open Market. We have not received
any further inquiries or correspondence from Open Market since that time and
have had no inquiries or discussions with BroadVision with regard to patent
matters. Although we do not believe that we are infringing their patent rights,
either of those companies may claim that we are doing so. If a claim of patent
infringement by these or other companies was made against us, we would likely
incur significant expenses in defending against the claim, which could adversely
affect our financial condition and results of operations. In addition, if a
claim of infringement is made against us and we are not successful in defending
against the claim, we could be liable for substantial damages. We may also be
required to make royalty payments, which could be substantial, to the holder of
the patent rights. These events could have a material adverse effect on our
business, financial condition, results of operations and prospects for growth.
Our success will depend in part on our continued ability to obtain and use
licensed technology that is important to the performance of our products. An
inability to continue to procure or use such technology would likely have a
material adverse effect on us. In general, license terms range from 1 to 3 years
and, unless terminated upon notice by one of the parties, generally renew for
additional one year periods.
EMPLOYEES
As of May 1, 1999, we had a total of 274 employees. Of the total employees,
91 were in development and product management, 75 in sales and marketing, 74 in
worldwide services and 34 in administration. None of our employees are
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
PROPERTIES
Our principal offices are located in New York, New York and consist of
approximately 48,000 square feet of leased office space. In June 1999, we leased
an additional 50,000 square feet in our existing facility. As a result, our
annual rental costs for our principal offices has increased by $1.1 million to
an aggregate of approximately $2.1 million. The lease for the New York offices
expires in April 2015. With the additional space, we believe that our existing
facilities are adequate to meet our needs for the foreseeable future. We expect
to sublease a substantial portion of the additional space until we require the
space for our operations. We also rent office space in various cities in the
United States and in other countries for sales and field service and support
activities.
LITIGATION
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers
and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael J. Donahue........................ 36 Chairman
Alan J. Andreini.......................... 52 President and Chief Executive
Officer, Director
Peter Schwartz............................ 55 Chief Financial Officer
Daniel Turano............................. 50 Vice President, Worldwide Field
Operations
Stephen Law............................... 45 Vice President, Engineering
Amy Aguilar-Brown......................... 33 Vice President, Legal Affairs and
Secretary
Kenneth G. Langone........................ 63 Director
Joseph C. Robinson........................ 35 Director
Yves Sisteron............................. 44 Director
Jack Slevin............................... 62 Director
Russell West.............................. 55 Director
</TABLE>
Michael J. Donahue. Mr. Donahue co-founded InterWorld in March 1995 and
serves as our Chairman. He served as Co-Chairman and Chief Technology Officer of
InterWorld from April 1997 until June 1998. He also served as President of
InterWorld from March 1995 until April 1997. Prior to founding InterWorld, from
1992 to 1995, Mr. Donahue was the sole proprietor of Donahue & Associates, Inc.,
an information technology consulting firm specializing in strategic planning and
systems reengineering.
Alan J. Andreini. Mr. Andreini joined InterWorld in April 1997 and serves
as our President and Chief Executive Officer and as a director. He served as
President and Chief Operating Officer of InterWorld from April 1997 to June
1998, at which time he became Chief Executive Officer. Prior to joining
InterWorld, Mr. Andreini was Executive Vice President and a member of the Office
of the President of Comdisco, Inc. Mr. Andreini joined Comdisco in 1978, and was
named Senior Vice President in 1986 and Executive Vice President in 1994.
Peter Schwartz. Mr. Schwartz joined InterWorld in October 1998 and serves
as our Chief Financial Officer. Since July 1983 and prior to joining InterWorld,
Mr. Schwartz served in various financial positions with Computer Associates
International, Inc., most recently as Chief Financial Officer from April 1987 to
June 1998. From June 1977 to June 1983, Mr. Schwartz served in various financial
positions with Xerox Corporation. Mr. Schwartz also currently serves as a
director of General Semiconductor, Inc.
Daniel Turano. Mr. Turano joined InterWorld in October 1997 and serves as
our Vice President, Worldwide Field Operations. Prior to joining InterWorld, Mr.
Turano was Vice President, North American Field Operations for Scopus
Technology, Inc. from
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January 1997 to October 1997. From September 1995 to December 1996, he served as
Senior Vice President of Worldwide Field Operations for Siebel Systems, Inc.
From September 1991 to September 1995, Mr. Turano served in various senior sales
capacities at Oracle Corporation, including Group Vice President of Eastern U.S.
Sales.
Stephen Law. Mr. Law joined InterWorld in May 1998 as our Vice President,
Engineering. Prior to joining InterWorld, Mr. Law was the Chief Technology
Officer of Global Financial Services at Perot Systems Corporation from February
1997 to May 1998. Prior to joining Perot Systems, Mr. Law was the Vice President
of Global Derivatives Systems Development at Citibank Corporation from December
1992 to February 1997.
Amy Aguilar-Brown. Ms. Aguilar-Brown joined InterWorld in September 1997
as Vice President, Legal Affairs. Ms. Aguilar-Brown was also appointed Secretary
of InterWorld in May 1998. Prior to joining InterWorld, Ms. Aguilar-Brown served
as Director of Field Operations and Legal Affairs for Sybase, Inc. from April
1994 to September 1997. From January 1992 to April 1994, she served as Director
of Operations for MicroDecisionware, Inc., which was acquired by Sybase, Inc.
Kenneth G. Langone. Mr. Langone has been a director of InterWorld since
1996. Mr. Langone has been Chairman and President of Invemed Associates LLC,
which he founded, since 1974. He is a director of The Home Depot, Inc., General
Electric Company, Unifi, Inc., DBT Online, Inc. and Tricon Global Restaurants,
Inc.
Joseph C. Robinson. Mr. Robinson has been a director of InterWorld since
1995. Mr. Robinson co-founded InterWorld in March 1995 and served as its
Executive Vice President until May 1998. Since October 1998, Mr. Robinson has
served as the Chairman of UGO Networks, Inc. Prior to joining InterWorld, from
1989 to 1995, Mr. Robinson was employed by Douglas, Elliman, Gibbons and Ives, a
real estate brokerage firm.
Yves Sisteron. Mr. Sisteron has been a director of InterWorld since 1996.
Mr. Sisteron has been a Principal of Global Retail Partners, L.P., an investment
fund, since January 1996 and Manager of U.S. Investments at Carrefour S.A. since
1993. Mr. Sisteron serves as a director of P.F. Chang's China Bistro, Inc. and
Zany Brainy, Inc.
Jack Slevin. Mr. Slevin has been a director of InterWorld since 1997. From
June 1995 until his retirement in January 1999, Mr. Slevin was the Chairman and
Chief Executive Officer of Comdisco, Inc. From October 1994 to June 1995, Mr.
Slevin was Chief Operating Officer at Comdisco, Inc. and from January 1993 to
October 1994, he was Executive Vice President of North American Sales at
Comdisco, Inc. He became a member of the Office of the President when it was
created in 1992 and was a member of Comdisco's board of directors from 1979
until January 1999. Mr. Slevin is also currently a director of U.S. West, Inc.
and Telehub Network Services Corporation.
Russell West. Mr. West has been a director of InterWorld since 1996. Mr.
West has been President of OneNetPlus.com, a provider of Internet technology
solutions, since May 1999. He was an Executive Vice President and Chief
Technology Officer for Comdisco, Inc., where he was employed from 1977 to May
1999.
All directors hold office until the next annual meeting of stockholders or
until their successors have been duly elected and qualified. All of our
directors serve on the board of directors pursuant to an agreement that will
terminate upon the closing of this offering.
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COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established an audit committee and a
compensation committee. The board of directors does not have a nominating
committee. The selection of nominees to the board of directors will be made by
the entire board of directors.
The audit committee is comprised of Messrs. Langone and Slevin. The audit
committee is responsible for reviewing with management our financial controls
and accounting and reporting activities. The audit committee reviews the
qualifications of our independent auditors, makes recommendations to the board
of directors regarding the selection of independent auditors, reviews the scope,
fees and results of any audit and reviews non-audit services and related fees.
The compensation committee is comprised of Messrs. Sisteron and Slevin. The
compensation committee is responsible for the administration of all salary and
incentive compensation plans for our officers and key employees, including
bonuses. The compensation committee also administers our stock option and
employee stock purchase plans.
DIRECTOR COMPENSATION
Directors do not receive any cash remuneration for serving as directors.
All directors are eligible to participate in our stock option plan. Each of
Messrs. Langone, Sisteron, Slevin and West were granted options to purchase
40,000 shares of common stock at an exercise price of $2.00 per share upon their
appointment to the board of directors. These options vest as to 20% on the first
anniversary of the date of grant and 5% on the first day following each
completed quarter thereafter. See "-- Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Slevin, a member of the compensation committee, was Chairman and Chief
Executive Officer of Comdisco, Inc., until his retirement in January 1999.
Comdisco, Inc. has in the past provided equity and debt financing to InterWorld.
See "Certain Transactions -- Issuances of Capital Stock," " -- Issuances of
Warrants," and " -- Leases and Licenses with Comdisco, Inc.; Secured Loan from
Comdisco, Inc."
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<PAGE> 51
EXECUTIVE COMPENSATION
The following table sets forth, in accordance with the rules of the
Securities and Exchange Commission, information concerning the compensation paid
to our current Chief Executive Officer, the four other most highly compensated
executive officers, our former Chief Executive Officer and our former Vice
President, Marketing (collectively, the "Named Executive Officers") for services
rendered in all capacities to us in 1997 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
---------------------------------- SECURITIES
OTHER UNDERLYING ALL
ANNUAL OPTIONS/ OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION SAR(#) COMPENSATION
- ----------------- ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Donahue............ 1998 $240,000 -- -- -- --
Chairman 1997 240,000 -- -- -- --
Alan J. Andreini(1)........... 1998 $226,667 -- -- -- --
President and Chief 1997 146,666 -- -- 892,849(2) $28,715(3)
Executive Officer
Daniel Turano(4).............. 1998 $150,000 $ 63,723 -- -- --
Vice President, 1997 30,000 100,000 -- 195,000(5) --
Worldwide Field Operations
Stephen Law(6)................ 1998 $ 98,542 $ 38,819 -- 175,000(7) --
Vice President, 1997 -- -- -- -- --
Engineering
Amy Aguilar-Brown(8).......... 1998 $145,000 $ 10,000 -- 15,000(9) --
Vice President, Legal 1997 39,750 7,500 -- 20,000(10) --
Affairs and Secretary
Robert L. Zangrillo(11)....... 1998 $184,800 -- $103,857(12) -- --
Former Chief 1997 240,000 -- 36,000(13) -- --
Executive Officer
Susan Fairty(14).............. 1998 $150,000 $ 75,000 -- -- --
Former Vice 1997 23,333 11,667 -- 175,000(15) --
President, Marketing
</TABLE>
- -------------------------
(1) Mr. Andreini joined InterWorld in April 1997.
(2) Options were granted pursuant to our stock option plan at an exercise price
of $2.00 per share. Options to purchase 267,885 shares of common stock
granted to Mr. Andreini vested on May 1, 1997, and he exercised options to
purchase 250,000 shares in March 1998. The remaining options held by Mr.
Andreini vest (a) as to 178,570 shares of common stock, upon the
consummation of this offering, and (b) as to 446,424 shares of common
stock, in 16 equal quarterly installments commencing June 30, 1998. The
options granted to Mr. Andreini expire on July 28, 2004.
(3) Represents relocation expense reimbursement.
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<PAGE> 52
(4) Mr. Turano joined InterWorld in October 1997.
(5) Options were granted pursuant to our stock option plan at an exercise price
of $2.00 per share. Mr. Turano's options vest (a) as to 45,000 shares, on
August 15, 1998 and (b) as to the remaining 150,000 shares, 20% on November
1, 1998 and 5% on the first day following each completed quarter
thereafter. The options granted to Mr. Turano expire on November 1, 2004.
(6) Mr. Law joined InterWorld in May 1998.
(7) Options were granted pursuant to our stock option plan at an exercise price
of $4.25 per share. Mr. Law's options vest (a) as to 25,000 shares, on May
11, 1998 and (b) as to the remaining 150,000 shares, 40,000 shares vest
during his first year of employment, and 30,000 shares vest during each of
his second, third, fourth and fifth years of employment. The options
granted to Mr. Law expire on May 11, 2005.
(8) Ms. Aguilar-Brown joined InterWorld in September 1997.
(9) Options were granted pursuant to our stock option plan at an exercise price
of $4.25 per share and vest as to 20% on January 1, 1999 and as to 5% on
the first day following each completed quarter thereafter. Such options
expire on January 1, 2005.
(10) Options were granted pursuant to our stock option plan at an exercise price
of $2.00 per share and vest as to 20% on September 15, 1998 and as to 5% on
the first day following each completed quarter thereafter. Such options
expire on September 15, 2004.
(11) Mr. Zangrillo resigned in June 1998.
(12) Includes $75,000 in loan principal forgiveness and $10,857 in interest
forgiveness (see "Certain Transactions -- Loans") and $18,000 paid to a
corporation controlled by Mr. Zangrillo for rent in connection with a home
office.
(13) Represents amounts paid to a corporation controlled by Mr. Zangrillo for
rent in connection with a home office.
(14) Ms. Fairty joined InterWorld in November 1997 and resigned in February
1999.
(15) Options were granted pursuant to our stock option plan at an exercise price
of $2.00 per share. Ms. Fairty's options vested (a) as to 25,000 shares, on
November 3, 1997 and (b) as to 30,000 shares, on November 3, 1998. Ms.
Fairty exercised options to purchase 55,000 shares in March 1999 and the
remaining options terminated in connection with her resignation.
45
<PAGE> 53
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all individual grants of stock options
during the year ended December 31, 1998 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR
OPTIONS EMPLOYEES IN BASE GRANT
GRANTED FISCAL PRICE EXPIRATION DATE
NAME (#)(1) YEAR ($/SH) DATE VALUE(2)
- ---- ---------- ------------ -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Michael J. Donahue........... -- -- -- -- --
Alan J. Andreini............. -- -- -- -- --
Daniel Turano................ -- -- -- -- --
Stephen Law (3).............. 175,000 15.0% 4.25 5/11/05 $943,300
Amy Aguilar-Brown(4)......... 15,000 1.3% 4.25 1/01/05 $ 80,900
Robert L. Zangrillo.......... -- -- -- -- --
Susan Fairty................. -- -- -- -- --
</TABLE>
- -------------------------
(1) All options were granted pursuant to our stock option plan.
(2) Grant date value was determined on the date of grant using the Black-Scholes
option-pricing model based on the following assumptions: volatility -- 75%;
expected life -- five years; risk-free interest rate -- 5.55%; and no
dividend yield.
(3) The options held by Mr. Law vest (a) as to 25,000 shares, on May 11, 1998
and (b) as to the remaining 150,000 shares, 40,000 shares vest during his
first year of employment, and 30,000 shares vest during each of his second,
third, fourth and fifth years of employment.
(4) The options held by Ms. Aguilar-Brown vest as to 20% on January 1, 1999 and
as to 5% on the first day following each completed quarter thereafter.
In February 1999, we granted options to purchase 200,000 shares of our
common stock to Peter Schwartz and options to purchase 22,500 shares of our
common stock to Amy Aguilar-Brown, in both cases for an exercise price of $10.00
per share. With respect to these options, Mr. Schwartz has options to purchase
100,000 shares that are currently vested and Ms. Aguilar-Brown has options to
purchase 5,000 shares that are currently vested. The remaining options vest as
to 20% on the first anniversary of the date of grant and 5% on the first day
following each completed quarter thereafter.
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<PAGE> 54
FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the number and
value of the outstanding options held by the Named Executive Officers at
December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END(#): OPTIONS AT FISCAL YEAR-END($):
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ---- ------------------------------ ------------------------------
<S> <C> <C>
Michael J. Donahue......... 0/0 0/0
Alan J. Andreini........... 101,560/541,289 1,320,280/7,036,757
Daniel Turano.............. 75,000/120,000 975,000/1,560,000
Stephen Law................ 48,333/126,667 519,580/1,361,670
Amy Aguilar-Brown.......... 5,000/30,000 65,000/356,250
Robert L. Zangrillo........ 0/0 0/0
Susan Fairty............... 55,000/0 715,000/0
</TABLE>
- -------------------------
(1) Based on an assumed initial public offering price per share of the common
stock of $15.00.
STOCK PLANS
Stock Option Plan. We have adopted the amended and restated 1996 stock
option plan. The stock option plan permits the grant of (1) options to purchase
shares of common stock intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code and (2) options that do not so qualify,
or non-qualified options. No award may be granted under the stock option plan
after 2006. The stock option plan is administered by the compensation committee.
Under the stock option plan, 6,600,000 shares of common stock have been
reserved for issuance, subject to adjustment for stock splits, stock dividends,
recapitalizations, reclassifications and similar events. If an option granted
under the stock option plan expires unexercised or is terminated or cancelled
for any reason, the shares of common stock previously reserved for issuance upon
exercise of the option will be available for future option grants under the
stock option plan.
Options may be granted to persons who are, at the time of grant, employees,
officers or directors of or consultants to us, except that incentive stock
options may only be granted to individuals who are our employees.
Options granted under the stock option plan must be exercised within no
more than seven years of the grant date, except that an incentive stock option
granted to a person owning more than 10% of the total combined voting power of
all classes of our stock must be exercised within no more that five years of the
grant date. No options may be assigned or transferred by the optionee other than
by will or the laws of descent or distribution. Each option may be exercised
only by the optionee during his or her lifetime.
The exercise price for each option granted will be determined by the
compensation committee at the time of grant. Options may not be granted at an
exercise price less than the fair market value per share of common stock. For
incentive stock options granted to a
47
<PAGE> 55
ten percent stockholder, the exercise price shall not be less than 110% of the
fair market value per share of common stock.
Options may be made exercisable in installments, and the exercisability of
options may be accelerated by the compensation committee. Options granted under
the stock option plan typically vest 20% on the first anniversary of the date of
grant and 5% each quarter thereafter.
As of March 31, 1999, an aggregate of 4,716,331 options were outstanding
under the stock option plan at a weighted average exercise price of $5.18 per
share, options to purchase 511,886 shares had been exercised and an aggregate of
1,381,783 shares were available for future options grants. Each director who is
not our employee receives non-qualified options to purchase 40,000 shares of
common stock when such director is elected to the board.
Employee Stock Purchase Plan. We have adopted, effective upon the date of
this prospectus, an employee stock purchase plan. Under the employee stock
purchase plan, eligible employees will be provided an opportunity to purchase
shares of common stock generally through regular payroll deductions. The
employee stock purchase plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code. The total number
of shares of common stock that are authorized for issuance under the employee
stock purchase plan is 1,000,000. All of our full-time employees will be
eligible to participate in the employee stock purchase plan, subject to limited
exceptions. Employees will be given an opportunity to purchase shares of common
stock during consecutive six-month periods, and the right to purchase shares
will expire on the last day of the sixth-month period. Employees electing to
participate for any semi-annual period will authorize payroll deductions at a
stated whole percentage ranging from 2% to 10% of the employee's compensation.
The purchase price for shares offered under the employee stock purchase plan
each year will be equal to a percentage designated by the compensation committee
(not less than 85%) of the lower of the fair market value of the common stock at
the commencement or termination of the six-month period as evidenced by the
initial public offering price per share in the case of the commencement of the
six-month period beginning on the date of this prospectus or, in all other
cases, by the closing price of the common stock on such date as reported on the
Nasdaq National Market. The employee stock purchase plan will expire on the
tenth anniversary of the date of this prospectus, unless sooner terminated by
the board of directors. Our board of directors may amend, suspend or terminate
the employee stock purchase plan at any time and from time to time, subject to
limitations. The employee stock purchase plan will be administered by the
compensation committee.
401(k) PLAN
We have a defined contribution savings plan, or a 401(k) Plan, which
qualifies under Section 401(k) of the Code. Participants may contribute up to
15% of their gross wages, not to exceed, in any given year, a limitation set by
Internal Revenue Service regulations. Our 401(k) Plan provides for discretionary
contributions to be made by us as determined by our board of directors. We have
not made any discretionary contributions to our 401(k) Plan.
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<PAGE> 56
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation and bylaws provide that the liability of
our directors for monetary damages will be limited to the fullest extent
permissible under Delaware law. This limitation of liability does not affect the
availability of injunctive relief or other equitable remedies.
Our bylaws provide that we will indemnify our directors and officers to the
fullest extent permissible under Delaware law. These indemnification provisions
require us to indemnify these persons against liabilities and expenses to which
they may become subject by reason of their service as a director or officer to
us or any of our affiliated enterprises. In addition, prior to the consummation
of this offering, we will enter into indemnification agreements with each of our
directors providing indemnification to the fullest extent permitted by
applicable law and also setting forth procedures, including the advancement of
expenses, that apply in the event of a claim for indemnification.
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<PAGE> 57
CERTAIN TRANSACTIONS
ISSUANCES OF CAPITAL STOCK
In March 1996, in connection with a round of private equity financing, we
issued 7,500 shares of common stock to Yves Sisteron, one of our directors,
250,000 shares of common stock to Wight Investment Partners, a partnership in
which Robert Zangrillo, one of our principal stockholders, has a pecuniary
interest and 500,000 shares of common stock to Comdisco, Inc., a company of
which Jack Slevin, one of our directors, served as Chairman and Chief Executive
Officer and Alan J. Andreini, our President and Chief Executive Officer, also
served as a director, for a purchase price of $2.00 per share.
In July 1996, in connection with a round of private equity financing, we
issued 156,382 shares of common stock to Kenneth Langone, one of our directors
and Chairman and President of Invemed Associates LLC, an aggregate of 49,661
shares of common stock to stockholders of the corporate parent of, and officers
and employees of, Invemed Associates LLC, an aggregate of 422,651 shares of
common stock to Global Retail Partners, L.P. and its affiliates, an investment
partnership of which Mr. Sisteron is a Principal and an aggregate of 158,494
shares of common stock to George Soros, one of our principal stockholders, for
himself and for trusts for the benefit of his children, for a purchase price of
$4.732 per share.
In December 1996, in connection with a round of private equity financing,
we issued 40,000 shares of common stock to Mr. Andreini, an aggregate of 32,000
shares of common stock to Global Retail Partners, L.P. and its affiliates,
40,000 shares of common stock to Mr. Langone and an aggregate of 681,600 shares
of common stock to Mr. Soros, for himself and for trusts for the benefit of his
children, for a purchase price of $6.25 per share.
In May 1997, in connection with a round of private equity financing, we
issued 33,333 shares of common stock to Mr. Andreini, 81,500 shares of common
stock to Mr. Langone, 33,333 shares of common stock to Mr. Slevin, 501,333
shares of common stock to Mr. Soros, 133,333 shares of common stock to Comdisco,
Inc. and an aggregate of 18,500 shares of common stock to stockholders of the
corporate parent of, and officers and employees of, Invemed Associates LLC, for
a purchase price of $7.50 per share.
In November 1997, in connection with a round of private equity financing,
we issued 29,412 shares of common stock to Comdisco, Inc. and 428,000 shares of
common stock to Mr. Soros for a purchase price of $8.50 per share.
In March 1998, in connection with a round of private equity financing, we
issued 1,000 shares of common stock to Invemed Fund, L.P., a fund affiliated
with Invemed Associates LLC.
INVESTMENT BANKING FEES
In January 1999, in connection with a round of private equity financing of
$16,500,000, Invemed Associates LLC received approximately $405,000 as
compensation for investment banking services provided to us.
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<PAGE> 58
ISSUANCES OF WARRANTS
In connection with a round of private equity financing, in March 1996 we
issued warrants to Comdisco, Inc. to purchase 103,420 shares of common stock at
an exercise price of $2.00 per share.
