<PAGE>
As filed with the Securities and Exchange Commission on April 27, 2000
Registration No. 333-34464
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
EoExchange, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7375 94-3260942
(State or other jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
282 2nd Street, Suite 400
San Francisco, CA 94105
(415) 538-8555
(Address, including zip code, and telephone number of Registrant's principal
executive offices)
----------------
Douglas S. Bennett
President and Chief Executive Officer
EoExchange, Inc.
282 2nd Street, Suite 400
San Francisco, CA 94105
(415) 538-8555
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
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<S> <C>
Michael W. Hall Benjamin B. Quinones
Laura L. Gabriel Lindsay C. Freeman
Patricia L. Bonheyo Jeanine M. Larrea
Lia M. Arnold Jennifer J. Massey
Latham & Watkins Brobeck, Phleger & Harrison LLP
135 Commonwealth Drive Spear Street Tower
Menlo Park, CA 94025 One Market
(650) 328-4600 San Francisco, CA 94105
(415) 442-0900
</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 the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of the Form, 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 of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may change. 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 APRIL 27, 2000.
Shares
Common Stock
EoExchange, Inc. is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
We have applied for quotation of our common stock on the Nasdaq National Market
under the symbol "EOEX." We anticipate that the initial public offering price
will be between $ and $ per share.
-----------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 5.
-----------------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to EoExchange, Inc................................. $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have granted the underwriters a 30-day option to purchase up to an
additional shares of common stock to cover over-allotments.
-----------------
Robertson Stephens Chase H&Q
William Blair & Company
The date of this Prospectus is , 2000.
<PAGE>
You should rely on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. We are offering to sell, and seeking offers to buy, shares
of common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock.
Until , 2000 (25 days after commencement of the offering), all dealers
effecting transactions in our common stock, whether or not participating in
this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
-------------------------
TABLE OF CONTENTS
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Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 28
Management............................................................... 44
Related-Party Transactions............................................... 53
Principal Stockholders................................................... 56
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 63
Underwriting............................................................. 64
Legal Matters............................................................ 66
Experts.................................................................. 66
Where You Can Find More Information...................................... 67
Index to Consolidated Financial Statements............................... F-1
</TABLE>
-------------------------
We hold several trademarks and service marks and own the rights to various
Internet domain names. We have applied for federal registration of certain of
these trademarks and service marks, including "EoExchange," "EoCenter,"
"EoEnabled," "EoMonitor," "EoProducer," "Eo" and "Internet Information Exchange
Company." We hold the trademark for "Aeneid." This prospectus contains product
names, trade names, trademarks and servicemarks of other organizations.
i
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including "Risk Factors" and the
consolidated financial statements and related notes, carefully before making an
investment decision.
EoExchange
EoExchange enables business-to-business websites by providing an outsourced
industry-specific search, monitor and notification infrastructure. Our services
enable our customers to build traffic, improve customer loyalty and increase
revenues through new commerce opportunities. We combine our proprietary
technologies with our in-house industry expertise to find and deliver relevant
business information to professionals via the Internet. By providing our
outsourced services to a wide range of industry-specific websites, we are
establishing a network of business-to business websites that enable us to offer
advertising and commerce opportunities targeted at business professionals.
Our search, monitor and notification solution benefits business professionals
such as managers, engineers and researchers by focusing their Internet searches
only on highly relevant websites within their industries. In contrast, general
business-to-consumer search engines typically conduct less targeted searches
that generate results often lacking the relevance and thoroughness required for
efficient business use. We earn revenues from multiple sources including fees
for service deployment, monthly subscriptions, and network advertising and
sponsorships. We also derive revenues from the sale, service and customization
of our search, monitor and notification solution, and we expect to earn
commissions from commerce sales initiated on web pages hosted by us.
In May 1999, we launched our first industry-specific search solution, or
EoCenter, for application in the high-technology industry. Customers of this
EoCenter include Red Herring Communications, CMP Media and EarthWeb. We have
launched additional EoCenters in the finance, healthcare and insurance
industries, and are rapidly developing new EoCenters for a range of industries
such as chemicals, metals, construction and telecommunications. As of March 31,
2000, our services are deployed on more than 50 websites and we have contracted
for approximately 150 additional website deployments. We also have strategic
relationships with Office.com and VerticalNet that extend our ability to
develop our EoCenter services across multiple new industries.
Market Opportunity
Gartner Group estimates that business-to-business electronic commerce will
generate $2.7 trillion in revenues by 2004. As a result, a large number of
industry-specific, business-to-business websites are emerging to link buyers
and sellers in those industries. By 2001, Gartner Group estimates that there
will be 100,000 such websites. As the overall number of industry-focused
websites increases, it will become more difficult for these websites to
differentiate themselves and for business users to quickly and efficiently
access the most relevant information available on these websites. We believe
that search and navigation solutions currently available inadequately serve the
needs of business professionals because they search across the entire Internet
and often return information that is either largely irrelevant or incomplete.
We further believe that the optimal solution for business-to-business vertical
websites is an outsourced search, monitor and notification infrastructure that
delivers only relevant, industry-specific content.
1
<PAGE>
Our Services
We provide businesses with search and navigation services through our
EoCenter research engine and with monitor and notification services through our
EoMonitor personalized tracking service. In addition, our EoExchange network
enables advertisers and merchants to target business professionals within
specific industries.
EoCenter. Our EoCenter research engine allows business professionals to
search the Internet efficiently by targeting their searches on information that
is most relevant to a specific industry. For example, a search performed on our
EoCenter for the high-technology industry will only search relevant industry
sources, such as the websites of hardware and software vendors, trade and
business press and technology organizations. Our EoCenter service retains the
branding, look and feel of our customer's website; however, EoCenter pages are
actually hosted by us on a separate website. This allows our customers to
deliver our value-added services as a natural extension of their websites.
EoMonitor. Our EoMonitor personalized tracking service notifies business
professionals when selected topics of interest are addressed or changed on web
pages or sites that they selected to be monitored. For example, an EoMonitor
user can monitor the websites of a competitor, supplier or customer and can
receive notification of changes or additions to these sites. Changes are
clearly marked and can be delivered to an e-mail account or published to the
Internet.
EoExchange Network. Our EoExchange network is the aggregation of industry
destinations created by providing our EoCenter and EoMonitor services to a
broad range of business-to-business vertical websites. We believe that our
EoExchange network represents a focused advertising, sponsorship and commerce
platform that reaches the leading websites in a particular industry. We believe
that our EoExchange network is valuable to marketers because it enables them to
deliver highly targeted advertisements to business professionals within an
industry.
Our Strategy
Our objective is to be the leading provider of outsourced search, monitor and
notification infrastructure for business-to-business vertical websites. Key
elements of our strategy include:
. building a network of business professionals by partnering with the
leading business-to-business websites;
. extending our leadership in our existing core business-to-business
markets;
. penetrating a wide range of additional business-to-business vertical
markets with our EoCenter and EoMonitor services;
. leveraging our network of business professionals to create a highly
targeted advertising, sponsorship and commerce platform;
. maximizing advertising, sponsorship and commerce revenue opportunities
with existing customers by targeting business professionals; and
. maintaining and strengthening our technology leadership through internal
development and acquisition of complementary technologies.
2
<PAGE>
Our Corporate Information
We were incorporated in California in October 1996 under the name Aeneid
Corporation and reincorporated as EoExchange, Inc., a Delaware corporation, in
March 2000. Our principal executive offices are located at 282 2nd Street,
Suite 400, San Francisco, California 94105, and our telephone number is (415)
538-8555. Our corporate website is located at www.eoexchange.com. Information
contained on our corporate website, our other websites or any other website
referenced elsewhere in this prospectus is not part of this prospectus.
The Offering
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<C> <S>
Common stock offered by EoExchange................. shares
Common stock to be outstanding after the offering.. shares
Use of proceeds.................................... (1) To expand into new vertical website
markets, (2) to significantly increase our
sales efforts, (3) for marketing and
branding and (4) for working capital and
other general corporate purposes, including
possible strategic acquisitions and
investments. See "Use of Proceeds."
Proposed Nasdaq National Market symbol............. EOEX
</TABLE>
The shares of common stock to be outstanding after the offering are based on
the number of shares outstanding as of , 2000 and exclude:
. 1,474,162 shares of common stock reserved for issuance under our 1996
stock option plan, all of which are subject to outstanding options;
. 4,028,005 shares of common stock reserved for issuance under our 1999
stock plan, of which 2,989,285 shares are subject to outstanding options;
and
. shares of common stock reserved for issuance under our employee
stock purchase plan.
----------------
Except as otherwise indicated, all of the information in this prospectus:
. reflects the automatic conversion of each outstanding share of preferred
stock into one share of common stock immediately prior to the closing of
this offering; and
. assumes no exercise of the underwriters' over-allotment option.
3
<PAGE>
Summary Consolidated Financial Data
You should read the summary financial data with our consolidated financial
statements and the related notes included elsewhere in this prospectus and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Selected Consolidated Financial Data." Please see note 2 of
the notes to our "Consolidated Financial Statements" for an explanation of the
determination of weighted average shares used in computing per share data.
Pro forma statement of operations data reflects the acquisition of InGenius
Technologies, Inc. as if it had occurred as of January 1, 1999.
<TABLE>
<CAPTION>
Three Month
Pro Forma Period Ended
Years Ended December 31, Year Ended March 31,
-------------------------- December 31, -----------------
1997 1998 1999 1999 1999 2000
------- ------- -------- ------------ ------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ -- $ 49 $ 496 $ 620 $ 25 $ 1,007
Cost of revenues........ -- 306 1,599 1,732 188 521
------- ------- -------- -------- ------- --------
Gross profit (loss)..... -- (257) (1,103) (1,112) (163) 486
Operating expenses...... 1,149 3,613 10,409 11,588 1,096 6,230
------- ------- -------- -------- ------- --------
Loss from operations.... (1,149) (3,870) (11,512) (12,700) (1,259) (5,744)
Interest income
(expense), net......... (32) 19 162 5 5 343
------- ------- -------- -------- ------- --------
Net loss................ (1,181) (3,851) (11,350) (12,695) (1,254) (5,401)
------- ------- -------- -------- ------- --------
Imputed dividends and
accretion attributable
to preferred stock..... -- -- (21,770) (21,770) (3,364) (6,507)
------- ------- -------- -------- ------- --------
Net loss attributable to
common stockholders.... $(1,181) $(3,851) $(33,120) $(34,465) $(4,618) $(11,908)
======= ======= ======== ======== ======= ========
Net loss per share:
Basic and diluted..... $ (0.28) $ (0.62) $ (4.27) $ (4.45) $ (0.61) $ (1.38)
======= ======= ======== ======== ======= ========
Weighted average
shares--basic and
diluted.............. 4,214 6,188 7,749 7,749 7,552 8,642
======= ======= ======== ======== ======= ========
</TABLE>
The following balance sheet data is provided on an actual basis, on a pro
forma basis and on a pro forma as adjusted basis. The pro forma column reflects
the conversion of all of our outstanding preferred stock. The pro forma as
adjusted column assumes, in addition, the sale of shares of our common stock at
an initial public offering price of $ per share after deducting the estimated
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
March 31, 2000
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...................... $ 24,161 $24,161
Working capital................................ 23,405 23,405
Total assets................................... 31,174 31,174
Long-term obligations, less current portion.... 10 10
Preferred stock................................ 71,695 --
Total stockholders' equity (deficit)........... (43,229) 28,466
</TABLE>
4
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks occur, our business,
financial condition or results of operations could be harmed, the value of our
common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business
Because we expect to continue to incur net losses, the price of our common
stock may decline and we may not be able to implement our business strategy
We have never achieved profitability and have experienced net operating
losses of approximately $5.4 million and $1.3 million for the three months
ended March 31, 2000 and 1999, respectively, and $11.4 million, $3.9 million
and $1.2 million, in 1999, 1998 and 1997, respectively. We have accumulated net
losses of approximately $21.9 million as of March 31, 2000. We expect to incur
operating losses for the foreseeable future. In addition, we expect to continue
to incur significant operating and capital expenses and the rate at which we
incur these losses will likely increase significantly from current levels. We
will need to generate significant revenues to achieve and maintain
profitability. Because of our limited operating history and the early stage of
the Internet information market, historical trends and expected performance are
difficult to analyze. To this point, we have limited revenues. If our revenues
grow more slowly than we anticipate, or if operating expenses exceed our
expectations or cannot be adjusted accordingly, our business, results of
operations and financial condition will be harmed.
Because we have a limited operating history, our business strategy may not be
successful
We were formed in October 1996 and did not generate revenues under our
current business model until June 1999. As a result, you have limited operating
and consolidated financial data about our company upon which to base an
evaluation of our performance and an investment in our common stock. In
addition, we have limited insight into trends that may emerge and affect our
business. You should consider our prospects in light of the risks, expenses and
difficulties we might encounter due to our early stage of development in a new
and rapidly evolving market. We cannot be certain that our business strategy
will be successful or that we will successfully address these risks.
Because our operating results from quarter to quarter may fluctuate, the price
of our common stock may decline
Our revenues, expenses and operating results have varied significantly in the
past and may vary significantly in the future on a quarterly and annual basis
due to a number of factors, many of which are outside of our control. For
example, our results of operations may be affected by the following:
. our ability to obtain new customers and strategic alliances and the
length of the development cycle of the business-to-business vertical
website market;
. our ability to obtain new advertising and sponsorship contracts, maintain
existing ones and effectively manage our advertising inventory;
. our ability to develop and introduce new technology;
. announcements and new technology introductions by our competitors;
5
<PAGE>
. our ability to attract and retain key personnel;
. costs relating to possible acquisitions and integration of technologies
or businesses;
. marketing expenses and technology infrastructure costs as well as other
costs that we may incur as we expand our operations; and
. our ability to develop new sources of revenue.
As a result, our revenues, expenses and results of operations could vary
significantly in the future, and you should not rely upon period-to-period
comparisons as indications of future performance. If our operating results fall
below the expectations of securities analysts and investors in future periods,
our stock price will likely decline. In addition, these fluctuations may make
our stock unattractive to investors and may result in a decline in the price of
our stock.
We depend on a small number of customers for a high percentage of our revenues
and the loss of a significant customer would result in a substantial decline in
our revenues
Our sales are concentrated among a limited number of customers and the loss
of one or more of these customers would cause our revenues to decrease. If we
lost one or more of these customers, or if one or more of these customers
delayed or reduced purchases of our services, our revenues will decrease. For
the three months ended March 31, 2000, our three largest customers accounted
for approximately 66%, 15% and 9% of our revenues, respectively. In 1999, our
two largest customers accounted for approximately 49% and 35% of our revenues,
respectively. The revenue we received from these two customers in 1999 and the
first quarter of 2000 were generated from fees for access to our hosted
services. The revenue we received from our largest customer for the first
quarter of 2000 represented the sale of our technologies. To date, we have sold
our technologies to one customer. We cannot assure you that we will sell our
technologies in the future. In addition, our other customers may decide not to
renew their agreements with us. We expect that a small number of customers will
continue to account for a substantial portion of our revenues for the
foreseeable future.
If we fail to successfully establish our new EoExchange name or brand, or if we
incur significant expenses in promoting and maintaining our name or brand, our
business could be harmed
In March 2000, we changed our name from Aeneid to EoExchange to better
represent the diversity of our Internet information services. The importance of
name and brand recognition will increase as more companies provide outsourced
Internet information solutions. If our efforts to build our name and brand
identity do not succeed, our business, financial condition and results of
operations could be seriously harmed. These efforts have required, and will
continue to require, significant expense. We cannot assure you that these
efforts will be successful. Additionally, our new EoExchange name and brand may
cause confusion to current and potential customers, and as a result, we may
lose customers, which would harm our business, financial condition and results
of operations. We cannot assure you that we will be able to enforce rights
related to the EoExchange name, that we will be free to use the name in all
jurisdictions, that there will be no challenges to the use of that name or that
we will not be required to expend significant resources in defending the use of
that name. Even if brand recognition increases, the number of new customers may
not increase. Further, even if the number of new customers increases, the
amount of traffic on our EoCenters and the number of customers may not increase
sufficiently to justify the expenditures. If our brand enhancement strategy is
unsuccessful, these expenses may never be recovered and we may be unable to
increase future revenues.
6
<PAGE>
Because the market in which we operate is highly competitive, we cannot be
certain that our services will be accepted in the marketplace or capture market
share
We compete in markets that are new and rapidly changing, and we expect
competition in our markets to intensify in the future. We believe no single
competitor competes directly with us across the full range of outsourced
services we offer. However, we currently or potentially compete indirectly with
a number of other companies that provide outsourced Internet business services.
These indirect competitors include:
. Internet outsourcing companies such as AltaVista, Ask Jeeves, InfoSpace,
Inktomi and LookSmart;
. content distribution companies such as iSyndicate and Screaming Media;
. information commerce enabling companies such as Qpass;
. advanced Internet search companies such as Autonomy, Infoseek and
NetMind; and
. content aggregation companies such as About.com, Dow Jones, Northern
Light and Reuters.
Many of our indirect competitors, as well as potential new competitors, have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their services. These competitors may also engage in more
extensive research and development, adopt more aggressive pricing policies and
make more attractive offers to existing and potential employees, customers,
advertisers and electronic commerce customers. As a result, it is possible that
new direct competitors may emerge and rapidly acquire significant market share.
Our senior managers and other key personnel are critical to our business, and
because there is significant competition for personnel in our industry, we may
not be able to attract and retain qualified personnel
We depend to a significant extent on the continued services of our key
personnel, particularly Mr. Bennett, our president and chief executive officer,
and Mr. Ainsbury, our chief technology officer and vice president. The
employment of all members of our senior management is terminable at will by us
or by them. In addition, we do not maintain key person life insurance for
members of our senior management. The loss of the services of our senior
management or other key employees would likely harm our business.
Our future success depends upon our continuing ability to attract, retain and
motivate highly skilled employees, each of which we may be unable to do in the
future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications as a result of our rapid
growth and expansion. In addition, there is significant competition for
qualified employees in the Internet industry. As a result, we are incurring
increased salaries, benefits and recruiting expenses. If we do not succeed in
attracting new personnel or retaining and motivating our current personnel, our
business will be harmed.
7
<PAGE>
Because we have rapidly expanded our personnel and expect to continue to do so
in the future, we may lack the ability to manage this growth, which would harm
our business
We have experienced and may continue to experience rapid growth of our
personnel. From January 1, 1999 to March 31, 2000, we have grown from 20 to 111
full-time employees. In addition, many members of our senior management,
including Mr. Bennett, our president, chief executive officer and chairman of
the board, have joined us within the last 12 months. These key employees may
not have been fully integrated into our company. This growth has placed, and
could continue to place, a significant strain on our managerial, financial and
operational resources. As part of this growth, we will have to implement new
operational and financial systems, procedures and controls. We will also need
to train new employees and maintain close coordination among our content,
product management, development, sales and marketing, and general and
administrative organizations. These processes are time-consuming and expensive,
will increase management responsibility and will divert management attention.
If we are unable to manage our growth effectively, our business could be
adversely affected.
Any acquisitions we make could disrupt our business and harm our financial
condition
In the fourth quarter of 1999, we acquired InGenius Technologies, Inc. We may
acquire other companies in the future. We may not be able to integrate InGenius
Technologies or any future acquisitions with existing operations without
substantial costs, delays or other problems. If we acquire businesses, key
employees of the acquired companies could resign and management's attention
could be diverted from the conduct of our ongoing business. We may not be able
to implement operational improvements in, or exploit potential synergies with,
acquired businesses. Any of these factors could materially and adversely affect
our operating results and financial condition. In addition, businesses we
acquire may not perform as well as we may expect and, as a result, we could be
seriously harmed by unforeseen liabilities, business conditions or market
conditions.
We depend on third party service providers' technologies and should any of
these services become unavailable to us, our business could be harmed
We depend on third party service providers for components of our search and
indexing infrastructure. If we lose our relationships with any of the third
parties who provide us with these services, we may not be able to enter into
commercially reasonable contracts with replacement service providers, if at
all. In this event, our business and operating results could be harmed.
Systems failure or delay may cause interruption and disruption of our services
which would harm our business
The performance of our server and networking hardware and software
infrastructure is critical to our business, reputation and ability to attract
vertical websites to use our EoCenters and the ability of vertical websites to
attract users and advertisers. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems. Computer viruses, electronic break-ins or other similar disruptive
problems could also adversely affect our services. Our business could be
adversely affected if our systems were affected by any of these occurrences.
Our insurance policies may not adequately compensate us for any losses that may
occur due to any failures or interruptions in our systems.
Our systems must accommodate a high volume of traffic and deliver frequently
updated information. Our website and EoCenters have in the past experienced
slow response times,
8
<PAGE>
decreased traffic and minor and infrequent interruptions. While these
occurrences have not had a material impact on our business, if system failures
or slowdowns were sustained or repeated, our revenues and our reputation could
be impaired. In addition, because we depend upon Internet and other online
service providers to provide consumers with access to our website and our
EoCenters, we are limited in our ability to prevent system failures in the
future. Many of these service providers have sustained significant outages
unrelated to our systems in the past and may experience similar failures in the
future, resulting in less traffic on our EoCenters, which could, in turn,
impair our revenues.
We may be unable to project capacity limits on our technology, network hardware
or software or transaction processing systems, and we may be unable to expand
and upgrade our systems to meet increased use which may harm our business
As traffic on our EoCenters continues to increase, we must expand and upgrade
our technology, transaction processing systems and network hardware and
software. We may not be able to accurately project the rate of increase in our
traffic. In addition, we may not be able to expand and upgrade our systems and
network hardware and software capabilities to accommodate increased use of our
service. If we do not appropriately upgrade our systems and network hardware
and software, our business will be harmed.
Risks Related to the Internet
Failure of the Internet to continue to grow would harm our business
Our market is new and rapidly evolving. Our business would be harmed if
Internet usage does not continue to grow. A number of factors may inhibit the
continued growth of Internet and commercial online services into a viable
commercial marketplace, including:
. inadequate network infrastructure;
. lack of availability of cost-effective, high-speed service;
. security and privacy concerns; and
. inconsistent quality of services.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth and its performance and
reliability may decline. In addition, websites have experienced interruptions
in their service as a result of outages and other delays occurring throughout
the Internet network infrastructure. If these outages or delays frequently
occur in the future, Internet usage could grow more slowly or decline. If
Internet usage grows slowly or declines, our revenues may also grow slowly or
decline.
Rapid technological change could render our services obsolete or require us to
make significant capital expenditures in order to remain competitive
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. The recent
growth of the Internet and intense competition in our industry exacerbate these
market characteristics. To achieve our goals, we need to effectively integrate
the software programs and tools required to enhance and improve service
offerings and manage our business. Our future success will depend on our
ability to adapt to rapidly changing technologies by continually improving the
performance features and reliability of our services. We may experience
difficulties that could delay or prevent the successful development,
9
<PAGE>
introduction or marketing of new services. In addition, these new services must
meet the requirements of our current and prospective users and must achieve
significant market acceptance. We could also incur substantial costs if we need
to modify our services or infrastructures to adapt to these changes.
Specifically, we are currently significantly upgrading our EoCenter
infrastructure and our upgrade may be unsuccessful, expensive and time-
consuming.
Our technology for performing data collection, interpretation, and analysis
currently may have difficulty processing documents from websites. When this
technology presents these documents, a user may experience document formatting
problems. User dissatisfaction of this type could cause us to lose customers,
and that, in turn, could cause us to lose revenue.
Our business would be seriously harmed if the Internet advertising market
develops more slowly than we expect
While we currently do not receive significant revenues from Internet
advertising, we anticipate that a substantial portion of our revenues for the
foreseeable future will come from Internet advertising. Because the Internet
advertising market is new and rapidly evolving, we cannot yet gauge the
effectiveness of Internet advertising as compared to traditional advertising
media. Advertisers that have traditionally relied upon other advertising media
may be reluctant to advertise on the Internet. These businesses may find
Internet advertising to be less effective than traditional advertising media
for promoting their products and services. Many potential advertising and
electronic commerce customers have little or no experience using the Internet
for advertising purposes. Consequently, they may allocate only limited portions
of their advertising budgets to Internet advertising. If the Internet
advertising market develops more slowly than we expect, we may be unsuccessful
in increasing our advertising revenues, which will harm our business.
Internet security concerns could hinder the growth and development of
electronic commerce and could harm our business
The need to securely transmit confidential information over the Internet has
been a significant barrier to electronic commerce and communications over the
Internet. Anyone who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our
operations. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by any breaches. To the
extent that our activities or the activities of third party contractors involve
the storage and transmission of proprietary or personal information, security
breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. This liability may include claims for
unauthorized purchases with credit card information, impersonation or other
similar fraud claims. Our security measures may not prevent security breaches
and any failure to prevent security breaches may seriously harm our business,
financial condition and results of operation. We rely on encryption and
authentication technology to provide the security and authentication necessary
for secure transmission of confidential information. Advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments may result in a compromise or breach of the algorithms we use to
protect customer transaction data. If our security were compromised, it could
seriously harm our reputation, as well as our business, financial condition and
results of operation.
We may be liable for information retrieved from the Internet
We may be subject to legal claims relating to the content we make available
to our users, or the downloading and distribution of this content. Providers of
Internet services have been sued in the
10
<PAGE>
past, sometimes successfully, based on the content of material. If our content
is improperly used or if we supply incorrect information, it could result in
unexpected legal liability. Our business could be materially adversely affected
due to the cost of investigating and defending these claims, even if these
claims do not result in material liability. Implementing measures to reduce our
exposure to this liability may require us to spend substantial resources and
limit the attractiveness of our service to users. Although we carry commercial
property and commercial general liability insurance, our insurance may not
cover potential claims of this type or may not be adequate to indemnify us for
all liability that may be imposed.
Government regulation and legal uncertainty may make it more expensive for us
to conduct business on the Internet
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future that address issues such as indexing and summarizing data located
on the Internet, retrieving information deeply embedded in websites, user
privacy, pricing and the characteristics and quality of products and services.
For example, Internet access and sales across the Internet may be subject to
additional taxation by federal, state and local governments, thereby
discouraging purchases over the Internet and adversely affecting the market for
our services. Additionally, current and future legislation or regulations
regarding online privacy and the collection and use of personal identification
information could impair our ability to provide our services to our customers.
United States legislators in the past have introduced a number of bills aimed
at regulating the use of personal data over the Internet and similar bills may
be considered in the future. In addition, the Federal Trade Commission and the
Department of Commerce recently held hearings regarding user profiling and
online privacy, and the European Union recently adopted a directive addressing
data privacy that may result in limitations on the collection and use of
information that will impact Internet users. These regulations may prevent us
from collecting demographic and personal information from members and providing
our customers with consumer and market data, which could result in the loss of
potential revenues.
Risks Related to Our Intellectual Property
If we fail to protect our proprietary rights adequately, we could lose these
rights and our business could be harmed
We rely or may in the future rely on a combination of patent, trademark,
trade secret and copyright law and contractual restrictions to protect the
proprietary aspects of our technology. These legal protections afford only
limited protection for our intellectual property. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy
aspects of our sales formats or to obtain and use information that we regard as
proprietary.
We cannot be certain that patents will issue from any of our pending or
future patent applications or that our issued patent will be sufficient to
protect our technology. We may also be unable to secure trademark registrations
for names used by us, including domain names, currently or in the future. It is
also possible that our competitors or others will adopt service names similar
to ours, thus impeding our ability to build brand identity and possibly leading
to customer confusion. Customer confusion related to our trademarks, or our
failure to obtain trademark registration, would negatively affect our business.
Finally, we may in the future provide our services internationally, and the
laws of many countries do not protect our proprietary rights to as great an
extent as do the laws of the United States. Our means of protecting our
proprietary rights may not be adequate, and our competitors could independently
develop similar technology.
11
<PAGE>
Asserting, defending and maintaining our intellectual property rights could be
difficult and costly and failure to do so may diminish our ability to compete
effectively and may harm our operating results
We may need to pursue lawsuits or legal action in the future to enforce our
intellectual property rights, to protect our trade secrets and domain names and
determine the validity and scope of the proprietary rights of others. If third
parties prepare and file applications for trademarks used or registered by us,
we may oppose those applications and be required to participate in proceedings
to determine priority of rights to the trademark. Similarly, competitors may
have filed applications for patents, may have received patents and may obtain
additional patents and proprietary rights relating to products or technology
that blocks or competes with ours. We may have to participate in interference
proceedings to determine the priority of invention and the right to a patent
for the technology. Litigation and interference proceedings, even if they are
successful, are expensive to pursue and time-consuming, and we could use a
substantial amount of our limited financial resources in either case.
We may face intellectual property infringement claims that may be costly to
resolve
Although we do not believe that our services infringe on any proprietary
rights of others, we cannot assure you that others will not assert claims
against us in the future or that these claims will not be successful. We could
incur substantial costs and diversion of management resources to defend
ourselves from any claims relating to proprietary rights. These costs and
diversions could harm our business. In addition, we are obligated under some
agreements to indemnify other parties as a result of claims that we infringe on
the proprietary rights of others. If we are required to indemnify parties under
these agreements, our business could be harmed.
