<PAGE>
Filed pursuant to Rule 424(b)(1)
Registration No. 333-68761
Prospectus
3,100,000 Shares
Common Stock
(Par value $.01 per share)
RoweCom Inc. is offering 3,100,000 shares of its common stock. This is our
initial public offering and no public market currently exists for our common
stock.
The common stock has been approved for quotation on the Nasdaq National Market
under the symbol "ROWE."
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
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Price to Underwriting Proceeds to
Public Discounts Company
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<S> <C> <C> <C>
Per Share $16.00 $1.12 $14.88
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Total $49,600,000 $3,472,000 $46,128,000
- -----------------------------------------------
</TABLE>
RoweCom has granted the underwriters the right to purchase up to an additional
465,000 shares of common stock to cover overallotments.
J.P. Morgan & Co.
CIBC Oppenheimer
Volpe Brown Whelan & Company
March 8, 1999
<PAGE>
ART
[Heading which reads "Connecting businesses with the world's most
comprehensive Internet source of books and subscriptions." On the left hand
side, a column of artwork depicting individuals in a corporate environment,
captioned "Business and Employees." On the right hand side, a column of
various magazine covers, captioned "Books and Subscriptions." Both columns
have arrows pointing towards a center circle which reads "RoweCom Business to
Business e-commerce." Below are corporate logos with the caption "Strategic
Alliances and Partners."]
[A listing of selected clients grouped by industry and various control
benefits for clients. Artwork depicting the Arthur Andersen kStore home page,
an example of a report generated by the kStore, and various magazine covers.]
[A listing of client benefits, such as convenience and cost savings, and
publisher benefits. Artwork depicting the kStore Web pages and various
magazine covers.]
[Artwork depicting the kStore transaction model with footnotes that describe
each step and various magazine covers.]
<PAGE>
Table of Contents
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Page
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Prospectus Summary.................................................... 1
Risk Factors.......................................................... 4
Forward-looking Statements............................................ 13
Use of Proceeds....................................................... 14
Dividend Policy....................................................... 14
Capitalization........................................................ 15
Dilution.............................................................. 16
Selected Financial Information........................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................................................ 19
</TABLE>
<TABLE>
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Page
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Business.............................................................. 28
Management............................................................ 38
Transactions Among Related Parties ................................... 45
Principal Stockholders................................................ 47
Description of Capital Stock.......................................... 49
Underwriting.......................................................... 52
Shares Eligible for Future Sale....................................... 54
Legal Matters......................................................... 55
Experts............................................................... 55
Available Information................................................. 55
Index to Consolidated Financial Statements............................ F-1
</TABLE>
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In deciding whether to buy our common stock, you should rely only on the
information contained in this prospectus. To understand this offering fully,
you should read this entire prospectus carefully, including the financial
statements and notes. We have included a brief overview of the most significant
aspects of the offering itself in the Prospectus Summary. However, individual
sections of the prospectus are not complete and do not contain all of the
information that you should consider before investing in RoweCom's common
stock. 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 the common stock.
We intend to furnish to our stockholders annual reports containing audited
financial statements and quarterly reports containing unaudited interim
financial information for the first three quarters of each fiscal year.
Until April 2, 1999, all dealers that buy, sell or trade RoweCom common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
(i)
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Prospectus Summary
RoweCom is the leading business-to-business provider of e-commerce solutions
for purchasing and managing the acquisition of magazines, newspapers, journals,
books and other printed sources of commercial, scientific and general interest
information and analysis. These products are referred to as "knowledge
resources" in the information industry and in this prospectus. We offer our
clients and their employees easy and convenient access to the largest catalog
of such knowledge resources on the Internet. We also provide businesses with a
highly effective means of managing and controlling purchases of knowledge
resources and reducing costs. We target clients in knowledge-intense
industries, such as financial and professional services, high technology and
healthcare, as well as selected academic and non-profit institutions.
Information has become increasingly critical in most industries. This has been
reflected by rapid growth in the quantity and degree of specialization of
knowledge resources, as well as in the number of employees utilizing such
resources. As a result, businesses are spending increasingly significant
amounts on knowledge resources. In addition, many individual employees purchase
knowledge resources directly from publishers or through consumer online
services rather than through a corporate library or centralized purchasing
group. Despite these changes, the means by which most businesses and
institutions acquire knowledge resources has not evolved significantly and
still involves a manually intensive, paper based process.
RoweCom's flagship product, the kStore(TM), addresses these problems by
facilitating decentralized purchasing of knowledge resources by businesses and
their employees while at the same time giving management the tools required to
effectively control knowledge resource purchases. The kStore provides
businesses with a single comprehensive source for the purchase of knowledge
resources, and allows individual employees to find, order, and pay for
knowledge resources quickly and conveniently. At the same time, the kStore
provides managers with detailed reports of knowledge resource purchases by
their employees, permits them to institute customized approval procedures, and
reduces the costs of purchasing knowledge resources.
RoweCom has grown rapidly since it began operations in 1994. RoweCom's revenues
have increased from $3.1 million in 1996 to $19.1 million in 1998. Most of this
growth has resulted from our direct selling efforts, which we intend to expand.
We have also increased the number of distribution channels available to us and
rapidly increased the size of our catalog through strategic alliances with
content providers and knowledge resource marketers. In August 1998, we entered
into a five-year agreement with barnesandnoble.com to combine and jointly
market our respective catalogs to business customers. We have also entered into
strategic alliances with NewSub Services, Intelisys Commerce and Publications
Research Group. These alliances generally allow us to share content with our
strategic partners, market one another's catalogs of knowledge resource titles
and share revenue. We plan to continue to pursue additional strategic
alliances.
We intend to maintain and strengthen our position as the leading business-to-
business provider of e-commerce solutions for purchasing and managing the
acquisition of knowledge resources. Key elements of our strategy include:
. Increasing our client base and the number of individuals accessing the
kStore from desktop computers at existing clients.
. Increasing the content and functionality of the kStore.
. Developing additional strategic alliances to increase our channels of
distribution and available content.
. Enhancing the kStore's brand recognition through Web based advertising,
traditional advertising and attendance and presentations at major trade
shows.
. Expanding internationally through alliances with, or acquisitions of,
foreign content providers.
In seeking to maintain and strengthen our competitive position, we face a
number of important challenges. Our business is not yet profitable--we had an
accumulated deficit of $13.9 million at December 31, 1998--and we need to
increase sales significantly if we are to become profitable. In addition, we
have not yet faced significant competition in the e-commerce, business-to-
business market from any other company providing a similar package of knowledge
resource content and management tools. We expect that such competition may
emerge in 1999 and could adversely affect our growth. For a discussion of risks
of investing in our common stock, see "Risk Factors," beginning on page 4.
1
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The Offering
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<C> <S>
Common Stock Offered......................... 3,100,000 shares
Common Stock Outstanding after the Offering.. 9,631,858 shares
Over-allotment Option........................ 465,000 shares
Use of Proceeds.............................. RoweCom will receive net
proceeds from this offering,
after deducting expenses, of
approximately $45.2 million, or
$52.1 million if the
underwriters purchase all of the
shares they are entitled to
purchase to cover over-
allotments. See "Underwriting."
We intend to use these proceeds
for working capital and general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol................ "ROWE"
</TABLE>
Unless otherwise indicated, the share information in the table above excludes
up to 465,000 shares that may be issued to the underwriters to cover over-
allotments. See "Underwriting."
The table reflects 5,005,678 shares of common stock issuable upon the
consummation of this offering as a result of the conversion of all outstanding
shares of all series of preferred stock of RoweCom, and the exercise of all
outstanding stock purchase warrants. See "Transactions Among Related Parties"
and "Principal Stockholders."
The table excludes 2,018,687 shares reserved for future issuance under
RoweCom's stock option and stock purchase plans and other options granted
outside of such plans. We have granted options to purchase 602,966 of such
shares and 163,584 of such options will be exercisable upon consummation of
this offering. See "Capitalization" and "Management--Stock Incentive Plans."
All references to shares of common stock in this prospectus reflect the impact
of a .34905-for-1 reverse stock split of the common stock declared by RoweCom's
board of directors on February 8, 1999.
--------------
Our principal executive office is located at 725 Concord Avenue, Cambridge,
Massachusetts 02138 and our telephone number is 617-497-5800. Our corporate Web
site address is http://www.rowe.com. Information contained on our Web site is
not part of this prospectus.
2
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Summary Financial Information
The following table contains summary consolidated financial data of RoweCom
which should be read together with RoweCom's consolidated financial statements
and related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Pro forma per share amounts in the table below reflect the common stock
outstanding during each period plus the common stock to be issued at the
closing of this offering in connection with the conversion of preferred stock
and the exercise of warrants. For a more complete explanation of how pro forma
per share amounts have been calculated, you should read "Selected Financial
Information."
The "Pro forma as adjusted" column in the second table below reflects the
conversion of preferred stock and exercise of warrants described above plus the
sale by RoweCom of 3,100,000 shares of common stock at an initial public
offering price of $16 per share. For a more complete explanation of how the
amounts in the "Pro forma as adjusted" column were calculated, you should read
"Selected Financial Information."
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<CAPTION>
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Year Ended December 31,
----------------------------------------------
1995 1996 1997 1998
---------- ---------- ---------- ----------
Dollars in thousands, except per
share data
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.......................... $ 324 $ 3,116 $ 12,890 $ 19,053
Cost of revenues.................. 323 3,083 12,701 18,736
---------- ---------- ---------- ----------
Gross profit.................. 1 33 189 317
Operating expenses:
Sales and marketing.............. 259 585 2,035 4,817
Research and development......... 149 532 584 1,631
General and administrative....... 171 351 751 1,561
---------- ---------- ---------- ----------
Total operating expenses........ 579 1,468 3,370 8,009
---------- ---------- ---------- ----------
Loss from operations.......... (578) (1,435) (3,181) (7,692)
Interest and other income, net.... 1 1 64 172
---------- ---------- ---------- ----------
Loss before income taxes...... (577) (1,434) (3,117) (7,520)
Provision for income taxes........ 8 16 137 109
---------- ---------- ---------- ----------
Net loss...................... $ (585) $ (1,450) $ (3,254) $ (7,629)
========== ========== ========== ==========
Basic and diluted pro forma net
loss per share................... -- -- -- $ (1.87)
Shares used in pro forma net loss
per share calculation............ 4,078,517
</TABLE>
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<CAPTION>
------------------------------------------------
As of December 31, 1998
----------------------------
As of December 31, Pro Forma
1997 Actual as adjusted
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<S> <C> <C> <C>
Dollars in thousands
Consolidated Balance Sheet
Data:
Working capital............... $ 185 $ 15,447 $60,875
Total assets.................. 2,108 20,284 65,712
Redeemable preferred stock.... 4,298 28,423 --
Total stockholders' (deficit)
equity....................... (3,768) (12,251) 61,600
</TABLE>
3
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Risk Factors
You should carefully consider the risks described below before deciding to
purchase shares of common stock. Although we believe that the risks and
uncertainties described below are the material risks currently facing our
company, such risks and uncertainties are not the only ones that we will face.
If any of the following risks occurs, our business, financial condition or
results of operations could be materially adversely affected. In such case, the
trading price of our common stock could decline, and you could lose all or part
of your investment.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including the risks described below and elsewhere in this prospectus.
See "Forward-looking Statements."
Risks Particular to RoweCom
We have had an extremely limited operating history and are subject to the risks
of start-up companies.
We began operations in 1994, did not generate significant revenues until March
1996 and began offering the kStore, our flagship product, in June 1997.
Consequently, we have an extremely limited operating history and our prospects
are subject to the risks and uncertainties frequently encountered by start-up
companies, particularly in the new and rapidly evolving markets for Internet
products and services. These risks include:
. the failure to maintain our leadership position through enhancement of
our services and catalog of magazines, newspapers, journals, books and
other knowledge resources;
. the failure to significantly and rapidly increase our client base;
. the development by competitors of services similar or superior to the
services we offer;
. the failure to increase penetration of our existing client base;
. the failure of businesses to widely adopt intranets and the Internet as
means for purchasing subscriptions and books; and
. the inability to identify, attract, retain and motivate qualified
personnel.
We may not be successful in addressing these risks and our failure to do so
could have a material adverse effect on our future results of operations and
financial condition.
We have a history of losses and will probably continue to incur net losses.
We have not achieved profitability on a quarterly or annual basis to date and
anticipate that we will continue to incur net losses for at least the near to
medium term. As of December 31, 1998, we had an accumulated deficit of $13.9
million. Although we have experienced revenue growth in recent periods, our
revenues may not continue at their current level or increase in the future. We
establish our expenditure levels for product development, sales and marketing
and other operating expenses based, in large part, on expected future revenues.
We currently expect to increase our operating expenses significantly in
connection with expansion of our sales and marketing operations and continued
development of our services and catalog. To the extent that these expenses are
not promptly followed by increased revenues, our future results of operations
and financial condition could be materially and adversely affected.
Our growth in revenue is not a reliable indicator of our prospects.
Our extremely limited operating history and the uncertain nature of the markets
in which we compete make the prediction of future results of operations
difficult or impossible. Therefore, our recent revenue growth should not be
taken as indicative of the rate of revenue growth, if any, that can be expected
in the future. We believe that period-to-period comparisons of our results
should not be relied upon as an indication of future performance.
We currently receive substantially all of our revenues from a single product--
the kStore.
We currently derive substantially all of our revenues from the kStore and we
expect that kStore-related revenues will continue to account for a significant
portion of our revenues for the foreseeable future. A decline in demand for the
kStore or the inability of the kStore to penetrate new markets as a result of
competition, technological change or other factors would have a material
adverse effect on our future results of operations and financial condition.
4
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Our prospects depend in part on the success of our strategic alliance with
barnesandnoble.com.
In August 1998, we entered into a strategic alliance agreement with
barnesandnoble.com llc. We are depending on this alliance for access to a broad
catalog of books to which we would not otherwise have access on comparable
terms. If this alliance does not generate significant levels of revenue, our
prospects would be adversely affected to a material extent. We have only
recently begun to put the alliance into practice and its benefits to RoweCom
have yet to be established. Under the agreement with barnesandnoble.com, we are
able to sell barnesandnoble.com's catalog of books and they are able to sell
our catalog of knowledge resources. For a description of the agreement, see
"Business--Strategic Alliances--barnesandnoble.com Relationship." The agreement
expires in five years, or may be terminated earlier by one or both of the
parties under certain circumstances, such as:
. material breach of the agreement;
. change of control other than an initial public offering by either party;
or
. failure to meet minimum sales targets.
Because we have only recently entered into this agreement, we cannot be sure
that the agreement will prove beneficial to us. In particular, we cannot be
sure that the barnesandnoble.com Business Solutions service, which commenced
operations in third quarter of 1998 and currently has a limited client base,
will generate a sufficient number of sales to make the strategic alliance
beneficial to RoweCom as a distribution channel. In addition, we cannot be
certain that the agreement will not be terminated prior to the initial five-
year term or renewed after five years. In the event the agreement is terminated
or not renewed, it is possible that we will not be able to develop a
relationship with another company to obtain access on comparable terms to the
catalog of books currently provided by barnesandnoble.com. If the agreement is
terminated or we are unable to renew the agreement or otherwise obtain access
to such content on acceptable terms, our future financial results could be
materially adversely affected.
We depend in part on unproven strategic alliances for growth.
We have recently entered into several other important strategic alliances and
our prospects depend significantly upon the development of these relationships.
These relationships are described under "Business--Strategic Alliances." If
these and any future strategic relationships into which we are able to enter do
not generate significant levels of revenue, or are terminated or expire, our
ability to become profitable could be adversely affected to a material extent.
We intend to continue to actively seek strategic partners and are relying on
such partnerships to generate a significant portion of RoweCom's growth in the
medium term. RoweCom's current strategic relationships are new and as yet
unproven.
If our marketing and content arrangements with our strategic partners were
lessened, curtailed, or otherwise modified, we might not be able to replace or
supplement such marketing efforts or the content provided by such partners
alone or with other companies. If these partners, which do not currently
compete with us, were to reduce their joint marketing activities with us,
further develop and market their own business-to-business service for
purchasing and managing the acquisition of subscriptions and books, or market
such services developed by a competitor, our business, results of operations
and financial condition would be materially and adversely affected.
Our prospects depend on our ability to succeed against intense competition in
the knowledge resource sales market.
The market for the sale of magazines, newspapers, journals, books and other
knowledge resources to businesses is intensely and increasingly competitive. We
cannot be certain that we will maintain our competitive position against
current and potential competitors, especially the significant number of such
competitors with greater name recognition and client bases and greater
financial, marketing, service, support, technical and other resources than we
have.
We have not yet had significant direct competition from other companies
offering a service for purchasing and managing the acquisition of subscriptions
and books with management control features comparable to those of the kStore.
However, we expect that such competition will develop in the short term and it
may have an adverse impact on our business. Many of our competitors may be able
to respond more quickly to new or emerging
5
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technologies and changes in client requirements, and to devote greater
resources to the development, promotion and sale of their service than we can.
It is possible that our current or potential competitors will develop Internet-
based services superior to those we have developed or adapt more quickly than
we have to new technologies, evolving industry trends or changes in client
requirements. Our market is still evolving and we cannot be certain that we
will be able to compete successfully with current or future competitors, or
that competitive pressures faced by us will not have a material adverse effect
on our future results of operations and financial condition. See "Business--
Competition in the Knowledge Resource Industry."
We rely on a small number of clients and industries for substantially all of
our revenues.
A small number of our clients account for a substantial amount of our revenues.
Any failure by one or more of these clients to purchase knowledge resources
through the kStore could have a material adverse effect on our results of
operations and financial condition. Our five largest clients accounted for
32.3% and 29.4% of our revenues in 1997 and 1998, respectively. Our revenues
also are highly concentrated in a small number of industries. Clients in the
high technology sector were responsible for 26.6% of our revenues in 1998 and
17.6% in 1997. Clients in the health services sector were responsible for 31.0%
of revenues in 1998 and 33.2% in 1997. We cannot be certain that our top five
clients, or other clients, will continue to purchase knowledge resources
through the kStore or any other RoweCom service. In addition, our dependence on
clients in the high technology and health services sectors makes us vulnerable
to downturns in those sectors. Such a downturn could lead our clients in those
sectors to reduce their level of knowledge resource purchases, which could have
a material adverse effect on our financial condition and results of operations.
We depend on Reed Elsevier to supply us with a substantial number of the
knowledge resources we sell.
The primary supplier of the magazines and journals whose subscriptions we sell
is Reed Elsevier, which supplied titles accounting for 24.0% and 23.3% of our
sales in 1997 and 1998, respectively. We currently do not have a contract with
Reed Elsevier. If Reed Elsevier stops offering us knowledge resources on
favorable terms, we may not be able to offer clients competitive prices on
their orders. If Reed Elsevier were to cease to provide us with knowledge
resources, it would not be possible to obtain replacements for many of the
titles Reed Elsevier publishes at a comparable price, if at all, from another
supplier. Either of these events could have a material adverse effect on our
financial condition and results of operations. Similarly, if any of the other
publishers with whom we do business decided not to provide us with knowledge
resources or decided to stop providing us with knowledge resources on favorable
terms, it could have a material adverse effect on our financial condition and
results of operations.
Our quarterly revenues are likely to fluctuate, which may have an impact on our
stock price.
Our quarterly revenues, expenses and operating results have varied
significantly in the past and are likely to vary significantly from quarter to
quarter in the future. As a result, our operating results may fall below market
analysts' expectations in some future quarters, which could have a material
adverse effect on the market price of our stock. Delays in client orders can
cause RoweCom's revenues and results of operations to significantly fluctuate
from period to period. Quarterly fluctuations may also result from factors such
as:
. penetration of our existing clients;
. obtaining new accounts;
. changes in our operating expenses;
. changes in the mix of knowledge resources sold;
. increased competition; and
. general economic factors.
Based upon all of these factors, we believe that quarterly revenues, expenses
and operating results are likely to vary significantly in the future, that
period-to-period comparisons of results of operations are not necessarily
meaningful and that, as a result, such comparisons should not be relied upon as
indications of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Selected Quarterly Results of
Operations."
6
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We may not be able to expand our catalog of knowledge resources.
One of the key elements of our strategy is to continue to expand our catalog of
knowledge resources. We gain content both through entrance into strategic
alliances and through contact with various publishers as we receive
particular requests from clients. There can be no assurance that we will be
able to continue to gain available content through strategic alliances or
directly from publishers. In the event that we are unable to continue to
increase our available content, we may:
. be at a competitive disadvantage with respect to competitors that may
compile greater libraries of available titles;
. lose clients that rely upon us as a single-source of knowledge resources;
and
. be unable to increase the amount of revenue that is otherwise generated
from particular clients.
Any of these effects could have a material adverse effect on our future results
of operations and financial condition.
We may not be able to establish our brand name.
We believe that establishing and maintaining the goodwill associated with our
brand name is a critical aspect of attracting and expanding our client base, as
well as of maintaining and building upon the competitive advantage of being the
first company to provide businesses with an Internet-based subscription and
book procurement system. We have not yet developed a strong brand name and if
we fail to do so it could have a material adverse impact on our business. The
importance of brand recognition will increase with competition. Promotion and
enhancement of the kStore brand will depend largely on our success in
continuing to provide high quality services, which cannot be assured. If users
do not perceive the kStore to be comprehensive and of high quality, or if we
introduce new features, or enter into new business ventures that are not
favorably received by users, we will risk diluting the value of our brand name.
If we are unable to provide high quality services, or otherwise fail to promote
and maintain our brand name, or if we incur excessive expenses in an attempt to
improve our services, or promote and maintain our brand name, our future
results of operations and financial condition could be materially and adversely
affected.
Our future success currently depends on the services of a small number of key
personnel.
Our future operating results depend in significant part upon the continued
services of a relatively small number of key technical and senior management
personnel, particularly Dr. Richard Rowe, our Chairman, President and Chief
Executive Officer. In addition our future results will depend significantly
upon the following key technical, sales and managerial employees:
. Louis Hernandez, Jr., Executive Vice President and Chief Financial
Officer;
. Steven Woit, Vice President, Content;
. Walter Crosby, Vice President and Chief Technical Officer; and
. Stephen Vozella, Vice President, Fulfillment.
There can be no assurance that we will retain our key employees or that we will
be successful in attracting, assimilating and retaining other highly qualified
technical, sales and managerial personnel in the future. The loss of any of our
key technical, sales and senior management personnel or the inability to
attract and retain additional qualified personnel could have a material adverse
effect on our future results of operations and financial condition. See
"Business--Employees."
We may have trouble expanding internationally
A part of our strategy is to expand into foreign markets. To date, we have had
only very limited experience in developing localized versions of our services
and in marketing and operating our services internationally. It may be
difficult for us to do so successfully in the future. In order to expand
overseas we intend to enter into relationships with foreign business partners.
We may experience difficulty in managing international operations because of
distance, as well as language and cultural differences, and there can be no
assurance that we or our future foreign business associates will be able to
successfully market and operate our services in foreign markets. We also
believe that, in light of substantial anticipated competition, it will be
necessary to implement our business strategy quickly in international markets
to obtain a significant share of the market. In addition, we
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do not currently have the content necessary to conduct operations in many
foreign markets. We will be unlikely to be able to penetrate such markets
unless we gain such content, either through partnerships with publishers or
other content-providers in such markets, or possibly through acquisitions.
We may lose clients if our systems fail.
The performance of our computer and telecommunications equipment is critical to
our reputation and achieving market acceptance of our services. Any system
failure, including network, software or hardware failure, that
causes interruption or an increase in response time of our online services
could result in decreased usage of our services. If such failures occur often,
it could reduce the attractiveness of our services to our users. An increase in
the volume of the kStore orders could strain the capacity of the hardware
employed by us, which could lead to slower response time or system failures.
Our operations are also dependent in part upon our ability to protect our
operating systems against physical damage from acts of God, power loss,
telecommunications failures, physical break-ins and similar events. The
occurrence of any of these events could result in interruptions, delays or
cessations in service to users of our services, which could have a material
adverse effect on our future financial results. Our property and business
interruption insurance may not be adequate to compensate us for all losses that
may occur.
All of our computer and telecommunications equipment is located at our network
facility in London, Ontario. We currently have no backup systems at other
sites. Accordingly, there is a significant risk to our operations from a
natural disaster or system failure at our London facility. We currently
anticipate that we will establish redundant systems in our Cambridge,
Massachusetts headquarters, or elsewhere, upon consummation of the offering.
There can be no assurances, however, that any such back-up systems will be
online soon after consummation of the offering, or at all.
We may not be able to provide services if the systems that we rely upon are not
Year 2000 compliant.
We are currently undergoing efforts to ensure that all business systems owned
or operated by us or by third parties, the failure of which would directly and
adversely affect our ability to provide our services or otherwise affect
revenues, safety or reliability for such a period of time as to lead to
unrecoverable consequences, will not fail or make miscalculations as a result
of the Year 2000 date change. Although we believe that most of our in-house and
licensed information technology, including our production systems and
accounting software, will not be affected by the Year 2000 date change, we
cannot be certain that the production systems of many of our strategic business
partners or the publishers from whom we purchase the newspapers, magazines,
journals and books that we sell to clients will not be adversely affected by
the Year 2000 date change. For a more complete discussion of the Year 2000
issue, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Impact of Year 2000 Issue on Operations and Financial
Condition of RoweCom."
Our revenues are seasonal in nature.
We have historically experienced seasonal fluctuations in revenues because
substantially all of our revenues have been generated in the fourth quarter of
each year when most subscriptions are purchased or renewed by our clients. This
pattern may be expected to continue, and interim results of financial
operations within any fiscal year cannot be expected to be representative. As a
strategic response to the concentration of orders in the fourth quarter, we may
from time to time make pricing, servicing or marketing decisions that could
have a material adverse effect on our future financial results.