In connection with an equipment lease financing, in March 1996, we issued
warrants to Comdisco, Inc. to purchase 37,500 shares of common stock at an
exercise price of $2.00 per share.
In connection with a letter of credit in support of a facility deposit, in
January 1997, we issued warrants to purchase 25,260 shares of common stock at an
exercise price of $6.25 per share to Comdisco, Inc.
In February 1997, in connection with an equipment lease financing, we
issued warrants to purchase 39,200 shares of common stock at an exercise price
of $6.25 per share to Comdisco, Inc.
In April 1997, we issued warrants to purchase an aggregate of 75,000 shares
of common stock at an exercise price of $7.50 per share, of which warrants to
purchase 73,657 shares were issued to Global Retail Partners, L.P. and its
affiliates as consideration for financial advisory services. Mr. Sisteron, one
of our directors, is a principal of Global Retail Partners, L.P.
In connection with two rounds of private equity financing, in November 1997
and March 1998, we issued warrants to purchase an aggregate of 110,294 and
39,864 shares of common stock, respectively, at an exercise price of $9.775 per
share to stockholders of the corporate parent of, and officers of, Invemed
Associates LLC, including warrants to purchase 103,129 shares of common stock to
Mr. Langone, in consideration for assistance provided by Invemed Associates LLC
in connection with the financings.
In connection with a loan and security agreement effective as of May 1998,
we issued a warrant to purchase up to 103,532 shares of common stock at an
exercise price of $9.775 per share to Comdisco, Inc. as described below under
"-- Leases and Licenses with Comdisco, Inc.; Secured Loan from Comdisco, Inc."
LOANS
In May 1996, we made loans, representing advances against salaries and
wages, to Messrs. Donahue, Robinson and Zangrillo in the principal amounts of
$72,118.66, $22,296.23 and $98,169.64, respectively, bearing interest at a rate
of 6% per annum. The principal and interest on the loans to Messrs. Donahue and
Robinson will be forgiven in equal annual installments starting in 1999, except
that if either of them voluntarily terminates his employment or service as a
director prior to May 2001, his loan, including interest, will become due and
payable in May 2001. In May 1998, Mr. Zangrillo repaid $23,169.64 of the
principal amount of his loan, reducing the principal amount thereof to $75,000.
The balance of Mr. Zangrillo's loan was forgiven and expensed in June 1998.
LEASES AND LICENSES WITH COMDISCO, INC.; SECURED LOAN FROM COMDISCO, INC.
During 1997, we completed a sale-leaseback transaction with Comdisco, Inc.,
selling computer equipment, office equipment and furniture and fixtures having a
fair market value of approximately $878,000, net of accumulated depreciation,
for approximately
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<PAGE> 59
$819,000, realizing a loss of approximately $59,000. The lease has been
accounted for as a capital lease. During 1997, we acquired computer equipment,
office equipment and furniture and fixtures pursuant to capital lease agreements
with Comdisco. The leases had an aggregate initial principal amount of
approximately $3,181,000. In connection with the leases, in March 1996 and
February 1997, we issued warrants to purchase 37,500 and 39,200 shares of common
stock at exercise prices of $2.00 and $6.25 per share, respectively, to
Comdisco, Inc.
During 1996 and 1997, we recognized product license and service revenues
from Comdisco, Inc. of approximately $156,000 and $12,000, respectively.
Effective as of May 1998, we entered into a secured loan agreement with
Comdisco, Inc. under which we may borrow up to $11.0 million. The loan accrues
interest, which is payable monthly, at a rate of 10% per annum and is secured by
our accounts receivable. We may borrow amounts under the line for a period of
twelve months subsequent to our initial borrowing under the loan agreement
(which occurred in October 1998) or until completion of this offering. The loan
principal is due and payable at the later of 15 months from the draw down date
of any advance or 21 months from the date of the date of the agreement. In
connection with the loan agreement, Comdisco, Inc. was issued a warrant to
purchase up to 103,532 shares of common stock at an exercise price of $9.775 per
share. Although we have borrowed under the loan agreement in the past, as of the
date of this prospectus, we have no outstanding borrowings under the loan
agreement.
RECENT SALES OF SECURITIES BY PRINCIPAL STOCKHOLDERS
In January 1998, Mr. Zangrillo sold an aggregate of 1,000,000 shares of
common stock to 13 of our then existing stockholders for an aggregate purchase
price of $6,000,000, or $6.00 per share, including an aggregate of 921,168
shares sold to George Soros, for himself and for trusts for the benefit of his
children.
In February 1998, Mr. Donahue sold 33,000 shares of common stock to Mr.
Andreini for an aggregate purchase price of $198,000, or $6.00 per share.
In March 1998, Mr. Donahue and Mr. Robinson sold an aggregate of 214,285
shares and 214,286 shares, respectively, of common stock to eight of our then
existing stockholders for an aggregate purchase price to each of them of
$1,500,000, or approximately $7.00 per share, including 78,644 shares to Mr.
Langone, 284,500 shares of common stock to Invemed Fund, L.P. and an aggregate
of 28,571 shares to an officer and an employee of Invemed Associates LLC.
In March 1998, Mr. Zangrillo sold 37,500 shares of common stock, Mr.
Donahue sold 175,571 shares of common stock and Mr. Robinson sold 71,429 shares
of common stock for an aggregate purchase price of $1,991,500, or $7.00 per
share, to one of our then existing stockholders.
In March 1998, Mr. Donahue and Mr. Zangrillo each sold 37,294 shares of
common stock for an aggregate purchase price of $633,998, or $8.50 per share, to
one of our then existing stockholders.
In November 1998, Mr. Donahue sold 56,250 shares of common stock for an
aggregate purchase price of $450,000, or $8.00 per share, to one of our then
existing stockholders.
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<PAGE> 60
In November 1998, Mr. Andreini purchased 10,000 shares of common stock for
an aggregate purchase price of $80,000, or $8.00 per share, from one of our
stockholders.
In January 1999, Mr. Zangrillo sold 612,706 shares of common stock for an
aggregate purchase price of $9.2 million, or $15 per share, subject to
adjustment based on the initial public offering price of the common stock, to
one of our then existing stockholders.
In February 1999, Mr. Donahue and Mr. Robinson sold 333,333 shares of
common stock each for an aggregate purchase price of $10.0 million, or $15 per
share, to a total of four of our then existing stockholders. With respect to
258,333 of these shares for Mr. Donahue and 108,333 of these shares for Mr.
Robinson, if we consummate this offering on or before August 30, 1999, the
purchase price will be adjusted to equal the initial public offering price. If
we do not consummate this offering by August 30, 1999, the purchase price will
be reduced to $12 per share. With respect to 75,000 of these shares for Mr.
Donahue and 225,000 of these shares for Mr. Robinson, if we consummate this
offering on or before August 30, 1999, the purchase price will be adjusted to
equal the initial public offering price. If we do not consummate this offering
by August 30, 1999, the price will remain at $15 per share.
Each of the persons who purchased shares from our principal stockholders in
the transactions described above was an accredited investor as defined in the
rules and regulations of the Securities and Exchange Commission.
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<PAGE> 61
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of July 1, 1999 and as adjusted to reflect the
sale by us of shares in this offering with respect to:
- each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
- each of the Named Executive Officers;
- each of our directors; and
- all executive officers and directors as a group.
The ownership percentages set forth in the table are based on 23,348,482
shares of common stock outstanding as of July 1, 1999 and 26,348,482 shares upon
consummation of this offering, together with applicable options and/or warrants
for each stockholder. 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 where applicable. Shares of common
stock subject to options that are presently exercisable or exercisable within 60
days of July 1, 1999 are deemed to be beneficially owned by the person holding
these options for the purpose of computing the percentage of ownership of the
person but are not treated as outstanding for the purpose of computing the
percentage of any other person.
Except as otherwise noted, the persons or entities named in the table have
sole voting and investment power with respect to all the shares of common stock
beneficially owned by them, subject to community property laws where applicable.
Except as otherwise indicated, the address of each beneficial owner of more than
5% of our common stock is c/o InterWorld Corporation, 395 Hudson Street, 6th
Floor, New York, New York 10014.
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<PAGE> 62
<TABLE>
<CAPTION>
PERCENTAGE OF
BENEFICIAL OWNERSHIP COMMON STOCK
------------------------------------------- OUTSTANDING
COMMON STOCK -------------------
COMMON STOCK UNDERLYING BEFORE AFTER
NAME OF BENEFICIAL OWNER OUTSTANDING OPTIONS/WARRANTS TOTAL OFFERING OFFERING
- ------------------------ ------------ ---------------- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Michael J. Donahue(1).... 4,909,433 0/0 4,909,433 21.0% 18.6%
Alan J. Andreini......... 366,333 308,031/0 674,364 2.9 2.5
Peter Schwartz........... 0 100,000/0 100,000 * *
Daniel Turano............ 90,000 7,500/0 97,500 * *
Stephen Law.............. 72,500 5,000/0 77,500 * *
Amy Aguilar-Brown........ 0 18,500/0 18,500 * *
Robert L. Zangrillo(2)
P.O. Box CC
Aspen, CO 81612........ 4,270,000 0/0 4,270,000 18.3 16.2
Susan Fairty............. 45,000 0/0 45,000 * *
Kenneth G. Langone(3).... 642,026 22,000/103,129 767,155 3.3 2.9
Joseph C. Robinson(4).... 1,477,952 0/0 1,477,952 6.3 5.6
Yves Sisteron(5)......... 445,763 26,000/73,657 545,420 2.3 2.1
Jack Slevin.............. 33,333 18,000/0 51,333 * *
Russell West............. 0 26,000/0 26,000 * *
George Soros(6)
888 Seventh Avenue
Suite 3300
New York, NY 10106..... 2,690,595 0/0 2,690,595 11.5 10.2
Laurence S. Zimmerman
156 West 56th Street
Suite 2001
New York, NY 10019..... 1,198,206 0/0 1,198,206 5.1 4.6
All executive officers
and directors as a
group (11 persons)..... 8,037,340 531,031/176,786 8,745,157 36.4 32.3
</TABLE>
- -------------------------
* Less than one percent.
(1) Includes 20,000 shares owned by Mr. Donahue's wife.
(2) Includes 4,000,000 shares owned of record by Strategic Global Partners,
LLC, an entity wholly owned and controlled by Mr. Zangrillo, 10,000 shares
owned by Mr. Zangrillo's wife, 10,000 shares held in trust for the benefit
of Mr. Zangrillo's child and 250,000 shares owned by Wight Investment
Partners, a partnership in which Mr. Zangrillo has a pecuniary interest.
(3) Includes 285,500 shares owned by Invemed Fund, L.P., a limited partnership
of which Invemed Associates LLC is the General Partner. Mr. Langone is the
President, Chief Executive Officer and Chairman of the Board of Invemed
Associates LLC.
(4) Includes 30,000 shares held in trust for the benefit of Mr. Robinson's
child and 3,000 shares held in a trust of which Mr. Robinson is the
trustee.
(5) Includes 438,263 shares of common stock and warrants to purchase 73,657
shares of common stock owned by Global Retail Partners, L.P. and its
affiliates, as to which Mr. Sisteron disclaims beneficial ownership. Mr.
Sisteron is a Principal of Global Retail Partners, L.P.
(6) Includes 352,330 shares held in five trusts for the benefit of members of
Mr. Soros' family.
55
<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this offering, our authorized capital stock will
consist of 115,000,000 shares, consisting of 100,000,000 shares of common stock,
par value $0.01 per share, and 15,000,000 shares of preferred stock, par value
$0.01 per share. As of March 31, 1999, we had issued and outstanding
- 23,201,885 shares of common stock,
- options to purchase 4,716,331 shares of common stock at a weighted
average exercise price of $5.18 per share, and
- warrants to purchase 534,070 shares of common stock at a weighted
average exercise price of $6.98 per share.
Information in this prospectus gives effect to the automatic conversion of all
outstanding shares of our Series A and Series B mandatorily redeemable preferred
stock into common stock upon the consummation of this offering.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted on by stockholders. The holders of common stock are not
entitled to cumulative voting rights. Subject to the rights of any preferred
stock, the holders of the common stock are entitled to receive dividends that
may be declared by the board of directors out of funds legally available for the
payment of dividends. In the event of a voluntary or involuntary liquidation,
dissolution or winding up, the holders of shares of common stock would be
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights and payment of any distributions owing to
holders of shares of preferred stock then outstanding, if any. Holders of the
shares of common stock have no preemptive rights. There are no redemption or
sinking fund provisions applicable to the shares of common stock. The
outstanding shares of common stock are, and the shares of common stock offered
by us in this offering will be, duly authorized, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Our certificate of incorporation authorizes the issuance of preferred stock
with designations, rights and preferences as may be determined from time to time
by the board of directors. Accordingly, our board of directors is empowered,
without stockholder approval, to issue preferred stock with dividends,
liquidation, voting or other rights that could adversely affect the voting power
or other rights of the holders of common stock. In the event of issuance, the
preferred stock could be used as a method of preventing a change in control.
Following this offering, no shares of preferred stock will be issued or
outstanding and we have no present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
The holders of 9,189,999 shares of common stock outstanding immediately
after this offering are entitled to have their shares registered under the
Securities Act. Under the terms of the agreement between us and the holders of
these shares, if we propose to register any of our securities under the
Securities Act after this offering, either for our own account or for the
account of other security holders exercising registration rights, these holders
are entitled to notice of the registration and are entitled to include shares in
the
56
<PAGE> 64
registration. The stockholders benefiting from these rights may also require us
to file a registration statement under the Securities Act at our expense with
respect to their shares of common stock on up to four occasions after the 180th
day following the date of this prospectus, and we are required to use our best
efforts to effect such registrations. All of these rights are subject to various
conditions and limitations, including the right of the underwriters of an
offering to limit the number of shares included in any registration.
WARRANTS
We have issued warrants to purchase 534,070 shares of common stock at a
weighted average exercise price of $6.98 per share, which are presently
exercisable. See "Certain Transactions." All warrants will expire after a period
of ten years from issuance or five years from the effective date of this
offering, whichever is later.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law prohibits, with several
exceptions, a Delaware corporation from engaging in any of a broad range of
business combinations, such as mergers, consolidations and sales of assets, with
an "interested stockholder" for a period of three years from the date that such
person became an interested stockholder. This makes a takeover of a company more
difficult and may have the effect of diminishing the possibility of certain
types of "front-end loaded" acquisitions of a company or other unsolicited
attempts to acquire a company. This may further have the effect of preventing
changes in the board of directors of a company, and it is possible that these
provisions of Delaware law could make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best
interests.
LISTING
We have applied to have the common stock approved for quotation on the
Nasdaq Stock Market's National Market under the trading symbol "INTW."
TRANSFER AGENT
The transfer agent for our common stock is Chase Mellon Shareholder
Services.
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<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Prior to 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, or the perception that such sales could occur, could adversely affect
the market price of our common stock.
Upon consummation of this offering, we will have outstanding 26,348,482
shares of common stock. Of these shares, the 3,000,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, unless they are purchased by our affiliates as that
term is defined in Rule 144 under the Securities Act (which sales would be
subject to restrictions under Rule 144). The remaining 23,348,482 outstanding
shares of common stock will be restricted securities, as that term is defined in
Rule 144, and may be sold only if registered or pursuant to an exemption from
registration such as are available by compliance with the conditions of Rule 144
under the Securities Act. Holders of 9,189,999 shares of common stock will also
have registration rights enabling them to cause us to register their shares
under the Securities Act. See "Description of Capital Stock -- Registration
Rights." In connection with this offering, we, our executive officers and
directors and substantially all of our stockholders, who will hold in excess of
23,000,000 shares of common stock outstanding after this offering, have agreed
that, subject to limited exceptions, we and they will not sell, offer or
contract to sell any shares of common stock without the prior written consent of
Invemed Associates LLC for a period of 180 days after the date of this
prospectus. See "Underwriting." We are not aware of any officers, directors or
stockholders who intend to ask Invemed Associates LLC for a waiver of these
restrictions during the 180-day period. After giving effect to the lock-up
agreements, most of the restricted securities will be eligible for sale under
Rule 144 beginning 180 days after the date of this prospectus. The foregoing
discussion does not give effect to the exercise of stock options that may occur.
After the completion of this offering, we intend to file Registration
Statements on Form S-8 under the Securities Act to register 5,941,517 shares of
common stock reserved for issuance under our stock option plan and 1,000,000
shares of common stock reserved for issuance under our employee stock purchase
plan.
58
<PAGE> 66
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the
underwriter, Invemed Associates LLC, 3,000,000 shares of common stock:
The underwriting agreement provides that the underwriter is obligated to
purchase all the shares of common stock in this offering, if any are purchased,
other than those covered by the over-allotment option described below.
We have granted to the underwriter a 30-day option to purchase on a pro
rata basis up to 450,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover over-allotments of common stock.
The underwriter proposes to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriter and selling group members may allow a discount of $ per share on
sales to other brokers/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
underwriter.
The following table summarizes the compensation we will pay:
<TABLE>
<CAPTION>
TOTAL
---------------------------
WITHOUT OVER- WITH OVER-
PER SHARE ALLOTMENT ALLOTMENT
--------- ------------- ----------
<S> <C> <C> <C>
Underwriting discounts and commissions
paid by us.............................. $ $ $
</TABLE>
We estimate that our out-of-pocket expenses for this offering will be
approximately $1.0 million.
The underwriter has informed us that it does not expect discretionary sales
to exceed 5% of the shares of common stock being offered by this prospectus.
We, as well as our directors, executive officers and substantially all of
our stockholders, who will hold in excess of 23,000,000 shares of common stock
outstanding after this offering, have agreed that, for a period of 180 days
after the date of this prospectus, we and they will not without the prior
written consent of Invemed Associates LLC, offer, sell, contract to sell, pledge
or otherwise dispose of, directly or indirectly, or, in our case, file with the
Securities and Exchange Commission a registration statement under the Securities
Act relating to, any shares of common stock or securities or other rights
convertible into or exchangeable or exercisable for any shares of common stock,
or publicly disclose the intention to make any offer, sale, contract to sell,
pledge, disposition or, in our case, filing.
In addition, our directors, executive officers and substantially all of our
stockholders have agreed that during the 180 day period they will not, without
the prior written consent of Invemed Associates LLC, enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences of ownership of shares of common stock, regardless of whether any
of the transactions described in this paragraph or the
59
<PAGE> 67
preceding paragraph is to be settled by delivery of common stock, securities or
other rights convertible into or exercisable or exchangeable for common stock,
in cash or otherwise.
Notwithstanding these restrictions:
(1) we may
- issue common stock in connection with the conversion or exchange of
convertible or exchangeable securities or the exercise of warrants or
options, in each case outstanding on the date of this prospectus,
- grant employee stock options or rights to purchase common stock under
the stock option plan or the employee stock purchase plan, and
- subject to some conditions, issue common stock in connection with the
exercise of options granted under our stock option plan; and
- issue common stock in connection with acquisitions of other entities
or substantially all of the assets of other entities; and
(2) our officers, directors and other shareholders may
- make bona fide gifts to or for the benefit, directly or indirectly,
of members of the person's family for estate planning purposes, so
long as the gifts are made other than on any securities exchange or
in the over-the-counter market and the donee agrees to terms
substantially similar to the foregoing for the underwriter's and our
benefit; and
- sell common stock acquired in this offering or in the open market.
The underwriter has not determined whether it will grant stockholders any
waivers from the 180 day lock-up described above. Among the factors the
underwriter may consider in connection with a request by a stockholder for a
waiver of the lock-up are the number of shares of our common stock subject to
the request in relation to the trading volume of the common stock and the
financial circumstances of the requesting stockholder. However, the actual
factors to be considered by the underwriter may differ from those described in
this paragraph and will depend on circumstances existing at the time of the
request.
The underwriter has reserved for sale, at the initial public offering
price, up to 275,000 shares of common stock for employees, directors, clients,
marketing, distribution and technology partners and suppliers who have expressed
an interest in purchasing common stock in this offering. The number of shares
available for sale to the general public in this offering will be reduced to the
extent these persons purchase the reserved shares. Any reserved shares not so
purchased will be offered by the underwriter to the general public on the same
terms as the other shares.
We have agreed to indemnify the underwriter against liabilities under the
Securities Act, or to contribute to payments which the underwriter may be
required to make in respect thereof.
The shares of common stock have been approved for listing on The Nasdaq
Stock Market's National Market.
60
<PAGE> 68
From time to time Invemed Associates LLC has provided assistance to us in
connection with some of our private equity financings, for which Invemed
Associates LLC, officers of Invemed Associates LLC and stockholders of its
parent received compensation. In addition, as of July 1, 1999, officers and
employees of Invemed Associates LLC and stockholders of its parent beneficially
owned an aggregate of 738,758 shares of common stock and warrants to purchase an
aggregate of 150,158 shares of common stock. Kenneth G. Langone, a director and
stockholder of InterWorld, is Chairman of the Board, Chief Executive Officer and
President of Invemed Associates LLC and is the principal stockholder of Invemed
Associates LLC's parent. See "Certain Transactions" and "Principal
Stockholders."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price has been determined by negotiations
between us and the underwriter. The principal factors considered in determining
the public offering price include:
- the information set forth in this prospectus and otherwise available to
the underwriter;
- the history of, and the prospects for, us and the industry in which we
compete;
- an assessment of our management;
- the prospects for, and timing of, our future earnings;
- the present state of our development and our current financial condition;
- the recent market prices of, and the demand for, publicly-traded common
stock of companies similar to us; and
- market conditions for initial public offerings.
The underwriter may engage in over-allotment, stabilizing transactions,
covering transactions and penalty bids in accordance with Regulation M under the
Securities Exchange Act of 1934. Over-allotment involves sales in excess of this
offering size, which creates a short position. Stabilizing transactions permit
bids to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Covering transactions involve purchases of the
common stock in the open market after the distribution has been completed in
order to cover short positions. Penalty bids permit the underwriter to reclaim a
selling concession from a selling group member when the common stock originally
sold by such selling group member is purchased in a covering transaction to
cover short positions. Stabilizing transactions, covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by O'Sullivan Graev & Karabell, LLP, New York, New York. The
O'Sullivan Graev & Karabell Profit Sharing Plan owns 22,500 shares of common
stock, and Robert Seber, a member of the firm, owns 5,000 shares of common
stock. Morgan, Lewis & Bockius LLP,
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<PAGE> 69
Philadelphia, Pennsylvania, has acted as counsel to the underwriter in
connection with this offering.
EXPERTS
The consolidated financial statements of InterWorld Corporation as of
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998 included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
CHANGE IN INDEPENDENT ACCOUNTANTS
In November 1996, we retained KPMG LLP as our independent accountants. In
July 1997, KPMG LLP resigned as our independent accountants because we entered
into a strategic partnership agreement with KPMG LLP. No audits were conducted
by KPMG LLP on our financial statements, and no reports were issued. There were
no disagreements between us and KPMG LLP on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure
during the period from their retention in November 1996 through their
resignation in July 1997.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission. This prospectus, which forms a part of the Registration
Statement, does not contain all of the information included in the Registration
Statement. Some information is omitted from this prospectus in accordance with
the rules of the Securities and Exchange Commission and you should refer to the
Registration Statement and its exhibits. Upon completion of this offering, we
will be required to file annual quarterly and other information with the
Commission. You may review a copy of the Registration Statement and any other
documents filed with the Securities and Exchange Commission at the Securities
and Exchange Commission's public reference room in Washington, D.C., and at the
Securities and Exchange Commission's regional offices in Chicago, Illinois and
New York, New York. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our Securities and Exchange Commission filings and the Registration
Statement can also be reviewed by accessing the Securities and Commission's
Internet site at http://www.sec.gov.