We face risks associated with domain names
We currently hold the Internet domain names eoexchange.com, eocenter.com,
eomonitor.com and eoenabled.com. Domain names generally are regulated by
Internet regulatory bodies. The regulation of domain names in the United States
and in foreign countries may change. Regulatory bodies could establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. As a result, we may not
acquire or maintain these domain names in all of the countries in which we
conduct business.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore, we
could be unable to prevent third parties from acquiring domain names that
infringe or otherwise decrease the value of our trademarks and other
proprietary rights. Also, there are risks that third parties could prevent us
from continuing to use one or more of our domain names.
Laws defining Internet-related intellectual property rights are currently
unsettled and may change in a way that could harm our business
The growth and development of the Internet has raised new issues relating to
intellectual property rights of parties who conduct business on the Internet.
These issues include the following:
. the risk of infringing on patented Internet-based technologies and
business processes, despite good faith efforts to avoid these
infringements and the resulting inability to continue the use of
infringing technologies or processes;
12
<PAGE>
. the potential difficulty in obtaining and enforcing patent rights on
Internet-related technologies and processes;
. the authority necessary to republish information available from websites
and other portals on the Internet;
. the right to collect, use, exploit or disseminate personal information
and data concerning users;
. the authority of parties to activate Internet browser functions that
cause the content on one party's website to be superimposed on the
content of another without the other party's consent;
. the extent of protection of intellectual property rights in foreign
jurisdictions; and
. the authority to link or hyperlink to a third party's website or
particular elements of the website without specific authorization from
the third party.
The laws applicable to these and other issues are developing and unsettled.
Future laws and legal precedents defining the rights and obligations of parties
regarding Internet-related intellectual property rights may impact how we
conduct our business and could harm our business.
Risks Relating to This Offering
We may need to raise additional capital in the future, and if we are unable to
secure additional funds on terms acceptable to us, we may be unable to execute
our business plan effectively
Various elements of our business and growth strategies, including our plans
to broaden existing services, introduce new services and invest in
infrastructure, will require additional capital. If adequate funds are not
available on acceptable terms or at all, we may not be able to take advantage
of market opportunities, develop or enhance new services, pursue acquisitions
that would complement our existing service offerings or enhance our technical
capabilities, execute our business plan or otherwise respond to competitive
pressures. If we raise additional equity capital, it would have a dilutive
effect for our existing stockholders, including purchasers of common stock in
this offering.
Our management may not use the proceeds of this offering to effectively
increase our results of operations or our market value
Our management will have considerable discretion in the application of the
net proceeds of this offering and may apply the net proceeds in ways which may
not increase our revenues, improve our operating results or increase our market
value. You will not have the opportunity, as part of your investment decision,
to assess whether the proceeds are being used appropriately.
Because there has been no prior market for our common stock, our stock price
may decline after this offering
Prior to this offering, you could not buy or sell our common stock on a
public market. We are applying to list the common stock for trading on the
Nasdaq National Market. We do not know whether investor interest in us will
lead to the development of a trading market or, if a trading market develops,
how active that market will be. Active trading markets generally result in
lower price volatility and more efficient execution of buy and sell orders for
investors. The initial public
13
<PAGE>
offering price will be determined by negotiations between us and the
representatives of the underwriters and may not be related to the price at
which the common stock will trade upon completion of this offering.
Because the Nasdaq Stock Market is likely to experience extreme price and
volume fluctuations, the price of our common stock may decline even if our
business is doing well
Stock prices and trading volumes for many Internet-related companies,
particularly companies quoted on the Nasdaq National Market, fluctuate widely
for a number of reasons, including some reasons which may be unrelated to their
businesses or results of operations. This market volatility, as well as general
domestic or international economic, political and market conditions, could
cause the price of our common stock to decline without regard to our operating
performance. These fluctuations or declines may be exaggerated if the trading
volume of our common stock is low. The price at which our common stock will
trade will depend on many factors, including:
. our historical and anticipated quarterly and annual operating results;
. variations between our actual results and analyst and investor
expectations;
. announcements by us or others and developments affecting our business;
and
. investor perceptions of us and comparable public companies.
Some of these factors are beyond our control. Volatility in our stock price
may prevent you from selling our stock at a favorable price at any given time
or knowing the appropriate time to sell our stock. Moreover, if our stock price
drops, it is possible that you may never be able to sell our stock at a
favorable price.
Because of likely fluctuations in the price of our stock, we, or our officers
or directors, may be named in a securities class action lawsuit, which could
distract management and result in substantial costs
In the past, securities class action lawsuits have often been brought against
companies and their officers or directors following periods of volatility in
the market price of their securities. We, or our officers or directors, may be
named in similar lawsuits in the future. These lawsuits could result in
substantial costs and could divert management's attention and resources from
our operations. This would have a negative impact on our financial condition
and results of operations.
A substantial number of our shares of common stock are eligible for future
sale, and the sale of these shares may depress our stock price, even if our
business is doing well
Sales of a large number of shares of common stock in our market after this
offering, or the perception that sales may occur, could cause the market price
of our common stock to decline. Those sales also might make it more difficult
for us to sell equity-related securities in the future at a time and price that
we deem appropriate.
Because the book value per share of our stock is less than the initial public
offering price, new investors will experience immediate dilution
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. Therefore, you will
incur immediate and substantial net tangible book value dilution. You may incur
additional dilution if holders of stock options, whether currently outstanding
or subsequently granted, exercise their options or if warrantholders exercise
their warrants to purchase common stock.
14
<PAGE>
Because our officers, directors and principal stockholders may have the ability
to control stockholder votes, the premium over market price that an acquiror
might otherwise pay may be reduced and any merger or takeover may be delayed
Our executive officers, directors and five percent or greater stockholders
together will beneficially own % of the common stock after completion of
this offering, or % if the over-allotment option is exercised in full. As a
result, these stockholders may be able to determine the composition of our
board of directors, may retain the voting power to approve all matters
requiring stockholder approval and will continue to have significant influence
over our affairs. This concentration of ownership could have the effect of
delaying or preventing a change in our control or otherwise discouraging a
potential acquirer from attempting to obtain control of us, that, in turn,
could have a material and adverse effect on the market price of the common
stock or prevent our stockholders from realizing a premium over the market
prices for their shares of common stock.
Provisions of our charter documents and Delaware law could prevent or delay a
change in our control and may reduce the market price of our common stock
Provisions of our certificate of incorporation and bylaws that will be in
effect after completion of this offering and Delaware law could make it more
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to stockholders.
This prospectus contains forward-looking statements that involve risks and
uncertainties which might not occur
Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including:
. implementing our business strategy;
. obtaining and expanding market acceptance of our services;
. meeting our requirements under our agreements with our customers; and
. competition in our market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "would," "could," "potential," "continue,"
"expects," "anticipates," "intends," "plans," "believes," "estimates,"
"predicts," "potential" or the negative of these terms and similar expressions.
These statements are based on our current beliefs, expectations and assumptions
and are subject to a number of risks and uncertainties. Actual results and
events may vary significantly from those discussed in the forward-looking
statements. A description of some of the risks that could cause our results to
vary can be found throughout this "Risk Factors" section and elsewhere in this
prospectus. These forward-looking statements are made as of the date of this
prospectus. In light of these assumptions, risks and uncertainties, the
forward-looking events discussed in this prospectus might not occur.
15
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of common stock in this
offering will be approximately $ , or $ if the underwriters exercise their
over-allotment option in full, based upon an assumed offering price per share
of $ and after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
We plan to use the net proceeds (1) to expand into new vertical website
markets, (2) to significantly increase our sales efforts, (3) for marketing and
branding and (4) for working capital and other general corporate purposes,
including investments and possible strategic acquisitions of companies or
technologies that complement our business. We may use a portion of the net
proceeds for other purposes.
Prior to the application of the net proceeds from the offering as described
above, we intend to invest the net proceeds from the offering in marketable,
investment-grade securities. The foregoing discussion represents our best
estimate of our allocation of the net proceeds from the sale of the shares
based on our current plans.
DIVIDEND POLICY
We have never paid any dividends and do not anticipate declaring or paying
cash dividends in the foreseeable future. We intend to retain future earnings,
if any, to provide funds for the operation and expansion of our business. Any
determination to declare or pay cash dividends will be at the discretion of our
board of directors.
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<PAGE>
CAPITALIZATION
The following table provides our capitalization as of March 31, 2000:
. on an actual basis;
. on a pro forma basis to reflect the conversion of all of our outstanding
preferred stock; and
. on a pro forma as adjusted basis to reflect the sale in this offering of
shares of our common stock at an initial public offering price of $
per share, and after deducting the underwriting discounts and commissions
and estimated offering expenses.
<TABLE>
<CAPTION>
March 31, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Capital lease obligations.................... $ 21 $ 21
Preferred stock, $0.01 par value; 30,800,000
shares authorized,
shares issued and outstanding:
Actual: 28,388,243 shares
Pro forma: 0 shares
Pro forma as adjusted: 0 shares............ 71,695 --
Stockholders' equity (deficit):
Common stock, $0.01 par value; 51,500,000
shares authorized,
shares issued and outstanding:
Actual: 10,817,542 shares
Pro forma: 39,205,785 shares
Pro forma as adjusted: shares......... 108 392
Additional paid-in capital................. -- 71,411
Notes receivable from stockholders......... (1,461) (1,461)
Deferred stock-based compensation.......... (5,617) (5,617)
Accumulated deficit........................ (36,259) (36,259)
-------- -------- ---
Total stockholders' equity (deficit)..... (43,229) 28,466
-------- -------- ---
Total capitalization................... $ 28,487 $ 28,487 $
======== ======== ===
</TABLE>
This table excludes the following:
. 4,354,571 shares of common stock issuable upon exercise of outstanding
options issued to our employees, directors and consultants as of March
31, 2000 under our 1996 stock option plan and 1999 stock plan;
. 1,157,220 shares reserved for issuance as of March 31, 2000 under our
1996 stock option plan and 1999 stock plan and not subject to outstanding
options; and
. warrants to purchase 25,862 shares of Series A preferred stock and
427,070 shares of Series D preferred stock, and the shares issuable upon
exercise of these warrants.
17
<PAGE>
DILUTION
Our net tangible book value as of March 31, 2000 was approximately
$26.1 million, or $0.67 per share of common stock on a pro forma basis. Net
tangible book value per share represents the amount of our total tangible
assets reduced by the amount of our total liabilities and divided by the total
number of shares of common stock outstanding, assuming the conversion of all of
our outstanding shares of preferred stock into shares of common stock.
After giving effect to the sale of shares of common stock in this
offering at the initial public offering price of $ per share and receipt of
the estimated net proceeds therefrom, our pro forma net tangible book value as
of March 31, 2000 would have been approximately $ million or $ per share.
This represents an immediate increase in pro forma net tangible book value of
$ per share to existing stockholders and an immediate dilution of $ per
share to the new investors, as illustrated by the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $
Pro forma net tangible book value per share at March 31,
2000......................................................... $0.67
Pro forma increase attributable to new investors..............
-----
Pro forma net tangible book value per share after this
offering.......................................................
----
Dilution per share to new investors............................. $
====
</TABLE>
The following table summarizes on a pro forma basis, as of March 31, 2000,
the differences between the number of shares of common stock purchased from us,
the aggregate consideration paid to us and the average price per share paid by
existing stockholders and new investors purchasing shares of common stock in
this offering, after giving effect to the conversion of all of our preferred
stock into common stock.
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration
-------------- -------------- Average
Number Percent Amount Percent Price Per Share
------ ------- ------ ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... % $ % $
---- ---- ----- ---- -----
New investors..................
---- ---- ----- ---- -----
Total....................... 100% $ 100%
==== ==== ===== ====
</TABLE>
The foregoing discussion and tables assume no sale of shares of common stock,
including shares held by an existing stockholder, or under the underwriters'
over-allotment option. The information presented regarding existing
stockholders excludes as of March 31, 2000, 4,354,571 shares subject to
outstanding options under our 1996 stock option plan and 1999 stock plan and a
warrant to purchase 25,862 shares of Series A preferred stock and warrants to
purchase 427,070 shares of Series D preferred stock at a weighted average
exercise price of $0.97 per share. If all of these options and warrants had
been exercised as of March 31, 2000, pro forma net tangible book value per
share after this offering would be $ and total dilution per share to new
investors would be $ .
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data with our
consolidated financial statements and the related notes included elsewhere in
this prospectus and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The data for the three years ended
December 31, 1997, 1998 and 1999 have been derived from the consolidated
financial statements that have been audited by PricewaterhouseCoopers LLP,
independent accountants, which are included elsewhere in this prospectus. The
data for the three month periods ended March 31, 1999 and 2000 have been
derived from our unaudited consolidated financial statements, which are
included elsewhere in this prospectus. The unaudited financial statements
include all adjustments, consisting of only normal recurring adjustments, which
we consider necessary for a fair presentation of our financial position and
results of operations for these periods. Please see note 2 of the notes to our
"Unaudited Condensed Consolidated Financial Statements" for an explanation of
the determination of weighted average shares in computing per share data.
Pro forma statement of operations data reflects the acquisition of InGenius
Technologies, Inc., as if it had occurred as of January 1, 1999. Please see
"Unaudited Pro Forma Financial Information--EoExchange, Inc. and InGenius
Technologies, Inc. Combined" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Pro Forma Three Month Period
Year Ended December 31, Year Ended Ended March 31,
-------------------------- December 31, -------------------
1997 1998 1999 1999 1999 2000
------- ------- -------- ------------ --------- ---------
Statement of Operations
Data: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 49 $ 496 $ 620 $ 25 $ 1,007
Cost of revenues........ -- 306 1,599 1,732 188 521
------- ------- -------- -------- -------- ---------
Gross profit (loss).... -- (257) (1,103) (1,112) (163) 486
Operating expenses:
Product development.... 536 1,466 1,964 2,081 447 941
Sales and marketing.... 214 1,158 3,263 3,339 361 2,028
General and
administrative........ 389 888 1,715 1,797 195 1,134
Depreciation and
amortization.......... 10 101 415 1,195 47 361
Stock-based
compensation.......... -- -- 3,052 3,176 46 1,766
------- ------- -------- -------- -------- ---------
Total operating
expenses............ 1,149 3,613 10,409 11,588 1,096 6,230
------- ------- -------- -------- -------- ---------
Loss from operations.... (1,149) (3,870) (11,512) (12,700) (1,259) (5,744)
Interest income
(expense), net......... (32) 19 162 5 5 343
------- ------- -------- -------- -------- ---------
Net loss............... $(1,181) $(3,851) $(11,350) $(12,695) $(1,254) $ (5,401)
======= ======= ======== ======== ======== =========
Imputed dividends and
accretion attributable
to preferred stock..... -- -- (21,770) (21,770) (3,364) (6,507)
------- ------- -------- -------- -------- ---------
Net loss attributable to
common stockholders.... $(1,181) $(3,851) $(33,120) $(34,465) $ (4,618) $ (11,908)
======= ======= ======== ======== ======== =========
Net loss per share:
Basic and diluted...... $ (0.28) $ (0.62) $ (4.27) $ (4.45) $ (0.61) $ (1.38)
======= ======= ======== ======== ======== =========
Weighted average
shares--basic and
diluted............... 4,214 6,188 7,749 7,749 7,552 8,642
======= ======= ======== ======== ======== =========
Pro forma net loss per
share:
Basic and diluted...... $ (1.66) $ (0.33)
======== =========
Weighted average
shares--basic and
diluted............... 19,924 36,277
======== =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------- March 31,
1997 1998 1999 2000
------ ------- -------- ---------
Balance Sheet Data: (In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents................ $ -- $ 2,980 $ 21,709 $ 24,161
Working capital.......................... 1,143) 1,944 20,495 23,405
Total assets............................. 107 3,841 27,289 31,174
Long-term portion of capital lease
obligations............................. 10 6 13 10
Preferred stock.......................... -- 7,068 58,469 71,695
Total stockholders' deficit.............. (1,058) (4,645) (33,531) (43,229)
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements.
These statements are based on our current beliefs, expectations and assumptions
and are subject to a number of risks and uncertainties. Actual results and
events may vary significantly from those discussed here. The following
discussion and analysis should also be read with our consolidated financial
statements and the related notes appearing elsewhere in this prospectus.
Overview
We enable business-to-business websites by providing an outsourced industry-
specific search, monitor and notification infrastructure. Our services enable
our customers to build traffic, improve customer loyalty and increase revenues
through new commerce opportunities. By providing our outsourced services to a
wide range of industry-specific, or vertical, websites, we are establishing a
network of business-to-business, or destination, websites, thus enabling us to
offer businesses advertising and commerce opportunities targeted at specific
audiences.
EoExchange was formed under the name Aeneid Corporation in October 1996. We
changed our name to EoExchange, Inc. in March 2000. During the period from our
inception in October 1996 through December 1998, we were primarily engaged in
the development of our technology for searching and retrieving information from
the Internet. In May 1999, we launched our first industry-specific search
solution, or EoCenter, for application in the high-technology industry.
Customers of this EoCenter include Red Herring Communications, CMP Media and
EarthWeb. We have launched additional EoCenters in the finance, healthcare and
insurance industries and are rapidly developing new EoCenters for a range of
industries such as fiber optics, telecommunications, construction, chemicals,
metals and business education. As of March 31, 2000, our services are deployed
on more than 50 websites and we have contracted for approximately 150
additional website deployments.
From our inception in October 1996 through May 1999, our revenue model was
based on generating fees for access to our search service. In June 1999, we
expanded our revenue model to one in which we also derive revenues from
advertising and from referral commissions. In addition, in October 1999, we
acquired InGenius Technologies, Inc. and began generating subscription revenues
from their service, which we call EoMonitor.
We generate revenues from providing access to our search, monitor and
notification technologies, including through the sale of our technologies or
through our hosted solution. We recognize revenues from the sale of our
technologies when we deliver the technologies to the customer. Revenues from
our hosted solution include deployment fees, advertising and sponsorships,
subscriptions to our EoMonitor service and fees from search, monitor and
notification services. We recognize deployment fees and EoMonitor subscriptions
as revenues ratably over the term of the relevant contract, which is typically
one to three years. We recognize service revenues when the service is provided
and advertising revenues when the advertisements are delivered. We include fees
received in advance of revenue recognition in the balance sheet as deferred
revenue.
We launched our EoCenter service in May 1999 and have generated nominal
revenues from the service to date. We consummated our first sale of our
technologies in March 2000. To date, we have sold our technologies to one
customer. See "--Strategic Agreements." We have incurred significant costs to
develop our technology and services and to recruit and train personnel for our
development,
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operations, sales, marketing and administration departments. As a result, we
have incurred substantial losses and negative cash flows from operations in
every fiscal period since our inception. We expect operating losses and
negative cash flows to continue for the foreseeable future. We anticipate our
net losses will increase significantly from current levels because we expect to
incur additional costs and expenses related to our expanded service offerings
for additional industries. We believe that our success depends on rapidly
increasing our customer base in multiple industries, improving the
functionality of our EoCenter services, and increasing the distribution of
advertisements and information commerce through our network of EoCenter and
EoMonitor customers.
Strategic Agreements
We recently entered into an agreement under which we sold a third party four
of our EoCenter taxonomies in our first sale of our technologies. Our
taxonomies are catalogs that organize industry-specific websites into
categories and subcategories. We have also separately agreed to purchase
software from this third party.
Acquisition
In the fourth quarter of 1999, we acquired InGenius Technologies, Inc. for
approximately $2.7 million in cash. In this transaction, we acquired technology
for monitoring web pages on the Internet and notifying users regarding changes,
additions and deletions made to those pages. We have continued to sell the
service developed by InGenius, which we call EoMonitor, on a monthly
subscription basis and have begun to integrate the technology into our EoCenter
service.
Stock-Based Compensation
As of March 31, 2000, we recorded aggregate deferred compensation expenses
totaling approximately $10.7 million relating to the grant of stock options to
our employees, directors and consultants. These expenses represent the
difference between the exercise price of options to purchase our common stock
and the deemed fair value of this common stock on the date of the grant of
these options, as determined for financial reporting purposes. This expense is
being amortized over the vesting period of the applicable stock option, which
is typically four years.
Stock-based compensation expenses were $1.8 million for the three months
ended March 31, 2000 and $3.1 million for the year ended December 31, 1999. We
expect amortization of additional stock-based compensation expenses of $2.9
million in the remainder of 2000, $1.9 million in 2001, $873,000 in 2002 and
$232,000 in 2003. Future amortization figures could be larger than these
estimates, depending upon future increases in personnel. There were no stock-
based compensation charges for the years ended December 31, 1998 and 1997.
Beneficial Conversion
In the fourth quarter of 1999 and first quarter of 2000, we issued an
aggregate of approximately 15.2 million shares of Series D preferred stock. All
shares were issued at $2.14 per share. Due to a deemed increase in the fair
value of our common stock into which the preferred stock is convertible, we
have recorded dividends of approximately $6.5 million and $8.0 million in the
first quarter of 2000 and fourth quarter of 1999, respectively, representing
the difference between the cash proceeds and the fair market value of the
common stock into which the preferred stock is convertible.
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Preferred Stock Accretion
Our preferred stock is redeemable at the higher of the original issuance
price or the fair market value as determined by the board of directors at or
any time after April 2003. Accordingly, we have valued the redeemable
convertible preferred stock at its fair value at the end of each period
presented, with the periodic differences recorded as preferred stock accretion.
We have recorded preferred stock accretion of approximately $13.8 million for
the year ended December 31, 1999 based on $2.14 per share being the estimated
fair market values of shares of this stock at December 31, 1999.
Three Months Ended March 31, 2000
Revenues. To date, we have derived revenues from the following sources:
. the sale of our EoCenter taxonomies;
. service fees for access to our search service;
. fees for deployment and customization of our services;
. monthly subscriptions to our EoMonitor service; and
. advertising revenues from the sale of online banner ads and sponsorships.
In the future, we expect to earn commissions on commerce initiated on our
EoCenters, however, we cannot assure you that we will be successful in
generating any referral commissions.
Revenues for the three months ended March 31, 2000 increased to $1.0 million
from $25,000 for the three months ended March 31, 1999. The increase includes
$660,000 from the sale of two of our EoCenter taxonomies pursuant to an
agreement, as discussed under "Strategic Agreements." Under this agreement,
which is our first transaction of this nature, we sold four taxonomies for
total consideration of $1.3 million, of which the remaining $660,000 is
expected to be recognized as revenue in the second quarter of 2000. The
remainder of the increase is due primarily to an increase in search service
fees derived from the addition of new customers, and also from increases in
subscription revenue, fees for deployment of our EoCenter service and
advertising revenue generated from our EoExchange network.
Cost of Revenues. Cost of revenues includes direct labor associated with the
maintenance and implementation of our EoCenter and EoMonitor services, fees
paid to a third party search service provider, technology license fees and fees
paid to third parties for hosting our data centers. Cost of revenues for the
three months ended March 31, 2000 were $521,000 an increase of 179% from
$188,000 for the three months ended March 31, 1999. The increase consists of an
increase of $271,000 in direct labor and increases in the fees paid to a third
party provider of search services of $36,000 and to our data center hosting
facility of $26,000. There was no cost of revenues related to the sale of our
EoCenter taxonomies.
Product Development. Product development expenses include personnel and
related costs for the design, development and implementation of our EoCenter
and EoMonitor services and for the integration of third party software and
products. Product development expenses for the three months ended March 31,
2000 were $941,000, an increase of 111% from $447,000 for the three months
ended March 31, 1999. The increase consists primarily of increases in salaries
and related personnel costs from the increase in development headcount.
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Sales and Marketing. Sales and marketing expenses include salaries,
commissions and associated costs of employment and facilities for our sales,
client services and marketing staff. Included in sales and marketing are those
personnel responsible for selling our EoCenter and EoMonitor services,
servicing our existing accounts, selling advertising space, and creating our
public relations and advertising campaigns. Sales and marketing expenses also
include the costs of advertising, public relations and attendance at industry
trade shows. Sales and marketing expenses for the three months ended March 31,
2000 were $2.0 million, an increase of 462% from $361,000 for the three months
ended March 31, 1999. The increase consists of an increase of $950,000 in
advertising and public relations expenses, an increase of $620,000 in salaries
and associated costs of employment, and an increase of $70,000 in travel
related expenses. We expect sales and marketing expenses to continue to
increase as we grow our sales staff to cover additional industries and as we
increase the size of our client services staff to service our customer base.
General and Administrative. General and administrative expenses include
personnel and related overhead costs for our executive, administrative, finance
and human resources functions, as well as legal and accounting fees. General
and administrative expenses for the three months ended March 31, 2000 were $1.1
million, an increase of 482% from $195,000 for the three months ended March 31,
1999. The increase consists of an increase of $500,000 in salaries and
associated costs of employment, an increase of $395,000 in professional fees,
including legal, accounting and consulting fees, and an increase of $122,000 in
other facilities and administrative costs. We expect general and administrative
expenses to increase as we expand our facilities and grow our support staff.
Depreciation and Amortization. Depreciation and amortization expense includes
the depreciation of computer hardware and software, office furniture and
equipment, and leasehold improvements, and the amortization of acquired
technology. Depreciation and amortization for the three months ended March 31,
2000 of $361,000 increased 668% from $47,000 for the three months ended March
31, 1999. The increase consists of an increase of $247,000 in the amortization
of acquired technology and an increase of $66,000 in the depreciation and
amortization of computer hardware and software, office furniture and equipment,
and leasehold improvements.
Other Income (Expense). Other income consists primarily of interest income
earned on cash balances in funds that invest primarily in U.S. government
obligations and corporate obligations with contractual maturities of 90 days or
less, and interest accrued on loans to officers. For the three months ended
March 31, 2000, other income increased to $343,000 from $5,000 for the three
months ended March 31, 1999.
Annual Results of Operations
Revenues. For the period from our inception in October 1996 through the end
of 1999, we derived substantially all of our revenues from service fees for our
Internet search and retrieval services and, to a lesser extent, from deployment
fees.
Revenues increased 912% to $496,000 for the year ended December 31, 1999 from
$49,000 for the year ended December 31, 1998. The increase resulted primarily
from our deployment of services on Office.com's website in June 1999, revenues
generated by our ongoing relationship with The Gale Group and commencement of
our EoMonitor service following our acquisition of InGenius Technologies, Inc.
in the fourth quarter of 1999. Revenues for the year ended December 31, 1998
resulted solely from our relationship with The Gale Group that commenced in the
fourth quarter of 1998. We generated no revenues for the year ended December
31, 1997.
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Cost of Revenues. Cost of revenues increased 423% to $1.6 million for the
year ended December 31, 1999 from $306,000 for the year ended December 31,
1998. This increase consists of a growth in direct labor of $800,000 and an
increase of $500,000 in the cost of our third party search service provider.
There were no costs of revenues for the year ended December 31, 1997.
Product Development. Product development expenses increased 34% to
$2.0 million for the year ended December 31, 1999 from $1.5 million for the
year ended December 31, 1998. The increase reflects the 44% increase in our
development staff during 1999, offset by the capitalization of $446,000 of
costs related to the development of internal use software during 1999. Product
development expenses increased to $1.5 million for the year ended December 31,
1998 from $536,000 for the year ended December 31, 1997 due to a 125% increase
in our product development staff during 1998.
Sales and Marketing. Sales and marketing expenses increased 182% to $3.3
million for the year ended December 31, 1999 from $1.2 million for the year
ended December 31, 1998. The increase consists of an $800,000 increase in
salaries and associated costs, an $800,000 increase in advertising expense,
and a $500,000 increase in other marketing activities such as public relations
and trade show attendance. Sales and marketing expenses increased from
$214,000 for the year ended December 31, 1997 to $1.2 million for the year
ended December 31, 1998. The increase reflects the 200% increase in sales and
marketing staff that occurred during 1998.
General and Administrative. General and administrative expenses increased
93% to $1.7 million for the year ended December 31, 1999 from $888,000 for the
year ended December 31, 1998. The increase consists of a $500,000 increase in
salaries and associated costs and a $400,000 increase in professional fees,
partially offset by a nominal decrease in other administrative expenses.
General and administrative expenses increased to $888,000 for the year ended
December 31, 1998 from $389,000 for the year ended December 31, 1997. The
increase reflects the increase in personnel costs and facilities and overhead
costs associated with our growth and the relocation to our current facility.
Depreciation and Amortization. Depreciation and amortization expense for the
year ended December 31, 1999 included depreciation of fixed assets of $258,000
and amortization of acquired technology of $157,000. The amortization of
acquired technology represents two months of amortization of the intangible
assets recorded as part of the acquisition of InGenius Technologies. For the
years ended December 31, 1998 and 1997, amortization and depreciation expense
consisted of depreciation of fixed assets.
Other Income (Expense). Net other income of $162,000 for the year ended
December 31, 1999, was primarily comprised of interest income of $214,000 and
interest expense of $52,000. The interest expense for the year ended December
31, 1999 represents interest accrued on notes payable. We recorded net
interest income of $19,000 for the year ended December 31, 1998 and net
interest expense of $32,000 for the year ended December 31, 1997.