Our success depends on our ability to continuously enhance our product
offerings.
Our future success will depend on our ability to enhance our current products
and to continue to develop and introduce new products and services that keep
pace with competitive product introductions and technological developments,
satisfy diverse and evolving client requirements and otherwise achieve market
acceptance. In particular, we believe that our future success will be
dependent, in large part, upon market acceptance of the most recent version of
the kStore. We cannot be certain that we will be successful in developing and
marketing on a timely and cost-effective basis future services or service
enhancements, or offer new services that respond to technological advances. Any
failure by us to anticipate or respond adequately to changes in technology and
client preferences, or any significant delays in other development efforts,
could have a material adverse effect on our future results of operations and
financial condition.
8
<PAGE>
Future acquisitions could harm our business.
We evaluate potential acquisitions on an ongoing basis. Acquisitions pose many
risks, including that:
. we may not be able to compete successfully for available acquisition
candidates, complete future acquisitions or accurately estimate the
financial effect on our company of any businesses we acquire,
. future acquisitions may require us to spend significant cash amounts or
may decrease our operating income,
. we may have trouble integrating the acquired business and retaining
personnel,
. acquisitions may disrupt our business and distract our management from
other responsibilities, and
. to the extent that any of the companies which we acquire fail, our
business could be harmed.
We may have difficulty in managing growth.
Our business has grown rapidly in the last four years and must continue to do
so in order for us to become profitable. Total revenues have increased from
$324,000 in 1995 to $19.1 million in 1998, the number of our employees has
grown from 9 at December 31, 1995 to 101 at December 31, 1998, and the scope of
our operating and financial systems has expanded significantly. This recent
rapid growth has placed and, if sustained, will continue to place, a
significant strain on our management and operations. Accordingly, our future
operating results will depend on the ability of our officers and other key
employees to continue to implement and improve our operational, client support
and financial control systems, and effectively expand, train and manage our
employee base. We cannot be certain that we will be able to manage any future
expansion successfully, and any inability to do so would have a material
adverse effect on our future results of operations and financial condition.
Risks Typical of E-Commerce Companies
The possible slow adoption of Internet and intranet solutions by businesses may
harm our prospects.
In order for us to be successful, intranets must continue to be adopted by
businesses as the means of making information and electronic services available
to employees. In addition, the Internet must continue to be adopted as an
important means of buying and selling products and services. Because intranet
and Internet usage is continuing to evolve, it is difficult to estimate with
any assurance the size of this market and its growth rate, if any. To date,
many businesses have been deterred from utilizing intranets and the Internet
for a number of reasons, including:
. security concerns;
. limited access to the corporate intranet;
. lack of availability of cost-effective, high-speed service;
. inconsistent quality of service;
. potentially inadequate development of network infrastructure;
. the inability to integrate business applications on these networks; and
. the need to operate with multiple and frequently incompatible products.
Businesses may not broadly accept electronic procurement of knowledge
resources, which could limit possible growth in our revenues.
Even if the Internet and intranets are widely adopted, the adoption of these
networks for book and subscription procurement, particularly by companies that
have relied on traditional means of procurement, will require broad acceptance
of the new approach. In addition, companies that have already invested
substantial resources in traditional methods of procurement may be reluctant to
adopt a new strategy. See "Business--Industry Overview."
The Internet may not be able to accommodate growth in e-commerce for companies
such as RoweCom.
We depend upon the Internet to conduct our business and any problems in the
functioning of the Internet could adversely affect our business. To the extent
that the Internet continues to experience significant growth in the number of
users, their frequency of use or their speed and quality-of-service
requirements, it is possible that the infrastructure for the Internet will not
be able to support the demands placed upon it. In addition, the Internet
9
<PAGE>
could lose its viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in or
insufficient availability of telecommunications services to support the
Internet also could result in slower response times and adversely affect usage
of the Internet generally and RoweCom's services in particular. If the
infrastructure for the Internet does not effectively support growth that may
occur, our future financial results will be materially adversely affected. Even
if the required Internet infrastructure, standards and protocols are developed,
we may be required to incur substantial expenditures in order to adapt our
services to changing or emerging technologies, which could have a material
adverse effect on our future results of operations and financial condition.
Potential imposition of government regulation on e-commerce and legal
uncertainties could limit our growth.
Few laws or regulations currently are directly applicable to access to or
commerce on the Internet and we are not subject to direct government
regulation, other than regulations applicable to businesses generally. The
adoption of new laws or the adaptation of existing laws to the Internet may
decrease the growth in the use of the Internet, which could in turn decrease
the demand for our services, increase the cost of our doing business or
otherwise have a material adverse effect on our future results of operations
and financial condition. A number of legislative and regulatory proposals
relating to Internet commerce are under consideration by federal, state, local
and foreign governments and, as a result, a number of laws or regulations may
be adopted with respect to Internet user privacy, taxation, pricing, quality of
products and services and intellectual property ownership. There is also
uncertainty as to how existing laws will be applied to the Internet in areas
such as property ownership, copyright, trademark, trade secret, obscenity and
defamation.
The imposition of possible sales tax and other tax obligations on e-commerce
could limit our growth.
We do not collect sales or other similar taxes when we sell books and
subscriptions. If one or more states or any foreign country were to require
that we collect sales or other taxes on the sale of books and subscriptions
through our system, it could have a material adverse effect on our future
financial results.
A number of proposals have been made at the state and local level that would
impose taxes on the sale of goods and services through the Internet. Such
proposals, if adopted, could substantially impair the growth of e-commerce and
could adversely affect our future results of operation and financial condition.
A law imposing a three-year moratorium on new taxes on Internet-based
transactions has recently been enacted in the US. This moratorium relates to
new taxes on Internet access fees and state taxes on e-commerce that
discriminate against out-of-state Web sites. Sales or use taxes imposed by
those buying or selling products or services over the Internet will not be
affected by this moratorium. We have not yet been able to determine how we will
be affected by this moratorium. To the extent that the moratorium provides a
material benefit, its expiration after three years could have a material
adverse effect on our financial condition and results of operations.
Possible e-commerce security breaches could harm our business.
We rely on encryption and authentication technology to effect secure
transmission of confidential information, such as payment instruction sets. It
is possible that advances in computer capabilities, new discoveries in the
field of cryptography, or other events or developments will result in a
compromise or breach of the codes used by us to protect client transaction
data. If any such compromise of our security were to occur, it could have a
material adverse effect on our reputation and future results of operations and
financial condition, and expose us to a risk of loss or litigation and possible
liability. It is possible that our security measures will not prevent security
breaches.
Possible infringement of intellectual property rights could harm our business.
Legal standards relating to the protection of intellectual property rights in
Internet-related industries are uncertain and still evolving. As a result, the
future viability or value of our intellectual property rights, as well as those
of other companies in the Internet industry, is unknown. We cannot be certain
that the steps we have
taken to protect our intellectual property rights will be adequate or that
third parties will not infringe or
10
<PAGE>
misappropriate our proprietary rights. Any such infringement or
misappropriation could have a material adverse effect on our future financial
results. In addition, we cannot be certain that our business activities will
not infringe upon the proprietary rights of others, or that other parties will
not assert infringement claims against us.
Risks Relating to the Offering
After the offering, we will continue to be controlled by existing stockholders.
Upon completion of this offering, the principal stockholders listed under
"Principal Stockholders" will beneficially own approximately 53.97% of our
outstanding common stock, and 51.50% if the underwriters' over-allotment option
is exercised in full. Consequently, such persons, as a group, will be able to
control the outcome of all matters submitted for stockholder action, including
the election of members to our board of directors and the approval of
significant change-in-control transactions. Therefore, they will effectively
control our management and affairs. This may have the effect of delaying or
preventing a change in control. See "Management" and "Principal Stockholders."
We will not pay dividends for the foreseeable future.
We anticipate that earnings, if any, will be retained for the development of
our business and that no cash dividends will be declared on the common stock
for the foreseeable future. RoweCom's loan agreement with Imperial Bank also
prohibits the payment of dividends. See "Dividend Policy."
There will be immediate and substantial dilution to new investors in this
offering.
The initial public offering price is substantially higher than the net tangible
book value per share of the outstanding common stock will be immediately after
the offering. Any common stock you purchase in the offering will have a post-
offering net tangible book value per share of $9.67 less than the price you
paid for the share. See "Dilution."
Our stock price may decline after the offering and may be volatile in the
future.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations
between the underwriters and us, and may not be indicative of our future market
prices. As a result, you may not be able to resell any shares you buy from us
at or above the initial public offering price due to a number of factors,
including:
. actual or anticipated fluctuations in our operating results;
. changes in expectations as to our future financial performance or
changes in financial estimates of securities analysts;
. announcement of new products or product enhancements by us or our
competitors;
. technological innovations by us or our competitors; and
. the operating and stock price performance of other comparable companies.
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect
the trading price of our common stock, regardless of our actual operating
performance. In particular, the stock prices for many companies in the
technology and emerging growth sectors have experienced wide fluctuations which
have often been unrelated to the operating performance of such companies. Such
fluctuations may adversely affect the market price of the common stock.
You should read the "Underwriting" section for a more complete discussion of
the factors to be considered in determining the initial public offering price.
Sales of outstanding common stock may depress the stock price after the
offering.
A substantial number of shares of our common stock could be sold into the
public market after this offering. The occurrence of such sales, or the
perception that such sales could occur, could materially and adversely affect
our stock price or could impair our ability to obtain capital through an
offering of equity securities. After this offering, we will have outstanding
9,631,858 shares of common stock, or 10,096,858 shares if the
11
<PAGE>
underwriters exercise their option to purchase additional shares of common
stock in the offering. We have also reserved an additional 2,018,687 shares of
common stock for issuance under our stock option and stock purchase plans and
under other stock option agreements. Options to purchase 602,966 of these
shares have been issued, of which 163,584 will be exercisable upon the
consummation of this offering.
The 3,100,000 shares of common stock being sold in this offering will be freely
transferable under the securities laws immediately after issuance, except for
any shares sold to "affiliates" of RoweCom. We intend to register for resale
the shares of common stock reserved for issuance under our stock option and
stock purchase plans approximately 180 days after the date of this prospectus.
In addition, substantially all stockholders have agreed under written "lock-up"
agreements that, for a period of 180 days from the date of this prospectus,
they will not sell their shares. As a result, upon the expiration of the lock-
up agreements 180 days after the date of this prospectus, 4,902,757 shares of
common stock will be eligible for sale subject, in most cases, to certain
volume and other restrictions under the Federal securities laws. The remaining
1,629,101 shares of common stock will become eligible for resale under the
Federal securities laws on the first anniversary of their respective dates of
issuance, beginning on December 11, 1999. See "Management--Stock Incentive
Plans" and "Shares Eligible for Future Sale."
We and shareholders who will hold in the aggregate 4,913,407 shares of common
stock upon the consummation of this offering have entered into a registration
rights agreement which requires us to include shares of common stock held by
such shareholders in registered offerings of common stock made by us in the
future.
12
<PAGE>
Forward-looking Statements
This prospectus contains forward-looking statements based on current
expectations, estimates and projections with respect to RoweCom and our
industry. These statements include:
. forecasts of growth in the business-to-business market for business
information, magazines, newspapers, journals, books and other knowledge
resources, growth in business-to-business e-commerce, and growth in the
number of professional workers relying on knowledge resources;
. statements regarding RoweCom's preparedness for the Year 2000 date
change and trends in RoweCom's sales, expense levels, and liquidity and
capital resources;
. statements relating to potential gross margin growth;
. statements regarding RoweCom's plans for international growth, including
in Canada; and
. other statements, including statements containing words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek," "intend"
and other similar words that signify forward-looking statements.
These forward-looking statements involve risks and uncertainties, both known
and unknown, and actual results may differ materially from those anticipated or
expressed in such statements. Potential risks and uncertainties include those
described in this prospectus under "Risk Factors," which begin on page 4, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which begin on page 19. The forecasts of growth referred to above
are also based on a number of additional assumptions, including that:
. the worldwide economy will resume its expansion;
. the number of people online and the total number of additional hours
spent online will increase significantly over the next three years;
. advances in database technology will stimulate greater demand for
information; and
. spending on electronically delivered information will increase
significantly.
If any one or more of the preceding assumptions turns out to be incorrect, or
one or more of the risks identified in "Risk Factors" occurs, actual growth may
be materially different from that forecasted. Accordingly, there can be no
assurance that the business-to-business market for business information,
magazines, newspapers, journals, books and other knowledge resources, business-
to-business Internet commerce, or the number of professional workers relying on
knowledge resources will grow over the next three years at the rates forecasted
or at all. Lack of growth at the forecasted rates may have a material adverse
impact on our future results of operations and financial condition.
Except as required by law, we undertake no obligation to update any forward-
looking statement, whether as a result of new information, future events or
otherwise.
13
<PAGE>
Use of Proceeds
RoweCom will receive approximately $45.2 million from the sale of common stock
in this offering, or $52.1 million if the underwriters' over-allotment option
is exercised in full. These amounts are net of underwriting discounts and
commissions, and estimated offering expenses of approximately $900,000 payable
by RoweCom.
The principal purposes of this offering are to:
. finance the expansion of RoweCom's business and to increase available
working capital;
. create a public market for the common stock;
. facilitate future access by RoweCom to public equity markets; and
. increase the visibility of RoweCom in the marketplace.
RoweCom currently intends to use:
. about 30-60% of the net proceeds of this offering to increase sales and
marketing efforts; and
. about 20-30% of the net proceeds of this offering to develop increased
functionality for the kStore, increase content available through the
kStore by increasing our content acquisition staff, and enhance our
technical infrastructure, including by developing redundant systems.
We intend to use the balance of the net proceeds of the offering for working
capital and general corporate purposes, including making capital expenditures
in the ordinary course of our business. We may also apply a portion of the net
proceeds of the offering to acquire businesses, products and technologies that
are complementary to ours. Although we have not identified any specific
businesses, products or technologies that we may acquire and have not entered
into any current agreements or negotiations with respect to any such
transactions, we evaluate such opportunities from time to time. Pending such
uses, the net proceeds will be invested in government securities and other
short-term, investment-grade, interest-bearing instruments.
Dividend Policy
RoweCom has never declared or paid any cash dividends on its capital stock and
does not intend to pay any cash dividends on its common stock for the
foreseeable future. Future dividends, if any, will be determined by the board
of directors. Under our loan agreement with Imperial Bank, we are prohibited
from paying dividends while the loan agreement is in effect.
14
<PAGE>
Capitalization
The following table sets forth the capitalization of RoweCom as of December 31,
1998 on an actual basis, and on a pro forma as adjusted basis after giving
effect to:
. The exchange of 1,611,568 shares of the Class A Preferred Stock and
1,186,240 shares of the Class B Preferred Stock of RoweCom's subsidiary,
Rowe Communications Ltd. ("RoweCom Canada") into 3,163,306 shares of
Class A-1 Preferred Stock of RoweCom and 1,186,240 shares of Class B
Preferred Stock of RoweCom, respectively;
. The conversion of 161,289 shares of Class A Preferred Stock, 3,163,306
shares of Class A-1 Preferred Stock, 6,326,610 shares of Class B
Preferred Stock and 4,586,599 shares of Class C Preferred Stock of
RoweCom into an aggregate of 4,969,705 shares of common stock;
. The exercise or net exercise of all outstanding stock purchase warrants
for 35,973 shares of common stock; and
. the sale by RoweCom of 3,100,000 shares of common stock in this offering
at an initial public offering price of $16 per share, after deducting
underwriting discounts and commissions, and estimated offering expenses
of approximately $900,000 payable by RoweCom.
The pro forma, as adjusted amounts included in the table below do not include
602,966 shares of common stock issuable upon the exercise of options
outstanding on the date of this prospectus at a weighted average exercise price
of $3.21 per share, and 1,415,721 additional shares of common stock reserved
for issuance under RoweCom's stock option and stock purchase plans.
This information should be read in conjunction with RoweCom's consolidated
financial statements and related notes appearing elsewhere in this prospectus,
as well as the information appearing under "Transactions Among Related Parties"
and "Management--Stock Incentive Plans."
<TABLE>
<CAPTION>
---------------------------
As of December 31, 1998
---------------------------
Pro Forma
Actual as adjusted
----------- --------------
<S> <C> <C>
Dollars in thousands, except per share data
Redeemable Convertible Preferred Stock:
Class A Preferred Stock, $.01 par value per share;
1,772,857 shares issued and outstanding; 0 shares
issued and outstanding, as adjusted(1)........... $ 4,637 --
Class B Preferred Stock, $.01 par value per share;
6,326,610 shares issued and outstanding; 0 shares
issued and outstanding, as adjusted(2)........... 8,198 --
Class C Preferred Stock, $.01 par value per share,
4,586,599 shares issued and outstanding; 0 shares
issued and outstanding, as adjusted.............. 15,588 --
----------- -----------
Total........................................... 28,423 --
Stockholders' equity:
Common Stock, $.01 par value per share; 34,000,000
shares authorized; 1,526,180 shares issued and
outstanding; 9,631,858 shares issued and
outstanding, as adjusted......................... 15 $ 96
Additional paid-in capital........................ 1,710 75,480
Treasury stock, at cost........................... (53) (53)
Accumulated deficit............................... (13,901) (13,901)
Cumulative translation adjustment................. (22) (22)
----------- -----------
Total stockholders' (deficit) equity............ (12,251) 61,600
----------- -----------
Total capitalization............................ $ 16,172 $ 61,600
=========== ===========
</TABLE>
- --------
(1)Includes 161,289 shares of Class A Preferred Stock of RoweCom and 1,611,568
shares of Class A Preferred Stock of RoweCom Canada. See note 12 to the
consolidated financial statements.
(2)Includes 5,140,370 shares of Class B Preferred Stock of RoweCom and
1,186,240 shares of Class B Preferred Stock of RoweCom Canada. See note 12 to
the consolidated financial statements.
15
<PAGE>
Dilution
The pro forma net tangible book value of RoweCom as of December 31, 1998 was
$15,764,754, or $2.41 per share of common stock after giving effect to the
conversion of all outstanding shares of preferred stock into common stock, and
the exercise of all outstanding stock purchase warrants. Pro forma net tangible
book value per share is determined by dividing the net tangible book value of
RoweCom (total tangible assets less total liabilities) by the total number of
shares of common stock outstanding after giving effect to the transactions
described in the previous sentence. After giving effect to the sale of the
3,100,000 shares of common stock offered by RoweCom hereby at an initial public
offering price of $16 per share, and after deducting underwriting discounts and
commissions and estimated offering expenses payable by RoweCom, which would
result in estimated net proceeds of $45,228,000, the adjusted pro forma net
tangible book value of RoweCom as of December 31, 1998, would have been
$60,992,754 or $6.33 per share. This represents an immediate increase in the
pro forma net tangible book value of $3.92 per share to existing stockholders
and an immediate dilution of $9.67 per share to new investors. The following
table illustrates the per share dilution:
<TABLE>
<S> <C>
Initial public offering price per share................................ $16.00
Pro forma net tangible book value per share before this offering(1).... $ 2.41
Increase attributable to new investors(1).............................. $ 3.92
Adjusted pro forma net tangible book value per share after this
offering.............................................................. $ 6.33
Dilution per share to new investors.................................... $ 9.67
</TABLE>
- --------
(1)Assumes no exercise of the underwriters' over-allotment option and no
exercise of stock options outstanding as of December 31, 1998. As of the date
of this prospectus, options to purchase 602,966 shares of common stock were
outstanding at a weighted average exercise price of $3.21 per share, and
1,415,721 shares were available for the issuance of additional stock options
under RoweCom's stock option and stock purchase plans. To the extent that any
of these options are exercised, there will be further dilution to new
investors. If all of these outstanding options were exercised in full, the
dilution per share to new investors in this offering would be increased by $.37
per share to a total of $10.04 per share, and the average price per share paid
by RoweCom's existing shareholders would be $4.20. See "Capitalization,"
"Management--Stock Incentive Plans," "Transactions Among Related Parties" and
note 14 to the consolidated financial statements.
The following table summarizes on a pro forma basis, as of December 31, 1998,
the difference between the number of shares of common stock purchased from
RoweCom, the total consideration paid to RoweCom and the average price per
share paid by the existing stockholders and by the new investors before
deduction of estimated underwriting discounts and commissions and offering
expenses:
<TABLE>
<CAPTION>
---------------------------------------------------
Shares Purchased Total Consideration
----------------- ------------------- Average Price
Number Percent Amount Percent Per Share
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 6,531,858 68% $29,950,402 39% $ 4.59
New investors(2)........... 3,100,000 32% 49,600,000 61% 16.00
--------- --- ----------- ----
Total...................... 9,631,858 100% $79,550,402 100%
</TABLE>
- --------
(1) Assumes the conversion of all outstanding shares of preferred stock into
common stock and the exercise of all outstanding stock purchase warrants, as if
each had occurred on December 31, 1998.
(2) See note 1 to the preceding table.
16
<PAGE>
Selected Financial Information
The following historical selected consolidated financial information of RoweCom
is qualified by reference to and should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
prospectus.
The statement of operations data set forth below for each of the fiscal years
ended December 31, 1997 and 1998 and the balance sheet data at December 31,
1997 and 1998 are derived from consolidated financial statements of RoweCom
audited by PricewaterhouseCoopers LLP, independent accountants, which are
included elsewhere in this prospectus. The statement of operations data set
forth below for the fiscal year ended December 31, 1995, and the balance sheet
data at December 31, 1995 and 1996 are derived from audited financial
statements of RoweCom not included in this prospectus.
The selected consolidated financial data for the period from inception (January
1, 1994) through December 31, 1994 and at December 31, 1994 are derived from
unaudited consolidated financial statements of RoweCom not included in this
prospectus. The unaudited consolidated financial statements include all
adjustments, comprised only of normal recurring entries, which we consider
necessary for a fair presentation.
<TABLE>
<CAPTION>
--------------------------------------------------
Year Ended December 31,
--------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Dollars in thousands,
except per share data
Statement of Operations
Data:
Revenues.................. -- $ 324 $ 3,116 $ 12,890 $ 19,053
Cost of revenues.......... -- 323 3,083 12,701 18,736
-------- -------- -------- -------- ----------
Gross profit.......... -- 1 33 189 317
Operating expenses:
Sales and marketing...... $ 9 259 585 2,035 4,817
Research and
development............. 19 149 532 584 1,631
General and
administrative.......... 7 171 351 751 1,561
-------- -------- -------- -------- ----------
Total operating
expenses............... 35 579 1,468 3,370 8,009
-------- -------- -------- -------- ----------
Loss from operations.. (35) (578) (1,435) (3,181) (7,692)
Interest and other income,
net...................... (3) 1 1 64 172
-------- -------- -------- -------- ----------
Loss before income
taxes................ (38) (577) (1,434) (3,117) (7,520)
Provision for income
taxes.................... -- 8 16 137 109
-------- -------- -------- -------- ----------
Net loss.............. $ (38) $ (585) $ (1,450) $ (3,254) $ (7,629)
======== ======== ======== ======== ==========
Basic and diluted pro
forma net loss per
share(1)................. -- -- -- -- $ (1.87)
Shares used in pro forma
net loss per share
calculation(1)........... 4,078,517
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------
At December 31, At December 31, 1998
------------------------- ------------------------
Pro Forma
1994 1995 1996 1997 Actual as adjusted(2)
---- ---- ----- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Dollars in thousands
Consolidated Balance Sheet
Data:
Working capital........... $ 1 $(49) $(481) $ 185 $ 15,447 $60,875
Total assets.............. 15 204 428 2,108 20,284 65,712
Redeemable preferred
stock.................... -- -- -- 4,298 28,423 --
Total stockholders' equity
(deficit)................ 12 52 (338) (3,768) (12,251) 61,600
</TABLE>
<TABLE>
<CAPTION>
--------------------------
Year ended December 31,
--------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Supplemental Information
Average number of transactions per client(3)....... 151 234 257
Average gross revenue in dollars per transaction(3)
.................................................. $ 456 $ 390 $ 396
Number of clients.................................. 45 141 187
</TABLE>
- --------
(1)Pro forma per share amounts are calculated by using the sum of (A) the
weighted average number of shares of common stock outstanding during the period
and (B) the weighted average number of shares of common stock issuable upon the
conversion of shares of RoweCom's preferred stock outstanding during the period
and the exercise of all outstanding stock purchase warrants. See "Transactions
Among Related Parties" and "Principal Stockholders."
17
<PAGE>
(2)Reflects the issuance of 5,005,678 shares of common stock as of the closing
of this offering upon the conversion of all shares of RoweCom's preferred stock
outstanding at that date and the exercise of all outstanding stock purchase
warrants. See "Transactions Among Related Parties" and "Principal
Stockholders". Also reflects the sale by RoweCom of 3,100,000 shares of common
stock at the initial public offering price of $16 per share, after deducting
underwriting discounts and commissions, and estimated offering expenses of
approximately $900,000 payable by RoweCom. Excludes (A) 602,966 shares of
common stock issuable upon the exercise of options outstanding on the date of
this prospectus at a weighted average exercise price of $3.21 per share and (B)
1,415,721 additional shares of common stock reserved for issuance under
RoweCom's stock option and stock purchase plans.
(3)A transaction is a single item purchased by a client, such as a single
subscription or book.
18
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and related notes thereto included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. RoweCom's actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this prospectus.
Overview of RoweCom's Operations and Financial Performance
RoweCom provides businesses and their employees with an e-commerce solution for
purchasing and managing the acquisition of magazines, newspapers, journals,
books and other knowledge resources through a corporate intranet or the
Internet. We offer our clients access to the largest catalog of magazines,
newspapers, journals, books and other knowledge resources on the Internet.
RoweCom allows employees to purchase knowledge resources easily and
conveniently from their desktop computers and provides businesses with a highly
effective means of managing and controlling purchases of knowledge resources
and reducing costs. Our target clients are in knowledge-intense industries,
such as financial and professional services, high technology and healthcare as
well as selected academic and non-profit institutions.