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<PAGE> 70
INTERWORLD CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999 (unaudited)............................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and for the three months
ended March 31, 1998 (unaudited) and 1999 (unaudited)..... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997, and 1998 and for the
three months ended March 31, 1999 (unaudited)............. F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and for the three months
ended March 31, 1998 (unaudited) and 1999 (unaudited)..... F-9
Notes to Consolidated Financial Statements.................. F-11
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of InterWorld Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
InterWorld Corporation and its subsidiaries at December 31, 1997 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has incurred substantial
operating losses, expects to incur substantial additional losses and expects
that its cash and working capital requirements will continue to increase as the
Company's operations continue to expand. These and other factors, as discussed
in Note 2, raise substantial doubt about its ability to continue as a going
concern. Management's plans in regards to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
New York, New York
March 3, 1999
F-2
<PAGE> 72
INTERWORLD CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS
DECEMBER 31, EQUITY
------------------ MARCH 31, MARCH 31,
1997 1998 1999 1999
------- ------- ----------- ------------
(UNAUDITED)
(UNAUDITED) (NOTE 16)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 6,081 $ 858 $ 7,103
Accounts receivable -- net (Note 3)..... 4,162 6,153 6,759
Prepayments and other current assets.... 78 497 1,418
Deferred offering costs................. -- -- 60
------- ------- -------
Total current assets............... 10,321 7,508 15,340
------- ------- -------
Property and equipment, net (Note 4)...... 6,648 6,070 6,932
Other assets (Note 8)..................... 462 541 513
------- ------- -------
Total assets............................ $17,431 $14,119 $22,785
======= ======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable and accrued expenses
(Note 5)............................. $ 3,447 $ 5,791 $ 5,593
Capital lease obligations to related
party-current (Note 14).............. 1,258 1,328 1,328
Deferred revenue and customer
deposits............................. 490 1,024 3,052
Deposits on preferred stock
subscriptions........................ 225 -- --
Net liabilities of discontinued
operations........................... 1,099 -- --
------- ------- -------
Total current liabilities.......... 6,519 8,143 9,973
------- ------- -------
Notes payable to related party (Note
10)..................................... -- 3,229 --
Capital lease obligations to related
party-long term (Note 14)............... 1,861 599 278
Deferred rent............................. 527 1,030 1,131
------- ------- -------
Total liabilities.................. 8,907 13,001 11,382
------- ------- -------
</TABLE>
F-3
<PAGE> 73
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS
DECEMBER 31, EQUITY
------------------ MARCH 31, MARCH 31,
1997 1998 1999 1999
------- ------- ----------- ------------
(UNAUDITED)
(UNAUDITED) (NOTE 16)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Commitments (Note 14)
Mandatorily redeemable Series A
Convertible Preferred Stock ($0.01 par
value; 8,200,000 shares authorized,
6,351,767 issued and outstanding at
December 31, 1997 and 7,539,999 issued
and outstanding at December 31, 1998 and
March 31, 1999, none issued and
outstanding pro forma) (Liquidating
preference of $37,997 at December 31,
1997 and $48,097 at December 31, 1998
and March 31, 1999) (Note 7)............ 37,319 47,334 47,379
Mandatorily redeemable Series B
Convertible Preferred Stock ($0.01 par
value; 2,500,000 shares authorized, none
issued and outstanding at December 31,
1997 and 1998, 1,650,000 issued and
outstanding, at March 31, 1999. None
issued and outstanding pro forma)
(Liquidating preference of $16,500 at
March 31, 1999) (Note 15)............... -- -- 15,569
Stockholders' deficit (Note 9):
Common stock ($0.01 par value, 35,000,000
shares authorized, 13,505,650,
13,869,786 and 14,011,886 shares issued
and outstanding at December 31, 1997 and
1998 and March 31, 1999, respectively,
23,201,885 issued and outstanding pro
forma).................................. 135 139 140 232
Additional paid-in capital................ 2,203 6,840 8,661 71,517
Accumulated deficit....................... (31,133) (53,195) (60,346) (60,346)
------- ------- ------- --------
Total stockholders' equity
(deficit)....................... (28,795) (46,216) (51,545) $ 11,403
------- ------- ------- ========
Total liabilities, mandatorily
redeemable convertible preferred
stock and stockholders' equity
(deficit)....................... $17,431 $14,119 $22,785
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 74
INTERWORLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues, net:
Product licenses (Note 8)....... $ 779 $ 4,883 $ 9,754 $ 1,546 $ 4,386
Services (Note 8)............... 1,241 3,073 4,834 866 2,615
Other........................... 408 100 2 -- --
------- -------- -------- ------- -------
Total revenues, net (Note
11)........................ 2,428 8,056 14,590 2,412 7,001
------- -------- -------- ------- -------
Cost of revenues:
Product licenses................ 82 278 671 72 208
Services........................ 1,735 6,744 6,052 1,132 2,756
Other........................... 322 107 -- -- --
------- -------- -------- ------- -------
Total cost of revenues....... 2,139 7,129 6,723 1,204 2,964
------- -------- -------- ------- -------
Gross profit................. 289 927 7,867 1,208 4,037
------- -------- -------- ------- -------
Operating expenses:
Research and development........ 2,362 6,863 9,558 1,964 3,637
Sales and marketing............. 2,435 8,487 11,969 2,064 4,968
General and administrative...... 2,730 6,405 6,356 1,425 1,213
Noncash employee compensation... 71 752 1,615 377 1,121
------- -------- -------- ------- -------
Total operating expenses..... 7,598 22,507 29,498 5,830 10,939
------- -------- -------- ------- -------
Loss from operations......... (7,309) (21,580) (21,631) (4,622) (6,902)
------- -------- -------- ------- -------
Other income (expense):
Interest income................. 112 218 265 63 92
Interest expense................ -- (313) (696) (85) (296)
------- -------- -------- ------- -------
Total other income
(expense).................. 112 (95) (431) (22) (204)
------- -------- -------- ------- -------
Loss before income taxes.......... (7,197) (21,675) (22,062) (4,644) (7,106)
Income taxes...................... -- -- -- -- (45)
------- -------- -------- ------- -------
Loss from continuing operations... (7,197) (21,675) (22,062) (4,644) (7,151)
------- -------- -------- ------- -------
</TABLE>
F-5
<PAGE> 75
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Discontinued operations (Notes 8
and 13):
Expenses from discontinued
operations of UGO Networks,
Inc.......................... -- (1,310) -- -- --
Provision for operating losses
to date of disposition....... -- (627) -- -- --
------- -------- -------- ------- -------
Net loss..................... $(7,197) $(23,612) $(22,062) $(4,644) $(7,151)
======= ======== ======== ======= =======
Basic loss per share and diluted
loss per share (Notes 6 and
7).............................. $ (0.53) $ (1.75) $ (1.60) $ (0.34) $ (0.52)
======= ======== ======== ======= =======
Basic loss per share and diluted
loss per share from continuing
operations (Notes 6 and 7)...... $ (0.53) $ (1.61) $ (1.60) $ (0.34) $ (0.52)
======= ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 76
INTERWORLD CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
-------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- ------ ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.... 13,500,000 $135 -- $ (324) $ (189)
Issuance of Series A preferred
stock warrants in connection
with sale of Series A
convertible preferred stock... -- -- $ 135 -- 135
Issuance of Series A preferred
stock warrants in connection
with equipment leases......... -- -- 49 -- 49
Accretion of mandatorily
redeemable convertible
preferred stock to redemption
value......................... -- -- (16) -- (16)
Compensatory stock options
issued to employees and
consultants................... -- -- 99 -- 99
Net loss........................ -- -- -- (7,197) (7,197)
---------- ---- ------ -------- --------
BALANCE AT DECEMBER 31, 1996.... 13,500,000 135 267 (7,521) (7,119)
Issuance of Series A preferred
stock warrants in connection
with equipment lease.......... -- -- 161 -- 161
Issuance of Series A preferred
stock warrants in connection
with security agreement....... -- -- 104 -- 104
Issuance of Series A preferred
stock warrants for consulting
services...................... -- -- 371 -- 371
Issuance of Series A preferred
stock warrants in connection
with sale of Series A
preferred stock............... -- -- 587 -- 587
Issuance of common stock upon
exercise of stock options..... 5,650 -- 7 -- 7
Compensatory stock options
issued to employees and
consultants................... -- -- 788 -- 788
Expenses related to issuance of
Series A preferred stock...... -- -- (54) -- (54)
Accretion of mandatorily
redeemable convertible
preferred stock to redemption
value......................... -- -- (28) -- (28)
Net loss........................ -- -- -- (23,612) (23,612)
---------- ---- ------ -------- --------
</TABLE>
F-7
<PAGE> 77
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
-------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- ------ ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997.... 13,505,650 $135 $2,203 $(31,133) $(28,795)
Issuance of common stock upon
exercise of stock options..... 364,136 4 684 -- 688
Compensatory stock options
issued to employees and
consultants................... -- -- 1,662 -- 1,662
Issuance of Series A preferred
stock warrants in connection
with sale of Series A
preferred stock............... -- -- 252 -- 252
Issuance of Series A preferred
stock warrants in connection
with loan agreement........... -- -- 1,023 -- 1,023
Expenses related to issuance of
Series A preferred stock...... -- -- (20) -- (20)
Accretion of mandatorily
redeemable convertible
preferred stock to redemption
value......................... -- -- (167) -- (167)
Distribution of net liabilities
of UGO Networks, Inc.......... -- -- 1,203 -- 1,203
Net loss........................ -- -- -- (22,062) (22,062)
---------- ---- ------ -------- --------
BALANCE AT DECEMBER 31, 1998.... 13,869,786 $139 $6,840 $(53,195) $(46,216)
Issuance of common stock upon
exercise of stock options..... 142,100 1 405 -- 406
Compensatory stock options
issued to employees and
consultants................... -- -- 1,531 -- 1,531
Accretion of mandatorily
redeemable convertible
preferred stock to redemption
value......................... -- -- (115) -- (115)
Net loss........................ -- -- -- (7,151) (7,151)
---------- ---- ------ -------- --------
BALANCE AT MARCH 31, 1999
(UNAUDITED)................... 14,011,886 $140 $8,661 $(60,346) $(51,545)
========== ==== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 78
INTERWORLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $(7,197) $(23,612) $(22,062) $(4,644) $(7,151)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for operating
losses-discontinued operations......... -- 627 -- -- --
Depreciation and amortization............. 282 1,393 2,505 558 707
Noncash consulting expense................ 28 407 47 47 410
Noncash employee compensation............. 71 752 1,615 377 1,121
Noncash interest expense.................. -- 157 338 17 262
Changes in discontinued operations........ -- (561) (175) (50) --
Changes in assets and liabilities:
Accounts receivable....................... (768) (3,394) (1,866) 390 (606)
Prepaid expenses and other current
assets................................. (298) 249 (419) (151) (397)
Deferred offering costs................... -- -- -- -- (60)
Accounts payable and accrued expenses..... 1,657 1,790 2,300 580 (1,199)
Deferred revenue and customer deposits.... 581 (406) 534 (170) 2,028
Other assets and liabilities.............. (280) (182) 70 22 28
Deferred rent............................. -- 527 558 176 101
------- -------- -------- ------- -------
NET CASH USED IN OPERATING
ACTIVITIES........................... (5,924) (22,253) (16,555) (2,848) (4,756)
------- -------- -------- ------- -------
Cash flows from investing activities:
Capital expenditures...................... (1,516) (3,530) (1,927) (282) (1,584)
Capital expenditures of UGO Networks,
Inc.................................... -- (117) -- -- --
------- -------- -------- ------- -------
NET CASH USED IN INVESTING
ACTIVITIES........................... (1,516) (3,647) (1,927) (282) (1,584)
------- -------- -------- ------- -------
</TABLE>
F-9
<PAGE> 79
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of notes by UGO
Networks, Inc.......................... -- 1,150 -- -- --
Principal payments on capital lease
obligations............................ -- (724) (1,284) (424) (321)
Proceeds from sale and leaseback of
equipment to related party............. -- 819 -- -- --
Net proceeds from issuance of Series A
preferred stock........................ 13,550 24,393 10,080 10,080 --
Proceeds from issuance of Series B
preferred stock........................ -- -- -- -- 16,500
Deposits on preferred stock
subscriptions.......................... -- 225 (225) (225) --
Proceeds from exercise of common stock
options................................ -- 7 688 570 406
Proceeds from notes payable to related
party.................................. -- -- 4,000 -- --
Payments of notes payable to related
party.................................. -- -- -- -- (4,000)
Notes payable to stockholders............. (49) -- -- -- --
------- -------- -------- ------- -------
NET CASH PROVIDED BY FINANCING
ACTIVITIES........................... 13,501 25,870 13,259 10,001 12,585
------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................... 6,061 (30) (5,223) 6,871 6,245
Cash and cash equivalents, beginning of
period.................................... 50 6,111 6,081 6,081 858
------- -------- -------- ------- -------
Cash and cash equivalents, end of period.... $ 6,111 $ 6,081 $ 858 $12,952 $ 7,103
======= ======== ======== ======= =======
Cash paid for:
Interest.................................. $ -- $ 154 $ 357 $ 68 $ 34
======= ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 80
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND BUSINESS
ORGANIZATION
InterWorld Corporation ("InterWorld") was incorporated in March 1995 under
the laws of the State of Delaware. The consolidated financial statements of
InterWorld include the accounts of InterWorld and its wholly owned subsidiaries,
InterWorld Technology Ventures Pty, Ltd., an Australian corporation incorporated
in November 1996, InterWorld Technology Ventures, Ltd., a Canadian corporation
incorporated in November 1996, and InterWorld U.K. Ltd., a United Kingdom
corporation incorporated in May 1998. In April 1997, InterWorld formed UGO
Networks, Inc., ("UGO," formerly ActionWorld, Inc.) under the laws of the State
of Delaware. Until March 30, 1998 InterWorld was the majority owner of UGO, and
UGO is included in the consolidated financial statements of InterWorld at
December 31, 1997. On March 30, 1998, InterWorld completed a spin-off
distribution of UGO (Note 13).
BUSINESS
InterWorld is a provider of Internet commerce software solutions that
enable manufacturers, distributors and retailers to conduct business over the
Internet. InterWorld's products, called "enterprise commerce" software, enable
companies to build their online businesses and integrate them with their
existing business practices and enterprise systems. InterWorld derives its
revenues from its family of enterprise commerce software consisting of its
Commerce Exchange platform, applications, tools and business adapters.
2. LIQUIDITY
InterWorld has incurred significant operating losses since inception. At
December 31, 1998 and March 31, 1999, InterWorld had an accumulated deficit of
$53,195 and $60,346, respectively, and working capital (deficit) of ($635) and
$5,307, respectively. Such losses have resulted principally from product
development costs, sales and marketing costs and general and administrative
costs associated with InterWorld developing its products and expanding its level
of operations. In order to fund these efforts, InterWorld completed private
placements of its mandatorily redeemable Series A Convertible Preferred Stock
("Series A Preferred") during 1996, 1997 and 1998 (Note 7). InterWorld utilized
the net proceeds from these issuances to fund operations and for working capital
requirements. The Company also completed a private placement of its mandatorily
redeemable Series B Convertible Preferred Stock ("Series B Preferred") in
January 1999 providing gross proceeds of approximately $16,500 (Note 15).
Effective as of May 1998, InterWorld's secured loan agreement with a holder of
Series A Preferred was amended to increase to $11,000 the maximum borrowings
that could be made by InterWorld to fund its future cash requirements (Note 10).
The accompanying consolidated financial statements have been prepared
assuming InterWorld will continue as a going concern. InterWorld's net losses
and negative cash
F-11
<PAGE> 81
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
flows from operations and expected additional losses raise substantial doubt
about its present ability to continue as a going concern. InterWorld's ability
to continue as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations as they come due.
Management is also actively pursuing other financing options which include
securing additional equity financing through an initial public offering. If for
any reason the initial public offering is delayed or postponed, InterWorld
intends to seek additional private equity financing. Management believes that
sufficient funding will be available to meet its planned business objectives for
a reasonable period of time; however, there can be no assurance that InterWorld
will be successful in its efforts to raise additional capital. The consolidated
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of the recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
InterWorld and its wholly owned and majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
Assets and liabilities of InterWorld's foreign subsidiaries are translated
to U.S. dollars based on exchange rates at the end of the respective reporting
period. Income and expense items are translated at average exchange rates during
the period. Transaction gains and losses are included in the determination of
operating expenses. Cumulative translation adjustments are insignificant at
December 31, 1998 and March 31, 1999.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents, which are stated at cost, consist of short-term, highly
liquid investments, with original maturities of less than three months when
purchased. Interest is accrued as earned.
ACCOUNTS RECEIVABLE -- NET
Accounts receivable are stated net of allowance for doubtful accounts of
$622, $1,217 and $1,194 at December 31, 1997 and 1998 and March 31, 1999,
respectively.
F-12
<PAGE> 82
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUIPMENT
Equipment is stated at cost. Depreciation is provided on a straight-line
basis over the estimated useful lives of the respective assets as follows:
<TABLE>
<S> <C>
Computer equipment and software... 3 years
Leasehold improvements............ Shorter of lease term or estimated
useful life
Furniture and fixtures............ 5 years
Office equipment.................. 3 years
</TABLE>
REVENUE RECOGNITION
Effective January 1, 1997 InterWorld adopted AICPA Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides guidance on
when and in what amounts revenue should be recognized for licensing, selling,
leasing, or otherwise marketing computer software. The adoption of SOP 97-2 did
not have a material impact on InterWorld's results of operations for the year
ended December 31, 1997.
During 1998, InterWorld also adopted SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" ("SOP
98-9"). SOP 98-9 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative vendor specific objective evidence of the elements. The adoption of SOP
98-9 did not have a material impact on InterWorld's results of operations for
the year ended December 31, 1998.
PRODUCT LICENSES
Revenue from the licensing of InterWorld's software products is recognized
upon delivery to the customer, pursuant to an executed software licensing
agreement when no significant vendor obligations exist, the fee is fixed or
determinable and collection is probable. If acceptance by the customer is
required, revenue is recognized upon customer acceptance. Amounts received from
customers in advance of product shipment are classified as deposits from
customers. InterWorld enters into reseller arrangements for its products that
typically provide for license fees payable to InterWorld based on a percentage
of the InterWorld's list price. License revenues from InterWorld's reseller
arrangements are recognized when the fee is fixed or determinable upon delivery
by the reseller when collection is probable.
SERVICES REVENUE
Revenue from professional services, such as custom development,
installation and integration support, is recognized as the services are
rendered. Contracts for professional services requiring significant production,
modification or customization to InterWorld's software products are recognized
on a percentage of completion basis.
F-13
<PAGE> 83
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue from maintenance and customer support services, such as telephone
support and product enhancements is recognized ratably over the period of the
agreement under which the services are provided, typically one year.
Deferred revenue consists principally of billings in advance for services
not yet provided.
ADVERTISING COSTS
Advertising costs included in sales and marketing expenses are expensed as
incurred and approximated $204, $455, $470 and $29 for the years ended December
31, 1996, 1997 and 1998 and for the three months ended March 31, 1999,
respectively.
RESEARCH AND DEVELOPMENT
InterWorld charges all costs incurred to establish the technological
feasibility of a product or product enhancement to research and development
expense as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of accounts receivable, accounts payable, accrued
expenses and notes payable approximates their fair values due to the relatively
short maturity of these instruments.
INTERIM FINANCIAL DATA
The unaudited financial data at March 31, 1999 and for the three months
ended March 31, 1998 and 1999 have been prepared by management and include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the results of operations and cash flows. The results of operations for
the three months ended March 31, 1999 are not necessarily indicative of the
operating results to be expected for the entire year ending December 31, 1999.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred
tax assets and liabilities reflect the tax rates expected to be in effect for
the years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or all of the
deferred tax asset will not be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments
F-14
<PAGE> 84
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
embedded in other contracts and for hedging activities. SFAS 133 requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. At March 31, 1999, InterWorld did not own any derivative
instruments and had not engaged in any hedging activities during the three
months ended March 31, 1999. InterWorld does not expect to purchase derivative
instruments or enter into hedging activities in the foreseeable future.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at December 31, 1997,
1998 and March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1997 1998 1999
------ ------ ---------
<S> <C> <C> <C>
Computer equipment and software................... $4,196 $5,967 $6,483
Office equipment.................................. 1,330 1,447 1,481
Leasehold improvements............................ 1,967 1,974 2,529
Furniture and fixtures............................ 835 867 1,325
------ ------ ------
8,328 10,255 11,818
Less: Accumulated depreciation and amortization... (1,680) (4,185) (4,886)
------ ------ ------
Property and equipment, net....................... $6,648 $6,070 $6,932
====== ====== ======
</TABLE>
Computer equipment and software, office equipment, and furniture and
fixtures include approximately $2,024, $1,149 and $827, respectively, of fixed
assets acquired under capital leases at December 31, 1997, 1998 and March 31,
1999. Accumulated depreciation related to these assets approximated $1,536,
$2,108 and $2,413 for the years ended December 31, 1997 and 1998 and for the
three months ended March 31, 1999, respectively.
F-15
<PAGE> 85
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following at
December 31, 1997, 1998 and March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1997 1998 1999
------ ------ ---------
<S> <C> <C> <C>
Trade accounts payable............................ $ 607 $3,047 $2,650
Accrued commissions............................... 509 264 434
Accrued incentive compensation.................... 856 615 575
Accrued professional fees......................... 160 674 28
Accrued financing fees............................ -- -- 900
Other accrued expenses............................ 1,315 1,191 1,005
------ ------ ------
$3,447 $5,791 $5,592
====== ====== ======
</TABLE>
6. LOSS PER COMMON SHARE
Effective December 31, 1997, InterWorld adopted SFAS No. 128, "Earnings per
Share" ("SFAS 128") which requires presentation of basic earnings per share
("Basic EPS") and diluted earnings per share ("Diluted EPS") by all entities
that have publicly traded common stock or potential common stock (options,
warrants, convertible securities or contingent stock arrangements). SFAS 128
also requires presentation of earnings per share by an entity that has made a
filing or is in the process of filing with a regulatory agency in preparation
for the sale of those securities in a public market. Basic EPS is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period. The computation
of Diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an antidilutive effect on earnings.
All prior periods presented have been restated for the adoption of SFAS
128.
F-16
<PAGE> 86
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The computations of basic loss per share and diluted loss per share for the
years ended December 31, 1996, 1997 and 1998 and for the three months ended
March 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net loss............. $ (7,197) $ (23,612) $ (22,062) $ (4,644) $ (7,151)
----------- ----------- ----------- ----------- -----------
Loss from continuing
operations......... (7,197) (21,675) (22,062) (4,644) (7,151)
----------- ----------- ----------- ----------- -----------
Weighted average
shares outstanding
used for basic loss
and diluted loss
per share.......... 13,500,000 13,500,709 13,771,371 13,507,149 13,867,442
Basic loss and
diluted loss per
share.............. $ (0.53) $ (1.75) $ (1.60) $ (0.34) $ (0.52)
=========== =========== =========== =========== ===========
Basic loss and
diluted loss per
share from
continuing
operations......... $ (0.53) $ (1.61) $ (1.60) $ (0.34) $ (0.52)
=========== =========== =========== =========== ===========
</TABLE>
At December 31, 1998, outstanding options to purchase 3,428,155 shares of
common stock, with exercise prices ranging from $1.25 to $8.50 per share, and at
March 31, 1999 options to purchase 4,716,331 shares of common stock with
exercise prices ranging from $1.25 to $10.00, have been excluded from the
computation of diluted loss per share as they are antidilutive. Outstanding
warrants to purchase 534,070 shares of Series A Preferred with exercise prices
ranging from $2.00 to $9.775 per share were also antidilutive and excluded from
the computation of diluted loss per share at both December 31, 1998 and March
31, 1999. Common shares issuable upon conversion of Series A Preferred and
Series B Preferred have also been excluded from the computation of diluted loss
per share at December 31, 1998 and March 31, 1999 as they are antidilutive.