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Quarterly Results of Operations
The following table provides the unaudited quarterly condensed consolidated
statements of operations data for each of the five quarters ended March 31,
2000. We believe this information reflects all adjustments, consisting only of
normal recurring adjustments that are necessary for a fair presentation of this
information for the quarters presented. These results are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------
June
March 31, 30, September 30, December 31, March 31,
1999 1999 1999 1999 2000
--------- ------- ------------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 25 $ 73 $ 171 $ 227 $ 1,007
Cost of revenues........ 188 333 410 668 521
------- ------- ------- ------- -------
Gross profit.......... (163) (260) (239) (441) 486
Operating expenses
excluding amortization
of deferred stock-based
compensation........... 1,050 1,350 1,767 3,190 4,464
Amortization of stock-
based compensation..... 46 352 185 2,469 1,766
------- ------- ------- ------- -------
Total operating
expenses............. 1,096 1,702 1,952 5,659 6,230
------- ------- ------- ------- -------
Loss from operations.... $(1,259) $(1,962) $(2,191) $(6,100) $(5,744)
======= ======= ======= ======= =======
</TABLE>
Liquidity and Capital Resources
Since our inception in October 1996, we have funded our cash requirements
primarily through net cash proceeds from private placements of equity
securities. In the second and third quarters of 1998, we sold Series A
preferred stock for net proceeds of $7.0 million. In March 1999, we sold Series
B preferred stock for net proceeds of $2.8 million. In September 1999, we sold
Series C preferred stock for net proceeds of $4.5 million. During the
fourth quarter of 1999, we sold Series D preferred stock for net proceeds of
$23.2 million. In January 2000, we sold additional Series D preferred stock for
net proceeds of $6.5 million.
As of March 31, 2000, total cash invested since our inception was $44.2
million, and we had cash and cash equivalents of $24.2 million.
Net cash used in operating activities totaled $3.7 million for the three
months ended March 31, 2000, $6.8 million for the year ended December 31, 1999,
$3.7 million for the year ended December 31, 1998 and $1.0 million for the year
ended December 31, 1997. Net cash used in operations for the three months ended
March 31, 2000 resulted from the net loss for the period, increases in accounts
receivable and prepaid expenses, partially offset by amortization of stock-
based compensation and an increase in accounts payable. Net cash used in
operations in 1999 resulted from operations and increases in accounts
receivable and prepaid expenses, partially offset by the inclusion of non-cash
charges for stock based compensation in net income and increases in accounts
payable and deferred revenues. Net cash used in operations in 1998 and 1997
resulted primarily from net losses.
Net cash used in investing activities for the three months ended March 31,
2000 totaled $935,000 and included $735,000 for the purchase of computer
hardware and software and office furniture and equipment and $200,000 in loans
to officers. Net cash used in investing activities totaled $4.4 million for the
year ended December 31, 1999 and included payments of $2.7 million
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for the acquisition of InGenius Technologies, the purchase of $727,000 of
computer hardware and software and office furniture and equipment and a
$500,000 loan to an officer. Net cash used in investing activities of $429,000
for the year ended December 31, 1998 and $81,000 for the year ended December
31, 1997 were for the purchase of computer hardware and software and office
furniture and equipment.
As part of the strategic agreement discussed under "--Strategic Agreements"
above, we will pay approximately $2.7 million for the acquisition of
infrastructure software in the second quarter of 2000.
Net cash provided by financing activities was $7.1 million for the three
months ended March 31, 2000 and consists of proceeds from the issuance of
preferred stock and proceeds from the sale of common stock. Net cash provided
by financing activities was $29.8 million in the year ended December 31, 1999
and consists primarily of proceeds from the issuance of preferred stock,
proceeds from the sale of common stock and net of repayments on our line of
credit. Net cash provided by financing activities was $7.1 million in the year
ended December 31, 1998, and consists primarily of proceeds from the issuance
of preferred stock, proceeds from the issuance of promissory notes, proceeds
from the sale of common stock and borrowings on our line of credit. Net cash
provided by financing activities was $1.0 million in the year ended December
31, 1997, and consists primarily of proceeds from the issuance of convertible
promissory notes and the sale of common stock.
We currently anticipate that our available cash resources, combined with the
proceeds of this offering, will be sufficient to meet our anticipated working
capital and capital expenditure requirements through December 2001. We may need
to raise additional funds, however, to fund more rapid expansion, to develop
new or enhance existing products or services, to respond to competition or to
acquire complementary businesses or technologies. If adequate funds are not
available on acceptable terms, our business, results of operations and
financial condition could be materially adversely affected.
Market Risk
We do not currently use derivative financial instruments. We generally place
our marketable security investments in funds that invest primarily in U.S.
government obligations and corporate obligations with contractual maturities of
90 days or less. We do not expect any material loss from our marketable
security investments and therefore believe that our potential interest rate
exposure is not material.
Year 2000 Readiness Disclosure
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. In order to distinguish
21st century dates from 20th century dates, the date code field needs to be
expanded to four digits. The use of software and computer systems that are not
year 2000 compliant could result in system failures or miscalculations
resulting in disruptions of operations, including a temporary inability to
process transactions, send invoices, or engage in normal business activities.
Although the transition from 1999 to 2000 has passed, and we are not aware of
any year 2000 problems with our services, we or third parties with whom we do
business may experience year 2000 problems in the future. If we were unable to
provide all or some of our services as a result, our revenues would decline.
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Recent Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. We do not
currently hold any derivative instruments and do not engage in hedging
activities. We expect the adoption of SFAS No. 133 will not have a material
impact on its financial position, results of operations or cash flow. We will
be required to adopt SFAS No. 133 for the year ending December 31, 2001.
In December 1999, the SEC staff released SAB No. 101, "Revenue Recognition in
Financial Statements." SAB 101 provides interpretive guidance on the
recognition, presentation, and disclosure of revenue in the financial
statements. SAB 101 must be applied to the financial statements no later than
the second quarter of 2000. We do not believe that the adoption of SAB 101 will
have a material affect on our financial results.
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BUSINESS
Overview
EoExchange enables business-to-business websites by providing an outsourced
industry-specific search, monitor and notification infrastructure. Our services
enable our customers to build traffic, improve website loyalty and increase
revenues through new commerce opportunities. We combine our proprietary
technologies with in-house industry expertise to find and deliver relevant
business information to professionals via the Internet. By providing our
outsourced services to a wide range of business-to-business vertical websites,
we are establishing a network of destination websites, thus enabling us to
offer businesses advertising and commerce opportunities targeted at business
professionals.
Users of business-to-business vertical websites are generally business
professionals, such as managers, engineers, clinicians and researchers, who
seek relevant, timely and specific industry information. Our search, monitor
and notification solution benefits the business professional by focusing
Internet searches only on relevant websites within a selected industry. In
contrast, business-to-consumer search engines typically conduct less targeted
searches that generate results often lacking required relevance and
thoroughness. Through our targeted outsourced solution, we provide business
professionals access to relevant business information on the Internet. In
addition, by having access to a large network of business professionals, we
believe that we will establish ourselves as a trusted source of information and
become a leader in the distribution and sale of premium business information.
In May 1999, we launched our first industry-specific search solution, or
EoCenter, for application in the high-technology industry. Customers of this
EoCenter include Red Herring Communications, CMP Media and EarthWeb. We have
launched additional EoCenters in finance, healthcare and insurance industries,
and are rapidly developing new EoCenters for a range of industries such as
chemicals, metals, construction and telecommunications. We have developed
proprietary software tools that aid in the rapid development and deployment of
new industry-specific EoCenters.
Industry Background
Growth of Business-to-Business Electronic Commerce. The Internet has become
an important medium for communicating, finding information and purchasing
products and services. While many of the early uses of the Internet were
directed primarily at consumers, commerce and communications between businesses
over the Internet have emerged as a key driver of Internet growth. According to
Forrester Research, as of February 2000, almost half of all U.S. companies
purchase some of their goods and services over the Internet, and 93% of U.S.
companies expect to do so by 2002. Gartner Group estimates that electronic
commerce transactions conducted between businesses, commonly referred to as
business-to-business electronic commerce, will generate $403 billion in
revenues in 2000 and will generate $2.7 trillion by 2004. To address this
opportunity, a large number of industry-specific, business-to-business websites
are emerging to link buyers and sellers, offer market-specific information and
provide a neutral, trusted business environment. Gartner Group estimated there
were 10,000 such vertical industry-focused websites in 1999 and forecasts that
there will be 100,000 of these websites in 2001.
As the number of vertical, industry-focused websites and the number of total
websites increases, it will become more difficult for business-to-business
websites to differentiate themselves. To
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succeed, an industry-specific, business-to-business website must become a
primary destination for business professionals in an industry. We believe the
key elements for websites to attract and retain these professionals will be the
amount and quality of industry-specific content they provide and their ability
to establish themselves as trusted, neutral sources of information.
Importance of Relevant Business Information. The highly competitive nature of
global business today has driven businesses to turn increasingly to industry,
financial and market research firms for reports and strategic counsel regarding
their market and purchase decisions. According to Veronis Suhler and
Associates, more than $52 billion will be spent on business information in
2002. In addition, access to free, industry-specific information online is
proliferating. As a result, businesses are increasingly turning to the Internet
as a primary source for research, financial, market and other industry-related
data. Currently, most Internet search engines are designed to conduct general
searches across the full breadth of the Internet. According to a study
conducted by NEC Research Institute and Inktomi Corporation, over one billion
Internet pages existed as of January 2000. Because broad Internet searches draw
results from the vast amount of information available on the Internet, we
believe they often return information that is either irrelevant or too general
to be of any use to business professionals.
We believe that the optimal solution for business-to-business vertical
websites is a search, monitor and notification infrastructure that delivers
relevant industry-specific content via a typical search engine or directory
service. However, business-to-business vertical websites often lack personnel
with the technical expertise and the time necessary to develop such a solution
internally. In addition, time to market is critical in the current competitive
landscape of the Internet. The diversion of management focus away from
executing core business strategies can be detrimental to the success of a
business-to-business vertical website. As a result of the resources and
technical expertise required to create in-house solutions, we believe business-
to-business vertical websites need an outsourced search, monitor and
notification solution that:
. is easily and rapidly integrated;
. delivers industry-relevant content from across the Internet;
. increases duration of visits and encourages repeat visits;
. uses familiar search engine and directory interfaces; and
. creates additional revenue opportunities.
Our EoEnabled Solution
Our EoEnabled services include our EoCenter research engine and our EoMonitor
personalized
tracking service. Each industry-specific EoCenter research engine aggregates a
catalog of relevant industry websites and documents identified by our in-house
industry experts using our proprietary advanced search technologies in order to
provide more relevant information to the user. Our EoMonitor technology allows
a user to track and be notified of changes to any web page presented through an
EoCenter and other user-selected pages available on the Internet. Our
proprietary search taxonomies enable both our EoCenter and EoMonitor services
to provide industry-relevant search, monitor and notification results to our
customers.
We believe that business-to-business vertical websites must provide
comprehensive access to relevant business information in order to attract and
retain industry professionals. We believe that our outsourced EoEnabled
services can be a key component in enabling a business-to-business website to
become an online destination of choice for business professionals in particular
industries. Our
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EoEnabled services are designed to provide these business-to-business vertical
websites with the following key benefits:
. comprehensive coverage of industry information through a single vendor
relationship;
. time-to-market advantages of a turnkey solution;
. cost-effective, outsourced search and monitor tools;
. access to leading search, monitor and notification technology;
. improved user retention and repeat usage; and
. additional revenue opportunities relating to targeted advertising and
commerce.
EoExchange Services
We provide an outsourced industry-specific search, monitor and notification
infrastructure to business-to-business websites. Our EoEnabled services include
our EoCenter research engine and our EoMonitor personalized tracking service.
The key to our proprietary solution is our industry-specific catalogs. These
catalogs include taxonomies and identify the sources of information for a given
industry and certain key metadata, which is information about the information,
that direct which information sources we search and monitor across the
Internet. We combine these catalogs with retrieval technologies so the
information can be automatically retrieved and displayed. To a user, our
EoEnabled services appear as pages within a business-to-business website where
a professional can go to search for and monitor industry-specific information.
However, these areas are actually on a different website, hosted by us, that
retain our customer's branding, look and feel, as demonstrated in Figure 1.
Figure 1. Demonstration of the Transition from the A.B. Watley Homepage to the
A.B. Watley-Branded EoCenter
[GRAPHIC APPEARS HERE]
[The picture depicts how a user on the A.B. Watley homepage enters into the
A.B. Watley-branded EoCenter using the research tab on A.B. Watley's site
navigation bar.]
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Our custom, scalable solution utilizes a standardized template that
identifies and displays the appropriate graphical characteristics of the
website from which the user accesses our EoEnabled services. Presentation of
customer logos, color schemes, fonts and other aesthetic attributes of
customers' websites are maintained while users access our services. This
scalable template technology allows our customers to provide our value-added
services as an extension of their websites and allows for a single template to
support multiple customers. For example, a single EoEnabled service, such as
our EoCenter for companies in the high-technology industry, may have dozens of
different appearances, each customized to reflect the branding of a particular
customer's website, as demonstrated in Figure 2 below.
Figure 2. Our EoCenters Can Be Branded to Appear as Natural Extensions of Our
Customers' Websites
[GRAPHIC APPEARS HERE]
[The picture depicts how the same EoCenter template for the high-technology
industry supports two different customers. An Earth Web Inc. branding template
and Red Herring branding template allow the EoCenter to appear as natural
extensions of customer sites.]
For each industry-specific EoCenter, we have developed and maintain a
proprietary catalog of relevant websites and data. Depending upon the industry,
the number of websites in a catalog may range from 500 to more than 3,000. In
addition to the high-technology, finance, healthcare and insurance markets that
we currently serve, we have developed 12 industry-specific catalogs in
association with our relationship with VerticalNet. We are also currently
developing catalogs for each of VerticalNet's trade communities which now serve
more than 50 industries.
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EoCenter
We believe that professionals generally demand higher quality Internet search
services than consumers. EoCenters are designed to meet the high standards of
professionals by coupling our in-house industry expertise with high quality
database search tools designed to overcome the challenges of finding relevant
information on the Internet. Rather than search the entire Internet for
information, EoCenters only search information that is relevant to the
industry. For example, our EoCenter for the high-technology industry will only
search industry-relevant sources, such as the websites of hardware and software
vendors, trade and business press and technology organizations.
In addition to identifying websites to search, our industry experts identify
frequently referenced documents, such as specific product reviews, Securities
and Exchange Commission filings and patent filings. Our industry experts then
create custom reports that are designed to meet the needs of specific
professionals within a given industry, such as a product analysis report
designed to assist an information technology manager in making an informed
purchasing decision. Each report includes a collection of documents and
searches selected to provide aggregated information on a specific topic.
Through our information collection tools, our industry experts deliver to the
business professional extensive, organized information designed to dramatically
reduce the amount of time normally required to collect the information from
multiple sources.
EoMonitor
We complement our Internet search services with monitor and notification
technologies to provide an integrated solution for business professionals'
information needs. Professionals who require business information to make
decisions often want the ability to monitor Internet pages and to be notified
when topics of interest are addressed or updated. EoMonitor meets this need by
monitoring specified websites and notifying the user about relevant changes.
Through use of our EoMonitor service, business-to-business destinations can
offer their visitors the ability to monitor user-selected Internet pages or
websites, whether they belong to a competitor, supplier, customer, news source
or even their own firm. Examples of pages that can be monitored include pages
containing publication of product releases and specifications from suppliers
and competitor websites, industry event listings and new Securities and
Exchange Commission filings.
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Our proprietary technology maintains a history of monitored pages and can
identify differences between original and updated pages. In addition to basic
monitoring, EoMonitor provides scoring and highlighting to show a history of
the changes made to the monitored page. Scoring differentiates the degree of
changes for pages being monitored, providing an overview of the magnitude of a
page's modifications. Our EoMonitor highlights actual changes graphically and
extracts relevant information, eliminating the user's need to visit and review
every monitored page, as illustrated in figure 3 below. Users can organize
monitored pages by name, folder, date, or score allowing for quick and easy
browsing of changes. Changes may be delivered to an account by e-mail or
published to the Internet. Deleted text is identified, along with new or
changed text.
Figure 3. Demonstration of Our EoMonitor Features
[GRAPHIC APPEARS HERE]
[The picture depicts EoMonitor features by displaying how users can select a
page to be monitored by clicking on the "Monitor Changes on This Page" icon,
how they are notified and ultimately how they view the page changes.]
EoExchange Network
By deploying our EoEnabled services on many business-to-business vertical
websites, we create our EoExchange network, which is an aggregation of industry
destinations with broad reach to business professionals. We believe our
EoExchange network represents a multi-channel advertising, sponsorship and
commerce platform in which each channel reaches leading websites in a
particular industry. For example, our high-technology channel includes websites
from CMP Media and EarthWeb, and our finance channel includes websites from AB
Watley and Forbes.com Inc. among others. Each EoCenter link placed on a
customer's website allows us to reach the website's target audience. In order
to identify an even more targeted audience, we further segment the channels
into sub-groups of websites. For example, PlanetIT, Datamation and TelecomWeb
are all targeted to reach the information technology professional. We intend to
make these groups of websites available to advertisers, sponsors and commerce
customers. The focused nature of EoCenter's search and content architecture
allows marketers to develop targeted campaigns to increase response rates and
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<PAGE>
transactions. We believe that this network will enable us to offer targeted
advertising and electronic commerce opportunities to businesses that strive to
build brand awareness and sell products or services to businesses.
We believe that our combination of highly targeted visitor demographics with
our ability to provide industry-specific search results creates a commerce
platform well-suited for the sale of business information. We analyze user
searches and behavior to serve the most relevant pay-per-view documents and
abstracts. Visitors are presented with relevant research and analysis reports
that cover industry and technology trends and events that aid professionals who
require business information to make decisions. Each EoCenter reserves a
prominently located portion of the page to merchandise content and services.
This portion of our EoCenter can display the title, publisher, price and date
of a purchasable document. We attempt to maximize the relevance of purchasable
information or services offered by using a variety of methods to determine the
appropriate listing of documents and services presented to a user. These
methods include interpreting visitor entered keywords and matching premium
documents to relevant reports and content sets. For example, a person searching
our EoCenter for the high-technology industry for "Application Service
Provider" would be presented a report titled "Application Service Provider
Leadership Study: Building, Managing, and Growing an ASP Business," which could
then be purchased via credit card over the Internet, as demonstrated in Figure
4 below.
Figure 4. Demonstration of an Information Commerce Transaction through Our
EoEnabled Services
[GRAPHIC APPEARS HERE]
[The picture depicts how a user would conduct an information commerce
transaction within our EoCenter.]
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<PAGE>
Strategy
Our goal is to be the leading provider of outsourced search, monitor and
notification infrastructure for business websites. By establishing our network
of business professionals, we believe we will be well positioned to be a leader
in the distribution and sale of business information and services. To achieve
our objectives, our business strategy includes the following key components:
Build a Network of Business Professionals by Partnering with the Leading
Business-to-Business Websites. A key element of our success is our ability to
reach a large base of professional users within specific industries. We plan to
access this base of users by building relationships with leading business-to-
business vertical websites across a wide range of industries with turnkey
search, monitor and notification services. In order to reach our targeted
customer base of business-to-business vertical websites, we intend to
significantly increase our sales, marketing and client services efforts.
Extend Our Leadership in Our Existing Core Business-to-Business Markets. We
believe that we have established a leading position as an outsourced provider
of search, monitor and notification services in the high-technology and finance
industries for business-to-business destination websites. We initially focused
on these industries because of the rapid growth of destination websites serving
these markets. As these core markets continue to expand and fraction into more
focused vertical segments, we plan to deploy additional sales, marketing and
development resources to strengthen our positions in these business-to-business
markets.
Penetrate a Wide Range of Additional Business-to-Business Vertical
Markets. Our goal is to establish an early presence in emerging business-to-
business vertical marketplaces. We are developing EoCenters for the chemicals,
metals, construction, telecommunications, fiber optics and business education
industries. We target customers who operate multiple websites in multiple
industries. For example, under our strategic relationship with VerticalNet, we
have developed 12 EoCenters across multiple industries and expect to develop
and deploy more than 50 additional EoCenters in a wide variety of industries.
In addition, strategic partners provide us industry and information expertise
that helps us to develop new EoCenters.
Leverage Our EoExchange Network to Create a Highly Targeted Advertising,
Sponsorship and Commerce Platform. Our EoExchange network, which is an
aggregation of industry destinations, serves as a commerce channel for premium
information providers and advertisers to reach professionals in particular
industries. We leverage this network of business professionals to create a
highly targeted advertising, sponsorship and commerce platform. Our sales team
then secures licenses from leading information providers and aggregators to
distribute their content across our EoExchange network. This results in a
greater inventory of premium information that increase our opportunities for
additional information commerce.
Maximize Revenue Opportunities with Existing Customers. Once an EoCenter is
integrated with a customer's website, our client services team develops design
proposals for ideal placement of links to our EoCenter. The team also provides
the customer with tools to easily deploy these links. Prominent link placement,
including linked keywords in headlines and editorials, provides opportunities
for additional traffic to each EoCenter. This traffic broadens the reach of the
EoCenter within each vertical website, creating opportunities for increased
advertisement, sponsorship and commerce revenues.
Maintain and Extend Our Technology Leadership. We believe that our technology
is superior to other search engine technologies in providing refined search for
business professionals. Our
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information retrieval technologies must continually be enhanced to keep pace
with the significant challenges posed by the growth of the Internet. To meet
this challenge, we spent approximately $4.4 million from January 1, 1998 to
March 31, 2000 to enhance our service offerings. We intend to further
strengthen our technology through increased development and the acquisition of
complementary technologies.
Customers
Our customers operate business-to-business websites in industries such as
high-technology, finance and healthcare. In addition, we intend to extend our
access to the chemicals, metals, construction, telecommunications, fiber optics
and business education industries and the small-to-medium business market
segment.
The following is a list of customers as of March 31, 2000 for whom we have
provided access to our search, monitor and notification services:
<TABLE>
<S> <C> <C>
1stVenture.com, Inc. Healthx.com, Inc. Online, Inc.
A.B. Watley Group, Inc. Hoover's, Inc. Pensare, Inc.
AdvisorTeam.com, Inc. Imagine Media, Inc. Pensiononline.com, Inc.
AltaVista Company Individual Investor Group, Inc. PeopleScape, Inc.
Ateer Corporation InfoSoft, Inc. PharMedia, Inc.
Asera, Inc. Inprise Corporation Phillips International, Inc.
B2B E-Commerce Intertemps, Inc. Red Herring Communications, Inc.
International, Inc. InterWorks Computer Products, Inc. SmartAge Corporation
Bloor Research IT News Smart Online, Inc.
CMP Media Inc. MedCareers Corporation Thomson Financial Media
Constructors, Inc. MetalShopper.com LLC Upside Media Inc.
EarthWeb Inc. MicroMed Health Care Vault.com Inc.
Ejigsaw.com, Inc. Information Systems, Inc. Venture Capital Online Inc.
EverythingOffice, Inc. MidnightTrader.com, Inc. VerticalNet, Inc.
Fitness Discount Outlet, Inc. National Hotel Executive Vision Capital L.P.
Forbes.com Inc. Net Market Makers, Inc. Webforia, Inc.
Gale Group Corporate Division Office.com Inc. WetFeet.com, Inc.
GoAuction, Inc. www.yellowpages.com, Inc.
</TABLE>
Our sales are concentrated among a limited number of customers. For the three
months ended March 31, 2000, our three largest customers accounted for
approximately 66%, 15% and 9% of our revenues, respectively. In 1999, our two
largest customers accounted for approximately 49% and 35% of our revenues,
respectively. See "Risk Factors--We depend on a small number of customers for a
high percentage of our revenues and the loss of a significant customer would
result in a substantial decline in our revenues."
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<PAGE>
As of March 31, 2000, our customers operate one or more of the following
industry-specific websites for which we have deployed our search, monitor and
notification services:
<TABLE>
<C> <S>
High-Tech.................. bloor-interarctive.com, brainpower.com, byte.com,
cabletoday.com, codeguru.com, crossnodes.com,
datamation.com, design-reuse.com, developer.com,
dice.com, earthweb.com, ebnonline.com,
econstructors.com, edtn.com, eetimes.com,
ejigsaw.com, erphub.com, gamelan.com,
gocertify.com, htmlgoodies.com, itauctions.com,
iwcp.com, internetwk.com, intranetjournal.com,
it-analysis.com, it-director.com, itknowledge.com,
it-news.com, it-seek.com, jars.com,
javascripts.com, line56.com, netmarketmakers.com,
nwc.com, onlineinc.com, opensourceit.com,
pcnalert.com, peoplescape.com, planetanalog.com,
planetit.com, redherring.com, semibiznews.com,
supportsource.com, sysopt.com, techcrawler.com,
telecomweb.com, upsidetoday.com and winmag.com
Finance.................... 1stventure.com, abwatley.com, americanbanker.com,
bankinfo.com, forbesfinder.com, hoovers.com,
individualinvestor.com, midnight-trader.com,
vcapital.com and visioncap.com
Health Care................ alteer.com, medcareers.com and pharmedia.com
Small-to-Medium Business .. everythingoffice.com, hotelexecutive.com,
office.com and yellowpages.com
</TABLE>
Sales and Business Development
Our sales and business development strategy is to build a large network of
customers. As of March 31, 2000, our sales and business development team
consists of 22 people organized into direct sales, corporate sales, commerce
sales and business development groups. The largest group is our direct sales
force that consists of channel and sales managers organized into industry-
focused teams. Our corporate sales group focuses on sales of our EoMonitor
service to Fortune 500 companies. Our commerce sales group manages sales of
advertisement and sponsorship inventory, and information commerce listings and
placement inventory. Our sales force develops sales presentations, demonstrates
our services and manages the complete sales cycle. After a customer agreement
is complete, our client services group assists the customer in the design,
implementation and ongoing management of our services.
Our business development group is responsible for identifying new industries
and strategic customers to grow the EoExchange network and aggregate user
traffic. Its responsibilities include managing and securing content
redistribution relationships with leading information distributors and
providers. We have identified four primary business development opportunities.
First, we intend to target strategic customers that have significant presence
in several industries or operate multiple websites within a single industry. We
believe we can benefit from reduced engineering and product costs of
customization by applying the custom EoCenters to all of a customer's websites.
Second, we plan to target established customers with one primary website whose
traffic exceeds one million page views per month. Collaboration with our
customers during design and implementation ensures a greater number and
increased prominence of links to EoEnabled services. Third, we believe
relationships with systems integration companies will lead to the development
of an indirect sales channel and the incorporation of EoEnabled services at
website inception. Finally, we believe corporate Intranet applications of
EoEnabled services, such as competitive analysis and corporate intelligence,
will continue to emerge.
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Marketing
To support our sales and business development efforts, we employ a variety of
tactics to drive traffic to our customers' websites, increase usage of our
EoEnabled services and attract additional customers. These include print and
online advertising, public relations and customer promotions. We also
extensively use co-op marketing platforms, a co-branding strategy in which our
customers pay us to subsidize part of the marketing cost for inclusion in the
campaign. This strategy increases our brand awareness by associating us with
our leading customers.
Our print advertising campaigns are designed to increase brand awareness and
to drive traffic to our customers. We reach our target market of business-to-
business destination website owners by running print advertisements in widely
distributed industry publications such as the Industry Standard, Forbes ASAP
and Red Herring. The majority of our online advertising and other customer
promotions programs are designed to generate traffic to our EoEnabled services
deployed on our customers' websites. We use online tactics including the
placement of banner advertisements on websites targeted to our end-user,
customer email newsletters and the placement of EoCenter search boxes on
websites outside our EoExchange network.
We also utilize a variety of public relations programs. We regularly issue
press releases highlighting our customers. We pursue editorial and speaking
opportunities to promote our EoEnabled services. Sponsorships and presentations
at industry trade shows and conferences, such as Industry Standard's iB2B and
eHealthcare World, allow our sales and business development teams to develop
relationships with potential business-to-business website customers.
Client Services
We believe that proactive customer service and support is critical to the
long term success of our EoEnabled services. Our client services group is
responsible for all account management, product implementation and service
functions after the sales and business development teams have completed a
customer agreement. Our client services team consists of 15 people whose
responsibilities include reducing overall deployment time, developing strong
relationships to ensure client satisfaction, leveraging customer relationships
to enhance the number and location of links to EoEnabled websites, and
facilitating and collecting customer feedback. We believe focused and dedicated
customer service will result in a greater number and more prominent placement
of links which will drive more user sessions and page views, ultimately leading
to increased revenues.
Technology
Over the past three years we have developed proprietary technologies and
search taxonomies designed to satisfy the information research demands of the
business professional. We combine third party search services, which index and
query documents from the Internet, with our in-house industry expertise and our
proprietary technologies to produce precise, industry-specific search
solutions. Our technologies are designed using a scalable template technology,
allowing rapid deployment of new EoCenters and minimizing their development
time. Supporting each EoCenter is our aggregation platform, which is the
technology core of the system that provides industry-specific cataloging,
searching and monitoring functions. We began development of our aggregation
platform in 1996 and continue to enhance it to meet the demands of the business
professional.