RoweCom began significant commercial operations in March 1996. We introduced
our flagship product, the kStore(TM), in June 1997. Since its inception,
RoweCom has incurred significant net losses and, as of December 31, 1998, had
an accumulated deficit on a consolidated basis of $13.9 million.
Substantially all of our revenues are generated by the sale of magazines,
newspapers, journals, books and other knowledge resources published by third
parties. The sales price of each knowledge resource during the reported periods
reflected the cost to RoweCom of the knowledge resource plus a transaction fee
retained by us. This pricing structure changed in the fourth quarter of 1998.
See "--RoweCom Gross Margin" on page 20. RoweCom received a flat fee or, in
some cases, a percentage of the selling price for each item purchased through
the kStore. While RoweCom receives orders and payments directly from its
clients, and processes such orders and payments on behalf of such clients, it
does not maintain an inventory of any of the knowledge resources it sells.
Accordingly, RoweCom does not incur inventory costs and is not subject to
inventory risk. Approximately 46.5% of our revenues for 1998 were generated
from the renewal of subscriptions. We believe that we will continue to receive
a substantial portion of revenue in the future from renewals. RoweCom, in some
cases, finances the knowledge resource purchases of its clients, principally
through borrowings under its credit facility, and at December 31, 1998 had
outstanding accounts receivable of $2.0 million.
RoweCom's services initially focused on academic libraries and centralized
purchasing groups. Beginning in 1998, we have increasingly focused our sales
and marketing efforts on corporate clients and on desktop purchases by
individuals rather than centralized purchasing groups. We believe that an
increase in the number of desktop purchasers at a client will increase the
amount of revenue generated by such client. As a result of our efforts,
purchases by corporate clients in 1998 have increased more rapidly than
purchases by academic and public institution clients. Sales to corporate
clients grew to approximately $12.6 million in 1998 from approximately $7.2
million in 1997.
To date, a substantial majority of our revenues have been generated in the
fourth quarter of each year, primarily because most subscriptions are purchased
or renewed in that quarter, with subscriptions generally beginning on January
1st. As purchases by individual employees increase as a percentage of total
revenues, the seasonality described above has begun to decrease because desktop
purchases are generally made as required, and thus are more evenly distributed
throughout the year. For a more detailed discussion of the seasonality of our
business, see "--Selected Quarterly Results of Operations."
Substantially all of RoweCom's expenses consist of the cost of the knowledge
resources sold to its clients, which are variable, and sales and marketing,
research and development and general and administrative expenses, which are
relatively fixed. RoweCom's fixed expense levels have increased over time as
its operations have expanded and are expected to continue to increase over the
near and medium term. Management expects that expenses will increase primarily
in sales and marketing as RoweCom increases its direct sales force and support
staff, and in research and development, as RoweCom develops new technology to
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enhance its service. Sales and operating results generally depend on the volume
and timing of orders received, which are difficult to forecast. As a result,
RoweCom may be unable to adjust fixed expense spending in a timely manner to
compensate for any unexpected fluctuation or shortfall in revenue or gross
profit. Any significant shortfall in gross profit in relation to RoweCom's
fixed expenses would have an immediate adverse effect on RoweCom's results of
operations.
In the third and fourth quarters of 1998, RoweCom entered into strategic
alliances with barnesandnoble.com llc and NewSub Services, Inc., each of which
added substantial new content to our catalog as well as new distribution
channels for our services. barnesandnoble.com will pay RoweCom a fixed
percentage of the purchase price of every book sold either through RoweCom's
kStore or barnesandnoble.com's Business Solutions service, other than sales to
existing clients of the Business Solutions service as of the date of the
agreement. RoweCom will pay barnesandnoble.com a fixed amount or percentage of
the purchase price of every subscription sold by RoweCom's kStore or
barnesandnoble.com's Business Solutions service, other than sales to existing
RoweCom customers as of the date of the agreement. Under the terms of the
agreement with NewSub Services, each party will earn revenue on titles sold
through the other party's online distribution channel by receiving a percentage
of the gross sales price or a transaction fee for each of its respective titles
sold by the other party. These strategic alliances are not expected to generate
material revenues until the second half of 1999. RoweCom has entered into other
strategic relationships and intends to continue to enter into strategic
relationships that will further increase content and add new distribution
channels. RoweCom expects that the terms of most strategic alliances will
include some element of revenue sharing between the parties. See "Business--
Strategic Alliances."
RoweCom's Gross Margin
RoweCom's gross margin has increased in each of the past three years from 1.08%
in 1996 to 1.66% in 1998. The gross margin reflects:
. the mix of products purchased by our clients;
. the discount rates we are able to obtain from publishers;
. our pricing structure; and
. the amount of installation fees we earn as a proportion of total
revenues.
We are seeking to increase RoweCom's gross margin by:
. revising our pricing structure;
. increasing sales of higher margin products;
. obtaining greater discounts from publishers; and
. increasing installation fees.
We believe that the combined effect of these strategies, which are discussed in
greater detail below, will be to improve our gross margin. However, we cannot
be certain that these strategies will be successful or of the timing or extent
of any improvement.
Pricing. RoweCom generally purchases publications from publishers at a discount
from the list price. These discounts vary widely from an average of 5% on high-
priced scientific, technical and medical publications, whose average selling
price is hundreds of dollars, to 80% for lower-priced general interest and
large circulation magazines, whose average selling price is below $30. Until
the fourth quarter of 1998, RoweCom's pricing strategy had been to pass the
discount provided by the publisher on to the buyer and retain only a flat fee
for each subscription sold. This aggressive pricing strategy was aimed at
gaining market share quickly and establishing the RoweCom brand, but led to low
gross margins.
In the fourth quarter of 1998, RoweCom began offering approximately 800 large
circulation and general interest publications under its alliance with NewSub
Services. RoweCom earns a 35% margin on initial orders and a 15% margin on
renewals of these publications. RoweCom plans to aggressively promote these
publications in 1999 in order to seek to improve gross margin overall.
In the first quarter of 1999, RoweCom began retaining a portion of the
discounts it obtains from publishers on serials instead of passing such
discounts on to customers, as it had done in the past. Nonetheless, RoweCom
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offers its large volume customers the guaranteed lowest price on the market for
all subscriptions. RoweCom expects that this change in pricing will benefit
RoweCom's gross margin, although no assurances can be given that this strategy
will be successful.
Product Mix. RoweCom believes that its increased focus on corporate desktop
purchases will result in increased sales of lower-priced items on which RoweCom
retains a higher percentage of the sales price. Corporate libraries and central
purchasing groups generally purchase higher-priced business and trade,
scientific, technical and medical publications, while desktop purchases tend to
be lower-priced business and trade, and general interest and large circulation
publications. RoweCom's kStore is specifically designed to allow decentralized
desktop purchases with centralized approval and reporting. This feature,
combined with favorable pricing on lower-priced items and books, should
increase sales of lower priced knowledge resources. Our increased focus on
desktop sales may result in higher gross margins, but there can be no assurance
that RoweCom's trend of increasing desktop purchases will continue or that, if
continued, the trend will produce increased gross margin.
Greater Discounts. We believe that the increasing volume of sales by RoweCom
will increase the buying power of RoweCom and possibly allow us to negotiate
higher discounts from publishers on the items we resell. This will provide the
opportunity for higher gross margins and improved pricing. We cannot be
certain, however, that our sales volumes will continue to increase or that we
will be able to obtain greater discounts.
Increasing Installation Fees. Prior to 1999, we frequently waived the
installation fee charged when a new customer's store was set up. Since 1999, it
has been RoweCom's policy to collect these fees and we believe that this change
in policy will have a positive effect on gross margin, although we cannot be
certain of the success of this strategy.
Results of Operations
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenues. Revenues consist almost entirely of the sales of knowledge resources.
Revenues increased to $19.1 million in 1998 as compared to $12.9 million in
1997, an increase of $6.2 million, or 47.8%. This increase resulted primarily
from increased sales per client and growth in our client base, particularly in
the corporate sector. Average revenues generated per client increased to
approximately $102,000 in 1998 from approximately $91,000 in 1997. During 1998,
187 of our clients placed orders, an increase of 33.0% over the 141 clients
that placed orders during 1997. A substantial majority of these new clients
were corporate clients. Revenues earned on sales to existing clients increased
by $3.0 million, or 23.0%, to $15.9 million in 1998 from $12.9 million in 1997.
Cost of Revenues. Cost of revenues consists almost entirely of the cost of
acquiring the knowledge resources sold to clients. Cost of revenues in 1998 was
$18.7 million as compared to $12.7 million during 1997, an increase of $6.0
million or 47.5%. This increase was due to the increase in sales discussed
above. Cost of revenues as a percentage of revenues decreased to 98.3% in 1998
as compared to 98.5% in 1997. This was primarily due to an increase in
installation revenues from $4,000 in 1997 to $41,000 in 1998.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and commissions paid to RoweCom's direct sales force, account managers and
client service representatives, travel expenses, and expenses relating to
marketing materials and fulfillment activities. Sales and marketing expenses
increased to $4.8 million during 1998 from $2.0 million during 1997, an
increase of $2.8 million or 136.8%. This growth principally reflected a $1.9
million increase in salary and hiring expenses and a $381,000 increase in sales
force expenses, including travel, office space, and telephone. The increase in
salary expense resulted from an increase in the average headcount of our direct
sales force, account managers and client service representatives during 1998 as
compared to 1997. RoweCom intends to significantly increase its direct sales
force in 1999, as well as hire additional account managers and client service
representatives.
Research and Development. Research and development expenses consist principally
of compensation and related expenses, including consulting fees, and other
expenses relating to the development and maintenance of our service and
production systems. Research and development expenses increased to $1.6 million
in 1998 from $584,000 in 1997, an increase of $1.0 million or 179.3%, primarily
as a result of increased staffing and
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associated costs incurred in an effort to integrate new content into our
catalog, to enhance the user interface and functionality of the kStore and to
develop the transaction processing systems. Consulting fees in connection with
improvements in the content of the catalog, user interface and functionality of
the kStore and transaction processing system increased 258.1% from $105,000 in
1997 to $376,000 in 1998.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for RoweCom's executive,
administrative, finance and human resources departments as well as professional
service fees. General and administrative expenses increased to $1.6 million in
1998 from $751,000 in 1997, an increase of $810,000 or 107.8%, principally
reflecting a $461,000 increase in salary and hiring expenses. This increase was
mainly due to growth in average headcount in the executive, administrative,
finance and human resources departments.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Revenues. Revenues increased to $12.9 million in 1997, as compared to $3.1
million in 1996, an increase of $9.8 million, or 313.6%. This increase resulted
primarily from the significant growth in RoweCom's client base, particularly in
the academic sector. During 1997, 141 of our clients placed orders, an increase
of 207.0% over the 45 clients that placed orders during 1996. Revenues earned
on sales to existing clients also increased by $1.7 million, or 55.0%, to $4.8
million in 1997 from $3.1 million in 1996, and average revenues generated per
client increased to approximately $91,000 in 1997 from approximately $69,000 in
1996.
Cost of Revenues. Cost of revenues in 1997 was $12.7 million as compared to
$3.1 million during 1996, an increase of $9.6 million or 312.0%. This increase
was due to the significant increase in sales discussed above. Cost of revenues
as a percentage of revenues was 98.5% in 1997 as compared to 98.9% in 1996.
This improvement was principally the result of an increase in the proportion of
titles sold for which RoweCom retains a higher percentage of the purchase
price.
Sales and Marketing. Sales and marketing expenses increased to $2.0 million
during 1997 from $585,000 during 1996, an increase of $1.4 million, or 248.0%.
This growth principally reflected an increase in salary and related expenses
and, to a lesser extent, increased advertising expenses. The increase in salary
and related expenses resulted from an increase in commissions paid to RoweCom's
direct sales force as a consequence of higher sales and an increase in the
average headcount of our direct sales force, account managers and client
service representatives in 1997 as compared to 1996.
Research and Development. Research and development expenses increased to
$584,000 in 1997 from $532,000 in 1996, an increase of $52,000 or 9.7%,
primarily as a result of increased staffing and associated costs relating to
efforts to develop and launch the kStore.
General and Administrative Expenses. General and administrative expenses
increased to $751,000 in 1997 from $351,000 in 1996, an increase of $400,000 or
113.8%, primarily due to increases in average headcount in the executive,
administrative, and finance departments.
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Selected Quarterly Results of Operations
The following table presents unaudited quarterly consolidated statement of
operations data for each of the four quarters during the years ended December
31, 1997 and 1998. In management's opinion, this information has been prepared
substantially on the same basis as the audited consolidated financial
statements appearing elsewhere in this prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been
included in the amounts stated below to present fairly the unaudited quarterly
results. The quarterly data should be read in conjunction with the audited
consolidated financial statements of RoweCom and the notes thereto appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Three Months Ended
------------------------------------------------------------------------
1997 1998
---------------------------------- ------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- ------- -------- -------
Dollars in thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 621 $ 80 $ 240 $11,949 $ 1,307 $ 865 $ 1,413 $15,468
Cost of revenues........ 607 79 233 11,782 1,284 819 1,391 15,242
----- ----- ------- ------- ------- ------- ------- -------
Gross profit......... 14 1 7 167 23 46 22 226
Operating expenses:
Sales and marketing.... 221 647 706 461 607 1,311 1,425 1,474
Research and
development........... 80 44 275 185 209 261 279 882
General and
administrative........ 229 198 241 83 288 310 382 581
----- ----- ------- ------- ------- ------- ------- -------
Total operating
expenses 530 889 1,222 729 1,104 1,882 2,086 2,937
----- ----- ------- ------- ------- ------- ------- -------
Loss from
operations.......... (516) (888) (1,215) (562) (1,081) (1,836) (2,064) (2,711)
Interest and other
income, net............ 5 17 33 9 28 18 58 68
----- ----- ------- ------- ------- ------- ------- -------
Loss before income
taxes............... (511) (871) (1,182) (553) (1,053) (1,818) (2,006) (2,643)
Provision for income
taxes.................. 34 34 34 35 28 28 31 22
----- ----- ------- ------- ------- ------- ------- -------
Net loss............. $(545) $(905) $(1,216) $ (588) $(1,081) $(1,846) $(2,037) $(2,665)
===== ===== ======= ======= ======= ======= ======= =======
</TABLE>
To date, a substantial majority of our revenues have been generated in the
fourth quarter of each year, primarily because most subscriptions are purchased
or renewed in that quarter, with subscriptions generally beginning on January
1st. In addition, the libraries and centralized purchasing groups to which we
initially targeted our services have tended to concentrate their purchases at
the end of each year. As purchases by individual employees increase as a
percentage of total revenues, the seasonality described above has begun to
decrease because desktop purchases are generally made as required, and thus are
more evenly distributed throughout the year. We have also recently added
approximately five million books to our catalog as a result of our strategic
alliance with barnesandnoble.com. As book sales become a larger portion of
total revenues, we believe that our revenues will become less seasonal because
books are typically purchased throughout the year, in contrast to
subscriptions, which generally come up for renewal in the fourth quarter of
each year.
Liquidity and Capital Resources
Net cash used in operating activities was $9.0 million in 1998 as compared to
$2.9 million in 1997 and $1.2 million in 1996. Cash used in operating
activities for 1998 resulted primarily from a net loss of $7.6 million and an
increase in accounts receivable of $1.7 million as well as an increase in other
current assets of $372,000 and a decrease in income taxes payable of $121,000.
This was partially offset by an increase in accounts payable, accrued expenses
and accrued compensation of $684,000. Cash used in operating activities in 1997
was primarily attributable to a net loss of $3.3 million and an increase in
accounts receivable and other current assets of $387,000. This was partially
offset by an increase in accrued expenses and accrued compensation of $479,000,
as well as an increase in income taxes payable of $126,000.
Net cash used in investing activities in 1998 was $597,000, substantially all
of which was used to purchase fixed assets, as compared to $229,000 in 1997 and
$91,000 in 1996.
Since its inception, RoweCom has financed its operations primarily through
sales of its equity securities in private placements. Net cash provided by
financing activities in 1998 was $25.0 million, primarily resulting from the
sale of shares of RoweCom's Class B Convertible Preferred Stock and Class C
Convertible Preferred
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Stock, and RoweCom Canada's Class B Preferred Stock. Net cash provided by
financing activities in 1997 was $3.8 million, primarily as the result of the
sale of shares of RoweCom Canada's Class A Preferred Stock. Net cash provided
by financing activities was $1.3 million in 1996, primarily as the result of
capital contributions by RoweCom's founder. All outstanding preferred stock of
RoweCom Canada will be exchanged for preferred stock of RoweCom immediately
prior to the completion of this offering, and all of the outstanding preferred
stock of RoweCom, including the shares issued in exchange for the preferred
stock of RoweCom Canada, will convert to common stock upon completion of this
offering. See "Transactions Among Related Parties."
In September 1998, RoweCom entered into an amendment of its loan agreement with
Imperial Bank which provided us with a revolving line of credit of up to
$4,000,000 in addition to the existing term loan of approximately $320,000.
RoweCom uses borrowings under this line of credit to finance its accounts
receivable. Borrowing requests under this facility are conditioned upon the
delivery of a list of eligible accounts receivable, as defined under the
amended loan agreement. As of December 31, 1998, RoweCom had $1,337,000
outstanding under this revolving line of credit. The loan agreement requires
compliance with certain customary financial covenants, such as a "quick ratio,"
defined as current assets divided by current liabilities, of 1.50 as of
December 31, 1998. The loan is collateralized by all of RoweCom's assets,
including accounts receivable and equipment, but excluding intellectual
property. See note 7 to consolidated financial statements.
RoweCom currently believes that cash balances will be sufficient to meet
anticipated cash requirements through the fourth quarter of 1999. We also
believe that the net cash proceeds from this offering, together with cash
balances, will be sufficient to meet currently planned working capital and
capital expenditure requirements through at least 2000. However, there can be
no assurance that additional capital beyond the amounts currently forecasted by
RoweCom will not be required nor that any such required additional capital will
be available on reasonable terms, if at all, at such time as required.
Impact of Possible Share Transfer
Working Ventures Canadian Fund Inc. has agreed to exchange immediately prior to
the consummation of this offering its Class A Preferred Stock and Class B
Preferred Stock of RoweCom Canada into Class A-1 Preferred Stock and Class B
Preferred Stock of RoweCom, respectively. All preferred stock of RoweCom will
be converted to common stock upon the effectiveness of this offering.
Under an agreement among RoweCom's shareholders, in the event that the market
value of Working Ventures' initial investment in shares of Class A Preferred
Stock of RoweCom Canada increases by 45% or more (on an annually compounded
basis) and Working Ventures is not legally restricted from selling such Class A
Preferred Shares, or any common shares into which such preferred shares have
been converted, Working Ventures must transfer an aggregate of 310,371 shares
of common stock to certain other shareholders or optionholders of RoweCom,
substantially all of whom are directors, or former directors, officers and
employees of RoweCom. RoweCom will be required to record a compensation charge
for the period in which these potential transfers occur with respect to the
shares of common stock which are transferred to the RoweCom option and warrant
holders who are eligible to receive such shares as described above. The amount
of this compensation charge will be equal to the aggregate fair market value of
the common stock transferred on the date such stock is transferred to such
option and warrant holders. RoweCom is currently unable to determine whether or
when such a charge will be incurred, or if incurred, the amount of such charge.
See "Transactions Among Related Parties."
Impact of Year 2000 Issue on Operations and Financial Condition of RoweCom
As many computer systems and other equipment with imbedded control chips or
microprocessors use only two digits to represent the year, they may be unable
to process accurately certain data before, during or after the year 2000. The
Year 2000 issue relates to the way that these business systems could fail or
make miscalculations due to interpreting a date including "00" to mean 1900,
not 2000. To the extent that a business system does not fail or make
miscalculations as a result of the Year 2000 date change, such a system is
described as being "Year 2000 Compliant." While RoweCom believes that it has
been taking adequate steps to make sure that its business systems are Year 2000
Compliant, and does not believe that it will incur material costs to prepare
for the Year 2000 date change, achieving complete Year 2000 Compliance is
subject to various risks and uncertainties, and there can be no assurance that
the Year 2000 date change will not lead to failures of such systems that may
have a material adverse effect on RoweCom's future results of operations and
financial condition.
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RoweCom has been aware of the possible impact of Year 2000 issues on its
operations since inception and has focused on making its business systems Year
2000 Compliant since that time. Most of this effort has been focused upon
business systems owned or operated by RoweCom or third parties, the failure of
which would directly and adversely affect RoweCom's ability to provide its
services or would otherwise affect revenues or reliability for such a period of
time as to lead to unrecoverable consequences. RoweCom has adopted a Year 2000
compliance program for these critical systems that is designed to:
. assess the readiness of our critical systems to deal with the Year 2000
date change;
. remediate any potential failures through the modification or replacement
of critical systems that may not be Year 2000 Complaint;
. test the existing and improved critical systems for Year 2000 Compliance
prior to the actual Year 2000 date change; and
. develop contingency plans to deal with possible failures by our critical
systems to be Year 2000 Compliant.
At present, approximately 20 employees of RoweCom are working either on a full-
time or part-time basis on Year 2000 Compliance issues and related issues, such
as back-office processing and integration of RoweCom's catalog with its
strategic partners.
RoweCom has focused its Year 2000 Compliance efforts on the following types of
critical systems:
In-house Information Technology
RoweCom has developed a new application that it will use for all client
operations, including order processing and report generation. RoweCom is
currently testing and has begun implementation of this application and is
expecting the application to be fully implemented no later than the third
quarter of 1999. This application, which was designed and developed entirely by
our in-house development staff, was designed to be Year 2000 Compliant.
Accordingly, RoweCom believes that it will not incur any material costs as a
result of any failures by its in-house information technology to be Year 2000
Compliant. RoweCom does not believe that any of its other in-house information
technology systems are critical systems.
Third Party Information Technology
RoweCom believes the only information technology licensed from third parties
that constitutes a Critical System is the Navision accounting software used by
the Company's finance and human resources departments and deployed on a client-
server system. We deployed a new release of this software in the first quarter
of 1998. In its contract with us, Navision represents that its system is Year
2000 Compliant. RoweCom has no reason to believe that this application is not
Year 2000 Compliant.
Third Party Operations
The critical systems maintained by third parties include the Electronic Data
Interchange transaction system, also known in the industry as "EDI," which
carries out RoweCom's transactions with publishers, the CyberCash credit card
transaction processing system that we use to clear credit card purchases, the
Automated Clearing House transaction system, also known in the industry as
"ACH," pursuant to which we clear automatic debit purchases, and the catalog
and purchasing operations maintained by barnesandnoble.com. RoweCom is in the
process of assessing the likelihood that any of these systems will not be Year
2000 Compliant. Toward that end, RoweCom is:
. inquiring about the readiness of such companies' systems for the Year
2000 date change;
. testing, where possible, such systems for Year 2000 Compliance; and
. developing contingency plans for those third party systems that we have
reason to believe may not be Year 2000 Compliant.
While the EDI transaction processing software, which sends order information to
publishers, is Year 2000 Compliant, the publishers' EDI access software may not
receive this data upon the Year 2000 date change or may send data to RoweCom in
a format that is not Year 2000 Compliant. In such an event, RoweCom may
experience material disruption of its operations, including failure to transmit
customers' orders to publishers, failure to receive information from
publishers, and failure to provide adequate customer service. This transaction
system relies on the production systems of a large number of publishers, many
of which may not
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have systems that are Year 2000 Compliant. Because the EDI transaction system
is based upon an industry standard, there are no means currently available by
which RoweCom can remediate possible failures to be Year 2000 Compliant.
RoweCom believes that the credit card transaction processing system it
currently uses is Year 2000 Compliant, based upon tests that it has conducted
using credit card expiration dates with years subsequent to 1999. RoweCom also
believes, based upon representations from Banc One, that the ACH transaction
processing system will be Year 2000 Compliant, although it has not conducted
independent testing of its readiness. In addition, Banc One, as a member of the
Federal Reserve System will be subjected to the stringent Year 2000 readiness
requirements mandated by that system. Accordingly, RoweCom does not have reason
to believe that its ACH transaction processing system will not be Year 2000
Compliant.
RoweCom's clients are currently able to purchase the books included in our
catalog of titles solely through our business partner, barnesandnoble.com.
Users currently may access the barnesandnoble.com and RoweCom catalogs by means
of links found in the Business Solutions and the kStore Web sites. RoweCom and
barnesandnoble.com expect that the Business Solutions and the kStore Web sites
will each contain an integrated catalog of titles by the end of the first
quarter of 1999. In the event that this integrated service is not operational
prior to the Year 2000 date change, a failure by barnesandnoble.com to make all
of its systems Year 2000 Compliant could result in serious difficulties in
processing book orders for the our clients. The Company intends to acquire
certifications from barnesandnoble.com with respect to its Year 2000
Compliance. In addition, RoweCom has also discussed Year 2000 readiness of
NewSub Services and, based upon these discussions, believes that the
proprietary processing system of NewSub is Year 2000 Compliant. However,
RoweCom is also developing an integrated catalog with NewSub Services similar
to the integration with the barnesandnoble.com described above. Failure to
develop an operational service with any partner prior to the Year 2000 date
change may result in an inability to adequately process and fulfill orders from
RoweCom's customers.
RoweCom believes that it has already incurred the majority of the expenses that
it expects to incur to deal with Year 2000 issues. In 1998, we spent
approximately $29,000 on licensing the Navision accounting package. RoweCom
does not believe that it will be required to spend significantly more on third
party information technology. In addition, during 1998 RoweCom incurred
expenses of approximately $541,000 in the development of its internal client
operations application. We anticipate that completing the development and
testing process for the in-house production system will cost an additional
$259,000. Additional costs also may be incurred by the Company in ensuring that
all of its other critical systems are Year 2000 Compliant, particularly with
regard to critical systems operated and maintained by third parties. RoweCom is
currently unable to estimate such costs with any reliability. We have funded
costs incurred to date from working capital and prior financings and will fund
any additional costs incurred from working capital and the net proceeds it
receives from this offering.