In January 1999, InterWorld completed the sale and issuance of 1,650,000
shares of Series B Preferred which are convertible into common stock (Note 15).
InterWorld also granted options to purchase 1,604,567 shares of common stock
(Note 15) in February 1999.
F-17
<PAGE> 87
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMON STOCK AND CONVERTIBLE PREFERRED STOCK
COMMON AND PREFERRED STOCK SPLITS
Effective March 5, 1996, InterWorld implemented a 5,400-for-1 stock split,
effected in the form of a stock dividend, applicable to all issued and
outstanding shares of InterWorld's common stock.
On July 12, 1996, InterWorld implemented a 2.5-for-1 stock split applicable
to all issued and outstanding shares of InterWorld's common and preferred stock
(without changing the par value thereof).
All common and preferred shares and related per share data reflected in the
accompanying financial statements and notes thereto have been presented as if
the stock splits had occurred on January 1, 1996.
COMMON STOCK
In June 1998, the Board of Directors authorized an increase in the number
of authorized shares of InterWorld's common stock from 27,000,000 shares to
35,000,000 shares. The Board of Directors also authorized an increase to
100,000,000 shares of common stock to be effective upon commencement of
InterWorld's planned initial public offering. In addition, the Board of
Directors also approved the authorization of an additional 15,000,000 shares of
preferred stock, $.01 par value.
MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK
At December 31, 1998, InterWorld had authorized the issuance of 8,200,000
shares of preferred stock, $.01 par value. Such preferred shares have been
designated as Series A Preferred. The holders of Series A Preferred are entitled
to (i) share in dividends on a pro-rata basis with common stockholders on an
as-converted basis; (ii) a liquidation preference equal to the sum of the price
paid per share and all declared and unpaid dividends (the "Preference Amount");
(iii) demand redemption of the Preference Amount in the event of a merger where
the shareholders of InterWorld do not control the surviving entity or a sale of
all or substantially all of InterWorld's assets; (iv) mandatory redemption of
the Preference Amount in cash at any date on or after March 2003 by a majority
vote of the Series A preferred holders; (v) vote on all matters on an as
converted basis; and (vi) convert to common stock at the Preference Amount
multiplied by the shares to be converted divided by the conversion price (the
"Conversion Price") per share. The initial Conversion Price is equal to the
issuance price per share of Series A Preferred, and is subject to adjustment in
the event shares of common stock are issued without consideration or for
consideration per share less than the conversion price.
F-18
<PAGE> 88
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, InterWorld had sold and issued in six private
placements an aggregate of 7,539,999 shares of Series A Preferred. A summary of
the issuances are as follows:
<TABLE>
<CAPTION>
CARRYING VALUE
ISSUANCE DECEMBER 31,
PRICE GROSS ----------------- REDEMPTION
DATE SHARES PER SHARE PROCEEDS 1997 1998 VALUE
- ---- --------- --------- -------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
March 1996............. 1,287,500 $2.00 $ 2,575 $ 2,475 $ 2,494 $ 2,575
July 1996.............. 1,056,631 4.732 5,000 5,000 5,000 5,000
December 1996.......... 956,000 6.25 5,975 5,975 5,975 5,975
January-June 1997...... 164,000 6.25 1,025 1,025 1,025 1,025
August 1997............ 1,122,931 7.50 8,422 8,422 8,422 8,422
September 1997......... 1,764,705 8.50 15,000 14,422 14,532 15,000
March 1998............. 1,188,232 8.50 10,100 -- 9,886 10,100
--------- ------- ------- ------- -------
Total........ 7,539,999 $48,097 $37,319 $47,334 $48,097
========= ======= ======= ======= =======
</TABLE>
The Series A Preferred shares are subject to automatic conversion upon
consummation of an underwritten public offering of InterWorld's common stock
providing aggregate proceeds, net of underwriting discounts and commissions, of
greater than $10,000.
In connection with the March 1996 Series A Preferred issuance, InterWorld
issued warrants to an investor to purchase 103,420 shares of Series A Preferred,
at an exercise price of $2.00 per share. The fair value of the warrants in the
amount of $135 has been recorded to additional paid-in capital. The warrants may
be exercised at any time and expire ten years from issuance or five years from
the effective date of InterWorld's initial public offering, whichever is later.
In connection with the September 1997 Series A Preferred issuance,
InterWorld issued warrants to purchase an aggregate of 110,294 shares of its
Series A Preferred, at an exercise price of $9.775 per share, as a placement
fee. The fair value of the warrants in the amount of $587 has been recorded to
additional paid-in-capital.
InterWorld incurred cash expenses of $54 and $20 during 1997 and 1998,
respectively, in connection with the Series A Preferred issuances.
In November 1997, InterWorld had authorized the issuance of 1,188,235
shares of Series A Preferred at $8.50 per share. As of December 31, 1997,
InterWorld had received deposits in the amount of $225 for subscriptions to
purchase 26,471 shares.
During 1997, InterWorld issued warrants to purchase 75,000 shares of Series
A Preferred at $7.50 per share to a financial advisor. The fair value of the
warrants in the amount of $371 was expensed during 1997.
In March 1998, in connection with the sale and issuance of Series A
Preferred, InterWorld issued warrants to purchase an aggregate of 39,864 shares
of its Series A
F-19
<PAGE> 89
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred at an exercise price of $9.775 per share as a placement fee. The fair
value of the warrants in the amount of $252 has been recorded to
paid-in-capital.
The excess of the redemption value over the carrying value of Series A
Preferred is being recorded by periodic charges to stockholders' equity through
March 2003, the earliest date at which the Series A Preferred holders may
require redemption of their shares.
8. TRANSACTIONS WITH RELATED PARTIES
During 1996 and 1997, InterWorld recognized product license and service
revenues from sales to a holder of Series A preferred of $156 and $12,
respectively.
In May 1996, InterWorld made loans in the aggregate amount of $193, bearing
interest at a rate of 6% per annum, to its three co-founders. The principal and
interest on the loans to two of the founders, in the aggregate amount of $114,
will be forgiven in equal installments starting in 1999, except that if either
of them voluntarily terminates his employment or service as a director prior to
May 2001, his loan including interest will become due and payable in May 2001.
In May 1998 the third founder repaid $23 of the principal amount of his loan,
reducing the principal amount of the loan to $75. The balance of such loan was
forgiven and expensed in June 1998. Interest income from such loans amounted to
$7, $12 and $9 in 1996, 1997 and 1998, respectively. At December 31, 1997 and
1998, other assets included $211 and $114, respectively, in amounts due from co-
founders.
During 1998, InterWorld recognized product license and service revenue from
sales to UGO of $474. All sales to UGO were for product licenses and services
provided subsequent to UGO's spin-off on March 30, 1998 (Note 13).
9. STOCK OPTION, DEFINED CONTRIBUTION AND PROFIT SHARING PLANS
STOCK OPTION PLANS
In March 1996, InterWorld implemented its 1996 Stock Option Plan (the
"Plan") whereby incentive and nonqualified options to purchase shares of
InterWorld's stock may be granted to directors and employees of InterWorld and
its subsidiaries. In June 1998, the Board of Directors approved amendments to
the Plan whereby the aggregate number of shares of common stock for which
options may be granted under the Plan was increased to 6,600,000. The exercise
and vesting periods and the exercise price for options granted under the Plan
are determined by the Board of Directors or a Committee of the Board of
Directors. The Plan stipulates that no option may be exercisable after seven
years from the date of grant. The fair market value of InterWorld's common stock
is determined by the Board of Directors. Options granted under the Plan
generally vest over a period of five years, 20% on the first anniversary of the
date of grant and 5% each quarter thereafter.
F-20
<PAGE> 90
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize activity regarding stock options for the
years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of
year............... -- 1,269,750 $1.25 2,904,737 $1.71
Options granted...... 1,271,750 $1.25 1,821,749 $2.00 875,068 $4.25
Options granted...... -- -- 291,050 $8.50
Options exercised.... -- (5,650) $1.25 (364,136) $1.89
Options forfeited.... (2,000) $1.25 (181,112) $1.38 (278,564) $2.39
--------- --------- ---------
Options outstanding,
end of year........ 1,269,750 $1.25 2,904,737 $1.71 3,428,155 $2.86
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT WEIGHTED AVERAGE
DECEMBER 31, 1998 REMAINING CONTRACTUAL LIFE
---------------------- --------------------------
<S> <C> <C>
At $1.25.......................... 902,750 5.0
At $2.00.......................... 1,455,579 5.6
At $4.25.......................... 781,576 6.2
At $8.50.......................... 288,250 6.5
</TABLE>
InterWorld applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its Plan and other stock-based compensation issued to employees. During the
years ended December 31, 1996, 1997, and 1998, InterWorld has recognized
compensation expense for options granted to employees of $71, $752 and $ 1,615,
respectively. InterWorld estimates that it will recognize compensation expense
in an aggregate amount of $4,385 in future years as options vest for grants made
during 1996, 1997 and 1998. (See Note 15 for compensation expense for Options
granted in 1999).
During 1996, 1997 and 1998, InterWorld issued 20,000, 15,000 and 8,706
options, respectively, to third party consultants in exchange for services.
InterWorld has recognized non-cash expense of $28 in 1996, $36 in 1997 and $47
in 1998 based on the fair value of such options at the date of grant.
Had compensation cost for option grants to employees been determined based
upon the fair value at the date of grant for awards under the Plan consistent
with the methodology prescribed under SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), InterWorld's net loss and loss per share for the
years ended December 31, 1996, 1997 and 1998 would have increased by
approximately $115, or $0.01 per share, $677 or $0.05, and $1,568 or $0.11 per
share, respectively.
F-21
<PAGE> 91
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair values of options granted to employees during the years ended
December 31, 1996, 1997 and 1998 have been determined on the date of the
respective grant using the Black-Scholes option-pricing model based on the
following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Dividend yield.................................... None None None
Weighted average risk-free interest rate on date
of grant........................................ 6.21% 5.90% 5.11%
Forfeitures....................................... None None None
Expected life..................................... 5 years 5 years 5 years
Volatility........................................ 75% 75% 85%
</TABLE>
DEFINED CONTRIBUTION PLAN
InterWorld has a defined contribution savings plan (the "Plan"), which
qualifies under Section 401(k) of the Internal Revenue Code. Participants may
contribute up to 15% of their gross wages not to exceed, in any given year, a
limitation set by Internal Revenue Service regulations. The Plan provides for
discretionary contributions to be made by InterWorld as determined by its Board
of Directors. InterWorld has not made any contributions to the Plan.
10. SECURED LOAN AGREEMENT
Effective as of May 1998, InterWorld's secured loan agreement with a holder
of Series A Preferred was amended to increase to $11,000 the maximum borrowings
that could be made by InterWorld. The loan accrues interest, which is payable
monthly, at a rate of 10% per annum and is secured by the accounts receivable of
InterWorld. InterWorld may borrow amounts under the loan agreement for a period
of twelve months subsequent to its initial borrowing under the loan agreement or
until completion of an initial public offering by InterWorld. The loan principal
is due and payable the later of 15 months from the initial borrowing or 21
months from the date of the agreement. The initial borrowing under the loan
agreement occurred on October 26, 1998.
At December 31, 1998, InterWorld had $4,000 in outstanding borrowings under
the loan agreement. Interest expense recognized on the loan in 1998 amounted to
$60.
The amount of $3,229 presented as notes payable to stockholders on the
balance sheet at December 31, 1998 is net of unamortized debt discount.
The lender was issued a warrant to purchase 51,766 shares of Series A
Preferred at an exercise price of $9.775 per share upon execution of the loan
agreement. The lender was also issued a warrant to purchase an additional 51,766
shares of Series A Preferred at a price of $9.775 per share upon InterWorld's
initial borrowing under the loan agreement in October, 1998.
The aggregate fair value of the warrants in the amount of $1,023 has been
recorded as debt discount on the loan obligation and is being amortized to
interest expense over a period of twelve months.
F-22
<PAGE> 92
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CONCENTRATIONS OF RISK AND CUSTOMER INFORMATION
Financial instruments which potentially subject InterWorld to
concentrations of credit risk are primarily cash, accounts receivable, accounts
payable, and notes payable. InterWorld generally does not require collateral and
the majority of its trade receivables are unsecured. InterWorld sells its
products to a wide range of commercial enterprises. InterWorld had no
significant foreign revenue in any of the periods presented.
For the year ended December 31, 1996, two customers accounted for 31% and
17% of net revenues. For the year ended December 31, 1997, two different
customers accounted for 11% and 10% of net revenues. For the year ended December
31, 1998, another customer accounted for 14% of net revenues. For the three
months ended March 31, 1999, two customers accounted for 27% and 15% of net
revenues.
For the years ended December 31, 1996, 1997 and 1998 and for the three
months ended March 31, 1999, InterWorld's foreign sales were not material.
12. INCOME TAXES
InterWorld has incurred losses since inception which have generated net
operating loss carryforwards of approximately $39,210 and $43,316 at December
31, 1998 and March 31, 1999, respectively, for federal and state income tax
purposes. These carryforwards are available to offset future taxable income and
expire in 2011 through 2019. At December 31, 1998 and March 31, 1999, InterWorld
also had research and development tax credit carryforwards in the amount of
$1,437 and $1,800, respectively, which expire in 2002 through 2019.
Section 382 of the Internal Revenue Code of 1986, as amended (the "IRC"),
places a limitation on the utilization of federal net operating loss
carryforwards upon the occurrence of an ownership change. In general, a change
in ownership occurs when a greater than 50 percent change in ownership takes
place over a three year testing period. The annual utilization of net operating
loss carryforwards generated prior to such change is limited, in any one year,
to a percentage of the entity's fair value at the time of the change in
ownership. As a result of certain equity transactions consummated by InterWorld,
a change in ownership, as defined by Section 382 of the IRC, has occurred during
the three months ended March 31, 1999.
The net operating loss carryforwards and temporary differences between
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax benefit of $21,842 and $24,507 at
December 31, 1998 and March 31, 1999, respectively. InterWorld's operating plans
anticipate taxable income in future periods; however, such plans make
significant assumptions which cannot be reasonably assured, including market
acceptance of InterWorld's products and services by customers. Therefore, in
consideration of InterWorld's accumulated losses and the uncertainty of its
ability to utilize this deferred tax benefit in the future, InterWorld has
recorded a valuation allowance in the amount of $21,842 and $24,507 at December
31, 1998 and March 31, 1999, respectively, to offset the deferred tax benefit
amount.
F-23
<PAGE> 93
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the noncurrent deferred tax asset at December 31,
1997 and 1998 and March 31, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss............................ $10,690 $17,250 $ 19,059
Net operating loss of discontinued operations... 616 -- --
Provision for losses of discontinued
operations to date of disposition.......... 295 -- --
Foreign operating loss carryforward........... 792 1,781 2,251
Accruals, reserves and other.................. 1,273 1,061 1,049
Research and development credits.............. 481 1,437 1,801
Depreciation.................................. -- 101 135
Nonqualified stock options and warrants....... 204 212 212
------- ------- --------
Total deferred tax assets.................. 14,351 21,842 24,507
------- ------- --------
Deferred tax liabilities:
Depreciation.................................. (77) -- --
------- ------- --------
Total deferred tax liabilities............. (77) -- --
------- ------- --------
Net deferred tax asset.......................... 14,274 21,842 24,507
------- ------- --------
Less: valuation allowance....................... (14,274) (21,842) (24,507)
------- ------- --------
Deferred tax asset, net......................... $ -- $ -- $ --
======= ======= ========
</TABLE>
F-24
<PAGE> 94
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. income tax rate to income (loss)
before taxes as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
-------------------- MARCH 31,
1996 1997 1998 1999
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Federal income tax statutory rate.......... (35)% (35)% (35)% (35)%
State income taxes, net of federal tax
benefit.................................. (12) (12) (9) (9)
Excess foreign tax benefits................ -- -- 4 --
Incentive stock options.................... -- 1 3 5
Other nondeductible items.................. -- -- 3 2
Increase in valuation allowance............ 47 46 34 37
--- --- --- --------
Income tax rate as recorded................ -- -- -- --
=== === === ========
</TABLE>
13. DISCONTINUED OPERATIONS
On March 30, 1998, InterWorld completed a spin-off distribution of its
subsidiary UGO, reducing its majority ownership to a minority interest of
approximately 18%. Since March 30, 1998, InterWorld's minority interest in UGO
has decreased to approximately 10% as a result of private equity financings by
UGO. Common shares of UGO were distributed to the InterWorld's common and
preferred stockholders of record as of March 30, 1998 on the basis of 0.18 a
common share of UGO for each common and preferred share (on an as converted
basis) of InterWorld. UGO is an online retailer of game and entertainment
software.
InterWorld has presented UGO as a discontinued operation in the
Consolidated Statement of Operations for the year ended December 31, 1997. A
provision of $627 for estimated operating losses through the disposal date was
recorded at December 31, 1997. The costs of disposal were not expected to be
significant.
A summary of the net liabilities distributed is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 30, 1998
----------------- --------------
<S> <C> <C>
Cash........................................... $ 596 $ 96
Equipment, net................................. 92 315
Other current assets........................... 20 53
Notes payable.................................. (1,150) (1,400)
Accounts payable and accrued expenses.......... (30) (113)
------- -------
$ (472) $(1,049)
======= =======
</TABLE>
F-25
<PAGE> 95
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
InterWorld has not guaranteed and is not contingently liable for any
obligations of UGO. InterWorld carries its investment in UGO at cost and it has
no continuing significant involvement in the operations of UGO.
During 1997, UGO had no revenues and incurred net losses of $1,310. The
basic loss per share and diluted loss per share for the year ended December 31,
1997 attributable to discontinuance of the operations of UGO was approximately
$0.14 per share.
14. COMMITMENTS
Leases
InterWorld has entered into noncancelable operating leases primarily for
office space, furniture and office equipment with initial or remaining terms of
six months or more. Total rent expense amounted to $365, $1,349 and $1,283 for
the years ended December 31, 1996, 1997 and 1998, respectively.
During 1997, InterWorld completed a sale-leaseback transaction with a
holder of Series A Preferred, selling computer equipment, office equipment, and
furniture and fixtures of $878, net of accumulated depreciation, for $819, and
realizing a loss of $59. The lease has been accounted for as a capital lease.
During 1997 InterWorld acquired computer equipment, office equipment, and
furniture and fixtures pursuant to capital lease agreements with the Series A
Preferred holder. The leases had an aggregate initial principal amount of
$3,181. In connection with the leases InterWorld issued the lessor in March 1996
and February 1997 warrants to purchase 37,500, and 39,200 shares of Series A
Preferred, at exercise prices of $2.00 and $6.25 per share, respectively. The
aggregate fair value of the warrants in the amount of $210 has been recorded as
debt discount on the related capital lease obligation and is being amortized to
interest expense over the term of the lease. During 1997 and 1998, InterWorld
recognized interest expense of $52 and $70 related to the warrants.
F-26
<PAGE> 96
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments by year under operating and capital leases
with initial or remaining terms of one year or more consisted of the following
at December 31, 1998:
<TABLE>
<CAPTION>
YEAR OPERATING CAPITAL
- ---- --------- -------
<S> <C> <C>
1999........................................................ $1,006 $1,505
2000........................................................ 1,138 627
2001........................................................ 930 --
2002........................................................ 852 --
2003........................................................ 825 --
2004 and thereafter......................................... 3,836 --
------ ------
Total minimum lease payments........................... $8,587 2,132
------ ------
Less: Amounts representing interest........................ (118)
------
Present value of future minimum lease payments.............. 2,014
Less: Current maturities................................... 1,398
------
CAPITAL LEASE OBLIGATIONS-LONG TERM.................... $ 616
======
</TABLE>
A Series A Preferred stockholder in January 1997 issued an irrevocable
letter of credit with a term of one year, in the amount of $1,579 as security
for performance under an office space lease. As consideration for the issuance,
InterWorld issued the Series A Preferred stockholder warrants to purchase 25,260
shares of Series A Preferred, at an exercise price of $6.25. The fair value of
such warrants, in the amount of $104, was recorded as interest expense during
1997.
15. SUBSEQUENT EVENTS
In January 1999, InterWorld completed the sale and issuance of 1,650,000
shares of Series B Preferred at $10.00 per share, providing gross proceeds of
$16,500 and net proceeds, after deducting placement fees and other expenses paid
by InterWorld, of $15,510. Except with respect to potential adjustments to the
conversion price, InterWorld's Series B Preferred shares provide the same rights
and preferences as those of prior Series A Preferred issuances.
In January 1999, InterWorld utilized a portion of net proceeds from the
issuance of the Series B Preferred to repay $4,000 under its secured loan
agreement (Note 10).
In February 1999, InterWorld granted to employees and consultants options
to purchase 1,604,567 shares of common stock, all at an exercise price of $10.00
per share of which the granting of options to purchase 115,000 common shares are
contingent upon the commencement of employment. InterWorld estimates it will
recognize approximately $8,556 of compensation expense over the vesting period
of these options.
F-27
<PAGE> 97
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
In June 1999, InterWorld entered into an agreement to lease additional
office space at its current location. As a result, annual rental costs have
increased by approximately $1.1 million. The lease expires in April 2015.
16. INITIAL PUBLIC OFFERING AND PRO FORMA PRESENTATION (UNAUDITED)
In May 1999, the Board of Directors of InterWorld authorized management to
pursue an underwritten sale of shares of InterWorld's common stock in an initial
public offering (the "IPO") pursuant to the Securities Act of 1933.
Upon completion of the IPO, InterWorld will adopt an employee stock
purchase plan. Under the plan, eligible employees will be provided an
opportunity to purchase shares of InterWorld's common stock through regular
payroll deductions. The total number of shares of common stock that are
authorized for issuance under the plan is 1,000,000. Employees will be given an
opportunity to purchase shares of common stock during consecutive six-month
periods, and the right to purchase shares will expire on the last day of the
six-month period. The purchase price for shares offered under the Plan each year
will be equal to a percentage designated by the compensation committee of the
Board of Directors (not less than 85%) of the lower of the fair market value of
InterWorld's common stock at the commencement or termination of the six-month
period. The plan will expire on the tenth anniversary of the effective date of
the plan.
Upon the closing of the IPO, all outstanding shares of Series A Preferred
and Series B Preferred will automatically convert into an aggregate of 9,189,999
shares of common stock. The pro forma effects of this conversion have been
reflected in unaudited pro forma stockholder's equity at March 31, 1999.
For the periods ended December 31, 1998 and March 31, 1999, the pro forma
basic and diluted loss per share from continuing operations reflecting the
effects of the conversion of Series A Preferred and Series B Preferred would
have been ($1.05) and ($0.31), respectively. Pro forma basic and diluted loss
per share for the periods ended December 31, 1998 and March 31, 1999 would have
been ($1.05)and ($0.31), respectively. The pro forma weighted average shares
outstanding at December 31, 1998 and March 31, 1999 would have been 21,031,403
and 22,746,329, respectively.
Also upon completion of the IPO, 178,570 previously unvested options to
purchase 178,570 shares of common stock will automatically vest. InterWorld will
recognize approximately $229 of noncash compensation expense upon the vesting of
such options.