Catalog Tools. We have invested heavily in building productivity tools that
enable our industry experts to handle large volumes of information and help
them monitor and classify relevant
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<PAGE>
information sources. A subset of tools is also offered to industry experts from
our larger customers' websites allowing them to manage certain aspects of the
catalog that underlies our EoCenter.
Figure 5 shows a model of how we and our customers use the cataloging tools.
Figure 5. EoExchange/Customer Editor Tools
[GRAPHIC APPEARS HERE]
[The picture depicts the model of how we and our customers' staff use
cataloging tools.]
A browser-based catalog editor allows our in-house industry experts and key
customers to modify the taxonomy of the catalog as well as add or delete
individual entries. A domain analyzer uses link analysis to crawl the Internet
and identify websites that are likely to be of relevance to an industry or
profession, which provides the cataloger with a methodical way to find relevant
information. A website profiler is then used to analyze large websites and
provide information on how to calibrate the crawlers. A script editor and a
form analyzer identify how to collect specific
39
<PAGE>
pages and aid with the construction of the industry reports. Additionally,
there is a comprehensive catalog editor which allows for the management of all
aspects of the catalog including indexers, commonly called crawlers,
taxonomies, scripts, reports, inputs and data dictionaries.
Search Sub-System. Our search sub-system works with our search provider to
deliver the industry-specific search results, and the technology manages the
indexing, tagging and querying cycle. The search process involves the
collection of pages, the indexing and tagging of these pages and then serving
lists of pages that most closely match a user's search request, known as a
query. While many search companies endeavor to find and index all the
information available on the Internet, our EoCenter technology is focused on
eliminating irrelevant pages and ensuring that only industry-relevant and
trusted information is included. By concentrating on industry-relevant
information sources, our technology updates the industry-specific catalogues
weekly and the most active information sources daily.
Document Collection Engine. Our document collection engine is designed to
access specific websites and retrieve frequently referenced industry documents.
The engine is able to collect pages that cannot be book marked, such as pages
that require forms to be completed. The core technology behind the industry
reports service of our EoCenter enables the simple process of collecting
multiple documents.
Change Monitoring Sub-System. Our change monitoring sub-system is responsible
for handling all of our EoMonitor services. At the core of the sub-system is a
central database of all pages that are being monitored across our EoExchange
network. Each entry in the database contains the most recent version of the
page along with a detailed history of prior changes to the page. Each page is
regularly checked, and if it has been modified, the database is updated with
the change details. This sub-system is also responsible for the email
notifications sent to users when they have requested notification upon change.
Customer Publication Engine. Our EoEnabled services utilize a template
technology that allows one EoCenter to look like each of our individual
customers' websites by displaying their logo and using their fonts, color
schemes and styles. In many cases, the users believe they are on our customer's
website when, in fact, they are using our EoCenter. The publication engine
combines cosmetic layout instructions with the core delivery engine in real
time. Using our scalable architecture, customers can utilize our EoCenter with
their websites' branding, look and feel.
Activity Profiling. Our aggregation platform maintains records of user
activity. The activity statistics provide our customers with detailed
information regarding the interests of their customers and provide
opportunities for highly targeted marketing.
Modular Architecture. Our aggregation platform is built on a multi-tiered
modular design that allows existing components to be upgraded and new
components to be added with minimal ramifications on other parts of the system.
In addition, we strive to utilize the best available technologies from other
vendors. This flexible architecture allows us to add and remove technologies to
best service the needs of the EoExchange customers.
Our EoCenter Operations
The operations and engineering teams collaborate at every stage of the design
and delivery of the aggregation platform. Operational redundancy is achieved by
hosting our servers at multiple commercial co-hosting facilities and by
designing server clusters in arrays with no single point of
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failure. Our servers are hosted in four locations including at an Exodus
Communications data center in California and at a Voyager.net co-location
facility in Michigan. These facilities have multiple Internet backbone
connections with physical security supplied via human monitored alarms and
keycard access systems. External email and paging notifications are sent to
network engineers if any production servers do not respond to monitoring
software within five minutes.
Our aggregation platform and EoCenter servers run on Intel-based multi-
processor HP NetServers running a mixture of Windows NT and LINUX operating
systems. At each facility, our servers are configured in redundant arrays, with
traffic being routed between servers for enhanced performance and fail-over
capability. Multiple systems can fail without impairing overall functionality.
We use F5 Network's Big/ip product to distribute incoming requests to the most
available server. As load and demand increase, additional servers are simply
added, and the load balancer immediately begins directing traffic to the new
servers. Additional server capacity is always available to handle surges in
traffic without performance delays. All server systems are configured with
Windows 2000, Active Directory and Distributed File System. Data is stored on a
highly available, redundant, and scalable Windows 2000 Advanced Server Cluster
Solution running SQL 7 database.
Security begins at our external routers at Exodus and is pervasive throughout
our network design. Our security firewalls block traffic not destined to
specific ports opened to our software applications. F5 Network's Big/ip devices
hide all IP addresses to our web servers, preventing external access to our web
servers. Finally, service level agreements with Exodus Communications ensure
response to external network intrusion attempts within 15 minutes of detection.
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Competition
We compete in markets that are new and rapidly changing, and we expect
competition in our markets to intensify in the future. We compete on the basis
of several factors, including relevance of results, performance, scalability,
price and ease of use of our online search, monitor and notification services.
We believe no single competitor competes directly with us with respect to the
full range of outsourced services we offer to business-to-business websites.
However, we currently or potentially compete indirectly with a number of other
companies that provide outsourced Internet business services. These indirect
competitors include Internet outsourcing, content distribution, information
commerce enabling, advanced Internet search and content aggregation companies,
as illustrated in the following table:
<TABLE>
<CAPTION>
Category Focus Example Companies
-------- ----- -----------------
<S> <C> <C>
Internet Outsourcing Outsource Internet navigation, AltaVista, Ask
Internet portal or website Jeeves, InfoSpace,
enhancement content Inktomi and LookSmart
Content Distribution Enable websites to deploy a package iSyndicate and
of Internet content aggregated from Screaming Media
external sources
Information Commerce Enable digital transactions to be Qpass
Enabling made online
Advanced Internet Search Provide information retrieval and Autonomy, Infoseek
monitor technology that can be used and NetMind
to build customized services
Content Aggregation Combine proprietary and external About.com, Dow Jones,
content from disparate sources, Northern Light and
including content publishers, Reuters
specialized search engines and non-
syndicating Internet directories
</TABLE>
Intellectual Property
We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions to establish and protect proprietary rights
in our products, services, know-how and information.
We have one allowed patent application covering an information platform for
performing data collection, interpretation and analysis, together with related
method and apparatus claims. We cannot assure you that this patent, if issued,
will be upheld as valid if its validity is challenged by any of our competitors
or other third parties, or that any patents will issue from future patent
applications.
We also hold several trademarks and service marks and own the rights to
various Internet domain names. We have applied for federal registration of
certain of these trademarks and service marks, including "EoExchange,"
"EoCenter," "EoEnabled," "EoMonitor," "EoProducer," "Eo" and "Internet
Information Exchange Company." We hold the trademark for "Aeneid."
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Employees
As of March 31, 2000, we had 111 full-time employees, including 61 primarily
involved in the production of our EoCenter and EoMonitor services, 43 in our
sales and marketing department and seven in our general and administrative
department. None of our employees is represented by a labor union, we have
never experienced a work stoppage and we believe that relations with our
employees are good.
Facilities
Our principal executive and administrative offices are located at 282 2nd
Street, Suite 400, San Francisco, California 94105, where we lease
approximately 13,000 square feet. We have signed a lease for an additional
2,000 square feet at that location as of June 1, 2000. We also lease
2,000 square feet of office space in Kalamazoo, Michigan, 1,725 square feet of
office space in Indianapolis, Indiana and 3,000 square feet of office space in
New York, New York.
Legal Proceedings
There are no legal proceedings pending or threatened against us. We have not
initiated any legal actions against third parties.
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MANAGEMENT
Executive Officers, Directors and Key Employees
Our executive officers, directors and key employees, and their ages as of
March 31, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Douglas S. Bennett.............. 41 President, Chief Executive Officer and
Chairman of the Board of Directors
Robert D. Ainsbury.............. 44 Vice President and Chief Technology
Officer
Wilfredo M. Tejada.............. 34 Vice President of Marketing
Richard L. Templeton............ 52 Vice President of Sales and Business
Development
Mark H. Elder................... 35 Vice President of Finance, Treasurer and
Assistant Secretary
Robert G. Allison............... 43 Director
Marc A. Butlein................. 61 Director
Scott N. Flanders............... 43 Director
Daniel S. Putterman............. 32 Director
Dag A. Tellefsen................ 57 Director
</TABLE>
Douglas S. Bennett has been our president and chief executive officer since
October 1999 and has been our chairman of the board of directors since March
2000. Mr. Bennett has served as a director since October 1999. From November
1998 to October 1999, Mr. Bennett served as president of Macmillan USA. From
June 1996 to October 1998, he served as president of Macmillan Digital
Publishing and from January 1995 through October 1998, he served as senior vice
president of Simon & Schuster's interactive distribution services. From July
1992 to June 1996, Mr. Bennett held several senior-level positions with Simon
and Schuster. Mr. Bennett also serves on the boards of Telstreet.com, an
Internet wireless retailer, and Snaz.com, an electronic commerce facilitator.
Robert D. Ainsbury, co-founder of EoExchange, has served as our vice
president and chief technology officer since March 1999. From June 1997 to
March 1999, Mr. Ainsbury served as our vice president of research and
development. From October 1996 to May 1997, Mr. Ainsbury was vice president of
engineering for NetManage. He served as vice president of research and
development at Maximum Information from January 1995 to June 1996. Mr. Ainsbury
has more than 20 years of experience in the software business and has developed
information systems for Mobil Oil Corporation, Conoco, Inc. and First National
Bank of Chicago, among others.
Wilfredo M. Tejada, co-founder of EoExchange, has served as our vice
president of marketing since October 1996. From April 1995 to October 1996, Mr.
Tejada served as vice president of marketing for NetManage, an Intranet
applications company. From January 1994 to April 1995, Mr. Tejada served as
vice president of product marketing for Novell Incorporated and directed its
product and channel marketing and overall strategic communications.
Richard L. Templeton has served as our vice president of sales and business
development since July 1999. From June 1997 to July 1999, Mr. Templeton served
as vice president of sales and partner marketing for Prodigy. From May 1994 to
May 1997, Mr. Templeton served as senior vice president of marketing
information for Reuters.
Mark H. Elder has served as our vice president of finance since April 2000
and as our treasurer since October 1999. He has also served as our assistant
secretary since May 1999. Mr. Elder served
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as our director of finance from May 1998 until April 2000. From October 1990
through May 1998, Mr. Elder worked for Montgomery Financial Management as a
financial consultant to emerging enterprises. During 1997, Mr. Elder served as
chief financial officer of New Media Corporation, a manufacturer of PCMCIA
products.
Robert G. Allison has served as a director since April 1998. Mr. Allison has
been a limited partner of Edgewater Private Equity Fund Management, L.P., the
general partner of Edgewater Private Equity Fund II, L.P., since March 1997.
Mr. Allison founded InterWorks Computer Products, Inc. in November 1995 and has
served as its chief executive officer since that date. InterWorks provides
modular subsystems solutions for the telecommunications markets. Mr. Allison
has also been the President of Innovate Partners, Inc. since May 1995. Mr.
Allison served as executive vice president, chief operating officer and
director of Aurora Electronics Group from November 1993 to May 1995. Mr.
Allison also served as a director to Advanced Photonix Inc from 1996 through
1999. Mr. Allison holds an undergraduate degree in economics from California
State University.
Marc A. Butlein has served as a director since February 1998. Mr. Butlein has
also been the chairman of MAS Communications since April 1999 and the chairman
of PPI Network since December 1999. He was appointed to the board of be-
there.com in January 2000, and has served as a director of Medscape since
December 1997. From January 1989 to May 1998, Mr. Butlein was the chairman of
META Group where he served on the board until May 1999. Mr. Butlein received an
undergraduate degree from the University of Connecticut and pursued doctoral
studies in political science at the Maxwell School at Syracuse University.
Scott N. Flanders has served as a director since March 2000. Mr. Flanders has
served as the chairman and chief executive officer of Columbia House since
November 1999. In 1998, Mr. Flanders co-founded Telstreet.com. From 1994 until
1998, Mr. Flanders served as president of Macmillan Publishing, a computer and
reference publisher. Mr. Flanders holds an undergraduate degree in economics
from the University of Colorado, received a J.D. from Indiana University and is
a certified public accountant.
Daniel S. Putterman, co-founder of EoExchange, has served as a director since
March 1997. He also served as our president and chief executive officer from
March 1997 through October 1999 and our chairman of the board of directors from
March 1997 until March 2000. Mr. Putterman is the president and chief executive
officer of ChannelDot Networks, Inc. In October 1994, Mr. Putterman founded
Maximum Information, a company that developed an enterprise Internet management
platform.
Dag A. Tellefsen has served as a director since July 1997. He is the founding
partner of Vision Capital L.P., a venture capital firm started in 1996. In
1982, Mr. Tellefsen was the founding partner of Glenwood Management L.P., the
predecessor to Vision Capital L.P. Mr. Tellefsen currently serves on the boards
of directors of Iwerks Entertainment, KLA-Tencor, Metorex International, Oy and
Altitun AB. Mr. Tellefsen received an undergraduate degree in engineering from
Princeton University and a M.B.A. from Stanford University.
Board Composition
Our bylaws currently authorize six directors. Our certificate of
incorporation provides that the board will be divided into three classes, Class
I, Class II and Class III, on or prior to the date that we first provide notice
of an annual stockholders meeting following this offering. Class I directors,
initially , hold office initially for a term expiring at the
annual
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meeting of stockholders in 2001. Class II directors, initially ,
hold office initially for a term expiring at the annual meeting of stockholders
in 2002. Class III directors, initially , hold office initially
for a term expiring at the annual meeting of stockholders in 2003. After these
initial periods, each class will serve a staggered three year term. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes, so that, as nearly as possible,
each class will consist of one-third of the directors. This staggered
classification of the board of directors may have the effect of delaying or
preventing changes in control or management. There are no family relationships
among any of our directors, officers or key employees.
Mr. Allison's board seat was designated pursuant to a right received in
connection with Edgewater's participation in our Series A preferred stock
financing. Mr. Tellefsen is Vision Capital's designee on our board of directors
pursuant to a 1997 financing.
Board Committees
Our board of directors established a compensation committee and an audit
committee in April 2000.
Our audit committee consists of Messrs. Allison, Butlein and Flanders, all of
whom are outside directors. The audit committee monitors the integrity of our
financial reporting process and systems of internal controls, monitors the
independence and performance of our outside auditor and internal audit function
and reviews our consolidated financial statements.
Our compensation committee consists of Messrs. Allison and Tellefsen, each of
whom are outside directors. The compensation committee makes recommendations to
the board of directors regarding matters of compensation of our officers and
administers our equity incentive plans.
Compensation Committee Interlocks and Insider Participation
We had no compensation committee as of December 31, 1999. Prior to the
establishment of the compensation committee, all of our directors participated
in deliberations of the board of directors concerning executive officer
compensation. None of the members of the compensation committee of the board
serves or has served as one of our officers or employees. None of our executive
officers served during the last fiscal year or currently serves as a member of
the board or compensation committee of any entity which has one or more
executive officers serving as a member of our board or compensation committee.
Messrs. Allison and Tellefsen are affiliated with Edgewater Funds, Vision
Capital L.P. and Vision Extension L.P., respectively, which are holders of our
preferred stock.
Director Compensation
We do not currently pay any cash compensation to our directors for their
services as members of the board of directors, although we reimburse them for
reasonable expenses in connection with attending our board and committee
meeting. We do not provide compensation for committee participation or special
assignments of the board of directors.
Jack Russo, a former director from November 1996 until September 1999,
received 10,000 shares of our common stock under the 1999 stock plan, valued at
$1.25 per share, in consideration for services previously rendered by Mr. Russo
as director.
Our non-employee directors receive option grants under our 1999 stock plan,
as described under "--1999 Stock Plan."
46
<PAGE>
Executive Compensation
The following table provides information concerning compensation of our chief
executive officer and the top four other highly compensated executive officers
who were serving as executive officers as of December 31, 1999. Mr. Bennett
joined us during the 1999 fiscal year and therefore his annual compensation
does not reflect his full base salary of $275,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation Long-Term Compensation
---------------- ----------------------------------
Restricted Shares
Stock Underlying All Other
Name And Principal Position Salary Bonus Awards Options Compensation
- --------------------------- -------- ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Douglas S. Bennett......... $ 56,085 $33,542 1,765,051 -- $100,920.62
President, Chief Executive
Officer and Director
Robert D. Ainsbury......... $175,000 $35,000 -- -- --
Vice President and Chief
Technology Officer
Wilfredo M. Tejada......... $150,000 $30,000 -- -- --
Vice President of
Marketing
Mark H. Elder.............. $117,424 $15,548 -- 60,000 --
Vice President of Finance,
Treasurer and
Assistant Secretary
Daniel S. Putterman........ $181,854 -- -- -- --
Chairman of the Board of
Directors
</TABLE>
Mr. Bennett's other compensation consists of a signing bonus and
reimbursement of costs of temporary housing, travel and relocation. Effective
March 2000, Mr. Bennett replaced Mr. Putterman as our chairman of the board of
directors.
Option Grants and Exercises
The following table provides information concerning grants of options to
purchase our common stock made during the fiscal year ended December 31, 1999
to the officers named in the summary compensation table.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percentage of Annual Rates of Stock
Total Options Price Appreciation
Granted to Exercise or for Option Term
Options Employees in Base Price Expiration ---------------------
Name Granted Fiscal Year per share Date 5% 10%
- ---- ------- ------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Douglas S. Bennett...... -- -- -- -- -- --
Robert D. Ainsbury...... -- -- -- -- -- --
Wilfredo M. Tejada...... -- -- -- -- -- --
Mark H. Elder........... 60,000 3% $0.80 8/16/2009
Daniel S. Putterman..... -- -- -- -- -- --
</TABLE>
The table above is based on options to purchase an aggregate of 2,024,051
shares of common stock granted by us in the year ended December 31, 1999 to our
employees and consultants. Potential gains are net of exercise price, but
before taxes associated with exercise. These amounts represent
47
<PAGE>
certain assumed annual rates of compounded appreciation only, based on the
Securities and Exchange Commission rules. Actual gains if any, on stock option
exercises are dependent on the future performance of the common stock, overall
market conditions and the option-holders' continued employment through the
vesting period. The amounts reflected in this table may not necessarily be
achieved.
Aggregate Option Exercises and Fiscal Year-End Values
The following table provides information concerning exercises of options to
purchase our common stock in the fiscal year ended December 31, 1999, and
unexercised options held at December 31, 1999, by officers named in the summary
compensation table.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held at In-The-Money Options at
December 31, 1999 December 31, 1999
Shares Value ------------------------- -------------------------
Acquired on Realized Exercisable Unexercisable Exercisable Unexercisable
Name Exercise ($) (#) (#) ($) ($)
- ---- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Douglas S. Bennett...... -- -- -- -- -- --
Robert D. Ainsbury...... -- -- 109,375 140,625 125,781.25 161,718.75
Wilfredo M. Tejada...... 65,000 74,750.00 364,687 195,313 419,390.05 224,609.95
Mark H. Elder........... -- -- 42,395 102,605 42,629.25 82,120.75
Daniel S. Putterman..... -- -- 109,375 140,625 125,781.25 161,718.75
</TABLE>
The value of the unexercised in-the-money options at December 31, 1999 is
based on fair market value of $1.25 at December 31, 1999, as determined by the
board of directors, and is net of the exercise price of such options.
Employment Agreements with Executive Officers
On October 18, 1999, we entered into an agreement for the at-will employment
of Douglas S. Bennett as our president and chief executive officer. The
agreement provides that Mr. Bennett is entitled to an annual salary of $275,000
through December 31, 2000 plus a target bonus of no less than $125,000 per
year, with a pro-rata guarantee for 1999 at the rate of $2,403 per week. The
agreement also provides for the reimbursement of Mr. Bennett for his travel and
relocation expenses. The agreement also provides that upon a sale of all or
substantially all of our assets, or our merger or consolidation which
constitutes a change of control, he will receive his target bonus and any
remaining principal and accrued interest on the $500,000 forgivable portion of
the $700,000 that we agreed to loan him toward the purchase of a residence will
be fully forgiven. $500,000 of the loan and accrued interest will be subject to
forgiveness at the rate of 1/5 per year, with the first 1/5 forgiven on and as
of January 1, 2001 and each year thereafter. If Mr. Bennett's employment is
terminated by us for any reason other than for cause, or in the event of a
constructive termination, death or disability, he will be entitled to receive
his base salary for a period of one year. Furthermore, Mr. Bennett will have
the option to enter into a consulting agreement with us for a period of one
year.
On January 1, 1999, we entered into an at-will employment agreement with
Robert D. Ainsbury. The agreement provides that Mr. Ainsbury is entitled to an
annual salary of $175,000, plus a discretionary bonus of up to 20% of his base
salary. If we terminate Mr. Ainsbury's employment for any reason other than for
cause, or in the event of a constructive termination, death or disability, he
will be entitled to receive his base salary for a period of one year. The
agreement also provides that any successor to us will assume our obligations
under the agreement. As of February 1, 2000, Mr. Ainsbury's annual salary was
increased to $200,000.
48
<PAGE>
On January 1, 1999, we entered into an at-will employment agreement with
founder Willie M. Tejada. The agreement provides that Mr. Tejada is entitled to
an annual salary of $150,000, plus a discretionary bonus of up to 20% of his
base salary. If we terminate Mr. Tejada's employment for any reason other than
for cause, or in the event of a constructive termination, death or disability,
he will be entitled to receive his base salary for a period of one year. The
agreement also provides that any successor to us will assume our obligations
under the agreement. As of February 1, 2000, Mr. Tejada's annual salary was
increased to $175,000.
On October 6, 1999, we entered into an at-will employment agreement with
Daniel Putterman. The employment agreement provided for Mr. Putterman's
employment as our president, chief executive officer and chairman of the board
of directors until our hiring of a new president or chief executive officer. As
president, chief executive officer and chairman of our board of directors,
Mr. Putterman was entitled to an annual salary of $175,000 and an annual cash
bonus of up to twenty percent of his base salary and severance benefits of 120%
of his salary in the event of his termination without cause or constructive
termination. Pursuant to the terms of his employment agreement, his employment
with us terminated at the hiring of Mr. Bennett and he became a consultant for
us as of October 22, 1999. Pursuant to the consulting provisions of his
employment agreement, Mr. Putterman has agreed to provide, at our request,
eight hours per week of consulting services to us for a twelve month period
commencing on October 22, 1999 in exchange for payments of $4,000 each month
and additional payments of $150 per hour for each additional hour of consulting
services he provides.
1996 Stock Option Plan
Our 1996 stock option plan was adopted by the board of directors and approved
by the stockholders on December 15, 1996. The 1996 plan provides for grants to
our employees of incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended, and for grants of nonstatutory
stock options and stock purchase rights to our employees and consultants,
including non-employee directors. We have discontinued use of our 1996 plan for
new grants.
Not including the shares that were returned to our pool of authorized and
unreserved shares when we determined to discontinue use of the 1996 plan, we
reserved a total of 2,759,699 shares of common stock for issuance under the
1996 plan. As of March 31, 2000, of those reserved shares, options to purchase
1,474,162 shares of common stock were outstanding under the 1996 plan and
1,285,537 shares had been issued upon exercise of previously granted options.
We have not granted any stock purchase rights under the 1996 plan.
The 1996 plan must be administered by our board of directors or a committee
of our board of directors. As of April 2000, the 1996 plan is administered by
our compensation committee. The administrator's powers include the ability to
determine the terms of the awards granted, including the exercise or purchase
price, the times when options or stock purchase rights may be exercised, any
vesting acceleration and any restrictions or limitations. The administrator
also has the power to select the individuals to whom awards will be granted.
The option exercise price of incentive stock options may not be less than 100%
of the fair market value of our common stock on the date of grant. The option
exercise price of nonstatutory stock options may not be less than 85% of the
fair market value of our common stock on the date the option is granted. In the
case of an incentive stock option granted to a person who at the time of the
grant owns stock representing more than 10% of the total combined voting power
of all classes of our stock, the option exercise price for each share covered
49
<PAGE>
by the option may not be less than 110% of the fair market value of a share of
our common stock on the date of grant of the option. The administrator
determines the term of an option in the specific option agreement; provided,
however, the term may not be longer than ten years. Furthermore, the maximum
term for an option granted to an optionee is five years, if at the time of the
grant the optionee owns more than 10% of the total combined voting power of all
classes of our stock. No option may be exercised by any person after its term
expires.
The 1996 plan provides that in the event of a merger or consolidation in
which we are not the surviving corporation, the sale of all or substantially
all of our assets or any other transaction which qualifies as a "corporate
transaction" under Section 425(a) of the Internal Revenue Code wherein our
stockholders give up all or substantially all of their equity interest in us,
the vesting of all options then outstanding under the 1996 plan will be
accelerated.
1999 Stock Plan
Our 1999 stock plan was initially adopted by the board of directors and
approved by the stockholders in February 26, 1999. A total of 6,290,300 shares
of common stock have been reserved for issuance under the 1999 plan. The 1999
plan provides for grants to our employees of incentive stock options and for
grants of nonstatutory stock options and stock purchase rights to our employees
and consultants, including non-employee directors. The 1999 plan must be
administered by our board of directors or a committee of our board of
directors. As of April 2000, the 1999 plan is administered by our compensation
committee.
The option exercise price of incentive stock options may not be less than
100% of the fair market value of our common stock on the date of grant. The
option exercise price of nonstatutory stock options may not be less than 85% of
the fair market value of our common stock on the date the option is granted. In
the case of an incentive stock option granted to a person who at the time of
the grant owns stock representing more than 10% of the total combined voting
power of all classes of our stock, the option exercise price for each share
covered by the option may not be less than 110% of the fair market value of a
share of our common stock on the date of grant of the option. The term of an
option is determined by the administrator in the specific option agreement;
provided, however, the term may not be longer than ten years. Furthermore, the
maximum term for an option granted to an optionee is five years if at the time
of the grant the optionee owns more than 10% of the total combined voting power
of all classes of our stock. No option may be exercised by any person after its
term expires.
In the event of a sale of all or substantially all of our assets, or our
merger, consolidation or other capital reorganization, each option and stock
purchase right under the 1999 plan must be assumed or an equivalent option
substituted by the successor corporation unless the successor corporation does
not so agree. In that case, the options and rights will terminate upon the
consummation of the merger or sale of assets; provided, however, that in the
event of a transaction described above that is also a change of control, an
additional 25% of the shares underlying each outstanding option or stock
purchase right will vest and become exercisable upon the consummation of a
change of control. Some of the stock option agreements under our 1999 plan
provide that 100% of the shares underlying their outstanding options will vest
and become exercisable upon a change of control. The 1999 plan defines change
of control to mean a sale of all or substantially all of our assets, or our
merger or consolidation with or into another corporation, other than a merger
or consolidation in which the holders of more than 50% of the shares of our
capital stock outstanding immediately prior to the transaction continue to hold
(either by the voting securities remaining
50
<PAGE>
outstanding or by their being converted into voting securities of the surviving
entity) more than 50% of the total voting power represented by our voting
securities, or the voting securities of the surviving entity, outstanding
immediately after the transaction.
On , 2000, our board of directors amended and restated our 1999 plan.
This amendment and restatement was approved by our stockholders on ,
2000. We have reserved a total of shares of common stock for issuance
under our 1999 plan. However, during the term of the plan, on each anniversary
of the date of , 2000, and each anniversary thereafter, the shares of
common stock authorized for issuance under the plan shall be increased by .
As of March 31, 2000, options to purchase 2,880,409 shares of common stock were
outstanding under the 1999 plan and we had issued 2,109,569 shares of common
stock under the 1999 plan and 143,102 shares of common stock upon exercise of
previously granted options.
As amended, the 1999 plan provides that each director who is not our employee
will receive automatic grants of stock options under the plan. At each
subsequent annual stockholder meeting after this offering at which they are re-
elected, each director who is not our employee will receive options to purchase
12,000 shares of our common stock which vest over three years, at the rate of
1/8th of the shares subject to the options on each quarterly anniversary of the
date of grant, commencing with the beginning of the ninth quarterly anniversary
of the date of grant. Each automatic grant will have an exercise price per
share equal to the fair market value per share of our common stock on the grant
date and will have a term of ten years, subject to earlier termination
following the optionee's cessation of board service.
Employee Stock Purchase Plan
Our employee stock purchase plan was adopted by the board of directors in
, 2000 and approved by the stockholders in , 2000. A total of
shares of common stock have been reserved for issuance under the plan. As of
the date of this prospectus, no shares have been issued under the plan. The
employee stock purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, contains consecutive six-month offering periods. The
offering periods generally start on May 1 and November 1 of each year, except
for the first offering period, which will commence on the effective date of
this offering and will end on , 2000.
Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, no employee may be granted a right
to purchase stock under the purchase plan (1) to the extent that, immediately
after the grant of the right to purchase stock, the employee would own, or be
treated as owning, stock possessing 5% or more of the total combined voting
power or value of all classes of our capital stock or (2) to the extent that
his or her rights to purchase stock under all of our employee stock purchase
plans accrues at a rate which exceed $25,000 worth of stock for each calendar
year. The amended plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's base compensation. Base
compensation is defined as the participant's gross base compensation. The
maximum number of shares a participant may purchase with respect to a single
offering period is shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the amended plan is 85% of the lesser of the fair market value
of the common stock at the beginning of the offering
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<PAGE>
period or at the end of the offering period. Participants may end their
participation at any time other than the final ten days of an offering period,
and they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us.
Rights to purchase stock granted under the purchase plan are not transferable
by a participant other than by will, the laws of descent and distribution, or
as otherwise provided under the purchase plan. The purchase plan provides that,
in the event of our merger with or into another corporation or a sale of
substantially all of our assets, each outstanding right to purchase stock may
be assumed or substituted for by the successor corporation.
The board of directors has the authority to amend or terminate our employee
stock purchase plan. However, no such action by the board of directors may
adversely affect any outstanding rights to purchase stock under the purchase
plan, except that the board of directors may terminate an offering period on
any exercise date if the board of directors determines that the termination of
the purchase plan is in the best interests of us and our stockholders.
Notwithstanding anything to the contrary, the board of directors may in its
sole discretion amend the purchase plan to the extent necessary and desirable
to avoid unfavorable financial accounting consequences.
Limitation on Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Our bylaws provide that we shall
indemnify each of its directors and officers against expenses, including
attorneys' fees, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding, arising by reason of the
fact that such person is or was our director or officer or serving as a
director or officer of another corporation, partnership, joint venture, trust
or other enterprise at our request. We have also entered into agreements to
indemnify our directors and executive officers.
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<PAGE>
RELATED-PARTY TRANSACTIONS
Since January 1, 1999, there has not been, nor is there currently proposed,
any transaction or series of transactions to which we were or are to be a part
in which the amount involved, exceeded or will exceed $60,000 and in which any
director, executive officer, holder of more than 5% of our common stock or any
member of the immediate family of any of the foregoing persons had or will have
a direct or indirect material interest other than compensation agreements and
other arrangements which are described under "Management" and the transactions
described below. We believe each of the transactions described below was
negotiated at arms-length and were on terms as favorable as those obtained from
disinterested third parties.
Preferred Stock
We issued an aggregate of 8,124,538 shares of Series A preferred stock in
private placements in April through August 1998 at a price of $0.87 per share.
Of those shares, we issued an aggregate of 2,147,530 shares in April 1998,
pursuant to the conversion of a portion of the outstanding principal of
convertible subordinated promissory notes which we issued on various dates from
July 1997 through April 1998. The purchasers of our Series A preferred stock
included, among others, the following holders of 5% or more of our stock,
directors, and entities associated with directors:
<TABLE>
<CAPTION>
Shares of
Series A
Purchaser Preferred Stock
--------- ---------------
<S> <C>
Bluestem Capital Partners II, L.P. .......................... 712,117
Marc A. Butlein.............................................. 46,455
Edgewater Private Equity Fund II, L.P. ...................... 3,467,061
Vision Capital L.P. ......................................... 1,261,680
</TABLE>
Mr. Allison, one of our directors, is a limited partner of Edgewater Private
Equity Fund Management, L.P., the general partner of Edgewater Private Equity
Fund II, L.P. Mr. Tellefsen, one of our directors, is a partner of Vision
Trans-Atlantic Limited, which is the general partner of Vision Partners L.P.,
which is the general partner of Vision Capital L.P. and Vision Extension L.P.
In April 1998, we issued an aggregate of 2,964,890 shares of common stock
pursuant to the conversion of an aggregate of $296,489.00 in convertible
subordinated promissory notes, which we issued on various dates from July 1997
through April 1998. The purchasers of our common stock included, among others,
the following holders of 5% or more of our stock, directors and entities
associated with directors:
<TABLE>
<CAPTION>
Shares of
Purchaser Common Stock
--------- ------------
<S> <C>
Marc A. Butlein................................................. 100,000
Edgewater Private Equity Fund II, L.P. ......................... 200,000
Vision Capital L.P. ............................................ 750,000
</TABLE>
In March 1999, we sold an aggregate of 2,194,666 shares of Series B preferred
stock at a price of $1.284 per share. The purchasers of our preferred stock
included, among others, the following holders of 5% or more of our stock and
entities associated with directors:
<TABLE>
<CAPTION>
Shares of
Series B
Purchaser Preferred Stock
--------- ---------------
<S> <C>
Bluestem Capital Partners II, L.P. .......................... 584,113
Edgewater Private Equity Fund II, L.P. ...................... 83,525
Vision Capital L.P. ......................................... 351,102
</TABLE>
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<PAGE>
In September 1999, we sold an aggregate of 2,898,706 shares of Series C
preferred stock at a price of $1.58 per share. The purchasers of our preferred
stock included, among others, the following holders of 5% or more of our common
stock and entities associated with directors:
<TABLE>
<CAPTION>
Shares of
Series C
Purchaser Preferred Stock
--------- ---------------
<S> <C>
Bluestem Capital Partners II, L.P. .......................... 749,683
Vision Capital L.P. ......................................... 249,458
</TABLE>
In October 1999, November 1999, December 1999 and January 2000, we sold an
aggregate of 15,170,333 shares of Series D preferred stock at a price of $2.14
per share. The purchasers of our preferred stock included, among others, the
following holders of 5% or more of our stock, directors, and entities
associated with directors:
<TABLE>
<CAPTION>
Shares of
Series D
Purchaser Preferred Stock
--------- ---------------
<S> <C>
Scott N. Flanders.......................................... 186,915
Seligman Communications and Information Fund, Inc. ........ 467,290
Seligman Investment Opportunities (Master) Fund-NTV
Portfolio................................................. 532,710
Seligman New Technologies Fund, Inc. ...................... 2,271,028
Vision Capital L.P. ....................................... 281,162
Vision Extension L.P. ..................................... 653,417
</TABLE>
Stock Options and Stock Issuances
From time to time since our inception in 1996, we have granted options to
purchase shares of our common stock, at exercise prices reflecting the fair
market value per share of our common stock on the date of grant as determined
by our board of directors, to the individuals that currently serve as our
executive officers and directors. On December 15, 1996, we granted Mr. Tejada
options to purchase 500,000 shares of common stock at a exercise price of $.10
per share. On August 28, 1997, we granted Mr. Tellefsen options to purchase
10,000 shares of common stock at a exercise price of $.10 per share. On March
27, 1998, we granted Messrs. Putterman, Ainsbury and Tejada options to purchase
250,000, 250,000 and 125,000 shares of common stock, respectively, at exercise
prices of $.10 per share. On May 18, 1998, we granted Mr. Elder options to
purchase 85,000 shares of common stock at an exercise price of $.10 per share.
On February 12, 1998, we granted Mr. Butlein options to purchase 225,000 shares
of common stock at an exercise price of $.10 per share. On August 17, 1999, we
granted Mr. Elder options to purchase 60,000 shares of common stock at an
exercise price of $.80 per share. On March 11, 2000 we granted Messrs. Allison,
Butlein, Flanders, Tellefsen and Elder options to purchase 24,000, 24,000,
36,000, 24,000 and 25,000 shares, respectively, of common stock at an exercise
price of $2.50 per share. The options granted to Messrs. Allison, Butlein and
Tellefsen are fully vested.
On November 13, 1996, we entered into stock purchase agreements with Mr.
Putterman and Mr. Ainsbury, pursuant to which we sold each of them 2,000,000
shares of common stock at a purchase price of $.025 per share. We have no
repurchase rights with respect to these shares.
On November 1, 1999, we issued 1,765,051 shares of our common stock at $.80
per share to Mr. Bennett pursuant to the terms of a restricted stock purchase
agreement under our 1999 stock plan. The shares are subject to repurchase by us
at the original purchase price in the event of the voluntary resignation by Mr.
Bennett from his employment or consulting relationship with us or the
termination by us for cause of Mr. Bennett's employment or consulting
relationship. This repurchase
54
<PAGE>
right lapses at the rate of 1/48th per month beginning on December 1, 1999.
Certain events will trigger the release of all of the shares from our
repurchase right.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors
and officers. These indemnification agreements require us to indemnify our
directors and officers to the fullest extent permitted by Delaware law. See
"Description of Capital Stock--Limitation on Directors' Liability and
Indemnification."
Loans to Executive Officers
On November 1, 1999, we loaned Mr. Bennett the $1,412,040.80 purchase price
for 1,765,051 shares of common stock issued under our 1999 stock plan pursuant
to the terms of a five-year promissory note whereby Mr. Bennett promised to pay
us the aggregate principal sum of $1,412,040.80, together with interest on the
sum of the outstanding principal balance, plus accrued but unpaid interest, at
a rate of 6.08% per annum compounded monthly. The promissory note is secured by
a pledge of the 1,765,051 shares of common stock pursuant to a pledge and
security agreement.
On January 28, 2000, we loaned Mr. Ainsbury $100,000 pursuant to the terms of
a three-year non-recourse promissory note whereby Mr. Ainsbury promised to pay
us the aggregate principal sum of $100,000, together with interest on the sum
of the outstanding principal balance, plus accrued but unpaid interest, at
5.73% per annum, compounded annually. The promissory note is secured by a
pledge of 63,292 shares of our common stock owned by Mr. Ainsbury pursuant to
the terms of a pledge and security agreement.
On January 28, 2000, we loaned Mr. Tejada $100,000 pursuant to the terms of a
three-year non-recourse promissory note whereby Mr. Tejada promised to pay us
the aggregate principal sum of $100,000, together with interest on the sum of
the outstanding principal balance, plus accrued but unpaid interest, at 5.73%
per annum, compounded annually. The promissory note is secured by a pledge of
63,292 shares of our common stock owned by Mr. Tejada pursuant to the terms of
a pledge and security agreement.
On October 6, 1999, we loaned Mr. Putterman $500,000 pursuant to the terms of
a three-year non-recourse promissory note whereby Mr. Putterman promised to pay
us the aggregate principal sum of $500,000, together with interest on the sum
of the outstanding principal balance, plus accrued but unpaid interest, at a
rate of 5.41% per annum compounded monthly. The promissory note is secured by a
pledge of 316,455 shares of our common stock owned by Mr. Putterman pursuant to
the terms of a pledge and security agreement.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides certain information as of March 31, 2000,
regarding the beneficial ownership of our common stock assuming the exercise of
all warrants to purchase preferred stock and the conversion of all outstanding
preferred stock into common stock upon the completion of this offering by:
. each person known by us to own beneficially more than five percent, in
the aggregate, of the outstanding shares of our common stock, assuming
the conversion of all outstanding preferred stock into common stock;
. each of our directors and our executive officers named in the "Summary
Compensation Table" who hold our securities; and
. all executive officers and directors as group.
The address for all executive officers and directors is c/o EoExchange, Inc.,
282 2nd Street, Suite 400, San Francisco, California 94105. Except as indicated
by footnote, we believe that the persons named in the table below, on the
information furnished by them, have sole voting and investment power for all
shares shown as beneficially owned by them.
Percent of beneficial ownership is based upon 39,205,785 shares of common
stock outstanding as of March 31, 2000, assuming the conversion of all of our
preferred stock into common stock, and shares of common stock outstanding
after this offering. Percentage of ownership is calculated pursuant to the
rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percent ownership of that person,
shares of common stock subject to options held by that person that are
currently exercisable or will become exercisable within 60 days after March 31,
2000 are deemed outstanding, while such shares are not deemed outstanding for
purposes of computing percent ownership by any other person.
56
<PAGE>
<TABLE>
<CAPTION>
Percent Ownership
Shares --------------------
Beneficially Before the After the
Name Owned Offering Offering
---- ------------ ---------- ---------
<S> <C> <C> <C>
Edgewater Private Equity Fund II, L.P. (1)... 3,774,568 9.6%
900 North Michigan Avenue, 14th Floor
Chicago, IL 60611
Vision Partners L.P. (2)..................... 3,577,694 9.1%
3000 Sand Hill Road, Bldg. 4, Suite 230
Menlo Park, CA 94025
J. & W. Seligman & Co. Incorporated (3)...... 3,271,028 8.3%
100 Park Avenue, 7th Floor
New York, NY
Bluestem Capital Partners II, L.P. .......... 2,045,913 5.2%
Bluestem Capital Company
122 S. Phillips Ave., Suite 300
Sioux Falls, SD 57014
Daniel S. Putterman (4)...................... 4,120,416 10.5%
Robert G. Allison (1)........................ 3,774,568 9.6%
Dag A. Tellefsen (2)......................... 3,577,694 9.1%
Robert D. Ainsbury (5)....................... 2,120,416 5.4%
Douglas S. Bennett........................... 1,765,051 4.5%
Wilfredo M. Tejada (6)....................... 494,791 1.3%
Marc A. Butlein (7).......................... 395,455 *
Scott N. Flanders............................ 186,915 *
Mark H. Elder (8)............................ 59,063 *
</TABLE>
- --------
* Less than 1%.
(1) Consists of 3,750,586 shares held by Edgewater Private Equity Fund II, L.P.
and options to purchase 24,000 shares of common stock held by Mr. Allison
and exercisable within 60 days of this offering that he has agreed to
transfer to Edgewater Private Equity Fund II, L.P. upon exercise. Mr.
Allison, a partner of Edgewater Private Equity Fund Management, L.P., the
general partner of Edgewater Private Equity Fund II, L.P., may be deemed to
have voting and investment power over the shares held by Edgewater Private
Equity Fund II, L.P. Mr. Allison disclaims beneficial interest in such
shares, except to the extent of his interest in Edgewater Private Equity
Fund Management, L.P.
(2) Consists of 3,546,819 shares held by Vision Capital L.P. and Vision
Extension L.P. and options to purchase 30,875 shares held by Mr. Tellefsen
and exercisable within 60 days of this offering that he has agreed to
transfer to Vision Capital L.P. upon exercise. Mr. Tellefsen is a partner
of Vision Partners L.P., Vision Trans-Atlantic Limited and Vision Extension
L.P. Vision Trans-Atlantic Limited is the general partner of Vision
Partners L.P., which is the general partner of Vision Capital L.P. and
Vision Extension L.P. Mr. Tellefsen disclaims beneficial interest in such
shares, except to the extent of his interests in Vision Partners L.P.,
Vision Trans-Atlantic Limited and Vision Extension L.P.
(3) Consists of 467,290 shares held by Seligman Communications and Information
Fund, Inc., 532,710 shares held by Seligman Investment Opportunities
(Master) Fund-NTV Portfolio and 2,271,028 shares held by Seligman New
Technologies Fund, Inc. J. & W. Seligman & Co. Incorporated is the
investment manager for Seligman Communications and Information Fund, Inc.,
Seligman Investment Opportunities (Master) Fund-NTV Portfolio and Seligman
New Technologies Fund, Inc., and has the power to vote and dispose of the
shares.
(4) Includes options to purchase 135,416 shares held by Mr. Putterman and
exercisable within 60 days of this offering and 1,985,000 shares owned of
record by Mr. Ainsbury that, pursuant to an irrevocable proxy, Mr.
Putterman has the power to vote. Mr. Ainsbury has retained investment power
with respect to the shares.
(5) Includes options to purchase 135,416 shares held by Mr. Ainsbury and
exercisable within 60 days of this offering.
(6) Includes options to purchase 79,791 shares held by Mr. Tejada and
exercisable within 60 days of this offering.
(7) Includes options to purchase 249,000 shares held by Mr. Butlein and
exercisable within 60 days of this offering.
(8) Consists of options to purchase 59,063 shares held by Mr. Elder and
exercisable within 60 days of this offering.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, our authorized capital stock will
consist of shares of common stock and shares of preferred stock. As
of , 2000, there were holders of record of common stock and
holders of record of preferred stock. The common stock and the preferred stock
each have a par value of $0.01 per share. As of March 31, 2000, there were
10,817,542 shares of common stock outstanding and 28,388,243 shares of
preferred stock outstanding, 8,124,538 of which are Series A preferred stock,
2,194,666 of which are Series B preferred stock, 2,898,706 of which are Series
C preferred stock and 15,170,333 of which are Series D preferred stock. As of
March 31, 2000, options to purchase 4,354,571 shares of common stock, a warrant
to purchase 25,862 shares of our Series A preferred stock and warrants to
purchase 427,070 shares of our Series D preferred stock were outstanding.
Concurrently with the completion of this offering, each outstanding share of
our preferred stock will be exchanged for and converted into one share of our
common stock. The following description of rights and preferences assumes this
conversion, including upon the exercise of the outstanding warrants described
above. Upon the closing of this offering, any outstanding warrants to purchase
Series A preferred stock and Series D preferred stock will be exercisable for
the same number of shares of common stock.
The following summary describes the material terms of our capital stock.
However, it does not purport to be complete and is qualified in its entirety by
reference to the actual terms of the capital stock contained in our certificate
of incorporation, bylaws and other agreements referenced below and by the
provisions of applicable Delaware law.
Common Stock
Holders of common stock are entitled to one vote for each share they hold as
prescribed by law. Subject to preferential rights with respect to any
outstanding preferred stock, holders of common stock are entitled to receive
ratably such dividends as may be declared by the board of directors out of
funds legally available therefor. See "Dividend Policy." In the event of our
liquidation, dissolution or winding up, our acquisition by another entity or
sale of all or substantially all of our assets, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and liquidation preferences of any outstanding shares of preferred stock.
Holders of common stock have no right to convert their common stock into any
other securities, nor do they have preemptive or other subscription rights. All
outstanding shares of common stock are fully paid and nonassessable. The rights
and preferences of the holders of common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock that we may designate in the future.
Preferred Stock
Upon the completion of this offering, all outstanding shares of Series A, B,
C and D preferred stock will automatically convert on a one-for-one basis into
common stock.
Upon the closing of this offering, we will be authorized to issue
shares of preferred stock, par value $0.01 per share, which may be issued from
time to time in one or more series. Following the closing of this offering, the
board of directors will be authorized to fix or alter from time to time the
designation, powers, preferences and rights granted upon, and the
qualifications, limitations or restrictions of, any wholly unissued series of
preferred stock, which may be greater than the rights of the common stock, and
to establish from time to time the number of shares
58
<PAGE>
constituting any such series. The board of directors will also be authorized to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of the
series then outstanding.
We believe that the board of directors' ability to issue preferred stock on
such a wide variety of terms will enable the preferred stock to be used for
important corporate purposes, such as financing acquisitions or raising
additional capital. However, it is not possible to state the actual effect of
the issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of this preferred stock. The effects might include, among other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control without further action by the
stockholders.
Registration Rights
Pursuant to the third amended and restated investors' rights agreement dated
October 18, 1999, holders of shares of common stock issued or issuable upon
conversion of Series A preferred stock, Series B preferred stock, Series C
preferred stock, and Series D preferred stock, including upon exercise of the
outstanding warrants to purchase our Series D preferred stock, are entitled to
the registration rights described below with respect to those shares of common
stock. Upon the completion of this offering, all shares of our outstanding
preferred stock will be automatically converted into an equal number of shares
of common stock.
Piggy-Back Registration. If we propose to register any of our or a holder's
common stock under the Securities Act solely for cash, other than a
registration on Form S-4, Form S-8 or any successors thereto, a registration in
which the only stock being registered is common stock issuable upon conversion
of debt securities which are also being registered, or any registration on any
form which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of the
registrable securities, such holders are entitled to notice of the proposed
registration and the opportunity to include their registrable securities in the
registration. If the registration involves an underwriting, the underwriters
have the right to limit shares proposed to be included in the registration and
underwriting by 20% of the total number of securities included in the
registration and underwriting, unless such offering is our initial public
offering in which case such holders may be excluded if no other stockholders'
securities are included.
Demand Registration. At any time after the earlier of six months after the
effective date of the first registration statement for a public offering of our
common stock or April 20, 2002, if the holders of a majority of such
registrable securities request that we file a registration statement, we are
required to use our best efforts to cause those shares to be registered,
subject to certain conditions and limitations. Such holders are each entitled
to two such demand registrations. If, in an underwritten public offering, the
underwriters require a limitation on the number of securities to be included in
the registration, then the number of shares of registrable securities that may
be included in the registration and underwriting will be allocated among
holders of registration rights in proportion, as nearly as practicable, to the
respective amounts of registrable securities held by the holders of
registration rights at the time of filing the registration statement.
59
<PAGE>
Registration on Form S-3. Such holders have the right to require us to
register all or a portion of their registrable securities on Form S-3 when this
form becomes available to us, provided that;
. the aggregate proceeds of such registration are expected to exceed
$500,000;
. we are not required to effect more than two such registrations in any
twelve-month period;
. we are not required to qualify to do business or to execute a general
consent to service of process in effecting such registration,
qualification or compliance; or
. it is not during the period ending 180 days after the effective date of a
registration statement subject to our obligations described above under
"Piggy-Back Registration."
In addition, if our president provides the rights holders with a certificate
stating that, in the good faith judgment of our board of directors, it would be
seriously detrimental to us and our stockholders for a Form S-3 registration to
be effected at that time, we have the right to defer the filing of the Form S-3
registration statement for a period of up to 120 days after receipt of the
request for registration. We cannot utilize this right more than one time in
any twelve month period.
Termination of Registration Rights. The registration rights terminate as to
any such holder five years following the closing of this offering or such time
as Rule 144 or another similar exemption under the Securities Act is available
for the sale of all of such holder's shares during a three month period without
registration.
Certificate of Incorporation, Bylaws and Statutory Provisions Affecting
Stockholders
Charter Provisions. Our certificate of incorporation and bylaws include the
following provisions that will become effective upon the closing of this
offering and that may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management:
. that all stockholder actions upon completion of this offering must be
effected at a duly called meeting of holders and not by consent in
writing;
. that special meetings of the stockholders may be called only by the board
of directors, or by the chairman of the board, or by the chief executive
officer or the president or vice president of the corporation;
. that our board of directors can issue up to shares of preferred
stock, as described under "--Preferred Stock" above;
. that there will be three classes of directors, approximately one-third of
whom would be elected each year, thus requiring any potential acquiror to
successfully complete two proxy contests in order to take control of the
board of directors;
. that advance notice must be given regarding the nomination of candidates
for election as directors and the presentation of stockholder proposals;
and
. that vacancies on the board of directors may be filled only by a majority
vote of the directors then in office.
60
<PAGE>
Statutory Provisions. We are a Delaware corporation and are subject to
Section 203 of the Delaware General Corporation Law, which generally prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the time
that the person became an interested stockholder, unless:
. before such time the board of directors of the corporation approved
either the business combination or the transaction in which the person
became an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested person owns at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares owned by persons who are
directors and also officers of the corporation and by certain employee
stock plans; or
. at or after such time the business combination is approved by the board
of directors of the corporation and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative
vote of at least 66-2/3% of the outstanding voting stock of the
corporation that is not owned by the interested stockholder.
A "business combination" generally includes mergers, asset sales and similar
transactions between the corporation and the interested stockholder, and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of the corporation's outstanding voting stock or
who is an affiliate or associate of the corporation and, together with his or
her affiliates and associates, has owned 15% or more of the corporation's
outstanding voting stock within three years.
The provisions of our certificate of incorporation, bylaws and the Delaware
General Corporation Law described above would make more difficult or discourage
a proxy contest or acquisition of control by a holder of a substantial block of
our stock or the removal of the incumbent board of directors. Such provisions
could also have the effect of discouraging an outsider from making a tender
offer or otherwise attempting to obtain control of us, even though such an
attempt might be beneficial to us and our stockholders.
Limitation of Director and Officers Liability. Our certificate of
incorporation limits the liability of our directors and officers, in their
capacity as agents to us to the fullest extent permitted by Delaware law.
Specifically, our directors and officers will not be personally liable for
expenses (including attorneys' fees), judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any proceeding,
arising by reason that such person is or was an agent of us, except for
liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions which involve intentional misconduct or a knowing
violation of law;
. under Section 174 of the Delaware General Corporation Law, which relates
to unlawful payments dividends or unlawful stock repurchases or
redemptions; or
. for any transaction from which the director derived an improper personal
benefit.
Indemnification Arrangements. Our certificate of incorporation provides that
our directors and officers shall be indemnified and provide for the advancement
to them of expenses in connection with actual or threatened proceedings and
claims arising out of their status as directors and officers to the fullest
extent permitted by the Delaware General Corporation Law. We expect to enter
into
61
<PAGE>
indemnification agreements with each of our directors and officers that will
provide them with rights to indemnification and expense advancement to the
fullest extent permitted under the Delaware General Corporation Law.
We believe that these provisions are necessary to attract and retain
qualified directors and officers. We have also entered into agreements to
indemnify our directors and officers.
Transfer Agent and Registrar
Upon the closing of this offering, will be the transfer agent and
registrar for the common stock.
Listing
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "EOEX."
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common stock
outstanding or shares if the underwriters exercise their over-allotment
option in full. The shares sold in the offering or shares if the
underwriters exercise their over-allotment option in full will be freely
tradable without restriction under the Securities Act, except for any such
shares held at any time by an "affiliate" of EoExchange, as this term is
defined under Rule 144 under the Securities Act.
We issued and sold the remaining 39,205,785 shares in private transactions.
These shares are "restricted securities" as defined in Rule 144 under the
Securities Act and may be publicly sold only if registered under the Securities
Act or sold in accordance with an applicable exemption from registration, such
as Rule 144. In general, under Rule 144, as currently in effect, a person who
has beneficially owned shares for at least one year, including an "affiliate,"
as that term is defined in Rule 144, is entitled to sell, within any three-
month period, a number of "restricted" shares that does not exceed the greater
of one percent of the then outstanding shares of common stock or the average
weekly trading volume during the four calendar weeks preceding the sale. Sales
under Rule 144 are subject to manner of sale limitations, notice requirements
and the availability of current public information about us. Rule 144(k)
provides that a person who is not deemed an "affiliate" and who has
beneficially owned shares for at least two years is entitled to sell those
shares at any time under Rule 144 without regard to the limitations described
above. Of the 39,205,785 remaining shares outstanding, affiliates beneficially
own approximately 16.6% of such shares. Of the shares owned by non-affiliates,
230,000 shares have been held by such non-affiliates in excess of two years.
Any employee, officer, director, advisor or consultant (who is a natural
person) of ours who purchased his or her shares pursuant to a written
compensatory plan or contract is entitled to rely on the resale provisions of
Rule 701, which permits non-affiliates to sell their Rule 701 shares without
having to comply with the public information, holding period, volume limitation
or notice provisions of Rule 144 and permits affiliates to sell their Rule 701
shares without having to comply with Rule 144's holding period restrictions, in
each case commencing 90 days after we become subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.
As of March 31, 2000, there were outstanding stock options to purchase an
aggregate of 4,354,571 shares of common stock. Following the offering, we
intend to file one or more registration statements on Form S-8 to register
shares of common stock reserved for issuance under the 1996 stock option plan,
the 1999 Stock Plan and the employee stock purchase plan, thus permitting the
resale of those shares by nonaffiliates in the public market without
restriction, subject to the satisfaction of applicable exercisability periods
and the agreements referred to below.
We, our officers and directors and certain stockholders and optionholders
have agreed subject to certain exceptions, not to sell or otherwise dispose of
any shares of our common stock for a period of 180 days from the date of this
prospectus without the prior written consent of FleetBoston Robertson Stephens
Inc. FleetBoston Robertson Stephens Inc., however, may in its sole discretion,
at any time without notice, release all or any portion of the shares subject to
lock-up agreements. The lock-up agreements by persons other than us cover an
aggregate of shares. Upon expiration of the 180-day lock-up period,
shares will be eligible for sale under Rule 144. additional shares will
be eligible for sale on January 21, 2001.
Prior to this offering, there has been no public market for the common stock.
We are unable to estimate the number of shares that may be sold in the future
by our existing stockholders or the effect, if any, that sales of shares by
such stockholders will have on the market price of the common stock prevailing
from time to time. Sales of substantial amounts of common stock by existing
stockholders could adversely affect prevailing market prices.
63
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc. and William Blair &
Company, L.L.C., have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock set forth below opposite their respective names. The
underwriters are committed to purchase and pay for all shares if any are
purchased.
<TABLE>
<CAPTION>
Number
of
Underwriter Shares
----------- ------
<S> <C>
FleetBoston Robertson Stephens Inc. ..................................
Chase Securities Inc. ................................................
William Blair & Company, L.L.C. ......................................
----
Total...............................................................