RoweCom has not yet developed formal contingency plans for the majority of the
critical systems. We believe that in the event of a failure of the Navision
accounting system, alternative systems that are Year 2000 Compliant will be
readily available at minimal cost. Because there is no real current alternative
for the ACH System, RoweCom is unlikely to be able to develop a contingency
plan to deal with a possible failure of such system to be Year 2000 Compliant.
In the event of a failure of the ACH System to be so compliant, RoweCom would
be required to rely on other payment methods, including credit cards. In the
event of a failure of any one of our other critical systems, we would be forced
to complete most transactions on a manual basis. RoweCom may also develop
additional contingency plans as the Year 2000 date change approaches in order
to deal with yet unknown Year 2000 issues.
Although RoweCom currently believes that the critical systems that it operates
will be Year 2000 Compliant, there can be no assurance that all of such systems
and the other critical systems maintained by third parties on behalf of RoweCom
will be Year 2000 Compliant by the end of 1999. A reasonably possible worst
case scenario might include one or more of the critical systems maintained by
one of our business partners being non-compliant. Any such failure could result
in a material disruption of our operations. Specifically, we could experience
interruptions in our ability to process orders with certain publishers, collect
and process receipts from credit cards or direct disbursement accounts,
accurately maintain accounting records and perform adequate customer service. A
failure by any of RoweCom's critical systems, or any other systems deployed by
us prior to the Year 2000 date change, to be Year 2000 Compliant could have a
material adverse effect upon our future results of operations and financial
condition.
RoweCom is not able to assess the Year 2000 Compliance of its clients. In the
event that a significant number of our clients face difficulties as a result of
the Year 2000 date change, such clients may be unable to process
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purchases through the kStore, or may face budgetary constraints that limit
knowledge resource purchasing. Any diminished purchasing by our clients as a
result of Year 2000 difficulties could have a material adverse effect on
RoweCom's future results of operations and financial condition.
Recent Accounting Pronouncements Applicable to this Offering
In March 1998, The American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance over accounting for computer software developed or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. RoweCom does not expect the adoption of this
standard to have a material effect on our capitalization policy.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS 133 will become effective in January 2000. SFAS
133 requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. To date RoweCom has not utilized derivative
instruments or hedging activities and, therefore, the adoption of SFAS 133 will
not have a material impact on RoweCom's financial position or results of
operations.
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Business
RoweCom is the leading business-to-business provider of e-commerce solutions
for purchasing and managing the acquisition of magazines, newspapers, journals,
books and other knowledge resources. RoweCom offers its clients access to the
largest catalog of such knowledge resources on the Internet and allows its
clients' employees to purchase knowledge resources easily and conveniently from
their desktop computers. RoweCom also provides businesses with a highly
effective means of managing and controlling purchases of knowledge resources
and reducing costs. RoweCom targets clients in knowledge-intense industries,
such as financial and professional services, high technology and healthcare, as
well as selected academic and non-profit institutions.
RoweCom's kStore(TM) facilitates decentralized purchasing of knowledge
resources by businesses and their employees while at the same time giving
management the tools required to effectively control knowledge resource
purchases. The kStore provides businesses with a single comprehensive source
for the purchase of knowledge resources, offering more than 43,000 magazines,
journals and newspapers from over 13,000 publishers, and approximately five
million books through RoweCom's alliance with barnesandnoble.com. The kStore's
automated service is easily accessible from an employee's desktop computer via
the corporate intranet or the Internet and permits the employee to find, order,
and pay for knowledge resources quickly and conveniently. At the same time, the
kStore provides managers with detailed reports of knowledge resource purchases
by their employees and permits them to institute customized approval
procedures. The kStore also helps management reduce the costs of knowledge
resource acquisition by eliminating many of the inefficiencies of traditional
knowledge resource acquisition methods and by offering discounted prices on
most titles.
Industry Overview
The effective use of knowledge resources has become an increasingly important
competitive advantage for businesses and other institutions. Timely and
relevant information, easily accessible to all members of an enterprise, has
become critical to job productivity. The quantity and the degree of
specialization of knowledge resources available to businesses and their
employees, and the cost of such resources have increased dramatically.
According to Veronis Suhler and Associates, Inc., US businesses spent
approximately $38 billion in 1997 on knowledge resources, such as market
studies, business magazines and professional publications, and other types of
business information, such as financial news services, credit reports and other
general business information. Veronis Suhler has forecasted that this spending
will grow to $51 billion by 2001. Based on US government census data and
projections, RoweCom believes that over the same period the number of US
professional workers that depend on knowledge resources will increase from 37
million to 41 million. As a result, businesses and other institutions need
efficient and cost effective methods for managing the growing number of
purchases of knowledge resources by employees.
The growth in demand for knowledge resources is occurring at a time when the
Internet and corporate intranets are becoming increasingly significant for
communications and e-commerce. International Data Corporation estimates that
business-to-business Internet commerce, including spending on knowledge
resources, will grow from an estimated $7.4 billion in 1997 to $179.4 billion
in 2001. RoweCom believes that spending on knowledge resources via the Internet
and corporate intranets has also accelerated in recent years and will increase
in the future.
Most companies currently do not have an efficient and easy-to-use means of
executing and managing purchases of knowledge resources. The process of
purchasing knowledge resources historically has involved significant manual
effort and has focused on the professional librarian or central purchasing
group, rather than the individual worker whose job performance depends on such
resources. This manually intensive, paper-based process requires finding the
appropriate publishers, submitting written or telephone orders, processing
multiple renewal notices, and completing expense reports for reimbursement.
Increasingly, individual employees are purchasing knowledge resources directly
from publishers and other vendors rather than ordering through a corporate
library or central purchasing group. As a result, employees are making numerous
individual purchases from a large number of publishers and services using a
variety of payment methods. RoweCom believes that for most businesses the
aggregate cost of purchases of knowledge resources made by individuals is
significantly larger than the knowledge resource budget of the corporate
library or central purchasing group. Decentralized purchases make it difficult
for businesses to manage employee purchases, control spending and prevent
duplicative or unauthorized orders.
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As knowledge resources have become more numerous and specialized, the marketing
and cost effective distribution of such knowledge resources to appropriate
users has become difficult for publishers and other content providers.
Conventional retail outlets do not reach the full range of individuals
purchasing knowledge resources and cannot physically stock the entire range of
knowledge resources available. In addition, the cost to the publisher of
maintaining inventories at multiple outlets is too high to allow the
distribution through such outlets of specialized knowledge resources that will
only sell in limited numbers at any one outlet.
The RoweCom Solution
RoweCom's business-to-business e-commerce solution provides clients and their
employees with an easy and convenient way to purchase and manage the
acquisition of knowledge resources through corporate intranets or the Internet.
From the desktop computer, a client's employee can access a customized RoweCom
Web site offering more than 43,000 magazines, newspapers and journals from over
13,000 publishers, and approximately five million books. RoweCom provides
businesses with a highly effective means of managing and controlling purchases
of knowledge resources and reducing costs. RoweCom also provides publishers and
other content providers with a unique distribution channel which enables
RoweCom to offer its clients additional content at lower prices. Key benefits
of the RoweCom solution include:
Convenience
RoweCom's kStore provides a single comprehensive source for the purchase of
knowledge resources. RoweCom offers its clients access to the largest combined
database of magazines, newspapers, journals, books and other knowledge
resources on the Internet. RoweCom's highly automated service provides an easy
and quick way to find, order, and pay for knowledge resources by providing
multiple electronic search functions and payment methods. These features
facilitate ordering and eliminate paper purchase orders, invoices, check
requests and manual approvals. The kStore can be made available through the
client's intranet site or the Internet, and may be accessed from an employee's
desktop computer, the corporate library or central purchasing group using a
point and click interface. The kStore also includes automated features, such as
subscription renewal notifications, and 24-hour, 7 days a week client support
via telephone and the Internet.
Control
RoweCom allows businesses to proactively manage their purchases of knowledge
resources through the implementation of customized purchase approval procedures
and the use of enterprise-wide purchasing reports. RoweCom also helps
businesses and their employees "buy smarter" by:
. indicating to employees which items have already been purchased by other
employees;
. creating greater awareness of available titles among employees; and
. allowing managers to analyze and guide employees' purchasing activities.
RoweCom helps clients reduce duplicate orders, increase shared use of knowledge
resources and enhance the likelihood that employees will purchase knowledge
resources that will maximize their productivity and performance.
Cost Savings
RoweCom offers substantial direct and indirect cost savings to its clients. The
kStore provides the lowest price available on the Internet for popular
magazines, and an additional 5% discount on the already discounted price of
books available directly from barnesandnoble.com. In addition, RoweCom offers
large volume clients the guaranteed lowest price on the Internet for all
subscriptions. Clients also achieve indirect cost savings through the kStore's
automated service, which reduces the manual processing of orders, approvals,
payment, claims and renewals. In addition, RoweCom enables enterprises to
reduce duplicate orders and facilitates resource sharing among employees.
Benefits to Publishers and other Content Providers
RoweCom provides publishers and other content providers with a number of
benefits, including:
. an efficient and low cost direct distribution channel to targeted buyers,
corporate libraries, and centralized purchasing groups; knowledge
resources are shipped at the time of purchase which enables vendors to
reduce the levels of inventory required and therefore reduce the costs
associated with stocking and returns;
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. an increase in the sales of many second and third tier magazines,
newspapers, journals, books and other knowledge resources that are not
typically stocked in physical locations and are generally hard to find;
and
. a unique distribution channel which enables RoweCom to offer its clients
additional content at lower prices.
Strategy
RoweCom's objective is to maintain and strengthen its position as the leading
business-to-business provider of e-commerce solutions for purchasing and
managing the acquisition of magazines, newspapers, journals, books and other
knowledge resources. Key elements of RoweCom's strategy include:
Penetrate the Business-to-Business Market
RoweCom seeks to increase the number of clients and individuals accessing the
kStore from the desktop computer. RoweCom targets companies in knowledge-
intense industries, such as financial and professional services, high
technology and healthcare, as well as certain academic and public institutions.
RoweCom is increasing its sales force to develop new client relationships and
to expand the use of the kStore by its existing clients by increasing the
awareness among, and availability to, the client's employees. RoweCom believes
that being the first knowledge resource purchasing solution on a client's
intranet promotes brand loyalty and provides it with a significant competitive
advantage. Once the kStore is adopted by the client, RoweCom is also well
positioned to add new services and knowledge resource offerings at minimal
additional cost. RoweCom also intends to increase its telesales efforts to
focus on small and mid-size businesses, educational institutions and government
agencies.
Increase Content and Functionality
RoweCom will continue to increase the content available to its clients and
enhance the capabilities of the kStore. This will reinforce its position as the
leading single source provider of knowledge resources to businesses on the
Internet and will increase the overall potential revenue per client. RoweCom
has significantly increased its catalog of knowledge resources through
strategic alliances with publishers and resellers, and has historically added
between 300-500 serial titles each month in response to requests from its
clients. In addition to expanding content, RoweCom has introduced new features
to the kStore, such as group-ordering which allows a designated individual to
order on behalf of a group of purchasers. RoweCom intends to further enhance
the kStore's functionality by adding new capabilities, such as collaborative
filtering, which provides users with information about purchases by other
individuals with similar buying profiles, and personalized recommendations of
knowledge resources based on individual profiles and purchasing patterns. We
believe that these new features may increase the volume and dollar size of
transactions per client.
Develop Strategic Alliances
RoweCom intends to continue to enter into strategic alliances to increase its
channels of distribution and available content. We recently entered into
strategic alliances with barnesandnoble.com and NewSub Services, which added
new distribution channels, substantial additional content and improved pricing.
RoweCom intends to enter into additional strategic distribution alliances to
obtain access to new clients and markets quickly and in a cost-effective
manner. Relationships with other vendors can provide access to additional
content offerings, such as electronic journals, aggregated full text archival
content, and databases that provide the most current information on any topic.
Enhance Brand Recognition
RoweCom intends to continue promoting the kStore as the leading business-to-
business e-commerce solution for purchasing and managing the acquisition of
knowledge resources. RoweCom intends to build brand recognition among
businesses through Web-based advertising, traditional advertising and
attendance and presentations at major trade shows. We believe that promoting
our reputation as the leading online provider of knowledge resources to the
business-to-business market will build loyalty among our client base, increase
usage of the kStore by clients' employees, attract new clients and promote the
value of our brand name. In addition, RoweCom believes that a strong brand name
will help it establish additional marketing and distribution alliances.
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Expand Internationally
RoweCom intends to expand its presence in markets outside the United States. By
adding foreign language content and localizing and translating the kStore user
interface, we intend to enhance our ability to fully service US-based clients
that have employees in other countries as well as non-US clients. RoweCom
expects to carry out its international expansion by means of strategic
alliances and, possibly, the acquisition of local content providers. Management
currently plans to commence its international expansion in Canada during the
second half of 1999.
RoweCom's Products And Services
The kStore
RoweCom's kStore provides each client with its own customized "company store"
which enables businesses and their employees to order, pay for and manage the
purchase of magazines, journals, newspapers, books and other knowledge
resources. The kStore can be customized for each client, quickly and easily.
RoweCom charges a fee, averaging approximately $5,000, for the initial
installation of the kStore on a client's intranet or for the set-up of a
customized Internet kStore site. The design of the kStore is open, scalable and
modular, which permits easy installation of additional features.
The following diagram illustrates the key steps involved in making a purchase
and implementing management policies using the kStore.
[DIAGRAM APPEARS HERE]
Access. Employees access the kStore easily through the corporate intranet or
the Internet. The secure customized site allows access only to qualified
corporate employees. The service may be customized for each client so that the
user interface and design is consistent with the corporate intranet and
reflects the client's pre-established purchase and payment policies. In
addition, the service may be customized to restrict the content available to
employees.
Search. The kStore offers a selection of search tools enabling employees to
quickly find knowledge resources by means of a variety of standard easy-to-use
methods, including searching by title, publisher, and standard cataloging
reference number. The kStore also provides additional information about a
title, including links to publisher Web sites and the Library of Congress.
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Select / Order. To select items, employees simply click on an icon to add a
book or subscription to their online shopping cart or remove products from
their shopping carts as they continue searching. The kStore provides employees
with price information and the identity of other employees in the enterprise
who have previously ordered the same item. Prior to executing orders, employees
may review the content of their cart, the number of titles ordered, and the
total purchase price including shipping and handling.
Approve. Once an order has been placed, it may be subject to one or more
approval levels that are based upon policies previously established by the
client for both order and payment. These approvals may be either passive, where
the kStore automatically compares the items ordered to a series of approval
rules pre-established by the client, or active, requiring the affirmative
approval of a supervising manager. The approval process occurs without the
participation of the employee.
Pay. RoweCom offers its clients several secure payment options including direct
debit, procurement card or credit card. Once the order and payment is approved
and processed, the employee receives an e-mail confirming that the order and
payment have been received and providing an estimated date that the knowledge
resource will be delivered.
Analyze Purchasing Patterns / Revise Policies. Using the kStore, managers can
obtain a variety of reports, including reports on purchases by location,
publication, and business area. These reports allow businesses to proactively
monitor purchasing of knowledge resources throughout the enterprise, to
implement and revise specific enterprise-wide purchasing policies, and to
optimize the use of knowledge resources within the enterprise. These reports
may be accessed online or ordered from RoweCom on a periodic basis.
Renew. Prior to the expiration date of a subscription, the kStore automatically
sends an e-mail notice to the purchasing employee to prompt the employee to
renew a subscription. This e-mail notice permits the employee to renew simply
by clicking on a single "renew" button on the e-mail notice. As with initial
purchases, clients may set up customized approval policies for subscription
renewals.
Content
RoweCom offers its clients access to the largest single source of magazines,
newspapers, journals, books and other knowledge resources on the Internet, with
access to more than 43,000 magazines, journals, and newspapers from over 13,000
publishers, approximately five million books from its alliance with
barnesandnoble.com, and approximately 2,200 newsletters and trade publications
from its alliance with Publications Resource Group. Of the 43,000 magazines,
journals and newspapers currently available from the kStore, approximately 800
are large circulation and general interest magazines and the balance consists
of business and trade magazines and scientific and medical journals. Annual
subscription rates range from under $50 for popular magazines to more than
$10,000 for certain scientific and medical journals. RoweCom will continue to
increase the content available to its clients to reinforce its position as the
leading single source provider of knowledge resources to businesses, and to
increase the overall potential revenue per client. Additional offerings are
expected to include electronic journals, aggregate full text archival content
and databases that provide the most current information on any topic. RoweCom
increases its catalog of knowledge resources through strategic relationships
with publishers and resellers as well as in response to requests from its
clients.
Management Tools
The kStore provides businesses with tools to better manage purchases of
knowledge resources by their employees. The kStore permits managers to create
single or multiple levels of approvals that govern purchases by employees. The
approvals that are included in a customized kStore may be either passive or
active. In a passive approval process, the order is compared to a series of
previously defined purchasing protocols. If the order meets the criteria set
forth in the protocol, the purchase is automatically approved. If the order
fails the protocol, it is either rejected or referred to a second approval
process, which may be active or passive. In an active approval process, the
affirmative approval by a supervising manager of an order is required to
consummate the purchase transaction. The active approval process can be
structured in a number of ways, including sending individual approval e-mails
to a manager requesting authorization for each order, and compiling collections
of requested approvals that may be reviewed on a periodic basis and then
approved either individually or collectively.
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Payment and Fulfillment
RoweCom has developed proprietary software that fully automates the ordering
and payment process. The system is able to accept multiple payment options
including credit cards and authorized debits to disbursement or procurement
accounts. Once orders are placed and approved, payment instructions are sent to
Banc One securely over the Internet. RoweCom has an ongoing relationship with
Bank One Corporation, the fifth largest bank holding company in the US and the
parent of Banc One, under which all orders are processed by the Banc One system
using RoweCom's proprietary software. RoweCom pays Banc One a nominal fee for
each item ordered through the kStore.
Although RoweCom does not fulfill or deliver any client's order for a knowledge
resource, it provides client support to ensure that the client's expectations
and needs are fulfilled with respect to each order. Client representatives are
available 24 hours per day, 7 days per week via the telephone and the Internet.
Client support provides a vital role in increasing sales to RoweCom's existing
client base by focusing on client satisfaction and on increasing the total
number of orders placed by each client.
Strategic Alliances
barnesandnoble.com Relationship
In August 1998, RoweCom entered into a five-year agreement with
barnesandnoble.com, a company jointly owned by Barnes and Noble, Inc. and
Bertelsman A.G., to combine and jointly market to business customers the
companies' respective catalogs. As a result of this agreement, RoweCom's
clients can access the largest combined database of magazines, newspapers,
journals, books and other knowledge resources on the Internet.
barnesandnoble.com currently markets to business customers over the Internet
through its Business Solutions service, which commenced operations in the third
quarter of 1998.
Under the agreement, barnesandnoble.com will provide all books ordered by
either party's business clients, and RoweCom will provide all magazine,
journal, and newspaper subscriptions ordered by its clients or by Business
Solutions clients. barnesandnoble.com will pay RoweCom a fixed percentage of
the purchase price of every book sold either through RoweCom's kStore or
barnesandnoble.com's Business Solutions service other than sales to Business
Solutions' clients as of the date of this agreement. RoweCom will pay
barnesandnoble.com a fixed amount or percentage of the purchase price of every
subscription sold by the kStore or the Business Solutions service, other than
sales to existing RoweCom customers as of the date of the agreement.
Users currently may access the barnesandnoble.com and RoweCom catalogs by means
of links found in the Business Solutions and the kStore Web sites. RoweCom and
barnesandnoble.com expect that the Business Solutions and the kStore sites will
each contain a complete catalog of RoweCom and barnesandnoble.com titles by the
end of the first quarter of 1999.
The agreement provides a framework for the parties to develop jointly an
integrated Web site to market and sell books, magazines and all other digital
media. This integrated Web site would combine both the kStore and Business
Solutions. However, management cannot be certain when, if ever, such an
integrated Web site would be initiated. barnesandnoble.com has also agreed that
it will not, prior to the launch of such an integrated Web site, enhance its
Business Solutions service to provide certain management control features such
as approval rules.
RoweCom believes that its relationship with barnesandnoble.com may enhance its
efforts to expand internationally as a result of the recent acquisition by
Bertelsman of a 50% interest in barnesandnoble.com. Bertelsman, one of the
largest global diversified media companies, sources and distributes a
significant amount of international content.
Other Significant Relationships
NewSub Services. In September 1998, RoweCom entered into content and
distribution agreement with NewSub Services, a consumer-based affinity marketer
for popular magazines, which provides RoweCom with additional content at low
prices. NewSub has agreed to offer its catalog of approximately 800 popular
titles through RoweCom's kStore at the guaranteed lowest publisher-authorized
price available on the Internet. RoweCom will, in turn, be the exclusive
provider of any RoweCom title not currently included in NewSub's title catalog
through NewSub Services' online magazine marketing and distribution channels.
Under the terms
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of the agreement with NewSub Services, each party will earn revenue on titles
sold through the other party's online distribution channel by receiving a
percentage of the gross sales price or a transaction fee for each of its
respective titles sold by the other party. This alliance is expected to be
implemented during the first quarter of 1999.
Intelisys Commerce. In August 1998, RoweCom entered into an agreement with
Intelisys to sell magazines, newspapers, journals, books and other knowledge
resources to Intelisys clients, providing RoweCom with a significant new
distribution channel for its products. Intelisys markets and sells software and
services that allow businesses to buy goods and services from vendors via the
Internet. Intelisys' clients will be able to access the kStore through the
Intelisys software. Under this agreement, Intelisys will receive a percentage
of any RoweCom title sold through an Intelisys distribution channel. In turn,
RoweCom will receive a percentage of the net revenue of each Intelisys software
installation for each client successfully referred by RoweCom to Intelisys.
This alliance is expected to be implemented in the first half of 1999.
Publications Resource Group. In October 1998, RoweCom entered into an agreement
with Publications Resource Group, whereby RoweCom obtains an additional
distribution channel and additional content. Publications Resource Group
markets and sells market research reports, newsletters, and other services to
businesses and consumers through catalogs and on the Internet. Publications
Resource Group will market RoweCom's kStore services and content through
Publication Resource Group's distribution channels, and RoweCom will distribute
Publication Resource Group's content through RoweCom's kStore. Publications
Resource Group will receive a percentage of the transaction fee for each
RoweCom title sold through a Publications Resource Group distribution channel
and RoweCom will receive a percentage of the gross sales price for each
Publications Resource Group title sold through the kStore. This alliance is
expected to be implemented in the first quarter of 1999.
Trilogy Software. In October 1998, RoweCom entered into a Memorandum of
Understanding with Trilogy Software, Inc., a management software provider. The
companies agreed to integrate Trilogy's Buying Chain software with RoweCom's
kStore to allow clients to make purchases of magazines, journals, newspapers
and books directly from the kStore using Trilogy's Buying Chain software
solution.
Ariba Technologies. In November 1998, RoweCom entered into a Memorandum of
Understanding with Ariba Technologies, Inc., a developer and supplier of
enterprise application software for operating resource management. Under this
agreement, Ariba will provide its customers with access to the kStore through
the Ariba Web site or the intranets Ariba installs for its customers, providing
RoweCom with an additional distribution channel for its products. Ariba will
also provide information about RoweCom to its worldwide sales force and include
RoweCom in its marketing materials.
Sales And Marketing
RoweCom's sales and marketing strategy is designed to attract new clients,
increase use of the kStore by existing clients and their employees, maximize
repeat purchases and renewals and develop additional revenue opportunities. Our
primary focus is a direct sales campaign to target companies in knowledge-
intense industries, such as financial and professional services, high
technology and healthcare, as well as certain academic and public institutions.
We believe this approach is both efficient and effective due to the size and
potential of the target market and the level of service to which the targeted
clients are accustomed. The majority of the direct sales effort is conducted by
RoweCom's national account managers, who are responsible for developing new
client relationships, primarily in the United States. RoweCom intends to
significantly increase the number of national account managers over the next 12
months, all of whom will initially focus on RoweCom's targeted markets. As of
December 31, 1998, there were six national account managers and in the first
month of 1999, RoweCom added 4 additional national account managers. However,
we do not expect to continue hiring national account managers at this rate. As
RoweCom hires additional national account managers, some or all of the national
account managers will begin to focus on additional targeted industries. We are
also increasing its telesales capacity in order to expand our direct sales
focus to small and mid-size businesses, academic institutions and government
agencies.
Once a client relationship has been established, a client is assigned an
Account Manager who helps to assess the client's needs, to customize the
kStore, and to develop a formal deployment plan designed to maximize the use of
the kStore. Account Managers serve as the primary client contact after the
initial sale and are responsible for maintaining the on-going relationship with
the client, working with the client to maximize the number of employees using
the kStore to purchase knowledge resources and to increase the number of
purchases per
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employee. RoweCom intends to add additional account managers over the next 12
months to service its expanding client base. RoweCom also offers 24-hour, 7
days a week client support via telephone and the Internet. Client support
provides a vital role in increasing sales to RoweCom's existing client base by
focusing on client satisfaction and on increasing the total number of orders
placed by each client.
RoweCom's marketing efforts also include print and Web advertising, direct
mailings, participation in trade shows, co-marketing with strategic partners,
and public relations campaigns to build and reinforce RoweCom's brand
recognition.
Clients
RoweCom targets companies in knowledge-intense industries, such as financial
and professional services, high technology and healthcare, as well as certain
academic and public institutions. At December 31, 1998, RoweCom had
approximately 187 clients, of which approximately 150 were companies and 37
were academic and non-profit organizations. RoweCom's largest clients by
revenue are in the high technology and healthcare sectors. The following is a
representative list of clients of RoweCom, by industry sector.