F-28
<PAGE> 98
[INSIDE BACK COVER ART]
<PAGE> 99
INTERWORLD LOGO
<PAGE> 100
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 15,346
National Association of Securities Dealers, Inc. filing
fee....................................................... 5,652
Nasdaq National Market listing fee.......................... 95,000
Accountants' fees and expenses.............................. 300,000
Legal fees and expenses..................................... 300,000
Blue Sky fees and expenses.................................. 10,000
Transfer Agent's fees and expenses.......................... 5,000
Printing and engraving expenses............................. 200,000
Miscellaneous............................................... 69,002
-----------
Total Expenses.............................................. $ 1,000,000
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law and our certificate of incorporation
and bylaws limit the monetary liability of directors to us and to our
stockholders and provide for indemnification of our officers and directors for
liabilities and expenses that they may incur in such capacities. In general,
officers and directors are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of us, and with respect to any criminal action or proceeding, actions
that the indemnitee had no reasonable cause to believe were unlawful. We also
have indemnification agreements with directors and officers that provide for the
maximum indemnification allowed by law. Reference is made to our certificate of
incorporation, bylaws and form of Indemnification Agreement for Officers and
Directors filed as Exhibits 3.1, 3.2 and 10.3 hereto, respectively.
We have an insurance policy which insures our directors and officers
against certain liabilities which might be incurred in connection with the
performance of their duties.
The underwriting agreement filed as Exhibit 1.1 hereto contains certain
provisions pursuant to which certain of our officers, directors and controlling
persons may be entitled to be indemnified by the underwriters named therein.
II-1
<PAGE> 101
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, we have issued the securities set forth below
which were not registered under the Securities Act of 1933. All share
information and exercise prices reflect a 2.5 for 1 stock split effected July
12, 1996:
1. On March 1, 1996, we issued to an accredited investor two warrants to
purchase an aggregate of 140,920 shares of preferred stock with an exercise
price of $2.00 per share.
2. Pursuant to a Subscription Agreement dated March 7, 1996, we sold an
aggregate of 1,287,500 shares of Series A preferred stock to 23 accredited
investors, including one director and one investment fund of which a former
officer of ours has a pecuniary interest, for a per share purchase price of
$2.00 and an aggregate purchase price of $2,575,000.
3. Pursuant to a Subscription Agreement dated July 12, 1996, we sold an
aggregate of 1,056,631 shares of Series A preferred stock to 26 accredited
investors, including one director and two investment funds of which a
director of ours is a principal, for a per share purchase price of $4.732
and an aggregate purchase price of $5,000,000.
4. Pursuant to a Subscription Agreement dated December 12, 1996, we sold an
aggregate of 1,120,000 shares of Series A preferred stock to 41 accredited
investors, including one director, one officer, two investment funds of
which a director of ours is a principal and two former officers, for a per
share purchase price of $6.25 and an aggregate purchase price of
$7,000,000.
5. On December 18, 1996, we granted options to purchase an aggregate of
1,271,750 shares of common stock to certain employees, including two former
officers, with an exercise price of $1.25 per share.
6. On January 9, 1997, we issued to an accredited investor a warrant to
purchase 25,260 shares of preferred stock with an exercise price of $6.25
per share.
7. On February 4, 1997, we issued to an accredited investor a warrant to
purchase 39,200 shares of preferred stock with an exercise price of $6.25
per share.
8. On April 22, 1997, we issued to certain accredited investors, including
three investment funds of which a director of ours is a principal, four
warrants to purchase an aggregate of 75,000 shares of preferred stock with
an exercise price of $7.50 per share.
9. On July 28, 1997, we granted options to purchase an aggregate of 1,821,749
shares of common stock to certain employees, including three officers,
three former officers and four directors, at an exercise price of $2.00 per
share.
10. Pursuant to a Subscription Agreement dated August 4, 1997, we sold an
aggregate of 1,122,931 shares of Series A preferred stock to 23 accredited
investors, including two directors and one officer, for a per share
purchase price of $7.50 and an aggregate purchase price of $8,422,000.
11. Pursuant to a Subscription Agreement dated September 19, 1997, we sold an
aggregate of 1,764,705 shares of Series A preferred stock to 24 accredited
investors for a per share purchase price of $8.50 and an aggregate purchase
price of $15,000,000.
II-2
<PAGE> 102
12. In November 1997, we issued 1,500 shares of common stock to an employee
pursuant to an option exercise for an aggregate purchase price of $1,875.
13. On November 26, 1997, we issued to accredited investors, including one
director, four warrants to purchase an aggregate of 110,294 shares of
preferred stock with an exercise price of $9.775 per share.
14. In December 1997, we issued an aggregate of 4,150 shares of common stock to
three employees pursuant to option exercises for an aggregate purchase
price of $5,187.50.
15. In February 1998, we issued an aggregate of 2,250 shares of common stock to
two employees pursuant to option exercises for an aggregate purchase price
of $2,812.50.
16. On February 20, 1998, we granted options to purchase an aggregate of
875,068 shares of common stock to certain employees, including two
officers, with an exercise price of $4.25 per share.
17. In March 1998, we issued an aggregate of 321,920 shares of common stock to
31 employees, including one officer and one consultant, pursuant to option
exercises for an aggregate purchase price of $603,827.50.
18. Pursuant to a Subscription Agreement dated March 27, 1998, we sold an
aggregate of 1,188,232 shares of Series A preferred stock to 18 accredited
investors, including an investment fund in which a director is a principal,
for a per share purchase price of $8.50 and an aggregate purchase price of
$10,100,000.
19. On March 27, 1998, we issued to accredited investors, including one
director, four warrants to purchase an aggregate of 39,864 shares of
preferred stock with an exercise price of $9.775 per share.
20. In April 1998, we issued 1,325 shares of common stock to three employees
pursuant to an option exercise for an aggregate purchase price of
$1,656.25.
21. In May 1998, we issued an aggregate of 3,425 shares of common stock to four
employees pursuant to option exercises for an aggregate purchase price of
$4,581.25.
22. In June 1998, we issued 16,716 shares of common stock to five employees and
one consultant pursuant to an option exercise for an aggregate purchase
price of $49,383.00.
23. On June 12, 1998, we granted options to purchase an aggregate of 291,050
shares of common stock to certain employees, including one former officer,
with an exercise price of $8.50 per share.
24. In July 1998, we issued an aggregate of 1,300 shares of common stock to
three employees pursuant to option exercises for an aggregate purchase
price of $1,850.
25. In August 1998, we issued an aggregate of 1,250 shares of common stock to
two employees pursuant to option exercises for an aggregate purchase price
of $2,312.50.
26. In September 1998, we issued an aggregate of 8,850 shares of common stock
to four employees pursuant to option exercises for an aggregate purchase
price of $11,062.50.
27. In October 1998 we issued 200 shares of common stock to an employee
pursuant to an option exercise for an aggregate purchase price of $250.
II-3
<PAGE> 103
28. On October 7, 1998, we issued to an accredited investor a warrant to
purchase up to 103,532 shares of Series A preferred stock with an exercise
price of $9.775 per share.
29. In November 1998, we issued an aggregate of 2,500 shares of common stock to
four employees pursuant to option exercises for an aggregate purchase price
of $3,612.50.
30. In December 1998, we issued an aggregate of 4,400 shares of common stock to
three employees pursuant to option exercises for an aggregate purchase
price of $6,437.50.
31. Pursuant to a Subscription Agreement dated January 12, 1999, we issued an
aggregate of 1,650,000 shares of Series B preferred stock to five
accredited investors for a purchase price of $10.00 per share, or an
aggregate purchase price of $16,500,000. In April 1999, the investors
reaffirmed their investment in these shares.
32. In January 1999, we issued an aggregate of 26,425 shares of common stock to
eight employees pursuant to option exercises for an aggregate purchase
price of $49,831.25.
33. In February 1999, we issued an aggregate of 28,775 shares of common stock
to seven employees, including one officer, pursuant to option exercises for
an aggregate purchase price of $113,537.50.
34. On February 2, 1999, we granted options to purchase an aggregate of
1,604,567 shares of common stock to certain employees, including two
officers, with an exercise price of $10.00 per share.
35. In March 1999, we issued an aggregate of 86,900 shares of common stock to
five employees, including one officer and one former officer, pursuant to
option exercises for an aggregate purchase price of $242,895.
36. In April 1999, we issued an aggregate of 20,790 shares of common stock to
three employees, including one officer, pursuant to option exercises for an
aggregate purchase price of $87,603.75.
37. In May 1999, we issued an aggregate of 23,561 shares of common stock to
twelve employees, including a former officer, pursuant to option exercises
for an aggregate purchase price of $52,864.25.
38. In June 1999, we issued an aggregate of 102,246 shares of common stock to
seven employees, including two officers, pursuant to option exercises for
an aggregate purchase price of $242,383.
The sales and issuances of the shares of common stock and options and
warrants to purchase common stock discussed above were made by us in reliance
upon the exemptions from registration provided under Section 4(2) of the
Securities Act of 1933 or Section 3(b) and Rule 701 promulgated thereunder. The
offers and sales were made to either accredited investors as defined in Rule
501(a) under the Securities Act or the persons referred to in Rule 701(c) under
the Securities Act pursuant to a written compensatory benefit plan (or a written
compensation contract) established by the Registrant; with respect for offers
and sales pursuant to Section 4(2), no general solicitation was made by either
the Registrant or any person acting in its behalf; the securities sold are
subject to transfer restrictions, and the certificates for the shares contained
an appropriate legend stating such securities have not been registered under the
Securities Act and may not be offered or sold absent registration or pursuant to
an exemption therefrom.
II-4
<PAGE> 104
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1A* Restated Certificate of Incorporation of the Registrant
3.1B Form of Amended and Restated Certificate of Incorporation of
Registrant to be filed upon pricing of this offering
3.1C Form of Amended and Restated Certificate of Incorporation of
Registrant to be filed in connection with the closing of
this offering
3.2 Bylaws of the Registrant
5.1 Opinion of O'Sullivan Graev & Karabell, LLP, Counsel to the
Registrant, as to the legality of the shares being
registered
10.1 Amended and Restated 1996 Stock Option Plan
10.2 Employee Stock Purchase Plan
10.3 Form of Indemnification Agreement between the Registrant and
each of its directors and executive officers
10.4 Lease dated as of January 12, 1997 between the Registrant as
Tenant and New York City District Council of Carpenters
Pension Fund, as Landlord.
10.5 Amended and Restated Loan and Security Agreement dated as of
October 7, 1998, between the Registrant and Comdisco, Inc.
10.6 First Amendment to Lease, dated as of July 1, 1999, between
Registrant, as Tenant, and New York City District Council
of Carpenters Pension Fund, as Landlord
10.7 Registration Rights Agreement
16.1 Letter from KPMG LLP regarding change in accountants
21.1 List of Subsidiaries
23.1* Consent of PricewaterhouseCoopers LLP
23.2 Consent of O'Sullivan Graev & Karabell, LLP (included in
Exhibit 5.1)
24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedule for the year ended December 31, 1998
27.2 Financial Data Schedule for the three month period ended
March 31, 1999
</TABLE>
- -------------------------
* Filed herewith.
II-5
<PAGE> 105
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
INTERWORLD CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
Year ended December 31,
1996................... $ -- $ 269 $-- $ -- $ 269
Year ended December 31,
1997................... 269 353 -- -- 622
Year ended December 31,
1998................... 622 1,438 -- (843) 1,217
Three months ended March
31, 1999............... 1,217 -- -- (23) 1,194
Valuation
Reserve -- Deferred Tax
Assets
Year ended December 31,
1996.................... $ 136 $ 3,365 $-- $ -- $ 3,501
Year ended December 31,
1997................... 3,501 10,773 -- -- 14,274
Year ended December 31,
1998................... 14,274 7,568 -- -- 21,842
Three months ended March
31, 1999............... 21,842 2,665 -- -- 24,507
</TABLE>
ITEM 17. UNDERTAKINGS
(a) 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.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, 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,
II-6
<PAGE> 106
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of the Registration Statement as of the time it was declared
effective.
(ii) For purposes of determining any liability under the Securities Act,
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 this offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-7
<PAGE> 107
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on this 6th day of August, 1999.
INTERWORLD CORPORATION
By: /s/ MICHAEL J. DONAHUE
-----------------------------------
Michael J. Donahue
Chairman
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to Registration Statement has been signed on this 6th day of August, 1999
by the persons and in the capacities indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* President and Chief Executive
- --------------------------------------------------- Officer (principal executive
Alan J. Andreini officer) and Director
* Chief Financial Officer (principal
- --------------------------------------------------- financial and accounting officer)
Peter Schwartz
* Chairman
- ---------------------------------------------------
Michael J. Donahue
* Director
- ---------------------------------------------------
Kenneth G. Langone
* Director
- ---------------------------------------------------
Joseph C. Robinson
* Director
- ---------------------------------------------------
Yves Sisteron
* Director
- ---------------------------------------------------
Jack Slevin
* Director
- ---------------------------------------------------
Russell West
</TABLE>
*By: /s/ MICHAEL J. DONAHUE
---------------------------------
Michael J. Donahue
Attorney-in-Fact
II-8
<PAGE> 108
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1A* Restated Certificate of Incorporation of the Registrant
3.1B Amended and Restated Certificate of Incorporation of
Registrant to be filed upon pricing of the offering
3.1C Amended and Restated Certificate of Incorporation of
Registrant to be filed in connection with closing of this
offering
3.2 Bylaws of the Registrant
5.1 Opinion of O'Sullivan Graev & Karabell, LLP, Counsel to the
Registrant, as to the legality of the shares being
registered
10.1 Amended and Restated 1996 Stock Option Plan
10.2 Employee Stock Purchase Plan
10.3 Form of Indemnification Agreement between the Registrant and
each of its directors and executive officers
10.4 Lease dated as of January 12, 1997 between the Registrant as
Tenant and New York City District Council of Carpenters
Pension Fund, as Landlord.
10.5 Amended and Restated Loan and Security Agreement dated as of
October 7, 1998, between the Registrant and Comdisco, Inc.
10.6 First Amendment to Lease dated as of July 1, 1999 between
Registrant, as Tenant, and New York City District Council
of Carpenters Pension Fund, as Landlord
10.7 Registration Rights Agreement
16.1 Letter from KPMG LLP regarding change in accountants
21.1 List of Subsidiaries
23.1* Consent of PricewaterhouseCoopers LLP
23.2 Consent of O'Sullivan Graev & Karabell, LLP (included in
Exhibit 5.1)
24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedule for the year ended December 31, 1998
27.2 Financial Data Schedule for the three month period ended
March 31, 1999
</TABLE>
- -------------------------
* Filed herewith.
<PAGE> 1
3,000,000 Shares
INTERWORLD CORPORATION
Common Stock
($.01 par value)
UNDERWRITING AGREEMENT
August __, 1999
INVEMED ASSOCIATES LLC
375 Park Avenue
New York, NY 10152
Dear Sirs:
1. Introductory. InterWorld Corporation, a Delaware corporation
("Company"), proposes to issue and sell 3,000,000 shares (the "Firm Securities")
of its authorized and unissued Common Stock, $.01 par value, ("Common Stock") to
Invemed Associates LLC (the "Underwriter"). As part of the offering contemplated
by this Agreement, the Underwriter has agreed to reserve out of the Firm
Securities purchased by it under this Agreement, up to 275,000 shares, for sale
to the Company's directors, officers, employees and other parties associated
with the Company (collectively, "Participants"), as set forth in the Prospectus
(as defined herein) under the heading "Underwriter" (the "Directed Share
Program"). The Firm Securities to be sold by the Underwriter pursuant to the
Directed Share Program (the "Directed Shares") will be sold by the Underwriter
pursuant to this Agreement at the public offering price. Any Directed Shares not
orally confirmed for purchase by a Participant by the end of the business day on
which this Agreement is executed will be offered to the public by the
Underwriter as set forth in the Prospectus. The Company also proposes to issue
and sell to the Underwriter, at the option of the Underwriter, an aggregate of
not more than 450,000 additional shares (the "Optional Securities") of its
Common Stock, as set forth below. The Firm Securities and the Optional
Securities are herein collectively called the "Offered Securities".
The Company hereby agrees with the Underwriter as follows:
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriter that:
(a) A registration statement (No. 333-79879) relating to the
Offered Securities, including a form of prospectus, has been
filed with the Securities and Exchange Commission
("Commission") and either (A) has been declared effective
under the Securities Act of 1933 ("Act") and is not proposed
to be amended or (B) is proposed to be amended by amendment or
post-effective amendment. If such registration statement (the
"initial registration statement") has been declared
<PAGE> 2
effective, either (A) an additional registration statement
(the "additional registration statement") relating to the
Offered Securities may have been filed with the Commission
pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if
so filed, has become effective upon filing pursuant to such
Rule and the Offered Securities all have been duly registered
under the Act pursuant to the initial registration statement
and, if applicable, the additional registration statement or
(B) such additional registration statement is proposed to be
filed with the Commission pursuant to Rule 462(b) and will
become effective upon filing pursuant to such Rule and upon
such filing the Offered Securities will all have been duly
registered under the Act pursuant to the initial registration
statement and such additional registration statement. If the
Company does not propose to amend the initial registration
statement or if an additional registration statement has been
filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement
has been filed with the Commission prior to the execution and
delivery of this Agreement, the most recent amendment (if any)
to each such registration statement has been declared
effective by the Commission or has become effective upon
filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
or, in the case of the additional registration statement, Rule
462(b). For purposes of this Agreement, "Effective Time" with
respect to the initial registration statement or, if filed
prior to the execution and delivery of this Agreement, the
additional registration statement means (A) if the Company has
advised the Underwriter that it does not propose to amend such
registration statement, the date and time as of which such
registration statement, or the most recent post-effective
amendment thereto (if any) filed prior to the execution and
delivery of this Agreement, was declared effective by the
Commission or has become effective upon filing pursuant to
Rule 462(c), or (B) if the Company has advised the Underwriter
that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as
of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is
declared effective by the Commission. If an additional
registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has
advised the Underwriter that it proposes to file one,
"Effective Time" with respect to such additional registration
statement means the date and time as of which such
registration statement is filed and becomes effective pursuant
to Rule 462(b). "Effective Date" with respect to the initial
registration statement or the additional registration
statement (if any) means the date of the Effective Time
thereof. The initial registration statement, as amended at its
Effective Time including all information contained in the
additional registration statement (if any) and deemed to be a
part of the initial registration statement as of the Effective
Time of the additional registration statement pursuant to the
General Instructions of the Form on which it is filed and
including all information (if any) deemed to be a part of the
initial registration statement as of its Effective Time
pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is
hereinafter referred to as the "Initial
-2-
<PAGE> 3
Registration Statement". The additional registration
statement, as amended at its Effective Time, including the
contents of the initial registration statement incorporated by
reference therein and including all information (if any)
deemed to be a part of the additional registration statement
as of its Effective Time pursuant to Rule 430A(b), is
hereinafter referred to as the "Additional Registration
Statement". The Initial Registration Statement and the
Additional Registration Statement are hereinafter referred to
collectively as the "Registration Statements" and individually
as a "Registration Statement". The form of prospectus relating
to the Offered Securities, as first filed with the Commission
pursuant to and in accordance with Rule 424(b) ("Rule 424(b)")
under the Act or (if no such filing is required) as included
in a Registration Statement is hereinafter referred to as the
"Prospectus". No document has been or will be prepared or
distributed in reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this
Agreement: (A) on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement
conformed in all material respects to the requirements of the
Act and the rules and regulations of the Commission ("Rules
and Regulations") and did not include any untrue statement of
a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein
not misleading, (B) on the Effective Date of the Additional
Registration Statement (if any), each Registration Statement
conformed or will conform, in all material respects to the
requirements of the Act and the Rules and Regulations and did
not include, or will not include, any untrue statement of a
material fact and did not omit, or will not omit, to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading, and (C) on the
date of this Agreement, the Initial Registration Statement
and, if the Effective Time of the Additional Registration
Statement (if any) is prior to the execution and delivery of
this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant
to Rule 424(b) or (if no such filing is required) at the
Effective Date of the Additional Registration Statement in
which the Prospectus is included, each Registration Statement
and the Prospectus will conform, in all material respects to
the requirements of the Act and the Rules and Regulations, and
neither of such documents includes, or will include, any
untrue statement of a material fact or omits, or will omit, to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading. If
the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement: on
the Effective Date of the Initial Registration Statement, the
Initial Registration Statement and the Prospectus will conform
in all material respects to the requirements of the Act and
the Rules and Regulations, neither of such documents will
include any untrue statement of a material fact or will omit
to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and
no Additional Registration Statement has been or will be
filed. The two preceding sentences do not apply to statements
in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the
Company by the Underwriter specifically for use therein, it
being understood and agreed that the only such information is
that described as such in Section 7(c) hereof.
-3-
<PAGE> 4
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of
Delaware, with power and authority (corporate and other) to
own or lease its properties and conduct its business as
described in the Prospectus; and the Company is duly qualified
to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such
qualification, except where the failure to be so qualified
would not have a material adverse effect on the condition
(financial or other), businesses, properties or results of
operations of the Company and its subsidiaries taken as a
whole ("Material Adverse Effect").
(d) Each subsidiary of the Company has been duly incorporated
and is an existing corporation in good standing under the laws
of the jurisdiction of its incorporation, with power and
authority (corporate and other) to own or lease its properties
and conduct its business as described in the Prospectus; and
each subsidiary of the Company is duly qualified to do
business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such
qualification, except where the failure to be so qualified
would not have a Material Adverse Effect; all of the issued
and outstanding capital stock of each subsidiary of the
Company has been duly authorized and validly issued and is
fully paid and nonassessable and is owned by the Company,
directly or through subsidiaries; and the capital stock of
each subsidiary owned by the Company, directly or through
subsidiaries, is owned free from liens, encumbrances and
defects.
(e) All outstanding shares of capital stock of the Company
have been duly authorized and validly issued, and are fully
paid and nonassessable and conform to the description thereof
contained in the Prospectus; and the stockholders of the
Company have no preemptive rights with respect to the Common
Stock.
(f) The Offered Securities have been duly authorized, and when
issued, delivered and paid for pursuant to this Agreement,
will be validly issued, fully paid and non-assessable, and
will conform to the description thereof contained in the
Prospectus.
(g) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company
and any person that would give rise to a valid claim against
the Company or the Underwriter for a brokerage commission,
finder's fee or other like payment in connection with this
offering.
(h) Except for the Amended and Restated Registration Rights
Agreement dated January 12, 1999, between the Company and the
holders of Series A Preferred Stock and Series B Preferred
Stock (the "Registration Rights Agreement"), there are no
contracts, agreements or understandings between the
-4-
<PAGE> 5
Company and any person granting such person the right to
require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to
be owned by such person or to require the Company to include
such securities in the securities registered pursuant to a
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the
Company under the Act. No person has any registration rights
with respect to the registration statement covering the
Offered Securities.
(i) The Common Stock has been approved for quotation subject
to notice of issuance on the Nasdaq National Market.
(j) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court is
required to be obtained or made by the Company for the
consummation of the transactions contemplated by this
Agreement in connection with the sale of the Offered
Securities, except such as have been obtained and made under
the Act, the Exchange Act and the rules and regulations of the
National Association of Securities Dealers, Inc. (the "NASD")
and such as may be required under state securities laws.
(k) The execution, delivery and performance of this Agreement,
and the consummation of the transactions herein contemplated
will not result in a breach or violation of any of the terms
and provisions of, or constitute a default under, (i) the
charter or by-laws of the Company or any subsidiary of the
Company, (ii) any agreement or instrument to which the Company
or any such subsidiary is a party or by which the Company or
any such subsidiary is bound or to which any of the properties
of the Company or any such subsidiary is subject, except for
any such breaches or defaults which, individually or in the
aggregate, would not have a Material Adverse Effect, or (iii)
any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having
jurisdiction over the Company or any such subsidiary of the
Company or any of their properties except for any such
breaches or defaults which, individually or in the aggregate
would not have a Material Adverse Effect.
(l) This Agreement has been duly authorized, executed and
delivered by the Company.