====
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price on the
cover page of this prospectus. The underwriters may sell shares to dealers at
that price less a concession of not in excess of $ per share, of which $
may be reallowed to other dealers. After this offering, the public offering
price, concession and reallowance to dealers may be reduced by the
representatives. No such reduction shall change the amount of proceeds to be
received by us as set forth on the cover page of this prospectus. The common
stock is offered by the underwriters or the terms discussed in this prospectus,
subject to receipt and acceptance by them and subject to their right to reject
any order.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
No Public Market. Prior to this offering, there has been no public market for
the common stock. Consequently, the public offering price for the common stock
offered by this prospectus has been determined through negotiations among the
representatives and us. Among the factors considered in such negotiations were
prevailing market conditions, our financial information, market valuations of
other companies that we and the representatives believe to be comparable to us,
estimates of our business potential, and the present state of our development.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to additional shares of common stock, to cover over-
allotments, if any, at the public offering price less the underwriting discount
set forth on the cover page of this prospectus. If the underwriters exercise
their over-allotment option to purchase any of the additional shares of
common stock, the underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof as the number
of shares to be purchased by each of them bears to the total number of shares
of common stock offered in this offering. If purchased, these additional shares
will be sold by the underwriters on the same terms as those on which the shares
offered hereby are being sold. We will be obligated to sell shares to the
underwriters to the extent the over-allotment option is
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<PAGE>
exercised. The underwriters may exercise the over-allotment option only to
cover over-allotments made in connection with the sale of the shares of common
stock offered in this offering.
The following table summarizes the compensation to be paid to the
underwriters by us:
<TABLE>
<CAPTION>
Total
-----------------------------
Per Without With
Share Over-allotment Over-allotment
----- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions
payable by us........................ $ $ $
</TABLE>
Expenses. We estimate expenses payable by us in connection with this
offering, other than the underwriting discounts and commissions referred to
above, will be approximately $ .
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including
liabilities under the Securities Act, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each of our executive officers and directors and
substantially all of our other stockholders have agreed, during the period of
180 days after the effective date of this prospectus, subject to specified
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of common
stock, or any securities convertible into or exchangeable for shares of common
stock owned as of the date of this prospectus or thereafter acquired directly
by those holders or with respect to which they have the power of disposition,
without the prior written consent of FleetBoston Robertson Stephens Inc.
However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at
any time or from time to time, without notice, release all or any portion of
the securities subject to lock-up agreements. There are no existing agreements
between the representatives and any of our stockholders who have executed a
lock-up agreement providing consent to the sale of shares prior to the
expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior consent of FleetBoston Robertson Stephens Inc., subject to
certain exceptions, consent to the disposition of any shares held by
stockholders subject to lock-up agreements prior to the expiration of the lock-
up period, or issue, sell, contact to sell, or otherwise dispose of, any shares
of common stock, any options or warrants to purchase any shares of common stock
or any securities convertible into, exercisable for or exchangeable for shares
of common stock other than our sale of shares in this offering, the issuance of
our common stock upon the exercise of outstanding options or warrants, and the
issuance of options under existing stock option and incentive plans provided
that those options do not vest prior to the expiration of the lock-up period.
Directed Share Program. The underwriters have reserved up to 7.5% of the
common stock to be issued by us and offered for sale in this offering, at the
initial public offering price, to directors, officers, employees, business
associates and persons otherwise connected to us. The number of shares of
common stock available for sale to the general public will be reduced to the
extent these individuals purchase reserved shares. Any reserved shares which
are not purchased will be offered by the underwriters to the general public on
the same basis as the other shares offered in this offering.
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act of 1933, some persons participating in
the offering may engage in transactions,
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<PAGE>
including stabilizing bids, syndicate covering transactions or the imposition
of penalty bids, that may have the effect of stabilizing or maintaining the
market price of the shares of common stock at a level above that which might
otherwise prevail in the open market. A "stabilizing bid" is a bid for or the
purchase of shares of common stock on behalf of the underwriters for the
purpose of fixing or maintaining the price of common stock. A "syndicate
covering transaction" is the bid for or purchase of common stock on behalf of
the common stock. A "syndicate covering transaction" is the bid for or purchase
of common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with the offering. A "penalty bid"
is an arrangement permitting the representatives to reclaim the selling
concession otherwise accruing to an underwriter or syndicate member in
connection with the offering if the common stock originally sold by such
underwriter or syndicate member purchased by the representatives in a syndicate
covering transaction and has therefore not been effectively placed by such
underwriter or syndicate member. The representatives have advised us that such
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the common stock being offered hereby will be passed upon for
us by Latham & Watkins, Menlo Park, California. Certain legal matters will be
passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San
Francisco, California. Attorneys of Latham & Watkins beneficially own an
aggregate of 15,823 shares of our stock and a partner of Latham & Watkins
serves as our secretary.
EXPERTS
The consolidated financial statements of EoExchange, Inc. as of December 31,
1998 and 1999, for the years ended December 31, 1997, 1998 and 1999, and the
financial statements of InGenius Technologies, Inc. as of October 22, 1999 and
for the period January 1, 1999 to October 22, 1999, included in this prospectus
have been so included in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
66
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act relating to the shares of common
stock offered by this prospectus. This prospectus does not contain all the
information provided in the registration statement, portions of which are
omitted as permitted by the rules and regulations of the Securities and
Exchange Commission. For further information about us and the shares offered by
this prospectus, you should refer to the registration statement, including the
exhibits and schedules filed with the registration statement. Statements made
in this prospectus regarding the contents of any contract or any other document
referred to in this prospectus or in the registration statement are not
necessarily complete, and in each instance reference is made to the copy of the
contract or document filed as an exhibit to the registration statement or other
document, each statement being qualified in all respects by that reference. You
may obtain copies of the registration statement of which this prospectus is a
part, together with the exhibits and schedules, upon payment of the fee
prescribed by the Securities and Exchange Commission, or you may examine these
documents without charge at the office of the Securities and Exchange
Commission.
After the offering is completed, we will be subject to the informational
requirements of the Securities Exchange Act of 1934 and will be required to
file annual and quarterly reports, proxy statements and other information with
the Securities and Exchange Commission. You can inspect and copy reports and
other information filed by us with the Securities and Exchange Commission at
the Securities and Exchange Commission's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may also obtain information on the
operation of the public reference room by calling the Securities and Exchange
Commission at 1-800-SEC-0300. The Securities and Exchange Commission also
maintains an Internet website at http://www.sec.gov that contains reports,
proxy and information statements regarding issuers, including us, that file
electronically with the Securities and Exchange Commission.
67
<PAGE>
EoEXCHANGE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
EoEXCHANGE, INC.
Audited Consolidated Financial Statements
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999.............. F-3
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1999........................................... F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Deficit for each of the three years in the period ended
December 31, 1999........................................................ F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1999........................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Unaudited Condensed Consolidated Financial Statements
Unaudited Consolidated Balance Sheets as of December 31, 1999 and March
31, 2000................................................................. F-22
Unaudited Consolidated Statements of Operations for the three months ended
March 31, 1999 and 2000.................................................. F-23
Unaudited Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 2000.................................................. F-24
Notes to Unaudited Condensed Consolidated Financial Statements ........... F-25
INGENIUS TECHNOLOGIES, INC.
Report of Independent Accountants......................................... F-30
Balance Sheet as of October 22, 1999...................................... F-31
Statement of Operations................................................... F-32
Statement of Changes in Stockholders' Deficit............................. F-33
Statement of Cash Flows................................................... F-34
Notes to Financial Statements............................................. F-35
UNAUDITED PRO FORMA FINANCIAL INFORMATION--EoEXCHANGE, INC. AND INGENIUS
TECHNOLOGIES, INC. COMBINED.............................................. F-39
Unaudited Pro Forma Combined Statement of Operations...................... F-40
Notes to Unaudited Pro Forma Combined Statement of Operations............. F-41
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of EoExchange, Inc.
(Formerly Aeneid Corporation)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, redeemable convertible preferred stock
and stockholders' deficit and cash flows present fairly, in all material
respects, the financial position of EoExchange, Inc. (formerly Aeneid
Corporation) at December 31, 1998 and 1999 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 auditing standards generally accepted in the United States,
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.
PricewaterhouseCoopers LLP
March 31, 2000
San Francisco, California
F-2
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,980 $ 21,709
Accounts receivable....................................... -- 325
Prepaid expenses and other current assets................. 376 799
------- --------
Total current assets.................................... 3,356 22,833
Note receivable ............................................ -- 500
Property and equipment, net................................. 423 1,337
Other assets................................................ 62 --
Intangibles, net............................................ -- 2,619
------- --------
Total assets............................................ $ 3,841 $ 27,289
======= ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Capital lease obligations, current........................ $ 8 $ 11
Bank borrowings........................................... 750 --
Accounts payable.......................................... 47 1,410
Accrued liabilities....................................... 356 498
Deferred revenue.......................................... 251 419
------- --------
Total current liabilities............................... 1,412 2,338
Capital lease obligations, long-term........................ 6 13
------- --------
Total liabilities....................................... 1,418 2,351
------- --------
Redeemable convertible preferred stock: $0.01 par value;
30,800,000 shares authorized; 8,124,538 and 25,121,333
shares issued and outstanding at December 31, 1998 and
1999....................................................... 7,068 58,469
------- --------
Stockholders' equity (deficit)
Common stock: par value $0.01; 51,500,000 shares
authorized; 7,551,890 and 10,063,374 shares issued and
outstanding at December 31, 1998 and 1999, 35,184,707
shares (unaudited) pro forma............................. 76 101
Additional paid-in capital................................ 379 --
Notes receivable from stockholders........................ -- (1,461)
Unearned stock-based compensation......................... -- (4,215)
Accumulated deficit....................................... (5,100) (27,956)
------- --------
Total stockholders' equity (deficit).................... (4,645) (33,531)
------- --------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity (deficit)............... $ 3,841 $ 27,289
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
For each of the three years in the period ended December 31, 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Revenues................................. $ -- $ 49 $ 496
Cost of revenues......................... -- 306 1,599
---------- ---------- -----------
Gross loss........................... -- (257) (1,103)
---------- ---------- -----------
Operating expenses:
Product development (exclusive of non-
cash compensation expense of $1,023).. 536 1,466 1,964
Sales and marketing (exclusive of non-
cash compensation expense of $1,184).. 214 1,158 3,263
General and administrative (exclusive
of non-cash compensation expense of
$845)................................. 389 888 1,715
Depreciation and amortization.......... 10 101 415
Stock-based compensation............... -- -- 3,052
---------- ---------- -----------
Total operating expenses............. 1,149 3,613 10,409
---------- ---------- -----------
Loss from operations..................... (1,149) (3,870) (11,512)
Interest income.......................... -- 70 214
Interest expense......................... (32) (51) (52)
---------- ---------- -----------
Net loss................................. (1,181) (3,851) (11,350)
Dividend paid to preferred stockholders
in connection with beneficial conversion
feature and accretion to redemption
value of preferred stock................ -- -- (21,770)
---------- ---------- -----------
Net loss attributable to common
stockholders............................ $ (1,181) $ (3,851) $ (33,120)
========== ========== ===========
Basic and diluted net loss per common
share................................... $ (0.28) $ (0.62) $ (4.27)
========== ========== ===========
Shares used in calculating basic and
diluted net loss per common share....... 4,213,562 6,187,626 7,748,963
========== ========== ===========
Proforma basic and diluted net loss per
common share (Note 17) (unaudited)...... $ (1.66)
===========
Shares used in calculating proforma basic
and diluted net loss per common share
(unaudited)............................. 19,924,000
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
For each of the three years in the period ended December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Redeemable
Convertible
Preferred Notes
Stock Common Stock Additional Receivable Unearned Total
-------------- ------------- paid-in from Stock-based Accumulated Stockholders'
Shares Amount Shares Amount Capital Shareholders Compensation Deficit Deficit
------ ------- ------ ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock................... -- $ -- 4,230 $ 42 $ 81 $ -- $ -- $ -- $ 123
Net loss................ (1,181) (1,181)
------ ------- ------ ---- ------- ------- ------- -------- --------
Balance at December 31,
1997.................... 4,230 42 81 -- -- (1,181) (1,058)
Issuance of common
stock................... 2,965 30 266 296
Exercise of common stock
options................. 357 4 32 36
Issuance of preferred
stock--Series A......... 8,125 7,000 --
Accretion on preferred
stock--Series A......... 68 (68) (68)
Net loss................ (3,851) (3,851)
------ ------- ------ ---- ------- ------- ------- -------- --------
Balance at December 31,
1998.................... 8,125 7,068 7,552 76 379 -- -- (5,100) (4,645)
Exercise of common stock
options................. 327 3 31 34
Deferred stock-based
compensation............ 7,478 (7,478) --
Amortization of deferred
stock-based
compensation............ 3,052 3,052
Stock-based compensation
for services............ 94 1 211 212
Issuance of common stock
in exchange for notes
receivable.............. 2,090 21 1,440 (1,461) --
Issuance of preferred
stock--Series B, net of
issuance costs of $8.... 2,195 2,809 --
Issuance of preferred
stock--Series C, net of
issuance costs of $54... 2,899 4,525 --
Issuance of preferred
stock--Series D, net of
issuance costs of
$2,654.................. 11,903 22,297 --
Beneficial conversion
feature of preferred
stock--Series D......... --
Accretion of preferred
stock................... 13,820 (10,264) (3,556) (13,820)
Dividend imputed on
beneficial conversion
feature................. 7,950 (7,950) (7,950)
Stock options issued in
connection with
acquisition............. --
Warrants issued in
connection with Series D
preferred stock......... 936 936
Net loss................ (11,350) (11,350)
------ ------- ------ ---- ------- ------- ------- -------- --------
Balance at December 31,
1999.................... 25,122 $58,469 10,063 $101 $ -- $(1,461) $(4,215) $(27,956) $(33,531)
====== ======= ====== ==== ======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For each of the three years in the period ended December 31, 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss.......................................... $(1,181) $(3,851) $(11,350)
Adjustments to reconcile net loss to net cash used
in operating activities
Interest expense recognized on converted notes
payable........................................ -- 69 --
Amortization of deferred compensation expense... -- -- 3,264
Depreciation and amortization................... 10 101 415
Changes in assets and liabilities
Accounts receivable........................... -- -- (299)
Prepaid expenses and other current assets..... (12) (364) (423)
Other assets.................................. -- (62) 63
Accounts payable.............................. -- 47 1,275
Accrued liabilities........................... 224 132 132
Deferred revenue.............................. -- 251 168
------- ------- --------
Net cash used in operating activities....... (959) (3,677) (6,755)
------- ------- --------
Cash flows from investing activities
Purchase of property and equipment................ (81) (429) (1,148)
Note receivable from officer...................... -- -- (500)
Payment for acquisition, net of cash acquired..... -- -- (2,710)
------- ------- --------
Net cash used in investing activities....... (81) (429) (4,358)
------- ------- --------
Cash flows from financing activities
Proceeds from preferred stock, net................ -- 5,132 30,567
Proceeds from common stock........................ 123 36 34
Payments on capital lease obligations............. (8) (2) (9)
Proceeds from convertible notes payable........... 925 1,170 --
Proceeds from (repayment of) bank borrowings...... -- 750 (750)
------- ------- --------
Net cash provided by financing activities... 1,040 7,086 29,842
------- ------- --------
Net increase in cash and cash equivalents... -- 2,980 18,729
Cash and cash equivalents at beginning of period.. -- -- 2,980
------- ------- --------
Cash and cash equivalents at end of period........ $ -- $ 2,980 $ 21,709
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
EoExchange, Inc. (the "Company"), formerly Aeneid Corporation, develops and
markets services for finding and monitoring information from the Internet.
Aeneid Corporation was incorporated in California on October 4, 1996. The
Company reincorporated in Delaware under the name of EoExchange, Inc., in March
2000. Expenses incurred during the period from October 4, 1996 (inception)
through December 31, 1996, were $54,000 and are included in the 1997
consolidated statement of operations. The Company earned no revenues in that
period.
The Company was in the development stage until 1999. Although no longer in
the development stage, the Company continues to be subject to the risks and
challenges similar to other companies in a comparable stage of development.
These risks include, but are not limited to, dependence on key individuals,
successful development and marketing of products, the ability to obtain
adequate financing to support growth, and competition.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Basis of presentation
The financial statements include the accounts of the Company and its wholly-
owned subsidiary (InGenius Technologies, Inc.) from October, 1999, the date of
acquisition. All significant intercompany balances and transactions have been
eliminated.
Revenue recognition
Revenues are derived from customer deployment fees, annual maintenance fees,
transaction fees and advertising on the Company's websites. Customer set-up
fees are received for the development and deployment of co-branded versions of
the Company's website. Deployment fees are generally billable upon the
deployment of the co-branded website and are recognized as revenue ratably over
the contract term, generally between one and three years. The costs incurred in
the deployment are generally insignificant. Annual maintenance fees are
received for the on-going maintenance of the customers' co-branded websites and
are recognized as revenue ratably over the life of the maintenance agreement.
Transactions fees are based on the number of search requests that are submitted
by the users of the customers' co-branded websites and are recognized as the
search transactions are provided. Advertising revenues generally are derived
from short-term advertising contracts. The Company uses third parties to place
advertisements. The Company shares the revenue, net of the fees charged by the
third parties, with customers that have co-branded versions of the Company's
website. The Company recognizes its share of the net revenues from the
advertisements when the advertisements have been delivered, and the fees are
fixed, determinable and collectible. All advertising revenues are derived from
cash transactions with third parties.
F-7
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Advertising expense
The Company expenses advertising costs as incurred. Advertising expenses for
1998 and 1999 were $7,000 and $797,000, respectively. There were no advertising
costs incurred in 1997.
Fair value of financial instruments
The reported amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash and cash equivalents and accounts receivable.
The Company limits its exposure to credit loss by placing its cash and cash
equivalents with high credit quality financial institutions.
Property and equipment
Property and equipment and leasehold improvements are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three to five years, or the lease term of
the respective assets, if shorter.
Intangible assets
Intangible assets consist of the technology acquired from InGenius (see Note
3), which is being amortized from the date of acquisition using the straight-
line method over the expected period of benefit, estimated at three years. The
Company assesses the recoverability of intangibles as well as other long-lived
assets, in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," which requires the Company to review the carrying
value of an asset for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset might not be recoverable. When
such an event occurs, the Company estimates the future undiscounted cash flows
expected to result from the use of the asset and its eventual disposition. If
the expected undiscounted future cash flows are less than the carrying amount
of the asset, an impairment loss is recognized.
Income taxes
Deferred taxes are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Valuation
allowances are provided if, based upon the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized.
F-8
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Product development
Product development costs and costs incurred in the design, creation, and
maintenance of content, graphics and user interface of the Company's websites
are expensed as incurred in accordance with Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Costs incurred in the development of underlying functionality,
software development tools and infrastructure of the websites are capitalized
and amortized over the useful life of the websites. In 1999 the Company
capitalized $446,000 of such costs.
Stock-based compensation
The Company accounts for stock-based compensation issued to employees using
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and provides pro forma disclosures as required under SFAS
No. 123 "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price of
the option. Stock, stock options and warrants for stock issued to non-employees
are accounted for in accordance with the provisions of SFAS No. 123 and
Emerging Issues Task Force ("EITF") Issue 96-18, "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
Business segments
The Company follows SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information." SFAS No. 131 requires publicly held companies to
report financial and other information about key revenue segments of the entity
for which this information is available and is utilized by the chief operating
decision maker. The Company conducts its business within one business segment
within the United States.
Comprehensive income
The Company follows SFAS No. 130, "Reporting Comprehensive Income," SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. There was
no difference between the Company's net loss and its comprehensive loss for any
of the periods presented in the accompanying consolidated statements of
operations.
Net loss per common share
Basic net loss per common share is computed by dividing the net loss
attributable to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share is computed by dividing the net loss attributed to common
stockholders for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
composed of common shares issuable upon the exercise of stock options and
warrants and upon conversion of preferred stock, are included in the diluted
net loss per common share calculation to the extent these shares are dilutive.
F-9
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the numerator and denominator used in the calculation of
basic and diluted net loss per common share follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Numerator
Net loss attributable to common
shareholders.................... $(1,181,000) $(3,851,000) $(33,120,000)
=========== =========== ============
Denominator
Weighted average common shares... 4,213,562 6,187,626 8,061,746
Weighted average unvested common
shares subject to repurchase.... -- -- (312,783)
----------- ----------- ------------
Denominator for basic and diluted
calculation..................... 4,213,562 6,187,626 7,748,963
----------- ----------- ------------
Basic and diluted net loss per
common share.................... $ (.28) $ (.62) $ (4.27)
=========== =========== ============
</TABLE>
The following weighted average common equivalent shares have not been
included in the calculation of diluted earnings per share because they are
anti-dilutive.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
------- --------- ---------
<S> <C> <C> <C>
Options to purchase common stock............... 582,293 1,718,153 2,028,559
Warrant to purchase convertible preferred
stock......................................... -- 14,880 71,770
------- --------- ---------
582,293 1,733,033 2,100,329
======= ========= =========
</TABLE>
Recent accounting pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. The Company
will be required to adopt SFAS No. 133 for the year ending December 31, 2001.
The Company does not currently hold any derivative instruments and do not
engage in hedging activities. Therefore, the Company expects the adoption of
SFAS No. 133 will not have a material impact on its financial position, results
of operations or cash flow.
In December 1999, the SEC staff released SAB No. 101, "Revenue Recognition in
Financial Statements." SAB 101 provides interpretive guidance on the
recognition, presentation, and disclosure of revenue in the financial
statements. SAB 101 must be applied to the financial statements no later than
the second quarter of 2000. The Company does not believe that the adoption of
SAB 101 will have a material affect on its financial position or results from
operations.
3. Acquisition of InGenius Technologies, Inc.
Effective October 22, 1999, the Company acquired InGenius Technologies, Inc.
("InGenius"). The total acquisition cost of $2,774,000 was paid in cash. The
acquisition was accounted for using the purchase method. Accordingly, the
results of operations for InGenius have been included in the Company's
consolidated statement of operations only from the date of acquisition.
F-10
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price was allocated to the acquired assets based on fair values
as follows (in thousands):
<TABLE>
<S> <C>
Net liabilities...................................................... $ (2)
Acquired technology.................................................. 2,776
------
Total.............................................................. $2,774
======
</TABLE>
The following unaudited pro forma consolidated financial information presents
the combined results of operations of the Company and InGenius as if the
acquisition had occurred on January 1, 1999, after giving effect to certain
adjustments, principally amortization of intangibles. This unaudited pro forma
consolidated financial information does not necessarily reflect the results of
operations that would have occurred had the acquisition been completed on
January 1, 1999 (in thousands, except per share amounts).
<TABLE>
<S> <C>
Revenues.......................................................... $ 620
========
Net loss attributable to common stockholders...................... $(34,465)
========
Basic and diluted net loss per common share....................... $ (4.45)
========
</TABLE>
4. Supplemental Noncash Investing And Financing Activity
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1997 1998 1999
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Noncash investing activity
Acquisition of property and equipment under capital
leases............................................... $ 24 $ -- $ --
Noncash financing activity
Conversion of notes payable into preferred stock--
Series A............................................. $ -- $1,869 $ --
Conversion of notes payable and accrued interest into
common stock......................................... $ -- $ 296 $ --
Issuance of common stock in exchange for stockholder
notes receivable..................................... $ -- $ -- $1,461
Stock-based compensation relating to employee option
grants............................................... $ -- $ -- $7,478
</TABLE>
5. Balance Sheet Components
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
----- ------
(in
thousands)
<S> <C> <C>
Property and equipment
Computer equipment and software............................... $ 463 $ 987
Furniture and fixtures........................................ 62 214
Leasehold improvements........................................ 9 59
Internally developed software................................. -- 446
----- ------
534 1,706
Less: accumulated depreciation and amortization............... (111) (369)
----- ------
$ 423 $1,337
===== ======
</TABLE>
F-11
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment includes $24,000 and $41,000 of computer equipment and
software under capital leases at December 31, 1998 and 1999, respectively.
Accumulated amortization of assets under capital leases totaled $10,000 and
$13,000 at December 31, 1998 and 1999, respectively.
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
----- ------
(in
thousands)
<S> <C> <C>
Prepaid expenses and other current assets
Prepaid advertising............................................ $ -- $ 424
Prepaid software license/search services....................... 336 249
Prepaid expenses and other current assets...................... 40 126
----- ------
$ 376 $ 799
===== ======
<CAPTION>
December 31,
------------
1998 1999
----- ------
(in
thousands)
<S> <C> <C>
Intangibles
Acquired technology............................................ $ -- $2,776
Less: accumulated amortization................................. (157)
----- ------
$ -- $2,619
===== ======
<CAPTION>
December 31,
------------
1998 1999
----- ------
(in
thousands)
<S> <C> <C>
Accrued liabilities
Compensation and benefits...................................... $ 2 $ 120
Service and support costs...................................... 300 260
Other.......................................................... 54 118
----- ------
$ 356 $ 498
===== ======
</TABLE>
6. Income Taxes
No provision for federal or state income taxes has been recorded for the
years ended December 31, 1996 through December 31, 1999 as the Company incurred
net operating losses, the benefit of which has been offset by a valuation
allowance as described below.
F-12
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Temporary differences which gave rise to significant portions of deferred tax
assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998 1999
----- ------- -------
<S> <C> <C> <C>
Net operating loss.................................. $ 400 $ 1,601 $ 4,978
Research and development credits.................... -- -- 341
Other............................................... -- -- 253
----- ------- -------
400 1,601 5,572
Valuation allowance................................. (400) (1,601) (5,572)
----- ------- -------
$ -- $ -- $ --
===== ======= =======
</TABLE>
Due to uncertainty of realizing the benefits of the deferred tax assets as
the Company has provided a full valuation allowance against its net deferred
tax assets. The valuation allowance increased by $1,201,000 and $3,971,000
during 1998 and 1999, respectively.
The difference between the Company's effective income tax rate and the
federal statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Statutory tax benefit..................................... $(1,309) $(3,860)
State taxes, net of federal benefit....................... -- (480)
Permanent differences..................................... -- 1,057
Research and development costs............................ -- (175)
Change in valuation allowance............................. 1,201 3,971
Other..................................................... 108 (513)
------- -------
$ -- $ --
======= =======
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $12,488,000 and $12,541,000 for Federal and California purposes,
respectively, available to reduce future taxable income, if any. These
carryforwards expire through 2019 and 2004 for Federal and California purposes,
respectively, if not utilized beforehand.
At December 31, 1999, the Company had research and development credit
carryforwards of approximately $235,000 and $162,000 for Federal and California
income tax purposes, respectively. The research and development credit
carryforwards expire beginning in the year 2018.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. In the event the Company has a change in ownership,
utilization of the carryforwards could be restricted.
F-13
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Borrowings
In June 1998, the Company signed an agreement with a bank for a $750,000
revolving credit line which expired in December 1999. Borrowings under the
credit agreement were at the bank's prime rate, and were collateralized by
substantially all of the Company's assets. All advances under the credit
agreement were repaid by December 4, 1999.
8. Commitments
Leases
The Company leases office space and equipment under non-cancelable operating
and capital leases with various expiration dates through 2003. Rent expense for
the period from October 4, 1996 (Inception) through December 31, 1997, and the
years ended December 31, 1998, and 1999 was $66,000, $88,000, and $250,000,
respectively.
Future minimum lease payments at December 31, 1999 under non-cancelable
operating and capital leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
-----------------
Capital Operating
Leases Leases
------- ---------
(in thousands)
<S> <C> <C>
2000....................................................... $14 $304
2001....................................................... 8 298
2002....................................................... 6 298
2003....................................................... -- 99
--- ----
Total minimum lease payments............................... 28 $999
====
Less: amount representing interest......................... 4
---
Present value of capital lease obligations................. 24
Less: current portion...................................... 11
---
Long-term portion of capital lease obligations............. $13
===
</TABLE>
9. Redeemable Convertible Preferred Stock
Redeemable Convertible Preferred Stock at December 31, 1999 consists of the
following:
<TABLE>
<CAPTION>
Proceeds
Shares Net of
---------------------- Liquidation Issuance
Series Authorized Outstanding Amount Costs
------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
A............................ 8,300,000 8,124,538 $ 7,068,000 $ 7,000,000
B............................ 2,500,000 2,194,666 2,818,000 2,809,000
C............................ 3,500,000 2,898,706 4,580,000 4,525,000
D............................ 16,500,000 11,903,423 25,473,000 23,233,000
---------- ---------- ----------- -----------
Total...................... 30,800,000 25,121,333 $39,939,000 $37,567,000
========== ========== =========== ===========
</TABLE>
F-14
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The holders of Redeemable Convertible Preferred Stock have various rights and
preferences as follows:
Voting
Each share of Redeemable Convertible Preferred Stock has voting rights equal
to an equivalent number of shares of Common Stock into which it is convertible
and votes together as one class with the Common Stock.
Dividends
Holders of Series A, Series B, Series C, and Series D Redeemable Convertible
Preferred Stock are entitled to receive noncumulative dividends at the per
annum rate of $0.087 per share, $0.1284 per share, $0.158 per share, and $0.214
per share, respectively, when and if declared by the Board of Directors. No
dividends on Redeemable Convertible Preferred Stock or common stock have been
declared by the Board through December 31, 1999.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets, the holders of Series A,
Series B, Series C, and Series D Redeemable Convertible Preferred Stock are
entitled to receive an amount of $0.87 per share, $1.284 per share, $1.58 per
share, and $2.14 per share, respectively, plus any declared but unpaid
dividends, prior to and in preference to any distribution to the holders of
common stock. Should the Company's legally available assets be insufficient to
satisfy these liquidation preferences, the funds will be distributed ratably
among the Series A, Series B, Series C, and Series D Redeemable Convertible
Preferred stockholders. Upon completion of the distribution to the Redeemable
Convertible Preferred stockholders, any assets remaining in the Company shall
be distributed to the holders of the common stock.