High Technology Professional Services Healthcare
BASF Corporation Arthur Andersen LLP Aurora Healthcare
Hewlett Packard Company Ernst & Young LLP Massachusetts General
Lawrence Livermore PricewaterhouseCoopers Hospital
National Laboratory LLP National Institutes of
Health
Financial Services Academic
First Chicago NBD Johns Hopkins University
First Union Corporation Ohio University
Blue Cross/Blue Shield University of California
Association at San Francisco
Competition in the Knowledge Resource Industry
The market for the sale of magazines, newspapers, journals, books and other
knowledge resources to businesses is intensely and increasingly competitive. We
have not yet had significant direct competition from other companies offering a
service for purchasing and managing the acquisition of subscriptions and books
with management control features comparable to those of the kStore. However, we
expect that such competition will develop in the short term and it may have an
adverse impact on our business. RoweCom's competitive landscape has been, and
will continue to be, impacted by changes in the prevalence and acceptance of
online commerce and changes in the knowledge resources industry. RoweCom
believes that the principal competitive factors in its emerging market will be
brand recognition, extent of content offerings, convenience, management
control, customization, price, client service, and a combined familiarity with
the knowledge market and the latest enabling technologies.
RoweCom currently competes, or may in the future compete, directly or
indirectly with companies that fall within the following categories:
. large, well-established news and information providers such as Dow
Jones, Knight-Ridder, Lexis/Nexis, Pearson, Reuters and Thomson, any of
which might in the future decide to expand their product offerings to
include magazines, newspapers, journals, books and other knowledge
resources of the type offered by RoweCom;
. traditional subscription agents, who may decide to focus on the
corporate market, expand their service to include control and management
features, and significantly expand their knowledge resource offerings;
. major consumer based online book resellers, such as Amazon.com, or
Borders.com who may also decide to focus on the business-to-business
market, expand their service functionality to include control and
management features such as those offered by RoweCom, or expand their
knowledge resources offerings;
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. consumer online services and portals such as Yahoo! and America Online
which may decide to focus on the business-to-business market and expand
their knowledge resources offering and management and control features;
. publishers and information providers which may decide to increase their
direct marketing efforts to the business-to-business market or develop a
competing service similar to the kStore; and
. enterprise-wide supplier management system providers which may decide to
focus specifically on the knowledge resources markets.
Intellectual Property
RoweCom regards its copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to its success, and
relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, clients, partners
and others to protect its proprietary rights. RoweCom pursues the registration
of its trademarks and service marks in the U.S., and has applied for the
registration of certain of its trademarks and service marks. We have been
granted trademark registrations for the marks "RoweCom" and "Subscribe," each
of which will remain in full force and effect without further action by RoweCom
until December 2003. RoweCom also has pending registration applications for the
marks "Knowledge Acquisition Manager," "Knowledge Acquisition Reporter," each
of which have been preliminarily approved by U.S. Patent and Trademark Office.
RoweCom also has pending registration applications for the marks "kStore,"
"knowledgeStore," and "kWorld," "Knowledge World" and "Knowledge For Your
Business." These applications are currently awaiting examination by the U.S.
Patent and Trademark Office. RoweCom has not sought trademark, service mark or
copyright protection outside of the United States and effective protection may
not be available in every country in which our products and services are made
available online.
Technology
RoweCom uses both proprietary solutions and commercially available licensed
technologies. RoweCom's services are built using industry standard Microsoft NT
products utilizing the Internet Information Server, Microsoft Transaction
Server, and SQL Server for database transactions. RoweCom is using products
utilized by other industry leaders. In addition, all of RoweCom's services are
designed to process information using standard Electronic Data Interchange
transactions as defined for the serials and periodicals industry, and RoweCom
is actively engaged with other leading e-commerce providers to develop XML
versions of these transactions. RoweCom seeks to maintain transaction security
through the use of industry standard SSL transactions, and uses proprietary EDI
interfaces and private networks to ensure the integrity of client order
information and credit card transactions. RoweCom is able to scale the number
of transactions that will be supported using load balancing and performance
management tools developed for its standard platform. RoweCom uses high
performance Web and database servers on enterprise-level systems and has
established high-performance Internet service provider links to ensure the
availability of bandwidth.
RoweCom's systems are supported by an experienced staff of developers and
technicians, who are responsible for both system development and maintenance.
This staff, which was comprised of 28 individuals as of December 31, 1998, is
primarily headquartered in our facilities in London, Ontario. This group mainly
focuses on back office processing and developing interfaces that permit
RoweCom's services to be customized to the particular needs of a client and to
be linked with corporate intranets, Internet service providers, content
providers and other online services. Many of RoweCom's development and support
professionals have specialized experience with particular segments in the
knowledge resource marketplace (e.g. corporate clients, corporate libraries,
educational institutions, public libraries, and consumers).
Employees
As of December 31, 1998, RoweCom had 95 full-time and 6 part-time employees.
RoweCom also employs a limited number of independent contractors and temporary
employees on a periodic basis. None of RoweCom's employees are represented by a
labor union and we consider our labor relations to be good.
RoweCom believes its success depends to a significant extent on its ability to
attract, motivate and retain highly skilled management and employees. To this
end, we focus on incentive programs such as employee stock options, competitive
compensation and benefits for its employees.
36
<PAGE>
Facilities
RoweCom is headquartered in Cambridge, Massachusetts where it leases
approximately 11,304 square feet pursuant to a term lease that expires on
October 31, 1999. These facilities are used for executive office space,
including sales and marketing and finance and administration, and client
support. In addition, RoweCom maintains a regional office in London, Ontario
where it leases approximately 7,733 square feet of office space pursuant to a
term lease that expires on October 31, 2001. These facilities are used for
research and development, technical support and content acquisition.
Legal Proceedings
RoweCom is not a party to any material litigation, and believes that no
litigation that has been threatened to be brought against RoweCom to date will
have a material adverse effect on its financial position or results of
operations or cash flows.
37
<PAGE>
Management
Executive Officers and Directors
The following sets forth certain information with respect to the directors and
executive officers of RoweCom as of the date of this prospectus.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Name Age Position(s)
- ---------------------------------------------------------------------------
<C> <C> <S>
Dr. Richard Rowe, Ph.D. 65 Chairman of the Board of Directors, President,
Chief Executive Officer and Director
Executive Vice President and Chief Financial
Louis Hernandez, Jr. 32 Officer
Steven Woit 40 Vice President, Content
Walter Crosby 40 Vice President and Chief Technology Officer
Stephen Vozella 52 Vice President, Fulfillment
Ronald Grigg 47 Vice President, Design and Development
Robert Rea 37 Sales and Service Director
Thomas Lemberg* 52 Director
Jerome Rubin+ 74 Director
Philippe Villers 63 Director
John Kennedy*+ 40 Director
Stanley Fung 41 Director
</TABLE>
- --------
* Member of Compensation Committee
+ Member of Audit Committee
Richard Rowe Ph.D., the founder of RoweCom, has served as Chairman of the
board, President and Chief Executive Officer of RoweCom since 1994. Prior to
founding RoweCom, from 1979 to 1993, Dr. Rowe was the President and CEO of the
Faxon Company, one of the world's largest library subscription agencies. Prior
to joining Faxon, Dr. Rowe was the Associate Dean of the Harvard Graduate
School of Education, Director of Harvard's interfaculty Doctoral Program in
Clinical Psychology and Public Practice, and Director of the Cambridge office
of the American Institutes for Research. Dr. Rowe holds a Ph.D. in clinical
psychology.
Louis Hernandez, Jr. has served as RoweCom's Executive Vice President since
January 1998 and Chief Financial Officer since February 1997. From February
1997 to December 1997, Mr. Hernandez also served as the Vice President of
RoweCom. Prior to joining RoweCom, Mr. Hernandez served as the Chief Financial
Officer and Corporate Secretary for U.S. Medical Instruments, Inc., a high
technology medical device company. From 1990 to 1996, Mr. Hernandez worked in
the business and advisory services group of Price Waterhouse LLP. Mr. Hernandez
is a certified public accountant.
Steven Woit has served as Vice President, Content since January 1998. Prior to
joining RoweCom, from 1980 to 1998, Mr. Woit had worked with International Data
Group as Vice President of New Product Development Division in independent
business units within International Data Group, including Federal Computer
Week, CIO Magazine, and Digital News. From January 1997 until December 1997,
Mr. Woit was General Partner with IDG Ventures. From September 1996 to December
1996 Mr. Woit was Chief Executive Officer of Web Shopper. Mr. Woit served as
Executive Vice President at Computerworld, Inc. from September 1994 to
September 1996.
Walter Crosby has served as Vice President and Chief Technical Officer since
June 1998. Prior to joining RoweCom, from October 1997 to June 1998, Mr. Crosby
was an independent consultant. From January 1995 to October 1997, Mr. Crosby
was Chief Information Officer and Vice President for Information Systems for
Computerworld, Inc. Prior to joining Computerworld, Inc., Mr. Crosby was
Corporate Director of Management Information Systems for Ziff Davis Publishing
Company from June 1990 to January 1995.
Stephen Vozella has served as Vice President, Fulfillment since June 1998.
Prior to joining RoweCom, from September 1993 to October 1996, Mr. Vozella
served as Vice President and Chief Information Officer for Fund Services at
First Data Investor Services Group. From May 1989 to June 1993, Mr. Vozella
held various senior management positions at Fidelity Investments including Vice
President, Information Technology, Retail Investor Services, and Vice
President/General Manager, Boston Telephone Operations.
38
<PAGE>
Ronald Grigg has served as Vice President, Design and Development since
December 1994. Prior to joining RoweCom, from 1982 to 1994 Mr. Grigg served as
the Director of Corporate Information Services for Faxon Canada Ltd. Prior to
joining Faxon, Mr. Grigg was the Systems Analyst for R.J. Thompson Data Systems
of London Ontario, where he designed customized accounting, inventory control
and general ledger software.
Robert Rea was appointed Sales and Service Director for RoweCom in November
1998. From April 1998 through October 1998, Mr. Rea was Business Development
Manager for RoweCom. From 1996 to 1998, Mr. Rea was Vice President, Sales and
Marketing for Ovum, Inc., an international research and information firm. From
1989 to 1996, Mr. Rea worked at Giga Information Group, most recently as
Eastern Regional Sales Manager where he was responsible for sales of
information technology products.
Thomas Lemberg has served as a director of RoweCom since May 1996. Mr. Lemberg
is Senior Vice President and General Counsel of the Polaroid Corporation. Prior
to joining the Polaroid Corporation, from 1987 to 1995, Mr. Lemberg was the
Vice President and General Counsel of Lotus Development Corporation.
Jerome Rubin has served as a director of RoweCom since May 1995. Mr. Rubin has
been Managing Director of Veronis, Suhler & Associates, Inc., an investment
banking firm specializing in the media and communications industry since 1995.
From 1991 through 1995, Mr. Rubin was also the Chairman Emeritus of the MIT
Media Lab's "News in the Future" consortium. Mr. Rubin has also been Chairman
of E-Ink, a development stage company since 1997. In 1973, Mr. Rubin founded
and was the first president of LEXIS/NEXIS, the first online legal database
service. From 1983 to 1991, Mr. Rubin was the Group Vice President/Chairman for
Professional Information and Book Publishing at the Times Mirror Company.
Philippe Villers has served as a director of RoweCom since August 1998. Mr.
Villers has been President and board Member of GrainPro, Inc. since 1996. Since
1981, he has also served as founder, President, and board Member of Families
USA Foundation. From 1985 to 1988, Mr. Villers previously founded and led
Cognition, Inc. where he served as President for three years. Prior to 1988, he
co-founded Computervision, Inc. and Automatix, Inc.
John Kennedy has served as a director of RoweCom since February 1999. Mr.
Kennedy is Director of Sales of M/Net, a division of PSDI Limited. Prior to
joining M/Net, from 1991 to 1997, Mr. Kennedy was the president of the
Efficient Systems Division of A.R.M. Group Inc.
Stanley Fung has served as a director of RoweCom since December 1998. Mr. Fung
has been a managing director of Zero Stage Capital Company since 1992. Prior to
joining Zero Stage in 1992, Mr. Fung was an investment manager in Advent
International, an international venture capital firm.
Board of Directors
At the first annual meeting of stockholders after the completion of this
offering, RoweCom's board of directors will be divided into three classes of
directors. Directors in the first class will be elected for a one-year term,
those in the second class will be elected for a two-year term, and those in the
third class will be elected for a three-year term. The board of directors has
not yet determined which directors will be in each class. At each subsequent
annual meeting, stockholders will elect replacements for the directors whose
term is then expiring, and the directors so elected will serve for a three-year
term.
RoweCom's board of directors has established a compensation committee and an
audit committee. The members of the compensation committee are Thomas Lemberg
and John Kennedy, and the members of the audit committee are Jerome Rubin and
John Kennedy.
Directors are elected by the stockholders at each annual meeting of
stockholders to serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. The current and continuing
directors of RoweCom were nominated and elected in accordance with the Second
Amended and Restated Stockholders Agreement, dated as of December 11, 1998,
which will terminate upon the closing of this offering.
Executive officers of RoweCom are appointed by its board of directors and serve
until their successors have been duly elected and qualified. There are no
family relationships among any of the executive officers or directors of
RoweCom.
39
<PAGE>
RoweCom anticipates that, following this offering, directors who are employees
of RoweCom will not be paid any fees or receive any additional compensation for
service as members of the board of directors or any committee of the board
other than the issuance of options to purchase shares of common stock under the
1999 Non-Employee Director Stock Option Plan and RoweCom will enter into
customary arrangements with respect to fees and other compensation, including
expense reimbursement, for directors who are not employees of RoweCom or any of
its subsidiaries. See "Management--Stock Incentive Plans--1999 Non-Employee
Director Stock Option Plan." RoweCom maintains directors' and officers'
liability insurance and its certificate of incorporation provides for mandatory
indemnification of directors and officers to the fullest extent permitted by
Delaware law. In addition, RoweCom's certificate of incorporation limits the
liability of its directors or its stockholders for breaches of the directors'
fiduciary duties to the fullest extent permitted by Delaware law. See
"Description of Capital Stock--Delaware Law and Certain Charter and By-Law
Provisions."
Compensation Committee Interlocks and Insider Participation
In May 1997, RoweCom's board of directors established a compensation committee.
The compensation committee is responsible for reviewing and approving all
compensation arrangements for officers of RoweCom and for administering its
stock option and stock purchase plans. During the period from May 1997 to the
end of 1997, the Compensation Committee was composed of Thomas Lemberg, Daniel
Nova, a former director of RoweCom who is affiliated with Highland Capital
Partners III Limited Partnership, a stockholder of RoweCom, and James Whitaker,
a former director of RoweCom who is affiliated with Working Ventures Canadian
Fund Inc. The current compensation committee consists of Thomas Lemberg,
Stanley Fung, and John Kennedy.
Employment and Non-Competition Agreements
With the exception of Mr. Hernandez, none of RoweCom's executive officers has
an employment contract, and each of such officers serves at the discretion of
RoweCom's board of directors. Mr. Hernandez is party to an Employment
Agreement, dated as of November 4, 1998, with RoweCom that provides for Mr.
Hernandez to be employed as RoweCom's Executive Vice President and Chief
Financial Officer for a period ending on December 31, 2000, subject to
extension by mutual consent. Under the terms of the Employment Agreement, Mr.
Hernandez is to be paid a base annual salary of $130,000 with the possibility
of annual cash bonuses equal to up to 50% of the base salary, based upon the
achievement of certain performance targets to be agreed upon by Mr. Hernandez
and RoweCom's Chief Executive Officer from time to time. The Employment
Agreement also contains non-competition and non-solicitation provisions that
are intended to survive the termination of employment for a period of 12
months.
Dr. Rowe and Messrs. Hernandez, Woit, and Grigg are each parties to Non-
Competition Agreements with RoweCom under which they have agreed not to compete
with the business of RoweCom or solicit its customers or employees for a period
of 18 months after termination of employment, in the case of Dr. Rowe, and 12
months after termination of employment, in the case of each of the other
officers. Under the terms of these Non-Competition Agreements, if the relevant
officer is terminated other than for Cause, as defined in the Non-Competition
Agreement, or resigns for Good Reason, also as defined in the Non-Competition
Agreement, RoweCom will pay to the officer for the duration of the non-
competition period a monthly non-competition payment equal to two-thirds of his
monthly salary at the time of termination. RoweCom has the option of ceasing
these payments at any time during the non-competition period, at which time the
officer's non-competition and related obligations under the Non-Competition
Agreement would cease.
40
<PAGE>
Executive Compensation
Summary Compensation Table
The following table sets forth certain information concerning the compensation
earned during the year ended December 31, 1998 for (i) RoweCom's Chief
Executive Officer and (ii) each other executive officer of RoweCom whose total
salary and bonus may exceed $100,000 for services rendered to RoweCom and its
subsidiary during 1998. For disclosure regarding terms of the stock options,
see "Management--Stock Incentive Plans."
<TABLE>
<CAPTION>
----------------------------------
Annual Long-Term
Compensation Compensation Options
------------ ---------------------
(Number of Securities
Underlying Options
Salary(1) Granted)
Name and Position(s) ------------ ---------------------
<S> <C> <C>
Richard Rowe, Ph.D........................ $153,000 --
Chairman of the board of directors,
President, Chief Executive Officer
and Treasurer
Louis Hernandez, Jr....................... 124,000 140,687
Executive Vice President and Chief
Financial Officer
Steven Woit............................... 119,000 55,208
Vice President, Content
Ronald Grigg.............................. 88,000 8,726
Vice President, Design and Development
</TABLE>
- --------
(1)Excludes certain perquisites and other benefits the amount of which did not
exceed 10% of the employee's total salary and expected bonus. RoweCom has
allocated approximately $260,000 for the payment of bonuses to employees for
bonuses earned with respect to 1998. No determination will be made regarding
the allocation of bonuses to these officers until after this offering.
Option Grants in Last Fiscal Year
The following table sets forth certain information concerning stock options
granted to each of the officers named in the Summary Compensation Table that
received such options during 1998. No stock appreciation rights were granted to
these individuals during such year. As of December 31, 1998, Richard Rowe did
not have any stock options.
Individual Grants
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Number of Stock Price
Securities % of Total Appreciation for
Underlying Options Granted Option Term(2)
Options to Employees Price Expiration ---------------------
Granted(1) in 1998 Per Share Dates 5% 10%
Name ---------- --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Louis Hernandez, Jr. ... 22,688 2.77% $ .72 1/29/08 $ 546,809 $ 839,619
63,292 7.73% .72 5/21/08 1,525,416 2,342,257
54,707 6.68% 2.86 9/10/08 1,201,434 1,907,478
Steven Woit............. 17,453 2.13% .72 1/29/08 420,639 645,886
37,755 4.61% .72 5/21/08 909,943 1,397,205
Ronald Grigg............ 8,726 1.07% .72 1/29/08 210,308 322,925
</TABLE>
- --------
(1)Shares underlying options generally vest over a four-year period, unless
accelerated in accordance with the stock option agreements governing such stock
options. For information regarding terms of the stock options, see
"Management--Stock Incentive Plans."
(2)Assumes increases in the fair market value of the common stock of 5% and 10%
per year from the initial public offering price set forth on the cover of this
prospectus, over the ten-year option period as mandated by the rules and
regulations of the Securities and Exchange Commission, and does not represent
RoweCom's estimate or projection of the future value of the common stock. The
actual value realized may be greater or less than the potential realizable
values set forth in the table.
41
<PAGE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information concerning option exercises
during 1998 and option holdings at December 31, 1998 with respect to each of
the officers named in the Summary Compensation Table that held options. As of
December 31, 1998, Richard Rowe did not have any stock options.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired on Value Options at In-the-Money Options at
Exercise Realized December 31, 1998(1) December 31, 1998(2)
Name ----------- -------- ------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Louis Hernandez, Jr..... -- -- 4,887 160,234 $ 74,673 $2,331,303
Steven Woit............. -- -- -- 55,208 -- 843,578
Ronald Grigg............ -- -- 14,544 11,634 211,906 175,703
</TABLE>
- --------
(1)"Exercisable" refers to those options which were both exercisable and
vested, while "Unexercisable" refers to those options which were unvested.
(2)Value is determined by subtracting the exercise price per share from the
initial public offering price set forth on the cover page of this prospectus,
and multiplying the result by the number of shares underlying the options.
Stock Incentive Plans
Amended and Restated 1998 Stock Incentive Plan
In February 1999, RoweCom's board of directors and stockholders approved
RoweCom's Amended and Restated 1998 Stock Incentive Plan, which provides for
the grant of incentive stock options, nonqualified stock options and restricted
stock awards to employees (including officers and employee directors) and
consultants. A maximum of 872,625 shares of common stock are currently reserved
for issuance pursuant to this plan. This maximum number of shares will
increase, effective as of January 1, 2000, and each January 1 thereafter during
the term of the plan, by an additional number of shares of common stock equal
to 5% of the total number of shares of common stock issued and outstanding as
of the close of business on the preceding December 31. No participant in this
plan may in any year be granted stock options or awards with respect to more
than 383,955 shares of common stock.
The Amended and Restated 1998 Stock Incentive Plan is administered by the
compensation committee of RoweCom's board of directors, which has the authority
to determine which eligible individuals are to receive options or restricted
stock awards, the terms of such options or awards, the status of such options
as incentive or nonqualified stock options under the federal income tax laws,
including the number of shares, exercise or purchase prices and times at which
the options become and remain exercisable or restricted stock vests and the
time, manner and form of payment upon exercise of an option. The exercise price
of options granted under this plan may not be less than 85% of the fair market
value of a share of common stock on the date of grant, or 100%, in the case of
incentive stock options. The options become exercisable at such time or times
as are determined by the compensation committee and expire after a specified
period that may not exceed ten years.
Upon the acquisition of 50% or more of RoweCom's outstanding common stock
pursuant to a hostile tender offer, each option granted to an officer of
RoweCom, if it has been outstanding for at least six months, will automatically
be canceled in exchange for a cash distribution to the officer based upon the
difference between the tender offer price and the exercise price of the option.
In the event RoweCom is acquired, vesting of options and restricted stock
awards granted under the Amended and Restated 1998 Stock Incentive Plan will
accelerate to the extent that the options or RoweCom's repurchase rights with
respect to restricted stock awards are not assumed by or assigned to the
acquiring entity. The compensation committee also has discretion to provide for
accelerated vesting of options and restricted stock awards upon the occurrence
of certain changes in control. Accelerated vesting may be conditioned upon
subsequent termination of the affected optionee's service.
With the consent of an option holder, the compensation committee can cancel
that holder's options and replace them with new options for the same or a
different number of shares having an exercise price based upon the fair market
value of RoweCom's common stock on the new grant date.
42
<PAGE>
As of December 31, 1998, no shares had been issued upon exercise of options
granted under the Amended and Restated 1998 Stock Incentive Plan, options for
285,219 shares were outstanding and options to purchase 587,406 shares were
available for future grant under this plan.
RoweCom's board of directors may amend or modify the Amended and Restated 1998
Stock Incentive Plan at any time, subject to the rights of holders of
outstanding options. This plan will terminate on May 4, 2008.
1999 Non-Employee Director Stock Option Plan
In February 1999, RoweCom's board of directors and its stockholders approved
the 1999 Non-Employee Director Stock Option Plan. Under this plan, each
director of RoweCom who is not also an employee of RoweCom will receive upon
the commencement of this offering, or upon later initial election to RoweCom's
board of directors, an option to purchase 10,472 shares of common stock.
Additionally, after a director's initial grant, the director will receive, as
of each date on which he is reelected as a director (but not more frequently
than 3 years), an option to purchase 10,472 shares of common stock minus the
number of options previously granted under this plan which have not yet vested.
Options are granted under the plan at an exercise price equal to the fair
market value of the common stock on the date of grant. They vest monthly, at
the rate of 3,491 shares a year, and have a term of ten years. An aggregate of
87,263 shares of common stock have been reserved for issuance under this plan.
1999 Employee Stock Purchase Plan
In February 1999, RoweCom's board of directors and stockholders approved the
1999 Employee Stock Purchase Plan, which enables eligible employees to acquire
shares of common stock through payroll deductions. This plan is intended to
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code of 1986, as amended. The initial offering period will start on the
date of this prospectus and end on June 30, 1999, unless otherwise determined
by RoweCom's board of directors. Subsequent offerings under this plan are
planned to start on January 1 and July 1 of each year and end on June 30 and
December 31 of each year. During each offering period, an eligible employee may
select a rate of payroll deduction of from 1% to 10% of compensation, up to an
aggregate of $12,500 in any offering period. The purchase price for the common
stock purchased under this plan is 85% of the lesser of the fair market value
of the shares on the first day or the last day of the offering period. An
aggregate of 872,625 shares of common stock have been reserved for issuance
under this plan.
1997 Stock Incentive Plan
In May 1997, RoweCom's board of directors and its stockholders approved
RoweCom's 1997 Stock Incentive Plan, which provides for the grant of incentive
stock options, nonqualified stock options and restricted stock awards to
employees, including officers and employee directors, and consultants. A
maximum of 114,618 shares of common stock have been reserved for issuance under
this plan. No participant in the 1997 Stock Incentive Plan may in any year have
been granted stock options or awards with respect to more than 52,358 shares of
common stock. No more than an aggregate of $100,000 or such other limit as may
be imposed by the Internal Revenue Code with respect to the aggregate fair
market value of the options as of the grant date may be exercised for the first
time by a participant under the 1997 Stock Incentive Plan. This limitation does
not apply to nonqualified stock options or restricted stock awards.