(m) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real
properties and all other properties and assets owned by them,
in each case free from liens, encumbrances and defects that
would materially affect the value thereof or materially
interfere with the use made or to be made thereof by them; and
except as disclosed in the Prospectus, the Company and its
subsidiaries hold any leased real or personal property under
valid and enforceable leases with no exceptions that would
materially interfere with the use made or to be made thereof
by them, except as enforcement thereof may be
-5-
<PAGE> 6
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting
creditors' rising generally or by general equitable
principles.
(n) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate
governmental agencies or bodies necessary to conduct the
business now operated by them and have not received any notice
of proceedings relating to the revocation or modification of
any such certificate, authority or permit that, if determined
adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse
Effect.
(o) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is
imminent that could reasonably be expected to have a Material
Adverse Effect.
(p) The Company and its subsidiaries own, license, possess or
can acquire on reasonable terms, adequate trademarks, trade
names and other rights to inventions, know-how, patents,
copyrights, confidential information and other intellectual
property (collectively, "intellectual property rights")
necessary to conduct the business now operated by them, or
presently employed by them, and have not received any notice
of infringement of or conflict with asserted rights of others
with respect to any intellectual property rights that, if
determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a
Material Adverse Effect.
(q) Except as disclosed in the Prospectus, neither the Company
nor any of its subsidiaries is in violation of any statute,
any rule, regulation, decision or order of any governmental
agency or body or any court, domestic or foreign, relating to
the use, disposal or release of hazardous or toxic substances
or relating to the protection or restoration of the
environment or human exposure to hazardous or toxic substances
(collectively, "environmental laws"), owns or operates any
real property contaminated with any substance that is subject
to any environmental laws, is liable for any off-site disposal
or contamination pursuant to any environmental laws, or is
subject to any claim relating to environmental laws, which
violation, contamination, liability or claim would
individually or in the aggregate have a Material Adverse
Effect; and the Company is not aware of any pending
investigation which might lead to such a claim.
(r) Except as disclosed in the Prospectus, there are no
pending actions, suits or proceedings against or affecting the
Company, any of its subsidiaries or any of their respective
properties that, if determined adversely to the Company or any
of its subsidiaries, would individually or in the aggregate
have a Material Adverse Effect, or would materially and
adversely affect the ability of the Company to perform its
obligations under this Agreement, or which are otherwise
material in the context of the sale of the Offered Securities;
and no such actions, suits or proceedings are, to the
Company's knowledge, threatened or contemplated.
-6-
<PAGE> 7
(s) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial
position of the Company and its consolidated subsidiaries as
of the dates shown and their results of operations and cash
flows for the periods shown, and such financial statements
have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a
consistent basis, and the schedules included in each
Registration Statement present fairly the information required
to be stated therein.
(t) Except as disclosed in the Prospectus, since the date of
the latest audited financial statements included in the
Prospectus there has been no material adverse change, nor any
development or event involving a prospective material adverse
change, in the condition (financial or other), business,
properties or results of operations of the Company and its
subsidiaries taken as a whole, and there has been no dividend
or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(u) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the
application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as defined in
the Investment Company Act of 1940.
(v) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or
affiliate located in Cuba within the meaning of Section
517.075, Florida Statutes, and the Company agrees to comply
with such Section if prior to the completion of the
distribution of the Offered Securities it commences doing such
business.
(w) The Company has not offered, or caused the Underwriter to
offer, any offered Securities to any person pursuant to the
Directed Share Program with the specific intent to unlawfully
influence (i) a customer or supplier of the Company to alter
the customer's or supplier's level or type of business with
the Company or (ii) a trade journalist or publication to write
or publish favorable information about the Company or its
products.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriter, and the Underwriter agrees to purchase from the Company, at a
purchase price of $________ per share, the Firm Securities.
The Company will deliver the Firm Securities to you, against payment of
the purchase price in Federal (same day) funds by wire transfer to an account at
a bank acceptable to the Underwriter drawn to the order of the Company at the
office of Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, NY 10178, at
10:00 A.M., New York time, on ________, 1999, or at such other time not later
than seven full business days thereafter as the Underwriter and the Company
determine, such time being herein referred to as the "First Closing Date." The
-7-
<PAGE> 8
certificates for the Firm Securities so to be delivered will be in definitive
form, in such denominations and registered in such names as the Underwriter
requests and will be made available for checking and packaging at the office of
Invemed Associates LLP, 375 Park Avenue, New York, NY 10152, at least 24 hours
prior to the First Closing Date. If the Underwriter so elects, delivery of Firm
Securities may be made by credit to the accounts at The Depository Trust Company
designated by the Underwriter.
In addition, upon written notice from the Underwriter given to the
Company from time to time (but not more than twice) not more than 30 days
subsequent to the date of the Prospectus, the Underwriter may purchase all or
less than all of the Optional Securities at the purchase price per share to be
paid for the Firm Securities. The Company agrees to sell to the Underwriter the
number of shares of Optional Securities specified in such notice and the
Underwriter agrees to purchase such Optional Securities. Such Optional
Securities shall be purchased from the Company by the Underwriter only for the
purpose of covering over-allotments made in connection with the sale of the Firm
Securities. No Optional Securities shall be sold or delivered unless the Firm
Securities previously have been, or simultaneously are, sold and delivered. The
right to purchase the Optional Securities or any portion thereof may be
exercised from time to time (but not more than twice) and to the extent not
previously exercised may be surrendered and terminated at any time upon notice
by the Underwriter to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by the
Underwriter but shall be not less than two full business days nor later than
five full business days after written notice of election to purchase Optional
Securities is given. The Company will deliver the Optional Securities being
purchased on each Optional Closing Date to the Underwriter, against payment of
the purchase price therefor in Federal (same day) funds by wire transfer to an
account at a bank acceptable to the Underwriter drawn to the order of the
Company, at the above office of Invemed Associates LLC, 101 Park Avenue, New
York, NY 10178. The certificates for the Optional Securities being purchased on
each Optional Closing Date will be in definitive form, in such denominations and
registered in such names as the Underwriter requests upon reasonable notice
prior to such Optional Closing Date and will be made available for checking and
packaging at the above office of Morgan, Lewis & Bockius LLP at a reasonable
time in advance of such Optional Closing Date. If the Underwriter so elects,
delivery of Optional Securities may be made by credit to the account at The
Depository Trust Company designated by the Underwriter.
4. Offering by Underwriter. It is understood that the Underwriter
proposes to offer the Offered Securities for sale to the public as set forth in
the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
Underwriter that:
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(a) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this
Agreement, the Company will file the Prospectus with the
Commission pursuant to and in accordance with subparagraph (1)
(or, if applicable and if consented to by the Underwriter,
subparagraph (4)) of Rule 424(b) not later than the earlier of
(A) the second business day following the execution and
delivery of this Agreement or (B) the fifteenth business day
after the Effective Date of the Initial Registration
Statement. The Company will advise the Underwriter promptly of
any such filing pursuant to Rule 424(b). If the Effective Time
of the Initial Registration Statement is prior to the
execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of
the Offered Securities under the Act but the Effective Time
thereof has not occurred as of such execution and delivery,
the Company will file the additional registration statement
or, if filed, will file a post-effective amendment thereto
with the Commission pursuant to and in accordance with Rule
462(b) on or prior to 10:00 P.M., New York time, on the date
of this Agreement or, if earlier, on or prior to the time the
Prospectus is printed and distributed to the Underwriter, or
will make such filing at such later date as shall have been
consented to by the Underwriter.
(b) The Company will advise the Underwriter promptly of any
proposal to amend or supplement the initial or any additional
registration statement as filed or the related prospectus or
the Initial Registration Statement, the Additional
Registration Statement (if any) or the Prospectus and will not
effect such amendment or supplementation without the
Underwriter's consent, which shall not unreasonably be
withheld; and the Company will also advise the Underwriter
promptly of the effectiveness of each Registration Statement
(if its Effective Time is subsequent to the execution and
delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus
and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will
use its best efforts to prevent the issuance of any such stop
order and to obtain as soon as possible its lifting, if
issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in
connection with sales by the Underwriter or dealer, any event
occurs as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at
any time to amend the Prospectus to comply with the Act, the
Company will promptly notify the Underwriter of such event and
will promptly prepare and file with the Commission, at its own
expense, if delivery of a prospectus is required at any time
prior to the expiration of nine months after the time of issue
of the Prospectus and at the expense of the Underwriter, if
delivery of a prospectus is required at any time after the
expiration of nine months after the time of issue of
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<PAGE> 10
the Prospectus, an amendment or supplement which will correct
such statement or omission or an amendment which will effect
such compliance. Neither the Underwriter's consent to, nor
delivery of, any such amendment or supplement shall constitute
a waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the
Availability Date (as defined below), the Company will make
generally available to its security holders an earnings
statement covering a period of at least 12 months beginning
after the Effective Date of the Initial Registration Statement
(or, if later, the Effective Date of the Additional
Registration Statement) which will satisfy the provisions of
Section 11(a) of the Act. For the purpose of the preceding
sentence, "Availability Date" means the 45th day after the end
of the fourth fiscal quarter following the fiscal quarter that
includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal
year, "Availability Date" means the 90th day after the end of
such fourth fiscal quarter.
(e) The Company will furnish to the Underwriter copies of each
Registration Statement (two of which will be signed and will
include all exhibits), each related preliminary prospectus,
and, so long as a prospectus relating to the Offered
Securities is required to be delivered under the Act in
connection with sales by the Underwriter or dealer, the
Prospectus and all amendments and supplements to such
documents, in each case in such quantities as the Underwriter
requests. The Prospectus shall be so furnished on or prior to
3:00 P.M., New York time, on the business day following the
later of the execution and delivery of this Agreement or the
Effective Time of the Initial Registration Statement. All
other such documents shall be so furnished as soon as
available. Except as set forth in Section 5(c), the Company
will pay the expenses of printing and distributing to the
Underwriter all such documents.
(f) The Company will use its reasonable best efforts to
qualify the Offered Securities for sale under the laws of such
jurisdictions in the United States as the Underwriter
designates and to continue such qualifications in effect so
long as required for the distribution of the Offered
Securities.
(g) During the period 5 years hereafter, the Company will
furnish to the Underwriter (i) as soon as practicable after
the end of each fiscal year, a copy of its annual report to
stockholders for such year, and (ii) as soon as available, a
copy of each report and any definitive proxy statement of the
Company filed with the Commission under the Securities
Exchange Act of 1934 or mailed to stockholders.
(h) For a period of 180 days after the date of the initial
public offering of the Offered Securities, the Company will
not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, or file with the Commission a
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<PAGE> 11
registration statement under the Act relating to, any
additional shares of its Common Stock or securities or other
rights convertible into or exchangeable or exercisable for any
shares of its Common Stock, or publicly disclose the intention
to make any such offer, sale, contract to sell, pledge,
disposition or filing, without the prior written consent of
the Underwriter, except (i) issuances of Common Stock pursuant
to the conversion or exchange of convertible or exchangeable
securities or the exercise of warrants outstanding on the date
hereof, (ii) grants of employee stock options pursuant to the
terms of the Company's Amended and Restated 1996 Stock Option
Plan (the "Option Plan") and rights to purchase shares under
the Company's Employee Stock Purchase Plan, (iii) issuances of
Common Stock pursuant to the exercise of options granted under
the Option Plan, provided that the Company shall have received
from the person to whom the Common Stock shall be issued upon
such exercise an agreement in substantially the same form and
containing substantially the same provisions as the agreements
specified in Section 5(j) hereof, (iv) issuances of Common
Stock to the stockholders of another entity in connection with
the acquisition of such entity by the Company, or to another
entity in connection with the acquisition of substantially all
of the assets of such entity, and (v) the filing by the
Company of a registration statement on Form S-8 to register
the shares of Common Stock issuable under the Option Plan and
the Company's Employee Stock Purchase Plan. Without limiting
the foregoing, the Company shall not amend the Registration
Rights Agreement so as to allow for the exercise of any
registration rights within 180 days of the Effective Date.
(i) The Company agrees with the Underwriter that the Company
will pay all expenses incident to the performance of the
obligations of the Company under this Agreement, for any
filing fees and other expenses (including reasonable fees and
disbursements of counsel) in connection with qualification of
the Offered Securities for sale under the laws of such
jurisdictions as the Underwriter designates pursuant to
paragraph (f) above and the printing of memoranda relating
thereto, for the filing fee incident to, and the reasonable
fees and disbursements of counsel to the Underwriter in
connection with, the review by the NASD of the Offered
Securities, for any travel expenses of the Company's officers
and employees and any other expenses of the Company in
connection with attending or hosting meetings with prospective
purchasers of the Offered Securities and for expenses incurred
in distributing preliminary prospectuses and the Prospectus
(including any amendments and supplements thereto) to the
Underwriter.
(j) The Company shall, prior to or concurrently with the
execution of this Agreement, deliver an agreement executed by
each of the directors and officers of the Company and each
other shareholder and each holder of options of the Company to
the effect that such person will not without the prior written
consent of Invemed Associates LLC during the period commencing
on the date such person signs such agreement and ending 180
days after the date of the Prospectus (i) offer, sell,
contract to sell, pledge, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any securities or
other rights convertible into or exchangeable or exercisable
for
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<PAGE> 12
any shares of Common Stock or publicly disclose the intention
to make any such offer, sale, contract to sell, pledge, or
disposition, (ii) enter into any swap or other arrangement
that transfers, in whole or in part, all or a portion of the
economic consequences of ownership of shares of any Common
Stock (regardless of whether any of the transactions described
in clause (i) or (ii) is to be settled by the delivery of
Common Stock, or such other securities, in cash or otherwise)
or (iii) make any demand for, or exercise any right with
respect to, the registration of any shares of Common Stock or
any securities convertible into or exercisable or exchangeable
for Common Stock; provided that such agreement shall not apply
to sales of the Offered Securities or sales of shares or
Common Stock purchased in the public trading markets; provided
further that any such person may exercise options to purchase
Common Stock granted under the Option Plan and may transfer
Common Stock or securities or other rights convertible into or
exchangeable or exercised for shares of Common Stock pursuant
to a bona fide gift to, or for the benefit of, directly or
indirectly, such person's children, grandchildren or spouse
for estate planning purposes; and provided further that any
such gift is made other than on a securities exchange or in
the over-the-counter market and that any such transferee
executes and delivers to you an agreement in substantially the
same form and containing substantially the same provisions as
in the agreement executed by such director, officer or
shareholder.
(k) In connection with the Directed Share Program, the
Underwriter will notify the Company in writing as to which
Participants will need to be restricted under the rules of the
NASD from sale, transfer, assignment, pledge or hypothecation
for a period of three months following the date of the
effectiveness of the Registration Statement. The Company will
direct the transfer agent to place stop transfer restrictions
upon such Participants' Directed Shares for such period of
time.
6. Conditions of the Obligations of the Underwriter. The obligations of
the Underwriter to purchase and pay for the Firm Securities on the First Closing
Date and the Optional Securities to be purchased on each Optional Closing Date
will be subject to the accuracy of the representations and warranties on the
part of the Company herein, to the accuracy of the statements of Company
officers made pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional conditions
precedent:
(a) The Underwriter shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the
Initial Registration Statement is prior to the execution and
delivery of this Agreement, shall be on or prior to the date
of this Agreement or, if the Effective Time of the Initial
Registration Statement is subsequent to the execution and
delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to the registration
statement to be filed shortly prior to such Effective Time),
of PricewaterhouseCoopers LLP confirming that they are
independent public accountants within the meaning of the Act
and the applicable published Rules and Regulations thereunder
and stating to the effect that:
(i) in their opinion the financial statements and
schedules examined by them and included in the
Registration Statements comply as to form in all
material respects with the applicable accounting
requirements of the Act and the related published
Rules and Regulations;
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<PAGE> 13
(ii) they have performed the procedures specified by
the American Institute of Certified Public
Accountants for a review of interim financial
information as described in Statement of Auditing
Standards No. 71, Interim Financial Information, on
the unaudited financial statements included in the
Registration Statements;
(iii) on the basis of the review referred to in
clause (ii) above, a reading of the latest available
interim financial statements of the Company,
inquiries of officials of the Company who have
responsibility for financial and accounting matters
and other specified procedures, nothing came to their
attention that caused them to believe that:
(A) the unaudited financial statements
included in the Registration Statements do
not comply as to form in all material
respects with the applicable accounting
requirements of the Act and the related
published Rules and Regulations or any
material modifications should be made to
such unaudited financial statements for them
to be in conformity with generally accepted
accounting principles;
(B) at the date of the latest available
balance sheet read by such accountants, or
at a subsequent specified date not more than
three business days prior to the date of
this Agreement, there was any change in the
capital stock or any increase in short-term
indebtedness or long-term debt of the
Company and its consolidated subsidiaries
or, at the date of the latest available
balance sheet read by such accountants,
there was any decrease in consolidated net
current assets or net assets, as compared
with amounts shown on the latest balance
sheet included in the Prospectus;
(C) for the period from the closing date of
the latest income statement included in the
Prospectus to the closing date of the latest
available income statement read by such
accountants there were any decreases, as
compared with the corresponding period of
the previous year and with the period of
corresponding length ended the date of the
latest income statement included in the
Prospectus, in consolidated net sales or net
operating income or in the total or per
share amounts of consolidated net income; or
(D) except in all cases set forth in clauses
(B) and (C) above for changes, increases or
decreases which the Prospectus discloses
have occurred or may occur or which are
described in such letter; and
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<PAGE> 14
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and
other financial information contained in the
Registration Statements (in each case to the extent
that such dollar amounts, percentages and other
financial information are derived from the general
accounting records of the Company and its
subsidiaries subject to the internal controls of the
Company's accounting system or are derived directly
from such records by analysis or computation) with
the results obtained from inquiries, a reading of
such general accounting records and other procedures
specified in such letter and have found such dollar
amounts, percentages and other financial information
to be in agreement with such results, except as
otherwise specified in such letter.
For purposes of this subsection, (i) if the
Effective Time of the Initial Registration Statement
is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be
amended by the amendment or post-effective amendment
to be filed shortly prior to its Effective Time, (ii)
if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of
this Agreement but the Effective Time of the
Additional Registration Statement is subsequent to
such execution and delivery, "Registration
Statements" shall mean the Initial Registration
Statement and the additional registration statement
as proposed to be filed or as proposed to be amended
by the post-effective amendment to be filed shortly
prior to its Effective Time, and (iii) "Prospectus"
shall mean the prospectus included in the
Registration Statements.
(b) The Company shall have received from
PricewaterhouseCoopers LLP (and furnished to the Underwriter)
a review report with respect to Management's Discussion and
Analysis of Financial Condition and Results of Operations of
the Company for the fiscal years ending 1996, 1997 and 1998
and for the three-month period ending March 31, 1999, and the
corresponding period for the prior fiscal year, each in
accordance with Statement on Standards for Attestation
Engagements No. 8 issued by the Auditing Standards Board of
the American Institute of Certified Public Accountants.
(c) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this
Agreement, such Effective Time shall have occurred not later
than 10:00 P.M., New York time, on the date of this Agreement
or such later date as shall have been consented to by the
Underwriter. If the Effective Time of the Additional
Registration Statement (if any) is not prior to the execution
and delivery of this Agreement, such Effective Time shall have
occurred not later than 10:00 P.M., New York time, on the date
of this Agreement or, if earlier, the time the Prospectus is
printed and distributed to the Underwriter, or shall have
occurred at such later date as shall have been consented to by
the
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<PAGE> 15
Underwriter. If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this
Agreement, the Prospectus shall have been filed with the
Commission in accordance with the Rules and Regulations and
Section 5(a) of this Agreement. Prior to such Closing Date, no
stop order suspending the effectiveness of a Registration
Statement shall have been issued and no proceedings for that
purpose shall have been instituted or, to the knowledge of the
Company or the Underwriter, shall be contemplated by the
Commission.
(d) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any change, or
any development or event involving a prospective change, in
the condition (financial or other), business, properties or
results of operations of the Company and its subsidiaries
taken as a whole which, in the judgment of the Underwriter, is
material and adverse and makes it impractical or inadvisable
to proceed with completion of the public offering or the sale
of and payment for the Offered Securities; (ii) any suspension
or limitation of trading in securities generally on the New
York Stock Exchange, or any setting of minimum prices for
trading on such exchange, or any suspension of trading of any
securities of the Company on any exchange or in the
over-the-counter market; (iii) any banking moratorium declared
by U.S. Federal or New York authorities; or (iv) any outbreak
or escalation of major hostilities in which the United States
is involved, any declaration of war by Congress or any other
substantial national or international calamity or emergency
if, in the judgment of the Underwriter, the effect of any such
outbreak, escalation, declaration, calamity or emergency makes
it impractical or inadvisable to proceed with completion of
the public offering or the sale of and payment for the Offered
Securities.
(e) The Underwriter shall have received an opinion, dated such
Closing Date, of O'Sullivan, Graev & Karabell, LLP, counsel
for the Company, to the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws
of the State of Delaware, with corporate power and
authority to own its properties and conduct its
business as described in the Prospectus; and the
Company is duly qualified to do business as a foreign
corporation in good standing in all other
jurisdictions in which its ownership or lease of
property or the conduct of its business requires such
qualification, except where the failure to be so
qualified would not have Material Adverse Effects;
(ii) The Offered Securities delivered on such Closing
Date (assuming issuance and delivery against payment
therefor in accordance with the terms hereof) and all
other outstanding shares of the Common Stock of the
Company have been duly authorized and validly issued,
are fully paid and nonassessable and conform to the
description thereof contained in the
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<PAGE> 16
Prospectus; and the stockholders of the Company have
no statutory preemptive rights or, to such counsel's
knowledge, similar rights with respect to the Common
Stock;
(iii) To the best of the knowledge of such counsel,
the grant of all outstanding options and the issuance
of all outstanding warrants have been duly
authorized, and such options and warrants have been
validly issued;
(iv) Except for the Registration Rights Agreement
there are no contracts, agreements or understandings
known to such counsel between the Company and any
person granting such person the right to require the
Company to file a registration statement under the
Act with respect to any securities of the Company
owned or to be owned by such person or to require the
Company to include such securities in the securities
registered pursuant to the Registration Statement or
in any securities being registered pursuant to any
other registration statement filed by the Company
under the Act. To such counsel's knowledge, no person
has any registration rights with respect to a
Registration Statement covering the Offered
Securities;
(v) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or
any court is required to be obtained or made by the
Company for the consummation of the transactions
contemplated by this Agreement in connection with the
sale of the Offered Securities, except such as have
been obtained and made under the Act or the Exchange
Act and the rules and regulations of the NASD and
such as may be required under state securities laws;
(vi) The execution, delivery and performance of this
Agreement and the consummation of the transactions
herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or
constitute a default under the charter or by-laws of
the Company or any subsidiary of the Company, any
statute, any rule, regulation or, to such counsel's
knowledge, order of any governmental agency or body
or any court having jurisdiction over the Company or
any subsidiary of the Company or any of their
properties, or, to such counsel's knowledge, any
material agreement or instrument to which the Company
or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which
any of the properties of the Company or any such
subsidiary is subject;
(vii) The Initial Registration Statement was declared
effective under the Act as of the date and time
specified in such opinion, the Additional
Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if
determinable) specified in such opinion, the
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<PAGE> 17
Prospectus either was filed with the Commission
pursuant to the subparagraph of Rule 424(b) specified
in such opinion on the date specified therein or was
included in the Initial Registration Statement or the
Additional Registration Statement (as the case may
be), and, to the knowledge of such counsel, no stop
order suspending the effectiveness of a Registration
Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or
are pending or contemplated under the Act, and each
Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their
respective effective or issue dates, complied as to
form in all material respects with the requirements
of the Act and the Rules and Regulations; the
descriptions in the Registration Statements and
Prospectus of statutes, legal and governmental
proceedings and contracts and other documents are
accurate and fairly present the information required
to be shown; and such counsel does not know of any
legal or governmental proceedings required to be
described in a Registration Statement or the
Prospectus which are not described as required or of
any contracts or documents of a character required to
be described in a Registration Statement or the
Prospectus or to be filed as exhibits to a
Registration Statement which are not described and
filed as required; it being understood that such
counsel need express no opinion as to the financial
statements or other financial data contained in the
Registration Statements or the Prospectus; and
(viii) This Agreement has been duly authorized,
executed and delivered by the Company.