Conversion
Each share of Redeemable Convertible Preferred Stock is convertible into
common stock at the option of the holder, according to a stated conversion
ratio, subject to adjustment for dilution. Each share of Redeemable Convertible
Preferred Stock automatically converts into the number of shares of common
stock into which such shares are convertible at the then effective conversion
ratio upon: (1) the closing of a public offering of common stock at a per share
price of at least $4.00 with gross proceeds of at least $15,000,000, or (2) the
consent of the holders of at least 65% of the Redeemable Convertible Preferred
Stock.
Redemption
Series A, Series B, Series C, and Series D Redeemable Convertible Preferred
Stock is redeemable, at the sole discretion of the individual holders, at any
time beginning in April 2003. The redemption price shall be an amount per share
equal to the higher of (1) $0.87, $1.284, $1.58, and
F-15
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$2.14, respectively, as adjusted for stock dividends, stock splits,
combinations and recapitalizations or (2) the fair value of each share of
Redeemable Convertible Preferred Stock, as determined in good faith by the
Company's Board of Directors.
At December 31, 1999, the Company had sufficient shares of Common Stock
reserved for the conversion of the Redeemable Convertible Preferred Stock.
Preferred stock accretion
Shares of Series A, B, C, and D Redeemable Convertible Preferred Stock are
redeemable at the higher of the original issuance price or the fair market
value as determined by the Board of Directors at or any time after April, 2003.
Accordingly, the Company has valued the Redeemable Convertible Preferred Stock
at its fair value at the end of each period presented, with the periodic
differences recorded as preferred stock accretion. The Company recorded
preferred stock accretion of $13,820,000 for the year ended December 31, 1999
based on $2.14 per share being the estimated fair market values of shares of
such stock at December 31, 1999.
Beneficial conversion
The Company issued 5,345,789, 3,810,221 and 2,747,413 shares of Series D
Preferred Stock in October, November and December, 1999, respectively. All
shares were issued at $2.14 per share. In connection with the Company's Initial
Public Offering the fair value of the Company's common stock into which the
preferred stock is convertible in November and December was deemed to be in
excess of the price paid for the preferred shares. Accordingly, the Company has
recorded a dividend of $7,950,000 representing the difference between the cash
proceeds and the deemed fair market value of the common stock into which the
preferred stock is convertible, in accordance with EITF Issue 98-5 "Accounting
for Convertible Securities with Beneficial Conversion Features or Continently
Adjustable Conversion Ratios."
Warrants for convertible preferred stock
In June 1998, the Company granted a fully exercisable warrant to purchase
25,862 shares of Series A Redeemable Convertible Preferred Stock for $0.87 per
share in connection with a line of credit arrangement with a bank. Such
warrants are outstanding at December 31, 1999 and expire in June 2003. Using
the Black-Scholes Model, the Company determined that the fair value of the
warrant was insignificant at the date of grant.
In October, November, and December 1999, the Company granted fully
exercisable warrants to purchase 357,101 shares of Series D Redeemable
Convertible Preferred Stock for $2.14 per share in connection with the Series D
placement. The fair value of the warrants, $936,000, was determined by the
Black-Scholes Model applying an expected life of 10 years, a weighted average
risk-free interest rate of 6.11%, an expected dividend yield of zero percent
and a volatility of 50%, and was charged to cost of financing. Such warrants
are outstanding at December 31, 1999 and expire in the fourth quarter of 2009.
F-16
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Common Stock
At December 31, 1999, the Company had reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
Conversion of preferred stock:
Series A....................................................... 8,300,000
Series B....................................................... 2,500,000
Series C....................................................... 3,500,000
Series D....................................................... 16,500,000
Exercise of options.............................................. 4,772,115
Exercise of warrants............................................. 382,963
----------
35,955,078
==========
</TABLE>
The Company had not declared or paid any cash dividends as of December 31,
1999.
11. Stock Options
Stock option plans
Under the Company's 1996 Stock Option Plan and 1999 Stock Plan (together, the
"Plans"), the Company may grant stock options to employees and consultants of
the Company. Options granted under the Plans may be either incentive stock
options or nonqualified stock options. Incentive stock options ("ISO") may be
granted only to Company employees (including officers and directors who are
also employees). Nonqualified stock options ("NSO") may be granted to Company
employees and consultants. The Company has reserved 4,772,115 shares of Common
Stock for issuance under the plans.
Options under the Plans may be granted for periods of up to ten years
provided that (i) the exercise price of an ISO shall not be less than 100% and
85% of the estimated fair value of the shares on the date of grant,
respectively, and (ii) the exercise price of an ISO granted to a 10%
shareholder shall not be less than 110% of the estimated fair value of the
shares on the date of grant, respectively. Options granted under the Plans
generally vest ratably over four years. The Company has certain repurchase
rights and rights of first refusal on 1.7 million shares purchased under the
Plans at December 31, 1999.
F-17
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity under the Plans is as follows:
<TABLE>
<CAPTION>
Weighted
Shares Shares Average
available for grant under option Exercise Price
------------------- ------------ --------------
<S> <C> <C> <C>
Shares reserved for
issuance.................... 2,000,000 --
Options granted.............. (1,871,045) 1,871,045 $0.10
Options cancelled............ 275,000 (275,000) $0.10
---------- ---------
Balance at December 31, 1997... 403,955 1,596,045 $0.10
---------- ---------
Additional shares reserved... 2,125,000 --
Options granted.............. (1,479,132) 1,479,132 $0.10
Options exercised............ -- (357,000) $0.10
Options cancelled............ 240,477 (240,477) $0.10
---------- ---------
Balance at December 31, 1998... 1,290,300 2,477,700 $0.10
---------- ---------
Additional shares reserved... 3,500,000 --
Options granted.............. (2,024,051) 2,024,051 $0.71
Restricted stock granted
under the Plans............. (2,100,029) --
Options exercised............ -- (327,011) $0.11
Options cancelled............ 118,748 (187,373) $0.36
---------- ---------
Balance at December 31, 1999... 784,968 3,987,367 $0.40
========== =========
</TABLE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Exercisable Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life in Years Price Outstanding Price
--------- ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .10 2,334,209 8 $ .10 1,439,749 $ .10
.30 684,000 9.4 .30 68,750 .30
.80 179,520 9.6 .80 10,357 .80
1.25 789,638 9.8 1.25 52,492 1.25
--------- --------- ---- ----- --------- -----
$.10-1.25 3,987,367 8.75 $ .40 1,571,348 $ .40
========= =========
</TABLE>
Deferred stock-based compensation
In connection with certain employee and non-employee stock option grants
during 1999, the Company recorded deferred stock-based compensation totaling
$7,478,000 which is being amortized over the vesting periods of the related
options, generally four years. Amortization of this stock-based compensation
during 1999 totaled approximately $3,052,000.
The balance of the stock-based compensation recorded through December 31,
1999 will be amortized as follows: $2,661,000 in 2000; $1,160,000 in 2001;
$495,000 in 2002; and $110,000 in 2003.
F-18
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Minimum value disclosures
Had compensation cost for the Company's stock-based compensation plan been
determined based on the minimum value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss to common stockholders
As reported...................... $(1,181,000) $(3,851,000) $(33,120,000)
=========== =========== ============
Pro forma........................ $(1,181,000) $(3,865,000) $(33,145,000)
=========== =========== ============
Basic and diluted net loss per
common share...................... $ (0.28) $ (0.62) $ (4.27)
=========== =========== ============
Basic and diluted net loss per
common share--pro forma........... $ (0.28) $ (0.62) $ (4.28)
=========== =========== ============
</TABLE>
The Company calculated the value of each option on the date of grant using
the minimum value pricing method with the following assumptions: dividend yield
at 0%; weighted average expected option term of five years; risk free interest
rate of 5.5%, 5.7%, and 5.57% for the period from October 4, 1996 (inception)
through December 31, 1997, the year ended December 31, 1998 and the year ended
December 31, 1999, respectively. The weighted average minimum value of options
granted during the period from October 4, 1996 (inception) through December 31,
1997, the year ended December 31, 1998, and the year ended December 31, 1999
was $0.02, $0.03 and $0.49, respectively.
13. 401(k) Plan
Effective January 1, 1998, the Company adopted the Aeneid Corporation 401(k)
Savings and Retirement Plan (the "401(k) Plan") that qualifies as a deferred
salary arrangement under Section 401 of the Internal Revenue Code. Under the
401(k) Plan, participating employees may defer a portion of their pretax
earnings not to exceed $10,000 per year. The Company, at its discretion, may
make contributions for the benefit of eligible employees. The Company has made
no contributions through December 31, 1999.
14. Notes Receivable
In 1999, the Company advanced the Chairman and Founder $500,000
collateralized by shares of common stock of the Company. Interest is 5.41% per
annum, compounded monthly. The note, plus any accrued, but unpaid interest, is
due and payable October 2002.
On April 10, 1999, in connection with the purchase of common stock by an
employee, the Company received a full-recourse promissory note in amount of
$48,747, collateralized by the stock purchased. Interest is 5.28% per annum,
compounded annually. Principal and interest are due and payable on April 30,
2004.
F-19
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On November 1, 1999 in connection with the purchase of common stock by the
Company's chief executive officer, the company received a full-recourse
promissory note in the amount of $1,412,041, with interest at 6.08% per annum,
compounded annually. The note is collateralized by the stock purchased, and the
principal and any accrued but unpaid interest are due and payable on November
1, 2004.
15. Concentrations and Major Customers
In 1999, one customer accounted for 49% of net revenues; one other customer
accounted for 100% of net revenues in 1998 and 35% in 1999.
16. Subsequent Events
In January, 2000 the Company issued 3,266,910 shares of Series D Preferred
Stock at $2.14 per share. A beneficial conversion dividend of approximately
$6.5 million will be recorded in the first quarter of 2000 in connection with
such issuance.
In addition, as part of the preferred stock issuance the Company granted
69,969 warrants to purchase Series D preferred stock for $2.14 per share. The
fair value of the warrants is estimated at $331,000 using the Black-Scholes
Model applying an expected life of 10 years, a weighted average risk free
interest rate of 5.50%, an expected dividend yield of zero percent and a
volatility of 50%. The cost will be charged to cost of financing. The warrants
expire in January 2010.
In April 2000, the Board of Directors authorized the filing of a registration
statement on Form S-1 for an Initial Public Offering ("IPO") of the Company's
common stock.
17. Pro Forma Net Loss Per Common Share and Pro Forma Stockholders' Equity
(Unaudited)
Upon the closing the Company's IPO, the outstanding convertible preferred
stock at December 31, 1999 will be automatically converted into 25,121,333
shares of common stock. The pro forma effect of this conversion has been
presented as a separate column in the Company's consolidated balance sheet, as
if the conversion had occurred at December 31, 1999.
Pro forma basic and diluted net loss per common share for the year ended
December 31, 1999 has been computed using the weighted average number of common
shares outstanding, plus the effect of the conversion of preferred stock into
common stock on an as-if converted basis. Common equivalent shares, composed of
common shares issuable upon the exercise of stock options and warrants, are not
included in diluted net common loss per share as such shares are antidilutive.
F-20
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the numerator and denominator used in the calculation of
pro forma basic and diluted net loss per common share follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Net loss, attributable to common stockholders................. $(33,120)
========
Shares used in computing basic and diluted net loss per common
share........................................................ 7,749
Adjusted to reflect the effect of the assumed conversion of
convertible preferred stock from the date of issuance:
Series A convertible preferred stock........................ 8,125
Series B convertible preferred stock........................ 1,750
Series C convertible preferred stock........................ 770
Series D convertible preferred stock........................ 1,530
--------
Weighted averages shares used in computing pro forma basic and
diluted net loss per common share............................ 19,924
========
Pro forma basic and diluted net loss per common share......... $ (1.66)
========
</TABLE>
F-21
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
UNAUDITED CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and March 31, 2000
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
December 31, March 31, March 31,
1999 2000 2000
------------ ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 21,709 $ 24,161
Accounts receivable.................... 325 868
Prepaid expenses and other current
assets................................ 799 1,074
-------- --------
Total current assets................. 22,833 26,103
Notes receivable from officers........... 500 741
Property and equipment, net.............. 1,337 1,957
Intangibles, net......................... 2,619 2,373
-------- --------
Total assets......................... $ 27,289 $ 31,174
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Capital lease obligations, current..... $ 11 $ 11
Accounts payable....................... 1,410 2,056
Accrued liabilities.................... 498 371
Deferred revenue....................... 419 260
-------- --------
Total current liabilities............ 2,338 2,698
Capital lease obligations, long-term..... 13 10
-------- --------
Total liabilities.................... 2,351 2,708
-------- --------
Redeemable convertible preferred stock:
$0.01 par value; 30,800,000 shares
authorized; 25,121,333 and 28,388,243
shares issued and outstanding at
December 31, 1999 and March 31, 2000,
respectively............................ 58,469 71,695 $ --
-------- -------- --------
Stockholders' equity/(deficit)
Common stock: par value $0.01;
51,500,000 shares authorized;
10,063,374 and 10,817,542 shares
issued and outstanding at December 31,
1999 and March 31, 2000, respectively;
39,205,785 pro forma.................. 101 108 392
Additional paid-in capital............. -- -- 71,411
Notes receivable from stockholders..... (1,461) (1,461) (1,461)
Unearned stock-based compensation...... (4,215) (5,617) (5,617)
Accumulated deficit.................... (27,956) (36,259) (36,259)
-------- -------- --------
Total stockholders' deficit.......... (33,531) (43,229) $ 28,466
-------- -------- ========
Total liabilities, redeemable
convertible preferred stock and
stockholders' deficit............... $ 27,289 $ 31,174
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-22
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1999 and 2000
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 2000
--------- ----------
(unaudited)
<S> <C> <C>
Revenues................................................ $ 25 $ 1,007
Cost of revenues........................................ 188 521
--------- ----------
Gross profit (loss)................................. (163) 486
--------- ----------
Operating expenses:
Product development (exclusive of non-cash employee
compensation expense of $43 and $501)................ 447 941
Sales and marketing (exclusive of non-cash employee
compensation expense of $Nil and $410)............... 361 2,028
General and administrative (exclusive of non-cash
employee compensation expense of $3 and $855)........ 195 1,134
Depreciation and amortization......................... 47 361
Stock-based employee compensation..................... 46 1,766
--------- ----------
Total operating expenses............................ 1,096 6,230
--------- ----------
Loss from operations.................................... (1,259) (5,744)
Interest income......................................... 21 345
Interest expense........................................ (16) (2)
--------- ----------
Net loss................................................ (1,254) (5,401)
Dividend to preferred stockholders on beneficial
conversion feature and accretion to redemption value of
preferred stock........................................ (3,364) (6,507)
--------- ----------
Net loss attributable to common stockholders............ $ (4,618) $ (11,908)
========= ==========
Basic and diluted net loss per common share............. $ (0.61) $ (1.38)
========= ==========
Shares used in calculating basic and diluted net loss
per common share....................................... 7,552,160 8,642,175
========= ==========
Proforma basic and diluted net loss per common share
(Note 10).............................................. $ (0.33)
==========
Shares used in calculating proforma basic and diluted
net loss per common share ............................. 36,277,000
==========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-23
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1999 and 2000
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 2000
--------- ---------
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss................................................ $ (1,254) $ (5,401)
Adjustments to reconcile net loss to net cash used in
operating activities
Amortization of deferred compensation expense......... 46 1,833
Depreciation and amortization......................... 47 361
Interest receivable on loans to officers.............. -- (41)
Changes in assets and liabilities
Accounts receivable................................. -- (543)
Prepaid expenses and other current assets........... 65 (275)
Accounts payable.................................... 33 646
Accrued liabilities................................. (87) (127)
Deferred revenue.................................... (25) (159)
--------- ---------
Net cash used in operating activities............. (1,175) (3,706)
--------- ---------
Cash flows from investing activities
Purchase of property and equipment...................... (180) (735)
Loans to officers....................................... -- (200)
--------- ---------
Net cash used in investing activities............. (180) (935)
--------- ---------
Cash flows from financing activities
Proceeds from preferred stock, net...................... 2,809 7,005
Proceeds from common stock.............................. -- 91
Payments on capital lease obligations................... (2) (3)
--------- ---------
Net cash provided by financing activities......... 2,807 7,093
--------- ---------
Net increase in cash and cash equivalents......... 1,452 2,452
Cash and cash equivalents at beginning of period........ 2,980 21,709
--------- ---------
Cash and cash equivalents at end of period.............. $ 4,432 $ 24,161
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-24
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
EoExchange, Inc. (the "Company"), formerly Aeneid Corporation, develops and
markets services for finding and monitoring information from the Internet.
Aeneid Corporation was incorporated in California on October 4, 1996. The
Company reincorporated in Delaware under the name of EoExchange, Inc., in
March, 2000.
During 1999, the Company emerged from the development stage. Although no
longer in the development stage, the Company continues to be subject to the
risks and challenges similar to other companies in a comparable stage of
development. These risks include, but are not limited to, dependence on key
individuals, successful development and marketing of products, the ability to
obtain adequate financing to support growth, and competition.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Basis of presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements included herein have been prepared on a basis
consistent with prior periods' reported financial statements and include all
material adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation of the Company's financial position as of
March 31, 2000 and its results of operations and cash flows for the three
months ended March 31, 1999 and 2000. The results of operations and cash flows
for the three months ended March 31, 1999 and 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999 and 2000. These condensed unaudited financial statements should be read in
conjunction with the Company's audited consolidated financial statements for
the year ended December 31, 1999.
Certain information and footnote disclosures normally included in the
financial statements have been condensed or omitted pursuant to rules and
regulations of the Securities and Exchange Commission, however, the Company
believes that the disclosures in the unaudited condensed consolidated financial
statements are adequate to ensure that the information presented is not
misleading.
Net loss per common share
Basic net loss per common share is computed by dividing the net loss
attributable to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share is computed by dividing the net loss attributed to
F-25
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(Continued)
common stockholders for the period by the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent
shares, composed of common shares issuable upon the exercise of stock options
and warrants and upon conversion of preferred stock, are included in the
diluted net loss per common share calculation to the extent these shares are
dilutive.
A reconciliation of the numerator and denominator used in the calculation of
basic and diluted net loss per common share follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 2000
----------- ------------
(unaudited)
<S> <C> <C>
Numerator
Net loss attributable to common
shareholders............................... $(4,618,000) $(11,908,000)
=========== ============
Denominator
Weighted average common shares outstanding.. 7,552,160 10,260,138
Weighted average unvested common shares
subject to repurchase...................... -- (1,617,963)
----------- ------------
Denominator for basic and diluted
calculation................................ 7,552,160 8,642,175
=========== ============
Basic and diluted net loss per common
share...................................... $ (0.61) $ (1.38)
=========== ============
</TABLE>
Recent accounting pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. The Company
will be required to adopt SFAS No. 133 for the year ending December 31, 2001.
The Company does not currently hold any derivative instruments and do not
engage in hedging activities. Therefore, the Company expects the adoption of
SFAS No. 133 will not have a material impact on its financial position, results
of operations or cash flow.
In December 1999, the SEC staff released SAB No. 101, "Revenue Recognition in
Financial Statements." SAB 101 provides interpretive guidance on the
recognition, presentation, and disclosure of revenue in the financial
statements. SAB 101 must be applied to the financial statements no later than
the second quarter of 2000. The Company does not believe that the adoption of
SAB 101 will have a material affect on its financial position or results from
operations.
3. Borrowings
In June 1998, the Company signed an agreement with a bank for a $750,000
revolving credit line which expired in December 1999. Borrowings under the
credit agreement were at the then prime rate. The line of credit was secured by
substantially all of the Company's assets. All advances under the credit
agreement were repaid by December 4, 1999.
F-26
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(Continued)
4. Sale of Taxonomy License
In March 2000, the Company entered into an agreement to sell taxonomies to a
third party. This license gives the third party the right to use the taxonomies
of Internet sites developed by the Company for four industry sectors. The
Company has no obligations to provide ongoing maintenance or updates to these
taxonomies. At the same time, the Company entered into an agreement to purchase
a license to use the third party's software.
In the three months ended March 31, 2000, the Company recognized $660,000 in
revenue related to the delivery of two of the taxonomies. An additional
$660,000 will be due upon delivery of the remaining two taxonomies.
5. Redeemable Convertible Preferred Stock
Beneficial conversion
The Company issued 3,266,910 shares of Series D Preferred Stock in January,
2000 at $2.14 per share. In connection with the Company's Initial Public
Offering the fair value of the Company's common stock into which this preferred
stock is convertible was deemed to be in excess of the price paid for the
preferred shares. Accordingly, the Company has recorded a dividend of
$6,507,000 representing the difference between the cash proceeds and the deemed
fair market value of the common stock into which the preferred stock is
convertible, in accordance with EITF Issue 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Continently Adjustable
Conversion Ratios."
Warrants for convertible preferred stock
In January 2000, the Company granted fully exercisable warrants to purchase
69,969 shares of Series D Redeemable Convertible Preferred Stock for $2.14 per
share in connection with the Series D placement. Using the Black-Scholes
pricing model, the Company calculated the fair value of the warrants to be
$286,000, applying an expected life of ten years, a weighted average risk-free
interest rate of 5.50%, an expected dividend yield of zero percent and a
volatility of 50%. As such, the Company recognized $286,000 of Series D cost of
financing and additional paid-in-capital. Such warrants are outstanding at
March 31, 1999 and expire in the first quarter of 2010.
6. Unearned Stock-Based Employee Compensation
In connection with certain employee stock option grants during the three
months ended March 31, 1999 and 2000, the Company recorded unearned stock-based
compensation totaling $218,000 and $3,235,000, respectively, which is being
amortized over the vesting periods of the related options, generally four
years. Amortization of this stock-based compensation recognized during the
three months ended March 31, 1999 and 2000 totaled approximately $46,000 and
$1,766,000, respectively.
The total unearned stock-based employee compensation at March 31, 2000 will
be amortized as follows: $2,855,000 in 2000; $1,937,000 in 2001; $873,000 in
2002; and $232,000 in 2003.
F-27
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(Continued)
7. Stock Option Plans
Activity under the 1996 and 1999 stock option plans ("the Plans") is as
follows:
<TABLE>
<CAPTION>
Shares Weighted
available Shares Average
for grant under option Exercise Price
---------- ------------ --------------
<S> <C> <C> <C>
Balance at December 31, 1998..... 1,290,300 2,477,700 $0.10
---------- ---------
Additional shares reserved....... 3,500,000 --
Options granted.................. (2,024,051) 2,024,051 $0.71
Restricted stock granted under
the Plans....................... (2,100,029) --
Options exercised................ -- (327,011) $0.11
Options cancelled................ 118,748 (187,373) $0.36
---------- ---------
Balance at December 31, 1999..... 784,968 3,987,367 $0.40
Additional shares reserved ...... 1,500,000 -- --
Options granted ................. (1,141,833) 1,141,833 $2.36
Stock granted under the Plans.... (9,540) -- --
Options exercised ............... -- (744,128) $0.12
Options cancelled ............... 23,625 (30,501) $0.79
---------- ---------
Balance of March 31, 2000........ 1,157,220 4,354,571 $0.96
========== =========
</TABLE>
8. Notes Receivable
In 1999, the Company advanced the Chairman and Founder, $500,000
collateralized by shares of common stock of the Company. The stated interest
rate is 5.41% per annum, compounded monthly. The note, plus any accrued but
unpaid interest, is due and payable October 2002.
On April 10, 1999, in connection with the purchase of common stock by an
employee, the Company received a full-recourse promissory note in amount of
$48,747, collateralized by the stock purchased. The stated interest rate is
5.28% per annum, compounded annually. Principal and interest are due and
payable on April 30, 2004.
On November 1, 1999, in connection with the purchase of common stock by the
Company's chief executive officer, the company received a full-recourse
promissory note in the amount of $1,412,041, with a stated interest rate 6.08%
per annum, compounded annually. The note is collateralized by the common stock
of the Company, and the principal and any accrued but unpaid interest are due
and payable on November 1, 2004.
In January 2000, the Company advanced two officers of the Company $100,000
each, collateralized by shares of common stock of the Company. The stated
interest rate is 5.73% per annum, compounded monthly. The notes, and any
accrued but unpaid interest, is due and payable on January 28, 2003.
F-28
<PAGE>
EoEXCHANGE, INC.
(Formerly Aeneid Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(Continued)
9. Commitment
The company has entered into agreements to purchase software for total
consideration of $2,750,000, that is expected to be paid in the second quarter
of 2000.
10. Pro Forma Net Loss Per Common Share and Pro Forma Stockholders' Equity
Upon the closing of the Company's IPO, all outstanding convertible preferred
stock will be converted automatically into common stock. The pro forma effect
of this conversion has been presented as a separate column in the Company's
consolidated balance sheet, assuming the conversion had occurred as of March
31, 2000.
Pro forma basic and diluted net loss per common share have been computed as
described in Note 2 and also give effect to common equivalent shares from
preferred stock that will automatically convert upon the closing of the
Company's IPO (using the as-if-converted method).
A reconciliation of the numerator and denominator used in the calculation of
pro forma basic and fully diluted net loss per common share follows (in
thousands):
<TABLE>
<CAPTION>
Three Months
Ended
March 31, 2000
--------------
<S> <C>
Net loss attributable to common stockholder............... $(11,908)
========
Shares used in computing basic and diluted net loss per
common share............................................. 8,642
Adjusted to reflect the effect of the assumed conversion
of convertible preferred stock on the date of issuance:
Series A convertible preferred stock.................... 8,125
Series B convertible preferred stock.................... 2,195
Series C convertible preferred stock.................... 2,899
Series D convertible preferred stock.................... 14,416
--------
Weighted averages shares used in computing pro forma basic
and diluted net loss per common share.................... 36,277
========
Pro forma basic and diluted net loss per common share..... $ (0.33)
========
</TABLE>
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of InGenius Technologies, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, changes in stockholders' deficit and cash flows present fairly, in
all material respects, the financial position of InGenius Technologies, Inc. at
October 22, 1999 and the results of its operations and its cash flows for the
period from January 1, 1999 through October 22, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, 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 audit provides a reasonable basis
for the opinion expressed above.
As described in Note 9, Aeneid Corporation purchased 100% of the stock of
InGenius Technologies, Inc., effective October 22, 1999.
PricewaterhouseCoopers LLP
March 21, 2000
San Francisco, California
F-30
<PAGE>
INGENIUS TECHNOLOGIES, INC.
BALANCE SHEET
As of October 22, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 64,163
Accounts receivable, net of allowance for doubtful accounts of
$1,573......................................................... 26,134
Prepaid expenses and other current assets ...................... 1,005
-----------
Total current assets.......................................... 91,302
Property and equipment, net....................................... 24,391
-----------
Total assets.................................................. $ 115,693
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities........................ $ 88,040
Accrued payroll................................................. 4,909
Interest payable................................................ 5,833
Capital lease obligations, current.............................. 8,603
Advance from Aeneid Corporation................................. 100,000
Convertible loan payable........................................ 200,000
-----------
Total current liabilities..................................... 407,385
Capital lease obligations, net of current portion................. 10,468
-----------
Total liabilities............................................. 417,853
-----------
Commitments (Note 8)
Stockholders' deficit:
Common stock, $1 par value; 60,000 shares authorized; 53,915
shares issued and outstanding.................................. 53,915
Additional paid-in capital...................................... 692,835
Stock-based compensation........................................ 169,020
Accumulated deficit............................................. (1,217,930)
-----------
Total stockholders' deficit................................... (302,160)
-----------
Total liabilities and stockholders' deficit................... $ 115,693
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
INGENIOUS TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
For the period from January 1, 1999 through October 22, 1999
<TABLE>
<S> <C>
Revenue:
Net revenue....................................................... $ 123,655
Cost of revenue................................................... 119,942
----------
Gross profit.................................................... 3,713
----------
Operating expenses:
Consulting services............................................... 132,242
General and administrative........................................ 253,133
----------
Total operating expenses........................................ 385,375
----------
Loss from operations................................................ (381,662)
Interest expense, net............................................... (156,888)
----------
Net loss............................................................ $(538,550)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
INGENIUS TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the period from January 1, 1999 through October 22, 1999
<TABLE>
<CAPTION>
Common stock Additional
---------------- paid-in Stock-based Accumulated
Shares Par value capital compensation deficit Total
------ --------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998................... 53,915 $53,915 $499,710 $ -- $ (679,380) $(125,755)
Value of options issued
for:
Services.............. 112,680 112,680
Consulting............ 56,340 56,340
Forgiveness of accrued
payroll liability by
shareholders........... -- -- 193,125 -- -- 193,125
Net loss................ -- -- -- -- (538,550) (538,550)
------ ------- -------- -------- ----------- ---------
Balance at October 22,
1999................... 53,915 $53,915 $692,835 $169,020 $(1,217,930) $(302,160)
====== ======= ======== ======== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
INGENIUS TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
For the period from January 1, 1999 through October 22, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss........................................................... $(538,550)
Adjustments to reconcile net loss to net cash used in operating
activities:
Allowance for doubtful accounts.................................. 1,573
Options issued................................................... 169,020
Accretion in value of convertible loan........................... 150,000
Depreciation..................................................... 9,030
Changes in assets and liabilities:
Increase in accounts receivable................................ (10,455)
Increase in prepaid expenses and other current assets.......... (157)
Increase in accounts payable and accrued liabilities........... 71,531
Increase in accrued payroll.................................... 54,875
Increase in interest payable................................... 5,833
---------
Net cash used in operating activities........................ (87,300)
---------
Cash flows from financing activities:
Proceeds from issuance of note payable............................. 50,000
Proceeds from deferred advance..................................... 100,000
Payments on capital lease obligations.............................. (823)
---------
Net cash provided by financing activities.................... 149,177
---------
Net increase in cash and cash equivalents.......................... 61,877
Cash and cash equivalents, beginning of period..................... 2,286
---------
Cash and cash equivalents, end of period........................... $ 64,163
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
INGENIUS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Business
InGenius Technologies, Inc. (the "Company") was incorporated on August 8,
1996 as a Michigan profit corporation. The Company provides change monitoring
services which allow customers to monitor web-sites to identify substantive
changes, and to be notified electronically of such changes.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the 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 and cash equivalents
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less to be cash equivalents.