The 1997 Stock Incentive Plan is administered by the compensation committee,
which has the authority to determine which eligible individuals are to receive
options or restricted stock awards, the terms of such options or awards, the
status of such options as incentive or nonqualified stock options under the
federal income tax laws, including the number of shares, exercise or purchase
prices and times at which the options become and remain exercisable or
restricted stock vests and the time, manner and form of payment upon exercise
of an option. The exercise price of options granted under this plan have been
determined by the compensation committee. These options were granted at 100% of
fair market value of the underlying common stock, in the case of incentive
stock options, and 110% of fair market value in the case of options granted to
10% or greater stockholders, measured in each case at the time of grant. The
options become exercisable at such time or times as determined by the
compensation committee and expire after a specified period that may not exceed
ten years, or five years, in the case of a greater than 10% stockholder. All
the 113,554 options that have been granted by the Company pursuant to this plan
will vest and become exerciseable upon a "Liquidity Event", as
43
<PAGE>
defined in the agreements representing the options granted under this plan. The
consummation of this offering and a sale of RoweCom will constitute a
"Liquidity Event" for such purpose. Accordingly, all of such options will vest
and become exerciseable immediately after such event.
With the consent of an option holder, the compensation committee can cancel
that holder's options and replace them with new options for the same or a
different number of shares having an exercise price based upon the fair market
value of the common stock on the new grant date.
As of December 31, 1998, 698 shares had been issued upon the exercise of
options granted under the 1997 Stock Incentive Plan, and options for 113,554
shares had been granted under this plan.
RoweCom's board of directors may amend or modify the 1997 Stock Incentive Plan
at any time, subject to the rights of holders of outstanding options. This plan
will terminate on April 25, 2007.
44
<PAGE>
Transactions Among Related Parties
In November 1996, Philippe Villers, a director of RoweCom, loaned RoweCom the
principal amount of $200,000. In January, 1997, Jerome Rubin, a director of
RoweCom, loaned RoweCom the principal amount of $100,000. In April, 1997, in
exchange for the cancellation of the indebtedness of RoweCom to Mr. Villers and
Mr. Rubin, RoweCom issued to Mr. Villers and Mr. Rubin 80,645 and 40,322 shares
of RoweCom's Class A Preferred Stock, respectively. RoweCom also issued to Mr.
Villers and Mr. Rubin, for no additional consideration, stock purchase warrants
providing for the purchase of up to 28,149 and 14,074 shares of RoweCom's
capital stock, respectively. Each of the stock purchase warrants will be
exercisable for shares of RoweCom's common stock at a strike price of $7.10 per
share, subject to any stock dividend, stock split, or similar event. In the
event that either of the stock purchase warrants are not exercised prior to the
consummation of this offering, such stock purchase warrant will be deemed to be
exercised on a "net" basis such that a portion of the shares available under
the stock purchase warrant having a value, determined with respect to the
difference between the price of the common stock in this offering and the
strike price of the stock purchase warrant, will be deemed to have been
surrendered in payment of the exercise price for the remaining shares available
under the stock purchase warrant.
In April 1997, Working Ventures Canadian Fund Inc. acquired 1,611,568 shares of
Class A Preferred Stock of Rowe Communications Ltd. ("RoweCom Canada"), and an
option to exchange shares of RoweCom Canada Class A Preferred Stock for shares
of common stock of RoweCom, for US $4,000,000. In May 1998, in connection with
the sale of RoweCom's Class B Preferred Stock, the Class A Exchange Option was
amended to permit Working Ventures to exchange its 1,611,568 shares of RoweCom
Canada Class A Preferred Stock for 3,163,306 shares of the Class A-1 Preferred
Stock of RoweCom.
In May 1998, Crystal Internet Venture Fund, L.P., Highland Capital Partners III
Limited Partnership, Highland Entrepreneurs' Fund III Limited Partnership, and
three other unaffiliated third parties purchased an aggregate of 5,140,370
shares of RoweCom's Class B Preferred Stock for an aggregate purchase price of
$6,500,000 and Working Ventures acquired 1,186,240 shares of Class B Preferred
Stock of RoweCom Canada, and an option to exchange such RoweCom Canada Class B
Preferred Stock for an equal number of shares of the Class B Preferred Stock of
the Company, for an aggregate purchase price of $1,500,000.
In December 1998, Axiom Venture Partners II Limited Partnership, Zero Stage
Capital VI, L.P., Working Ventures, Crystal Internet Venture Fund, L.P.,
Highland Capital Partners III Limited Partnership, and other unaffiliated
parties purchased an aggregate of 4,586,599 shares of RoweCom's Class C
Preferred Stock for an aggregate purchase price, net of expenses, of
$15,531,599. All of Working Ventures' shares, together with the remaining
outstanding shares of RoweCom's Class A Preferred Stock, Class A-1 Preferred
Stock, Class B Preferred Stock, and Class C Preferred Stock will convert into
common stock upon the consummation of this offering in accordance with their
terms.
In February 1999, RoweCom and Working Ventures entered into an Exchange Option
Exercise Agreement under which Working Ventures agreed to exchange all of its
RoweCom Canada Class A Preferred Stock and Class B Preferred Stock for shares
of RoweCom's Class A-1 Preferred Stock and Class B Preferred Stock,
respectively, effective immediately prior to the consummation of this offering.
Under the terms of the Exchange Option Exercise Agreement and a Second Amended
and Restated Stockholders Agreement to which Working Ventures and RoweCom are
parties, each share of RoweCom Canada Class A Preferred Stock will be exchanged
for 1.963 share of Class A-1 Preferred Stock of RoweCom and each share of Class
B Preferred Stock of RoweCom Canada will be exchanged for one share of Class B
Preferred Stock of RoweCom.
Working Ventures has agreed that, in the event that certain circumstances occur
after the exercise of the Series A Exchange Option, after the consummation of
this offering, it will transfer, for no additional consideration, an aggregate
of 310,371 shares of common stock to the other stockholders and optionholders
of RoweCom who held stock or options on the date that the RoweCom Class A
Preferred Stock was originally issued, including Richard Rowe, Ph.D., the
Chairman of the board of directors, President and Chief Executive Officer of
RoweCom, Thomas Lemberg, Jerome Rubin, and Philippe Villers, each a director of
RoweCom, Louis Hernandez, Jr., the Executive Vice President and Chief Financial
Officer of RoweCom, Steven Woit, the Vice President, Sources of RoweCom, Ronald
Grigg, the Vice President, Design and Development of RoweCom and PV Securities
Corp., a Massachusetts securities corporation of which Philippe Villers, a
director
45
<PAGE>
of RoweCom, is the sole stockholder. Set forth below is a chart that describes
the number of shares of common stock that may be received by the individuals
and entity named above as a result of the transfer of these shares of common
stock by Working Ventures, after giving effect to the conversion of all shares
of Class A-1 Preferred Stock into common stock upon consummation of this
offering. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Impact of Possible Share Transfer."
<TABLE>
<CAPTION>
--------------
Shares of
Common Stock
to be Received
Shareholder --------------
<S> <C>
Richard Rowe, Ph.D. .......................................... 255,095
Thomas Lemberg................................................ 895
Jerome Rubin.................................................. 6,007
PV Securities Corp. .......................................... 4,813
Philippe Villers.............................................. 4,814
Louis Hernandez, Jr........................................... 8,057
Steven Woit................................................... 2,984
Ronald Grigg.................................................. 7,325
</TABLE>
In March 1998, Dr. Rowe loaned RoweCom $100,000 payable on demand. The
Promissory Note accrued interest at the rate of 12% per annum compounded daily,
and was repaid in full (including $2,000 of accrued interest) on May 5, 1998.
Working Ventures, Axiom Venture Partners II Limited Partnership, Zero Stage
Capital VI, L.P., Crystal Internet Venture Fund, L.P., Highland Capital
Partners III Limited Partnership, and substantially all of the other
stockholders of RoweCom are entitled to certain registration rights with
respect to the common stock they will hold upon the consummation of this
offering. See "Description of Capital Stock--Registration Rights."
We believe that all of the transactions set forth above that were consummated
with parties that may be deemed to be affiliated with RoweCom were made on
terms no less favorable to us than could have been obtained from unaffiliated
third parties. All future transactions with parties that may be deemed to be
affiliated with RoweCom, including loans between RoweCom and its officers,
directors, principal stockholders and their affiliates, will be approved by a
majority of the board, including a majority of the independent and
disinterested outside directors on RoweCom's board of directors, and will
continue to be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
46
<PAGE>
Principal Stockholders
The following table sets forth certain information regarding beneficial
ownership of the common stock as of December 31, 1998 by:
. each person who is known by RoweCom to own beneficially more than five
percent of the outstanding common stock;
. each of RoweCom's directors and the Named Officers; and
. all current executive officers and directors of RoweCom as a group.
The table has been prepared on a pro forma basis assuming the:
. conversion of all outstanding shares of preferred stock into common
stock of RoweCom;
. exercise of all options that, by their terms, are exercisable within 60
days of December 31, 1998; shares subject to such options are deemed
outstanding for the purpose of computing the ownership percentage of the
person holding such options, but are not deemed outstanding for purposes
of computing the ownership percentage of any other person;
. exercise of all outstanding stock purchase warrants; and
. where indicated, the sale of 3,100,000 shares in this offering, assuming
no exercise of the underwriters' over-allotment option.
As used in this table, "beneficial ownership" means the sole or shared power to
vote or direct the voting or to dispose or direct the disposition of any common
stock.
<TABLE>
<CAPTION>
-----------------------------------------
Shares Percentage of Common
Beneficially Stock Beneficially
Owned Owned
------------ -------------------------
<S> <C> <C> <C>
Before After
Beneficial Owner Number Offering Offering
Richard Rowe, Ph.D. ............... 1,491,848(1) 22.84% 15.49%
Working Ventures Canadian Fund
Inc............................... 1,543,822(2) 23.64% 16.03%
Highland Capital Partners III
Limited Partnership............... 1,084,574(3) 16.61% 11.26%
Crystal Internet Venture Fund,
L.P............................... 628,914(4) 9.63% 6.53%
Thomas Lemberg..................... 5,235(5) * *
Jerome Rubin....................... 27,133(6) * *
John Kennedy....................... 1,543,822(7) 23.64% 16.03%
Philippe Villers................... 91,204(8) 1.39% *
Louis Hernandez, Jr. .............. 65,245(9) * *
Steven Woit........................ 17,453(10) * *
Ronald Grigg....................... 34,111(11) * *
Stanley Fung....................... 205,459(12) 3.14% 2.13%
All executive officers and
directors as a group (12
persons).......................... 3,539,650(13) 54.19% 36.75%
</TABLE>
- --------
*Less than 1%.
(1)Does not include 255,095 shares that may be transferred to Dr. Rowe by
Working Ventures after consummation of this offering. If such transfer had
occurred as of December 31, 1998, the percentages of common stock beneficially
owned before and after the offering by Dr. Rowe would have been 26.75% and
18.14%, respectively. Dr. Rowe's address is c/o RoweCom, Inc., 725 Concord
Avenue, Cambridge, MA 02138.
(2)Consists entirely of shares issuable upon the conversion of 3,163,306 shares
of Class A-1 Preferred Stock, 1,186,240 shares of Class B Preferred Stock and
73,378 shares of Class C Preferred Stock into common stock upon consummation of
this offering. Includes 310,371 shares that may be transferred to various other
stockholders after the consummation of this offering. If such transfer had
occurred as of December 31, 1998, the percentage of common stock beneficially
owned before and after the offering would have been 18.89% and 12.81%,
respectively. See "Transactions Among Related Parties." The address for Working
Ventures is 250 Bloor Street East, Suite 1600, Toronto, Ontario M4W1E6.
(3)Consists entirely of shares issuable upon the conversion of 3,036,773 shares
of Class B Preferred Stock and 70,443 shares of Class C Preferred Stock owned
by Highland Capital Partners III Limited Partnership, and 126,532 shares of
Class B Preferred Stock and 2,935 shares of Class C Preferred Stock owned by
Highland Entrepreneurs' Fund III Limited Partnership, an affiliate of Highland
Capital Partners III Limited Partnership,
47
<PAGE>
into common stock upon consummation of this offering. The address for Highland
Capital Partners III Limited Partnership is Two International Place, Boston, MA
02110.
(4)Consists entirely of shares issuable upon the conversion of 1,581,654 shares
of Class B Preferred Stock and 220,135 shares of Class C Preferred Stock into
common stock upon consummation of this offering. The address for Crystal
Internet Venture Fund, L.P. is 1120 Chester Avenue, Cleveland, OH 44114.
(5)Includes 5,235 shares issuable upon the exercise of options that will become
exercisable within 60 days of December 31, 1998. Does not include 895 shares
that may be transferred to Mr. Lemberg by Working Ventures after the
consummation of this offering.
(6)Includes 7,824 shares issuable upon the net exercise of a stock purchase
warrant held by Mr. Rubin, and 5,235 shares issuable upon the exercise of
options that will become exercisable within 60 days of December 31, 1998. Does
not include 6,007 shares that may be transferred to Mr. Rubin by Working
Ventures after consummation of the offering. See "Transactions Among Related
Parties."
(7)Consists entirely of shares beneficially owned by Working Ventures Canadian
Fund Inc. Mr. Kennedy is the representative of Working Ventures Canadian Fund
Inc. to RoweCom's board of directors and may be deemed to control the voting
and disposition of the common stock held by Working Ventures Canadian Fund Inc.
Mr. Kennedy disclaims beneficial ownership of the common stock held by Working
Ventures Canadian Fund Inc. Mr. Kennedy's address is c/o Working Ventures
Canadian Fund Inc., 250 Bloor Street East, Suite 1600, Toronto, Ontario M4W1E6.
See also note (2) above.
(8)Includes 45,602 shares held by PV Securities Corp., a Massachusetts
securities corporation of which Mr. Villers is the sole shareholder and 28,149
shares issuable upon the exercise of stock purchase warrants held by members of
Mr. Villers' immediate family or trusts for the benefit of such persons. Does
not include 9,627 shares that may be transferred to Mr. Villers or PV
Securities Corp. by Working Ventures after the consummation of this offering.
If such transfer had occurred as of December 31, 1998, the percentage of common
stock beneficially owned before and after the offering would have been 1.54%
and 1.04% respectively. See "Transactions Among Related Parties."
(9)Includes 65,245 shares issuable upon the exercise of options that will
become exercisable within 60 days of December 31, 1998. Does not include 8,057
shares that may be transferred to Mr. Hernandez by Working Ventures after the
consummation of this offering. If such transfer had occurred as of December 31,
1998, the percentage of common stock beneficially owned before and after the
offering would have been 1.11% and 0.76%, respectively. See "Transactions Among
Related Parties."
(10)Includes 17,453 shares issuable upon the exercise of options that will
become exercisable within 60 days of December 31, 1998. Does not include 2,984
shares that may be transferred to Mr. Woit by Working Ventures after the
consummation of this offering.
(11)Includes 17,452 shares issuable upon the exercise of options that will
become exercisable within 60 days of December 31, 1998. Does not include 7,325
shares that may be transferred to Mr. Grigg by Working Ventures after the
consummation of this offering. See "Transactions Among Related Parties."
(12) Consists entirely of shares beneficially owned by Zero Stage Capital VI
L.P. Mr. Fung is managing director of Zero Stage Capital VI L.P. and may be
deemed to control the voting and disposition of the common stock held by Zero
Stage Capital VI L.P. Mr. Fung disclaims beneficial ownership of the common
stock held by Zero Stage Capital VI L.P. Mr. Fung's address is c/o Zero Stage
Capital VI L.P., 101 Main Street, Cambridge, MA 02142.
(13)Includes 197,467 shares issuable upon the exercise of options that will
become exercisable within 60 days of December 31, 1998.
48
<PAGE>
Description of Capital Stock
Upon the closing of this offering, the authorized capital stock of RoweCom will
consist of 34,000,000 shares of common stock, $.01 par value per share, and
23,000,000 shares of preferred stock, $.01 par value per share, whose rights
and designation have not yet been established. There will be no preferred stock
outstanding immediately after the closing of this offering. The description in
the sections below of RoweCom's certificate of incorporation and by-laws refers
to RoweCom's Third Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws, respectively, as they will be in effect upon the
closing of this offering.
Common Stock
As of December 31, 1998, there were 1,526,180 shares of common stock
outstanding and held by five stockholders. These numbers do not reflect certain
transactions that will take place prior to the closing of this offering. These
transactions are described previously in the section entitled "Transactions
Among Related Parties." They are as follows:
. The conversion of all preferred stock of RoweCom and RoweCom Canada that
is outstanding prior to this offering into RoweCom common stock.
. The exercise of all outstanding preferred stock purchase warrants. The
price that the holders of the warrants must pay to obtain their shares,
the "exercise price," may in some cases not be paid in cash. Instead, we
will take the number of shares that the holder would otherwise have
received and deduct from that the number of shares that is equal in
value, based on the offering price of the common shares, to the "exercise
price."
Based upon the number of shares of common stock outstanding as of December 31,
1998 and giving effect to the issuance of the 3,100,000 shares of common stock
offered by this prospectus and the exercise of all outstanding stock purchase
warrants, assuming the underwriters do not exercise their over-allotment
option, there will be 9,631,858 shares of common stock outstanding upon the
closing of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders, and are not able to multiply the
number of shares they own by the number of directors up for election for
purpose of electing directors. Accordingly, holders of a majority of the shares
of common stock entitled to vote in any election of directors may elect all of
the directors standing for election. Holders of common stock are entitled to
receive dividends in proportion to the number of shares they hold, if they are
declared by RoweCom's board of directors out of funds that are legally
available for that purpose, provided that dividends declared on outstanding
preferred stock shall have priority. Upon the liquidation, dissolution or
winding up of RoweCom, the holders of common stock are entitled to receive the
net assets of RoweCom available after the payment of all debts and other
liabilities, provided that holders of the outstanding preferred stock shall
have priority. Holders of the common stock have no preferential right to
participate in any future debt or equity offerings, right to have their shares
redeemed or right to convert their shares into any other type of security. The
outstanding shares of common stock are, and the shares offered by RoweCom in
this offering will be, when issued and paid for, fully paid and non-assessable.
In the event RoweCom issues shares of preferred stock in the future, the rights
of the holders of RoweCom's common stock may be adversely affected by that
issuance. This is because it is probable that any preferred stock issued will
have certain rights and preferences that entitle the holders of such shares to
have priority over the holders of the common stock with respect to certain
matters. These matters include the right to receive dividends and the right to
receive the assets of RoweCom in the event of a bankruptcy or similar type
event. There will be no shares of preferred stock outstanding immediately after
the closing of this offering.
Preferred Stock
Under RoweCom's certificate of incorporation, RoweCom's board of directors is
authorized, subject to certain limitations prescribed by law, without further
stockholder approval, from time to time to issue up to an aggregate of
23,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series. Each series may have different rights, preferences and
designations and qualifications, limitations and restrictions that may be
established by RoweCom's board of directors without approval from the
shareholders. These rights, designations and preferences include:
. number of shares to be issued;
. dividend rights;
49
<PAGE>
. dividend rates;
. right to convert the preferred shares into a different type of security;
. voting rights attributable to the preferred shares;
. right to set aside a certain amount of assets for payments relating to the
preferred shares; and
. prices to be paid upon redemption of the preferred shares or a
bankruptcy type event.
If RoweCom's board of directors decides to issue any preferred stock, it could
have the effect of delaying or preventing another party from taking control of
RoweCom. This is because the terms of the preferred stock would be designed to
make it prohibitively expensive for any unwanted third party to make a bid for
the shares of RoweCom. We have has no present plans to issue any shares of
preferred stock.
Delaware Law and Certain Charter and By-Law Provisions
RoweCom is subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a certain period of time. That period is
three years after the date of the transaction in which the person became an
interested stockholder, unless the interested stockholder attained that status
with the approval of the board of directors or unless the business combination
is approved in a prescribed manner. A "business combination" includes certain
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns, or owned within three years prior, 15% or more of the
corporation's voting stock.
RoweCom's certificate of incorporation and by-laws provide for the division of
the board of directors into three classes, as nearly equal in size as possible,
with each class beginning its three year term in a different year. See
"Management--Executive Officers and Directors." Any director may be removed
only for cause by the vote of a majority of the shares that are permitted to
vote for the election of directors.
RoweCom's by-laws provide that for nominations to its board of directors or for
other business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder must first have given timely notice of the matter
in writing to RoweCom's Secretary. To be timely, a notice of nominations or
other business to be brought before an annual meeting must be delivered (x)
between 120 and 150 days before the date that is the one year anniversary of
the date of the preceding year's proxy statement relating to the annual
meeting; or (y) if the date of the current year's annual meeting is more than
30 days before or 60 days after the anniversary date described in (x) or no
proxy statement was delivered in the preceding year, then notice must be given
no earlier than 90 days before the meeting and no later than (1) 60 days before
the meeting or (2) 10 days after the date on which a public announcement that
relates the date of the annual meeting is made, whichever is later. With
respect to special meetings, notice must generally be delivered not more than
90 days prior to such meeting and not later than the later of 60 days prior to
such meeting or 10 days following the day on which public announcement of such
meeting is first made by RoweCom. The notice must contain, among other things,
certain information about the stockholder delivering the notice and, as
applicable, background information about each nominee or a description of the
proposed business to be brought before the meeting.
RoweCom's certificate of incorporation empowers its board of directors, when
considering a tender offer or merger or acquisition proposal, to take into
account factors in addition to potential economic benefits to stockholders.
These factors may include:
. comparison of the proposed consideration to be received by stockholders
in relation to the then current market price of RoweCom's capital stock,
the estimated current value of RoweCom in a freely negotiated transaction
and the estimated future value of RoweCom as an independent entity and
. the impact of a transaction on the employees, suppliers and clients of
RoweCom and its effect on the communities in which RoweCom operates.
The provisions described above could make it more difficult for a third party
to acquire control of RoweCom and, furthermore, could discourage a third party
from making any attempt to acquire control of RoweCom.
50
<PAGE>
RoweCom's certificate of incorporation provides that any action required or
permitted to be taken by the stockholders of RoweCom may be taken only at duly
called annual or special meeting of the stockholders, and that special meetings
may be called only by the Chairman of the board of directors of RoweCom, a
majority of the board of directors of RoweCom or the President of RoweCom,
except that holders of a majority of the common stock entitled to vote on the
election of directors may call a special meeting for the purpose of filling a
vacancy on the board of directors, and holders of at least two-thirds of the
common stock entitled to vote generally may call a special meeting for any
other purpose. These provisions could have the effect of delaying until the
next annual stockholders meeting stockholder actions that are favored by the
holders of a majority of the outstanding voting securities of RoweCom. These
provisions may also discourage another person or entity from making an offer to
RoweCom stockholders for the common stock. This is because the person or entity
making the offer, even if it acquired a majority of the outstanding voting
securities of RoweCom, would be unable to call a special meeting of the
stockholders and would further be unable to obtain unanimous written consent of
the stockholders. As a result, any meeting as to matters they endorse,
including the election of new directors or the approval of a merger, would have
to wait for the next duly called stockholders meeting.
The Delaware General Corporation Law provides that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless the corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. RoweCom's certificate of incorporation requires the affirmative
vote of the holders of at least 67% of the outstanding voting stock of RoweCom
to amend or repeal any of the provisions of RoweCom's certificate of
incorporation described above, or to reduce the number of authorized shares of
common stock and preferred stock. The 67% vote is also required to amend or
repeal any of RoweCom's by-law provisions described above. The RoweCom by-laws
may also be amended or repealed by unanimous vote of RoweCom's board of
directors. The 67% stockholder vote would be in addition to any separate vote
that each class of preferred stock is entitled to that might in the future be
required in accordance with the terms of any preferred stock that might be
outstanding at the time any amendments are submitted to stockholders.
Registration Rights
RoweCom is party to a Second Amended and Restated Registration Rights
Agreement, dated as of December 11, 1998, with substantially all of its
stockholders, including Working Ventures Canadian Fund Inc., Axiom Venture
Partners II Limited Partnership, Zero Stage Capital VI, L.P., Highland Capital
Partners III Limited Partnership and Crystal Internet Venture Fund, L.P. In
accordance with the Registration Rights Agreement, RoweCom has granted these
stockholders, who will hold in the aggregate 4,969,705 shares of common stock
upon the completion of this offering, the following rights:
. The right to demand, upon four occasions, that their shares of common
stock be registered under the Securities Act of 1933, as amended, in a
manner similar to the registration of the shares that are offered by this
prospectus. They may make this request after the earlier of (x) January 31,
2003 or (y) six months after RoweCom's initial public offering.
. The right to have their shares of capital stock of RoweCom included in
any registration of common stock by RoweCom under the Securities Act, other
than those effected on Forms S-4 or S-8. In addition, RoweCom has agreed to
file registration statements on Form S-3 registering common stock for
resale by these stockholders, subject to certain limitations, upon the
request of the holders of certain percentages of common stock.
RoweCom is required to bear the expenses of the first twelve registrations and
all registrations described in the first sentence of the second bullet point
above conducted by RoweCom in accordance with the Registration Rights
Agreement. Stockholders of RoweCom who will hold in the aggregate 4,718,215
shares of common stock upon completion of this offering have agreed not to
exercise any registration rights during the 180 day period beginning on the
date of this prospectus.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is BankBoston, N.A.
51
<PAGE>
Underwriting
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom J.P. Morgan Securities Inc., CIBC Oppenheimer Corp. and Volpe Brown Whelan
& Company, LLC, are acting as representatives, have severally agreed to
purchase, and RoweCom has agreed to sell to them, the respective number of
shares of common stock set forth opposite their names below.