Such counsel shall also state that it has no reason
to believe that any part of a Registration Statement or any
amendment thereto, as of its effective date, contained any
untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading; or that the
Prospectus or any amendment or supplement thereto, as of its
issue date or as of such Closing Date, contained or contains
any untrue statement of a material fact or omitted or omits to
state any material fact necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading.
(f) The Underwriter shall have received an opinion, dated such
Closing Date, of Gottlieb, Rackman & Reisman, P.C., patent
counsel for the Company, to the effect that:
(i) Such counsel has no knowledge of any reason that
any patent of the Company is not valid and has no
knowledge of any reason why any patents that may
issue from applications for patents filed by the
Company with the United States Patent and Trademark
Office would not be valid;
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<PAGE> 18
(ii) To the knowledge of such counsel, the Company is
not infringing or otherwise violating any patents,
trade secrets, know-how or proprietary rights or
techniques of others and there is no pending, or, to
the knowledge of such counsel, threatened action,
suit, proceeding or claim by others that the Company
has infringed or otherwise violated any patents,
licensing rights, licensing or royalty arrangements
or agreements, trade secrets or know-how and
proprietary rights;
(iii) To the knowledge of such counsel, there is no
infringement on the part of any third party of any
patent, application for patent, trade secret,
know-how or other proprietary right of the Company,
and there is no pending or, to the knowledge of such
counsel, threatened action, suit, proceeding or claim
by others challenging the validity or scope of any
patent or application for patent by the Company;
(iv) To the knowledge of such counsel, the statements
in the Registration Statements and Prospectus and any
amendments and supplements thereto under the captions
"Risk Factors--Our proprietary rights may not be
fully protected, and we may be subject to
intellectual property infringement claims by others"
and "Business--Proprietary Rights," insofar as such
statements constitute a summary of the Company's
patents, applications for patents and proprietary
technology, are in all material respects accurate
descriptions of the legal matters, documents and
proceedings relating thereto; and
(v) Such counsel has reviewed the statements in the
Registration Statements and Prospectus and any
amendments and supplements thereto under the captions
"Risk Factors--Our proprietary rights may not be
fully protected, and we may be subject to
intellectual property infringement claims by others"
and "Business--Proprietary Rights," and such counsel
has no reason to believe that as of their respective
effective dates, such portions of the Registration
Statement or any amendment thereto contained or
contains any untrue statement of a material fact or
omitted or omits to state any material fact required
to be stated therein or necessary to make the
statements therein not misleading or that as of its
issue date or such Closing Date, such portions of the
Prospectus or any amendment or supplement thereto
contained or contains any untrue statement of a
material fact or omitted or omits to state any
material fact necessary to make the statements
therein, in light of the circumstances under which
they were made, not misleading.
(g) The Underwriter shall have received an opinion, dated such
Closing Date of Amy Aguilar-Brown, Vice President, Legal
Affairs of the Company, to the effect that she has no reason
to believe that any part of a Registration Statement or
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<PAGE> 19
any amendment thereto, as of its effective date, contained any
untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading; or that the
Prospectus or any amendment or supplement thereto, as of its
issue date or as of such Closing Date, contained or contains
any untrue statement of a material fact or omitted or omits to
state any material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading; and she does not know of
any legal or governmental proceedings required to be described
in a Registration Statement or the Prospectus which are not
described as required or of any contracts or documents of a
character required to be described in a Registration Statement
or the Prospectus or to be filed as exhibits to a Registration
Statement which are not described and filed as required; it
being understood that she need express no opinion as to the
financial statements or other financial data contained in the
Registration Statements or the Prospectus.
(h) The Underwriter shall have received from Morgan, Lewis &
Bockius LLP, counsel for the Underwriter, such opinion or
opinions, dated such Closing Date, with respect to the
incorporation of the Company, the validity of the Offered
Securities delivered on such Closing Date, the Registration
Statements, the Prospectus and other related matters as the
Underwriter may reasonably request, and the Company shall have
furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
(i) The Underwriter shall have received a certificate, dated
such Closing Date, of the President and the Chief Financial
Officer of the Company in which such officers, shall state on
behalf of the Company that: the representations and warranties
of the Company in this Agreement are true and correct; the
Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder
at or prior to such Closing Date; no stop order suspending the
effectiveness of any Registration Statement has been issued
and no proceedings for that purpose have been instituted or,
to their knowledge, are contemplated by the Commission; the
Additional Registration Statement (if any) satisfying the
requirements of subparagraphs (1) and (3) of Rule 462(b) was
filed pursuant to Rule 462(b), including payment of the
applicable filing fee in accordance with Rule 111(a) or (b)
under the Act, prior to the time the Prospectus was printed
and distributed to the Underwriter; and, subsequent to the
respective dates of the most recent financial statements in
the Prospectus, there has been no material adverse change, nor
any development or event involving a prospective material
adverse change, in the condition (financial or other),
business, properties or results of operations of the Company
and its subsidiaries taken as a whole except as set forth in
or contemplated by the Prospectus or as described in such
certificate.
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<PAGE> 20
(j) The Company shall have delivered to you the agreements
specified in Section 5(j) hereof which agreements shall be in
full force and effect on the Closing Date.
(k) The Underwriter shall have received a letter, dated such
Closing Date, of PricewaterhouseCoopers LLP which meets the
requirements of subsection (a) of this Section, except that
the specified date referred to in such subsection will be a
date not more than three business days prior to such Closing
Date for the purposes of this subsection.
(l) The Company will furnish the Underwriter with such
conformed copies of such opinions, certificates, letters and
documents as the Underwriter reasonably requests.
The Underwriter may in its sole discretion waive compliance with any conditions
to the obligations of the Underwriter hereunder, whether in respect of an
Optional Closing Date or otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless the
Underwriter against any losses, claims, damages or
liabilities, joint or several, to which the Underwriter may
become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment
or supplement thereto, or any related preliminary prospectus,
or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and will reimburse the Underwriter for any legal
or other expenses reasonably incurred by the Underwriter in
connection with investigating or defending any such loss,
claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company will not be
liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or
alleged omission from any of such documents in reliance upon
and in conformity with written information furnished to the
Company by the Underwriter specifically for use therein, it
being understood and agreed that the only such information
furnished by the Underwriter consists of the information
described as such in subsection (c) below; and provided
further, that with respect to any untrue statement or alleged
untrue statement in or omission or alleged omission from any
preliminary prospectus, the indemnity agreement contained in
this subsection (a) shall not inure to the benefit of the
Underwriter in connection with the assertion of any such
losses, claims, damages or liabilities by a person who
purchased the Offered Securities, to the extent that a
prospectus relating to such Offered
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<PAGE> 21
Securities was required to be delivered by the Underwriter
under the Act in connection with such purchase, and any such
loss, claim, damage or liability of the Underwriter results
from the fact that there was not sent or given to such person,
at or prior to the written confirmation of the sale of such
Offered Securities to such person, a copy of the Prospectus if
the Company had previously furnished copies thereof to the
Underwriter.
The Company agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the
Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or
investigating any such action or claim) related to, arising
out of, or in connection with the Directed Share Program,
other than losses, claims, damages or liabilities (or expenses
relating thereto) that are finally judicially determined to
have resulted from the bad faith or gross negligence of the
Underwriter.
(b) Insofar as the foregoing indemnity agreement, or the
representations and warranties contained in Section 2, may
permit indemnification for liabilities under the Act of any
person who is an Underwriter or a partner or controlling
person of an Underwriter within the meaning of Section 15 of
the Act and who, at the date of this Agreement, is a director,
officer or controlling person of the Company, the Company has
been advised that in the opinion of the Commission such
provisions may contravene Federal public policy as expressed
in the Act and may therefore be unenforceable. In the event
that a claim for indemnification under such agreement or such
representations and warranties for any such liabilities
(except insofar as such agreement provides for the payment by
the Company of expenses incurred or paid by a director,
officer or controlling person in the successful defense of any
action, suit or proceeding) is asserted by such a person, the
Company will submit to a court of appropriate jurisdiction
(unless in the opinion of counsel for the Company the matter
has already been settled by controlling precedent) the
question of whether or not indemnification by it for such
liabilities is against public policy as expressed in the Act
and therefore unenforceable, and the Company will be governed
by the final adjudication of such issue.
(c) The Underwriter will indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to
which the Company may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration
Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out
of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in
each
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<PAGE> 22
case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with
written information furnished to the Company by the
Underwriter specifically for use therein, and will reimburse
any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending any such loss,
claim, damage, liability or action as such expenses are
incurred, it being understood and agreed that the only such
information furnished by the Underwriter consists of the name
of the Underwriter and the fourth, seventh, eleventh and last
paragraphs and the second and third sentences of the fifteenth
paragraph under the caption "Underwriting".
(d) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party under subsection (a) or (c)
above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to
any indemnified party otherwise than under subsection (a) or
(c) above. In case any such action is brought against any
indemnified party and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled
to participate therein and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to
such indemnified party (who shall not, except with the consent
of the indemnified party, be counsel to the indemnifying
party), and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of
which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified
party unless such settlement includes an unconditional release
of such indemnified party from all liability on any claims
that are the subject matter of such action.
(e) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified
party under subsection (a) or (c) above, then each
indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a)
or (c) above (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the
one hand and the Underwriter on the other from the offering of
the Offered Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriter on
the other in connection with the statements or
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<PAGE> 23
omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company
on the one hand and the Underwriter on the other shall be
deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the
Company bear to the total underwriting discounts and
commissions received by the Underwriter. The relative fault
shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company or the
Underwriter and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages
or liabilities referred to in the first sentence of this
subsection (e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in
connection with investigating or defending any action or claim
which is the subject of this subsection (e). Notwithstanding
the provisions of this subsection (e), the Underwriter shall
not be required to contribute any amount in excess of the
amount by which the total price at which the Offered
Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages
which the Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(d) of the
Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(f) The obligations of the Company under this Section shall be
in addition to any liability which the Company may otherwise
have and shall extend, upon the same terms and conditions, to
each person, if any, who controls the Underwriter within the
meaning of the Act; and the obligations of the Underwriter
under this Section shall be in addition to any liability which
the Underwriter may otherwise have and shall extend, upon the
same terms and conditions, to each director of the Company, to
each officer of the Company who has signed a Registration
Statement and to each person, if any, who controls the Company
within the meaning of the Act.
8. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and the Underwriter set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation, or statement as to the results thereof, made by or on behalf of
the Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If for any reason the purchase of the
Offered Securities by the Underwriter is not consummated, the Company shall
remain responsible for the expenses to be paid or reimbursed by it pursuant to
Section 5 and the respective obligations of the Company and the Underwriter
pursuant to Section 7 shall remain in effect, and if any Offered Securities have
been purchased hereunder the representations and warranties in Section 2 and all
obligations under Section 5 shall also remain in effect. If the purchase of the
Offered Securities by the Underwriter is not consummated for
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<PAGE> 24
any reason other than solely because of the occurrence of any event specified in
clause (ii), (iii) or (iv) of Section 6(d), the Company will reimburse the
Underwriter for all out-of-pocket expenses (including fees and disbursements of
counsel) reasonably incurred by it in connection with the offering of the
Offered Securities.
9. Notices. All communications hereunder will be in writing and, if
sent to the Underwriter, will be mailed, delivered or telegraphed and confirmed
to the Underwriter, Invemed Associates LLC, 375 Park Avenue, New York, NY
10152-0189, Attention: Cristina H. Kepner - Executive Vice President, or, if
sent to the Company, will be mailed, delivered or telegraphed and confirmed to
it at InterWorld Corporation, 395 Hudson Street, 6th Floor, New York, NY 10014,
Attention: Amy Aguilar-Brown.
10. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective personal representatives
and successors and the officers and directors and controlling persons referred
to in Section 7, and no other person will have any right or obligation
hereunder.
11. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
12. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
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<PAGE> 25
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company one of the counterparts hereof,
whereupon it will become a binding agreement among the Company and the
Underwriter in accordance with its terms.
Very truly yours,
INTERWORLD CORPORATION
By............................
[Insert title]
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above
written.
INVEMED ASSOCIATES LLC
By.................................
[Insert title]
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<PAGE> 1
RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERWORLD CORPORATION
-------------------------------------------------------
Pursuant to Section 103, Section 242 and Section 245 of
the General Corporation Law of the State of Delaware
-------------------------------------------------------
ARTICLE I
NAME
The name of the corporation is InterWorld Corporation (the "Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the initial registered and principal office of
this corporation in this state is c/o National Registered Agents, Inc., 9 East
Loockerman Street, City of Dover, County of Kent, State of Delaware 19901 and
the name of the registered agent at said address is National Registered Agents,
Inc.
ARTICLE III
OBJECT AND PURPOSES
The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the corporation laws
of the State of Delaware.
ARTICLE IV
CAPITAL STOCK
The Corporation shall be authorized to issue 45,700,000 shares
of all classes, consisting of (i) 35,000,000 shares of Common Stock, $.01 par
value (the "Common Stock"), and (ii) 10,700,000 shares of Preferred Stock, $.01
par value (the "Preferred Stock"). Of the Preferred Stock, 8,200,000 shares
shall be designated as "Series A Preferred Stock" (the "Series A Preferred
Stock") and 2,500,000 shares shall be designated as "Series B Preferred Stock"
(the "Series B Preferred Stock").
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<PAGE> 2
The Series A Preferred Stock and the Series B Preferred Stock
shall have the following designations, preferences, and other rights:
1. DIVIDENDS.
The holders of Series A Preferred Stock and Series B Preferred Stock
shall be entitled to share in any dividends declared and paid upon or set aside
for the Common Stock of the Corporation, pro rata in accordance with the number
of shares of Common Stock into which such shares of Series A Preferred Stock and
Series B Preferred Stock are then convertible pursuant to Section 6.
2. LIQUIDATION.
(a) Upon a Liquidation (as defined below), after payment or provision
for payment of the debts and other liabilities of the Corporation and all
amounts which the holders of any class of capital stock ranking senior to the
Series A Preferred Stock shall be entitled to receive upon such Liquidation, the
holders of Series A Preferred Stock shall be entitled to receive, out of the
remaining assets of the Corporation available for distribution to its
stockholders, with respect to each share of Series A Preferred Stock an amount
(the "Series A Preference Amount") equal to the sum of (i)(A) $2 for shares
issued prior to July 1, 1996 (or pursuant to the Warrant Agreements dated March
1, 1996 (the "First Comdisco Warrants"), between the Corporation and Comdisco,
Inc. ("Comdisco")), (B) $4.732 for shares issued on or after July 1, 1996, and
prior to December 2, 1996, (C) $6.25 for shares issued on or after December 2,
1996, and prior to May 21, 1997 (or pursuant to the Warrant Agreement dated
January 9, 1997, between the Corporation and Comdisco (the "Second Comdisco
Warrants") or the Warrant Agreement dated February 4th, 1997, between the
Corporation and Comdisco (the "Third Comdisco Warrants")), (D) $7.50 for shares
issued on or after May 21, 1997, and before August 4, 1997 or pursuant to the
Warrant Agreements dated April 22, 1997, between the Corporation and Global
Retail Partners L.P. and their affiliates (the "Global Warrants"), (E) $8.50 for
shares issued on or after August 4, 1997 (except for shares issued pursuant to
the Warrants referred to in clause (F)), (F) $9.775 for up to 253,690 shares
issued pursuant to (1) the Warrant Agreements dated November 26, 1997 and March
27, 1998, between the Corporation and associates of Invemed Corporation and its
affiliates (the "Invemed Advisor Warrants") and (2) a Warrant Agreement dated
October 26, 1998 between the Corporation and Comdisco (the "Fourth Comdisco
Warrants"), and (ii) all declared but unpaid dividends payable with respect to
such share under Section 1, before any distribution shall be made to the holders
of the Common Stock or any other class of capital stock of the Corporation
ranking junior to the Series A Preferred Stock.
(b) Upon a Liquidation, after payment or provision for payment of the
debts and other liabilities of the Corporation and all amounts which the holders
of any class of capital stock ranking senior to the Series B Preferred Stock
shall be entitled to receive upon such Liquidation, the holders of Series B
Preferred Stock shall be entitled to receive, out of the remaining assets of the
Corporation available for distribution to its stockholders, with respect to each
share of Series B Preferred Stock an amount (the "Series B Preference Amount"
and together with the Series A Preference Amount, the "Preference Amounts")
equal to the sum of (i) $10.00 and (ii) all declared but unpaid dividends
payable with respect to such share under
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<PAGE> 3
Section 1, before any distribution shall be made to the holders of the Common
Stock or any other class of capital stock of the Corporation ranking junior to
the Series B Preferred Stock.
(c) If upon any Liquidation the assets of the Corporation available for
distribution to its stockholders shall be insufficient to pay the holders of
Series A Preferred Stock and the Series B Preferred Stock the full Preference
Amounts to which they shall be entitled, the holders of Series A Preferred Stock
and Series B Preferred Stock shall share pro rata in any distribution of assets
in accordance with their respective full Preference Amounts and the amount of
Series A Preferred or Series B Preferred Stock, as applicable, owned by each
such stockholder.
(d) Upon any Liquidation, after payment or provision for payment in
full of all Preference Amounts, the holders of Common Stock shall be entitled to
share pro rata in the distribution of the remaining assets of the Corporation.
(e) "Liquidation" means any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, other than any
dissolution, liquidation or winding up in connection with any reincorporation of
the Corporation in another jurisdiction.
3. REDEMPTION UPON CORPORATE TRANSACTION.
(a) In connection with any Corporate Transaction (as defined below),
each holder of shares of Series A Preferred Stock and Series B Preferred Stock
may demand that the Corporation redeem (out of funds legally available for that
purpose) all or a portion of all shares of Series A Preferred Stock or Series B
Preferred Stock, as the case may be, then held by such holder for a cash amount
per share equal to the applicable Preference Amount. The Corporation shall send
notice of any proposed Corporate Transaction by first-class certified mail,
return receipt requested, postage prepaid, to the holders of record of the
shares of Series A Preferred Stock or Series B Preferred Stock, as the case may
be, at their respective addresses as they appear on the books of the
Corporation. Such notice shall be mailed prior to or at the same time as any
notice of a stockholders meeting to be held for the purpose of voting on such
Corporate Transaction or as any request for consent in lieu of such meeting. If
no such notice or consent is required, the notice of such proposed Corporate
Transaction shall be mailed no later than 20 days before the anticipated date of
closing of the Corporate Transaction. The right of each holder of Series A
Preferred Stock and Series B Preferred Stock under this Section may be exercised
by delivering to the Corporation, prior to the consummation of such Corporate
Transaction, a notice specifying the number of shares of Series A Preferred
Stock or Series B Preferred Stock, as the case may be, to be redeemed.
(b) At any time on or after the date of consummation of such Corporate
Transaction, each holder of record of shares of Series A Preferred Stock or
Series B Preferred Stock, as the case may be, to be redeemed on such date shall
be entitled to receive the redemption price upon actual delivery to the
Corporation or its agents of the certificate or certificates representing the
shares to be redeemed. On any such date, all rights in respect of the shares of
Series A Preferred Stock or Series B Preferred Stock, as the case may be, to be
redeemed, except the right to receive the redemption price, shall cease and
terminate (unless default shall be made by the Corporation in the payment of the
applicable redemption price, in
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<PAGE> 4
which event such rights shall be exercisable until such default is cured), and
such shares shall no longer be deemed to be outstanding, whether or not the
certificate or certificates representing such share have been received by the
Corporation.
(c) If the Corporation has insufficient funds legally available to
redeem any shares of Series A Preferred Stock or Series B Preferred Stock, as
the case may be, required to be redeemed in connection with any Corporate
Transaction, those funds legally available for such purpose shall be used to
redeem the number of such shares which may be redeemed. The holders of shares of
Series A Preferred Stock or Series B Preferred Stock, as the case may be, to be
redeemed shall participate in any such partial redemption pro rata according to
the number of such shares then held by them. At any time and from time to time
thereafter when additional funds become legally available for the redemption of
Series A Preferred Stock or Series B Preferred Stock, as the case may be, such
funds shall be used promptly to redeem the balance of the shares of Series A
Preferred Stock or Series B Preferred Stock, as the case may be, to be redeemed.
(d) "Corporate Transaction" means (i) any consolidation or merger of
the Corporation, other than any merger or consolidation resulting in the holders
of the capital stock of the Corporation entitled to vote for the election of
directors holding a majority of the capital stock of the surviving or resulting
entity entitled to vote for the election of directors, and (ii) any sale or
other disposition by the Corporation of all or substantially all of its assets.
4. MANDATORY REDEMPTION.
(a) At any time on or after March 11, 2003 (the seventh anniversary of
the date of original issuance of the first share of Series A Preferred Stock)
(the "Original Issuance Date"), the holders of a majority of all shares of
Series A Preferred Stock and Series B Preferred Stock (voting as a single class
on a common stock equivalent basis) may demand (which demand shall be binding
upon all holders of Series A Preferred Stock and Series B Preferred Stock, as
the case may be,) that the Corporation redeem (out of funds legally available
for that purpose) all, but not less than all, shares of Series A Preferred Stock
and Series B Preferred Stock then outstanding for a cash amount per share equal
to the applicable Preference Amount. Such right may be exercised by delivery to
the Corporation of a notice (a "Mandatory Redemption Notice") requesting such
redemption. The Corporation shall redeem all shares of Series A Preferred Stock
and Series B Preferred Stock on a date (the "Mandatory Redemption Date") that is
not more than 120 days after the date of delivery of the Mandatory Redemption
Notice.
(b) If the Corporation has insufficient funds legally available to
redeem all shares of Series A Preferred Stock and Series B Preferred Stock, as
the case may be, required to be redeemed on the Mandatory Redemption Date, those
funds legally available for such purpose shall be used to redeem the number of
such shares which may be redeemed. The holders of shares of Series A Preferred
Stock and Series B Preferred Stock shall participate in any such partial
redemption pro rata according to the number of such shares then held by each
such holder. At any time and from time to time thereafter when additional funds
become legally available for the redemption of Series A Preferred Stock and
Series B Preferred Stock such funds shall be used promptly to redeem the balance
of the shares of Series A Preferred Stock and Series B Preferred Stock to be
redeemed.
4
<PAGE> 5
(c) At any time on or after the Mandatory Redemption Date, each holder
of record of shares of Series A Preferred Stock and Series B Preferred Stock to
be redeemed on such date shall be entitled to receive the applicable Preference
Amount upon actual delivery to the Corporation or its agents of the certificate
or certificates representing the shares to be redeemed. On the Mandatory
Redemption Date, all rights in respect of the shares of Series A Preferred Stock
and Series B Preferred Stock to be redeemed, except the right to receive the
applicable redemption price, shall cease and terminate (unless default shall be
made by the Corporation in the payment of the applicable redemption price, in
which event such rights shall be exercisable until such default is cured), and
such shares shall no longer be deemed to be outstanding, whether or not the
certificate or certificates representing such shares have been received by the
Corporation.