Fair value of financial instruments
The reported amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying values of convertible loan payable approximate fair
value.
Significant customers
For the period from January 1, 1999 through October 22, 1999, four customers
accounted for 45.3%, 14.4%, 12.5% and 10.2% of the Company's revenue.
Four of these customers accounted for 38.7%, 19.4%, 19.4% and 13.4% of the
Company's accounts receivable at October 22, 1999.
Property and equipment
Property and equipment are stated at cost and are depreciated on the
straight-line basis over their estimated useful lives of three years. Property
and equipment held under capital leases, which involve a transfer of ownership,
are amortized over the estimated useful life of the asset of three years, or
the life of the lease, if shorter. Major additions and improvements are
capitalized, while maintenance and repairs that do not improve or extend the
life of the assets are charged to operations. Upon retirement or sale, the cost
of assets disposed of and the related accumulated depreciation are removed from
the accounts and any resulting gain or loss is credited or charged to income.
F-35
<PAGE>
INGENIUS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Software development costs
Costs associated with the development of computer software are expensed prior
to establishment of technological feasibility and capitalized thereafter until
the product is available for general release to customers. No software
development costs were capitalized during the period from January 1, 1999
through October 22, 1999 since costs incurred subsequent to establishment of
technological feasibility were not significant.
Revenue recognition
Revenue from services is recognized monthly as the service is provided.
Revenue from the set-up of a customer's account is recognized over the
estimated life of the customer relationship.
Accounting for stock-based compensation
Employee stock awards under the Company's compensation plans are accounted
for in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related interpretations. The
Company provides the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), and related interpretations. Stock-based awards to nonemployees are
accounted for under the provisions of SFAS No. 123.
Income taxes
Deferred taxes are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Valuation
allowances are provided if, based upon the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized.
3. Balance Sheet
Property and equipment
<TABLE>
<S> <C>
Computer equipment................................................. $ 46,882
Less--accumulated depreciation..................................... (22,491)
--------
$ 24,391
========
</TABLE>
At October 22, 1999, property and equipment under capital leases consisted of
computer equipment with a cost basis of $20,287. Accumulated amortization of
property and equipment under capital leases totaled $1,856 at October 22, 1999.
4. Convertible Loan
In May 1999, a shareholder loaned the Company $50,000 pending receipt of
permanent funding. The loan is senior to all other indebtedness of the Company,
excluding trade debts, and provides for an interest rate of 7% per annum, with
all interest accumulating until the note is paid or converted. The loan is
convertible, at the option of the holder, into either special convertible
preferred stock or another form of a convertible loan after a subsequent equity
or debt financing of a specified level.
F-36
<PAGE>
INGENIUS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Upon conversion, the value of the preferred stock or convertible loan becomes
four times the initial loan amount. The loan is immediately convertible, at the
option of the holder, prior to a publicly underwritten equity offering, or upon
a sale of the Company approved by a majority of its shareholders.
As described in Note 9, Aeneid Corporation purchased the Company on October
22, 1999. The investor elected to convert the amount into a convertible loan
with an amount due of $200,000. The increase in the loan value was recorded as
interest expense.
5. Deferred Advance
In June 1999, the Company received a $100,000 nonrefundable deposit from
Aeneid Corporation. The deposit was given in anticipation of the acquisition of
the Company.
6. Stock Options
In June 1999, the Company issued an option to purchase 3,000 shares of the
Company's common stock at $1 per share. For financial reporting purposes, the
fair value of the stock exceeded the exercise price. As a result compensation
expense of $112,680 has been recorded in the period. The options fully vested
at October 22, 1999 as a result of the Company's acquisition by Aeneid
Corporation.
The pro-forma loss under the provisions of SFAS No. 123 is $541,550, using
the following assumptions:
<TABLE>
<S> <C>
Risk free interest rate......................................... 5.09%
Dividend yield.................................................. 0.00%
Weighted average life........................................... 6 months
</TABLE>
In June 1999, the Company issued an option to purchase 3,000 shares of the
Company's common stock for 50% of the estimated fair value per share. The
options, issued in exchange for services provided, were exercisable
immediately. The value of the compensation, $56,340, was charged to expense and
calculated using the Black Scholes Model with the following assumptions: no
dividend yield, a risk free interest rate of 5.09% volatility of 50% and an
expected term of three months.
7. Income Taxes
For the period from January 1, 1999 through October 22, 1999, no provision
for income taxes has been recorded as the Company incurred net operating
losses. Temporary differences that gave rise to significant portions of
deferred tax assets and liabilities are as follows.
<TABLE>
<S> <C>
Net operating loss carryforwards.................................. $ 234,097
Depreciation and amortization..................................... (11,292)
Accrued liabilities............................................... 558
Deferred compensation............................................. 59,921
---------
Net deferred tax assets........................................... 283,284
Deferred tax asset valuation allowance............................ (283,284)
---------
$ --
=========
</TABLE>
F-37
<PAGE>
INGENIUS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has provided a valuation allowance for the net deferred tax
assets since realization of any future benefit is not assured at October 22,
1999. The valuation allowance increased $184,742 during the period from January
1, 1999 through October 22, 1999.
The difference between the Company's effective income tax rate and the
federal statutory rate is as follows:
<TABLE>
<S> <C>
Statutory tax benefit............................................... (34.00)%
State taxes, net of federal benefit................................. (1.45)%
Change in valuation allowance....................................... 34.30 %
Other............................................................... 1.15 %
</TABLE>
At October 22, 1999, the Company had net operating loss carryforwards of
approximately $689,000 for federal purposes available to reduce future taxable
income, if any. These carryforwards expire in 2019 if not used beforehand.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may result in a limitation on the amount of
net operating loss carryforwards and research and development credit
carryforwards which can be used in future years.
8. Commitments
The Company leases certain computer equipment under three year noncancelable
capital leases.
Future minimum lease payments under capital leases at October 22, 1999 are as
follows:
<TABLE>
<CAPTION>
Capital
Year ending October 22, leases
----------------------- -------
<S> <C>
2000................................................................ $ 8,603
2001................................................................ 8,603
2002................................................................ 6,260
-------
Less: portion representing interest................................. (4,395)
-------
$19,071
=======
</TABLE>
9. Subsequent Event
Effective October 22, 1999, the Company was purchased by Aeneid Corporation
for $2.7 million in cash.
F-38
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION--EoEXCHANGE, INC. AND INGENIUS
TECHNOLOGIES, INC. COMBINED
Effective October 22, 1999, EoExchange, Inc. (formerly Aeneid Corporation)
(the "Company") acquired 100% of the stock of InGenius Technologies, Inc.
("InGenius"). The transaction was accounted for using the purchase method of
accounting and the results of InGenius were included in the results of the
Company from October 22, 1999, the effective date of the transaction.
The following unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1999 gives effect to the acquisition by the Company of
InGenius as if it had occurred on January 1, 1999. The statement has been
derived from the statement of operations of the Company for the year ended
December 31, 1999 and the statement of operations of InGenius for the period
from January 1, 1999 through October 22, 1999, both appearing elsewhere in this
Prospectus. The unaudited pro forma financial data is not necessarily
indicative of the results of operations of the Company, had the transactions
assumed therein occurred at the beginning of the period presented, nor are they
necessarily indicative of the results of operations which may be expected to
occur in the future. The unaudited Pro Forma Combined Statement of Operations
should be read in conjunction with the historical financial statements and
notes thereto of the Company and InGenius included elsewhere in this
Prospectus.
F-39
<PAGE>
EoEXCHANGE, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year ended December 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
EoExchange InGenius For
For the Year the Period From Pro Forma
Ended January 1, 1999 ---------------------
December 31, through Acquisition
1999 October 22, 1999 Adjustments Combined
------------ ---------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.................. $ 496 $ 124 $ -- $ 620
Cost of revenues.......... 1,599 120 13 1,732
--------- ----- ----- ---------
Gross profit (loss)... (1,103) 4 (13) (1,112)
--------- ----- ----- ---------
Operating expenses
Research and
development............ 1,964 110 7 2,081
Sales and marketing..... 3,263 76 -- 3,339
General and
administrative......... 1,715 67 15 1,797
Depreciation and
amortization........... 415 9 771 1,195
Stock-based
compensation........... 3,052 124 -- 3,176
--------- ----- ----- ---------
Total operating
expenses............. 10,409 386 793 11,588
--------- ----- ----- ---------
Loss from operations.. (11,512) (382) (806) (12,700)
--------- ----- ----- ---------
Interest income........... 214 -- -- 214
Interest expense.......... (52) (157) -- (209)
--------- ----- ----- ---------
Net loss.............. (11,350) (539) (806) (12,695)
Dividend and accretion
attributable to preferred
stockholders............. (21,770) -- -- (21,770)
--------- ----- ----- ---------
Net loss attributable
to common
stockholders......... $ (33,120) $(539) $(806) $ (34,465)
========= ===== ===== =========
Basic and diluted net loss
per common share......... $ (4.27) $ (4.45)
========= =========
Shares used in calculating
basic and diluted net
loss per common share.... 7,748,963 7,748,963
========= =========
</TABLE>
F-40
<PAGE>
EoEXCHANGE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Note A--Amortization of Intangibles
Reflects additional amortization expense from January 1, 1999 related to the
intangibles acquired in the purchase of InGenius. Acquired technology is being
amortized over a period of three years.
Note B--Additional Compensation Cost
Reflects additional compensation cost from January 1, 1999 related to the
employment agreements signed with two former InGenius founders.
Note C--Allocation of Purchase Price to Intangible Assets
The purchase price of InGenius was allocated to tangible net assets and
identifiable intangible assets. The fair value of tangible assets approximated
their historical book value at October 22, 1999. The identifiable intangible
asset of $2,776,000 was allocated to acquired technology and is being amortized
over an estimated life of three years.
Note D--Unaudited Pro Forma Combined Net Loss Per Share
Pro forma net loss reflects the impact of the adjustments above. Basic and
diluted net loss per common share (pro forma) is computed using EoExchange's
weighted-average number of shares of common stock outstanding.
F-41
<PAGE>
[EOEXCHANGE LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses to be paid by the Registrant in connection with the distribution
of the securities being registered are as set forth in the following table:
<TABLE>
<S> <C>
Securities and Exchange Commission Fee.............................. $18,216
NASD Filing Fee..................................................... 7,400
Nasdaq National Market Listing Fee..................................
*Legal Fees and Expenses............................................
*Accounting Fees and Expenses.......................................
*Printing Expenses..................................................
*Blue Sky Fees and Expenses.........................................
*Registrar and Transfer Agent Fees and Expenses.....................
*Miscellaneous......................................................
-------
*Total............................................................ $ --
=======
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director.
In addition, as permitted by the Delaware General Corporation Law, the
Registrant's Bylaws provide that:
(1) the Registrant will indemnify each of our directors and officers
against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such
person is or was our agent;
(2) the Registrant will have the power to indemnify each of our employees
and agents (other than directors and officers) against expenses (including
attorneys' fees), judgments, fines, settlements and other amounts actually
and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was our agent;
(3) the Registrant will pay expenses incurred in defending any action or
proceeding for which indemnification is required or permitted by the Bylaws
in advance of final disposition of the action or proceeding upon receipt of
an undertaking by or on behalf of the indemnified party to repay such
amount if ultimately he is not entitled to indemnification; and
(4) the rights conferred in the Bylaws are not exclusive and the
Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees.
We have entered into indemnification agreements with each of our directors
and officers.
The Bylaws permit the Registrant to purchase and maintain director and
officer liability insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or
II-1
<PAGE>
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
The Registrant has obtained a policy of directors' and officers' liability
insurance for its directors and officers to insure directors and officers
against the costs of defense, settlement or payment of a judgment under certain
circumstances.
Item 15. Recent Sales of Unregistered Securities
Since April 1, 1997, the Registrant has issued and sold unregistered
securities as follows:
(1) The Registrant issued an aggregate of 3,266,910 shares of Series D
preferred stock in a private placement on January 21, 2000. The
consideration received for such shares was $6,991,187.40.
(2) The Registrant issued a warrant to purchase 69,969 shares of Series D
preferred stock at an aggregate purchase price of $149,733.66 on January
21, 2000.
(3) The Registrant issued an aggregate of 2,747,413 shares of Series D
preferred stock in a private placement on December 23, 1999. The
consideration received for such shares was $5,879,468.82.
(4) The Registrant issued a warrant to purchase 82,422 shares of Series D
preferred stock at an aggregate purchase price of $176,383.08 on December
23, 1999.
(5) The Registrant issued an aggregate of 3,810,221 shares of Series D
preferred stock in a private placement on November 24, 1999. The
consideration received for such shares was $8,153,872.94.
(6) The Registrant issued a warrant to purchase 114,306 shares of Series
D preferred stock at an aggregate purchase price of $244,614.84 on November
24, 1999.
(7) The Registrant issued an aggregate of 5,345,789 shares of Series D
preferred stock in a private placement on October 18, 1999. The
consideration received for such shares was $11,439,988.46.
(8) The Registrant issued a warrant to purchase 160,373 shares of Series
D preferred stock at an aggregate purchase price of $343,198.22 on October
18, 1999.
(9) The Registrant issued an aggregate of 2,898,706 shares of Series C
preferred stock in a private placement in September 17, 1999. The
consideration received for such shares was $4,579,955.48.
(10) The Registrant issued an aggregate of 2,194,666 shares of Series B
preferred stock in a private placement on March 19, 1999. The consideration
received for such shares was $2,817,951.14.
(11) The Registrant issued an aggregate of 287,356 shares of Series A
preferred stock in a private placement on August 21, 1998. The
consideration received for such shares was $249,999.72.
(12) The Registrant issued a warrant to purchase 25,862 shares of our
Series A preferred stock at an aggregate purchase price of $22,499.94 on
June 4, 1998.
II-2
<PAGE>
(13) From April 1997 through February 1998, the Registrant granted
options to purchase an aggregate of 2,307,177 shares of common stock to
employees, consultants and directors with exercise prices of $0.10 per
share pursuant to the Registrant's 1996 stock option plan.
(14) The Registrant issued an aggregate of 8,124,538 shares of Series A
preferred stock in private placements in April through August 1998 for an
aggregate consideration of $7,068,348.06. Of those shares, the Registrant
issued an aggregate of 2,147,530 shares in April 1998, pursuant to the
conversion of a portion of the outstanding principal of convertible
subordinated promissory notes which we issued on various dates from July
1997 through April 1998.
(15) In April 1998, the Registrant issued an aggregate of 2,464,890
shares of common stock pursuant to the conversion of an aggregate of
$246,489.00 in convertible subordinated promissory notes, which the
Registrant issued on various dates from July 1997 through April 1998.
(16) From February 1999 through April 2000, the Registrant granted
options to purchase an aggregate of 3,284,384 shares of common stock to
employees, consultants and directors with exercise prices ranging from
$0.10 per share to $4.00 per share pursuant to the Registrant's 1999 stock
plan.
(17) In April 1999, the Registrant issued 324,978 shares of common stock
to an employee at $0.15 price per share pursuant to the Registrant's 1999
stock plan. In November 1999, the Registrant issued 1,765,051 shares of
common stock to an officer at $0.80 price per share pursuant to the
Registrant's 1999 stock plan. In November 1999, the Registrant issued
10,000 shares of common stock to a director at $1.25 price per share
pursuant to the Registrant's 1999 stock plan.
(18) In October 1999, the Registrant issued to consultants an aggregate
of 84,444 shares of common stock at purchase prices of $.80 per share.
(19) In October 1999, the Registrant granted options to purchase an
aggregate of 500,000 shares of common stock to employees with exercise
prices of $0.80 per share.
(20) In March 2000, the Registrant issued to consultants an aggregate of
9,540 shares of common stock at purchase prices of $2.50 per share.
The sales and issuances of these securities were exempt from registration
under the Securities Act pursuant to (1) Rule 701 promulgated thereunder on the
basis that these options were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to written contracts relating to
consideration, as provided by Rule 701, or (2) Section 4(2) thereof or
Regulation D promulgated thereunder, on the basis that the transactions did not
involve a public offering.
No underwriters were used in connection with these sales and issuances.
Appropriate legends were affixed to the stock certificates issued in the above
transactions. Similar legends were imposed in connection with any subsequent
sales of any such securities.
II-3
<PAGE>
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit Description
-------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Second Amended and Restated Certificate of Incorporation of the
Registrant.
*3.2 Bylaws of the Registrant.
*4.1 Form of Specimen Common Stock Certificate.
*5.1 Opinion of Latham & Watkins.
**9.1 Voting Agreement among the Registrant and certain of its
stockholders, dated April 20, 1998.
**9.2 Voting Agreement among the Registrant and certain of its
stockholders, dated October 6, 1999.
**10.1 Form of Indemnification Agreement between the Registrant and its
directors and officers.
*10.2 1996 Stock Option Plan of the Registrant.
*10.3 Employee Stock Purchase Plan of the Registrant.
*10.4 Amended and Restated 1999 Stock Plan of the Registrant.
**10.5 Third Amended and Restated Investors' Rights Agreement among the
Registrant and certain of its stockholders, dated October 18, 1999.
**10.6 Series D Preferred Stock Placement Agency Agreement between the
Registrant and BancBoston Robertson Stephens Inc., dated October 18,
1999.
**10.7 Second Amended and Restated Co-Sale and Management Agreement among
the Registrant and certain of its stockholders, dated September 17,
1999.
**10.8 Employment Agreement between the Registrant and Robert Ainsbury,
dated January 1, 1999.
**10.9 Employment Agreement between the Registrant and Wilfredo M. Tejada,
dated January 1, 1999.
**10.10 Employment Agreement between the Registrant and Daniel Putterman,
dated October 6, 1999.
**10.11 Employment Agreement between the Registrant and Douglas S. Bennett,
as amended, dated October 18, 1999.
**10.12 Pledge and Security Agreement between the Registrant and Douglas S.
Bennett, dated November 1, 1999.
**10.13 Promissory Note from Douglas S. Bennett to the Registrant, dated
November 1, 1999.
**10.14 Pledge and Security Agreement between the Registrant and Robert
Ainsbury, dated January 28, 2000.
**10.15 Non-Recourse Promissory Note from Robert Ainsbury to the Registrant,
dated January 28, 2000.
**10.16 Pledge and Security Agreement between the Registrant and Willie
Tejada, dated January 28, 2000.
**10.17 Non-Recourse Promissory Note from Willie Tejada to the Registrant,
dated January 28, 2000.
**10.18 Pledge and Security Agreement between the Registrant and Daniel
Putterman, dated October 6, 1999.
+**10.19 Non-Recourse Promissory Note from Daniel Putterman to the Registrant,
dated October 6, 1999.
**10.20 Agreement and Plan of Merger entered into as of October 22, 1999 by
and among the Registrant, Aeneid Merger Sub, Inc., InGenius
Technologies, Inc. and Julie Stock and Gary Stock.
**10.21 Amendment No. 1 to Agreement and Plan of Merger entered into as of
October 22, 1999 by and among the Registrant, Aeneid Merger Sub,
Inc., InGenius Technologies, Inc. and Julie Stock and Gary Stock.
*10.22 Lease Agreement between The Ronald and Barbara Kaufman Revocable
Trust and the Registrant, dated February 17, 1997.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
*10.23 Lease Amendment No. 1. between The Ronald and Barbara Kaufman
Revocable Trust and the Registrant, dated April 15, 1998.
*10.24 Lease Amendment No. 2. between The Ronald and Barbara Kaufman
Revocable Trust and the Registrant, dated February 11, 1999.
*10.25 Lease Amendment No. 3. between The Ronald and Barbara Kaufman
Revocable Trust and the Registrant, dated March 18, 1999.
*10.26 Lease Amendment No. 3. (sic) between The Ronald and Barbara Kaufman
Revocable Trust and the Registrant, dated December 5, 1999.
*10.27 Sublease Agreement between Intergraph Corporation and the Registrant,
dated October 26, 1999.
*10.28 Lease Agreement between Wesley C. Vande Streek and Barbara J. Ohs and
InGenius Technologies, Inc., dated October 31, 1996.
*10.29 Lease Agreement between Wesley C. Vande Streek and InGenius
Technologies, Inc., dated January 1, 1998.
*10.30 Lease Agreement by and between New Boston Moat Limited Partnership and
the Registrant, dated March 1, 2000.
**21.1 Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
*23.2 Consent of Latham & Watkins (included in Exhibit 5.1).
**24.1 Powers of Attorney (contained on the signature page of this
Registration Statement).
**27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Replaces previously filed exhibit.
Item 17. Undertakings
The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to 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 of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-5
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of San
Francisco, state of California, on April 27, 2000.
EoExchange, Inc.
/s/ Douglas S. Bennett
By: _________________________________
Douglas S. Bennett
President, Chief Executive Officer
and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by each of the following persons in the capacities
and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Douglas S. Bennett President, Chief Executive April 27, 2000
______________________________________ Officer, Chairman of the Board
Douglas S. Bennett of Directors (principal
executive officer)
* Vice President Finance, April 27, 2000
______________________________________ Treasurer and Assistant
Mark H. Elder Secretary (principal financial
and accounting officer)
* Director April 27, 2000
______________________________________
Robert G. Allison
* Director April 27, 2000
______________________________________
Mark Butlein
* Director April 27, 2000
______________________________________
Scott N. Flanders
* Director April 27, 2000
______________________________________
Daniel S. Putterman
* Director April 27, 2000
______________________________________
Dag A. Tellefsen
/s/ Douglas S. Bennett
*By: _________________________________
Douglas S. Bennett
Attorney-in-fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
-------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Second Amended and Restated Certificate of Incorporation of the
Registrant.
*3.2 Bylaws of the Registrant.
*4.1 Form of Specimen Common Stock Certificate.
*5.1 Opinion of Latham & Watkins.
**9.1 Voting Agreement among the Registrant and certain of its
stockholders, dated April 20, 1998.
**9.2 Voting Agreement among the Registrant and certain of its
stockholders, dated October 6, 1999.
**10.1 Form of Indemnification Agreement between the Registrant and its
directors and officers.
*10.2 1996 Stock Option Plan of the Registrant.
*10.3 Employee Stock Purchase Plan of the Registrant.
*10.4 Amended and Restated 1999 Stock Plan of the Registrant.
**10.5 Third Amended and Restated Investors' Rights Agreement among the
Registrant and certain of its stockholders, dated October 18, 1999.
**10.6 Series D Preferred Stock Placement Agency Agreement between the
Registrant and BancBoston Robertson Stephens Inc., dated October 18,
1999.
**10.7 Second Amended and Restated Co-Sale and Management Agreement among
the Registrant and certain of its stockholders, dated September 17,
1999.
**10.8 Employment Agreement between the Registrant and Robert D. Ainsbury,
dated January 1, 1999.
**10.9 Employment Agreement between the Registrant and Wilfredo Tejada,
dated January 1, 1999.
**10.10 Employment Agreement between the Registrant and Daniel Putterman,
dated October 6, 1999.
**10.11 Employment Agreement between the Registrant and Douglas S. Bennett,
as amended, dated October 18, 1999.
**10.12 Pledge and Security Agreement between the Registrant and Douglas S.
Bennett, dated November 1, 1999.
**10.13 Promissory Note from Douglas S. Bennett to the Registrant, dated
November 1, 1999.
**10.14 Pledge and Security Agreement between the Registrant and Robert
Ainsbury, dated January 28, 2000.
**10.15 Non-Recourse Promissory Note from Robert Ainsbury to the Registrant,
dated January 28, 2000.
**10.16 Pledge and Security Agreement between the Registrant and Willie
Tejada, dated January 28, 2000.
**10.17 Non-Recourse Promissory Note from Willie Tejada to the Registrant,
dated January 28, 2000.
**10.18 Pledge and Security Agreement between the Registrant and Daniel
Putterman, dated October 6, 1999.
+**10.19 Non-Recourse Promissory Note from Daniel Putterman to the Registrant,
dated October 6, 1999.
**10.20 Agreement and Plan of Merger entered into as of October 22, 1999 by
and among the Registrant, Aeneid Merger Sub, Inc., InGenius
Technologies, Inc. and Julie Stock and Gary Stock.
**10.21 Amendment No. 1 to Agreement and Plan of Merger entered into as of
October 22, 1999 by and among the Registrant, Aeneid Merger Sub,
Inc., InGenius Technologies, Inc. and Julie Stock and Gary Stock.
*10.22 Lease Agreement between The Ronald and Barbara Kaufman Revocable
Trust and the Registrant, dated February 17, 1997.
*10.23 Lease Amendment No. 1. between The Ronald and Barbara Kaufman
Revocable Trust and the Registrant, dated April 15, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
*10.24 Lease Amendment No. 2. between The Ronald and Barbara Kaufman
Revocable Trust and the Registrant, dated February 11, 1999.
*10.25 Lease Amendment No. 3. between The Ronald and Barbara Kaufman
Revocable Trust and the Registrant, dated March 18, 1999.
*10.26 Lease Amendment No. 3. (sic) between The Ronald and Barbara Kaufman
Revocable Trust and the Registrant, dated December 5, 1999.
*10.27 Sublease Agreement between Intergraph Corporation and the Registrant,
dated October 26, 1999.
*10.28 Lease Agreement between Wesley C. Vande Streek and Barbara J. Ohs and
InGenius Technologies, Inc., dated October 31, 1996.
*10.29 Lease Agreement between Wesley C. Vande Streek and InGenius
Technologies, Inc., dated January 1, 1998.
*10.30 Lease Agreement by and between New Boston Moat Limited Partnership and
the Registrant, dated March 1, 2000.
**21.1 Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
*23.2 Consent of Latham & Watkins (included in Exhibit 5.1).
**24.1 Powers of Attorney (contained on the signature page of this
Registration Statement).
**27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Replaces previously filed exhibit.
<PAGE>
EXHIBIT 10.19
NON-RECOURSE PROMISSORY NOTE
----------------------------
$500,000 San Francisco, California
October 6, 1999
For value received, the undersigned promises to pay Aeneid Corporation, a
California corporation (the "Company"), at its principal office the principal
-------
sum of $500,000, together with interest on the sum of the outstanding principal
balance, plus accrued but unpaid interest, at the rate of 5.41% per annum,
compounded monthly. Such principal and interest shall be due and payable on
October 6, 2002.
Principal and interest are payable in lawful money of the United States of
America. AMOUNTS DUE UNDER THIS NOTE MAY BE PREPAID AT ANY TIME WITHOUT INTEREST
OR PENALTY.
Should suit be commenced to collect any sums due under this Note, such sum
as the Court may deem reasonable shall be added hereto as attorneys' fees. The
makers and endorsers have severally waived presentment for payment, protest,
notice of protest, and notice of nonpayment of this Note.
This Note, which is non-recourse, is secured by a pledge of certain shares
of Common Stock of the Company owned by the undersigned and is subject to the
terms of a Pledge and Security Agreement between the undersigned and the Company
of even date herewith.
THIS NOTE IS NON-RECOURSE TO THE UNDERSIGNED. The Company shall look solely
to any collateral securing this Note for payment of any unpaid amounts due under
this Note, whether or not the value of such collateral is sufficient to
liquidate the entire amount due. The Company shall have no claim against the
undersigned for payment of any amount due under this Note other than to the
extent of the interest of the undersigned in the collateral securing this Note
in accordance with the aforementioned Pledge and Security Agreement.
In the event that any one or more provisions of this Note shall be held to
be illegal, invalid or otherwise unenforceable, the same shall not affect any
other provision of this Note, and the remaining provisions of this Note shall
remain in full force and effect.
This Note shall be governed by, and construed in accordance with, the laws
of the State of California without regard to conflicts of laws principles.
/s/ David Putterman
---------------------------
Daniel Putterman
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1, as
amended, of our report dated March 31, 2000 relating to the consolidated
financial statements of EoExchange, Inc., which appears in such Registration
Statement. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Registration Statement.
We also consent to the use in this Registration Statement on Form S-1, as
amended, of our report dated March 21, 2000 relating to the financial
statements of InGenius Technologies, Inc., which appears in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
April 24, 2000