<TABLE>
<CAPTION>
----------------
Number of Shares
Underwriters ----------------
<S> <C>
J.P. Morgan Securities Inc. ............................... 1,255,500
CIBC Oppenheimer Corp. .................................... 837,000
Volpe Brown Whelan & Company, LLC.......................... 697,500
BancBoston Robertson Stephens Inc. ........................ 77,500
BT Alex Brown Incorporated................................. 77,500
Salomon Smith Barney Inc. ................................. 77,500
Charles Schwab & Co., Inc. ................................ 77,500
---------
Total.................................................... 3,100,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase shares of common stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. Under the
terms and conditions of the underwriting agreement, all of the underwriters are
obligated to take and pay for all such shares of common stock, if any are
taken.
The underwriters propose initially to offer the shares of common stock directly
to the public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $.67 per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $.10 per share to certain other dealers. After the
initial public offering of the common stock, the offering price and other
selling terms may be changed from time to time by the Underwriters.
According to the terms of the underwriting agreement, RoweCom has granted to
the underwriters an option, exercisable for 30 days from the date hereof, to
purchase up to 465,000 additional shares of common stock, on the same terms and
conditions as set forth on the cover page hereof. If such option is exercised
in full, the total price to the public, underwriting discounts and commissions,
and proceeds to RoweCom will be $57,040,000, $3,992,800 and $53,047,200,
respectively. The underwriters may exercise such option solely to cover over-
allotments, if any, made in connection with the sale of shares of common stock
offered hereby. To the extent that option is exercised, each of the
underwriters will have a commitment, subject to certain conditions, to purchase
approximately the same percentage of those additional shares as the number of
shares of common stock to be purchased by it as shown in the table above bears
to the total number of shares of common stock initially offered hereby.
RoweCom and certain of its stockholders, option holders, warrant holders,
officers and directors have agreed that during the period beginning on the date
of this prospectus and continuing to and including the date 180 days after the
date of this prospectus they will not (1) offer, pledge, announce the intention
to sell, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any
shares of common stock or any securities of RoweCom which are substantially
similar to the common stock, including but not limited to any securities that
are convertible into or exercisable or exchangeable for, or that represent the
right to receive common stock or any such substantially similar securities or
(2) enter into any swap, option, future, forward or other agreement that
transfers, in whole or in part, any of the economic consequences of ownership
of common stock or any securities substantially similar to the common stock
(other than, in the case of RoweCom, (x) pursuant to employee stock option
plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this prospectus and (y)
the issuance of common stock in connection with the transactions described in
this prospectus), without the prior written consent of J.P. Morgan Securities
Inc.
RoweCom has agreed to indemnify the underwriters against specified liabilities,
losses and expenses, including liabilities under the Securities Act, or to
contribute to payments that the underwriters may be required to make in
connection with such liabilities.
52
<PAGE>
In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot in connection with this offering,
creating a syndicate short position. In addition, the underwriters may bid for,
and purchase, shares of common stock in the open market to cover syndicate
short positions or to stabilize the price of the common stock. Finally, the
underwriting syndicate may reclaim selling concessions allowed for distributing
the common stock in this offering, if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain
the market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
Prior to this offering, there has been no public market for the common stock.
The initial public offering price for the shares of common stock offered hereby
has been determined by agreement between RoweCom and the underwriters. Among
the factors considered in making such determination were the history of and the
prospects for the industry in which RoweCom competes, an assessment of
RoweCom's management, the present operations of RoweCom, the historical results
of RoweCom and the trend of its revenues and earnings, the prospects for future
earnings of RoweCom, the general condition of the securities markets at the
time of this offering and the prices of similar securities of generally
comparable companies. There can be no assurance that an active trading market
will develop for the common stock or that the common stock will trade in the
public market at or above the initial public offering price.
It is expected that delivery of the shares sold in this offering will be made
to investors on or about March 12, 1999.
The underwriters have reserved for sale up to 304,000 shares of common stock
for directors and employees of RoweCom, existing stockholders of RoweCom and
selected strategic business partners who have expressed an interest in
purchasing such shares of common stock in this offering. The underwriters have
advised RoweCom that the price per share for such shares will be the initial
public offering price. The number of shares available for sale to the general
public in this offering will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares not so purchased will be offered by
the underwriters to the general public on the same basis as the other shares
offered by this prospectus.
53
<PAGE>
Shares Eligible For Future Sale
Upon completion of this offering, we will have outstanding 9,631,858 shares of
common stock assuming the exercise of all outstanding stock purchase warrants
but no exercise of the underwriters' over-allotment option and no exercise of
outstanding options under RoweCom's stock incentive plans or other agreements.
Of these shares, the 3,100,000 shares sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act, except for any shares held by an existing "affiliate" of RoweCom, as such
term is defined by Rule 144 under the Securities Act. The remaining 6,531,858
shares, and any shares purchased by affiliates in this offering, will be
"restricted shares" as defined in Rule 144.
In addition, substantially all of the optionholders, warrantholders and
stockholders of RoweCom, and all officers and directors of RoweCom, have agreed
under written "lock-up" agreements not to sell any shares of common stock for
180 days after the date of this prospectus without the prior written consent of
J.P. Morgan Securities Inc. See "Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after this
offering, a person (or persons whose shares are aggregated) who owns shares
that were purchased from RoweCom or any affiliate at least one year previously,
including a person who may be deemed an affiliate of RoweCom, is entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
. 1% of the then outstanding shares of the common stock which will equal
approximately 9,632 shares immediately after the completion of this
offering or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 must be made with the required notice and the availability
of current public information about RoweCom.
Any person, or persons whose shares are aggregated, who is not deemed to have
been an affiliate of RoweCom at any time during the 90 days preceding a sale,
and who owns shares within the definition of "restricted securities" under Rule
144 under the Securities Act that were purchased from RoweCom or any affiliate
at least two years previously, would be entitled to sell such shares under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements, or notice requirements.
Rule 701 may be relied upon with respect to the resale of securities originally
purchased from RoweCom by its employees, directors, officers, consultants or
advisers prior to this offering. In addition, the Commission has indicated that
Rule 701 will apply to the typical stock options granted by an issuer before it
becomes a public company, along with the shares acquired upon exercise of such
options (including exercises after the date of this prospectus). Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this prospectus, may be sold by:
. persons other than affiliates, in ordinary brokerage transactions; and
. by affiliates under Rule 144 without compliance with its one-year
holding period requirement.
As a result of the foregoing regulations, beginning 90 days after the closing
of this offering, we expect that 31,748 shares of common stock will be eligible
for resale without restriction under Rule 144(k) or Rule 701, all of which
shares are subject to lock-up agreements. In addition, upon the expiration of
the lock-up agreements 180 days after the date of this prospectus, an
additional 4,902,757 shares of common stock, including 4,026,237 shares of
common stock held by affiliates of RoweCom, will become eligible for sale under
Rule 144, subject to the volume and other limitations of such rule. The
remaining 1,629,101 shares of common stock will be eligible for sale under Rule
144 on the first anniversary of their respective dates of issuance, beginning
on December 11, 1999.
RoweCom has agreed not to offer, sell or otherwise dispose of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock or any rights to acquire common stock for a period of 180 days
after the date of this prospectus, without the prior written consent of the
Representatives of the Underwriters, subject to certain limited exceptions. See
"Underwriting."
54
<PAGE>
After the completion of this offering, the holders of 4,969,705 shares of
common stock or their transferees would be entitled to have their shares
registered under the Securities Act. See "Description of Capital Stock--
Registration Rights." Registration of such shares under the Securities Act
would cause such shares to be freely tradable without restriction under the
Securities Act, except for shares purchased by Affiliates, immediately upon the
effectiveness of such registration, which could result in some of such shares
becoming eligible for sale in advance of the dates set forth above.
In addition, RoweCom intends to file one or more registration statements under
the Securities Act covering approximately 114,618 shares of common stock
reserved for issuance under the 1997 Plan, 872,625 shares reserved for issuance
under the Amended 1998 Plan, 872,625 shares reserved for issuance under the
1999 Employee Stock Purchase Plan, 87,263 shares reserved for issuance under
the Director Option Plan, and 71,556 options granted outside of such plans. See
"Management--Stock Incentive Plans." Such registration statements are expected
to be filed within 90 days after the date of this prospectus and will
automatically become effective upon filing. Following such filing, shares
registered under such registration statements will, subject to the 180-day
lock-up agreements described above and Rule 144 volume limitations applicable
to Affiliates, be available for sale in the open market upon the exercise of
vested options 90 days after the effective date of this prospectus. As of the
date of this prospectus, options to purchase an aggregate of 602,966 shares
were issued and outstanding under the 1997 Plan, the 1998 Amended Plan, and the
options issued and outstanding outside of such plans.
Legal Matters
The validity of the common stock offered in this prospectus will be passed upon
for RoweCom by Bingham Dana LLP, Boston, Massachusetts. Certain legal matters
in connection with the offering will be passed upon for the underwriters by
Davis Polk & Wardwell, New York, New York.
Experts
The consolidated balance sheets as of December 31, 1997 and 1998, and the
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for each of the three years in the period ended December 31, 1998,
included in this prospectus and the Registration Statement of which this
prospectus is a part have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
Available Information
We have filed with the Commission a registration statement on Form S-1 with
respect to the common stock being offered by this prospectus. This prospectus
does not contain all of the information set forth in the registration
statement. For further information about us and the common stock, see the
registration statement, and its exhibits. Descriptions in this prospectus of
any contract or other document are not necessarily complete and, where the
contract or document is an exhibit to the registration statement, any such
description is qualified in all respects by the exhibit. Copies of the
registration statement, including exhibits, may be examined without charge in
the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W. Room 1024, Washington, DC 20549, and the Securities and
Exchange Commission's Regional Offices located at 500 West Madison Street,
Suite 1400, Chicago, IL 60601, and 7 World Trade Center, 13th Floor, New York,
NY 10048 or on the Internet at http://www.sec.gov. You can get information
about the operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-800-SEC-0300. Copies of all or a portion of the
registration statement can be obtained from the Public Reference Section of the
Securities and Exchange Commission upon payment of prescribed fees.
As a result of this offering, RoweCom will become subject to the information
and reporting requirements of the Securities Exchange Act of 1934 and will be
required to file periodic reports, proxy statements and other information with
the Securities and Exchange Commission.
55
<PAGE>
ROWECOM INC.
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1998 ................ F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998...................................................... F-4
Consolidated Statements of Stockholders' (Deficit) Equity for the years
ended December 31, 1996, 1997 and 1998................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of RoweCom Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows present fairly, in all material respects, the financial position of
RoweCom Inc. and its subsidiary at December 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 15, 1999 (Except for the information presented in Notes 12 and 15 for
which the date is February 8, 1999)
F-2
<PAGE>
RoweCom Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
----------------------------------------
Pro Forma
At December 31, at December 31,
----------------------- ---------------
1997 1998 1998
---------- ----------- ---------------
(Note 1)
(unaudited)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents........... $ 691,358 $16,050,826 $16,250,826
Accounts receivable (net of
allowance for doubtful accounts of
$0 and $60,000).................... 254,256 1,981,530 1,981,530
Restricted cash..................... 588,499 922,851 922,851
Other current assets................ 229,254 604,523 604,523
---------- ----------- -----------
Total current assets.............. 1,763,367 19,559,730 19,759,730
Equipment and furnishings, net........ 235,386 632,155 632,155
Deferred tax asset.................... 81,730 76,477 76,477
Other assets, net..................... 27,558 16,023 16,023
---------- ----------- -----------
Total assets...................... $2,108,041 $20,284,385 $20,484,385
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY:
Current liabilities:
Accounts payable.................... 166,013 365,853 365,853
Accrued expenses.................... 582,330 810,633 810,633
Accrued compensation................ 114,896 355,780 355,780
Customer advances................... 588,499 922,851 922,851
Income taxes payable................ 126,321 -- --
Loans payable....................... -- 1,657,719 1,657,719
---------- ----------- -----------
Total current liabilities......... 1,578,059 4,112,836 4,112,836
Commitments (Note 9)
Class A Redeemable, Convertible
Preferred stock, $.01 par value,
5,000,000 shares authorized,
1,772,857 shares issued and
outstanding and 0 shares issued and
outstanding on a pro forma basis
(liquidation value of $4,920,758).... 4,298,210 4,636,533 --
Class B Redeemable, Convertible
Preferred stock, $.01 par value,
8,000,000 shares authorized,
6,326,610 shares issued and
outstanding and 0 shares issued and
outstanding on a pro forma basis
(liquidation value of $8,367,101).... -- 8,198,016 --
Class C Redeemable, Convertible
Preferred Stock, $.01 par value,
5,000,000 shares authorized;
4,586,599 shares issued and
outstanding and 0 shares issued and
outstanding on a pro forma basis
(liquidation value of $15,683,252)... -- 15,588,268 --
Stockholders' (deficit) equity:
Common stock, $.01 par value per
share, 34,000,000 shares
authorized; 1,544,140 shares issued
and outstanding at December 31,
1997; 1,526,180 shares issued and
outstanding at December 31, 1998
and 6,531,858 shares issued and
outstanding on a pro forma basis... 15,441 15,261 65,319
Additional paid-in capital.......... 1,709,249 1,709,742 30,282,501
Treasury stock, at cost............. -- (53,267) (53,267)
Accumulated deficit................. (5,509,613) (13,901,240) (13,901,240)
Cumulative translation adjustment... 16,695 (21,764) (21,764)
---------- ----------- -----------
Total stockholders' (deficit)
equity........................... (3,768,228) (12,251,268) 16,371,549
---------- ----------- -----------
Total liabilities and
stockholders' (deficit) equity... $2,108,041 $20,284,385 $20,484,385
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
RoweCom Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
-------------------------------------
Year Ended December 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues................................ $ 3,116,454 $12,889,988 $19,052,639
Cost of revenues........................ 3,082,763 12,701,290 18,735,846
----------- ----------- -----------
Gross profit......................... 33,691 188,698 316,793
Operating expenses:
Sales and marketing.................... 584,602 2,034,331 4,817,402
Research and development............... 532,488 584,081 1,631,052
General and administrative............. 351,246 751,107 1,560,882
----------- ----------- -----------
Total operating expenses.............. 1,468,336 3,369,519 8,009,336
----------- ----------- -----------
Loss from operations................. (1,434,645) (3,180,821) (7,692,543)
Interest and other income, net......... 617 63,652 172,051
----------- ----------- -----------
Loss before income taxes............. (1,434,028) (3,117,169) (7,520,492)
Provision for income taxes............. 15,695 136,352 109,000
----------- ----------- -----------
Net loss............................. (1,449,723) (3,253,521) (7,629,492)
=========== =========== ===========
Accretion of dividends on redeemable
preferred stock....................... -- (183,584) (762,135)
----------- ----------- -----------
Net loss to common stockholders...... $(1,449,723) $(3,437,105) $(8,391,627)
=========== =========== ===========
Pro forma (unaudited):
Basic and diluted pro forma net loss
per share (Notes 1 and 2) ............ $ (1.87)
Weighted average shares used in
computing basic and diluted pro forma
net loss per share (Notes 1 and 2).... 4,078,517
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
RoweCom Inc.
Consolidated Statements of Stockholders' (Deficit) Equity
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Common Additional Treasury Cumulative
Stock Common Paid-In Stock at Accumulated Translation Comprehensive
Shares Stock Capital Cost Deficit Adjustment Total Loss
------ -------- ---------- -------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 7,679 $ 77 $ 674,700 -- $ (622,792) -- $ 51,985
Capital contributions
to Rowe
Communications, Inc... -- -- 839,913 -- -- -- 839,913
Issuance of common
stock in connection
with the foundation of
RoweCom LLC, July 1,
1996.................. 1,544,140 15,441 194,559 -- -- -- 210,000
Net loss............... -- -- -- -- (1,449,723) -- (1,449,723) $ (1,449,723)
Cumulative translation
adjustment............ -- -- -- -- -- $ 9,584 9,584 9,584
------------
Comprehensive loss..... -- -- -- -- -- -- -- $ (1,440,139)
--------- -------- ---------- -------- ------------ -------- ------------- ============
Balance, December 31,
1996................... 1,551,819 15,518 1,709,172 -- (2,072,515) 9,584 (338,241)
Shares cancelled upon
dissolution of Rowe
Communications, Inc... (7,679) (77) 77 -- -- -- --
Accretion of dividends
on preferred stock to
redemption value...... -- -- -- -- (183,577) -- (183,577)
Net loss............... -- -- -- -- (3,253,521) -- (3,253,521) $ (3,253,521)
Cumulative translation
adjustment............ -- -- -- -- -- 7,111 7,111 7,111
------------
Comprehensive loss..... -- -- -- -- -- -- -- $ (3,246,410)
--------- -------- ---------- -------- ------------ -------- ------------- ============
Balance, December 31,
1997................... 1,544,140 15,441 1,709,249 -- (5,509,613) 16,695 (3,768,228)
Accretion of dividends
on preferred stock to
redemption value...... -- -- -- -- (762,135) -- (762,135)
Exercise of stock
options............... 698 7 493 -- -- -- 500
Purchase of treasury
stock shares.......... (18,658) (187) -- $(53,267) -- -- (53,454)
Net loss............... -- -- -- -- (7,629,492) -- (7,629,492) $ (7,629,492)
Cumulative translation
adjustment............ -- -- -- -- -- (38,459) (38,459) (38,459)
------------
Comprehensive loss..... -- -- -- -- -- -- -- $ (7,667,951)
--------- -------- ---------- -------- ------------ -------- ------------- ============
Balance, December 31,
1998................... 1,526,180 $ 15,261 $1,709,742 $(53,267) $(13,901,240) $(21,764) $(12,251,268)
========= ======== ========== ======== ============ ======== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
RoweCom Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
--------------------------------------
Years Ended December 31,
--------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(1,449,723) $(3,253,521) $ (7,629,492)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 49,660 79,476 211,738
Loss on disposal of intangibles..... -- 29,033 --
Changes in operating assets and
liabilities:
Accounts receivable................. (26,155) (228,101) (1,731,677)
Other current assets................ (41,945) (158,631) (371,957)
Accounts payable.................... 80,339 23,373 202,067
Income taxes payable................ -- 126,321 (121,302)
Accrued expenses and accrued
compensation....................... 197,165 478,744 481,624
----------- ----------- ------------
Net cash used in operating
activities......................... (1,190,659) (2,903,306) (8,958,999)
Cash flows from investing activities:
Purchase of equipment and
furnishings......................... (56,329) (203,173) (595,887)
Purchase of intangible assets........ (34,840) (25,531) (1,000)
----------- ----------- ------------
Net cash used in investing
activities.......................... (91,169) (228,704) (596,887)
Cash flows from financing activities:
Net proceeds from issuance of
preferred stock..................... -- 3,712,464 23,362,472
Proceeds from issuance of common
stock............................... 210,000 -- 500
Loan proceeds........................ 210,000 127,638 2,507,719
Loan repayments...................... -- (37,638) (850,000)
Capital contribution................. 839,913 -- --
Purchase of treasury stock........... -- -- (53,454)
----------- ----------- ------------
Net cash provided by financing
activities......................... 1,259,913 3,802,464 24,967,237
Effect of exchange rates on cash..... 9,584 7,111 (51,883)
Net (decrease) increase in cash and
cash equivalents.................... (12,331) 677,565 15,359,468
Cash and cash equivalents, beginning of
period................................ 26,124 13,793 691,358
----------- ----------- ------------
Cash and cash equivalents, end of
period................................ $ 13,793 $ 691,358 $ 16,050,826
=========== =========== ============
Supplementary information:
Conversion of loan payable into
preferred stock..................... -- $ 300,000 --
Accretion of preferred stock......... -- $ 183,577 $ 762,135
Income taxes paid.................... $ 15,286 -- $ 211,058
Interest paid........................ $ -- $ 9,820 $ 19,356
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
RoweCom Inc.
Notes To Consolidated Financial Statements
1. Summary of Significant Accounting Policies
RoweCom Inc. ("RoweCom"), was formed as Rosewood Knowledge Management, Inc. on
January 12, 1994, and was renamed as Rowe Communications, Inc. on February 16,
1995, to provide Internet-based knowledge acquisition and management services.
RoweCom's principal product is the knowledgeStore (the "kStore"). The kStore
allows knowledge workers, librarians, and purchasing agents to order, pay for,
and manage the purchase of knowledge resources. RoweCom provides each client's
organization with its own highly customized "company store" which facilitates
the ordering, payment and management of subscriptions to magazines, newspapers
and journals as well as other knowledge resources electronically through
RoweCom's online catalog. The kStore allows ordering from a decentralized or
centralized environment, the inclusion of built-in approval levels, and the
automation of enterprise-wide reporting.
On July 1, 1996, Rowe Communications, Inc. transferred substantially all of its
assets and liabilities to RoweCom LLC in exchange for a 97% interest in RoweCom
LLC, which is a limited liability company formed under the laws of the State of
Delaware. On April 25, 1997, RoweCom LLC merged with RoweCom. The merger had no
significant impact on RoweCom's financial statement presentation. Rowe
Communications Ltd., a Canadian company ("RoweCom Canada"), is a subsidiary of
RoweCom. All significant intercompany accounts and transactions between RoweCom
and its sole subsidiary, RoweCom Canada, included in the accompanying
consolidated financial statements have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
remaining maturities of three months or less from the date of purchase and
whose carrying amounts approximate fair value due to the short maturity of the
investments.
Revenues
Revenues are principally generated from subscription orders for third-party
publications, which include the cost of the subscription and the associated
transaction fee earned by RoweCom. RoweCom recognizes revenues from a
subscription order when the customer transmits an order.
Revenues for the setup of the kStore on customers' intranets are recognized
upon installation. Revenue earned from installations was immaterial for the
years ended 1996, 1997 and 1998. Revenues related to transaction fees paid by
third parties for transactions sourced from RoweCom's kStore site are
recognized when reported by the third-party.
Research and Development and Capitalized Software Costs
Costs incurred prior to the establishment of technological feasibility are
charged to research and development expense as incurred. Software production
costs incurred subsequent to the establishment of technological feasibility are
capitalized until the product or enhancement is available for general release
to customers. Amortization is based on the straight-line method over the
remaining estimated life of the product. Software production costs eligible for
capitalization have been immaterial.
Advertising Costs
RoweCom expenses advertising costs as incurred. Advertising expense for the
years ended 1996, 1997 and 1998 was $40,325, $227,183 and $244,806,
respectively.
Equipment and Furnishings
Equipment and furnishings are stated at cost, net of accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
lives of the related assets. Leasehold improvements are depreciated over the
shorter of the lease term or the estimated useful life. Upon retirement or
sale, the cost of the assets disposed of and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in the determination of net income or loss.
Other Current Assets
Included in other current assets at December 31, 1997 is $130,000 in advances
to publishers. There were no such amounts outstanding at December 31, 1998.
F-7
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
Other Assets
Other assets are recorded at cost and consist of trademark costs and a license
agreement. Trademark costs are being amortized over five years using the
straight-line method. The license agreement with Banc One Corporation for
processing services is being amortized over a thirty-one month period using the
straight-line method.
Foreign Currency Translation
The local currency for Rowe Communications, Ltd., the Canadian dollar, is the
functional currency of that company. The accounts of Rowe Communications Ltd.
are translated into U.S. dollars using exchange rates in effect at period-end
for assets and liabilities and at average exchange rates during the period for
results of operations. The related translation adjustments are reported as a
separate component of stockholders' equity. Gains and losses resulting from
foreign currency transactions have been immaterial for all periods presented
and are included in interest and other income, net.
Income Taxes
RoweCom accounts for income taxes under the liability method. Under this
method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities using enacted tax rates in effect
in the years in which the differences are expected to reverse. The measurement
of deferred tax assets is reduced by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized.
Prior to its merger into RoweCom on April 25, 1997, RoweCom LLC was a limited
liability company for which all U.S. income and losses flowed through to its
members and are, therefore, not available to offset future taxable income of
RoweCom.
Concentration of Credit Risk, Significant Customer Information and Segment
Information
Financial instruments which potentially expose RoweCom to concentrations of
credit risk consist primarily of trade accounts receivable. RoweCom performs
ongoing evaluations of customers' financial condition, in certain cases
requires advances from customers for future purchases and maintains reserves
for potential uncollectible amounts, which, in the aggregate, have not exceeded
management expectations. For the years ended December 31, 1997 and 1998, the
top three customers represented 23% and 21% of revenues, respectively. RoweCom
has adopted Statement of Financial Accounting Standard No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which requires
segment disclosure. RoweCom has determined that it conducts its operations in
one business segment.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to provide estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expense during the reporting period. Actual results
could differ from those estimates.
RoweCom has a limited operating history, has never achieved profitability and
is subject to the risks and uncertainties encountered by start-up companies
such as the uncertain nature of the markets in which RoweCom competes and the
risk that RoweCom may be unable to manage any future growth successfully.
In addition, RoweCom is subject to the risks encountered by companies relying
on the continued growth of online commerce and Internet infrastructure. The
risk includes the use of the Internet as a viable commercial marketplace and
the potentially inadequate development of the necessary network infrastructure.
One supplier provided 24% and 23% of knowledge resources sold by RoweCom for
the years ended December 31, 1997 and 1998, respectively. If this supplier were
to cease providing knowledge resources at favorable prices RoweCom may be
unable to offer competitive prices to its customers.
F-8
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
Finally, RoweCom has historically experienced season fluctuations in revenues.
This pattern may be expected to continue and results of financial operations
within any fiscal year cannot be expected to be representative.
Pro Forma Balance Sheet (Unaudited)
Upon the closing of RoweCom's initial public offering, all of the outstanding
shares of Class A, A-1, B and C redeemable convertible preferred stock and all
outstanding stock purchase warrants will automatically convert into 5,005,678
shares of RoweCom common stock. The unaudited pro forma presentation of the
balance sheet has been prepared assuming the conversion of the preferred stock
and the preferred stock warrants, into common stock as of December 31, 1998.
Pro Forma Net Loss Per Common Share (Unaudited)
The pro forma net loss per common share is computed based upon the weighted
average number of common shares and common equivalent shares (using the
treasury stock method) outstanding after certain adjustments described below.