5. VOTING RIGHTS.
(a) In addition to the rights provided by law or in paragraphs (b), (c)
and (d) below, the holders of Series A Preferred Stock and the Series B
Preferred Stock, as the case may be, shall be entitled to vote on all matters as
to which holders of Common Stock shall be entitled to vote, in the same manner
and with the same effect as such holders of Common Stock, voting together with
the holders of Common Stock as one class. Each share of Series A Preferred Stock
or Series B Preferred Stock, as the case may be, shall entitle the holder
thereof to such number of votes as shall equal the number of whole and
fractional shares of Common Stock into which such share of Series A Preferred
Stock or Series B Preferred Stock, as the case may be, is then convertible
pursuant to Section 6.
(b) In addition, to the rights provided by law, the Corporation shall
not, without the affirmative consent or approval of the holders of a majority of
the shares of Series A Preferred Stock and Series B Preferred Stock then
outstanding, voting together separately as a single class:
(i) authorize any class or series of capital stock ranking
senior to or pari passu with the Series A Preferred Stock and the
Series B Preferred; or
(ii) amend or waive any provision of the Corporation's
Restated Certificate of Incorporation.
(c) In addition to the rights provided by law, the Corporation shall
not, without the affirmative consent or approval of the holders of a majority of
the shares of Series A Preferred Stock then outstanding, voting separately as a
class, in any manner alter or change the powers, preferences, rights or
qualifications of, or limitations or restrictions on, the shares of Series A
Preferred Stock so as to affect them adversely.
(d) In addition to the rights provided by law, the Corporation shall
not, without the affirmative consent or approval of the holders of a majority of
the shares of Series B Preferred Stock then outstanding, voting separately as a
class, in any manner alter or change the powers, preferences, rights or
qualifications of, or limitations or restrictions on, the shares of Series B
Preferred Stock so as to affect them adversely.
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<PAGE> 6
6. OPTIONAL CONVERSION.
(a) Upon the terms set forth in this Section, each holder of shares
of Series A Preferred Stock shall have the right, at such holder's option, at
any time and from time to time, to convert any of such shares into the number of
fully paid and nonassessable shares of Common Stock equal to the quotient
obtained by dividing (i) the product of the Series A Preference Amount and the
number of shares of Series A Preferred Stock being converted, by (ii) the Series
A Conversion Price (as defined below), as last adjusted and then in effect, by
surrender of the certificates representing the shares of Series A Preferred
Stock to be converted. The conversion price per share at which shares of Common
Stock shall be issuable upon conversion of shares of Series A Preferred Stock
(the "Series A Conversion Price") shall be (A) $2 upon conversion of shares of
Series A Preferred Stock issued before July 1, 1996, or pursuant to the First
Comdisco Warrants, (B) $4.732 upon conversion of shares of Series A Preferred
Stock issued on or after July 1, 1996, and before December 2, 1996, (C) $6.25
upon conversion of shares of Series A Preferred Stock issued on or after
December 2, 1996 and before May 21, 1997, or pursuant to the Second Comdisco
Warrants or the Third Comdisco Warrants, (D) $7.50 upon conversion of shares of
Series A Preferred Stock issued on or after May 21, 1997, and before August 4,
1997, or pursuant to the Global Warrants, (E) $8.50 upon conversion of shares of
Series A Preferred Stock issued on or after August 4, 1997 (except for shares
issued pursuant to the Warrants referred to in clause (F)), and (F) $9.775 upon
conversion of shares of Series A Preferred Stock issued pursuant to the Invemed
Advisor Warrants or the Fourth Comdisco Warrants, in each case subject to
adjustment as set forth in paragraph (e) below.
(b) Upon the terms set forth in this Section, each holder of shares
of Series B Preferred Stock shall have the right, at such holder's option, at
any time and from time to time, to convert any of such shares into the number of
fully paid and nonassessable shares of Common Stock equal to the quotient
obtained by dividing (i) the product of the Series B Preference Amount and the
number of shares of Series B Preferred Stock being converted, by (ii) the Series
B Conversion Price (as defined below), as last adjusted and then in effect, by
surrender of the certificates representing the shares of Series B Preferred
Stock to be converted. The conversion price per share at which shares of Common
Stock shall be issuable upon conversion of shares of Series B Preferred Stock
(the "Series B Conversion Price" and each of the Series A Conversion Price and
Series B Conversion Price, a "Conversion Price") shall be $10.00, subject to
adjustment as set forth in paragraph (e) below.
(c) The holder of any shares of Series A Preferred Stock or Series B
Preferred Stock, as the case may be, may exercise the conversion right pursuant
to paragraph (a) or (b) above, as the case may be, by delivering to the
Corporation the certificate or certificates for the shares to be converted, duly
endorsed or assigned in blank or to the Corporation (if required by it),
accompanied by written notice stating that the holder elects to convert such
shares and stating the name or names (with address) in which the certificate or
certificates for the shares of Common Stock are to be issued. Conversion shall
be deemed to have been effected on the date when such delivery is made (the
"Conversion Date"). As promptly as practicable thereafter, the Corporation shall
issue and deliver to or upon the written order of such holder, to the place
designated by such holder, a certificate or certificates for the number of full
shares of Common Stock to which such holder is entitled, and a cash amount in
respect of any fractional interest in a share of Common Stock as provided in
paragraph (d) below. The person in whose name the
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certificate or certificates for Common Stock are to be issued shall be deemed to
have become a stockholder of record on the applicable Conversion Date unless the
transfer books of the Corporation are closed on that date, in which event such
person shall be deemed to have become a stockholder of record on the next
succeeding date on which the transfer books are open, but the applicable
Conversion Price shall be that in effect on the Conversion Date. Upon conversion
of only a portion of the number of shares covered by a certificate representing
shares of Series A Preferred Stock or Series B Preferred Stock, as the case may
be, surrendered for conversion, the Corporation shall issue and deliver to or
upon the written order of the holder of the certificate so surrendered for
conversion, at the expense of the Corporation, a new certificate covering the
number of shares of Series A Preferred Stock or Series B Preferred Stock, as the
case may be, representing the unconverted portion of the certificate so
surrendered.
(d) No fractional shares of Common Stock or scrip shall be issued
upon conversion of shares of Series A Preferred Stock or Series B Preferred
Stock, as the case may be. The number of full shares of Common Stock issuable
upon conversion of Series A Preferred Stock or Series B Preferred Stock, as the
case may be, shall be computed on the basis of the aggregate number of shares of
Series A Preferred Stock or Series B Preferred Stock, as the case may be, to be
converted. Instead of any fractional shares of Common Stock which would
otherwise be issuable upon conversion of any shares of Series A Preferred Stock
or Series B Preferred Stock, as the case may be, the Corporation shall pay a
cash adjustment in respect of such fractional interest in an amount equal to the
product of (i) the price of one share of Common Stock as determined in good
faith by the Board and (ii) such fractional interest. The holders of fractional
interests shall not be entitled to any rights as stockholders of the Corporation
in respect of such fractional interests.
(e) The applicable Conversion Price shall be subject to adjustment
from time to time as follows:
(i) If the Corporation shall at any time or from time to time
after the Original Issuance Date issue any shares of Common Stock other
than Excluded Stock (as defined below) without consideration or for a
consideration per share less than the Conversion Price in effect
immediately prior to the issuance of such Common Stock, then the
Conversion Price in effect immediately prior to each such issuance
shall forthwith be lowered to a price equal to the quotient obtained by
dividing:
(A) an amount equal to the sum of (x) the total
number of shares of Common Stock outstanding (including any
shares of Common Stock deemed to have been issued pursuant to
subdivision (C) of clause (ii) below) immediately prior to
such issuance, multiplied by the Conversion Price in effect
immediately prior to such issuance, and (y) the consideration
received by the Corporation upon such issuance; by
(B) the total number of shares of Common Stock
outstanding (including any shares of Common Stock deemed to
have been issued pursuant to subdivision (C) of clause (ii)
below) immediately after the issuance of such Common Stock.
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(ii) For the purposes of any adjustment of the Conversion
Price pursuant to clause (i) above, the following provisions shall be
applicable:
(A) In the case of the issuance of Common Stock for
cash in a public offering or private placement, the
consideration shall be deemed to be the amount of cash paid
therefor after deducting therefrom any discounts, commissions
or placement fees payable by the Corporation to any
underwriter or placement agent in connection with the issuance
and sale thereof.
(B) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair
market value thereof as determined in good faith by the Board
of Directors of the Corporation, irrespective of any
accounting treatment.
(C) In the case of the issuance of options to
purchase or rights to subscribe for Common Stock, securities
by their terms convertible into or exchangeable for Common
Stock, or options to purchase or rights to subscribe for such
convertible or exchangeable securities:
(1) the aggregate maximum number of shares
of Common Stock deliverable upon exercise of such
options to purchase or rights to subscribe for Common
Stock shall be deemed to have been issued at the time
such options or rights were issued and for a
consideration equal to the consideration (determined
in the manner provided in subdivisions (A) and (B)
above), if any, received by the Corporation upon the
issuance of such options or rights plus the minimum
purchase price provided in such options or rights for
the Common Stock covered thereby;
(2) the aggregate maximum number of shares
of Common Stock deliverable upon conversion of or in
exchange for any such convertible or exchangeable
securities or upon the exercise of options to
purchase or rights to subscribe for such convertible
or exchangeable securities and subsequent conversion
or exchange thereof shall be deemed to have been
issued at the time such securities, options, or
rights were issued and for a consideration equal to
the consideration received by the Corporation for any
such securities and related options or rights
(excluding any cash received on account of accrued
interest or accrued dividends), plus the additional
consideration, if any, to be received by the
Corporation upon the conversion or exchange of such
securities or the exercise of any related options or
rights (the consideration in each case to be
determined in the manner provided in subdivisions (A)
and (B) above);
(3) on any change in the number of shares or
exercise price of Common Stock deliverable upon
exercise of any such options or rights or conversions
of or exchange for such securities, other than a
change resulting from the antidilution provisions
thereof, the Conversion Price shall forthwith be
readjusted to such Conversion Price as would have
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<PAGE> 9
obtained had the adjustment made upon the issuance of
such options, rights or securities not converted
prior to such change or options or rights related to
such securities not converted prior to such change
been made upon the basis of such change; and
(4) on the expiration of any such options or
rights, the termination of any such rights to convert
or exchange or the expiration of any options or
rights related to such convertible or exchangeable
securities, the Conversion Price shall forthwith be
readjusted to such Conversion Price as would have
obtained had the adjustment made upon the issuance of
such options, rights, securities or options or rights
related to such securities been made upon the basis
of the issuance of only the number of shares of
Common Stock actually issued upon the exercise of
such options or rights, upon the conversion or
exchange of such securities, or upon the exercise of
the options or rights related to such securities and
subsequent conversion or exchange thereof.
(iii) "Excluded Stock" means (1) 6,600,000 shares of Common
Stock, and options therefor, reserved for issuance or grant under the
1996 Stock Option Plan of the Corporation, as amended; (2) shares of
Common Stock issued upon conversion of shares of Series A Preferred
Stock or Series B Preferred Stock; and (3) 800,000 shares of Series A
Preferred Stock reserved for issuance under the First Comdisco
Warrants, the Second Comdisco Warrants, the Third Comdisco Warrant, the
Global Warrants, the Invemed Advisor Warrants or the Fourth Comdisco
Warrants.
(iv) If, at any time after July 12, 1996, the number of shares
of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, following the record date for the determination of
holders of Common Stock entitled to receive such stock dividend,
subdivision or split-up, the Conversion Price shall be appropriately
decreased so that the number of shares of Common Stock issuable on
conversion of each share of Series A Preferred Stock or Series B
Preferred Stock, as the case may be, shall be increased in proportion
to such increase in outstanding shares.
(v) If, at any time after the Original Issuance Date, the
number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock, then, following
the record date for such combination, the Conversion Price shall be
appropriately increased so that the number of shares of Common Stock
issuable on conversion of each share of Series A Preferred Stock or
Series B Preferred Stock, as the case may be, shall be decreased in
proportion to such decrease in outstanding shares.
(vi) In the event of any capital reorganization of the
Corporation, any reclassification of the stock of the Corporation
(other than a change in par value or from no par value to par value or
from par value to no par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or any consolidation
or merger of the Corporation, each share of Series A Preferred Stock or
Series B Preferred
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Stock, as the case may be, shall after such reorganization,
reclassification, consolidation, or merger be convertible into the kind
and number of shares of stock or other securities or property of the
Corporation or of the corporation resulting from such consolidation or
surviving such merger to which the holder of the number of shares of
Common Stock deliverable (immediately prior to the time of such
reorganization, reclassification, consolidation or merger) upon
conversion of such share of Series A Preferred Stock or Series B
Preferred Stock, as the case may be, would have been entitled upon such
reorganization, reclassification, consolidation or merger. The
provisions of this clause shall similarly apply to successive
reorganizations, reclassifications, consolidations or mergers.
(vii) All calculations under this paragraph shall be made to
the nearest one hundredth (1/100) of a cent or the nearest one tenth
(1/10) of a share, as the case may be.
(viii) In any case in which the provisions of this paragraph
(e) shall require that an adjustment shall become effective immediately
after a record date of an event, the Corporation may defer until the
occurrence of such event (i) issuing to the holder of any share of
Series A Preferred Stock or Series B Preferred Stock, as the case may
be, converted after such record date and before the occurrence of such
event the shares of capital stock issuable upon such conversion by
reason of the adjustment required by such event in addition to the
shares of capital stock issuable upon such conversion before giving
effect to such adjustments, and (ii) paying to such holder any amount
in cash in lieu of a fractional share of capital stock pursuant to
paragraph (d) above; provided, however, that the Corporation shall
deliver to such holder an appropriate instrument evidencing such
holder's right to receive such additional shares and such cash.
(f) Whenever a Conversion Price shall be adjusted as provided in
paragraph (e), the Corporation shall make available for inspection during
regular business hours, at its principal executive offices or at such other
place as may be designated by the Corporation, a statement, signed by its chief
executive officer, showing in detail the facts requiring such adjustment and the
applicable Conversion Price that shall be in effect after such adjustment. The
Corporation shall also cause a copy of such statement to be sent by first class
certified mail, return receipt requested and postage prepaid, to each holder of
Series A Preferred Stock or Series B Preferred Stock, as the case may be, at
such holder's address appearing on the Corporation's records. Where appropriate,
such copy may be given in advance and may be included as part of any notice
required to be mailed under the provisions of paragraph (g) below.
(g) If the Corporation shall propose to take any action of the types
described in clauses (v), (vi) or (vii) of paragraph (e) above, the Corporation
shall give notice to each holder of shares of Series A Preferred Stock or Series
B Preferred Stock, as the case may be, in the manner set forth in paragraph (f)
above, which notice shall specify the record date, if any, with respect to any
such action and the date on which such action is to take place. Such notice
shall also set forth such facts with respect thereto as shall be reasonably
necessary to indicate the effect of such action (to the extent such effect may
be known at the date of such notice) on the applicable Conversion Price and the
number, kind or class of shares or other securities or property which shall be
deliverable or purchasable upon the occurrence of such action or deliverable
upon conversion of shares of Series A Preferred Stock or Series B Preferred
Stock, as
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the case may be. In the case of any action which would require the fixing of a
record date, such notice shall be given at least 20 days prior to the date so
fixed, and in case of all other action, such notice shall be given at least 30
days prior to the taking of such proposed action. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of any such
action.
(h) The Corporation shall reserve, and at all times from and after the
date of Original Issuance Date keep reserved, free from preemptive rights, out
of its authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of Series A Preferred Stock or Series B
Preferred Stock, as the case may be, sufficient shares of Common Stock to
provide for the conversion of all outstanding shares of Series A Preferred Stock
and Series B Preferred Stock.
(i) At any time the Corporation makes or fixes a record date for the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in securities of the Corporation other than shares of
Common Stock, provision shall be made so that each holder of shares of Series A
Preferred Stock or Series B Preferred Stock, as the case may be, shall receive
upon conversion thereof, in addition to the shares of Common Stock receivable
thereupon, the number of securities of the Corporation which it would have
received had its shares of Series A Preferred Stock or Series B Preferred Stock,
as the case may be, been converted into shares of Common Stock on the date of
such event and had such holder thereafter, during the period from the date of
such event to and including the date of conversion, retained such securities
receivable by it pursuant to this paragraph during such period, subject to the
sum of all other adjustments called for during such period under this Section
with respect to the rights of such holder of shares of Series A Preferred Stock
or Series B Preferred Stock, as the case may be.
7. MANDATORY CONVERSION.
(a) Upon the consummation of the first underwritten public offering for
the account of the Corporation of Common Stock pursuant to a registration
statement filed under the Securities Act of 1933 with aggregate proceeds (net of
underwriting discounts and commissions) to the Corporation of not less than
$25,000,000 (a "Qualified Public Offering"), each share of Series A Preferred
Stock and Series B Preferred Stock then outstanding shall, by virtue of and
simultaneously with such Qualified Public Offering, be deemed automatically
converted (a "Mandatory Conversion") into the number of fully paid and
nonassessable shares of Common Stock equal to the quotient obtained (i) in the
case of the Series A Preferred Stock, by dividing (A) the Series A Preference
Amount by (B) the Series A Conversion Price, as last adjusted and then in effect
and (ii) in the case of the Series B Preferred Stock, by dividing (A) the Series
B Preference Amount by (B) the Series B Conversion Price, as last adjusted and
then in effect; provided, however, that if a Mandatory Conversion occurs on or
prior to December 31, 2000 and the initial price per share of Common Stock to
the public in the Qualified Public Offering (the "IPO Price") is less than
$12.00, then each share of Series B Preferred Stock shall be converted into the
number of fully paid and nonassessable shares of Common Stock equal to the
quotient obtained by dividing (C) $12.00 by (D) the IPO Price.
(b) As promptly as practicable after the date of consummation of any
Qualified Public Offering and the delivery to the Corporation of the certificate
or certificates for the shares
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of Series A Preferred Stock or Series B Preferred Stock, as the case may be,
which have been converted, duly endorsed or assigned in blank to the Corporation
(if required by it), the Corporation shall issue and deliver to or upon the
written order of each holder of Series A Preferred Stock or Series B Preferred
Stock, as the case may be, to the place designated by such holder, a certificate
or certificates for the number of full shares of Common Stock to which such
holder is entitled, and a cash amount in respect of any fractional interest in a
share of Common Stock as provided in paragraph (c) below. The person in whose
name the certificate or certificates for Common Stock are to be issued shall be
deemed to have become a stockholder of record on the date of such Qualified
Public Offering and on such date the shares of Series A Preferred Stock or
Series B Preferred Stock, as the case may be, shall cease to be outstanding,
whether or not the certificates representing such shares have been received by
the Corporation.
(c) The provisions set forth in Section 6(d) shall apply to the
conversion of Series A Preferred Stock or Series B Preferred Stock, as the case
may be, pursuant to this Section in the same manner as they apply to the
conversion of Series A Preferred Stock or Series B Preferred Stock, as the case
may be, pursuant to Section 6.
ARTICLE V
DIRECTORS
1. The number of directors of the corporation shall be such as from
time to time shall be fixed by, or in the manner provided in the By-Laws.
Election of directors need not be by ballot unless the By-Laws so provide.
2. The Board of Directors shall have power without the assent or vote
of the stockholders:
(a) To make, alter, amend, change, add to or repeal the By-Laws of
the corporation; to fix and vary the amount to be reserved for any proper
purpose; to authorize and cause to be executed mortgages and liens upon all or
any part of the property of the corporation; to determine the use and
disposition of any surplus or net profits; and to fix the times for the
declaration and payment of dividends.
(b) To determine from time to time whether, and to what times and
places, and under what conditions the accounts and books of the corporation
(other than the stock ledger) or any of them, shall be open to the inspection of
the stockholders.
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3. The directors in their discretion may submit any contract or act for
approval or ratification at any annual meeting of the stockholders or at any
meeting of the stockholders called for the purpose of considering any such act
or contract, and any contract or act that shall be approved or be ratified by
the vote of the holders of a majority of the stock of the corporation which is
represented in person or by proxy at such meeting and entitled to vote thereat
(provided that a lawful quorum of stockholders be there represented in person or
by proxy) shall be as valid and as binding upon the corporation and upon all the
stockholders as though it had been approved or ratified by every stockholder of
the corporation, whether or not the contract or act would otherwise be open to
legal attack because of directors' interest, or for any other reason.
4. In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the corporation; subject, nevertheless, to the provisions of the statutes of
Delaware, of this certificate, and to any by-laws from time to time made by the
stockholders; provided, however, that no by-laws so made shall invalidate any
prior act of the directors which would have been valid if such by-law had not
been made.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS
No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except with respect to (1) a breach of the director's duty of loyalty to the
corporation or its stockholders, (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3)
liability under Section 174 of the Delaware General Corporation Law or (4) a
transaction from which the director derived an improper personal benefit, it
being the intention of the foregoing provision to eliminate the liability of the
corporation's directors to the corporation or its stockholders to the fullest
extent permitted by Section 102(b)(7) of the Delaware General Corporation Law,
as amended from time to time. The corporation shall indemnify to the fullest
extent permitted by Sections 102(b)(7) and 145 of the Delaware General
Corporation Law, as amended from time to time, each person that such Sections
grant the corporation the power to indemnify.
ARTICLE VII
COMPROMISE OR ARRANGEMENT WITH CREDITORS
Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court or equitable
jurisdiction within the State of Delaware, may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 Title 8 of the Delaware
Code order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three-fourths (3/4) in
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value of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of this corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of this corporation as
consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders, of
this corporation, as the case may be, and also on this corporation.
ARTICLE VIII
AMENDMENTS
The corporation reserves the right to amend, alter, change or
repeal any provision contained in this certificate of incorporation in the
manner now or hereafter prescribed by law, and all rights and powers conferred
herein on stockholders, directors and officers are subject to this reserved
power.
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RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERWORLD CORPORATION
--------------------------------
InterWorld Corporation, a Delaware corporation (the
"Corporation"), does hereby certify that:
FIRST: The present name of the Corporation is "InterWorld
Corporation." The Corporation was originally incorporated under the name
"InterWorld Technology Ventures, Inc." The date of filing of the original
Certificate of Incorporation of the Corporation with the Secretary of State of
the State of Delaware was March 28, 1995. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on July 12, 1996. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on December 17, 1996. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on May 21, 1997. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on September 10, 1997. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on February 20, 1998.
SECOND: This Restated Certificate of Incorporation (the
"Certificate") amends and restates in its entirety the present Certificate of
Incorporation of the Corporation. This Certificate has been duly adopted and
approved by the Board of Directors of the Corporation by unanimous written
consent in lieu of a meeting thereof in accordance with the provisions of
Sections 141(f), 242 and 245 of the General Corporation Law of the State of
Delaware and by the Stockholders of the Corporation by written consent in lieu
of a meeting thereof in accordance with the provisions of Sections 228(a), 242
and 245 of the General Corporation Law at the State of Delaware.
THIRD: This Certificate shall become effective immediately
upon its filing with the Secretary of State of the State of Delaware.
FOURTH: Upon the filing with the Secretary of State of the
State of Delaware of this Certificate, the Certificate of Incorporation of the
Corporation shall be amended and restated in its entirety to read as set forth
on Exhibit A attached hereto.
<PAGE> 16
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be executed by a duly authorized officer this 12th day of
January, 1999 and hereby affirms that the facts stated herein are true.
INTERWORLD CORPORATION
By: /s/ Alan J. Andreini
____________________________________
Alan J. Andreini
President and Chief Executive Officer
<PAGE> 17
EXHIBIT A
RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERWORLD CORPORATION
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated March 3, 1999, relating to the consolidated financial
statements and financial statement schedules of InterWorld Corporation, which
appears in such Registration Statement. We also consent to the references to us
under the headings "Experts" and "Selected Consolidated Financial Data" in such
Registration Statement.
PricewaterhouseCoopers LLP
New York, NY
August 6, 1999