Common equivalent shares are not included in the per share calculations where
the effect of their inclusion would be anti-dilutive. In the computation of pro
forma net loss per share, accretion of preferred stock to the mandatory
redemption amount is not included as an increase to net loss. Also, the pro
forma net loss per common share gives effect to the exchange of all outstanding
preferred stock of RoweCom Canada into preferred stock of RoweCom, the
mandatory conversion of all outstanding shares of preferred stock into shares
of common stock and the exercise of all outstanding stock purchase warrants.
2. Net Loss Per Common Share
The following is a calculation of net loss per share
<TABLE>
<CAPTION>
----------------------------------------
Year Ended December 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Historical
Basic and diluted:
Net loss to common stockholders.... $ (1,449,723) $ (3,437,105) $ (8,391,627)
Weighted average number of common
shares............................ 776,084 1,551,819 1,527,827
Net loss per common share-basic and
diluted........................... $ (1.87) $ (2.22) $ (5.49)
Pro forma (Unaudited)
Basic and diluted:
Net loss........................... $ (7,629,492)
Weighted average number of common
shares............................ 1,555,976
Weighted average assumed number of
shares upon conversion of
preferred stock and the net
exercise of all outstanding stock
purchase warrants................. 2,522,541
------------
Total weighted average number of
shares used in computing pro forma
net loss per share................ 4,078,517
Basic and diluted pro forma net
loss per common share............. $ (1.87)
</TABLE>
Options to purchase shares of RoweCom's common stock totaling 101,224 and
155,327 at December 31, 1996 and 1997, and 470,327 at December 31, 1998, and
preferred stock purchase warrants totaling 120,968 at December 31, 1997, and
1998 were outstanding but were not included in the computations of diluted
earnings per share as the inclusion of these shares would have been anti-
dilutive. No options were granted prior to 1996.
F-9
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
3. Restricted Cash
Restricted cash consists of funds advanced by customers for the future purchase
of publications. The amount has also been recorded as customer advances.
4. Equipment and Furnishings
The components of equipment and furnishings were as follows:
<TABLE>
<CAPTION>
--------------------------------
At December 31,
Useful Life --------------------
(Years) 1997 1998
----------- --------- ---------
<S> <C> <C> <C>
Computer equipment and software............... 3 $ 275,049 $ 669,442
Furniture and office equipment................ 5 60,986 195,638
Leasehold improvements........................ 1-2 -- 67,017
--------- ---------
336,035 932,097
Less: accumulated depreciation................ (100,649) (299,942)
--------- ---------
$ 235,386 $ 632,155
========= =========
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997, and 1998 was
$41,913, $56,528 and $199,293, respectively.
5. Other Assets
The components of other assets were as follows:
<TABLE>
<CAPTION>
------------------
At December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Trademarks.................................................. $ 28,541 $ 29,541
License agreement........................................... 40,000 40,000
-------- --------
68,541 69,541
Less accumulated amortization............................... (40,983) (53,518)
-------- --------
$ 27,558 $ 16,023
======== ========
</TABLE>
6. Income Taxes
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
-------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Current
Federal............................................. -- -- --
State............................................... -- -- $ 40,000
Foreign............................................. $15,695 $136,352 69,000
<CAPTION>
------- -------- --------
<S> <C> <C> <C>
Total................................................. $15,695 $136,352 $109,000
<CAPTION>
======= ======== ========
</TABLE>
F-10
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
The following is a reconciliation between U.S. federal statutory rate and the
effective rate:
<TABLE>
<CAPTION>
---------------------------
Year ended December 31
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
U.S. federal statutory rate....................... (34.0)% (34.0)% (34.0)%
Foreign taxes..................................... 1.1 4.4 .5
State taxes, net of federal tax benefit........... -- -- 1.0
Net operating losses not benefited................ 34.0 % 34.0 % 34.0 %
------- ------- -------
1.1 % 4.4 % 1.5 %
</TABLE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
----------------------
1997 1998
--------- -----------
<S> <C> <C>
Net Operating Loss...................................... $ 238,000 $ 1,628,499
Stock Issuance Costs................................... 102,162 100,366
Reserves and Other..................................... -- 394,188
<CAPTION>
--------- -----------
<S> <C> <C>
Total................................................. 340,162 2,123,053
Valuation Allowance..................................... (238,000) (2,022,687)
<CAPTION>
--------- -----------
<S> <C> <C>
Net Deferred Tax Asset................................ $ 102,162 $ 100,366
<CAPTION>
========= ===========
</TABLE>
As of December 31, 1998, RoweCom has net operating losses for federal & state
income tax purposes of approximately $4,071,000 which begin to expire in 2012
and 2003, respectively. The difference between the statutory rate and the
effective tax rate is primarily attributed to the valuation allowance.
As required by Statement of Financial Accounting Standards No. 109, management
of RoweCom has evaluated the positive and negative evidence bearing upon the
realizability of its deferred tax assets, which are comprised principally of
intangible assets and net operating loss carryforwards. Management has
determined that it is more likely than not that RoweCom will not recognize the
benefits of the federal and state deferred tax assets and, as a result, a
valuation allowance of approximately $2,023,000 has been established at
December 31, 1998.
RoweCom has recognized a net deferred tax asset at December 31, 1997 and 1998
of $102,162 and $100,366, respectively, related to issuance costs of its Class
A and Class B Redeemable Convertible Preferred Stock. No valuation allowance
was recorded for the foreign net deferred tax assets since it is more likely
than not that these net deferred tax assets will be realized in the future.
Included in other current assets is $20,432 and $23,889 representing the
current portion of the net deferred tax asset of RoweCom at December 31, 1997
and 1998, respectively.
7. Loans Payable
RoweCom's loan payable of $200,000 outstanding at December 31, 1996 with a
third-party individual with an interest rate of 8%, compounded daily, was
converted to preferred shares and stock purchase warrants in 1997 (see note
12).
On June 19, 1998, RoweCom entered into an equipment loan agreement with a bank.
Under this loan agreement RoweCom may borrow up to $500,000, for the purpose of
acquisition of equipment, for a period of six months. In December 1998, the
outstanding balance of $320,369 was converted into a term loan, to be repaid in
thirty equal monthly installments. The interest on the outstanding balance is
calculated daily at the bank's prime rate (7.75% at December 31, 1998), plus
1.0%. The loan is collateralized by all RoweCom's assets, including accounts
receivable and equipment, but excluding intellectual property. RoweCom is
required to maintain certain financial ratios, including a "quick ratio" of
1.50 through December 31, 1998, and 1.10 thereafter. The loan agreement defines
"quick ratio" as the sum of consolidated cash and cash equivalents plus
consolidated eligible accounts receivable, divided by consolidated current
liabilities.
Effective September 23, 1998, RoweCom and the bank amended the agreement by
adding a revolving line of credit totaling $4,000,000. Outstanding principal is
due on the earlier of the 85th day after the date of each revolving loan, or
September 23, 1999. The interest rate on the outstanding balance is computed
daily at the
F-11
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
bank's prime rate plus 0.5%. At December 31, 1998, $1,337,350 was outstanding
under this line of credit. At December 31, 1998, the weighted average interest
rate on outstanding borrowing under this agreement was 8.35%.
8. Related Party Transactions
Included in accounts payable at December 31, 1996 was $1,701 for consulting
services rendered by members of the board of directors and $24,000 for legal
services rendered by a party related to a significant shareholder. The December
31, 1997 and December 31, 1998 accounts payable includes $313 and $0,
respectively, for legal services rendered by a party related to a principal
shareholder and total expense for December 31, 1997 and 1998 for these services
was $9,207 and $38,314, respectively.
9. Commitments
RoweCom leases office space in Cambridge, Massachusetts and London, Ontario
under operating lease agreements which expire on August 31, 2000 and April 30,
1999, respectively. Rent expense for the years ended December 31, 1996, 1997
and 1998 was $31,461, $108,000 and $217,234, respectively. RoweCom also leases
certain office equipment under operating leases expiring through 2001. Future
minimum lease payments are $273,058, $83,395 and $2,534 for 1999, 2000 and
2001, respectively.
10. Retirement Plan
RoweCom maintains a contributory 401(k) defined contribution plan (the "Plan")
to provide retirement benefits for principally all employees of RoweCom, as
defined. Under the terms of the Plan, participants may defer between 1% and 15%
of their compensation, a portion of which may be contributed on a pretax basis
as defined by law. RoweCom may also make discretionary contributions to the
Plan. Participants vest in employer contributions over a five-year period.
RoweCom did not make any contributions to the Plan during 1996, 1997 or 1998.
11. Stockholders' (Deficit) Equity
Common Stock
RoweCom has authorized 34,000,000 shares of common stock, $.01 par value.
Common stock has full voting rights. Dividend and liquidation rights of common
stock are subordinated to those of all classes of preferred stock.
12. Redeemable Convertible Preferred Stock
RoweCom
RoweCom has authorized 5,000,000 shares of Class A Redeemable Convertible
Preferred Stock, $.01 par value, of which 161,289 shares were issued and
outstanding at December 31, 1997 and December 31, 1998. RoweCom has authorized
5,000,000 shares of Class A-1 Redeemable Convertible Preferred Stock, $.01 par
value, of which none were issued and outstanding at December 31, 1997 and
December 31, 1998. RoweCom has authorized 8,000,000 shares of Class B
Redeemable Convertible Preferred Stock, $.01 par value, of which 5,140,370
shares were issued and outstanding at December 31, 1998, and 5,000,000 shares
of Class C Redeemable Convertible Preferred Stock, $.01 par value, of which
none were issued and outstanding at December 31, 1996 and 1997 and 4,586,599
shares were issued and outstanding at December 31, 1998.
In April 1997, the loan payable for $200,000 held by a third party at December
31, 1996 and an additional loan payable of $100,000 which was entered into in
1997 were converted into 161,289 shares of Class A.
In May 1998, RoweCom sold 5,140,370 shares of Class B at a price of $1.2645 per
share. Net proceeds to RoweCom, after deducting issuance costs, were
$6,372,678.
F-12
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
In December 1998, RoweCom sold 4,586,599 shares of Class C Preferred Stock at a
price of $3.407 per share. Net proceeds to RoweCom, after deducting issuance
costs, were $15,531,559.
The terms of Class A, Class A-1, Class B and Class C are as follows:
Conversion. Each share of Class A, Class A-1, Class B and Class C may be
converted into 0.34905 common shares at the option of the stockholder.
On February 8, 1999, the Second Amended and Restated Certificate of
Incorporation was amended to provide, among other things, that upon the
closing of an initial public offering of RoweCom's common stock in which
RoweCom has an equity valuation of at least $80,000,000, and results in
proceeds of at least $20,000,000 (a "Qualified IPO"), all outstanding
shares of Class A, Class A-1, Class B and Class C are automatically
converted into shares of common stock.
Dividend and Voting Rights. Holders of Class A, Class A-1, Class B and
Class C are entitled to fixed, preferential, cumulative dividends in the
amount of 6.75% per annum on the liquidation preference of $2.48, $1.2645,
$1.2645 and $3.407 for each Class A share, Class A-1 share, Class B share
and Class C share, respectively. When and if declared by RoweCom's board of
directors, dividends on Class A, Class A-1, Class B and Class C are payable
in cash or additional Class A, Class A-1, Class B and Class C shares in
preference and prior to any payment of any dividend on the common shares.
Dividends on Class C are payable in preference and prior to any other class
of shares and dividends on Class B are payable in preference and prior to
any dividends on Class A and Class A-1 shares. The determination of whether
a dividend is payable in cash or in additional shares is to be made at the
discretion of the board. Any dividend that is not declared by the board of
directors or paid in cash or additional preferred shares will accrue and
compound annually at a rate of 6.75%. Upon the consummation of a Qualified
IPO, any and all rights to accrued and unpaid dividends shall cease. The
holders of Class A, Class A-1, Class B and Class C are entitled to vote on
all matters and are entitled to the number of votes equal to the number of
common shares into which the Class A, Class A-1, Class B and Class C are
convertible as of the date of record.
Liquidation Preferences. In the event of any liquidation, dissolution or
winding up of RoweCom, the holders of Class A, Class A-1, Class B and Class
C are entitled to receive, prior to and in preference to any payment or
distribution of any assets or surplus funds of the Company to the holders
of the common shares, an amount for each Class A, Class A-1, Class B and
Class C share held, equal to $2.48, $1.2645, $1.2645 and $3.407,
respectively, plus in each case, any accrued and unpaid dividends on the
Class A, Class A-1, Class B and Class C shares, whether or not declared. If
upon such liquidation, the assets and funds thus distributed among the
holders of the preferred shares shall be insufficient to permit the payment
to such holders of the full liquidation preference, then the entire assets
and funds of RoweCom legally available for distribution shall be
distributed in the following order: (i) first, among the holders of Class C
shares, (ii) second, among the holders of Class B shares and (iii) third,
pro rata according to liquidation preference among the holders of Class A
and Class A-1, treated as a single class.
Redemption. Upon the earlier of the occurrence of certain events or May 5,
2003 and at any time thereafter, the holders of Class A will be entitled to
require RoweCom to redeem all of the Class A shares at a price of $2.48 per
share, plus all unpaid cumulative dividends, whether or not declared, which
have accrued thereon. The holders of Class A-1, Class B and Class C will
have the right to require the Company to purchase from the holders all of
the outstanding Class A-1, Class B and Class C shares on December 11, 2003
and at any time thereafter up until December 11, 2005. RoweCom must
purchase the Class A-1, Class B and Class C shares at a purchase price
equal to the greater of (i) the fair market value of such shares or (ii)
the respective liquidation preference plus all accrued but unpaid
dividends.
F-13
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
The following table sets forth preferred stock activity of RoweCom Inc.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Class A Class B Class C
Shares Class A Shares Class B Shares Class C Total
------- -------- --------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December
31, 1996.. -- -- -- -- -- -- --
------- -------- --------- ---------- --------- ----------- -----------
Conversion
of note
payable to
Class A
redeemable
convertible
preferred
stock..... 161,289 $300,000 -- -- -- -- $ 300,000
------- -------- --------- ---------- --------- ----------- -----------
Balance at
December
31, 1997.. 161,289 300,000 -- -- -- -- 300,000
Accretion
of Class A
redeemable
convertible
preferred
stock..... -- 47,555 -- -- -- -- 47,555
Issuance of
Class B
redeemable
convertible
preferred
stock, net
of
issuance
costs of
$127,320.. -- -- 5,140,370 $6,372,678 -- -- 6,372,678
Accretion
of Class B
redeemable
convertible
preferred
stock..... -- -- -- 298,145 -- -- 298,145
Issuance of
Class C
redeemable
convertible
preferred
stock, net
of
issuance
costs of
$94,984... -- -- -- -- 4,586,599 $15,531,559 15,531,559
Accretion
of Class C
redeemable
convertible
preferred
stock..... -- -- -- -- -- 56,709 56,709
------- -------- --------- ---------- --------- ----------- -----------
Balance at
December
31, 1998.. 161,289 $347,555 5,140,370 $6,670,823 4,586,599 $15,588,268 $22,606,646
======= ======== ========= ========== ========= =========== ===========
</TABLE>
Rowe Communications Ltd.
Rowe Communications Ltd. ("Ltd.") has an unlimited authorized number of its
Class A Redeemable Convertible Voting Preferred Stock ("Ltd. Class A") and an
unlimited authorized number of its Class B Redeemable Convertible Non-Voting
Preferred Stock ("Ltd. Class B").
In April 1997 Ltd. sold 1,611,568 shares of Ltd. Class A at $2.48 per share, in
a private offering to a Canadian venture capital firm. Net proceeds to Ltd.,
after deducting issuance costs, were $3,712,464. At December 31, 1997 and 1998,
1,611,568 shares of Ltd. Class A were issued and outstanding. These shares are
aggregated on the Company's balance sheet with the Class A shares.
In May 1998, Ltd. sold 1,186,240 shares of Ltd. Class B at $1.2645, in a second
private offering to a Canadian venture capital firm. Net proceeds to Ltd.,
after deducting issuance costs, were $1,458,235. At December 31, 1998,
1,186,240 shares of Ltd. Class B were issued and outstanding. These shares are
aggregated on the Company's balance sheet with the Class B shares.
Conversion. The holder of Ltd. Class A has the right (pursuant to the
RoweCom Second Amended and Restated Stockholders Agreement) at any time to
require RoweCom to issue 3,163,306 Class A-1 shares in the capital stock of
RoweCom, in exchange for such holder's Ltd. Class A shares (the "Class A
Exchange Option") plus any additional shares or assets (including
dividends, whether declared or accumulated) which the holder would have
acquired had the holder held such number of Class A-1 shares in the capital
stock of RoweCom. If the stockholder of Ltd. Class A has exercised the
Class A Exchange Option, the stockholder must transfer, for no additional
consideration, a total of 889,187 (subject to adjustments) Class A-1 shares
to certain existing stock, option and warrant holders of the Company upon
the occurrence of certain events. At December 31, 1998, approximately
150,000 of those Class A-1 shares would be transferred to existing holders
of stock options and warrants to purchase the Company's common stock. The
holder of Ltd. Class B has the right at any time to require RoweCom to
issue Class B shares, in exchange for such holders Ltd. Class B shares
(Class B Exchange Option) on a one for one basis plus any additional shares
or assets (including dividends, whether declared or accumulated) which the
holder would have acquired had the holder held the same number of Class B
shares in the capital stock of RoweCom.
F-14
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
Under an Exchange Option Exercise Agreement, the holder of the Ltd. Class A
Preferred Shares and the Ltd. Class B Preferred Shares irrevocably agrees
to exercise its Class A Exchange Option and Class B Exchange Option upon
the closing of an Initial Public Offering meeting certain conditions.
Dividend and Voting Rights. The holder of Ltd. Class A was entitled to
receive fixed, preferential, cumulative dividends in the amount of 6.75%
per annum on the liquidation preference of $2.48 for each Ltd. Class A
share from April 1997 through May 1998. In May 1998 and upon the closing of
the Ltd. Class B offering, the Articles of Incorporation of Ltd. were
amended such that the holder of Ltd. Class A and the holder of Ltd. Class B
are entitled to receive dividends as and when declared by the board of
directors. The holders of Ltd. Class B are not entitled to receive notice
of or to attend and vote at meetings of the shareholders of Ltd. except to
the extent that such holders are entitled to vote under the Business
Corporations Act (Ontario). The holders of Ltd. Class A Preferred Shares
shall be entitled to receive notice of and attend all meetings of the
shareholders of Ltd. and each Ltd. Class A Preferred Share shall confer the
right to one (1) vote.
Liquidation Preferences. In the event of any liquidation, dissolution or
winding up of Ltd., holders of Ltd. Class A and Ltd. Class B are entitled
to receive prior to and in preference to any payment or distribution of any
assets to the holders of the common shares, an amount for each Ltd. Class A
share and Ltd. Class B share held, equal to $2.48 and $1.2645, plus any
accrued and unpaid dividends on the Ltd. Class A and Ltd. Class B shares
declared.
Redemption. Upon the earlier of the occurrence of certain events or May 5,
2003 and at any time thereafter, the holders of Ltd. Class A and Ltd. Class
B may require RoweCom to redeem all of the Ltd. Class A and Ltd. Class B
shares at a price of $2.48 and $1.2645 per Ltd. Class A and Ltd. Class B
share, plus all accrued and unpaid cumulative dividends, declared.
The following table sets forth preferred stock activity of Rowe Communications
Ltd.
<TABLE>
<CAPTION>
----------------------------------------------------
Class A Class B
Shares Class A Shares Class B Total
--------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996..................... -- -- -- -- --
<CAPTION>
--------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of Class A
redeemable convertible
preferred stock, net of
issuance costs of
$284,225................. 1,611,568 $3,712,464 -- -- $3,712,464
Tax effect of issuance of
preferred stock.......... -- 102,169 -- -- 102,169
Accretion of Class A
redeemable convertible
preferred stock.......... -- 183,577 -- -- 183,577
<CAPTION>
--------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997..................... 1,611,568 3,998,210 -- -- 3,998,210
Accretion of Class A
redeemable convertible
preferred stock.......... -- 290,768 -- -- 290,768
Issuance of Class B
redeemable convertible
preferred stock, net of
issuance costs of
$41,765.................. -- -- 1,186,240 $1,458,235 1,458,235
Accretion of Class B
redeemable convertible
preferred stock.......... -- -- -- 68,958 68,958
<CAPTION>
--------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1998..................... 1,611,568 $4,288,978 1,186,240 $1,527,193 $5,816,171
<CAPTION>
========= ========== ========= ========== ==========
</TABLE>
13. Stock Purchase Warrants
In connection with the issuance of Ltd. Class A (note 12) and the conversion of
the loans payable into 161,289 shares of Class A, 120,968 stock purchase
warrants of RoweCom were issued with an exercise price of $2.48 per share. The
class of stock purchasable under the stock purchase warrants is Ltd. Class A
Preferred. If prior
F-15
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
to the time of exercise, the warrant holder has exercised the Class A Exchange
Option, then the stock purchase warrants shall become exercisable for an
aggregate of 42,223 shares of the common stock of RoweCom at an exercise price
of $7.10 per share. The value of the warrants was immaterial at the time of
issuance.
14. Stock Options
In 1996 as part of the initial formation and operating agreement of RoweCom and
prior to the inception of the 1997 Stock Incentive Plan, stock options were
issued to key employees and members of the board of directors. Vesting terms
range from immediate vesting to vesting at a rate of 20% per year. All options
expire ten years from RoweCom's date of formation. A total of 95,989 options
were issued in 1996 and an additional 69,810 were authorized for future grants.
On April 25, 1997, RoweCom adopted the 1997 Stock Incentive Plan for directors,
officers, employees, and consultants of RoweCom. A total of 114,618 shares of
common stock were reserved for issuance under the 1997 Stock Incentive Plan.
These options vest over a five-year period and expire over a period not
exceeding ten years.
On April 8, 1998, RoweCom adopted the 1998 Stock Incentive Plan. A total of
349,050 shares of common stock were reserved for issuance under the 1998 Stock
Incentive Plan. These options vest over a four year period and expire over a
period not exceeding ten years.
The board establishes the exercise price and vesting period at the time the
options are granted and specifies these terms in the applicable option
agreements.
Under the terms of the Plans, the exercise price of incentive stock options
granted must not be less than 100% (110% in certain cases) of the fair market
value of the common stock on the date of grant, as determined by the board of
directors. In reaching the determination of fair market value at the time of
each grant, the board of directors considers a broad range of factors including
the illiquid nature of an investment in RoweCom's common stock, RoweCom's
historical financial performance, and RoweCom's future prospects.
After assessing the fair value of the Company's common stock, the Board of
Directors, on July 9, 1998, determined that certain stock options held by
employees of the Company had an exercise price significantly higher than the
estimated fair value. As a result, such stock options were not providing the
desired incentive to the employees, and such employees were then provided the
opportunity to replace their existing options with new options, on a one for
one basis, at a price of $0.72 per share, with no change in their original
vesting schedule. This stock option repricing resulted in new options to
purchase 385,144 shares of common stock. At the execution of the stock option
repricing, the fair value of the Company's common stock was $0.72 per share and
therefore no compensation charge was recorded.
Transactions during 1996, 1997 and 1998 related to stock options granted by
RoweCom were as follows:
<TABLE>
<CAPTION>
------------------------
Weighted
Average
Shares Exercise Price
-------- --------------
<S> <C> <C>
Outstanding at January 1, 1996
Granted.............................................. 118,677 $ 2.00
Exercised............................................ -- --
Forfeited/canceled................................... (17,452) 1.43
--------
Outstanding at December 31, 1996....................... 101,225 1.75
Granted.............................................. 57,593 2.55
Exercised............................................ -- --
Forfeited/canceled................................... (3,490) 2.86
--------
Outstanding at December 31, 1997....................... 155,328 2.03
Granted.............................................. 819,198 2.09
Exercised............................................ (698) .72
Forfeited/canceled................................... (503,500) 2.72
--------
Outstanding at December 31, 1998....................... 470,328 $ 1.17
<CAPTION>
========
</TABLE>
F-16
<PAGE>
RoweCom Inc.
Notes to Consolidated Financial Statements--(Continued)
At December 31, 1996, 1997 and 1998, 31,414, 69,228, and 66,994 options were
exercisable at exercise prices ranging from $0.72 to $2.86 and at December 31,
1998 64,896 were available for grant.
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ .72 350,873 8.7 $ .72 34,416 $ .72
1.43 43,631 2.4 1.43 30,833 1.43
2.86 64,829 9.7 2.86 1,745 2.86
5.01 10,995 9.8 5.01 --
------- ------
470,328 8.3 years $1.17 66,994 $1.09
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" (SFAS No. 123), encourages but does not require companies
to record compensation cost for stock-based employee contribution plans at fair
value. RoweCom has chosen to account for stock-based employee compensation
using the intrinsic value method prescribed under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation expense has been recognized for
its stock-based compensation plan.
Had compensation cost for RoweCom's stock option plans been determined based on
the estimated fair value of the option at the date of grant for awards in 1996,
1997 and 1998 using the minimum value method consistent with SFAS No. 123, the
adjustment to net loss would have been immaterial. The weighted average fair
values of options granted are $0.52, $1.03, and $0.80, respectively. For this
purpose, the fair value of options at the date of grant was estimated using the
minimum value method with the following weighted-average assumptions: risk-free
interest rates of 6.57%, 6.58%, and 5.40%; no dividend yields; no volatility
factors; and a weighted-average expected life of the options of eight years.
15. Stock Split
On February 8, 1999, the board of directors declared a .34905-for-1 reverse
stock split of the RoweCom's common stock, to be effective upon the filing of
the Third Restated Certificate of Incorporation of RoweCom. All references to
the number of common shares and per share amounts in the consolidated financial
statements and related footnotes have been restated to reflect the effect of
the reverse stock split for all periods presented.
F-17
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